1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 24, 2000March 25, 2001
Commission file number: 0-21154
CREE, 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] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par value
$0.00125 per share, as of January 23,May 1, 2001 was 74,253,849.72,691,054.
2
CREE, INC.
FORM 10-Q
For the Quarter Ended December 24, 2000March 25, 2001
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 24, 2000
(unaudited) and June 25, 2000 3
Consolidated Statements of Income for the three and
six months ended December 24, 2000 and December 26,
1999 (unaudited) 4
Consolidated Statements of Cash Flow for the six
months ended December 24, 2000 and December 26, 1999
(unaudited) 5
Notes to Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 25, 2001 (unaudited) and
June 25, 2000 3
Consolidated Statements of Operations for the three and nine months ended
March 25, 2001 and March 26, 2000 (unaudited) 4
Consolidated Statements of Cash Flow for the nine months ended
March 25, 2001 and March 26, 2000 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 24,March 25, June 25,
2001 2000
2000
----------------- ---------------
ASSETS----------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 59,496 $103,843117,102 $ 103,843
Short-term investments, held to maturity 190,39277,984 142,461
Marketable securities, 7,832available for sale 9,644 15,842
Accounts receivable, net 22,70831,540 12,406
Interest receivable 4,3932,261 3,893
Inventories 13,33515,853 9,320
Deferred income taxtaxes 139 --
Prepaid expenses and other current assets 1,5412,104 1,254
----------------- ------------------------ ---------
Total current assets 299,836256,627 289,019
Property and equipment, net 185,393215,853 137,118
Long-term investments held to maturity --7,971 41,965
Deferred income taxes 10,624 10,624
Patent and license rights, net 2,6182,882 2,324
Intangible assets 85,736 --
Other assets 26,82131,822 5,152
----------------- ------------------------ ---------
Total assets $525,292 $486,202
================= ===============$ 611,515 $ 486,202
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 18,11915,765 $ 14,204
Accrued salaries and wages 1,7752,178 3,133
Deferred income tax 10,174taxes 15,785 455
Other accrued expenses 5,9507,677 5,270
----------------- ------------------------ ---------
Total current liabilities 36,01841,405 23,062
Long term liabilities:
Long term liability 437 --
----------------- ------------------------ ---------
Total long term liabilities 437 --
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares authorized at December -- --
24, 2000March
25, 2001 and June 25, 2000; none issued and outstanding -- --
Common stock, par value $0.00125; 200,000 and 120,000 shares
authorized 89 88
at December 24, 2000March 25, 2001 and June 25, 2000, respectively; shares
issued and outstanding 71,57772,686 and 70,696 at December 24, 2000March 25, 2001 and
June 25, 2000, respectively 90 88
Additional paid-in-capital 421,568508,466 415,716
Deferred compensation expense (1,476)(1,348) (1,755)
Retained earnings 74,67169,490 48,156
Accumulated other comprehensive (loss) income, (loss), net of tax (6,015)(7,025) 935
----------------- ------------------------ ---------
Total shareholders' equity 488,837569,673 463,140
----------------- ------------------------ ---------
Total liabilities and shareholders' equity $525,292 $486,202
================= ===============$ 611,515 $ 486,202
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
3The accompanying notes are an integral part of the
consolidated financial statements.
4
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In thousands, except per share data)
(Unaudited)
--------------------------- ---------------------------
Three Months Ended SixNine Months Ended
--------------------------------------- ----------------------------------------
December 24, December--------------------------- ---------------------------
March 25, March 26, December 24, DecemberMarch 25, March 26,
2001 2000 19992001 2000
1999
----------------- ------------------ ------------------ --------------------------- --------- --------- ---------
Revenue:
Product revenue, net $37,587 $22,137 $71,898 $40,385$ 48,042 $ 26,177 $ 119,940 $ 66,561
Contract revenue, net 3,907 2,677 7,238 5,290
----------------- ------------------ ------------------ ------------------5,323 3,351 12,561 8,641
--------- --------- --------- ---------
Total revenue 41,494 24,814 79,136 45,67553,365 29,528 132,501 75,202
Cost of revenue:
Product revenue 16,163 10,075 30,652 19,57123,819 10,971 54,471 30,542
Contract revenue 3,257 2,012 5,844 3,900
----------------- ------------------ ------------------ ------------------3,849 2,758 9,693 6,658
--------- --------- --------- ---------
Total cost of revenue 19,420 12,087 36,496 23,471
----------------- ------------------ ------------------ ------------------27,668 13,729 64,164 37,200
--------- --------- --------- ---------
Gross profit 22,074 12,727 42,640 22,20425,697 15,799 68,337 38,002
Operating expenses:
Research and development 2,295 1,911 4,396 2,8423,627 2,246 8,023 5,088
Sales, general and administrative 3,010 2,767 6,967 4,8235,105 2,969 12,072 7,792
Intangible asset amortization 2,280 -- 2,280 --
In-process research and development 17,400 -- 17,400 --
costs, one-time charge
Other (income) expense 62 (8) 62 93
----------------- ------------------ ------------------ ------------------
Income158 1,169 220 1,261
--------- --------- --------- ---------
(Loss) income from operations 16,707 8,057 31,215 14,446(2,873) 9,415 28,342 23,861
Other non operating income (loss) (11) -- (99) --162 495 63 495
Interest income, net 4,322 573 9,105 1,126
----------------- ------------------ ------------------ ------------------3,824 3,768 12,929 4,894
--------- --------- --------- ---------
Income before income taxes 21,018 8,630 40,221 15,5721,113 13,678 41,334 29,250
Income tax expense 7,157 2,983 13,706 5,371
----------------- ------------------ ------------------ ------------------6,295 4,716 20,000 10,087
--------- --------- --------- ---------
Net (loss) income $13,861 $ 5,647 $26,515 $10,201
================= ================== ================== ==================(5,182) $ 8,962 $ 21,334 $ 19,163
========= ========= ========= =========
Other comprehensive (loss) income, net
of tax:
Unrealized holding (loss) gain on
available for sales securities (1,010) 7,039 (7,960) 6,602
--------- --------- --------- ---------
Comprehensive (loss) (5,532) 1,981 (6,950) (437)
----------------- ------------------ ------------------ ------------------
Comprehensive income $ 8,329(6,192) $ 7,628 $19,56516,001 $ 9,764
================= ================== ================== ==================
Earnings13,374 $ 25,765
========= ========= ========= =========
(Loss) earnings per share:
Basic $0.19 $0.09 $0.37 $0.16
================= ================== ================== ==================$ (0.07) $ 0.13 $ 0.30 $ 0.30
========= ========= ========= =========
Diluted $0.18 $0.08 $0.35 $0.15
================= ================== ================== ==================$ (0.07) $ 0.12 $ 0.28 $ 0.28
========= ========= ========= =========
Shares used in per share calculation:
Basic 71,495 62,870 71,154 62,620
================= ================== ================== ==================73,920 68,031 72,075 64,424
========= ========= ========= =========
Diluted 75,200 67,084 75,230 66,705
================= ================== ================== ==================73,920 73,122 75,818 68,844
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
4The accompanying notes are an integral part of the
consolidated financial statements.
