SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberDecember 26, 1999
Commission file number: 0-21154
CREE, RESEARCH, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1572719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Silicon Drive
Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 313-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X][X] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par value
$0.0025 per share, as of October 14, 1999January 20, 2000 was 29,499,599.32,989,048.
CREE, RESEARCH, INC.
FORM 10-Q
For the Quarter Ended SeptemberDecember 26, 1999
INDEX
Page No.
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Consolidated Balance Sheets at SeptemberDecember 26, 1999 (unaudited)
and June 27, 1999.....................................31999 3
Consolidated Statements of OperationsIncome for the three and six months
ended SeptemberDecember 26, 1999 and SeptemberDecember 27, 1998 (unaudited).......................................................4 4
Consolidated Statements of Cash FlowsFlow for the threesix months ended
SeptemberDecember 26, 1999 and SeptemberDecember 27, 1998 (unaudited).......5 5
Notes to Consolidated Financial Statements (unaudited)............6 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................11Operations 11
Item 3. Quantitative and Qualitative Disclosures ofAbout Market Risk..........15Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K................................16
SIGNATURES...............................................................17
EXHIBIT LIST.............................................................188-K 19
SIGNATURES 20
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CREE, RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
SeptemberDecember 26, June 27,
1999 1999
------------------------- ----------
ASSETS (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $41,226 $42,506$ 38,164 $ 42,506
Marketable securities 3,7275,708 6,145
Accounts receivable, net 16,90018,478 16,285
Inventories 4,0604,609 3,977
Deferred income taxestax 296 296
Prepaid expenses and other current assets 571455 558
------------------------- ----------
Total current assets 66,78067,710 69,767
Property and equipment, net 77,57588,291 69,884
Patent and license rights, net 1,7981,937 1,731
Deferred income taxes 2,827 2,827
Other assets 125147 8
============= ==========------------ ----------
Total assets $ 149,105160,912 $ 144,217
========================= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $5,406$ 6,128 $ 7,487
Accrued salaries and wages 2,0431,512 819
Other accrued expenses 3,6916,410 1,239
------------------------- ----------
Total current liabilities 11,14014,050 9,545
Long term liabilities:
Long term liability 30 --
Deferred income taxestax 4,650 4,650
------------------------- ----------
Total long term liabilities 4,680 4,650
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at SeptemberDecember 26, 1999 and June 27,
1999; none issued and outstanding
Common stock, par value $0.0025; 60,000 shares 74 73
authorized at September 26, 1999 and June 27,
1999;authorized; shares issued and outstanding
29,50029,700 and 29,258 at SeptemberDecember 26, 1999 and
June 27, 1999, respectively
Additional paid-in-capital 112,180113,311 111,136
Retained earnings 21,03128,797 18,813
------------------------- ----------
Total shareholders' equity 133,285142,182 130,022
============= ==========------------ ----------
Total liabilities and shareholders' equity $ 149,105160,912 $ 144,217
========================= ==========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
------------------------------
September 26, September 27,
1999 1998
------------- -------------
Revenue:
Product revenue, net $ 18,257 $ 10,720
Contract revenue, net 1,791 1,559
------------- -------------
Total revenue 20,048 12,279
Cost of revenue:
Product revenue, net 9,498 5,415
Contract revenue, net 1,136 1,207
-------------- -------------
Total cost of revenue 10,634 6,622
Gross profit 9,414 5,657
Operating expenses:
Research and development 931 806
Sales, general and Administrative 1,927 1,218
Other expense 101 269
-------------- -------------
Income from operations 6,455 3,364
Interest income, net 569 115
-------------- -------------
Income before income taxes 7,024 3,479
Income tax expense 2,388 1,113
-------------- -------------
Net income 4,636 2,366
============== =============
Other comprehensive income, net of tax
Unrealized holding gain (loss) (2,418) --
============== =============
Comprehensive income 2,218 2,366
============== =============
Earnings per share:
Basic $ 0.16 $ 0.09
============== =============
Diluted $ 0.15 $ 0.09
============== =============
Shares used in per share calculation:
Basic 29,337 25,840
============== =============
Diluted 31,214 26,498
==============
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------- ------------ ------------ ------------
Revenue:
Product revenue, net $ 22,136 $ 12,805 $ 40,392 $ 23,525
Contract revenue, net 1,794 1,233 3,585 2,792
------------- ------------ ------------ ------------
Total revenue 23,930 14,038 43,977 26,317
Cost of revenue:
Product revenue 10,075 6,377 19,572 11,792
Contract revenue 1,122 1,045 2,258 2,252
------------- ------------ ------------ ------------
Total cost of revenue 11,197 7,422 21,830 14,044
------------- ------------ ------------ ------------
Gross profit 12,733 6,616 22,147 12,273
Operating expenses:
Research and development 1,911 1,121 2,843 1,927
Sales, general and 2,639 1,450 4,565 2,668
administrative
Other (income) expense (8) 298 92 567
------------- ------------ ------------ ------------
Income from operations 8,191 3,747 14,647 7,111
Interest income, net 573 20 1,142 135
------------- ------------ ------------ ------------
Income before income taxes 8,764 3,767 15,789 7,246
Income tax expense 2,980 916 5,368 2,029
------------- ------------ ------------ ------------
Net income $5,784 $ 2,851 $ 10,421 $ 5,217
============= ============ ============ ============
Other comprehensive income,
net of tax:
Unrealized holding gain 1,981 -- (437) --
(loss) ------------- ------------ ------------ ------------
Comprehensive income $7,765 $ 2,851 $ 9,984 $ 5,217
============= ============ ============ ============
Earnings per share:
Basic $0.20 $0.11 $0.35 $0.20
============= ============ ============ ============
Diluted $0.18 $0.10 $0.33 $0.19
============= ============ ============ ============
Shares used in per share
calculation:
Basic 29,587 25,664 29,462 25,752
============= ============ ============ ============
Diluted 31,594 27,668 31,404 27,082
============= ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
CREE, RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
ThreeSix Months Ended
--------------------------------
September-----------------------------
December 26, SeptemberDecember 27,
1999 1998
-------------- -------------------------- ------------
Operating activities: (Unaudited)
Net income $4,636 $ 2,36610,421 $ 5,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,009 1,1404,447 2,341
