UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission file number: 0-21154
CREE RESEARCH, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1572719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Silicon Drive, Durham, NC 27703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 361-5709
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
$0.005 per share, as of October 20, 1998 was 12,777,138.
CREE RESEARCH, INC.
FORM 10-Q
For the Quarter Ended September 27, 1998
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 27, 1998 (unaudited) and
June 28, 1998 3
Consolidated Statements of Income for the three months ended September
27, 1998 and September 28, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
September 27, 1998 and September 28, 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
2
PART 1- FINANCIAL INFORMATION
Item 1- Financial Statements
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's except per share amounts)
September 27, June 28,
1998 1998
-------------- --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $13,036 $17,680
Marketable securities 824 657
Accounts receivable, net 11,696 10,479
Inventories 3,249 2,543
Deferred income tax 1,951 1,952
Prepaid expenses and other current assets 754 1,347
-------------- --------------
Total current assets 31,510 34,658
Property and equipment, net 40,668 36,476
Patent and license rights, net 1,568 1,525
Other assets 64 65
-------------- --------------
Total assets $73,810 $72,724
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $4,969 $5,595
Current maturities of long term debt 69 17
Accrued salaries and wages 718 391
Other accrued expenses 1,794 1,052
-------------- --------------
Total current liabilities 7,550 7,055
-------------- --------------
Long term liabilities:
Long-term debt 9,931 8,650
Deferred income tax 2,153 2,154
-------------- --------------
Total long term liabilities 12,084 10,804
-------------- --------------
Shareholders' equity:
Preferred stock, par value $0.01; 2,750
shares authorized; none issued and
outstanding - -
Common stock, $0.005 par value; 14,500 shares
authorized; shares issued and outstanding
12,776, and 12,989, at September 27, 1998, and
June 28, 1998, respectively 64 65
Additional paid-in-capital 46,622 49,676
Retained earnings 7,490 5,124
-------------- --------------
Total shareholders' equity 54,176 54,865
-------------- --------------
Total liabilities and shareholders' equity $73,810 $72,724
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
3
CREE RESEARCH, INC.
STATEMENTS OF INCOME
(in 000's except per share amounts)
(Unaudited)
Three Months Ended
--------------------------------------------------------
September 27, September 28,
1998 1997
------------------- ----------------------
Revenue:
Product revenue, net $10,720 $8,206
Contract revenue, net 1,559 2,001
------------------- --------------------
Total revenue 12,279 10,207
------------------- --------------------
Cost of revenue:
Product revenue 5,415 5,419
Contract revenue 1,207 1,653
------------------- --------------------
Total cost of revenue 6,622 7,072
------------------- --------------------
Gross margin 5,657 3,135
Operating expenses:
Research and development 806 394
Sales, general and administrative 1,218 1,140
Other (income) expense 269 (6)
------------------- --------------------
Income from operations 3,364 1,607
Interest income, net 115 164
------------------- --------------------
Income before income taxes 3,479 1,771
Income tax expense 1,113 602
------------------- --------------------
Net income 2,366 $1,169
=================== ====================
Basic earnings per common share $0.18 $0.09
=================== ====================
Diluted earnings per common share $0.18 $0.09
------------------- --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's except per share amounts)
(Unaudited)
Three Months Ended
----------------------------------------------------
September 27, September 28,
1998 1997
--------------------------- -----------------
Operating activities:
Net income $2,366 $1,169
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,140 1,017
Loss on disposal of property, equipment and patents 511 294
Amoritization of patent rights 28 25
Amortization and write off of goodwill 0 10
Purchase of marketable trading security (234) -
Loss on marketable trading security 67 -
Changes in assets and liablilties:
Accounts receivable (1,217) (871)
Inventories (706) 735
Prepaid expenses and other assets 595 48
Accounts payable, trade (2,452) (850)
Accrued expenses 1,119 890
------------------- ------------------
Net cash provided by operating activities 1,217 2,467
Investing activities:
Purchases of property and equipment (4,006) (775)
Proceeds from sale of property and equipment 10 35
Purchase of patent rights (91) (82)
------------------- ------------------
Net cash used in investing activities (4,087) (822)
Financing activities:
Proceeds from issuance of long-term debt 1,281 -
Net proceeds from issuance of common stock 159 826
Repurchase of common stock (3,214) -
------------------- ------------------
Net cash (used in) provided by financing activities (1,774) 826
Net (decrease) increase in cash and cash equivalents (4,644) 2,471
=================== ==================
Cash and cash equivalents:
Beginning of period 17,680 10,448
=================== ==================
End of period $13,036 $12,919
=================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts capitalized $ 112 $ -
=================== ==================
Cash paid for income taxes $ 164 $ 81
=================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
5
Cree Research, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The balance sheet as of September 27, 1998, the statements of income for
the three month periods ended September 27, 1998 and September 28, 1997, and the
statements of cash flows for the three months ended September 27, 1998 and
September 28, 1997 have been prepared by the Company and have not been audited.