5
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
SixNine Months Ended
-------------------------------------------
December 24, December----------------------------
March 25, March 26,
2001 2000
1999
--------------------- -----------------
Operating activities:----------- ---------
(Unaudited)
Operating activities:
Net income $ 26,51521,334 $ 10,20119,163
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,050 4,588of fixed assets 15,016 7,475
Loss on disposal of property, equipment and patents 62 44221 1,212
Write-off of acquired in process research & development, one
time charge 17,400 --
Amortization of patent rights 87 70142 107
Amortization of goodwill 2,068 --
Amortization of other intangible assets 211 --
Issuance and amortization of deferred compensation 279 (101)407 (1,462)
Deferred income taxes 13,16119,291 --
Loss (gain)Purchase of marketable trading securities -- (1,786)
Sale of marketable trading securities -- 2,280
Gain on sale of available for sale securities (1,182) --(1,379) (494)
Changes in operating assets and liabilities:
Accounts receivable, (10,802) (2,152)net (16,113) (8,360)
Inventories (4,015) (632)(2,903) (3,105)
Prepaid expenses and other assets (287) (35)(618) (624)
Accounts payable, , trade 3,915 (1,354)693 (266)
Accrued expenses and long-term liability (243) 5,847
--------------------- -----------------1,744 11,856
--------- ---------
Net cash provided by operating activities 36,540 16,476
--------------------- -----------------57,514 25,996
--------- ---------
Investing activities:
Acquisition fees for purchase transaction (1,908) --
Purchase of available for sale securities (7,176) --(10,318) (184,429)
Proceeds from sale of available for sale securities 5,837 --
Purchase of property and equipment (57,388) (23,042)(88,193) (47,278)
Purchase of securities held to maturity (56,606)(116,528) --
Proceeds from securities held to maturity 50,640214,998 --
Increase in other long-term assets (21,670) --(26,694) (3)
Purchase of patent rights (381) (304)
--------------------- -----------------(700) (556)
--------- ---------
Net cash used in investing activities (86,744) (23,346)
--------------------- -----------------(23,506) (232,266)
--------- ---------
Financing activities:
Acquisition fees for purchase accounting transaction (674) --
Net proceeds from the issuance of short-term debt -- 200
Repurchase of common stock (30,668) --
Net proceeds from issuance of common stock 6,531 2,459
--------------------- -----------------9,919 271,827
--------- ---------
Net cash (used in) provided by financing activities 5,857 2,659
--------------------- -----------------(20,749) 272,027
--------- ---------
Net decreaseincrease in cash and cash equivalents (44,347) (4,211)13,259 65,757
Cash and cash equivalents:
Beginning of period 103,843 42,545
===================== =================--------- ---------
End of period $ 59,496117,102 $ 38,334
===================== =================108,302
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts capitalized $ 0 $ 0
===================== =================
Cash paid for income taxes $ 414611 $ 268
===================== =================Common stock issued in connection with purchase business
combination $ 113,500 $ --
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
5The accompanying notes are an integral part of the consolidated
financial statements.
6
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The consolidated balance sheet as of December 24, 2000,March 25, 2001, the consolidated statements
of income for the three and sixnine months ended December 24,March 25, 2001 and March 26, 2000, and
December 26, 1999,
and the consolidated statements of cash flow for the sixnine months ended December 24,March 25,
2001 and March 26, 2000 and December 26, 1999 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 consolidated financial position, results of
operations and cash flow at December 24, 2000,March 25, 2001, and for all for periods presented have
been made. The balance sheet at June 25, 2000 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 accounting principles generally accepted
accounting principlesin the United States have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's fiscal 2000
Form 10-K. The consolidated results of operations for the periodperiods ended December 24, 2000March
25, 2001 are not necessarily indicative of the operating results that may be
attained for the entire fiscal year.
ACCOUNTING POLICIES
Business Combination
On May 1, 2000, the Company acquired Nitres, Inc. in a business combination
accounted for as a pooling of interests. Nitres, Inc., became a wholly owned
subsidiary (Cree Lighting Company) of the Company through the exchange of
3,695,492 shares of the Company's common stock for all of the outstanding stock
of Nitres, Inc. In addition, the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 304,446
options and warrants to purchase shares of Cree's common stock. All prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Nitres, Inc., as though Nitres,
Inc. had been a part of the Company for all periods presented.
On December 29, 2000 the Company completed the acquisition of the UltraRF
division of Spectrian Corporation, through the purchase of the assets of the
business by Cree's wholly owned subsidiary, Ultra RF, Inc. ("UltraRF") in a
business combination accounted for under the purchase method. Under the terms of
the Asset Purchase Agreement, Ultra RF acquired substantially all of the net
assets of the business from Spectrian Corporation in exchange for a total of
2,656,917 shares of Cree common stock valued at $113.5 million. Of the total
shares issued, 191,094 shares were placed in escrow to secure Spectrian's
representations, warranties and covenants under the Asset Purchase Agreement.
The escrow period is one year, with 50% of the escrowed shares to be released
after six months if there have been no indemnification claims.
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The consolidated financial statements reflect the allocation of the purchase
price to fair value of the assets acquired, including goodwill of $81.7 million
and other intangible assets of $6.3 million. Goodwill is being amortized on a
straight-line basis over ten years and other related intangibles are being
amortized over five to eight years. In connection with the acquisition of the
UltraRF business, the Company recognized a one-time charge of $17.4 million
representing the write-off of the appraised value of certain acquired in-process
research and development costs as of the acquisition date.
UNAUDITED PRO FORMA SUMMARY
The following unaudited pro forma summary for the nine months ended March 25,
2001 and March 26, 2000 presents the condensed consolidated results of
operations as if the acquisition of UltraRF made during 2001 had occurred as of
June 26, 2000 and June 28, 1999, respectively. These unaudited pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made as of June
26, 2000 or June 28, 1999 or of results that may occur in the future.
Nine Months Ended Nine Months Ended
March 25, 2001 March 26, 2000
----------------- -----------------
(In thousands, except per share amounts)
Revenue $149,631 $98,897
Net income 18,244 17,541
Basic net income per share $ 0.25 $ 0.26
Diluted net income per share $ 0.24 $ 0.25
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Ultra
RF, Inc., Cree Research FSC, Inc., Cree Funding LLC, Cree Employee Services
Corporation, CI Holdings, Limited and Cree Technologies, Inc. All material
intercompany accounts and transactions have been eliminated in consolidation.
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7
Reclassifications
Certain fiscal 2000 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 2001 presentation. These
reclassifications had no effect on previously reported net income or
shareholder's equity.
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 2001 and fiscal 2000. The Company's current fiscal year extends
from June 26, 2000 through June 24, 2001.
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Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term and long-term
investments, available for sale securities, accounts and interest receivable,
accounts payable debt and other liabilities approximate fair valuevalues at December
24, 2000March 25, 2001
and June 25, 2000.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:
(a) Securities 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 -- 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.
(c) Securities 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 shareholders' equity.
As of December 24,March 25, 2001 and June 25, 2000, the Company's short-term investments
held to maturity included $190.4$78.0 million consisting of $134.2and $142.5 million, respectively, in
high-grade corporate bonds, $26.6 million in government securities, and $29.6 million in a closed end
mutual fund investing in high grade corporate securities.bonds. The company purchased the investments with a portion
of the proceeds from its public stock offering in January 2000. The Company has
the intent and ability to hold 7
8
these securities until maturity; therefore, they
are accounted for as "securities held-to maturity" under SFAS 115. The
securities are reported on the consolidated balance sheetsheets at amortized cost, as
a short-term investment with unpaid interest included in interest receivable.
As of March 25, 2001 and June 25, 2000, the Company's long-term investments
consisted of $8.0 million and $42.0 million, respectively, in high-grade
commercial paper. The Company purchased the commercial paper with a portion of
the proceeds from the public stock offering in January 2000. The Company has the
intent and ability to hold these securities until maturity; therefore, they are
accounted for as "securities held-to-maturity" under SFAS 115. The securities
are reported on the balance sheet at amortized cost, as long-term marketable
securities with unpaid interest included in accounts receivable if interest is
due in less than 12 months, and as a long term receivable if interest is due in
more that 12 months.
At December 24,March 25, 2001 and June 25, 2000, and December 26, 1999, the Company held a short-term equity
investment in common stock of Microvision, Inc. ("MVIS"). The Company purchased
268,600 common
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shares in a private equity transaction in May 1999 at a price of $16.75 per
share, or $4.5 million. Pursuant to an agreement signed March 17, 2000, the
Company committed to increase its equity position in MVIS by investing an
additional $12.5 million in MVIS common stock. This additional investment was
completed on April 13, 2000, when the Company purchased 250,000 shares at a
price of $50.00 per share. In June 2000, 162,500162,600 MVIS shares were sold for $6.3
million, with a gain for $3.6 million realized from the sale. The Company has
also purchased other securities for investment purposes. Management views these
transactions as investments, and the shares are accounted for as "available for
sale" securities under SFAS 115. Therefore unrealized gains or losses are
excluded from earnings and are recorded in other comprehensive income or loss,
net of tax.