Loss on disposal of property, equipment and equipment 43 51144 951
patents
Amortization of patent rights 32 2867 56
Proceeds from sale of marketable trading -- 489
securities
Purchase of marketable trading securities -- (234)(232)
Loss (gain) on marketable trading securities -- 67
securities(116)
Changes in operating assets and liabilities:
Accounts receivable (615) (1,217)(2,193) (1,964)
Inventories (83) (706)(632) (859)
Prepaid expenses and other assets (130) 595(35) 1,004
Accounts payable , trade (2,081) (2,452)(1,360) (3,073)
Accrued expenses 3,707 1,119
-------------- --------------5,894 420
------------ ------------
Net cash provided by operating activities 7,518 1,217
-------------- --------------16,653 4,234
------------ ------------
Investing activities:
Purchase of property and equipment (9,744) (4,006)(22,898) (10,380)
Proceeds from sale of property and equipment -- 10
equipment189
Purchase of patent rights (99) (91)
-------------- --------------(274) (194)
------------ ------------
Net cash used in investing activities (9,843) (4,087)
-------------- --------------(23,172) (10,385)
------------ ------------
Financing activities:
Net proceedsProceeds from issuance of long termlong-term debt -- 1,281
debt1,333
Net proceeds from issuance of common stock 1,045 1592,177 2,527
Receipt of Section 16(b) common stock -- 594
profits
Repurchase of common stock -- (3,214)
-------------- -------------------------- ------------
Net cash provided by financing 1,045 (1,774)
activities -------------- --------------2,177 1,240
------------ ------------
Net increasedecrease in cash and cash equivalents $(1,280) $(4,644)(4,342) (4,911)
Cash and cash equivalents:
Beginning of period $42,506 $17,680
-------------- --------------42,506 17,680
============ ============
End of period $41,226 $13,036
============== ==============$ 38,164 $ 12,769
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts $ -- $ 112275
capitalized
-------------- --------------============ ============
Cash paid for income taxes $ 63268 $ 164
============== ==============1,396
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
CREE, RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of PresentationBASIS OF PRESENTATION
The consolidated balance sheet as of SeptemberDecember 26, 1999, the consolidated
statements of operationsincome for the three month periodsand six months ended SeptemberDecember 26, 1999 and
SeptemberDecember 27, 1998, and the consolidated statements of cash flowsflow for the threesix
months ended SeptemberDecember 26, 1999 and SeptemberDecember 27, 1998 have been prepared by the
Company and have not been audited. In the opinion of management, all normal and
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flowsflow at SeptemberDecember 26, 1999, and all periods
presented, have been made. The balance sheet at June 27, 1999 has been derived
from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's fiscal 1999 Form 10-K. The results of
operations for the period ended SeptemberDecember 26, 1999 are not necessarily indicative
of the operating results that may be attained for the entire fiscal year.
Accounting PoliciesACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13 week
period in fiscal 2000 and fiscal 1999. The Company's current fiscal year extends
from June 28, 1999 through June 25, 2000.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS("SFAS No. 115)115"). This statement requires certain securities
to be classified into three categories:
(a) Securities Held-to-Maturity-Held-to-Maturity -- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities-Securities -- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in
earnings.
-6-
(c) Securities Available-for-Sale-Available-for-Sale -- Debt and equity securities not
classified as either securities held-to-maturity or trading securities
are reported at fair value with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders'
equity.
-6-
in retained earnings.
As of SeptemberDecember 26, 1999, the Company's short-term investments consisted of
common stock holdings of Microvision, Inc. ("MVIS"). The Company purchased
268,600 common shares in a private equity transaction in May 1999 at a price of
$16.75 per share. In August 1999, MVIS filed a registration statement for the
Company's sale of these shares; however, Cree has agreed not to sell the shares
until at least January 6, 2000. SinceAs of December 26, 1999, the Company is currentlywas
restricted from trading these shares and since management views this transaction
as an investment, the shares are accounted for as "available for sale"
securities under SFAS 115. Therefore unrealized gains or losses are excluded
from earnings and reported as
a separate component of shareholders' equity.are recorded directly in retained earnings.
As of SeptemberDecember 27, 1998, the Company's short-term investments consisted of
common stock holdings in C3, Inc ("C3"), the majority of which were bought in
November 1997. The Company also acquired additional shares of C3 in September
1998 and acquired 24,601 shares directly from C3 pursuant to the exercise of an
option in January 1997. This investment was treated for accounting purposes as a
trading security, with net realized and unrealized gains and losses included in
net earnings. All common shares of C3 held by Cree were subsequently sold during
fiscal 1999. RealizedRecognized gains on shares of C3 stock soldrecorded to the statement of
income during fiscal 1999 by the Company were $140,000. This amount was recorded
as other income.
As of September 27, 1998, the Company's Chief Executive Officer ("CEO") had
promised to indemnify the Company for losses of up to $450,000 for the net
difference between the aggregate cash consideration paid by Cree for the shares
of C3 common stock and the cash proceeds received by Cree upon the sale of C3
common shares. At September 27, 1998, the Company had recorded a $450,000
receivable from the CEO (included in net accounts receivable) based upon this
agreement for the net realized and unrealized losses on this investment. Since
Cree sold its shares of C3 for a net gain, the indemnity has been terminated
with no payments becoming due. Net unrealized losses on shares of C3 stock
offset by the unrealized gain on shares acquired from C3 directly were $233,000
at September 27, 1998.
Long Term Debt
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10,000,000$10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $2,950,000$3.0 million was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
subsequent upfits, accrued interest at a fixed rate of 8% and carried customary
covenants, including the maintenance of a minimum tangible net worth and other
requirements. As of SeptemberDecember 27, 1998 the entire $10,000,000$10.0 million loan was
outstanding, including a current portion of $69,000$121,000 and a long term amount of
$9,931,000.$9.9 million. On February 17, 1999, the entire $10,000,000$10.0 million indebtedness was
repaid with proceeds received from a public stock offering.
