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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 December 24, 2000
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, 2001 was 74,253,849.
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CREE, INC.
FORM 10-Q
For the Quarter Ended December 24, 2000
INDEX
Page No.
--------
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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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 24, June 25,
2000 2000
----------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 59,496 $103,843
Short-term investments held to maturity 190,392 142,461
Marketable securities 7,832 15,842
Accounts receivable, net 22,708 12,406
Interest receivable 4,393 3,893
Inventories 13,335 9,320
Deferred income tax 139 --
Prepaid expenses and other current assets 1,541 1,254
----------------- ---------------
Total current assets 299,836 289,019
Property and equipment, net 185,393 137,118
Long-term investments held to maturity -- 41,965
Deferred income taxes 10,624 10,624
Patent and license rights, net 2,618 2,324
Other assets 26,821 5,152
----------------- ---------------
Total assets $525,292 $486,202
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 18,119 $ 14,204
Accrued salaries and wages 1,775 3,133
Deferred income tax 10,174 455
Other accrued expenses 5,950 5,270
----------------- ---------------
Total current liabilities 36,018 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, 2000 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, 2000 and June 25, 2000, respectively; shares issued and
outstanding 71,577 and 70,696 at December 24, 2000 and June 25, 2000,
respectively
Additional paid-in-capital 421,568 415,716
Deferred compensation expense (1,476) (1,755)
Retained earnings 74,671 48,156
Accumulated other comprehensive income (loss), net of tax (6,015) 935
----------------- ---------------
Total shareholders' equity 488,837 463,140
----------------- ---------------
Total liabilities and shareholders' equity $525,292 $486,202
================= ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
--------------------------------------- ----------------------------------------
December 24, December 26, December 24, December 26,
2000 1999 2000 1999
----------------- ------------------ ------------------ ------------------
Revenue:
Product revenue, net $37,587 $22,137 $71,898 $40,385
Contract revenue, net 3,907 2,677 7,238 5,290
----------------- ------------------ ------------------ ------------------
Total revenue 41,494 24,814 79,136 45,675
Cost of revenue:
Product revenue 16,163 10,075 30,652 19,571
Contract revenue 3,257 2,012 5,844 3,900
----------------- ------------------ ------------------ ------------------
Total cost of revenue 19,420 12,087 36,496 23,471
----------------- ------------------ ------------------ ------------------
Gross profit 22,074 12,727 42,640 22,204
Operating expenses:
Research and development 2,295 1,911 4,396 2,842
Sales, general and administrative 3,010 2,767 6,967 4,823
Other (income) expense 62 (8) 62 93
----------------- ------------------ ------------------ ------------------
Income from operations 16,707 8,057 31,215 14,446
Other non operating income (loss) (11) -- (99) --
Interest income, net 4,322 573 9,105 1,126
----------------- ------------------ ------------------ ------------------
Income before income taxes 21,018 8,630 40,221 15,572
Income tax expense 7,157 2,983 13,706 5,371
----------------- ------------------ ------------------ ------------------
Net income $13,861 $ 5,647 $26,515 $10,201
================= ================== ================== ==================
Other comprehensive income, net of tax:
Unrealized holding gain (loss) (5,532) 1,981 (6,950) (437)
----------------- ------------------ ------------------ ------------------
Comprehensive income $ 8,329 $ 7,628 $19,565 $ 9,764
================= ================== ================== ==================
Earnings per share:
Basic $0.19 $0.09 $0.37 $0.16
================= ================== ================== ==================
Diluted $0.18 $0.08 $0.35 $0.15
================= ================== ================== ==================
Shares used in per share calculation:
Basic 71,495 62,870 71,154 62,620
================= ================== ================== ==================
Diluted 75,200 67,084 75,230 66,705
================= ================== ================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended
-------------------------------------------
December 24, December 26,
2000 1999
--------------------- -----------------
Operating activities: (Unaudited)
Net income $ 26,515 $ 10,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,050 4,588
Loss on disposal of property, equipment and patents 62 44
Amortization of patent rights 87 70
Issuance and amortization of deferred compensation 279 (101)
Deferred income taxes 13,161 --
Loss (gain) on available for sale securities (1,182) --
Changes in operating assets and liabilities:
Accounts receivable (10,802) (2,152)
Inventories (4,015) (632)
Prepaid expenses and other assets (287) (35)
Accounts payable , trade 3,915 (1,354)