During the first sixthree and nine months of fiscalended March 25, 2001, the Company realized
a gaingains of $1.2$199,000 and $1.4 million, respectively, from the sale of
available-for-sale securities. During the three and nine months ended March 26,
2000, the Company realized gains of $494,000 and $494,000, respectively, from
the sale of available-for-sale securities. For the three and nine months ended
March 25, 2001, the Company had unrealized holding losses of $1.5 million and
$12.1 million, respectively, associated with investments made in available for
sale securities.
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:
December 24, June 25,
2000 2000
---------------------- --------------------
(In thousands)
Raw materials $ 2,850 $ 2,415
Work-in-progress 4,569 3,094
Finished goods 5,916 3,811
---------------------- --------------------
Total Inventory $ 13,335 $ 9,320
====================== ====================
March 25, June 25,
2001 2000
--------- ---------
(In thousands)
Raw materials $ 4,156 $ 2,415
Work-in-progress 6,568 3,094
Finished goods 5,129 3,811
--------- ---------
Total Inventory $ 15,853 $ 9,320
========= =========
Research and Development Accounting PolicyAgreements
The U.S. Government provides funding through research contracts for several of
the Company's current research and development ("R&D") efforts. The contract
funding may be based on either a cost-plus or a cost-share arrangement. The
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 paid 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.
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The revenue and expense classification for contract activities is based on the
nature of the contract. For contracts where the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is reported as
9
10
contract revenue and all direct costs are reported as costs 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, costs are reported 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 included in research and development
expenses:
Three Months Ended SixNine Months Ended
----------------------------------------- ------------------------------------------
December 24, December-------------------------- --------------------------
March 25, March 26, December 24, DecemberMarch 25, March 26,
2001 2000 19992001 2000
1999
----------------- ------------------- -------------------- --------------------------- --------- --------- ---------
(In thousands)
Net R&D costs $174 $ 134160 $ 239164 $ 174399 $ 298
Government funding 314 331 660 398
----------------- ------------------- -------------------- ------------------371 227 1,031 625
--------- --------- --------- ---------
Total direct costs incurred $488 $ 465531 $ 899391 $ 572
================= =================== ==================== ==================1,430 $ 923
========= ========= ========= =========
Significant Sales ContractContracts
In July 2000, the Company entered into a new Purchase Agreement with Osram Opto
Semiconductors GmbH & Co. ("Osram"), pursuant to which Osram agreed to purchase
and the Company is obligated to ship certain quantities of standard brightness,
high brightnessstandard-brightness,
high-brightness and ultra-brightnessultra-bright LED chips and silicon carbide wafers through
September 2001.
The Osram agreement calls for certain quantities of standard brightness, high
brightnessstandard-brightness,
high-brightness and ultra-brightnessultra-bright 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, Osram is entitled to liquidated damages. These
damages are calculated at 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% of
standard-brightness LED's and 25% of standard brightness LEDshigh-brightness and high brightness and ultra-brightnessultra-bright 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 standard brightness,
high brightnessstandard-brightness,
high-brightness and ultra-brightnessultra-bright LEDs. In each case, Osram is required to accept
all products within 90 days of the original shipment date. In all other cases,
Osram may reschedule shipments only with the Company's mutual written agreement.
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 9
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higher prices were negotiated by the Company to
offset higher per unit costs expected earlier in the contract.
In December 2000, the Company's subsidiary, UltraRF, entered into a Supply
Agreement with Spectrian. Under this agreement, Spectrian has committed to
purchase semiconductor components having a minimum aggregate purchase price of
approximately $58.0 million during
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the two years ended December 31, 2002. In addition, UltraRF agreed to allocate
sufficient capacity to supply Spectrian with quantities in excess of its minimum
commitment by up to 20%. The minimum purchase amounts are fixed for each quarter
during the two-year term of the agreement, with the aggregate of the eight
quarters equaling $58.0 million. Cree, UltraRF and Spectrian also entered into a
development agreement, under which Spectrian has agreed to provide funding of
$2.4 million during calendar 2001. This work will support development by Cree
and UltraRF directed to improve high linearity and gain laterally diffused metal
oxide semiconductors ("LDMOS") power modules, and silicon carbide based RF power
transistors for potential use in Spectrian's power amplifier products.
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.
Shareholders' Equity
On January 18, 2001, the Company announced that its Board of Directors has
authorized the repurchase of up to four million shares, or about five percent,
of its outstanding common stock. Additionally, on March 22, 2001, the Company
announced that its Board of Directors increased the repurchase limits under the
stock repurchase program announced in January 2001 to include an additional
three million shares, for a total of seven million shares of its outstanding
common stock. As of March 25, 2001, the Company repurchased 1.85 million shares
of its common stock at an average price of $16.58 per share.
The Company expects to use available cash to finance purchases under the
program, which extends to January 2002. At the discretion of the Company's
management, the repurchase program can be implemented through open market or
privately negotiated transactions. The Company will determine the time and
extent of repurchases based on its evaluation of market conditions and other
factors.
In connection with the stock repurchase program, and in addition to the
purchases described above, the Company sold put options covering an aggregate of
1.95 million shares for an aggregate premium of $2.9 million in January 2001.
The options are exercisable on a specific date in the fourth quarter of fiscal
2001, at an average exercise price of $19.52 per share. The put options were
sold to investment banks without registration in reliance on the exemption
provided by Section 4 (2) of the Securities Act of 1933, as amended. Each
transaction was privately negotiated with the purchaser, which was an accredited
investor.
(LOSS) EARNINGS PER SHARE
The Company presents (loss) earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS
128 required the Company to change its method of computing, presenting and
disclosing earnings per share information.11
12
The following computation reconciles the differences between the basic and
diluted presentations:
Three Months Ended SixNine Months Ended
------------------ ----------------
December 24, December-------------------------- --------------------------
March 25, March 26, December 24, DecemberMarch 25, March 26,
2000 1999* 2000 1999*
--------------- ---------------- ---------------- ----------------2001 2000(*) 2001 2000(*)
--------- --------- --------- ---------
(In thousands except per share amounts)
Net (loss) income $ 13,861(5,182) $ 5,647 $26,5158,962 $ 10,20121,334 $ 19,163
Weighted average common shares 71,495 62,870 71,154 62,620
--------------- ---------------- ---------------- ----------------73,920 68,031 72,075 64,424
--------- --------- --------- ---------
Basic (loss) earnings per common share $ 0.19 $0.09 $0.37 $0.16
=============== ================ ================ ================(0.07) $ 0.13 $ 0.30 $ 0.30
========= ========= ========= =========
Net (loss) income $13,861 $5,647 $ 26,515 $10,201(5,182) $ 8,962 $ 21,334 $ 19,163
Diluted weighted average common shares:
Common shares outstanding 71,495 62,870 71,154 62,62073,920 68,031 72,075 64,424
Dilutive effect of stock options and warrants 3,705 4,214 4,076 4,085
--------------- ---------------- ---------------- ------------------ 5,091 3,743 4,420
--------- --------- --------- ---------
Total diluted weighted average common shares 75,200 67,084 75,230 66,705
--------------- ---------------- ---------------- ----------------73,920 73,122 75,818 68,844
--------- --------- --------- ---------
Diluted (loss) earnings per common share $0.18 $0.08 $0.35 $0.15
=============== ================ ================ ================$ (0.07) $ 0.12 $ 0.28 $ 0.28
========= ========= ========= =========
*(*) Weighted average shares and per share amounts have been adjusted for the two
for one stock split effective December 1, 2000.