-7-
During the three and six months ended SeptemberDecember 27, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the three and six months ended
SeptemberDecember 27, 1998 was $84,000.$34,000 and $118,000, respectively.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out (FIFO) method. Inventories consist of the
following:
September-7-
December 26, June 27,
1999 1999
------------- -------------
(in------------ ------------
(In thousands)
Raw materials $ 1,3521,729 $ 1,290
Work-in-progress 1,1931,579 1,675
Finished goods 1,5151,301 1,012
------------- ------------------------- ------------
Total Inventory $ 4,0604,609 $ 3,977
============= ========================= ============
Research and Development Accounting Policy
The Company contracts withU.S. Government provides funding for several of the U.S. government for many of itsCompany's current
research and development efforts. By entering into these contracts, the Company has most
of its research and product development costs funded by the U.S. government. The contract funding may be based on either a
cost-plus or a cost-share arrangement. Pursuant to each contract, theThe amount of funding under each contract
is determined based on cost estimates that include direct costs, plus an
allocation for research and development, general and administrative and the cost
of capital expenses. Cost-plus funding is determined based on actual costs plus
a set percentage margin. For the cost-share contracts, the actual costs are
divided between the U.S. government and the Company based on the terms of the
contract. The government's cost share is then fundedpaid to the Company. Activities
performed under these arrangements include research regarding silicon carbide
and gallium nitride materials. The contracts typically require the submission of
a written report that documents the results of such research.
FundingThe revenue and expense classification for contract activities is based on the
nature of the contract. For contracts under whichwhere the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is recordedreported as
contract revenue and relatedall direct costs are reported as a costcosts of contract revenue.
For contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, direct costs are shownreported as
research and development expenses and related funding as an offset of those
expenses. The following table details information about contracts for which
direct expenses exceed funding by period as reflectedincluded in the statements of operations:research and development
expenses:
Three months ended
------------------------------
SeptemberMonths Ended Six Months Ended
December 26, SeptemberDecember 27, December 26, December 27,
1999 1998 ------------- -------------
(in1999 1998
------------ ------------ ------------ ------------
(In thousands)
Net research and developmentR&D costs $ 40134 $ --- $ 174 $ -
Government funding 67 --
============= ============331 - 398 -
------------ ------------ ------------ ------------
Total direct costs $ 465 $ - $ 572 $ -
incurred $ 107 $ --
========================= ============ ============ ============
-8-
Significant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with Siemens AG
("Siemens"), pursuant to which Siemens agreed to purchase LEDlight emitting diode
("LED") chips made with the Company's gallium nitride-on-silicon carbide
technology. In April 1997, December 1997 and September 1998, contract amendments
were executed that provided for enhanced product specifications requested by
Siemens and larger volume requirements, respectively. In December 1998, the
Purchase Agreement was amended to provide for additional shipments of LED
products through September 1999. The Purchase Agreement was subsequently
assigned to an indirect subsidiary of Siemens, OSRAM Opto Semiconductors GMBH &
Co. OHG ("Osram"), effective as of January 1, 1999.
In August 1999, the Company entered into a new Purchase Agreement with Osram,
pursuant to which Osram agreed to purchase and the Company is obligated to ship
stipulated quantities of both the standard brightness and the high brightness
LED chips and silicon carbide wafers through September 2000.
The agreement calls for certain quantities of standard brightness and high
brightness LED chips to be delivered by month. In the event the Company
is
unable to ship at least 85% of the cumulative quantity due to have been shipped
each month,materially defaults in delivering shipments, Osram is entitled tomay recover liquidated
damages of one percent per week of the purchase price of the delayed product,
subject to a maximum of ten percent of the purchase price. If product shipments
are delayed six weeks or more due to circumstances within the Company's control,
then in lieu of liquidated damages, Osram may claim damages actually resulting
from the delay up to forty percent40% of the purchase price of delayed products.
The contract also gives Osram limited rights to defer shipments. For products to
be shipped in more than 24 weeks after initial notice, Osram can defer 30% and
20% of standard brightness and high brightness LEDs, respectively. For products
to be shipped in more than 12 weeks, but less than 24 weeks, Osram may defer 10%
of scheduled quantities for both standard brightness and high brightness LEDs.
Also, additional quantities of high brightness LEDs stipulated in the contract
may be deferred to the next quarter with 60 days notice at the election of
Osram. In all cases, Osram would be required to accept all products within 90
days of the original shipment date. Additionally, the Purchase Agreement
provides for higher per unit prices early in the contract with reductions in
unit prices being available as the cumulative volume shipped increases. The
higher prices were negotiated by the Company to offset higher per unit costs
expected earlier in the contract.
Depreciation
The Company has changed its depreciation policy to reflectadopted lower useful lives on new manufacturing equipment. The
useful life has been reduced from 9 years to 5
years for all manufacturing equipment purchased since the beginning of
fiscal year 2000 is estimated to be 5 years. No changes have been made to the
estimated useful life of 9 years for manufacturing equipment placed in service
prior to fiscal 2000. In management's estimate, this new policy change was necessary
due to the
changes in estimated useful lives of new equipment caused by technology changes
-9-
anticipated with the future development of larger
diameter wafers. Based on information available at this time, management
estimates that the change in policy may reduce the Company's fiscal 2000 net
income by approximately $660,000 or $0.02 per share, but actual results may vary.
-9-
Income Taxes
The Company has established an estimated tax provision based upon an effective
rate of 34%. The estimated effective rate was based upon projections of income
for the fiscal year and the Company's ability to utilize remaining net operating
loss carryforwards and other tax credits. However, the actual effective rate may
vary depending upon actual pre-tax book income for the year or other factors.
Earnings Per ShareEARNINGS PER SHARE
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" ("SFAS 128"). SFAS No.
128 required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128.