Accrued expenses and long-term liability (243) 5,847
--------------------- -----------------
Net cash provided by operating activities 36,540 16,476
--------------------- -----------------
Investing activities:
Purchase of available for sale securities (7,176) --
Proceeds from sale of available for sale securities 5,837 --
Purchase of property and equipment (57,388) (23,042)
Purchase of securities held to maturity (56,606) --
Proceeds from securities held to maturity 50,640 --
Increase in other long-term assets (21,670) --
Purchase of patent rights (381) (304)
--------------------- -----------------
Net cash used in investing activities (86,744) (23,346)
--------------------- -----------------
Financing activities:
Acquisition fees for purchase accounting transaction (674) --
Net proceeds from the issuance of short-term debt -- 200
Net proceeds from issuance of common stock 6,531 2,459
--------------------- -----------------
Net cash provided by financing activities 5,857 2,659
--------------------- -----------------
Net decrease in cash and cash equivalents (44,347) (4,211)
Cash and cash equivalents:
Beginning of period 103,843 42,545
===================== =================
End of period $ 59,496 $ 38,334
===================== =================
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts capitalized $ 0 $ 0
===================== =================
Cash paid for income taxes $ 414 $ 268
===================== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The consolidated balance sheet as of December 24, 2000, the consolidated
statements of income for the three and six months ended December 24, 2000 and
December 26, 1999, and the consolidated statements of cash flow for the six
months ended December 24, 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 financial position,
results of operations and cash flow at December 24, 2000, and 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 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 2000 Form 10-K. The results of
operations for the period ended December 24, 2000 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Cree
Research FSC, Inc., Cree Funding LLC, Cree Employee Services Corporation and
Cree Technologies, Inc. All material intercompany accounts and transactions have
been eliminated in consolidation.
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Reclassifications
Certain 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.
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 value at December
24, 2000 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, 2000, the Company's short-term investments held to maturity
included $190.4 million consisting of $134.2 million 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. 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
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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 a short-term investment with unpaid interest
included in interest receivable.
At December 24, 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 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, 162,500 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 six months of fiscal 2001, the Company realized a gain of $1.2
million from the sale of 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
====================== ====================
Research and Development Accounting Policy
The U.S. Government provides funding through research contracts for several of
the Company's current research and development 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
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 Six Months Ended
----------------------------------------- ------------------------------------------
December 24, December 26, December 24, December 26,
2000 1999 2000 1999
----------------- ------------------- -------------------- ------------------
(In thousands)
Net R&D costs $174 $ 134 $ 239 $ 174
Government funding 314 331 660 398
----------------- ------------------- -------------------- ------------------
Total direct costs
incurred $488 $ 465 $ 899 $ 572
================= =================== ==================== ==================
Significant Sales Contract
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 brightness and ultra-brightness LED chips and silicon carbide wafers
through September 2001.
The agreement calls for certain quantities of standard brightness, high
brightness and ultra-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, 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 percent 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
25% of standard brightness LEDs and high brightness and ultra-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 standard brightness,
high brightness and ultra-brightness 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
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higher prices were negotiated by the Company to offset higher per unit costs
expected earlier in the contract.
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 SHARE
The Company presents 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.