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, 1,034,4415,951,074 shares for the three and sixnine months
ended December 24, 2000,March 25, 2001, respectively, were not included in calculating diluted
(loss) income per share for the periods presented. For the three and sixnine months
ended DecemberMarch 26, 1999,2000, there were no potential shares considered antidilutive.
10
11
The Company effected a two-for-one split of its common stock in December 2000.
The stock split was effected by an amendment to the Company's Articles of
Incorporation that became effective at the close of business on December 1,
2000. Each issued and unissued authorized share of common stock, $0.0025 par
value per share, was automatically split into two whole shares of common stock,
$0.00125 par value per share. On December 8, 2000, 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, unless otherwise stated.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998,BUSINESS SEGMENTS
The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative InstrumentsCompany operates in two business segments, Cree and Hedging Activities" ("SFAS 133").
SFAS 133,UltraRF. The Cree
segment incorporates its proprietary technology to produce LEDs, silicon carbide
wafers and government contract research. Products from this segment are used in
automotive and liquid crystal display backlighting; indicator lamps, full color
light emitting diode displays and other lighting applications as amended by SFAS 137well as power
applications and SFAS 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In the first six months
of fiscal 2001, the Company adopted SFAS 133. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
SUBSEQUENT EVENT
On December 29, 2000 the Company completed the acquisition of theresearch.
12
13
The UltraRF division ("business") of Spectrian Corporation ("Spectrian"), through the
purchase of the assets of the business by Cree's wholly-owned subsidiary, Zoltar
Acquisition, Inc. The subsidiary was renamed UltraRF, Inc. ("UltraRF")
following the completion of the acquisition. UltraRFsegment designs, manufactures and markets a complete line of bipolar transistorssilicon
based LDMOS and laterally diffused metal oxide
semiconductor ("LDMOS")bipolar radio frequency ("RF") power semiconductors. The asset
purchase was consummated pursuant to an Asset Purchase Agreement dated November
20, 2000 (the "Asset Purchase Agreement") between Spectrian and UltraRF.
Under the terms of the Asset Purchase Agreement, Cree's subsidiary, UltraRF,
acquired substantially all of the assets of the business, including inventories,
equipment and tangible property, intangible assets, contract rights, records,
supplies, rights associated with prepaid expenses, certain rights against third
parties, certain software and trade accounts receivable attributable to external
sales (offset by accounts payable, with no obligation of Cree, to collect
accounts receivable), and assumed certain specified liabilities of the business,
including obligations and liabilities under certain contracts, warranty
obligations and tax obligations and liabilities relating to the business, in
exchange for a total of 2,656,917 shares of Cree common stock. Of the total
shares issued, 191,094 shares were placed in escrow to secure Spectrian's
representations, warranties and covenants under the Asset Purchase Agreement.
The escrow period is one year, with 50% of the escrowed shares to be released
after six months if there have been no indemnification claims. The acquired
assets included equipment and other physical property used by the business is
designing, manufacturing and marketing bipolar and LDMOS RF power semiconductors, the critical
component utilized in building power amplifiers for wireless infrastructure
applications.
Summarized financial information concerning the reportable segments for the
three and Cree intends to continuenine months ended March 25, 2001 are shown in the following table. The
"Other" column represents amounts excluded from specific segments such use through its UltraRF subsidiary.
11
12
The UltraRF facility is located in a building on one of two parcels of land in
Sunnyvale, California, that Spectrian leased in November 1996 for a 15-year term
(with three options to extend the lease for up to an additional fifteen years).
In connection with the acquisition of the assets of the business, Spectrian and
Cree's subsidiary, UltraRF, also entered into a sublease agreement with respect
to the UltraRF facility. Under the sublease, if Spectrian exercises its option
to extend the term of its master lease with its landlord, UltraRF may also
exercise an option to extend its sublease of the UltraRF facility. Cree has
guaranteed the obligations of its subsidiary under the sublease.as
interest income. In addition, at the closing of the acquisition, Cree's subsidiary, UltraRF
signed"Other" column also includes corporate assets
such as cash and cash equivalents, short-term investments held to maturity,
marketable securities, interest receivable and long-term investments held to
maturity which have not been allocated to a supply agreement with Spectrian. Under this agreement, Spectrian has
committed to purchase semiconductor components having a minimum aggregate
purchase price of approximately $58 million during the two years ended December
31, 2002. In addition, UltraRF agreed to allocate sufficient capacity to supply
Spectrian with quantities in excess of its minimum commitment by up to 20%. The
minimum purchase amounts are fixed for each quarter during the two-year term of
the agreement, with the aggregate of the eight quarters equaling $58.0 million.
Cree, UltraRF and Spectrian also entered into a development agreement, under
which Spectrian has agreed to provide funding of $2.4 million during calendar
2001. This work will support development by Cree and UltraRF directed to
improve high linearity and gain LDMOS power modules, and silicon carbide based
RF power transistors for potential use in Spectrian's power amplifier products.
The acquisition will be recorded using the purchase method of accounting.
12specific segment.
Cree UltraRF Other Total
-------- -------- -------- --------
(In thousands)
Three Months Ended March 25, 2001
Revenue $ 44,064 $ 9,301 $ 0 $ 53,365
Income (loss) before income taxes 14,735 (17,446) 3,824 1,113
Assets $293,807 $102,746 $214,962 $611,515
Cree UltraRF Other Total
-------- -------- -------- --------
(In thousands)
Nine Months Ended March 25, 2001
Revenue $123,200 $ 9,301 $ 0 $132,501
Income (loss) before income taxes 45,851 (17,446) 12,929 41,334
Assets $293,807 $102,746 $214,962 $611,515
13
1314
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 our actual operating results and financial
position to differ materially. Such forward-looking statements can be identified
by the use of forward-looking terminology such as "may," "will," "anticipate,"
"believe," "plan," "estimate," "expect," and "intend" or the negative thereof or
other variations thereof or comparable terminology. The Company cautionsWe caution that such
forward-looking statements are further qualified by important factors that could
cause the Company'sour actual operating results to differ materially from those
forward-looking statements. These factors include, but are not limited to,
uncertainties regarding economic condition; risks from increased competition;
uncertainty whether we can achieve our targets for increased yields and cost
reductions needed to permit lower product pricing without margin reductions;
risks associated with the production ramp-up for our new ultra-bright LED chips,
including the possibility of unexpected delays, increased costs and
manufacturing difficulties or less than expected market acceptance; risks
associated with the planned release of new products under development, including
the possibility we will be unable to develop and manufacture commercially viable
versions of such products; the risk of variability in our manufacturing
processes that can adversely affect yields and product performance; uncertain
product demand; concentration of our business among few customers; whether we
can manage our growth and integrate acquired businesses effectively; uncertainty
whether our intellectual property rights will provide meaningful protection; the
possibility of adverse results in our pending intellectual property litigation
and general economic conditions. See Exhibit 99.1 for further discussion of
factors that could cause the Company'sour actual results to differ.
Overview
Cree, Inc. is the world leader in developing and manufacturing semiconductor
materials and electronic devices made from silicon carbide ("SiC") and gallium
nitride ("GaN"). 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") products. The Company offersWe offer LEDs at three brightness levels: ultra-bright blue
and green devices, high-brightness blue and green products and
standard brightnessstandard-brightness blue products. Our LED devices are utilized by end users for
automotive dashboard lighting, liquid crystal display ("LCD") backlighting,
including wireless handsets and other consumer products, indicator lamps,
miniature white lights, indoor sign and arena displays, outdoor full color
displays, traffic signals and other lighting applications.
The Company'sWe introduced our new ultra-bright LED products were introduced to customers in sample
quantities in October 2000. During the second quarter of fiscal
2001, revenues
derived from these products represented 8% of the total LED sales mix.2001. We believe the ultra-bright chipsproducts are two-times brighter than our
high-brightness devices, and they will replace some of the demand for our older
products over time. The ultra-bright chips are priced slightly higher than the
high-brightness devices; therefore, the cost per lumen of brightness to the
customer has been substantially reduced with the introduction of this product.