The following computation reconciles the differencedifferences between the basic and
diluted presentations:
Three Months Ended ----------------------------------
SeptemberSix Months Ended
December December December December
26, September27, 26, 27,
1999 1998* ------------- -------------
(in1999 1998*
-------- -------- -------- --------
(In thousands, except per share data)
Basic:amounts)
Net income $ 4,636 $2,366
============= =============5,784 $ 2,851 $10,421 $ 5,217
Weighted average common shares 29,337 25,840
============= =============29,587 25,664 29,462 25,752
-------- -------- -------- --------
Basic incomeearnings per common share $0.16 $ 0.09
============= =============
Diluted:0.20 $ 0.11 $ 0.35 $ 0.20
======== ======== ======== ========
Net income $ 4,636 $2,366
============= =============
Weighted5,784 $ 2,851 $10,421 $ 5,217
Diluted weighted average common
shares-basic 29,337 25,840shares:
Common shares outstanding 29,587 25,664 29,462 25,752
Dilutive effect of stock options & 1,877 6582,007 2,004 1,942 1,330
and warrants ============= =============
Weighted-------- -------- -------- --------
Total diluted weighted average 31,594 27,668 31,404 27,082
common shares-diluted 31,214 26,498
============= =============shares -------- -------- -------- --------
Diluted incomeearnings per common share $0.15 $ 0.09
============= =============0.18 $ 0.10 $ 0.33 $ 0.19
======== ======== ======== ========
* Weighted average shares and per share amounts have been adjusted for the two
for one stock split effective July 26, 1999.
-10-
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. Accordingly, 476,000 and 1,040,000 shares for the three months ended SeptemberAs of
December 26, 1999 and SeptemberDecember 27, 1998, respectively,there were not included in calculating
diluted income per share for the periods presented.no potential shares
considered to be antidilutive.
-10-
On July 13, 1999 the Company filed a Form 8-K announcing a two-for-one split of
its common stock. The stock split was effected by an amendment to the Company's
Articles of Incorporation that became effective at the close of business on July
26, 1999. With the effectiveness of the amendment, each issued and unissued
authorized share of common stock, $0.005 par value per share, was automatically
split into two whole shares of common stock, $0.0025 par value per share. On
July 30, 1999, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the common stock split.
SUBSEQUENT EVENT
On January 20, 2000, the Company completed a public offering of 3,289,000 shares
of its common stock at a price to the public of $85.125 per share. The Company
received net aggregate proceeds of approximately $266.1 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds will be used primarily for manufacturing facility expansion and
purchase of additional equipment, the acquisition of an additional facility,
research and development, and general corporate purposes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward-looking"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934. These statements
represent the Company'sour judgment concerning the future and are subject to risks and
uncertainties that could cause the Company'sour actual operating results and financial
position to differ materially. Such forward-lookingForward looking statements can beare typically
identified by the use of forward-looking terminology such terms as "may," "will," "anticipate," "believe,"
"plan," "estimate," "expect," and "intend" or the
negative thereof or other variations thereof or comparable terminology. The
Company cautions that any such forward-lookingand similar words, although some
forward looking statements are further qualified
by important factors that could cause the Company'sexpressed differently. Our actual operating
results tocould differ materially from those contained in the forward-looking statements. Theseforward looking
statements due to a number of factors, include, but are not limited to,including fluctuations in our operating
results, production yields in our manufacturing processes, whether we can
produce greatersufficient quantities of high brightness blue and green LEDs to meet
demand, our dependence on a few customers, whether new customers will emerge,
whether we can develop, introduce and create market demand for new products,
whether we can manage our growth effectively, assertion of intellectual property
rights by others and adverse economic conditions, and insufficient capital resources.conditions. See Exhibit 99.1 for
additional factors that could cause the Company'sour actual results to differ.
Overview-11-
OVERVIEW
Cree, Research, Inc. is the world leader in developing and manufacturing semiconductor
materials and electronic devices made from silicon carbide ("SiC"). We recognize
product revenue at the time of shipment or in accordance with the terms of the
relevant contract. We derive the largest portion of our revenue from the sale of
blue and green light emitting diode ("LED")LED products. The Company offersWe offer LEDs at two brightness levels --levels: high
brightness blue and green products and standard brightness blue products. The high brightnessOur
LED devices are utilized by end users for automotive dashboard backlighting,
liquid crystal display ("LCD") backlighting, including wireless handsets and
other consumer products, have now been integrated intoindicator lamps, miniature white lights, indoor sign
and arena displays, outdoor full color stadium displays, traffic signals and
other lighting applications. LED products represented 57% of our -11-
manufacturing facilityrevenue for full production.the
first six months of fiscal 2000 and represented 48% of our revenue in the first
six months of fiscal 1999.
During the first quartersix months of fiscal 2000, revenues derived from sales of high
brightness LED salesLEDs were greater than 50%60% of the total LED sales mix. Historically,
we have experienced low margins with many new product introductions, andincluding
the high brightness products. We have continued to make improvements to output
and yield since the high brightness products were introduced in fiscal 1999.
During the first quartersix months of fiscal 2000, marginswe made progress towards our fiscal
2000 goal of a 50% cost reduction for the high brightness LED products were reaching levels attained for the standard brightness product as
improvementsthrough a 36%
reduction in yield contributed to a 16% reduction inunit costs from the fourth quarter of fiscal 1999. During the
remainder of fiscal 2000, we plan to focus on reducing unit costs through higher
production yields and from higher volumes as fixed
costs are spread over a greater number of units.increased volume.
We derive additional revenue from the sale of SiC wafers that are used for device
production and research and development. In addition, we sell SiC crystals to
C3, which uses them in gemstone applications. Sales of advanced materials made
from SiC represented approximately 35% of our revenue for the first six months
of fiscal 2000 and approximately 41% during the first six months of fiscal 1999.
During late fiscal 1998, fiscal 1999 and early fiscal 2000, C3 purchased crystal
growth equipment we constructed but retain to use in manufacturing material for
C3; this equipment has more than doubled our capacity allocated to the
production of crystals for C3. In the fall of 1999, C3 announced lower sales and
higher inventory levels than anticipated. C3 also launched a new marketing
campaign for its gemstone products. Recently, we agreed that are used primarily for research and development.C3 could reschedule
approximately one-half of its purchase commitments from the first half of
calendar 2000 to the second half of the year. We also sell SiC crystalsanticipate that overall sales
to C3 which incorporates themwill decrease in gemstonecalendar 2000 and we may use manufacturing capacity that
becomes available due to a reduction in sales to C3 for our other product
applications. We anticipate that product revenue from C3 will decrease to less
than 10% of our revenue for the fourth quarter of fiscal 2000 and will continue
to decline as a percentage of revenue through the first half of fiscal 2001.
