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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 25, 2000
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction Identification Number)
of incorporation)
4600 Silicon Drive, Durham, North Carolina 27703
(Address of principal executive offices)
(919) 313-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0025 par value
(Title of Class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of August 4, 2000 was approximately $3,368,572,950 (based on the
closing sale price of $102 per share).
The number of shares of the registrant's Common Stock, $0.0025 par value per
share, outstanding as of August 4, 2000 was 35,351,133.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held October 31, 2000
are incorporated by reference into Part III.
CREE, INC.
FORM 10-K
For the Fiscal Year Ended June 25, 2000
INDEX
Part I Page
Item 1. Business............................................................3
Item 2. Properties.........................................................20
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................20
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................21
Item 6. Selected Financial Data............................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........30
Item 8. Financial Statements and Supplementary Data........................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...............................53
Part III
Item 10. Directors and Executive Officers of the Registrant.................54
Item 11. Executive Compensation.............................................54
Item 12. Security Ownership of Certain Beneficial Owners and
Management.........................................................54
Item 13. Certain Relationships and Related Transactions.....................54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....55
SIGNATURES...................................................................57
PART I
Item 1. Business
INTRODUCTION
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Cree, Inc., a North Carolina corporation, was established in 1987 to
commercialize silicon carbide, or SiC, semiconductor wafers and devices. Today,
we are the world leader in developing and manufacturing compound semiconductor
materials and electronic devices made from SiC. SiC-based devices offer
significant advantages over competing products made from silicon, gallium
arsenide, sapphire and other materials for certain electronic applications. We
use our compound semiconductor technology to make enabling products such as blue
and green light emitting diodes, or LEDs. We sell our LEDs to customers who
package them for use in applications such as backlighting for automotive
dashboards and automotive interior lighting, wireless handsets and other
consumer products. Other applications for our LEDs include indoor and outdoor
full color displays, such as video boards in indoor arenas and outdoor stadiums
or billboards and message signs. Our LEDs are also used in traffic signals,
indicator lights for consumer or industrial equipment and miniature white
lights. We have developed several generations of LED products, including high
performance LEDs with increased brightness over our previous diodes and small
chip products, which consume less power. Our SiC-based blue and green LEDs offer
benefits to our customers over competing products, including an industry
standard chip structure, improved resistance to electrostatic discharge, small
size and low unit price. We also manufacture SiC materials products, including
SiC wafers, that we sell for use in manufacturing and for research directed to
optoelectronics, microwave and power applications, and SiC crystals used in the
production of unique gemstones.
We have new product initiatives for RF and microwave transistors and recently
began shipping limited quantities of these devices. We believe that these
products may prove useful in a variety of applications, including power
amplifiers for wireless infrastructure, home-based multi-channel multi-point
subscriber units, digital broadcast applications and solid state radar. We also
have new product initiatives aimed at developing high power devices for power
conversion and switching uses and blue laser diodes for use in high-density
digital versatile disk, or DVD, players and other optical storage applications.
We are also developing LEDs with a higher luminous efficiency to expand our
existing family of devices. We believe if certain significant milestones are
achieved these LED chip products currently in development may enable our
customers to produce white lamps that could compete in the conventional lighting
market.
BACKGROUND
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Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon evolved as the dominant semiconductor material because it is relatively
easy to grow into large, single crystals and is suitable for fabricating many
electronic devices. Alternative materials, such as gallium arsenide, or GaAs,
have emerged to enable the fabrication of new devices with characteristics that
could not be obtained using silicon, including certain RF, microwave, LED, laser
and other solid state devices. However, GaAs, silicon and other commercially
available semiconductor materials have certain physical and electronic
characteristics that limit their usefulness in certain applications. For
example, silicon and GaAs-based semiconductors have not demonstrated the ability
to fabricate short wavelength optoelectronic devices. In addition, the power
handling capabilities of silicon and GaAs-based microwave transistors can limit
the power and performance of microwave systems used in many
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commercial and military applications. SiC can deliver five times the power per
single device than silicon or GaAs based devices, therefore, SiC based wireless
systems may use fewer transistors per base station with less complex circuitry,
which may result in a lower system cost. Furthermore, few silicon or GaAs
devices can operate effectively at temperatures above 400 degrees Fahrenheit.
This is a significant limitation for applications such as advanced electronic
systems for high power electric motors, jet engines and satellites.
Substantial research and development efforts have been undertaken to explore the
properties of other potential semiconductor materials. These efforts have
identified few candidate materials that are capable of being grown as low defect
single crystals, a requirement in the production of most semiconductors. SiC
also possesses physical and electronic properties that meaningfully increase
device performance over products fabricated from semiconductor materials in
general use. Of the few potential candidates, the properties of SiC make it an
excellent material for extending existing semiconductor device technology where
high power, high temperature or short wavelengths are important for performance.
SiC OVERVIEW
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SiC has many physical characteristics that make it difficult to produce. For
example, in a typical semiconductor manufacturing process, the semiconductor
material is grown in single crystal form and sliced into wafers. The wafers are
then polished and chemically etched, coated with thin crystalline films
containing controlled levels of impurities and fabricated into devices. Because
SiC can form many different atomic arrangements and must be grown at process
temperatures above 3,500 degrees Fahrenheit, it is difficult to grow large
single crystals that are homogeneous in structure. In addition, the high
temperatures required to grow SiC make the control of impurity levels in SiC
crystals and thin films difficult. "Micropipes," or small diameter holes, may
appear in the crystals during their growth, affecting the electrical integrity
of the wafer and reducing the usability of portions of the wafer for certain
applications. Slicing and polishing SiC wafers is also hindered by the intrinsic
hardness of the material. Similarly, its inherent chemical resistance makes SiC
a difficult material to etch. The characteristics discussed below distinguish
SiC from conventional silicon and GaAs-based semiconductor materials, resulting
in significant advantages if production hurdles can be overcome:
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to ionize an
electron from the valence band to the conduction band. SiC is classified as a
"wide bandgap" semiconductor material, meaning that more energy is required for
ionization. Electronic devices made from this material can operate more
efficiently and at much higher temperatures than devices made from other common
semiconductor materials.
HIGH BREAKDOWN ELECTRIC FIELD. The "breakdown electric field" is the amount of
voltage per unit distance that a material can withstand and still effectively
operate as a semiconductor device. SiC has a much higher breakdown electric
field than silicon or GaAs. This characteristic allows SiC devices to operate at
much higher voltage levels. Additionally, it allows SiC power devices to be
significantly smaller while carrying the same as or greater power levels than
comparable silicon and GaAs-based devices.
HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This feature enables
SiC-based devices to operate at high power levels and still dissipate the excess
heat generated.
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HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC has a "saturated electron drift
velocity" higher than that of silicon or GaAs. The saturated electron drift
velocity is the maximum speed at which electrons can travel through a material.
This characteristic, combined with a high breakdown electric field, allows the
fabrication of SiC-based microwave transistors that operate at significantly
higher power levels than current silicon and GaAs-based devices.
ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. As a result, SiC can withstand much higher
electrical pulses and is much more radiation-resistant than silicon or GaAs. SiC
is also extremely resistant to chemical breakdown and can operate in harsh
environments.
GEMOLOGICAL APPEAL. In the gemstone industry, SiC is known as moissanite. Its
high refractive index and dispersion give it "diamond-like" sparkle or fire. In
addition, its hardness allows superior faceting and wear resistance compared to
many gemstone materials.
THE CREE SOLUTION
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Some of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material very difficult to
produce. Through our 13 years of development and manufacturing experience, we
have succeeded in overcoming many of the difficulties involved in processing SiC
for commercial use. We introduced our first product in October 1989 and believe
we are currently the leading volume producer of SiC wafers and SiC-based blue
and green LED products in the world. We believe that our proprietary process
techniques and the inherent attributes of SiC give our products significant
advantages over competing products for certain electronic and gemological
applications. These advantages include:
BLUE AND GREEN LIGHT EMISSION. We produce high efficiency blue and green LEDs
using gallium nitride, or GaN, a wide bandgap material, and other nitrides grown
on SiC substrates. Other manufacturers of nitride-based LEDs currently use
sapphire substrates. The conductive properties of SiC enable us to fabricate a
simpler, industry standard sized LED chip that is smaller than LEDs grown on
competing sapphire substrates. We believe the industry standard size of our chip
affords our customers more flexibility in gaining design wins and our smaller
chip size enables our product to be offered for a lower cost per chip in
comparison to sapphire-based products currently available. We are also
developing LEDs with higher luminous efficiency that may allow our products to
better compete with the brightness offered from sapphire-based products.
Sapphire-based products currently offer a higher brightness than our existing
LED products. We are also working to develop highly efficient near-ultraviolet
LED chips that may eventually be used by our customers to produce white lamps
that can compete with conventional lighting products for certain applications.
We have also demonstrated in the laboratory and are continuing development of
nitride-based blue laser diodes grown on SiC. The principal advantages of SiC
over other substrate materials for blue laser diodes are its high electrical and
thermal conductivity and its ability to be cleaved, providing an excellent
surface for laser light emission.
ENABLING SUBSTRATE PROPERTIES. The inherent attributes of SiC as a substrate
enable researchers to work on developing new optoelectronic, microwave and power
devices that offer significant advantages over competing products and which
could not be produced as effectively on other substrate materials. We
manufacture SiC wafers for both internal use and for sale to external
development programs to further new product development. We also sell some
wafers to Osram OS for the production of LED products. In October 1999, we
introduced a larger three-inch wafer to production for research purposes and
demonstrated a four-inch prototype wafer.
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GEMSTONE MATERIAL PROPERTIES. We manufacture SiC crystals that are used to
produce moissanite gemstones. The combination of SiC's optical properties (high
refractive index and dispersion) and robust material properties give these
gemstones both diamond-like sparkle or fire and hardness characteristics. We
continue to develop larger and higher quality SiC crystals for this application.
HIGH POWER RF AND MICROWAVE OPERATIONS. We have demonstrated SiC RF and
microwave transistors that can operate at much higher voltages than silicon or
GaAs because of SiC's high breakdown electric field, allowing much higher power
operation at high frequencies. We believe our higher power SiC devices will
enable the design and manufacture of SiC-based RF and microwave transmitters
with less circuit complexity and higher total output power. These same
advantages exist for microwave devices made using GaN on SiC substrates, which
can also operate at much higher frequencies than SiC-only devices. We recently
began shipping limited quantities of SiC RF devices that can be used in wireless
infrastructure applications such as cellular base station transmission systems.
We believe that SiC devices offer certain advantages for RF and microwave
applications in comparison to silicon and GaAs devices, including using fewer
devices for a similar range of frequency, superior linearity for digitally
modulated carrier applications which results in less distortion to the signal,
superior efficiency, and the ability to operate at higher temperatures. We are
continuing development of additional RF and microwave devices for use in
wireless infrastructure and other commercial and defense-related applications.
HIGH POWER, HIGH VOLTAGE OPERATION. We are developing SiC power diodes and
switches that are able to operate at higher power densities than currently used
semiconductor materials because of the much higher breakdown electric field of
SiC. In addition, we believe that our SiC power devices will be able to operate
with lower resistive losses and lower switching losses than those made with
silicon or GaAs.