As a result, during the third quarter of fiscal 2001, revenues derived from
ultra-bright devices have gained
13LED
14
14
strong initial acceptance15
products increased from our customers, but will require a design-in cycle
that is expected to continue for several months. The ultra-bright products may
allow new applications for Cree customers, including additional outdoor displays
and traffic signal designs as a result of the higher brightness level. We are
targeting these products to ramp quickly, and we believe they may account for up
to 25%8% of our total LED chip volumerevenue in the Marchsecond quarter of
fiscal 2001 to 39% of revenue in the third quarter if we meet our
production milestones. Historically, we have experienced lower margins with many
new product introductions, including the ultra-brightness products. We will
strive to make improvements to output and yield over the next several quarters
for these products.of fiscal 2001.
During the secondthird quarter of fiscal 2001, our high-brightness chips made-upcomprised the
largest portion of our revenue at 71%42% of LED sales. However, these sales have
declined as a percentage of total LED revenue from 82%79% in the three monthsquarter ended
SeptemberDecember 2000 due to the sales of our new ultra-bright products. We believeRevenues from
the high-brightness chips will continue to declinestandard-brightness products were fairly flat as a percentage of our LED
sales if we meet our production targetsmix during the third quarter of fiscal 2001. Over the next few quarters,
LED revenue mix by product is targeted to remain near the same range as the
March 2001 quarter.
We anticipate that new designs targeted to be ready for sale in the first half
of fiscal 2002 will create a greater demand for our ultra-bright devices. The
standard-brightness products are targetedIn
addition, we announced a new LED product design, our megabright chip, that we
target to maintain a range of 15-20%be released in volume production in June 2001. We believe this product
offers two-times the brightness of our ultra-bright devices and will likely
benefit customers who provide outdoor displays, automotive designs, PDA's and
solid state illumination products. In addition, we are in the later stages of
developing a new ultra violet ("UV") LED volume dueproduct that we are targeting to be
available beginning in the low price and customers current designs requiring the
device.first half of fiscal 2002 in limited quantities for
white light conversion applications.
Through the first halfnine-months of fiscal 2001, average sales prices for LEDs have
declined 13%20%. We target average sales prices for these products to decline at a
rate of 25% to 30% for the entire fiscal year; however, greater declines may be
necessary depending on future market conditions.
In anticipation of these declines in average sales prices, our management team
is focused on the execution of yield improvements in our LED production
processes. We have continued to make improvements to our LED output and yield;
however, during the first half of fiscal 2001, we did not meet our internal cost
reduction goals, as declines in cost only kept pace with reductions in average
sales prices. Wafer yield improvements will be critical to our success in the
next few quarters. In addition, the Company must continue to ramp capacity for
our ultra-bright LED products as we pursue market penetration and acceptance.
During the remainder of fiscal 2001, Cree must continue to focus on adding
capacity through yield improvements. If we are unable to meet yield improvement
objectives, continue the production ramp of our ultra-bright products and gain
new LED customers, future margins may decline or our revenue growth may slow.year.
We derive additional revenue from the sale of advanced materials made from SiC
that are used primarily for research and development for new semiconductor
applications. During the secondthird quarter of fiscal 2001, sales of SiC wafers
increased by 40%120% over the September 2000 quarter.third quarter of fiscal 2000. Strong demand from the
corporate and research communities is driving this growth, including new
interest in SiC for microwave and power devices from certain customers. During
the first halfquarter, we continued process refinement to lower costs of fiscal 2001,two-inch product
while improving quality and manufacturing processes for three-inch material. We
continue to expand our epitaxial capabilities for three-inch production of
nitride and SiC based products. For some RF and power products it is critical
that we also sold SiC crystals to Charles & Colvard,
Ltd. ("C&C"), for use in gemstone applications. We anticipate little toget these processes on line so that we can deliver devices at the proper
price point and margins. There was no revenue from the gemstone business over the next several quarters as they
balance their inventory levels. C&C sales made up approximately 5% of total
revenue during the
secondthird quarter of fiscal 2001.
During the quarter ended March 25, 2001, UltraRF exceeded our revenue
expectation at $9.3 million. In the long term, UltraRF's success will depend on
the rate at which we diversify our Spectrian-concentrated business. However, we
experienced a strong quarter from Spectrian, with sales extending beyond the
minimum purchase requirements in our contract. We believe the LDMOS product line
will enable growth of our products to customers other than Spectrian. These
products focus on multi-carrier applications and may allow for new design wins.
The balance of our revenue is derived from government and customer research
contract funding.
14We continue to focus on cost reduction as one of our highest priorities. During
the past twelve months, we maximized our capacity and have invested in
additional plant and equipment and other infrastructure that has increased our
overall cost base. We anticipate that we will use much of this equipment and
infrastructure in the near term to perform research and development work
15
1516
to support the commercialization and growth of future products. We are also now
thoroughly examining our cost structure and identifying ways to minimize costs
through vendor negotiations, process improvements and other efficiencies and to
increase overall yields. We believe that a successful cost reduction program
will be critical to meeting our profit objectives over the next several
quarters.
RESULTS OF OPERATIONS
Three Months Ended December 24,March 25, 2001 and March 26, 2000 and December 26, 1999
Revenue. Revenue grew 67%81% from $24.8$29.5 million in the secondthird quarter of fiscal 2000
to $41.5$53.4 million in the secondthird quarter of fiscal 2001. This increase was
attributable to an increasea rise in product revenue of 70%84% from $22.1$26.2 million in the secondthird
quarter of fiscal 2000 to $37.6$48.0 million in the secondthird quarter of fiscal 2001.
This riseWithout the acquisition of Ultra RF, revenue for the third quarter would have
increased 49% over the prior year comparative results. Much of the increase in
revenue for our core business unit resulted from demand for our LED and silicon
carbide wafer products. LED chip volume increased 127% over units delivered in
the third quarter of last year. Our new ultra-bright LED products showed the
highest percentage gain over the December 2000 quarter as unit shipments
increased more than five times. Ultra bright products, which are approximately
two times brighter than our high-brightness chips, made up more than 24% of our
total chip volume and 39% of total LED revenue during the quarter. The ultra
bright products will likely continue to replace some of the demand for older
devices, as new customer product revenue wasqualifications are completed. As a result of
the 114% increasegrowth of these products, our high-brightness chips declined sequentially
from 71% in the December 2000 quarter to 42% of LED sales for the March 2001
quarter. Sales of our LED productsstandard-brightness chips continued to be strong in the
secondthird quarter of fiscal 2001 as volume increased 153% over the same quarter in
the prior year due to the timing of demand for automotive applications, displays
and indicator lights. Average LED sales prices declined 27% in the third quarter
of fiscal 2001 compared to the secondthird quarter of fiscal 2000. LED volume rose 161% over the prior year due to a
significant increase in demand for ultra-bright2000, and high-brightness blue and
green LED products, as well as greater capacity from our manufacturing facility.
Average sales prices for LED products have declined 18% in the second quarter of
fiscal 2001 compared to fiscal 20006%
sequentially, due to expected contractual volume discounts and other factors.
Revenue attributablegiven to sales of SiC materials was 6% lower in the second
quarter of fiscal 2001 than in the same period of fiscal 2000, due to a
significant decline in sales to C&C for gemstone materials. C&C ramped up their
gemstone business in the second quarter of fiscal 2000 and have since reduced
their orders as they balance their inventory. We anticipate little to no revenue
from the gemstone business over the next several quarters.customers.
SiC wafer sales have
increased 89%120% in the secondthird quarter of fiscal 2001 compared to
the same period of fiscal 2000,2000. This is due to demand from the corporate and
research communities, including new interest in SiC for microwave and power
devices from certain customers.customers and other customers now using our SIC wafers for
commercial production. Wafer units have increased 95%148%, while average sales
prices have declined 2%11% in the secondthird quarter of fiscal 2001 compared to the
three months
endedthird quarter of fiscal 2000. Sales of gemstone products declined 100% during
the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000,
as there were no sales to Charles & Colvard ("C&C") during the March 2001
quarter. We anticipate little to no revenue from this customer over the next
several quarters.