In the opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows at September 27, 1998,
and all periods presented, have been made. The balance sheet at June 28, 1998
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 1998 Form 10-K. The results of
operations for the period ended September 27, 1998 are not necessarily
indicative of the operating results that may be attained for the entire fiscal
year.
Accounting Policies
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last
Sunday in the month of June. Accordingly, all quarterly reporting reflects a 13
week period in fiscal 1999. In fiscal 1998, the Company changed its fiscal year
from the twelve months ending June 30, to the 52 week period ending on the last
Sunday in the month of June. Accordingly, all quarterly reporting for that year
reflected a 13 week period, except that the period ended September 28, 1997,
which commenced July 1, 1997, reflected the results of twelve weeks and five
days. The Company's current fiscal year will extend from June 29, 1998 to June
27, 1999.
6
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 stockholders'
equity.
The Company's short-term investments are comprised of equity securities
that are classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at September 27, 1998, with
net realized and unrealized gains and losses included in net earnings.
As of September 27, 1998, short-term investments consist of common stock
holdings in C3, Inc. ("C3"), the majority of which were purchased in November
1997 and September 1998. The Company's president has, through a binding
agreement, promised to indemnify the Company for losses of up to $450,000 for
the net difference between the aggregate cash consideration paid by Cree for the
shares of C3 common stock and the cash proceeds received by Cree upon the sale
of C3 common shares. This indemnity covers losses that may result from the sale
of shares purchased in November 1997 and September 1998 below the purchase price
paid, offset by gains realized on shares acquired directly from C3 in January
1997 (see below). Payment of this obligation is due within ten days after
receipt by the president of the Company's written demand made pursuant to a vote
of the majority of the members of the Board of Directors other than the
president. At September 27, 1998, the Company had recorded a $450,000 receivable
from the president (included in net accounts receivable) based upon this
agreement for the net realized and unrealized losses on this investment.
Realized losses on shares of C3 stock sold by the Company during fiscal 1998
totaled $254,000, and net unrealized losses offset by the unrealized gain on
shares acquired from C3 directly (see below) were $233,000 at September 27,
1998. Approximately $5,000 of losses on the investment in C3 stock is included
in other income (expense) for fiscal 1999.
In addition to the shares of C3 purchased in November 1997 and September
1998, the Company acquired 24,601 shares of C3 common stock in January 1997.
These shares
7
were issued pursuant to an option C3 granted to the Company in 1995. The option
gave the Company the right to acquire, for an aggregate consideration of $500,
one percent of the outstanding common stock of C3. C3 retained the right to
waive the consideration and issue the stock at any time, which it elected to do
in January 1997. The shares issued pursuant to the option are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933,
which permits the sale of such securities without registration if certain
conditions are met. The shares first become eligible for sale under Rule 144 in
the third quarter of fiscal 1998.
Long Term Debt
The Company obtained a term loan from a commercial bank of up to
$10,000,000 to finance the purchase and upfit of a production facility and
service and warehouse buildings in November 1997. As of September 27, 1998 the
entire $10,000,000 loan was outstanding, including a current portion of $69,000
and a long term amount of $9,931,000. The loan, which is collateralized by the
purchased property, accrues interest at a fixed rate of 8% and carries customary
covenants, including the maintenance of a minimum tangible net worth and other
requirements. Accrued interest is due monthly until May 1999, at which time the
outstanding principal balance will be amortized over twenty years until 2011,
when the loan balance becomes due.
During the three months ended September 27, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the three months ended September 27,
1998, was $84,000.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined under the first-in, first-out (FIFO) method. Inventories consist of
the following:
September 27, 1998 June 28, 1998
(in 000's) (in 000's)
---------- ----------
Raw materials $1,190 $ 999
Work-in-progress 1,157 752
Finished goods 902 792
------ ------
Total Inventory $3,249 $2,543
------ ------
8
Research and Development Accounting Policy
The U.S. Government provides funding for several of the Company's current
research and development efforts. The contract funding may be based on 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 cost of
capital expenses. Cost-plus funding is determined based on actual costs plus a
set percentage margin. For 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 submission of a written
report to document the results of such research.