The following computation reconciles the differences between the basic and
diluted presentations:
Three Months Ended Six Months Ended
------------------ ----------------
December 24, December 26, December 24, December 26,
2000 1999* 2000 1999*
--------------- ---------------- ---------------- ----------------
(In thousands, except per share amounts)
Net income $ 13,861 $ 5,647 $26,515 $ 10,201
Weighted average common shares 71,495 62,870 71,154 62,620
--------------- ---------------- ---------------- ----------------
Basic earnings per common share $ 0.19 $0.09 $0.37 $0.16
=============== ================ ================ ================
Net income $13,861 $5,647 $ 26,515 $10,201
Diluted weighted average common shares:
Common shares outstanding 71,495 62,870 71,154 62,620
Dilutive effect of stock options and warrants 3,705 4,214 4,076 4,085
--------------- ---------------- ---------------- ----------------
Total diluted weighted average common shares 75,200 67,084 75,230 66,705
--------------- ---------------- ---------------- ----------------
Diluted earnings per common share $0.18 $0.08 $0.35 $0.15
=============== ================ ================ ================
* 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,
1,034,441 shares for the three and six months ended December 24, 2000,
respectively, were not included in calculating diluted income per share for the
periods presented. For the three and six months ended December 26, 1999, there
were no potential shares considered antidilutive.
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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, The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, as amended by SFAS 137 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 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. UltraRF designs, manufactures and
markets a line of bipolar transistors and laterally diffused metal oxide
semiconductor ("LDMOS") 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
and Cree intends to continue such use through its UltraRF subsidiary.
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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.
In addition, at the closing of the acquisition, Cree's subsidiary, UltraRF
signed 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.
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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 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's 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 cautions that
such forward-looking statements are further qualified by important factors that
could cause the Company's actual operating results to differ materially from
those forward-looking statements. These factors include, but are not limited to,
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; 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's
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"). 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 offers LEDs at
three brightness levels: ultra-bright blue and green devices, high-brightness
blue and green products and standard 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's 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. We
believe the ultra-bright chips 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, the
ultra-bright devices have gained
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strong initial acceptance 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% of our LED chip volume in the March 2001 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.
During the second quarter of fiscal 2001, our high-brightness chips made-up the
largest portion of our revenue at 71% of LED sales. However, these sales have
declined as a percentage of total LED revenue from 82% in the three months ended
September 2000 due to the sales of our new ultra-bright products. We believe the
high-brightness chips will continue to decline as a percentage of our LED sales
if we meet our production targets for our ultra-bright devices. The
standard-brightness products are targeted to maintain a range of 15-20% of our
LED volume due to the low price and customers current designs requiring the
device. Through the first half of fiscal 2001, average sales prices for LEDs
have declined 13%. We target average sales prices for these products to decline
at a rate of 25% 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.
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 second quarter of fiscal 2001, sales of SiC wafers
increased by 40% over the September 2000 quarter. 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 half of fiscal 2001, we also sold SiC crystals to Charles & Colvard,
Ltd. ("C&C"), for use in gemstone applications. We anticipate little to 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 second quarter of fiscal 2001. The balance of our revenue is
derived from government and customer research contract funding.
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RESULTS OF OPERATIONS
Three Months Ended December 24, 2000 and December 26, 1999
Revenue. Revenue grew 67% from $24.8 million in the second quarter of fiscal
2000 to $41.5 million in the second quarter of fiscal 2001. This increase was
attributable to an increase in product revenue of 70% from $22.1 million in the
second quarter of fiscal 2000 to $37.6 million in the second quarter of fiscal
2001. This rise in product revenue was a result of the 114% increase in sales of
our LED products in the second quarter of fiscal 2001 compared to the second
quarter of fiscal 2000. LED volume rose 161% over the prior year due to a
significant increase in demand for ultra-bright 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 2000 due to expected contractual volume discounts
and other factors.