Revenue from our newly acquired UltraRF subsidiary was $9.3 million during the
March 2001 quarter, which was relatively unchanged from results reported by
UltraRF as a division of Spectrian Corporation in the December 1999.2000 quarter.
UltraRF continues to ramp its production of LDMOS products currently being
shipped for next generation wireless base station applications while working on
new customer design wins. We acquired Ultra RF in December 2000; therefore,
there were no sales for this unit in the comparable March 2000 quarter.
16
17
Contract revenue received from U.S. Government agencies and non-governmental
customers increased 46%59% during the secondthird quarter of fiscal 2001 compared to the
secondthird quarter of fiscal 2000 due to additional contract awards receivedreceived. During
the past 12 months, our Cree Lighting subsidiary, and we were awarded 12 new
government funded contracts. In addition, certain prior year rate adjustments
were recorded which increased revenue in the first half of fiscal 2001.March 2001 quarter.
Gross Profit. Gross profit increased 73%63% to $22.1$25.7 million in the secondthird quarter
of fiscal 2001.2001 compared to $15.8 million in the third quarter of fiscal 2000.
Compared to the prior year, gross margin increaseddecreased to 53%48% from 51%54% of revenue.
Lower margins resulted from the combination of the UltraRF business, where gross
margins were 42% of revenue for the third quarter of fiscal 2001. Margins were
lower for this unit due primarily to one-time adjustments to record costs associated with
acquired inventory at fair value in accordance with the higher throughput and manufacturing yield on
high brightness LEDs and materialspurchase method of
accounting, in addition to other adjustments to costs. Without these
adjustments, margins at UltraRF would have been 49%. Our product margin,
excluding UltraRF, would have been 53% of revenue for the March 2001 quarter.
The LED line also realized lower profitability due to contractual declines in
average sales prices combined with flat costs. In the March 2001 quarter, we
made chip modifications to certain LED products that have resulted in lower unit
costs. Duringwe believe will improve our
competitive advantage for new design wins. We believe the secondchallenges involved
with learning this new process were mostly overcome during the third quarter of
fiscal 2001, therefore, we increased wagestarget improved yields for non-exempt employees one-dollar per hour. Withoutour LED products in the
hourly wage increase,
product margins would have been 57.6%fourth quarter of product revenue for the quarter. For
the remainder of fiscal 2001, we plan to continue the strategy of reducing LED
costs through higher production yields.2001. Wafer costs for SiCSIC material sales were also declined 23%flat in the
secondthird quarter of fiscal 2001, compared to results in the secondthird quarter of fiscal
2000 due to improved yields and greater throughput of materials.2000.
Research and Development. Research and development expenses increased 20%64% or
$1.4 million in the secondthird quarter of fiscal 2001 to $2.3$3.6 million from $1.9$2.2
million in the secondthird quarter of fiscal 2000. Much of this increase was caused by greater investmentsIncreased spending for research in the RF and microwave and optoelectronics programs. We believe
that research and
development results from the combination of UltraRF expenses will continueand increased
internal funding to grow duringsupport microwave and optoelectronic programs. Without the
remainderaddition of UltraRF expenses, research and development costs would have
increased 32% from the third quarter of fiscal 2001 due2000. Internal funding for
programs is targeted to increased funding necessaryaccelerate in the next several months as we increase our
efforts to develop new products that we believe will improve our competitive
position and create new opportunities for future release; however, as a percentagethe use of revenue theses expenses are
targeted to remain relatively even.
15
16silicon carbide and gallium
nitiride in the marketplace.
Sales, General and Administrative. Sales, general and administrative expenses
increased 9%76% or $2.2 million in the secondthird quarter of fiscal 2001 to $3.0$5.1
million from $2.8$3.0 million in the secondthird quarter of fiscal 2000, due to greater spendingthe
combination of UltraRF expenses and significant legal costs primarily associated
with patent litigation. Excluding UltraRF results, selling, general and
administrative expenses would have been 37% higher, which is directly attributed
to supportcosts incurred during the overall growthMarch 2001 quarter in connection with ongoing
intellectual property litigation.
Intangible Assets Amortization and In-Process Research and Development Costs. As
a result of the businessacquisition of UltraRF, we generated goodwill and additional legal expenses resultingother
intangible assets, which will be amortized over periods ranging from five to 10
years. In addition, due to the patent litigation. Duringcombination with Ultra RF, we recorded a one-time
charge of $17.4 million in the secondthird quarter of fiscal 2001 the Company
changed its employee profit sharing bonus program. This plan was changed to
provide that, in lieu of a cash bonus, employees would be granted options to
purchase common stock of the Company upon achieving quarterly financial
objectives. This change reduced S,G&A expenses by $500,000 during the second
quarter of fiscal 2001 as compared to the same quarter in the prior year. For
the remainder of fiscal 2001, we anticipate that total sales, generalassociated with
acquired in-process research and administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
constant.development costs.
17
18
Other (Income) Expense. Other expense has increaseddecreased to $62,000$158,000 during the secondthird
quarter of fiscal 2001 from income of $8,000$1.2 million recognized for the secondthird quarter of
fiscal 2000. InThis decrease is attributable to the seconddisposal of fewer fixed assets
during the quarter.
Other Non Operating Income (Loss). Other non-operating income declined $333,000
to $162,000 for the third quarter of fiscal 2001 we instituted a physical
tagging system for fixed assets that resulted indue to reduced gains from the
write-downsale of $62,000 of
assets.trading securities being recognized.
Interest Income, Net. Interest income, net has increased $3.7remained constant at $3.8 million
to $4.3
million infor the secondthird quarter of fiscal 2001 from $573,000 in the prior year
period. This was due to higher average cash balances being available in the
second quarter ofand fiscal 2001 as a result of the public stock offering completed
in January 2000. Higher interest rates in the second quarter of fiscal 2001 also
improved interest income.
Income Tax Expense. Income tax expense for the secondthird quarter of fiscal 2001 was
$7.2$6.3 million compared to $3.0$4.7 million in the secondthird quarter of fiscal 2000. ThisThe
increase in income tax expense resulted from higher profitabilityincome before income taxes,
adjusted for acquired in-process research and development charges, which were
not deductible for tax purposes during the secondthird quarter of fiscal 2001 over the same period in fiscal 2000. Our2001. The
income tax provision rate provision was 34% for both periods.
SixNine Months Ended December 24,March 25, 2001 and March 26, 2000 and December 26, 1999
Revenue. Revenue increased 73%76% from $45.7$75.2 million in the first sixnine months of
fiscal 2000 to $79.1$132.5 million in the first sixnine months of fiscal 2001. This
increase resulted from a rise in product revenue of 78%80% from $40.4$66.6 million in
the first sixnine months of fiscal 2000 to $71.9$119.9 million in the first sixnine months
of fiscal 2001. Greater product revenue was largely a result of the 128%100%
increase in sales of our LED products in the first sixnine months of fiscal 2001
compared to the first sixnine months of fiscal 2000. Our high brightnesshigh-brightness LED
products experienced the heaviest demand; however, units sold of our
standard brightnessstandard-brightness chips also increased 48%38% during the comparative period.
Overall LED chip volume grew 140%135% in the first sixnine months of fiscal 2001 over
units shipped in the first sixnine months of fiscal 2000, while our average sales
prices for LEDs hassold during each period declined 5%
during this time frame.
Revenue attributable to sales of SiC material was 4% lower in the first six
months of fiscal 2001 than in the same period of fiscal 2000,15% due to a
significant decline in sales to C&C for gemstone applications. C&C ramped up
their gemstone business in the first half of fiscal 2000 and have since reduced
their orders as they balance their inventory. We anticipate little to no revenue
from
16
17
the gemstone business over the next several quarters.expected contractual
volume discounts.