The balance of our revenue, 8% for the first six months of fiscal 2000 and 11%
for fiscal 1999, is derived from government and customer research contract funding. Under various
programs, U.S. Government entities provide funding to aidsupport the development of our technology.
Resultstechnology by
supplementing our research and development funding. We retain ownership of
Operationspatent rights on technology developed under such contracts, subject to certain
license rights retained by the government. Contract revenue includes funding of
direct research and development costs and a portion of our general and
administrative expenses and other operating expenses for contracts under which
we expect funding to exceed direct costs over the life of the contract. For
contracts under which we anticipate that direct costs will exceed amounts to be
funded over the life of the contract (i.e., certain cost-share arrangements), we
report direct costs as research and development expenses with related
reimbursements recorded as an offset to those expenses.
-12-
In June 1999, we announced the introduction of the first of a family of RF and
microwave transistor products made from SiC. These products are designed for use
in a variety of power amplification applications. A second phase of transistor
products is expected to be available in fiscal 2000. We expect that these
products will be marketed to a variety of amplifier producers for a number of
uses, including wireless base station and digital broadcast applications. While
distribution of these products on a sample basis commenced in early fiscal 2000,
we believe that these products will be sold in limited quantities as evaluation
kits during fiscal 2000 since design cycles for the target applications
generally exceed six months. There can be no assurance that customers will
develop applications requiring commercially significant volumes of our RF
products or that such products will be successful in the market.
In September 1996, we entered into an agreement with Siemens under which Siemens
agreed to purchase a fixed quantity of our blue LED chips. In December 1998,
this agreement was amended to provide for additional shipments of LED products
through September 1999. This contract was assigned to Osram, an indirect
subsidiary of Siemens, effective January 1, 1999. Siemens (including its Osram
subsidiary) accounted for 40% of our revenue for fiscal 1998 and 37% of our
revenue in fiscal 1999.
In August 1999, we entered into a new purchase agreement with Osram pursuant to
which Osram agreed to purchase, and we are obligated to ship, stipulated
quantities of both standard brightness and high brightness LED chips, as well as
SiC wafers, through September 2000. This contract gives Osram limited rights to
defer shipments. It also provides for recovery of liquidated damages, and actual
damages in some instances, if we materially default in meeting shipment
schedules. The contract provides for higher unit prices early in the contract
term, with unit price reductions becoming available as the cumulative volume of
products shipped increases.
RESULTS OF OPERATIONS
Three Months Ended SeptemberDecember 26, 1999 and SeptemberDecember 27, 1998
Revenue. ForRevenue increased 71% from $14.0 million in the second quarter ended September 26,of
fiscal 1999 to $23.9 million in the Company reportedsecond quarter of fiscal 2000. This increase
was attributable to an increase in product revenue of $20,048,000 reflecting73% from $12.8 million in
the second quarter of fiscal 1999 to $22.1 million in the second quarter of
fiscal 2000. This rise in product revenue was a 63%result of the 105% increase in
revenue oversales of our LED products in the firstsecond quarter of fiscal 2000 compared to the
second quarter of fiscal 1999. First quarter product revenue of $18,257,000, which includes sales
of light emitting diodes ("LEDs") and materials, increased 70% over the first
quarter of fiscal 1999. Higher product revenueGrowth in LED volume was primarily the result of LED
revenue growth of 92% in the first quarter of fiscal 2000 as compared to the
same period in the prior year. Much of this growth was attributeddue to a 121%significant
increase in LED volumes over the comparable period with a substantially higher
mix ofdemand for high brightness blue and green LED products. Duringproducts which
represented over 50% of total LED shipments for the firstsecond quarter of fiscal
2000, revenue from2000. As a result of the increasing mix of high brightness chips surpassed revenues from our
standard brightness products. Averageproducts, average LED
sales prices paid by customers
declined 15%have increased 25% in the firstsecond quarter of fiscal 2000 compared withto
the firstsecond quarter of fiscal 1999. During the remaining quarters of fiscal 2000, average sales
prices for standard brightness and high brightness LED products are expected to
remain stable or decline slightly at a slowed pace from reductions experienced
in previous years. Management believes that increased volumes will offset any
decline in average LED sales prices during the remaining quarters of fiscal
2000.
LED shipments also increased as a result of the new Osram contract which calls
for a 44% increase in chip shipments over the previous agreement and extends the
Osram purchase commitment through the first quarter of fiscal 2001. While we
believe that Osram will continue to be our largest customer during fiscal 2000,
we expect that the percentage of revenue from this customer will decline as new
customers emerge in Asia and Europe. However, there can be no assurance that
revenue from new or existing customers will reduce the concentration of our
total revenues derived from the Osram contract.
-12-
Revenue attributable to sales of SiC materials was 46%37% higher in the firstsecond
quarter of fiscal 2000 than in the same period of fiscal 1999. The increased
revenue was1999 due to a
significant contributions made byincrease in sales to C3 for gemstone applications. During the fourth
quarter of fiscal 1999 and the first quarter of fiscal 2000, C3 purchased
additional equipment from us to increase our capacity to manufacture gemstone
products and
improvements in throughput and yield efficiency in wafer production. Gemstone
product sales have benefited fromfor them by more than 50%. Recently, we agreed to spread shipments of
gemstone products for the added capacity provided underremainder of fiscal 2000 over the C3
supply agreement. Wafer volume has also increased asnext twelve months.
We believe that these reduced orders for the Company continues tosecond half of fiscal 2000 can be
successful in offering wafer productsoffset with lower defect densities, which enable
customers to conduct advanced research for microwave and power applications.additional LED revenue. Contract revenue received from U.S.
Government agencies increased 15%45% during the firstsecond quarter of fiscal 2000
as compared to the samesecond quarter in the prior year.
Theof fiscal 1999 due to additional revenue was anticipated as additional contract awards were received
in late fiscal 1999 and in the first quarter of fiscal 2000.