Revenue attributable 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. SiC wafer sales have
increased 89% in the second quarter of fiscal 2001 compared to the same period
of fiscal 2000, due to demand from the corporate and research communities,
including new interest in SiC for microwave and power devices from certain
customers. Wafer units have increased 95%, while average sales prices have
declined 2% in the second quarter of fiscal 2001 compared to the three months
ended December 1999. Contract revenue received from U.S. Government agencies and
customers increased 46% during the second quarter of fiscal 2001 compared to the
second quarter of fiscal 2000 due to additional contract awards received in the
first half of fiscal 2001.
Gross Profit. Gross profit increased 73% to $22.1 million in the second quarter
of fiscal 2001. Compared to the prior year, gross margin increased to 53% from
51% of revenue due primarily to the higher throughput and manufacturing yield on
high brightness LEDs and materials products that have resulted in lower unit
costs. During the second quarter of fiscal 2001, we increased wages for
non-exempt employees one-dollar per hour. Without the hourly wage increase,
product margins would have been 57.6% 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. Wafer costs for SiC material sales also
declined 23% in the second quarter of fiscal 2001 compared to the second quarter
of fiscal 2000 due to improved yields and greater throughput of materials.
Research and Development. Research and development expenses increased 20% in the
second quarter of fiscal 2001 to $2.3 million from $1.9 million in the second
quarter of fiscal 2000. Much of this increase was caused by greater investments
for research in the RF and microwave and optoelectronics programs. We believe
that research and development expenses will continue to grow during the
remainder of fiscal 2001 due to increased funding necessary to develop products
for future release; however, as a percentage of revenue theses expenses are
targeted to remain relatively even.
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Sales, General and Administrative. Sales, general and administrative expenses
increased 9% in the second quarter of fiscal 2001 to $3.0 million from $2.8
million in the second quarter of fiscal 2000, due to greater spending to support
the overall growth of the business and additional legal expenses resulting from
the patent litigation. During the second 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, general 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.
Other (Income) Expense. Other expense has increased to $62,000 during the second
quarter of fiscal 2001 from income of $8,000 recognized for the second quarter
of fiscal 2000. In the second quarter of fiscal 2001, we instituted a physical
tagging system for fixed assets that resulted in the write-down of $62,000 of
assets.
Interest Income, Net. Interest income, net has increased $3.7 million to $4.3
million in the second 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 of 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 second quarter of fiscal 2001 was
$7.2 million compared to $3.0 million in the second quarter of fiscal 2000. This
increase resulted from higher profitability during the second quarter of fiscal
2001 over the same period in fiscal 2000. Our tax rate provision was 34% for
both periods.
Six Months Ended December 24, 2000 and December 26, 1999
Revenue. Revenue increased 73% from $45.7 million in the first six months of
fiscal 2000 to $79.1 million in the first six months of fiscal 2001. This
increase resulted from a rise in product revenue of 78% from $40.4 million in
the first six months of fiscal 2000 to $71.9 million in the first six months of
fiscal 2001. Greater product revenue was largely a result of the 128% increase
in sales of our LED products in the first six months of fiscal 2001 compared to
the first six months of fiscal 2000. Our high brightness LED products
experienced the heaviest demand; however, our standard brightness chips also
increased 48% during the comparative period. Overall LED chip volume grew 140%
in the first six months of fiscal 2001 over units shipped in the first six
months of fiscal 2000, while our average sales prices for LEDs has 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, 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
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the gemstone business over the next several quarters. SiC wafer sales have
increased 72% in the first six 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%, while average sales prices have
declined 17% in the first half fiscal 2001 compared to the first six months of
fiscal 2000. Average sales prices have declined due to a shift in mix of
products sold. Contract revenue received from U.S. Government agencies and
customers increased 37% during the first six months of fiscal 2001 compared to
the first six months of fiscal 2000 due to new contract awards received in the
first half of fiscal 2001.
Gross Profit. Gross profit increased 92% from $22.2 million in the first six
months of fiscal 2000 to $42.6 million in the first six months of fiscal 2001.
This increase is due primarily to the rise in LED sales volumes combined with
LED cost declines that stayed ahead of reductions in average sales prices.