PRODUCTS
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All of our current products are based on our SiC technology. The following chart
illustrates our existing products and existing and potential applications of
these products by our customers and their end users:
PRODUCT EXISTING AND POTENTIAL USER APPLICATIONS
------- ----------------------------------------
Blue and green LEDs o Backlighting in applications such as automotive
dashboards and interior lighting, wireless hand-
sets and other lighting applications
o Large indoor full color displays, such as arena
video screens
o Large outdoor full color displays
o White light products to replace miniature incan-
descent bulbs, such as those used in automobile
map lights and other lighting applications
o Traffic signals
o Indicator lights used for consumer, office and
other equipment
Wafer Products o Manufacture of LEDs
o Research and development for new semiconductor
devices
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SiC crystals o Gemstones
RF transistors and o Power amplifier systems for wireless infra-
amplifiers structure, such as base stations, wireless local
loop and multi-channel, multi-point distribution
system base station and subscriber sites
o Digital broadcast systems
o Solid-state radar systems
o Military communications systems
BLUE AND GREEN LEDs
LEDs are solid-state chips used in miniature lamps in everyday applications such
as indicator lights on printers, computers and other equipment. LEDs generally
offer substantial advantages over small incandescent bulbs, including longer
life, lower maintenance cost and energy consumption, and smaller space
requirements. Groups of LEDs can make up single or multicolor electronic
displays. Since the introduction of our first blue SiC-only LED product in 1989,
we have developed several generations of LED products, including blue and green
LEDs using nitride materials on SiC substrates, a more robust conductive buffer
chip that is easier to build into lamps, higher brightness products and a small
size low power consumption diode. All of these products have a lower unit price
than competing products. We believe that LEDs made from SiC substrates offer
important benefits over those made from the sapphire substrates presently used
by our competitors, including:
o an industry standard vertical chip structure requiring a single wire bond
that permits faster LED assembly and reduced cost;
o a small chip size;
o improved resistance to electrostatic discharge, or ESD, which reduces the
cost, engineering effort and time to qualify LEDs at customer production
sites; and
o a lower-priced outdoor-capable product.
Presently, our LED chips are used for backlighting purposes in applications such
as automotive dashboards, interior automotive lighting, and liquid crystal
display or LCD, including wireless handsets and other consumer products. In
addition, they are used in office equipment indicator lighting, full color video
display technology, such as arena video boards, billboards and moving message
advertising and informational signs. Our standard brightness LED products,
offered in blue wavelengths only, are primarily used in indoor applications. In
September 1998, we introduced brighter, higher-priced blue and green LEDs that
offer a lower cost alternative to competing products made on sapphire
substrates. These products increased brightness up to 300% over our standard LED
products. These higher brightness parts are used by our customers to produce
packaged components marketed for backlighting applications requiring low power
consumption, such as LCDs for wireless handsets and consumer products, and in
traffic signals and outdoor full-color display applications where brightness is
critical.
We also offer a product line within our blue LED products that our customers use
in manufacturing solid-state LED components that emit white light. By passing
blue or near ultraviolet LED output through certain conversion materials such as
phosphors or polymers, blue light may be converted into white light. We
currently sell blue LED chips to customers who produce packaged components that
emit white light. Commercial products incorporating our chips for white light
conversion include backlighting applications for automobile dashboards and
instrumentation and LCD backlighting for
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wireless handsets. Other applications for white light LEDs include miniature
incandescent lighting, such as map lights, automobile trunk lights and small
flashlights.
In June 2000, we announced the introduction of a new smaller chip that is
available at standard and high brightness levels in blue and in high brightness
levels for green. This product costs less and uses 50% less power than our
larger sized chips. We are targeting this product to the low cost handset
market.
We are focusing current development efforts on further improving the brightness
of our high brightness LEDs. We believe that increased brightness is necessary
to effectively compete against LEDs fabricated on sapphire substrates, which are
presently brighter than our high brightness products, and may eventually lead to
products marketed for commercial lighting applications. LED products represented
63%, 49%, and 43% of our revenue for the fiscal years ended June 25, 2000, June
27, 1999, and June 28, 1998, respectively.
MATERIALS PRODUCTS
We manufacture SiC wafers for sale to corporate, government and university
programs that use SiC as the basis for research in optoelectronic, microwave and
high power devices. Each order may be sold as a bare wafer or customized by
adding epitaxial films, depending upon the nature of the customer's development
program. For the past several years, we have worked to improve the quality of
our wafers while increasing their size. In October 1999, we released a low-cost
two-inch wafer targeted as an alternative to sapphire substrates used by many
researchers in the optoelectronics field. In the same month, we introduced our
first three-inch wafer for sale to the research community.
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, we manufacture SiC crystals in near colorless form for use in gemstone
applications. We sell SiC crystals directly to Charles & Colvard, or C&C, a
company founded to develop gemstone products from SiC crystals. C&C cuts and
facets the SiC crystals to fabricate diamond-like gemstones targeted at
customers who desire affordable high quality jewelry. In December 1999, C&C
announced lower sales revenue and higher inventory levels than anticipated as
well as the initiation of a new marketing campaign for its gemstone products. As
a result, we anticipate that sales to C&C will continue to decline as a
percentage of our business in fiscal 2001. Future demand also is dependent on
C&C's ability to cut, facet and effectively market its gemstone products. Wafer
and other material products represented 26%, 37% and 31% of our revenue for the
fiscal years ended June 25, 2000, June 27, 1999, and June 28, 1998,
respectively.
RF AND MICROWAVE TRANSISTORS
In June 1999, we announced the first of a planned line of SiC-based RF and
microwave transistor products. Samples of this product were shipped throughout
fiscal 2000. In June 2000, the first 10-watt transistor products were released
to production and became available to customers in limited quantities. These
products include a complete, self-biased broadband power amplifier covering 100
megahertz to 1 gigahertz as well as pre-matched transistors for broadband
wireless access bands up to 3.7 gigahertz. We believe that these products can be
used in a variety of power amplifier applications, including wireless
infrastructure, home-based subscriber units, cable TV and digital broadcast
applications. At this time we are shipping only limited quantities of these
products. Revenue growth from sales of these devices is dependent on the results
of customer evaluations of the first SiC RF products and whether the products
are designed into customer applications.
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PRODUCTS UNDER DEVELOPMENT
- --------------------------
The following chart illustrates the potential user applications for each area of
current product development:
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
---------------- ---------------------------
RF and microwave devices o Power amplifier systems for wireless
applications, such as base stations,
wireless local loop and multi-channel,
multi-point distribution system base
station and subscriber sites
o Amplifiers for CATV
o Digital broadcast systems
o Solid-state radar systems
Power devices o Industrial motor controls
o Electric vehicles
o High voltage power supplies
o Lighting ballasts
o Factory robotics
o Locomotive applications
o Solid-state power transmission
Blue and ultraviolet lasers o High density optical storage, such as
DVDs
LEDs with higher lumenous o Premium outdoor display signs
efficiency o Products for the conventional lighting
market
RF AND MICROWAVE DEVICES
We are currently developing SiC-based high power transistors that operate at
radio and microwave frequencies. We believe these devices will have applications
in wireless base stations, high power solid-state broadcast systems for
television and radio and radar search and detection equipment. These SiC-based
devices are targeted for frequencies from 30 megahertz to 4 gigahertz, including
third generation, or 3G transmitter site networks. We believe that future SiC
transistors in development, with higher output power per transistor than current
silicon and GaAs-based devices, will allow wireless systems to use fewer
transistors per base station, resulting in less complex circuitry, higher
linearity and lower cost. New higher power devices are targeted for introduction
in fiscal 2001 on a sample basis. We have also demonstrated 50 watts of
continuous wave power at 2 gigahertz in a complete amplifier from a single SiC
transistor.
We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). We
previously reported the demonstration of GaN on SiC transistors that operated
with an output power of 40 watts at 10 gigahertz which we believe to be the
highest publicly reported pulsed power output for a single device at this
frequency. We also reported a record high power density of 9.8 watts per
millimeter, continuous wave, at 8.2 gigahertz on smaller GaN devices. This power
density is higher than that achieved with equivalent silicon or GaAs-based
devices. We do not anticipate that a commercial device capable of emitting power
at this level will be available in the near term.
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POWER DEVICES
We are developing prototype high power devices that have many potential uses.
Such devices could be employed in applications involving power conditioning as
well as power switching. SiC-based power devices have the potential to handle
significantly higher power densities than existing silicon-based devices and
operate at significantly higher temperatures and voltages with superior
switching capabilities, yielding power savings due to higher efficiency.
Potential applications include power drive components for electric vehicles,
lighting ballast components, industrial motor controls and power conditioning
for high voltage power transmission. In early fiscal 1999, we entered into a
three-year project with Kansai Electric Power Company, one of the largest power
companies in the world, for development of SiC-based devices for use in power
transmission networks. Under this program, we recently demonstrated a 12 kV high
efficiency SiC rectifier for use in electric power switching. We believe this
voltage level was higher than any previously reported for a single rectifier
device. We do not anticipate that a commercial device capable of switching power
at this voltage level will be available in the near term.
BLUE AND NEAR ULTRAVIOLET LASER DIODES
We continue to focus on the development of blue and near ultraviolet laser
diodes. SiC's inherent attributes, including its natural cleavability and high
thermal conductivity, make it an excellent substrate material for development of
such short wavelength laser diodes. The storage capacity of optical disk drives
can be increased significantly by utilizing a laser diode capable of emitting
shorter wavelength light. We have demonstrated in the laboratory a short-lived
blue laser diode, fabricated from nitride materials deposited on SiC substrates,
which has a shorter wavelength than that of the red or infrared lasers used in
applications today. We believe that the shorter wavelength of blue light could
potentially result in storage capacity for optical disk drives that is
significantly greater than the capacity permitted by red light. Substantial
research and development work is needed for us to produce a short wavelength
laser suitable for consumer applications. In May 1999 we entered into a one-year
development agreement with Microvision, Inc., or Microvision, under which
Microvision provided $2.6 million in funding for us to conduct research in edge
emitting LEDs and laser diodes. In April 2000, the agreement was extended for an
additional two years with Microvision providing funding of $4.5 million and $5.5
million in the first and second years of the program, respectively.
LEDs WITH HIGHER LUMINOUS EFFICIENCY
In May 2000, we acquired Nitres, Inc., (now a wholly owned subsidiary known as
Cree Lighting Company, or Cree Lighting) with operations based in Goleta,
California. Cree Lighting is engaged in the development of new LED device and
manufacturing technology, with the goal of developing higher efficiency LED
technology necessary for LEDs to compete with incandescent and fluorescent
lighting technology for conventional lighting markets. In July 2000, Cree
Lighting demonstrated a near ultraviolet LED made using nitride materials on a
sapphire substrate with a power output of 17 mW and 28% external quantum
efficiency. This is the highest known external quantum efficiency publicly
reported for an LED in the UV-to-blue portion of the wavelength spectrum. Our
goal is to begin production of products using this new development in fiscal
2001.
GOVERNMENT CONTRACT FUNDING
- ---------------------------
We derive a portion of our revenue with funding from research contracts with the
U.S. Government. For the fiscal years ended June 25, 2000, June 27, 1999 and
June 28, 1998, government funding represented
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11%, 14% and 21% of total revenue, respectively. These contracts typically cover
work performed over several months up to three years. These contracts may be
modified or terminated at the convenience of the government. The contracts
generally provide that we may elect to obtain title to inventions made in the
course of research, with the government retaining a nonexclusive license to
practice such inventions for government purposes.
RESEARCH AND DEVELOPMENT
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We invest significant resources in research and development aimed at improving
our semiconductor materials and developing new device and production technology.
Our core SiC materials research is directed to improving the quality and
diameter of our SiC substrates. We are also working to improve the quality of
the SiC and nitride epitaxial materials we grow to produce devices and to
improve device yields by reducing variability in our processes.
We spent $20.0 million in fiscal 2000, $12.1 million in fiscal 1999 and $9.9
million in fiscal 1998 for direct expenditures relating to research and
development activities. Off-setting these expenditures were $12.7 million in
fiscal 2000, $9.0 million in fiscal 1999 and $9.7 million in fiscal 1998 of U.S.
Government funding for direct and indirect research and development expenses. In
addition, certain customers have also sponsored research activities related to
the development of new products. Customers contributed $5.5 million in fiscal
2000, $4.5 million in fiscal 1999 and $ 3.5 million in fiscal 1998 towards our
product research and development activities.
SALES AND MARKETING
- -------------------
We actively market our wafer and optoelectronic products through targeted
mailings, telemarketing, select advertising and attendance at trade shows. We
generally use an executive sales approach, relying predominantly on the efforts
of senior management and a small direct sales staff for worldwide product sales.
We believe that this approach is preferable in view of our current customer base
and product mix, particularly since the production of lamp and display products
incorporating LED chips is concentrated among a relatively small number of
manufacturers. However, we depart from this approach for sales to certain Asian
countries. In Japan, we market our LED products and SiC wafers through our
distributors Sumitomo Corporation, or Sumitomo, and Shin-Etsu Handotai Co. Ltd.,
or Shin-Etsu. We also use sales representatives to market our LED products in
Hong Kong, China, Taiwan and South Korea. We sell SiC crystal materials for use
in gemstone applications directly to C&C under an exclusive supply agreement. We
are using both direct sales and sales representative arrangements to market RF
products. We have engaged nine representatives for our RF products in the United
States. We have not yet engaged sales representatives or made other distribution
arrangements for our RF products outside the United States.