The revenue and expense classification for contract activity is determined
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 (in 000's)
September 27, September 28,
1998 1997
----------- ----------
Net R&D costs $ - $ 120
Government funding - 287
------ ------
Total direct costs incurred $ - $ 407
------ ------
As of September 27, 1998, all funding under contracts where the Company
anticipates that direct costs will exceed amounts to be funded has been
exhausted. Therefore, the Company anticipates that all future funding under
existing contracts will be reflected as contract revenue while direct costs will
be reported as contract cost of sales.
Significant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with
Siemens AG ("Siemens"), pursuant to which Siemens agreed to purchase LED chips
made with the Company's gallium nitride-on-silicon carbide technology. In April
1997 and December 1997, contract amendments were executed that provided for
enhanced product specifications requested by Siemens and larger volume
requirements, respectively.
In September 1998, the Company and Siemens further amended the contract to
extend the Purchase Agreement with respect to shipments to be made on or after
June 29,
9
1998. The third amendment obligates the Company to ship, and Siemens to
purchase, stipulated quantities of both the conductive buffer and the new high
brightness LED chips and silicon carbide wafers through fiscal 1999. The
agreement also limits Siemen's right to defer shipments to 30% of scheduled
quantities for items to be shipped in more than 24 weeks after initial notice
and 10% of scheduled quantities for items to be shipped in more than 12 weeks.
In both cases, Siemens would be required to accept all product within 90 days of
the original shipment date. Additionally, the amendment provides for higher per
unit prices early in the contract with reductions in unit prices being available
as the cumulative volume shipped increases. The higher prices were negotiated by
the Company to offset higher per unit costs expected earlier in the contract.
Income Taxes
The Company has established an estimated tax provision based upon an
effective rate of 32%. 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 (SFAS) No. 128, "Earnings Per Share". SFAS No.
128 required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128.
10
The following computation reconciles the differences between the basic and
diluted presentations:
Three Months Ended
September 27, September 28,
1998 1997
(in 000's, (in 000's,
except per except per
share share
amounts) amounts)
---------- -----------
Net income $2,366 $1,169
Weighted average common shares 12,920 12,609
---------- -----------
Basic earnings per common share $0.18 $0.09
========== ===========
Net income $2,366 $1,169
Weighted average common shares:
Common shares outstanding 12,920 12,609
Dilutive effect of stock
options & warrants 329 799
---------- -----------
Total weighted average common
shares 13,249 13,408
Diluted earnings per common
share $0.18 $0.09
========== ===========
Potential common shares that would have the effect of increasing
diluted income per share are considered to be antidilutive. In accordance with
SFAS No. 128, these shares were not included in calculating diluted income per
share. Accordingly, 1,040,000 and 300,000 shares for the three months ended
September 27, 1998 and September 28, 1997, respectively, were not included in
calculating diluted income per share for the periods presented.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement Identifying Important Factors That Could Cause the
Company's Actual Results to Differ From Those Projected in Forward Looking
Statements
Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include but are not limited to (i) projections of revenues, income or
loss, earnings per share, capital expenditures, dividends, capital structure and
other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including product enhancements,
or estimates or predictions of actions by customers, suppliers or competitors,
or regulatory authorities, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying other statements and statements about
the Company and its business.
This report also identifies important factors which could cause actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the Company's ability to
complete development of and successfully introduce new LED and microwave
products, to lower LED and wafer costs, gain a larger customer base, and to
increase product yields and wafer size, potential difficulties in manufacturing
products repeatability due to the complexity of the Company's manufacturing
processes, possible price competition, potential failure to obtain expected
volume increases from existing customers, potential infringement claims by third
parties, potential inability of the Company to enforce its intellectual property
rights against others, availability and continuation of U.S. Government funded
research contracts, possible delays in the introduction of other new products,
and delays in customer acceptance of products and services and other factors
discussed in the Company's report on Form 10-K for the year ended June 28, 1998.
Results of Operations
For the first quarter ended September 27, 1998, the Company reported
record revenue and net income of $12,279,000 and $2,366,000 or $0.18 per share,
respectively. These results reflect a 20% increase in revenue and a 102% rise in
net income over the first quarter of fiscal 1998. Product revenue, which
includes sales of light emitting diodes ("LEDs") and materials, increased 31%
over the first quarter of fiscal 1998. Results for the first quarter of fiscal
1998 reflect the change to a 13-week quarterly period as discussed in the Notes
to Consolidated Financial Statements.
12
Product Revenue
LED sales grew 25% in the first quarter of fiscal 1999 as compared to the
same period in the prior year. Much of this growth was prompted by the 128%
increase in LED volume shipped over the comparable period, which was driven by
new sales in Asia and additional quantities delivered to Siemens A.G.