Average LED costs were lower due to higher throughput and manufacturing yield on
high brightness LEDs and materials products. Margins on wafer products have also
improved during the first six months of fiscal 2001 as higher yields have
reduced costs 27% compared to the same period of the prior year.
Research and Development. Research and development expenses increased 55% in the
first six months of fiscal 2001 to $4.4 million from $2.8 million in the first
six months of fiscal 2000. 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.
Sales, General and Administrative. Sales, general and administrative expenses
increased 44% in the first six months of fiscal 2001 to $7.0 million from $4.8
million in the first six months of fiscal 2000, 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
theses costs will remain constant.
Other Expense. Other expense decreased 33% to $62,000 during the first six
months of fiscal 2001 from $93,000 for the first six months of fiscal 2000. In
the first six months of fiscal 2000, the Company incurred a greater amount of
fixed asset write-downs.
Other Non-Operating Expense. Other non-operating expenses for the first six
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 on 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.
Interest Income, Net. Interest income, net increased 709% to $9.1 million in the
first six months of fiscal 2001 from $1.1 million in the first six months of
fiscal 2000. This was due to higher average cash balances being available in the
first half of fiscal 2001 as a result of the public stock
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offering completed in January 2000. Higher interest rates in the first half of
fiscal 2001 also improved interest income.
Income Tax Expense. Income tax expense for the first half of fiscal 2001 was
$13.7 million compared to $5.4 million in the six months ended December 1999.
This increase resulted from higher profitability during the first half of fiscal
2001 over the same period in fiscal 2000. Our tax 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, we had
working capital of $263.8 million, including $257.7 million in cash and
short-term investments. Operating activities generated $36.5 million for the
first six months of fiscal 2001 compared with $16.5 million generated during the
comparative period in fiscal 2000. This increase was primarily attributable to
higher profitability.
Most of the $86.7 million used in investing activities in the first six months
of fiscal 2001 was related to the purchase of held to maturity investments and
capital improvements. We invested $57.4 million in capital expenditures during
the first six months of fiscal 2001 compared to $23.0 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 million in the first six months of fiscal 2001 represents
strategic investments made in private companies such as Xemod, Inc. Cash
provided by financing activities during the first six months of fiscal 2001
related primarily to the receipt of $6.5 million in proceeds from the exercise
of stock options from the Company's 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 Company 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, 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, 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 accounted for as "available for sale" securities under SFAS 115.
The fair market value of these investments as of December 24, 2000, using the
closing sale price of December 22, 2000 was $7.8 million.
During the first six months of fiscal 2001, the Company invested some of the
proceeds from its January 2000 public offering into 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 reported in the Company's statement on Form 10-Q filed November 3, 2000, the
Company filed 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 relating 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 diodes 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 answer and
counterclaim seeking a declaratory judgement of non-infringement and invalidity
of the LEO patent. On December 21, 2000, Nichia Corporation filed an answer and
counterclaim against 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
Cree and a former Nichia researcher now employed by a Cree subsidiary on a
part-time basis. The counterclaim filed by Nichia Corporation seeks damages and
an injunction. Although there can be no assurance of success, management of
the Company believes the counterclaims asserted in the case are without merit
and intends to defend against them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held 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 auditors for the fiscal year
ending June 24, 2001*
FOR 31,922,298
AGAINST 37,929
ABSTENTIONS AND BROKER NON-VOTES 35,549
* Prior to adjustment for the Company's two-for-one stock split that was
effective December 1, 2000.
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The matters listed above are described in detail in the Company's definitive
proxy statement dated September 27, 2000, for the Annual Meeting of Shareholders
held on October 31, 2000.
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 *
99.1 Certain Business Risks and Uncertainties
(b) Reports on Form 8-K:
On December 14, 2000 the Company filed a Form 8-K announcing a
two-for-one stock split of its outstanding common stock.
* Compensatory Plan
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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, 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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