CUSTOMERS
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During fiscal 2000, revenues from three customers- Siemens AG, or Siemens,
Sumitomo and C&C each accounted for more than 10% of total revenue. For the year
ended June 27, 1999, and June 28, 1998, revenue from Siemens, C&C and the
Department of Defense each accounted for more than 10% of total revenue. For
financial information about foreign and domestic sales, please see Note 2,
"Summary of Significant Accounting Policies" to our consolidated financial
statements included in Item 8 of this report.
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BACKLOG
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As of June 25, 2000, we had a firm backlog of approximately $76.5 million
consisting of approximately $55.1 million of product orders and $21.4 million
under research contracts signed with the U.S. Government, a portion which have
not yet been appropriated. This compares to a firm backlog level of $42.3
million as of June 27, 1999, which consisted of approximately $25.6 million of
product orders and approximately $16.7 million of research contracts signed with
the U.S. Government. We believe the entire backlog could be filled during fiscal
2001, with the exception of approximately $9.3 million in U.S. government funded
contracts.
MANUFACTURING
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Our products are manufactured in a six-part process, which includes: SiC crystal
growth, wafer slicing, polishing, epitaxial deposition, fabrication, and testing
and packaging. SiC crystals are grown using a proprietary high temperature
process designed to produce uniform crystals in a single crystalline form.
Crystals used for moissanite gemstones exit the manufacturing process at this
stage. Crystals used for other products are then sliced into wafers. The wafers
are polished and then processed using our epitaxial deposition processes, which
require that we grow thin layers of SiC, GaN or other material on the polished
wafer, depending on the nature of the device under production. SiC wafer
products may leave the manufacturing process either after polishing or epitaxy.
Following epitaxy, LED and RF chips are fabricated in a clean room environment.
The final steps include testing and packaging for shipment to the customer. In
manufacturing our products we depend substantially on our custom-manufactured
equipment and systems, some of which are manufactured internally and some of
which we acquire from third parties and customize ourselves.
SOURCES OF RAW MATERIALS
- ------------------------
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in our SiC products and LEDs, including certain key materials
and equipment used in our crystal growth, wafering, polishing, epitaxial
deposition, device fabrication and device test processes. We generally purchase
these limited source items pursuant to purchase orders and have no guaranteed
supply arrangements with our suppliers. In addition, the availability of these
materials, components and equipment to us is dependent in part on our ability to
provide our suppliers with accurate forecasts of our future requirements. We
endeavor to maintain ongoing communication with our suppliers to guard against
interruptions in supply and, to date, generally have been able to obtain
adequate supplies in a timely manner from our existing sources. However, any
interruption in the supply of these key materials, components or equipment could
have a significant adverse effect on our operations.
COMPETITION
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. We
believe that we currently enjoy a favorable position in the existing markets for
SiC-based products and materials. However, we face actual and potential
competition from a number of established domestic and international compound
semiconductor companies. Many of these companies have greater engineering,
manufacturing, marketing and financial resources than we have.
-12-
Our primary competition for blue and green LED products comes from Nichia
Chemical Industries, Ltd., or Nichia, Toyoda Gosei Co. Ltd. and Lumi Leds
Lighting, a joint venture between Agilent Technologies and Philips Lighting.
These companies currently market blue and green LED products that are brighter
than our high brightness blue and green LED devices. In addition, Uniroyal
Technologies, Inc., American Xtal Technology, Lucky Goldstar and other Asian
based companies have announced intentions to begin production of blue and green
LEDs, all on sapphire substrates. Some of our existing competitors have been
more successful than us in the market for outdoor display applications because
of the brightness demands of outdoor displays, as well as the decreased price
sensitivity of the outdoor display market. We believe our brighter blue and
green LEDs have enabled us to compete successfully in this market because our
LEDs often can be used in the same applications at a lower cost than competing
products. We are working on plans to improve the brightness of our LEDs to
enhance our ability to compete in this market. We believe that our approach to
manufacturing blue and green LEDs from SiC substrates offers a more
cost-effective design and process than competitors, who use a sapphire
substrate. Our smaller chip design, which is possible because we use a
conductive substrate, permits more devices to be fabricated on each wafer
processed, which lowers our cost per unit. In addition, our industry standard
vertical chip structure allows manufacturers to package the LED on the same
production line as other green, amber and red LEDs, eliminating the need for
special equipment necessary for chips made from sapphire substrates.
Furthermore, our SiC-based devices can withstand a higher level of ESD than
existing sapphire-based products and therefore are more suitable for
applications that require high ESD emission ratings, such as automotive
applications.
In addition to competitor using alternative LED technology, Osram OS is
currently producing LEDs using technology licensed from us in 1995. Shin-Etsu
has also licensed certain of our LED technology in 1996 but has not begun
production under this license. The market for SiC wafers also is becoming
competitive, as other companies in recent years have begun to offer SiC wafer
products or announced plans to do so.
PATENTS AND PROPRIETARY RIGHTS
- ------------------------------
We seek to protect our proprietary technology by applying for patents where
appropriate and in other cases by preserving the technology and related know-how
and information as trade secrets. We have also from time to time acquired,
through license grants or assignments, rights to patents on inventions
originally developed by others.
At June 25, 2000 we owned or held exclusive rights licensed under a total of 70
issued U.S. patents, subject in some cases to nonexclusive license rights held
by third parties. These patents expire between 2007 and 2018. Two of these
patents are jointly owned with a third party. In addition, we own or hold
exclusive license rights under corresponding patents and patent applications in
certain foreign countries.
Included in the patent licenses we hold is an exclusive license granted by North
Carolina State University, or N.C. State, to 10 U.S. patents, and to
corresponding foreign patents and applications, that relate to SiC materials and
device technology, including a process to grow single crystal SiC. The license,
granted pursuant to an agreement executed with N.C. State in 1987, is a
worldwide, fully paid, exclusive license to manufacture, use and sell products
and processes covered by the claims of patent applications filed by N.C. State
relating to the licensed inventions. Ten U.S. patents were subsequently issued
with respect to the applications, with expiration dates between 2007 and 2009.
Twelve of the foreign applications have been issued with expiration dates from
2006 to 2013. The U.S. government holds a non-exclusive license to practice the
inventions covered by the N.C. State license for government purposes. We have
also entered into other license agreements with N.C. State, and with the
licensing
-13-
agencies of other universities, under which we have obtained rights to practice
inventions claimed in various patents and applications issued or pending in the
U.S. and other foreign countries.
For proprietary technology which is not patented or otherwise published, we seek
to protect the technology and related know-how and information as trade secrets
and to maintain it in confidence through appropriate non-disclosure agreements
with employees and others to whom the information is disclosed. There can be no
assurance that these agreements will provide meaningful protection against
unauthorized disclosure or use of our confidential information or that our
proprietary technology and know-how will not otherwise become known or
independently discovered by others. We also rely upon other intellectual
property rights such as copyright where appropriate.
Because of rapid technological developments in the semiconductor industry, the
patent position of any semiconductor materials or device manufacturer, including
ours, is subject to uncertainties and may involve complex legal and factual
issues. Consequently, there can be no assurance that patents will be issued on
any of the pending applications owned or licensed to us or that claims allowed
in any patents issued or licensed to us will not be contested or invalidated. In
the past, the U.S. patent that we license from N.C. State relating to growth of
SiC was subject to a reissue proceeding; however, that patent was successfully
reissued. Currently, a corresponding European patent is being opposed, which
means that we could lose patent protection in Europe for this particular method
or that the scope of our patent protection may be reduced. There is likewise no
assurance that patent rights owned or exclusively licensed to us will provide
significant commercial protection since issuance of a patent does not prevent
other companies from using alternative, non-infringing technology. Further, we
earn a material amount of our revenues in overseas markets. While we hold and
have applied for patent protection for certain of our technologies in these
markets, there can be no assurance that we will obtain protection in all
commercially significant foreign markets or that our intellectual property
rights will provide adequate protection in all such markets.
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia in Tokyo District Court. As previously reported, the
complaint in this proceeding is directed to our standard brightness LED products
and alleges that these products infringe a Japanese patent owned by Nichia. The
suit seeks a permanent injunction against further distribution of the products
in Japan. We have intervened in the proceeding and filed a response denying the
allegations of infringement. In April 2000, Nichia commenced two additional
lawsuits against Sumitomo in Tokyo District Court in which it alleges that our
high brightness LED products infringe a second Japanese patent owned by Nichia.
The complaints in the new proceedings seek provisional and permanent injunctive
relief prohibiting Sumitomo from further sales of these products in Japan. We
have intervened in the new proceedings and have filed responses denying the
allegations of infringement. No monetary damages for infringement have been
sought in any of the lawsuits brought by Nichia against Sumitomo. Management
believes that the infringement claims are without merit and that the lawsuits
are motivated by competitive factors. We intend to vigorously defend our
products against these claims.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. Litigation may be necessary in
the future to enforce our intellectual property rights or to defend us against
claims of infringement, and such litigation can be protracted and costly and
divert the attention of key personnel. There can be no assurance that third
parties will not attempt to assert infringement claims against us with respect
to our current or future products. We have been notified from time to time of
assertions that our products or processes may be infringing patents or other
intellectual property rights of others. We have investigated such claims and
determined the assertions were without merit or taken steps to obtain a license
or avoid the infringement. However, we cannot
-14-
predict whether past or future assertions of infringement may result in
litigation or the extent to which such assertions may require us to seek a
license under the rights asserted or whether a license would be available or
available on acceptable terms. Likewise, we cannot predict the occurrence of
future assertions of infringement that may prevent us from selling products,
result in litigation or require us to pay damage awards.
ENVIRONMENTAL REGULATION
- ------------------------
The Company is subject to a variety of governmental regulations pertaining to
chemical and waste discharges and other aspects of our manufacturing process.
For example, we are responsible for the management of the hazardous materials we
use and dispose of hazardous waste resulting from our manufacturing process. The
proper handling and disposal of such hazardous material and waste requires us to
comply with certain government regulations. We believe we are in full compliance
with such regulations, but any failure to comply, whether intentional or
inadvertent, could have an adverse effect on our business.
EMPLOYEES
- ---------
As of June 25, 2000, the Company (including its subsidiaries) employed 680
people, including 524 in manufacturing operations, 110 in research and
development, and 46 in sales and general administration. None of our employees
is represented by a labor union or subject to collective bargaining agreements.
We believe relations with our employees are strong.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
- ----------------------------------------
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATE.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates and we may experience
significant fluctuations in our revenue and earnings in the future.
Our operating results will depend on many factors, including the following:
o our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
o whether we encounter low levels of usable product produced during each
manufacturing step (our "yield");
o our ability to expand our production of SiC wafers and devices;
o our ability to produce higher brightness products;
o demand for our products or our customers' products;
o competition; and
o general industry and global economic conditions.
Our future operating results could be adversely affected by these or other
factors. If our future operating results are below the expectations of stock
market analysts or our investors, our stock price may decline.
IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER.
Our SiC material products and our LED and RF device products are manufactured
using technologies that are highly complex. Our customers incorporate our
products into high volume applications such as
-15-
automotive dashboards, wireless handsets, full color video displays and
gemstones, and they insist that our products meet exact specifications for
quality, performance and reliability.
The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including but
not limited to the following:
o impurities in the materials used;
o contamination of the manufacturing environment;
o equipment failure, power outages or variations in the manufacturing
process;
o losses from broken wafers or other human error; and
o defects in packaging.
Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected. For this reason, we are
constantly trying to improve our yields. In the past, we have experienced
difficulties in achieving acceptable yields on new products, which has adversely
affected our operating results. We may experience similar problems in the future
and we cannot predict when they may occur or their severity. These problems
could significantly affect our future operating results.