-13-
Gross Profit. The Company's grossGross margin was 47% for53% of revenue during the three months ended
September 26, 1999second quarter of
fiscal 2000 as compared to 46%47% during the second quarter of fiscal 1999. This
increase is due primarily to the increases in LED sales volumes and average
sales price per chip for the same period in the prior year. The
sustained profitability stems fromLEDs discussed above. In addition, higher throughput
and manufacturing yield on LEDhigh brightness LEDs and materials products thereby loweringhave
resulted in lower unit costs. Wafer costs for SiC material sales also declined
44% in the cost per unit and successfully
matching or more than offsetting lower sales prices. The Company has also been
successful in growing LED revenue by lowering prices and raising the volume of
high brightness products. For the remaindersecond quarter of fiscal 2000 compared to the Company plans to
continue the strategysecond quarter of
seeking to lower LED costs and expects that the
greatest cost saving benefits will be derived from greater volume and higher
yield efficiency on the high brightness products. Lower costs also have been
achieved on wafer products due to improved efficiency. Margins from gemstone
products have also improved due to higher yields.fiscal 1999.
Research and Development. Research and development expenses for the three months
ending September 26, 1999, increased 16% over the comparable prior year period.
This was due to increases in internal research and development efforts not
included71% in the
scopesecond quarter of government contract funding.fiscal 2000 to $1.9 million from $1.1 million in the second
quarter of fiscal 1999. Much of this increase was caused by greater investments
for research in the RF and microwave and optoelectronics programs. In addition,
spending under the MVIS contract was higher than funding received. We anticipate
that internal funding for the development of new products will continue to grow
in future periods, while we believe that government funding for our development
projects will remain constant.
Sales, General and Administrative. Sales, general and administrative expenses
for the three month period ended September 26, 1999 increased by 58% over the
same period82% in the prior yearsecond quarter of fiscal 2000 to $2.6 million from $1.5
million in the second quarter of fiscal 1999, due to increased costsgreater spending to support
the overall growth of the business. OverallWe anticipate that total sales, general and
administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue S,G&A coststhey will remain
at 10%constant.
Other (Income) Expense. Other (income) expense has decreased 103% to ($8,000)
during the second quarter of revenue infiscal 2000 from $298,000 for the first quarter compared to the firstsecond quarter of
fiscal 1999. TheseIn the second quarter of fiscal 1999, we realized impairments to
leasehold costs as a percentageresult of revenue are expectedmanagement's decision to remain comparable formove equipment from our
leased facility to our new manufacturing site. This was offset somewhat by
investment income recognized on stock held in C3.
Interest Income, Net. Interest income, net has increased to $570,000 in the
remainder of fiscal 2000.
Other (Income) Expense. The Company continues to perform under an agreement with
C3 to sell equipment manufactured by the Company to C3 at cost plus a comparable
overhead allocation to those incurred from government contracts. The overhead
allocation was recorded as "other operating income"; however, the amount was
more than offset by unrelated asset writeoffs for both the firstsecond quarter of fiscal 2000 and 1999, respectively.
Interest Income, Net. Net interest income increased by $454,000from $20,000 in the first
quarter over the firstsecond quarter of fiscal 1999. This was1999
due primarily to the
investmenta higher available cash balance as a result of cash proceeds from the public stock offering
in February 1999. In
addition, aInterest rates were also higher in fiscal 2000. A portion of
the proceeds from the public stock offering werewas used to -13-
repay the $10,000,000$10.0 million
term loan commitmentfrom NationsBank in the third quarter of fiscal 1999; therefore, no
interest expense was incurred in the firstsecond quarter of fiscal 2000. Interest
expense incurred with the term loan commitment was capitalized as a part of the
construction improvements made to the facility in fiscal 1999. When certain
manufacturing operations were movedHowever, the
majority of the interest incurred in the second quarter of fiscal 1999 was
expensed.
Income Tax Expense. Income tax expense for the second quarter of fiscal 2000 was
$3.0 million compared to $900,000 in the second quarter of fiscal 1999. This
increase resulted from higher profitability during the second quarter of fiscal
2000 over the same period in fiscal 1999 and a higher effective tax rate. Our
tax rate during the second quarter of fiscal 2000 was 34% compared to 24% in the
second quarter of fiscal 1999 due to a reduction in the reserve for deferred tax
assets.
-14-
Six Months Ended December 26, 1999 and December 27, 1998
Revenue. Revenue increased 67% from $26.3 million in the first six months of
fiscal 1999 to $44.0 million in the first six months of fiscal 2000. This
increase resulted from an increase in product revenue of 72% from $23.5 million
in the first six months of fiscal 1999 to $40.4 million in the first six months
of fiscal 2000. This rise in product revenue was largely a result of the 99%
increase in sales of our LED products in the first six months of fiscal 2000
compared to the new sitefirst six months of fiscal 1999. Our high brightness LED
products experienced the heaviest demand. While our LED chip volume has grown
88% in the first six months of fiscal 2000 over units shipped in the first six
months of fiscal 1999, our average sales prices for LEDs have also increased 6%
in the first six months of fiscal 2000 over the same period in the prior year.
The greater average sales price reflects a significant shift in mix to the
higher priced high brightness LED products. For the first six months of fiscal
2000, more than 60% of LED sales were attributable to high brightness products.
For the first six months of fiscal 1999, less than 15% of LED sales were from
high brightness products.
Revenue attributable to sales of SiC material was 41% higher in the first six
months of fiscal 2000 than in the same period of fiscal 1999 due to a
significant increase in sales to C3 for gemstone applications. During the fourth
quarter of fiscal 1999 and the first quarter of fiscal 2000, C3 purchased
additional equipment from us to increase our capacity to manufacture gemstone
products for them by more than 50%. Recently, we agreed to spread shipments of
gemstone products for the remainder of fiscal 2000 over the next twelve months.
We believe that these reduced orders for the second half of fiscal 2000 can be
offset with additional LED revenue. Contract revenue received from U.S.
Government agencies increased 28% during the first six months of fiscal 2000
compared to the first six months of fiscal 1999 portionsdue to new contracts that have
been awarded to us during fiscal 2000.
Gross Profit. Gross profit increased 80% from $12.3 million in the first six
months of fiscal 1999 to $22.1 million in the first six months of fiscal 2000.
This increase is due primarily to the increases in LED sales volumes and average
sales price per chip for LEDs discussed above. During the first six months of
fiscal 2000, the average cost of high brightness LEDs has been reduced 36%.