("Siemens") under an amendment to the parties' 1996 purchase agreement. The
amendment, signed in September 1998, extends Siemens' purchase commitment
through fiscal 1999 and obligates the Company to ship both the conductive buffer
and the new high brightness LED chips and silicon carbide wafers. This amendment
calls for up to a 44% increase in chip shipments over the previous agreement,
with an estimated 5% reduction in the net average selling price over the
duration of the contract period. The agreement also includes a change in the
product mix to be delivered through June 1999 to include an increasing
percentage of high brightness chips; however, the conductive buffer product may
be substituted by Siemens at a lower price, if certain quantity requirements are
not met by Cree or Siemen's customers are unable to qualify the new products. A
substitution of conductive buffer products for high brightness chips may impact
Cree's revenue for fiscal 1999 by up to $1,800,000 due to the lower pricing
associated with the conductive buffer chip. The first high brightness chips were
shipped in September 1998 on a limited basis and are expected to be delivered in
greater volumes in the second and third quarters. However, there can be no
assurance that these chips will be delivered or qualified by customers. The
significant rise in LED volume over the year ago period has been partly offset
by a 44% decline in the average sales price received. During fiscal 1999,
average sales prices for LED products are expected to continue to decline as
Cree moves to lower customer price points that are expected to stimulate greater
volume.
While the Company has been successful in growing LED revenue by lowering
prices and significantly raising volume, LED gross margin has increased 86% in
the first quarter of fiscal 1999 as compared to the year ago quarter. This was
accomplished mostly by the 58% decrease in LED costs per unit during the
comparable period. This significant cost reduction was caused by a combination
of technology breakthroughs in the manufacture of the LED product, which
included a smaller sized chip on a larger wafer and the introduction of the
conductive buffer chip in the fourth quarter of fiscal 1998. The conductive
buffer product reduces the complexity of manufacturing steps necessary to
produce the chip, thus lowering the cost. In addition, greater manufacturing
throughput and improved yields have also contributed to the lower cost.
The manufacturing process for higher brightness blue and green LEDs is
highly complex. Even though the Company shipped product to customers in
the first quarter of fiscal 1999, there can be no assurance that refinement of
such processes for higher yields and deliveries will be achieved in accordance
with forecasts. A delay in this manufacturing ramp could cause the Company's
results to fall below current expectations.
For the remainder of fiscal 1999, the Company will continue the strategy
of seeking to lower LED costs and expects that the greatest cost saving benefits
will be derived from increased volume and higher yield efficiency. If the
Company is unable to continue to expand its LED volume and lower its production
costs, its revenue and earnings growth may be adversely impacted. Management
continues to believe that market growth for the LED product remains dependent on
its ability to lower pricing. There can be no assurance that Cree will increase
unit shipments, achieve lower costs or maintain similar margins, or that the
high brightness product will be accepted by customers. In addition, the
introduction of the high brightness product line could result in unexpected
problems that could lower production during the transition period.
13
Material product sales continue to show the most dramatic increase in the
recent quarter due to contributions made by the gemstone products and the
overall improvements made to wafer quality. As a result, revenues for material
products grew 50% over the same period in the prior year. Material sales have
benefited from the added capacity available from the C3 supply agreement. During
the fourth quarter of fiscal 1998, C3 requested that Cree more than double
available capacity in order to meet their customer demand. Funding for the
capital expansion was provided by C3. During the first quarter of 1999
approximately 66% of this added capacity was brought on line, with the remaining
equipment scheduled for initial production in the second quarter. This added
capacity was a primary contributor for the 73% increase in revenue recognized
from C3 over amounts recorded in the first quarter of fiscal 1998. Wafer volume
has also increased 32% as a result of the Company's success in offering wafer
products with lower defect densities, which enable customers to conduct advanced
research for microwave and power applications.
Revenue contributions from the display modules and moving messages sign
products were 96% lower than the prior year as results for the first quarter of
1998 included a significant sale to a module customer in Korea. The Company
continues to redirect current investment away from this area as it analyzes the
future business plan for these products.
Contract Gross Margin
Research contract revenue and cost of contract revenue decreased 22% and
27%, respectively, during the first quarter of fiscal 1999 as compared to the
prior year quarter, due to the completion of existing government funding
commitments and the limitation of new funds available from the government for
research. Some of this research is now being funded by the Company which
resulted in a 104% increase in research and development expenses over the
comparative period in the prior year.
Product Margin
The Company's gross margin was a record 46% for the three months ended
September 27, 1998 as compared to 31% in the prior year. The overall growth in
profitability stems from higher throughput and manufacturing yield on LED and
materials products, thereby lowering the cost per unit. In addition, technology
contributions from a smaller sized chip on a larger two inch wafer, plus the
implementation of the lower cost conductive buffer process have contributed to
this increase. Higher LED and material unit sales have also enhanced overall
profitability.