THERE ARE LIMITATIONS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by N.C. State and others. The licensed
patents include patents relating to our SiC crystal growth process. We intend to
continue to file patent applications in the future, where appropriate, and to
pursue such applications with U.S. and foreign patent authorities, but we cannot
be sure that patents will be issued on such applications or that our existing or
future patents will not be successfully contested. Also, since issuance of a
valid patent does not prevent other companies from using alternative,
non-infringing technology, we cannot be sure that any of our patents (or patents
issued to others and licensed to us) will provide significant commercial
protection. In addition to patent protection, we also rely on trade secrets and
other non-patented proprietary information relating to our product development
and manufacturing activities. We try to protect this information with
confidentiality agreements with our employees and other parties. We cannot be
sure that these agreements will not be breached, that we would have adequate
remedies for any breach or that our trade secrets and proprietary know-how will
not otherwise become known or independently discovered by others.
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDs, OUR
OPERATING RESULTS MAY SUFFER.
We believe that higher volume production of high brightness blue and green LEDs
will be important to our future operating results. Achieving greater volumes
requires improved production yields for these products. Successful production of
these products is subject to a number of risks, including the following:
o our ability to consistently manufacture these products in volumes large
enough to cover our fixed costs and satisfy our customers' requirements;
and
o our ability to improve our yields and reduce the costs associated with
the manufacture of these products.
Our inability to produce adequate quantities of our high brightness blue and
green products would have a material adverse effect on our business, results of
operations and financial condition.
-16-
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner, and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development and introduction
of new products. Products currently under development include high power RF and
microwave devices, power devices, blue laser diodes, high temperature devices
and higher brightness LED products. The successful development and introduction
of these products depends on a number of factors, including the following:
o achievement of technology breakthroughs required to make commercially
viable devices;
o the accuracy of our predictions of market requirements and evolving
standards;
o acceptance of our new product designs;
o the availability of qualified development personnel;
o our timely completion of product designs and development;
o our ability to develop repeatable processes to manufacture new products
in sufficient quantities for commercial sales;
o our customers' ability to develop applications incorporating our
products; and
o acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.
WE DEPEND ON A FEW LARGE CUSTOMERS.
Historically, a substantial portion of our revenue has come from large purchases
by a small number of customers. We expect that trend to continue. For example,
for fiscal 2000 our top five customers accounted for 82% of our total revenue.
Accordingly, our future operating results depend on the success of our largest
customers and on our success in selling large quantities of our products to
them. The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may stop purchasing our products and
our operating results will suffer. If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.
WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.
In order to increase production at our new facility, we must add critical new
equipment, move existing equipment and complete the construction and upfit of
buildings. Expansion activities such as these are subject to a number of risks,
including unforeseen environmental or engineering problems relating to existing
or new facilities or unavailability or late delivery of the advanced, and often
customized, equipment used in the production of our products, and delays in
bringing production equipment on-line. These and other risks may affect the
construction of new facilities, which could adversely affect our business,
results of operations and financial condition.
-17-
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The market for our products is highly competitive. Our competitors currently
sell blue and green LEDs made from sapphire wafers that are brighter than the
high brightness LEDs we currently produce. In addition, new firms have begun
offering or announced plans to offer blue and green LEDs. The market for SiC
wafers is also becoming competitive as other firms have in recent years begun
offering SiC wafer products or announced plans to do so. We also expect
significant competition for products we are currently developing, such as those
for use in microwave communications.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.
We have experienced a period of significant growth that has strained our
management and other resources. We have grown from 188 employees on December 31,
1996 to 680 employees on June 25, 2000 and from revenues of $44.0 million for
the fiscal year ended June 28, 1998 to $108.6 million for the fiscal year ended
June 25, 2000. To manage our growth effectively, we must continue to:
o implement and improve operation systems;
o maintain adequate manufacturing facilities and equipment to meet customer
demand;
o add experienced senior level managers; and
o attract and retain qualified people with experience in engineering,
design, technical marketing support.
We will spend substantial amounts of money in supporting our growth and may have
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development, and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business operating results and financial condition could be
adversely affected.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.
Beginning in fiscal 2001, we plan to begin shifting LED production from two-inch
wafers to three-inch wafers. We must first qualify our production processes on
systems designed to accommodate the larger wafer size, and some of our existing
production equipment must be refitted for the larger wafer size. Delays in this
process could have an adverse effect on our business. In addition, in the past
we have experienced lower yields for a period of time following a transition to
a larger wafer size until use of the larger wafer is fully integrated in
production and we begin to achieve production efficiency. We anticipate that we
will experience similar temporary yield reductions during the transition to the
three-inch wafers, and we have factored this into our plan for production
capacity. If this transition phase takes longer than we expect or if we are
unable to attain expected yield improvements, our operating results may be
adversely affected.
-18-
WE RELY ON A FEW KEY SUPPLIERS.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our SiC products, including key materials
and equipment used in critical stages of our manufacturing processes. We
generally purchase these limited source items with purchase orders, and we have
no guaranteed supply arrangements with such suppliers. If we were to lose such
key suppliers, our manufacturing efforts could be hampered significantly.
Although we believe our relationship with our suppliers is good, we cannot
assure you that we will continue to maintain good relationships with such
suppliers or that such suppliers will continue to exist.
IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could be
adversely affected.
OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Other companies may hold or obtain patents on inventions or may otherwise claim
proprietary rights to technology necessary to our business. We cannot assure you
that third parties will not attempt to assert infringement claims against us
with respect to our current or future products, including our core products. We
cannot predict the extent to which such assertions may require us to seek
licenses or, if required, whether such licenses will be offered or offered on
acceptable terms or that disputes can be resolved without litigation. Litigation
to determine the validity of infringement, or claims alleged by third parties,
could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not the litigation is ultimately
determined in our favor. We cannot predict the occurrence of future intellectual
property claims that may prevent us from selling products, result in litigation
or give rise to indemnification obligations or damage claims.
IF AN ADVERSE JUDGEMENT IS ENTERED IN THE PENDING PATENT LITIGATION, OUR
BUSINESS MAY SUFFER.
Our distributor in Japan is currently a party to patent litigation in Japan,
brought by Nichia, in which Nichia claims that our LED products infringe two
Japanese patents it owns. The complaints in the proceedings seek injunctive
relief that would prohibit our distributor from further sales of our LED
products in Japan. A result adverse to the distributor in these cases would
impair our ability to sell both our standard brightness and high brightness LED
products in Japan. Subject to contractual limitations, we have an obligation to
indemnify our distributor for certain patent infringement claims.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 69%, 59% and 58%
of our revenue in fiscal 2000, 1999 and 1998, respectively. We expect that
revenue from international sales will continue to be a significant part of our
total revenue. International sales are subject to a variety of risks, including
risks arising from currency fluctuations, the emergence of the Euro, trading
restrictions, tariffs, trade barriers and taxes. Also, U.S. Government or
military export restrictions could limit or prohibit sales to customers in
certain countries because of their uses in military or surveillance
applications. Because all
-19-
of our foreign sales are denominated in U.S. dollars, our products become less
price competitive in countries with currencies that are low or are declining in
value against the U.S. dollar. Also, we cannot be sure that our international
customers will continue to place orders denominated in U.S. dollars. If they do
not, our reported revenue and earnings will be subject to foreign exchange
fluctuations.
Item 2. Properties
We operate our own facilities in Durham, North Carolina. Direct control over SiC
crystal growth, wafering, epitaxial deposition, device fabrication and test
operations allows us to shorten our product design and production cycles and to
protect our proprietary technology and processes. In November 1997, we acquired
our present manufacturing facility, a 30-acre industrial site in Durham, North
Carolina, consisting of a 139,000 square foot production facility and 33,000
square feet of service and warehouse buildings. In the second quarter of fiscal
2000, we completed a 42,000 square foot expansion of this facility. During the
third quarter of fiscal 2000, we purchased a 120,000 square foot shell building
on 17.5 acres of land near the existing production site that we plan to use for
administrative offices and as an employee services center. We are upfitting this
facility and have plans to begin using portions of it in the second quarter of
fiscal 2001. In addition, we are currently engaged in construction of a 250,000
square foot expansion of our main facility to provide added capacity for our LED
and materials production and future product lines. We are targeting primary
phases of this project to be finished in fiscal 2001, with the balance targeted
for completion in fiscal 2002.
We lease approximately 21,900 square feet in Durham, North Carolina for support
of our manufacturing and administrative activities. This lease expires in
December 2001. We also lease approximately 13,200 square feet in a separate
building in Durham, North Carolina that is used for RF production and microwave
research and development. This lease expires in August 2002. We lease a 3,000
square foot facility in Goleta, California for research and development
activities of Cree Lighting. This lease expires in April 2001. Finally we lease
facilities for two small administrative offices in West Lake Village, California
and Clearwater, Florida. The first lease is on a month to month renewal and the
other expires in December 2000.
Item 3. Legal Proceedings
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia in Tokyo District Court. The complaint in this
proceeding is directed to our standard brightness LED products and alleges that
these products infringe a Japanese patent owned by Nichia. The suit seeks a
permanent injunction against further distribution of the products in Japan. We
have intervened in the proceeding and filed a response denying the allegations
of infringement. In April 2000, Nichia commenced two additional lawsuits against
Sumitomo in Tokyo District Court in which it alleges that our high brightness
LED products infringe a second Japanese patent owned by Nichia. The complaints
in the new proceedings seek provisional and permanent injunctive relief
prohibiting Sumitomo from further sales of these products in Japan. We have
intervened in the new proceedings and have filed responses denying the
allegations of infringement. No monetary damages for infringement have been
sought in any of the lawsuits brought by Nichia against Sumitomo. Management
believes that the infringement claims are without merit and that the lawsuits
are motivated by competitive factors. We intend to vigorously defend our
products against these claims.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
-20-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock Market Information. The Company's common stock is traded in the
NASDAQ National Market and is quoted under the symbol "CREE". The following
table sets forth, for the quarters indicated, the high and low bid prices as
reported by NASDAQ. Quotations represent interdealer prices without an
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
FY 2000 FY 1999*
------- --------
High Low High Low
First Quarter $ 44.750 $23.500 $ 8.750 $ 5.250
Second Quarter 79.000 32.125 23.500 6.813
Third Quarter 202.000 66.625 26.625 15.125
Fourth Quarter 175.000 83.000 36.688 18.625
*As adjusted for the two-for-one split effective on July 26, 1999.
Holders and Dividends. There were approximately 530 holders of record of the
Company's common stock as of August 4, 2000.
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. There are no
contractual restrictions in place that currently materially limit, or are likely
in the future to materially limit, the Company from paying dividends on its
common stock, but applicable state law may limit the payment of dividends. The
present policy of the Company is to retain earnings, if any, to provide funds
for the operation and expansion of its business.
On May 1, 2000, the Company acquired all of the outstanding shares of Nitres,
Inc. from its shareholders in exchange for 1,847,746 shares of the Company's
common stock. The issuance of shares of the Company's common stock was exempt
from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended (the "Securities Act"), as a result of a fairness hearing conducted by
the Securities Administrator of the Office of the North Carolina Secretary of
State.
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 25, 2000, June 27, 1999 and June 28, 1998, and the
consolidated balance sheet data at June 25, 2000 and June 27, 1999 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the years ended June 30, 1997 and 1996 and the consolidated
balance sheet data at June 28, 1998, and June 30, 1997 and 1996 are derived from
audited consolidated financial statements not included herein. All consolidated
statement of operations and consolidated balance sheet data shown below are
adjusted to reflect the acquisition of Nitres, Inc. effective May 1, 2000. This
transaction was accounted for under the pooling of interests method. All share
amounts have been restated to reflect the Company's two-for-one stock split
effective July 26, 1999.
-21-
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
--------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $ 96,742 $ 53,424 $ 34,891 $ 19,823 $ 9,689
Contract revenue, net 11,820 8,977 9,071 7,025 3,960
License fee income -- -- -- 2,615 1,423
-------- ------- -------- -------- --------
Total revenue 108,562 62,401 43,962 29,463 15,072
Income from continuing operations $ 30,520 $ 12,448 $ 6,243 $ 3,650 $231
Net income per share, basic $0.93 $0.43 $0.23 $0.14 $0.01
Net income per share, dilutive $0.87 $0.41 $0.22 $0.13 $0.01
Weighted average shares outstanding-diluted 35,217 30,432 28,987 28,251 25,230
Years Ended
--------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $265,957 $ 59,889 $ 28,265 $ 21,121 $ 18,584
Total assets 486,202 145,933 74,379 50,568 43,811
Long-term obligations -- 4,650 11,046 1,638 --
Shareholders' equity 463,140 131,001 55,905 45,236 40,660
-22-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins, and anticipated expense levels, as well as other statements, including
words such as "may," "will," "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Certain Business Risks and Uncertainties" in
Item 1 of this report, as well as other risks and uncertainties referenced in
this report.