Margins on wafer and gemstone products have also improved during the first six
months of fiscal 2000 as higher quality materials are being produced with
greater yields.
Research and Development. Research and development expenses increased 48% in the
first six months of fiscal 2000 to $2.8 million from $1.9 million in the first
six months of fiscal 1999. Much of this increase was caused by a greater
investment made for research in the RF and microwave and optoelectronics
programs. We anticipate that internal funding for development of new products
will continue to grow in future periods, while we believe that government
funding for our development activities will remain constant.
-15-
Sales, General and Administrative. Sales, general and administrative expenses
increased 71% in the first six months of fiscal 2000 to $4.6 million from $2.7
million in the first six months of fiscal 1999, due to greater spending to
support the overall growth of the business. We anticipate that total sales,
general and administrative costs will continue to increase in connection with
the growth of the business; however, we believe that as a percentage of revenue
they will remain constant.
Other Expense. Other expense decreased 84% to $92,000 during the first six
months of fiscal 2000 from $567,000 for the first six months of fiscal 1999. In
the first six months of fiscal 1999, we realized impairments to leasehold costs
as a result of management's decision to move equipment from our leased facility
to our new manufacturing site.
Interest Income, Net. Interest income, net increased 746% to $1.1 million in the
first six months of fiscal 2000 from $135,000 in the first six months of fiscal
1999 due to a higher available cash balance as a result of the public stock
offering in February 1999. Interest rates were also higher in fiscal 2000. In
addition, in November 1997, we obtained a $10.0 million term loan from
NationsBank to fund the acquisition and construction of our manufacturing
facility in Durham, North Carolina. The majority of the interest associated with the completed work were
expensed. Forincurred in the
first quartersix months of fiscal 1999 total interest incurred was $196,000
with only $84,000 being eligible for capitalization, and therefore $112,000 was expensed.
Income Tax Expense. Income tax expense for the first quartersix months of fiscal 2000
was $2,388,000$5.4 million compared to $1,113,000$2.0 million in the first quartersix months of fiscal
1999. This increase resulted from increasedhigher profitability during the first quartersix
months of fiscal 2000 over the same periodfirst six months of fiscal 1999.
Liquidity1999 and Capital Resources
Neta higher
effective tax rate. Our tax rate during the first six months of fiscal 2000 was
34% compared to 28% in the first six months of fiscal 1999 due to a reduction in
the reserve for deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of December 26, 1999, we had
working capital of $53.7 million, including $38.2 million in cash provided by operations was $7,518,000and cash
equivalents. Operating activities generated $16.7 million for the threefirst six
months ended
September 26, 1999of fiscal 2000 compared with $1,217,000$4.2 million generated during the
comparative period in fiscal 1999. TheThis increase was primarily attributable to
higher profitability and was supplemented by timing differences and the net
increase in accounts payable and accrued expenses.
The Companyexpenses due mostly to a higher income tax provision.
We invested $9,843,000$22.9 million in capital expenditures during the first threesix months of
fiscal 2000 compared to $4,087,000$10.4 million during the same period in the prior fiscal
year. The majority of the increase in spending was due to new equipment
additions to increase manufacturing capacity in theour crystal growth and epitaxy
areas. The Company also continues to expand facilitiesAlso, we recently completed a 42,000 square foot facility expansion at
theour production site near Research Triangle Park, North Carolina.
-16-
We are currently engaged in construction activities relating to a 125,000 square
foot expansion of our epitaxial and clean room fabrication facilities. We also
intend to expand our facility for RF and microwave test and packaging areas in
calendar 2000. We believe these additions will allow us to dramatically increase
capacity at our facility for LED, RF and microwave and power products. We
anticipate total costs for these facilities to be between $25.0 million and
$30.0 million. Estimates for equipment costs relating to this expansion total
between $25.0 million and $30.0 million. We also recently committed to purchase
a 120,000 square foot facility under construction on 17.5 acres of land near our
present facility. We plan to use this facility for sales, general and
administrative and research and development personnel, as well as for general
employee services functions. The cost to acquire this facility (not including
the upfit costs for completing the shell building) is $8.1 million. We plan to
fund all of these expansion activities with the net proceeds of the January 2000
stock offering.
Although from time to time we evaluate potential acquisitions of and investments
in complementary businesses and anticipate continuing to make such evaluations,
we have no present commitments or agreements with respect to the potential
acquisition of or investment in another business.
Cash provided by financing activities during the first six months of fiscal 2000
related toreflected the receipt of $1,045,000$2.2 million in proceeds from the exercise of stock
options from the Company'sour employee stock option plan.
The Company is presently reviewing capital requirements for fiscal 2000
and beyond and may seek additional financing alternatives in the future.
Although the Company from time to time evaluates potential acquisitions of and
investments in complementary businesses and anticipates continuing to make such
evaluations, the Company has no present commitments or agreements with respect
to the acquisition of or investment in another business other than its equity
interest in MVIS.
At September 27, 1998, the Companywe had a loan outstanding for $10,000,000$10.0 million from a
commercial bank to finance portions of the upfit of the production facility. The
final draw to this loan was made during the first quarter of fiscal 1999 for
$1,281,000.$1.3 million. The loan was subsequently paid off in the third quarter of fiscal
1999. The CompanyWe also committed $3,214,000$3.2 million during the first quarter of fiscal 1999 to
repurchase Companycommon stock.
ImpactWe anticipate that internally generated cash plus the proceeds of the January
2000 stock offering will be sufficient to fund our capital requirements for the
next 12 months.
IMPACT OF THE YEAR 2000
Even though the date is now past January 1, 2000 and we have not experienced any
immediate adverse impact from the transition to the Year 2000, State of Readiness
Wewe cannot provide
assurance that our suppliers and customers have evaluated all of our internal software, embedded systems and products
againstnot been affected in a manner
that is not yet apparent. In addition, certain computer programs which were date
sensitive to the Year 2000 concernsmay not process the Year 2000 as a leap year, and believe thatany
negative consequential effects remain unknown. As a result, we will continue to
monitor our products and businesses will not
be substantially affected by the advent of the year 2000. We have completed a Year 2000 compliance plan that included four phases: inventory, assessment,
-14-
remediation and testing. A detailed inventory of all computers and related
systems was completed and all critical upgrades were finished for all computers
that were non-Year 2000 compliant. All factory-dependent computers were also
tested and are Year 2000 compliant.