SiC wafer sales have increased 72% in the first sixnine months of fiscal 2001 compared
to the same period of fiscal 2000, due to heavy demand from the corporate and
research communities, including new interest in SiC for microwave and power
devices from certain customers. Wafer units have increased 106%122%, while average
sales prices have declined 17%15% in the first halfnine months of fiscal 2001 compared
to the first sixnine months of fiscal 2000. Average sales prices have declined due to a
shift in mix to high volume products now used by our customers in their
commercial production applications.
Revenue attributable to sales of products sold.SiC material used in the gemstone business was
58% lower in the first nine months of fiscal 2001 than in the same period of
fiscal 2000. This decline was due to C&C ramping up their gemstone business in
the first half of fiscal 2000, while reducing their orders in fiscal 2001 as
they balance their inventory. We anticipate little to no revenue from the
gemstone business over the next several quarters.
Revenue from UltraRF increased 100% during the first nine months of fiscal 2001
compared to the same period in fiscal 2000, as we acquired the UltraRF business
in a purchase transaction on December 29, 2000.
18
19
Contract revenue received from U.S. Government agencies and customers increased
37%45% during the first sixnine months of fiscal 2001 compared to the first sixnine
months of fiscal 20002000. Contract revenue grew over the same period of the prior
year due to new contract awards, receivedincreases in funding under existing programs
and rate adjustments recorded. During the first half of fiscal 2001.12 months ended March 2001, our Cree
Lighting Company subsidiary and we were awarded 12 new government funded
contracts.
Gross Profit. Gross profit increased 92%80% from $22.2$38.0 million in the first sixnine
months of fiscal 2000 to $42.6$68.3 million in the first sixnine months of fiscal 2001.
This increase is due primarily to the rise in LED sales. Margin on LED products
also improved in the nine months ending March 2001 as compared to the same
period in the prior year as average LED sales volumes combined with
LED cost declines that stayed ahead of reductions inprices were reduced 15% while
average sales prices.
Average LED costs were 16% lower due to higher throughput and manufacturing
yield on high brightness LEDs and materials products.high-brightness LEDs. Margins on wafer products have also
improveddeclined during the
first sixnine months of fiscal 2001 as higher yields have
reduced costs 27% compared to the same period ofin the prior year.year
as average sales prices decreased 15% while costs were reduced 12%.
Research and Development. Research and development expenses increased 55%57% in the
first sixnine months of fiscal 2001 to $4.4$8.0 million from $2.8$5.1 million in the first
sixnine months of fiscal 2000. Much of this increase was caused byresulted from the acquisition
of UltraRF, as well as a greater investment made for research in the RF and
microwave, power and optoelectronics programs. We anticipatebelieve that internal funding
for the development of new products will continue to grow especially in future periods, while we believe that government
funding for our development activities will remain constant.the next
few quarters.
Sales, General and Administrative. Sales, general and administrative expenses
increased 44%55% in the first sixnine months of fiscal 2001, to $7.0$12.1 million, from
$4.8$7.8 million in the first sixnine months of fiscal 2000,2000. This increase in expenses
is due to the acquisition of Ultra RF and greater spending to support the
overall growth of the business. We anticipate that total sales,
generalbusiness, as well as costs associated with ongoing
intellectual property litigation.
Intangible Asset Amortization and administrative costsIn-Process Research and Development Costs. The
purchase of UltraRF generated goodwill and other intangible assets, which will
continuebe amortized over periods ranging from five to increase in connection with
the growth10 years. In addition, as a
result of the business; however,acquisition of UltraRF, we believe that asrecorded a percentageone-time charge of revenue
theses$17.4
million in the third quarter of 2001 associated with acquired in-process
research and development costs
will remain constant.
Other (Income) Expense. Other expense decreased 33% to $62,000$220,000 during the first
sixnine months of fiscal 2001 from $93,000$1.3 million for the first sixnine months of fiscal
2000. In
the first six months of fiscal 2000, the Company incurred a greater amount ofThe decrease was attributable to fewer fixed asset write-downs.disposals.
Other Non-Operating Expense.Non Operating Income (Loss). Other non-operating expensesincome declined $432,000
to $ 63,000 for the first sixnine months of fiscal 2001 were $99,000 compared to $0 in the prior year period, due to additional costs associated with the acquisition of Nitres, Inc. In addition,
during the first quarter of fiscal 2001, the Company realized a $1.2 million
gain onreduced gains from
the sale of marketable securities. This gain was offset by a one-time
charitable contribution of $1.2 million made to the University of California at
Santa Barbara to endow a Cree chair in solid state lighting and displays.trading securities being recognized.
Interest Income, Net. Interest income, net increased 709%163% to $9.1$12.9 million in
the first sixnine months of fiscal 2001 from $1.1$4.9 million in the first sixnine months
of fiscal 2000. This was due to higher average cash balances being available in
the first halfnine months of fiscal 2001 as a result of the public stock
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completed in January 2000. Higher interest rates in the first halfnine months of
fiscal 2001 also improved interest income.
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Income Tax Expense. Income tax expense for the first halfnine months of fiscal 2001
was $13.7$20.0 million compared to $5.4$10.1 million in the sixfirst nine months ended December 1999.of fiscal
2000. This increase resulted from higher profitability during the first halfnine
months of fiscal 2001 over the same period in fiscal 2000.2000, as adjusted for the
cost of in-process research and development which is non-deductible in the
current period. Our income tax provision rate provision was 34% for both periods.
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 24, 2000,March 25, 2001, we had
working capital of $263.8$215.2 million, including $257.7$204.7 million in cash and
short-term investments. Operating activities generated $36.5cash of $57.5 million for
the first sixnine months of fiscal 2001 compared with $16.5$26.0 million generated
during the comparative period in fiscal 2000. This increase was primarily
attributable to higher profitability.
Most of the $86.7$23.5 million used in investing activities in the first sixnine months
of fiscal 2001 was related to the purchase of securities held to maturity investments and
capital improvements. We invested $57.4of
$116.5 million. In addition, we spent $88.1 million in capital expenditures
during the first sixnine months of fiscal 2001 compared to $23.0$47.0 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 our
epitaxy, cleanroom and package and test areas. We are also nearing the
completion of a 125,000 square foot facility expansion at our production site
near Research Triangle Park, North Carolina. The increase in other long-term
assets of $21.7$26.7 million in the first sixnine months of fiscal 2001 represents
strategic investments made in private companies such as Xemod, Inc.companies. Proceeds of $215.0 million from
the sale of securities held to maturity were used to fund these investing
activities.
Cash provided byused in the financing activities duringincluded a common stock repurchase of
1,850,000 shares on the first six months of fiscal 2001
related primarily to the receipt of $6.5open market for $30.7 million. In addition, we received
$9.9 million in proceeds from the exercise of stock options from the Company'sour employee
stock option plan and the exercise of outstanding stock warrants.
On January 18, 2001, Cree announced that its Board of Directors has authorized
the repurchase of up to four million shares, or about five percent, of its
outstanding common stock. The Company expects to use available cash to finance
purchases under the program, which extends to January 2002. At the discretion of
the Company's management, the repurchase program can be implemented through open
market or privately negotiated transactions. The Company will determine the time
and extent of repurchases based on its evaluation of market conditions and other
factors.
The CompanyWe may also issue additional shares of common stock for the acquisition of
complementary businesses or other significant assets. From time to time we
evaluate potential acquisitions of and investments in complementary businesses
and anticipate continuing to make such evaluations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
As of December 24, 2000,March 25, 2001, the Company maintains investments in equity securities
that are treated for accounting purposes under SFAS 115 as ""available for sale"
securities. These investments are carried at fair market value based on quoted
market prices of the investments as of December 24, 2000,March 25, 2001, with net unrealized gains
or losses excluded from earnings and reported as a separate component of
stockholder's equity. These investments are subject to market risk of equity
price changes. Management views these stock holdings as investments; therefore,
the shares are
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accounted for as "available for sale" securities under SFAS 115. The fair market
value of these investments as of December 24, 2000,March 25, 2001, using the closing sale price of
December 22, 2000March 23, 2001, was $7.8$9.6 million.