Overview
- --------
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC. We recognize product revenue at the time
of shipment or in accordance with the terms of the relevant contract. We
recognize the largest portion of our revenue from the sale of blue and green LED
products. We offer LEDs at two brightness levels- high brightness blue and green
products and standard blue products. Our LED devices are utilized by end users
for automotive backlighting, LCD backlighting (including wireless handsets),
indicator lamps, miniature white lighting, indoor sign and arena displays,
outdoor full color stadium displays, traffic signals and other lighting
applications. LED products represented 63% of our revenue in fiscal 2000 and 49%
in fiscal 1999.
We also derive revenue from the sale of materials products made from SiC that
are used primarily for research and development for new semiconductor
applications. We also sell SiC crystals to C&C, which incorporates them in
gemstone applications. Sales of SiC materials products and SiC crystals
represented 26% of our revenue in fiscal 2000 and approximately 37% during
fiscal 1999.
The balance of our revenue, 11% for fiscal 2000 and 14% for fiscal 1999 is
derived from government contract funding. Under various programs, U.S.
Government entities further the development of our technology by funding our
research and development efforts. All resulting technology remains our property
after the completion of the contract, subject to certain license rights retained
by the government. Contract revenue includes funding of direct research and
development costs and a portion of our general and administrative expenses and
other operating expenses for contracts under which we expect funding to exceed
direct costs over the life of the contract. For contracts under which we
anticipate that direct costs will exceed amounts to be funded over the life of
the contract (i.e., certain cost-share arrangements), we report direct costs as
research and development expenses with related reimbursements recorded as an
offset to those expenses.
We have new product initiatives for RF and microwave transistors and recently
began shipping limited quantities of our first RF devices. We believe that these
products can be used in a variety of applications, including power amplifiers
for wireless infrastructure, home-based subscriber units, digital broadcast
applications and solid state radar. We also have new product initiatives for
high power devices for power conversion and switching uses and blue laser diodes
for high-density digital versatile disk, or DVD, players and other optical
storage applications. We are also developing LEDs with a higher luminous
efficiency to expand our existing family of devices.
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
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Years Ended
-----------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Revenue:
Product revenue, net................ 89.1% 85.7% 79.4%
Contract revenue, net............... 10.9 14.3 20.6
-------- -------- --------
Total revenue................... 100.0 100.0 100.0
Cost of Revenue:
Product revenue, net................ 40.0 43.2 49.4
Contract revenue, net............. 8.2 11.5 17.1
-------- -------- --------
Total cost of revenue........... 48.2 54.7 66.5
-------- -------- --------
Gross margin............................. 51.8 45.3 33.5
Operating expenses:
Research and development.......... 6.5 7.1 4.0
Sales, general and administrative 10.2 10.4 10.0
Other expense....................... 1.2 1.9 1.1
-------- -------- --------
Income from operations.............. 33.9 25.9 18.4
Other non-operating income............. 0.6 0.2 0.0
Interest income, net.................... 8.6 1.7 1.7
-------- -------- --------
Income before income taxes...... 43.1 27.8 20.1
Income tax expense....................... 15.0 7.8 5.9
-------- -------- --------
Net income.......................... 28.1% 20.0% 14.2%
======== ======== ========
Fiscal Years Ended June 25, 2000 and June 27, 1999
- --------------------------------------------------
Revenue
Revenue grew 74% to $108.6 million in fiscal 2000 from $62.4 million in fiscal
1999. This increase was attributable to higher product revenue, which rose 81%
to $96.7 million in fiscal 2000 from $53.4 million in fiscal 1999. This increase
in product revenue was a result of the 124% rise in sales of our LED products
and a 24% increase in SiC material revenue in fiscal 2000 compared to fiscal
1999, respectively.
Our high brightness LED products experienced the heaviest demand. While our LED
chip volume has grown 78% in fiscal 2000 over units shipped in fiscal 1999, our
average sales prices for LEDs have also increased 26% over the prior year. The
greater average sales price reflects a significant shift in mix to the higher
priced high brightness LED products. During fiscal 2000, the high brightness
products sold for an average sales price that was 125% higher than the standard
brightness product. For fiscal 2000, more than 70% of LED sales were
attributable to high brightness products. During fiscal 1999, less than 15% of
LED sales were from the high brightness devices. The average sales price for the
high brightness product line declined 12% in fiscal 2000 as compared to the
prior year. The increase in high brightness unit volume was due to the strong
demand from customers and the availability of additional capacity from our
factory as a result of our facility and equipment expansion and yield
improvements. Unit shipments of the high brightness product also increased due
to the introduction of small-sized chips
-24-
during the fourth quarter of fiscal 2000. The small-sized high brightness chips
represented 8% of total LED volume for that quarter.
While we continue to improve our manufacturing process and yields on our high
brightness and standard brightness products, we must continue to significantly
increase our production output to meet the growing demands of our customers. We
believe that our LED products continue to be attractive to the marketplace due
to our low prices and industry standard vertical structure. We expect that in
order to increase market demand for all of our LED products, we must continue to
lower average sales prices, which is common in our industry. During fiscal 2001,
we believe that the average sales price for all LED products will decline based
on current and projected orders. However, we are targeting strong growth for our
LED revenue in fiscal 2001 to more than offset these lower prices with
significantly higher volume, stemming from strong customer demand and our
continued capacity expansion and yield improvements.
Revenue attributable to sales of SiC materials was 24% higher in fiscal 2000
than the same period in 1999 due to a significant increase in sales to C&C for
gemstone applications and demand for wafer products. In the second quarter of
fiscal 2000, C&C announced lower sales and higher inventory levels than
anticipated and we agreed to allow C&C to reschedule approximately one-half of
its purchase commitments from the first half of calendar 2000 to the second half
of the year. For fiscal 2001, we believe gemstone sales will comprise less than
5% of total revenue and strong demand from our LED business will more than
offset further reductions in gemstone sales. Demand for our wafer business
remains solid, and we are targeting increased revenue from these products in
fiscal 2001 due to higher demand for optoelectronic production and microwave and
power device research.
Contract revenue received from U.S. Government agencies increased 32% during
fiscal 2000 compared to fiscal 1999, due to increased revenue on a microwave
contract awarded in late fiscal 1999, and additional contract awards for Cree
Lighting during fiscal 2000. We are targeting contract revenue to increase
slightly in fiscal 2001 based on contracts awarded in late fiscal 2000.
Gross Profit
Gross profit increased 99% to $56.2 million in fiscal 2000 from $28.2 million in
fiscal 1999. This increase is due primarily to the rise in LED sales volume
discussed above and improved profitability. During fiscal 2000, the average
sales price of high brightness and standard brightness LED products declined 12%
and 21%, respectively, over the prior year. During the same comparative period,
the cost of these devices declined 45% and 28%, respectively. The lower costs
resulted from improved yields and greater throughput.
Profits on wafer and gemstone products have also improved during fiscal 2000 as
compared to fiscal 1999, due to higher quality materials being produced with
greater yields. As a result, average wafer costs for SiC material sales also
declined 34% during fiscal 2000 over the comparative period.
For fiscal 2001, we are targeting our average sales prices for LEDs to decline.
Historically, we have been successful in matching lower sales prices with lower
costs. During fiscal 2001, we plan to continue our focus on reducing costs
through higher production yields and from significantly greater volumes as fixed
costs are spread over a greater number of units.
-25-
Research and Development
Research and development expenses increased 59% in fiscal 2000 to $7.1 million
from $4.4 million in fiscal 1999. Much of this increase was caused by greater
investments for research and development in RF and microwave and optoelectronics
programs. In May of 1999, we signed a $2.6 million agreement with Microvision,
Inc. or MVIS, for the development of edge-emitting LEDs and blue laser diodes.
In April 2000, we amended our contract with MVIS to extend the agreement for an
additional two-year period. Under the amended agreement, MVIS will fund an
additional $10.0 million. As development costs are incurred under the original
and amended contract, funding from MVIS is offset against these expenses. During
fiscal 2000, approximately $3.1 million of funding from MVIS was offset against
research and development expenses. During fiscal 1999, only $500,000 was applied
to research and development expenses. The remaining $9.0 million of funding is
expected to be applied to research and development expenses in fiscal 2001 and
fiscal 2002, with $4.5 million of funding expected to be applied each year. We
believe that including the offset of MVIS funds in fiscal 2001, research and
development expenses will continue to grow in future periods; however, we
believe that as a percentage of revenue, research and development costs will
remain constant.
Sales, General and Administrative
Sales, general and administrative expenses increased 71% in fiscal 2000 to $11.1
million from $6.5 million in fiscal 1999 due primarily to the general growth in
our business. In future periods, we believe that total sales, general and
administrative costs will continue to increase in connection with the growth of
our business; however, we believe that as a percentage of revenue they will
remain constant.
Other Expense
Other expense increased 11% to $1.3 million during fiscal 2000 from $1.2 million
in fiscal 1999 due to higher write-downs for fixed assets during the year.
Other Non-Operating Income
Other non-operating income increased 372% to $700,000 in fiscal 2000 from
$100,000 in fiscal 1999 due to greater income recognized from the sale of
investment securities. During fiscal 2000, a $4.1 million gain was recognized on
the sale of securities. This gain combined with one-time proceeds from an
insurance recovery of $400,000, more than offset a $3.8 million one-time charge
for expenses incurred with the acquisition of Nitres, Inc. In fiscal 1999,
$100,000 was recognized on the sale of securities.
Interest Income, net
Interest income, net has increased 788% to $9.4 million in fiscal 2000 from $1.1
million in fiscal 1999 due to higher average cash balances being available in
fiscal 2000 as a result of two public stock offerings completed in January 2000
and February 1999. Higher interest rates in fiscal 2000 also contributed to
increased interest income. In addition, in November 1997, we obtained a $10.0
million term loan from NationsBank to fund the acquisition and construction of
our manufacturing facility in Durham, North Carolina. The majority of the
interest incurred in the first half of fiscal 1999 was expensed and was shown as
an offset to "Interest income, net". This loan was repaid in the third quarter
of fiscal 1999; therefore, there was no interest expense associated with this
loan in fiscal 2000.
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Income Tax Expense
Income tax expense for fiscal 2000 was $16.3 million compared to $4.9 million in
fiscal 1999. This increase resulted from increased profitability during fiscal
2000 over fiscal 1999. Our effective tax rate during fiscal 2000 was 35%
compared to 28% in fiscal 1999 due to a reduction in the reserve for deferred
tax assets.
Fiscal Years Ended June 27, 1999 and June 28, 1998
- --------------------------------------------------
Revenue
Revenue grew 42% to $62.4 million in fiscal 1999 from $44.0 million in fiscal
1998. This increase was attributable to higher product revenue, which rose 53%
to $53.4 million in fiscal 1999 from $34.9 million in fiscal 1998. This increase
in product revenue was a result of the 62% rise in sales of our LED products and
58% increase in materials revenue in fiscal 1999 compared to fiscal 1998,
respectively.
Growth in LED volume resulted from the introduction of the new high brightness
devices and improvements in the product design of and strong demand for the
standard brightness product. During fiscal 1999, LED volume grew 160% while
average sales prices declined 38%.
Revenue attributable to sales of SiC material was 58% higher in fiscal 1999 than
in the same period of fiscal 1998 due to a significant increase in sales to C&C
for gemstone applications and strong demand for wafer products. During fiscal
1998, C&C was in the initial stages of operation; therefore, unit sales were
limited. Revenue from sales of SiC wafers were higher in fiscal 1999 as compared
to fiscal 1998, due to quality improvements in wafers, along with the
availability of the larger two-inch wafer during fiscal 1999.