14
Selling and General and Administrative Expenses
Sales, general and administrative expenses for the three month period
ended September 27, 1998, increased by 7% over the same period in the prior year
due to increased costs to support the growth of business. Overall as a
percentage of revenue, S, G&A costs are 10% of revenue as compared to 11%
experienced in the first quarter of fiscal 1998. These costs as a percentage of
revenue are expected to remain comparable for the remainder of fiscal 1999.
Other Expenses
The Company has entered an agreement with C3 to sell equipment
manufactured by the Company at cost plus a reasonable overhead allocation in
order to increase capacity available under the supply agreement. The overhead
allocation was recorded as "other operating income"; however, the amount was
more than offset by leasehold write-offs associated with the move to the new
facility.
Net interest income decreased by 30% over the first quarter of fiscal 1998
as interest expense associated the $10,000,000 loan commitment was recorded.
Throughout fiscal 1998, much of the interest expense incurred with this
commitment was capitalized as a part of the construction improvements made to
the facility. When certain manufacturing operations were moved to the new site
in the first quarter of fiscal 1999, portions of the interest associated with
the completed work were expensed. For the first quarter of 1999 total interest
incurred was $196,000 with only $84,000 being eligible for capitalization,
therefore $112,000 was expensed. No interest expense was incurred in the first
quarter of fiscal 1998.
Liquidity and Capital Resources
Net cash provided by operations was $1,217,000 for the three months
ended September 27, 1998 compared with $2,467,000 generated during the
comparative period in fiscal 1998. The decrease was primarily attributable to
higher profitability, being offset by a significant decrease in accounts payable
and accrued expenses.
The Company invested $4,087,000 in capital expenditures during the first
three months of fiscal 1999 compared to $822,000 during the same period in the
prior year. The majority of the increase in spending was due to the continued
upfit of the new production facility near Research Triangle Park, North
Carolina. The Company also increased manufacturing capacity by adding new
equipment in the epitaxial and clean room departments.
The Company currently has a loan outstanding for $10,000,000 from a
commercial bank to finance portions of the upfit of the facility. The final draw
to this loan was made during the first quarter of 1999 for $1,281,000. The
Company is presently reviewing capital requirements for fiscal 1999 and may look
for additional financing alternatives. The Company also committed $3,214,000
during the quarter to repurchase Company stock.
15
Year 2000
The Company's products are of a nature that they are not subject to
failure because of Year 2000 issues. The Company has assigned full-time
information technology professionals to the task of identifying and resolving
Year 2000 problems that may impact the Company's business and has adopted a
phased Year 2000 compliance plan. During the first phase, which is scheduled to
be completed in December 1998, the Company will inventory and collect
documentation on all of its computers, computer related equipment and embedded
processors. The Company will then contact critical vendors and suppliers to
obtain assurances of their ability to ensure smooth delivery of products and
services after December 1999. In the second and third phases, the Company will
prioritize and implement necessary repairs or replacements to equipment in order
to achieve Year 2000 compliance, which it expects to complete in the first
quarter of calendar 1999. The final phase will consist of a testing program,
scheduled for completion in the second quarter of calendar 1999. The Company has
not prepared estimates of costs for the correction of Year 2000 problems. Based
on information available at this time, including the Year 2000 compliance status
of equipment that has been examined as well as the anticipated replacement
schedule for equipment, the Company does not believe that the cost of remedial
actions will have a material adverse effect on the Company's results of
operations or financial condition. There can be no assurance that there will not
be delay in, or increased costs associated with, the implementation of
corrections as the Year 2000 compliance plan is performed. Failure to implement
such changes could have an adverse effect on future results of operations. In
addition, unexpected costs of correcting equipment that has not yet been fully
evaluated could have an adverse effect on future results of operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.15 Third Amendment to Purchase Agreement between the Company
and Siemens A.G. dated September 8, 1998 (1)
b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated September 25, 1998
reporting in Item 4 the dismissal of PricewaterhouseCoopers LLP and
the engagement of Ernst & Young LLP as the Company's independent
accountant.
16
(1) Confidential treatment of portions of this document is being
requested pursuant to Rule 24b-2 of the Securities and Exchange
Commission.
17
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CREE RESEARCH, INC.
Date: October 30, 1998 /s/F. Neal Hunter
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F. Neal Hunter, President and
Chief Executive Officer
/s/ Cynthia B. Merrell
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Cynthia B. Merrell, Chief Financial Officer
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