During the first sixnine months of fiscal 2001, the Company invested some of the
proceeds from its January 2000 public offering intoin other investments at fixed
interest rates that vary by security. No other material changes in market risk
were identified during the most recent quarter.
QUALITATIVE DISCLOSURES
Investments in the common stock of other public companies are subject to the
market risk of equity price changes. While the Company can not predict or manage
the future market price for such stock, management continues to evaluate its
investment position on an ongoing basis.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reporteddiscussed in the Company's statementreports on Form 10-Q10Q filed November 3, 2000 and
February 2, 2001, the Company filedand North Carolina State University ("NCSU")
commenced a patent infringement lawsuit on September 22, 2000 against Nichia
Corporation and Nichia America Corporation in the United States District Court
for the Eastern District of North Carolina. The lawsuit seeks enforcement of a
patent relatingIn their answer to gallium nitride-based semiconductor devices that are
manufactured using lateral epitaxial overgrowth (LEO) technology. This
technology permits the growth of high quality gallium nitride-based materials
useful in manufacturing certain laser diodescomplaint,
Nichia Corporation and other devices ("the LEO
patent"). The LEO patent was issued to North Carolina State University in April
2000 and is licensed to Cree under a June 1999 agreement pursuant to which Cree
obtained rights to a number of LEO and related techniques. In its complaint,
Cree alleges that Nichia is infringing the LEO patent by, among other things,
importing, selling and offering for sale in the United States certain gallium
nitride-based laser diodes covered by one or more claims of the LEO patent. The
lawsuit seeks damages and an injunction against infringement. North Carolina
State University is a co-plaintiff in the action.
On November 30, 2000, Nichia America Corporation filed an answerdenied infringement and
counterclaimasserted counterclaims seeking a declaratory judgement of non-infringementthat the subject patent
is invalid, and invalidity
ofnon infringed. Nichia America Corporation also moved on December
11, 2000, for partial summary judgement seeking a determination that the LEO patent. On December 21, 2000,subject
patent is invalid. The Company and NCSU have opposed the motion, which remains
pending.
Nichia Corporation filed an answer and
counterclaim againstalso asserted counterclaims alleging that the Company also seeking a
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declaratory judgement of non-infringement and invalidity of the LEO patent. The
Nichia Corporation answer also included counterclaims asserting that Cree is
infringing four U.S. patents relating to nitride semiconductor technology and
further asserting misappropriation of trade secrets and related claims against
Creethe Company and a former Nichia Corporation researcher now employed by a Company
subsidiary, Cree subsidiaryLighting Company, on a part-time basis. On February 20, 2001,
the Company and its counterclaim codefendant moved to dismiss the non-patent
counterclaims on the grounds that Nichia Corporation failed to allege a basis
for subject matter jurisdiction and failed to state a claim upon which relief
may be granted. The motion also seeks dismissal of certain counterclaims on
forum non-conveniens grounds.
On February 20, 2001, the Company also replied to the patent infringement
counterclaims, denying any infringement and asserting a claim seeking a
declaratory judgement that the four patents at issue are invalid, unenforceable
and not infringed. The Company also added a claim for damages in which it
alleges that Nichia Corporation's actions in asserting the patent infringement
counterclaims were not made for any legitimate purpose and constitute unfair
competition in violation of North Carolina law. On April 2, 2001, Nichia
Corporation moved to leave to file an amended answer and counterclaim that seeks
to address jurisdictional concerns, to add Cree Lighting Company as a
counterclaim defendant and to add federal statutory claims under the Computer
Fraud and Abuse Act against the Cree Lighting Company employee previously added
as a party. The motion for leave to file the amended answer and counterclaim has
been opposed and remains pending.
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Motions of the parties for protective orders have been denied so discovery is
proceeding, except that the court has stayed discovery as to damages and willful
infringement issues pending ruling on a motion filed by Nichia Corporation seeksthe Company and NCSU
seeking to have the proceedings bifurcated into separate liability and damages
and
an injunction.phases.
Although there can be no assuranceassurances of success, management of the Company believes the
counterclaims asserted in the North Carolina case are without merit and intends
to defend against them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TheAs discussed in the Company's Annual Meeting of Shareholders was heldReport on October 31, 2000. The
following proposals were introduced and voted upon:
PROPOSAL NO. 1 -- Election of directors*
Name Votes For Votes Withheld
---------------------- --------------------- ---------------------
F. Neal Hunter 31,942,482 53,294
Charles M. Swoboda 31,940,912 54,864
John W. Palmour 31,942,353 53,423
Walter L. Robb 31,907,453 88,323
William J. O'Meara 31,938,728 57,048
Dolph W. von Arx 31,130,416 865,360
James E. Dykes 31,940,447 55,329
PROPOSAL NO. 2 -- Amendment of Articles of Incorporation to increase the number
of authorized shares of common stock*
FOR 31,518,990
AGAINST 446,233
ABSTENTIONS AND BROKER NON-VOTES 30,553
PROPOSAL NO. 3 -- Amendment to Equity Compensation Plan to increase the number
of shares authorized for awards*
FOR 13,676,584
AGAINST 7,789,950
ABSTENTIONS AND BROKER NON-VOTES 10,529,242
PROPOSAL NO. 4 -- Selection of Ernst & Young LLP as auditorsForm 10-K for the fiscal year
endingended June 24, 2001*
FOR 31,922,298
AGAINST 37,929
ABSTENTIONS AND BROKER NON-VOTES 35,549
* Prior to adjustment for25, 2000, the Company has also intervened in three patent
infringement lawsuits filed in Tokyo District Court by Nichia Corporation
against one of the Company's two-for-one stock splitdistributors. The complaint in one of these cases,
filed in December 1999, alleges that was
effective December 1, 2000.
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21the Company's standard brightness LED
products infringe a Japanese patent owned by Nichia Corporation. The matters listed abovecourt has
closed proceedings in the case and is scheduled to render its decision during
the fourth quarter of fiscal 2001. Although there can be no assurances of
success, the Company's management believes the claims asserted in the Japanese
lawsuits are without merit and intends to defend the Company's products against
them vigorously.
ITEM 2. CHANGES IN SECURITIES
In January 2001, the Company sold put options covering an aggregate of 1.95
million shares of its common stock. The sale of the put options is described in
detailthe Notes to Consolidated Financial Statements (unaudited) included in the Company's definitive
proxy statement dated September 27, 2000, for the Annual MeetingPart I,
Item I of Shareholders
held on October 31, 2000.this report and such description is incorporated by reference into
this Part II, Item 2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation, as amended
10.1 Equity Compensation Plan, as amended and restated
December 1, 2000 *
10.2 Management Incentive Compensation Program - Fiscal
Year 2001 Plan *Exhibits
(b)
99.1 Certain Business Risks and Uncertainties
(b) Reports on Form 8-K:
On December 14, 2000March 19, 2001 the Company filed aamended its Form 8-K announcing a
two-for-one stock splitdated
December 29, 2000 to report financial results associated with the acquisition of
its outstanding common stock.
* Compensatory Plan
21Ultra RF, Inc.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CREE, INC.
Date: February 1,May 9, 2001 /s/ Cynthia B. Merrell
------------------------------------------------------------------------------------------
Cynthia B. Merrell
Chief Financial Officer and Treasurer
(Authorized Officer and Chief Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
No.
3.1 Articles of Incorporation, as amended
10.1 Equity Compensation Plan, as amended and restated December 1, 2000*
10.2 Management Incentive Compensation Program - Fiscal Year 2001 Plan*
99.1 Certain Business Risks and Uncertainties
* Compensatory Plan
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