During fiscal 1999, sales from our displays business declined 96% from the prior
year period as we had chosen to discontinue this product line. Contract revenue
received from U.S. Government agencies also declined 1% during fiscal 1999
compared to fiscal 1998, as a significant contract that funded optoelectronic
research was exhausted in early fiscal 1999.
Gross Profit
Gross margin climbed to 45% of revenue during fiscal 1999 as compared to 34%
during fiscal 1998. This increase is predominantly attributable to design and
manufacturing improvements that occurred in fiscal 1999 resulting in significant
reductions in cost. With the introduction of the new conductive buffer LED
technology in the fourth quarter of fiscal 1998, we were able to significantly
lower costs of production due to fewer manufacturing steps required with the new
chip structure and improved yield. During the first six months of fiscal 1998,
we introduced a smaller LED chip size and, in December 1997, we began to
fabricate devices on a larger two-inch wafer. During much of fiscal 1998, we
were still in the process of establishing these new manufacturing designs and
had not achieved production efficiency. In addition, the larger two-inch wafer
had not been in full production for much of fiscal 1998; therefore, average die
yields were significantly lower. During fiscal 1999, margins realized on the
high brightness products were lower than those derived from our standard blue
LED product, as the yield from the manufacturing process was less than our
standard product.
Average wafer costs for SiC material products sales also declined 32% during
fiscal 1999 over the comparative period due to more efficient processes and
improved yield.
-27-
Research and Development
Research and development expenses increased 150% in fiscal 1999 to $4.4 million
from $1.8 million in fiscal 1998. Much of this increase was caused by
significantly higher costs for the initial development of the new high
brightness LED products. In May of 1999, the company signed a $2.6 million
agreement with MVIS for the development of edge-emitting LEDs and blue laser
diodes. As development costs were incurred under this contract, funding from
MVIS was offset against these expenses. During fiscal 1999, approximately
$500,000 of funding from MVIS was offset against research and development
expenses. The remaining $2.1 million of funding was applied to research and
development expenses in fiscal 2000.
Sales, General and Administrative
Sales, general and administrative expenses increased 48% in fiscal 1999 to $6.5
million from $4.4 million in fiscal 1998 due primarily to the general growth in
our business. In addition, in fiscal 1998 two insurance events were recorded
that reduced expenses by $400,000. As a result of the dismissal of a securities
class action lawsuit in November 1997, we were reimbursed $200,000 for costs
incurred in connection with the lawsuit. Most of these expenses were recorded in
fiscal 1997. In addition, we received a $200,000 reimbursement of medical
expenses due to a negotiated cost cap in a partially self-funded insured health
plan.
Other Expense
Other expense increased 135% to $1.2 million during fiscal 1999 from $500,000 in
fiscal 1998. During fiscal 1999, we realized impairments to leasehold costs as a
result of management's decision to move equipment from our leased facility to
our new manufacturing site. We also wrote-off other assets that had no future
value to us.
Other Non-Operating Income
Other non-operating income increased 100% to $100,000 in fiscal 1999 due to a
gain recorded for the sale of securities in that year. In fiscal 1998 there was
no "Other non-operating income".
Interest Income, net
Interest income, net has increased 40% to $1.1 million in fiscal 1999 from
$800,000 in fiscal 1998 due to higher average cash balances being available in
fiscal 1999 as a result of a public stock offering completed in February 1999. A
portion of the proceeds received from the offering was used to repay all debt
that was outstanding; therefore during much of the third quarter and all of the
fourth quarter of fiscal 1999, there was no interest expense incurred. In
November 1997, we obtained a term loan from NationsBank to fund the acquisition
and construction of our manufacturing facility in Durham, North Carolina. Most
of that interest was capitalized during fiscal 1998.
Income Tax Expense
Income tax expense for fiscal 1999 was $4.9 million compared to $2.6 million in
fiscal 1998. This increase resulted from increased profitability during fiscal
1999 over fiscal 1998. Our effective tax rate during fiscal 1999 was 28%
compared to 29% in fiscal 1998.
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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 June 25, 2000, we had working
capital of $266.0 million, including $246.3 million in cash, cash equivalents
and short-term investments. Operating activities generated $63.0 million in
fiscal 2000 compared with $20.4 million generated during fiscal 1999. This
increase was primarily attributable to net income and other non-cash expenses of
$42.7 million, a $12.8 million increase in accounts payable and accrued
expenses, and a $27.3 million tax benefit associated with stock option
exercises. These amounts were partly offset by a $11.6 million increase in
deferred income taxes, and a $5.3 million rise in inventory.
Most of the $274.6 million of cash used in investing activities in fiscal 2000
was related to purchases of held to maturity investments. We also invested $12.5
million to acquire available for sale marketable securities. We invested $78.0
million in capital expenditures during fiscal 2000 compared to $41.4 million
during the same period of the prior fiscal year. The majority of the increase in
spending was due to new equipment additions to increase manufacturing capacity
in our crystal growth, epitaxy and package and test areas. Also we completed a
42,000 square foot facility expansion at our production site near Research
Triangle Park, North Carolina and began the construction of an additional
250,000 square foot facility expansion at the same site. In addition, we
acquired a 120,000 square foot shell building on 17.5 acres of land near our
present facility. We plan to use this facility for sales, general and
administrative, as well as for general employee service functions. The cost to
acquire this facility (not including the upfit costs for completing the shell
building) was $8.2 million.
The $272.9 million of cash provided by financing activities during fiscal 2000
related primarily to the receipt of $266.1 million in net proceeds from the
January 2000 stock offering and the exercise of stock options and stock
warrants. The stock warrants exercised were distributed in connection with our
September 1995 private placement and have an exercise price of $13.62. As of
June 25, 2000 warrants remained outstanding to purchase 231,000 shares; these
warrants will expire in September 2000.
We 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.
We are currently engaged in construction activities relating to a 250,000 square
foot expansion of our main facility to provide added capacity for our LED and
materials and future product lines. We are targeting phases of this project to
be finished beginning in December 2000, with the balance targeted for completion
within 18 months. We anticipate total costs for these facilities to be between
$45.0 million and $50.0 million. Estimates for equipment costs relating to this
expansion and other additions total approximately $65.0 million. We plan to fund
this expansion with cash from operations and cash on hand.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures:
- -------------------------
As of June 25, 2000, the Company maintains an investment in equity securities
that is treated for accounting purposes under SFAS 115 as "available for sale"
securities. This investment is carried at fair market value based upon quoted
market price of that investment as of June 25, 2000, with net unrealized gains
or losses excluded from earnings and reported as a separate component of
stockholder's equity. This investment, which consists of common stock of MVIS,
is subject to market risk of equity price changes. The common stock of MVIS is
publicly traded on the Nasdaq National Market. The Company acquired 268,600
shares from MVIS in a private placement in May 1999. In April 2000, the company
purchased 250,000 additional shares of common stock of MVIS. In June 2000,
162,600 shares from the initial investment were sold, leaving 356,000 shares
remaining. Management views this stock holding as an investment; therefore, the
shares are accounted for as "available for sale" securities under SFAS 115. The
fair market value of this investment as of June 25, 2000, using the closing sale
price as of June 23, 2000, was $15.8 million.
During the third quarter of fiscal 2000, the Company invested some of the
proceeds from its January 2000 public offering into high-grade corporate debt,
commercial paper, government securities and other investments at fixed interest
rates that vary by security. No other material changes in market risk were
identified during the most recent quarter.
During fiscal 1999, the Company repaid the term loan that was outstanding as of
June 28, 1998. The Company currently has no debt outstanding.
Qualitative Disclosures:
- ------------------------
The investment in MVIS common stock is 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.
-30-
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors...............................................32
Report of Independent Accountants............................................33
Consolidated Balance Sheets as of June 25, 2000 and June 27, 1999............34
Consolidated Statements of Operations for the years ended June 25, 2000,
June 27, 1999 and June 28, 1998..............................................35
Consolidated Statements of Cash Flow for the years ended June 25, 2000,
June 27, 1999 and June 28, 1998..............................................36
Consolidated Statements of Shareholders' Equity for the years ended
June 25, 2000, June 27, 1999 and June 28, 1998...............................37
Notes to Consolidated Financial Statements...................................38
-31-
Report of Independent Auditors
The Board of Directors and Shareholders of
Cree, Inc.
We have audited the accompanying consolidated balance sheets of Cree, Inc. and
subsidiaries as of June 25, 2000 and June 27, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements of Cree,
Inc. and subsidiaries as of and for the year ended June 28, 1998 were audited by
other auditors whose report dated July 22, 1998, except for the restatement of
the fiscal 1998 financial statements as a result of the business combination
described in the first three paragraphs of Note 2 for which the date is May 1,
2000, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cree,
Inc. and subsidiaries as of June 25, 2000 and June 27, 1999, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
July 21, 2000
-32-
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Cree, Inc.
In our opinion, based on our audit and the report of other auditors, the
consolidated statements of income, of shareholders' equity, and of cash flow for
the year ended June 28, 1998 present fairly, in all material respects, the
results of operations and cash flows of Cree, Inc. and its subsidiaries for the
year ended June 28, 1998, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements give retroactive effect to the merger of Nitres, Inc. on May 1, 2000
in a transaction accounted for as a pooling of interest, as described in Note 2
to the consolidated financial statements. We did not audit the financial
statements of Nitres, Inc. which statements reflect total revenues of
$1,430,561, for the year ended June 28, 1998. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Nitres,
Inc., is based solely on the report of the other auditors. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of Cree, Inc. for any period subsequent to June 28, 1998.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998, except for the restatement
of the fiscal 1998 financial statements as
a result of the business combination
described in the first three paragraphs
of Note 2 for which the date is May 1, 2000
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CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 25, June 27,
2000 1999
ASSETS --------- ---------
Current assets:
Cash and cash equivalents $103,843 $ 42,545
Short-term investments held to maturity 142,461 --
Marketable securities available for sale 15,842 6,145
Accounts receivable, net 12,406 16,099
Interest receivable 3,893 109
Inventories 9,320 3,986
Deferred income taxes -- 296
Prepaid expenses and other current assets 1,254 991
--------- ---------
Total current assets 289,019 70,171
Property and equipment, net 137,118 71,130
Long-term investments held to maturity 41,965 --
Deferred income taxes 10,624 2,879
Patent and license rights, net 2,324 1,742
Other assets 5,152 11
--------- ---------
Total assets $486,202 $145,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 14,204 $ 7,757
Current maturities of long term debt -- 478
Accrued salaries and wages 3,133 819
Other accrued expenses 5,725 1,228
--------- ---------
Total current liabilities 23,062 10,282
Long term liabilities:
Deferred income taxes -- 4,650
--------- ---------
Total long term liabilities -- 4,650
Shareholders' equity:
Preferred stock, par value $0.01; -- --
3,000 shares authorized at June 25,
2000 and June 27, 1999; none issued
and outstanding
Common stock, par value $0.0025; 60,000 88 77
shares authorized at June 25, 2000 and
June 27, 1999; 35,348 and 31,258 shares
issued and outstanding at June 25, 2000
and June 27, 1999, respectively
Additional paid-in-capital 415,716 113,268
Deferred compensation expense (1,755) (967)
Retained earnings 48,156 17,636
Accumulated other comprehensive income, 935 987
net of tax -------- --------
Total shareholders' equity 463,140 131,001
-------- --------
Total liabilities and shareholders' equity $486,202 $145,933
======== =========
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 amounts)
Year Ended
-----------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Revenue:
Product revenue, net $ 96,742 $ 53,424 $ 34,891
Contract revenue, net 11,820 8,977 9,071
-------- -------- --------
Total revenue 108,562 62,401 43,962
Cost of revenue:
Product revenue, net 43,399 26,968 21,727
Contract revenue, net 8,963 7,195 7,496
-------- -------- --------
Total cost of revenue 52,362 34,163 29,223
-------- -------- --------
Gross profit 56,200 28,238 14,739
Operating expenses:
Research and development 7,054 4,443 1,774
Sales, general and administrative 11,091 6,472 4,383
Other expense 1,305 1,180 502
-------- -------- --------
Income from operations 36,750 16,143 8,080
Other non-operating income 656 139 --
Interest income, net 9,400 1,058 754
-------- -------- --------
Income before income taxes 46,806 17,340 8,834
Income tax expense 16,286 4,892 2,591
-------- -------- --------
Net income $30,520 $12,448 $6,243
======== ======== ========
Earnings per share:
Basic $0.93 $0.43 $0.23
======== ======== ========
Diluted $0.87 $0.41 $0.22
======== ======== ========
Shares used in per share calculation:
Basic 32,965 29,015 27,726
======== ======== ========
Diluted 35,217 30,432 28,987
======== ======== ========
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)
Year Ended
-----------------------------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------------------- ------------------- ------------------
Operating activities:
Net income $ 30,520 $ 12,448 $6,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,803 5,593 4,368
Loss on retirement of property and equipment 1,256 1,602 719
Loss on write off of patents -- 51 17
Amortization of patent rights 145 117 102
Amortization and write off of goodwill -- -- 86
Purchase of marketable trading securities (1,786) (233) (1,500)
Proceeds from sale of marketable trading securities 2,280 1,421 421
Loss (gain) on marketable trading securities (494) (141) 32
Loss (gain) on available for sale securities (3,567) -- --
Deferred income taxes (11,617) 628 382
Income tax benefits from stock option exercises 27,336 2,672 1,791
Amortization of deferred compensation 980 142 10
Changes in operating assets and liabilities:
Accounts and interest receivable (91) (5,753) (2,656)
Inventories (5,334) (1,443) 1,406
Prepaid expenses and other current assets (263) 414 (880)
Accounts payable, trade 6,447 2,049 1,141
Accrued expenses 6,356 799 350
-------------------- ------------------- ------------------
Net cash provided by operating activities 62,971 20,366 12,032
-------------------- ------------------- ------------------
Investing activities:
Purchase of available for sale securities (12,500) (4,500) --
Proceeds from sale of available for sale securities 6,291 -- --
Purchase of securities held to maturity (195,883) -- --
Proceeds from maturities of securities held to 11,457 -- --
maturity
Purchase of property and equipment (78,047) (41,439) (15,894)
Proceeds from sale of property and equipment -- 186 463
Purchase of patent rights (727) (379) (383)
Increase in other long term assets (5,141) -- --
-------------------- ------------------- ------------------
Net cash used in investing activities (274,550) (46,132) (15,814)
-------------------- ------------------- ------------------
Financing activities:
Net proceeds from issuance of long term debt -- 1,350 8,891
Net repayment of long term debt (47) (10,241) --
Net proceeds from issuance of common stock 272,924 61,470 3,736
Receipt of Section 16(b) common stock profits -- 594 --
Repurchase of common stock -- (3,213) (1,262)
-------------------- ------------------- ------------------
Net cash provided by financing activities 272,877 49,960 11,365
-------------------- ------------------- ------------------
Net increase in cash and cash equivalents 61,298 24,194 7,583
Cash and cash equivalents:
Beginning of year 42,545 18,351 10,768
-------------------- ------------------- ------------------
End of year $103,843 $42,545 $ 18,351
==================== =================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ 13 $ 282 $ 93
==================== =================== ==================
Cash paid for income taxes $ 272 $ 2,175 $ 336
==================== =================== ==================
Non-cash investing and financing activities:
Deferred compensation $ 1,768 $ 1,016 $ 98
==================== =================== ==================
Conversion of note payable to common stock $ 431 $ -- $ --
==================== =================== ==================
Equipment donated for common stock $ -- $ -- $ 150
==================== =================== ==================
The accompanying notes are an integral part of the
consolidated financial statements.