Although we cannot control whether and how third parties will address the Year 2000 issue, we have now contacted critical vendors and have been informed that
they have the ability to ensure smooth delivery of products without disruptions
caused by Year 2000 problems. Based on the responses of these vendors to our
survey, we believe that all vendors are either substantially Year 2000 compliant
or that any noncompliance will not have a material effect on our operations.
Costs
We do not believe that the costs associated with Year 2000 compliance have had a
material adverse effect on our business, results of operations, or financial
condition. As of September 26, 1999, this project is complete.
Year 2000 risks
Although we believe that our planning efforts are adequate to address our Year
2000 concerns, there can be no assurance that we will not experience negative
consequences and material costs as a result of undetected errors or defects in
the technology used in our internal systems. Also, there is no assurance that
the systems of third parties on which we rely will be made compliant on a timely
basis. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
We believe that our greatest risk stems from the potential non-compliance of our
suppliers. We depend on a limited number of suppliers for certain raw materials,
components and equipment necessary for the manufacture of our products.
Accordingly, if those suppliers are unable to process or fill our orders or
otherwise interact with us because of Year 2000 problems, we could experience
material adverse effects to our business. While our critical suppliers have
informed us that they do not anticipate any disruption as a result of Year 2000
problems, we are investigating alternate sources of supply. As a consequence of
our dependence on limited sources of supply, we generally maintain a significant
inventory of certain critical materials and require suppliers to keep certain
amounts of inventory available for us. There can be no assurance that we will
have enough materials on hand to continue production without interruption in the
event one or more of our suppliers
experiences Year 2000 problems that affect
its (their) ability to supply us. Any supply chain disruptions would affect our
ability to manufacture our products, which could result in material adverse
consequences to our business, results of operations and financial condition.customers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes in market risk have been identified during the most recent
quarter.
-15--17-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In December 1999 the Company intervened as a party to a lawsuit pending in Tokyo
District Court brought by Nichia Corporation against Sumitomo Corporation, one
of the Company's distributors in Japan. Nichia's complaint against Sumitomo,
filed December 1, 1999, alleged that certain blue LEDs sold by Sumitomo infringe
a Japanese patent owned by Nichia. The allegation pertained to the Company's
standard brightness LED products purchased by Sumitomo. The complaint
principally sought provisional relief in the nature of a preliminary injunction
prohibiting Sumitomo from making further sales of the product in Japan. The
Company, as an intervenor, filed a response that denied any infringement with
respect to its products. Nichia thereafter voluntarily dismissed the first
complaint but commenced a second action against Sumitomo in Tokyo District Court
seeking a permanent injunction based on the same patent. The complaint in the
second suit was filed December 24, 1999. The Company has intervened in the
second suit and filed a response denying any infringement. No monetary damages
for infringement have been sought in either action. The Company believes the
infringement claim is without merit and intends to vigorously defend its
products against the claim.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on November 2, 1999. The
following proposals were introduced and voted upon:
PROPOSAL NO. 1 -- Election of Directors
Votes Votes
Name For Withheld
------------------------ ----------------- ---------------
F. Neal Hunter 26,381,618 281,803
Calvin H. Carter, Jr. 26,381,694 281,727
John W. Palmour 26,381,674 281,747
Walter L. Robb 26,375,554 287,867
Michael W. Haley 26,380,804 282,617
Dolph W. von Arx 26,084,724 578,697
James E. Dykes 26,381,054 282,367
PROPOSAL NO. 2 - Approval of amendment to Articles of Incorporation to change
name to Cree, Inc.
FOR 26,571,069
AGAINST 74,077
ABSTAINED 18,275
BROKER NON-VOTES 0
PROPOSAL NO. 3 - Approve amendments to the Equity Compensation Plan
FOR 16,319,065
AGAINST 1,497,423
ABSTAINED 83,599
BROKER NON-VOTES 8,763,334
-18-
PROPOSAL NO. 4 - Approval of adoption of 1999 Employee Stock Purchase Plan
FOR 17,153,415
AGAINST 504,881
ABSTAINED 59,635
BROKER NON-VOTES 8,945,490
PROPOSAL NO. 5 - Ratification of the selection of Ernst & Young LLP as auditors
for the fiscal year ending June 25, 2000
FOR 26,628,967
AGAINST 14,476
ABSTAINED 19,978
BROKER NON-VOTES 0
The matters listed above are described in detail in the Company's definitive
proxy statement dated September 30, 1999, for the Annual Meeting of Shareholders
held on November 2, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Equity Compensation Plan, as amended and restated August 24, 1999
10.2 Purchase Agreement between the Company and Osram Opto
Semiconductors GmbH & Co. dated August 30, 1999. (1)
27 Financial Data Schedule
99.1 Certain Business Risks and Uncertainties
(b) Reports on Form 8-K:
On July 13, 1999No reports on Form 8-K were filed by the Company filed a Form 8-K announcing a two-for-one
split of its common stock to be effective atduring the close of business on
Julyquarter
ended December 26, 1999.
- ------------------
(1) Confidential treatment of portions of this document is being requested
pursuant to Rule 24b-2 of the Securities and Exchange Commission.
-16--19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CREE, RESEARCH, INC.
Date: November 4, 1999January 31, 2000 /s/ Cynthia B. Merrell
-----------------------------------------------------------------------------------------
Cynthia B. Merrell
Chief Financial Officer and Treasurer
(Authorized Officer and Chief Financial
and Accounting Officer)
-17--20-
EXHIBIT INDEX
Exhibit No. Description
- -------
10.1 Equity Compensation Plan, as amended and restated August 24, 1999
10.2 Purchase Agreement between the Company and Osram Opto Semiconductors
GmbH & Co. dated August 30, 1999. (1)
27 Financial Data Schedule----------- ----------------------------------------
99.1 Certain Business Risks and Uncertainties
- -------------------
(1) Confidential treatment of portions of this document is being requested
pursuant to Rule 24b-2 of the Securities and Exchange Commission.
-18--21-