-36-
CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 25, 2000, JUNE 27, 1999 AND JUNE 28, 1998
(In thousands)
Compre-
Common Additional Deferred hensive Total
Stock Paid-in Compen- Retained Income Shareholders'
Par Value Capital sation Earnings Equity
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 30, 1997 $ 64 $46,234 $(5) $(1,055) $ -- $45,238
Common stock options exercised for
cash, 434 shares 1 1,693 1,694
Common stock warrants exercised for
cash, 662 shares 2 1,240 1,242
Employees granted stock, 52 shares 98 (98) --
Issuance of common stock for cash 1 949 950
and assets, 558 shares
Purchase of common stock for the
treasury, 164 shares (1,262) (1,262)
Retirement of 164 treasury shares (1,262) 1,262 --
Income tax benefits from stock
option exercises 1,791 1,791
Amortization of deferred 10 10
compensation
Net income 6,243 6,243
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 28, 1998 68 50,743 (93) 5,188 -- 55,906
Common stock options exercised for
cash, 418 shares 1 1,511 1,512
Common stock warrants exercised for
cash, 342 shares 4,656 4,656
Employees & directors granted
stock, 441 shares 1 1,015 (1,016) --
Issuance of common stock for cash,
3,010 shares 7 55,290 55,297
Purchase of common stock for the
treasury, 470 shares (3,213) (3,213)
Retirement of 470 treasury shares (3,213) 3,213 --
Receipt of Section 16(b) common
stock profits from a director 594 594
Income tax benefits from stock
option exercises 2,672 2,672
Amortization of deferred 142 142
compensation
Net income 12,448 12,448
Unrealized gain (loss) on
securities available for sale, net 987 987
of tax of $658
--------------
Comprehensive income 13,435
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 27, 1999 77 113,268 (967) 17,636 987 131,001
Common stock options exercised for
cash, 927 shares 3 6,383 6,386
Common stock warrants exercised for
cash, 27 shares 367 367
Employees granted stock options,
137 shares 785 (785) --
Employees granted stock, 171 shares 983 (983) --
Common stock warrants granted, 16 31 31
shares
Loan converted to common stock, 169
shares 431 431
Issuance of common stock for cash,
3,289 shares 8 266,132 266,140
Income tax benefits from stock
option exercises 27,336 27,336
Amortization of deferred 980 980
compensation
Net income 30,520 30,520
Unrealized gain (loss) on
securities available for sale, net (52) (52)
of tax of $(27)
--------------
Comprehensive income 30,468
----------- ------------- ---------- ------------ ----------- --------------
Balance at June 25, 2000 $ 88 $415,716 $ (1,755) $ 48,156 $ 935 $463,140
=========== ============= ========== ============ =========== ==============
The accompanying notes are an integral part of the
consolidated financial statements.
-37-
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree, Inc., the "Company," or "Cree," a North Carolina corporation, develops,
manufactures, and markets silicon carbide-based semiconductor devices. Revenues
are primarily derived from the sale of blue and green light emitting diodes
("LED"), and silicon carbide ("SiC") based materials. The Company markets its
blue and green LED chip products principally to customers who incorporate them
into packaged lamps for resale to original equipment manufacturers. The Company
also sells SiC material products to corporate, government, and university
research laboratories. In addition, the Company is engaged in a variety of
research programs related to the advancement of SiC process technology and the
development of electronic devices that take advantage of SiC's unique physical
and electronic properties. The Company recovers the costs of a significant
portion of its research and development efforts from revenues on contracts with
agencies of the Federal government. This funding is recorded as contract
revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
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
1,847,746 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 152,223
options and warrants to purchase shares of Cree's common stock. The accompanying
consolidated financial statements for fiscal 2000 are based on the assumption
that the companies were combined for the full year. 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.
Reconciliation of Previously Reported Operations - Selected Financial Data
The following table reflects the summarized results of operations of the
separate companies for the nine months ended March 26, 2000, the nearest
practical reporting period prior to the business combination on May 1, 2000. In
addition, a reconciliation of the amounts of net sales and net income previously
reported with restated amounts is included.
-38-
(Unaudited)
Nine Months
ended (Year Ended (in 000s)
March 26, ---------------------
2000 June 27, June 28,
(in 000s) 1999 1998
----------- -------- --------
Net sales and other revenue:
As previously reported by Cree, Inc. $ 72,342 $ 60,050 $ 42,531
Nitres, Inc. 2,887 2,391 1,431
Elimination of intercompany transactions (27) (40) -
----------- -------- --------
As restated $ 75,202 $ 62,401 $ 43,962
=========== ======== ========
Net income (loss):
As previously reported by Cree, Inc. $ 19,575 $ 12,702 $ 6,275
Nitres, Inc. (392) (234) (32)
Elimination of intercompany transactions (20) (20) -
----------- -------- --------
As restated $ 19,163 $ 12,448 $ 6,243
=========== ======== =========
Elimination of Prior Intercompany Transactions
Prior to May 1, 2000, the Company and Nitres, in the normal course of business,
entered into certain transactions for the purchase and sale of merchandise.
These intercompany transactions have been eliminated in the accompanying
restated consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Real
Color Displays, Incorporated. ("RCD"), Cree Research FSC, Inc. ("FSC"), Cree
Funding LLC. ("Cree Funding") and Cree Technologies, Inc. ("Tech"). All material
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain 1999 and 1998 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 2000 presentation. These
reclassifications had no effect on previously reported net income or
shareholders' 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. In fiscal 1998, the Company changed its fiscal year from the
twelve months ending June 30, to the annual period ending on the last Sunday in
the month of June.
Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at June 25, 2000 and June 27,
1999, and the reported amounts of revenues and expenses during the years ended
June 25, 2000, June 27, 1999 and June 28, 1998. Actual amounts could differ from
those estimates.
-39-
Revenue Recognition
The Company recognizes product revenue at the time of shipment or in accordance
with the terms of the relevant contract. Revenue from government contracts is
recorded on the percentage-of-completion method as expenses per contract are
incurred.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the development of the Company's technology. The applicable contracts
generally provide that the Company may elect to retain ownership of inventions
made in performing the work, subject to a non-transferable, non-exclusive
license retained by the government to practice the inventions for government
purposes. Contract revenue includes funding of direct research and development
costs and a portion of the Company's general and administrative expenses and
other operating expenses for contracts under which funding is expected to exceed
direct costs over the life of the contract. The specific reimbursement
provisions of the contracts, including the portion of the Company's general and
administrative expenses and other operating expenses that are reimbursed, vary
by contract. Such reimbursements are recorded as contract revenue. For contracts
under which the Company anticipates that direct costs will exceed amounts to be
funded over the life of the contract (i.e., certain cost share arrangements),
the Company reports direct costs as research and development expenses with
related reimbursements recorded as an offset to those expenses.
In September 1996, the Company entered into a license and supply agreement with
Shin-Etsu Handotai Co. LTD. ("Shin-Etsu") and other parties to use certain LED
fabrication technology and has agreed to supply silicon carbide wafers required
to manufacture the licensed product. The license agreement provides for payment
of a license fee and royalties based on a percentage of sales of products made
using the licensed technology. The license fee was payable in installments which
totaled $2.7 million. As of June 25, 2000, all license fees had been received.
Substantially all of the Company's obligations to transfer the licensed
technology were performed during fiscal 1997 and the net present value of the
license fee payments and commission were recognized in that year.
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 June 25,
2000 and June 27, 1999.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 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.
-40-
(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 or
losses excluded from earnings and reported as a separate
component of shareholders' equity.
At June 25, 2000, and June 27, 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, 162,600 MVIS shares were sold for $6.3
million, with a gain on sale recognized for $3.6 million. 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, net of
tax. For the years ended June 25, 2000, June 27, 1999 and June 28, 1998, the
Company recorded unrealized holding gains on this investment of $900,000 (net of
tax of $600,000), $1.0 million (net of tax of $700,000), and $0, respectively.
The fair market value of the MVIS investment as of June 25, 2000, using the
closing sale price as of June 23, 2000, was $15.8 million, representing 356,000
shares. The fair market value of this investment as of June 27, 1999 was $6.1
million.
As of June 25, 2000, the Company's short-term investments held to maturity
included $142.5 million consisting of $97.9 million in high-grade corporate
bonds, $15.0 million in government securities, and $29.6 million in a closed end
mutual fund investing in high grade corporate securities that mature within one
year. 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 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.
As of June 25, 2000, the Company's long-term investments held to maturity
consisted of $42.0 million in high-grade corporate bond holdings that mature
after June 25, 2001. The Company purchased the corporate bonds 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 a long-term held to
maturity investment with unpaid interest included in interest receivable if
interest is due in less than 12 months, and as a long-term other asset if
interest is due in more than 12 months.
During fiscal 2000, the Company purchased and sold marketable trading securities
that resulted in the Company recording a realized gain on the sale of stock of
$500,000.
As of June 28, 1998, the Company's short-term investments consisted of common
stock holdings in Charles & Colvard, or C&C, the majority of which were bought
in November 1997. The Company also acquired additional shares of C&C in
September 1998 and acquired 24,601 shares directly from C&C pursuant to the
exercise of an option in January 1997. This investment was treated for
accounting
-41-
purposes as a trading security, with net realized and unrealized gains and
losses included in net earnings. All common shares of C&C held by Cree were
subsequently sold during fiscal 1999. Realized gains on shares of C&C stock sold
during fiscal 1999 by the Company were $140,000. This amount was recorded as
other income. Approximately $32,000 of net loss was recorded to other income
(expense) in fiscal 1998 related to this investment.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method. Inventories consist of
the following:
Year Ended (in 000s)
-----------------------------------
June 25, June 27,
2000 1999
--------------- ----------------
Raw materials $2,415 $1,290
Work-in-progre 3,094 1,675
Finished goods 3,811 1,021
--------------- ----------------
$9,320 $3,986
=============== ================
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three to
twenty years. Leasehold improvements are amortized over the life of the related
lease. Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and related accumulated
depreciation of the assets are removed from the accounts upon disposition and
any resulting gain or loss is reflected in operations. During the years ended
June 25, 2000, June 27, 1999 and June 28, 1998, the Company recorded $1.3
million, $1.6 million and $700,000, respectively, as losses on retirement of
property and equipment reflected in other operating expense on the consolidated
statements of income.
The Company has entered into two agreements with C&C to sell crystal growth
equipment manufactured by the Company to C&C at cost plus a reasonable overhead
allocation. As a result of these transactions, the Company has recognized
$227,000, $473,000 and $332,000, in fiscal 2000, fiscal 1999 and fiscal 1998,
respectively, as "other operating income" for the overhead allocation portion of
the sales price. These equipment agreements were completed in October 1999. In
May 2000, the Company agreed to purchase all of the crystal growth equipment
previously sold to C&C for a purchase price of $5.0 million, which was less than
the Company's direct cost to manufacture the equipment.
In November 1997, the Company purchased real property consisting of
approximately thirty acres of land with a production facility of approximately
139,000 square feet and a total of approximately 33,000 square feet of service
and warehouse buildings. This property is located in Durham, North Carolina, in
the vicinity of the Research Triangle Park. The purchase price for the land and
buildings was $3.0 million. The Company has now moved the majority of its
employees and production to this facility.
In the second quarter of fiscal 2000, the Company completed a 42,000 square foot
facility expansion at its production site near Research Triangle Park, North
Carolina. In the third quarter of fiscal 2000, the
-42-
Company purchased a 120,000 square foot facility on 17.5 acres of land adjacent
to the existing production site. The Company plans to use this facility for
sales, general and administrative and research and development personnel, as
well as for general employee services functions. The cost to acquire this
facility (not including the upfit costs for completing the shell building) was
$8.1 million. In addition, the Company is currently engaged in construction
activities relating to a 250,000 square foot expansion of its facility.
Impairment of Long-Lived Assets
The Company assesses the realizability of the carrying value of its investment
in long-lived assets whenever events or changes in circumstances indicate that
an impairment may have occurred in accordance with the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for
Impairment of Long Lived Assets and Assets to be Disposed of". As of June 25,
2000, the Company has not recorded an impairment in the carrying value of its
long-lived assets.
Depreciation
The Company has changed its depreciation policy to reflect lower useful lives on
new manufacturing equipment. The useful life has been reduced from 9 years to 5
years for all manufacturing equipment purchased since the beginning of fiscal
year 2000. In management's estimate, this new policy was necessary due to the
changes in estimated useful lives of new equipment caused by technology changes
anticipated with the future development of larger diameter wafers. Management
estimates that the change in policy reduced the Company's fiscal 2000 net income
by $889,000 or $0.03 per share.
Patent and License Rights
Patent rights reflect costs incurred to enhance and maintain the Company's
intellectual property position. License rights reflect costs incurred to use the
intellectual property of others. Both are amortized on a straight-line basis.
During fiscal 1997, the Company changed its previous estimate of the useful life
of patents from 17 years, beginning at the date of patent issue, to 20 years
from the date of patent application. This change was made to conform to a
legislative amendment made to the U.S. patent laws, which became effective in
June 1995. This change in estimate had no material impact on net income or
earnings per share, since the average period of time between patent application
and issue is generally about three years. Amortization expense was $148,000,
$117,000, and $102,000 for the years ended June 25, 2000, June 27, 1999, and
June 28, 1998, respectively. Total accumulated amortization for patents and
license rights was approximately $813,000 and $669,000 at June 25, 2000 and June
27, 1999, respectively.
Goodwill
Goodwill represented the amount by which the costs to acquire the net assets of
the Real Color Displays subsidiary exceeded their related fair value at
acquisition. Based on a review of undiscounted cash flows of the subsidiary
anticipated over the remaining amortization period, the Company determined that
goodwill had been impaired. As a result, the Company wrote off the remaining
$66,000 carrying value of such goodwill in the second quarter of fiscal 1998. As
required by generally accepted accounting principles, this charge was included
in the results of operations.
-43-
Research and Development
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.
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:
Year ended (in 000s)
---------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Net research and development costs $ 538 $ -- $ 276
Government funding 868 -- 601
-------- -------- --------
Total direct costs incurred $ 1,406 $ -- $ 877
======== ======== =========
Interest Capitalization
No interest was capitalized in the fiscal year ended June 25, 2000. During the
fiscal years ended June 27, 1999, and June 28, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with its newly acquired facilities. Interest capitalized for fiscal years 1999
and 1998 was $128,000, and $128,000, respectively.
Credit Risk, Major Customers and Major Suppliers
Financial instruments, which may subject the Company to a concentration of
credit risk, consist principally of marketable securities, cash equivalents and
accounts receivable. Marketable securities consist primarily of high-grade
corporate debt, commercial paper, government securities and other investments at
interest rates that vary by security. The Company's cash equivalents consist
primarily of money market funds. Certain bank deposits may at times be in excess
of the FDIC insurance limit.
The Company sells its products to manufacturers and researchers worldwide and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses, in the aggregate, have generally been within
management's expectations. The Company presently derives primarily all of its
contract revenues from contracts with the U.S. Department of Defense.
Approximately 19% and 10%, respectively, of the Company's accounts receivable
balance at June 25, 2000 and June 27, 1999 was
-44-
due from the Department of Defense. The Company had amounts due from Siemens
A.G. (or its indirect subsidiary, Osram) totaling 19% and 35%, of accounts
receivable balances at June 25, 2000 and June 27, 1999, respectively. In
addition, the Company had amounts due from Sumitomo Corporation totaling 22% of
accounts receivable balances at June 25, 2000.
In May 2000, the Company agreed to purchase $5 million of manufacturing
equipment from C&C. As consideration for this equipment the Company offset
existing accounts receivable from C&C and future product shipments up to the $5
million purchase price. As a result, no accounts receivable balances were due
from C&C at June 25, 2000. At June 27, 1999, the Company had amounts due from
C&C totaling 17% of accounts receivable balances.
The Company has derived its product and contract revenue from sales in the
United States, the Far East, and Europe as follows:
Year ended
------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
United States 31% 41% 42%
Far East 64% 48% 39%
Europe 5% 11% 19%
One customer accounted for 26%, 35%, and 40% of revenue for fiscal 2000, 1999,
and 1998, respectively. Another customer accounted for 15%, 18%, and 10% of
revenue for fiscal 2000, 1999, and 1998, respectively. A third customer
accounted for 25%, 7%, and 8% of revenue fiscal 2000, 1999, and 1998,
respectively. The Department of Defense accounted for 90%, 96%, and 94% of
contract revenues during fiscal 2000, 1999, and 1998, respectively.
The Company depends on single or limited source suppliers for a number of raw
materials and components used in its SiC wafer products and LEDs. Any
interruption in the supply of these key materials or components could have a
significant adverse effect on the Company's operations.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of
common stock shares outstanding. Diluted earnings per common share is computed
using the weighted average number of common stock shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock.
Accounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", no compensation is recorded for stock options or
other stock-based awards that are granted to employees with an exercise price
equal to or above the common stock price on the grant date.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation." This
Statement establishes fair value as the measurement basis for equity instruments
issued in exchange for goods or services and stock-based compensation plans.
Fair value may be measured using quoted market prices, option-pricing models or
other reasonable estimation methods. SFAS 123 permits the Company to choose
between adoption of
-45-
the fair value based method or disclosing pro forma net income information. The
Statement is effective for transactions entered into after December 31, 1995.
The Company will continue to account for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, as amended, and will provide
the pro forma disclosures required by SFAS 123.
3. ACCOUNTS RECEIVABLE, NET
The following is a summary of the components of accounts receivable:
Year Ended (in 000s)
-----------------------
June 25, June 27,
2000 1999
-------- --------
Billed trade receivables $ 10,262 $ 14,645
Unbilled contract receivables 2,394 1,629
-------- --------
12,656 16,274
Allowance for doubtful accounts (250) (175)
-------- --------
Total accounts receivable, net $ 12,406 $ 16,099
======== ========
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 25, 2000, June 27, 1999, and June 28,
1998:
Year Ended (in 000s)
------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Balance at beginning of year $ 175 $ 151 $ 216
Charges to cost and expenses 75 24 50
Deductions (write-offs to reserve) -- -- (115)
-------- -------- ---------
Balance at end of year $ 250 $ 175 $ 151
======== ======== =========
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
Year ended (in 000s)
-------------------------------
June 25, June 27,
2000 1999
-------- --------
Office equipment and furnishings $ 2,765 $ 1,948
Land & Buildings 41,087 21,031
Machinery and equipment 77,856 47,804
Leasehold improvements 1,461 1,549
-------- --------
123,169 72,332
Accumulated depreciation (22,633) (13,670)
-------- --------
100,536 58,662
Construction in progress 36,582 12,468
-------- --------
Net Property & Equipment $137,118 $71,130
======== ========
Depreciation and amortization of property and equipment totaled $10.8 million,
$5.6 million, and $4.4 million for the years ended June 25, 2000, June 27, 1999,
and June 28, 1998, respectively.
-46-
5. SHAREHOLDERS' EQUITY
On January 20, 2000, the Company completed a public offering of 3,289,000 shares
of its common stock at a price to the public of $85.125 per share. The Company
received net aggregate proceeds of approximately $266.1 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds are being used primarily for manufacturing facility expansion and
purchase of additional equipment, the acquisition of an additional facility,
research and development, and general corporate purposes.
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30,000,000 shares of common stock, with a par value of
$0.005 per share, and 3,000,000 shares of preferred stock, with a par value of
$0.01 per share. The preferred stock may be issued in one or more classes or
series with the number of shares, designation, relative rights, preferences, and
limitations of each class or series to be determined by resolution of the Board
of Directors. The Articles of Incorporation were amended, effective at the close
of business on July 26, 1999, to effect a two-for-one split of the common stock.
As a result, as of the effective date of the amendment, the Articles of
Incorporation authorize the Company to issue up to 60,000,000 shares of common
stock, with a par value of $0.0025 per share. The amendment did not change the
number of authorized shares or other provisions relating to the preferred stock.
On July 30, 1999, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the common stock split.
On February 17, 1999, the Company completed a public offering selling 2,990,000
shares of its common stock at a price of $19.69 per share. The Company received
net aggregate proceeds of approximately $55.2 million after deducting
underwriter discounts and estimated offering costs. A portion of the net
proceeds, $10 million, was used to repay debt to a commercial bank. The majority
of the funds are being used for plant expansion and the balance for general
corporate purposes, including working capital and potential acquisition of or
investments in complementary businesses.
At June 25, 2000, the Company had reserved a total of 5,486,472 shares of its
common stock for future issuance as follows.
Number of shares
----------------
For exercise of outstanding warrants to purchase
common stock 246,680
For exercise of outstanding common stock options 4,089,527
For future common stock option awards 872,904
For possible future issuance to employees under the
Employee Stock Purchase Plan 277,361
----------------
Total reserved 5,486,472
================
-47-
6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by SFAS 123, "Accounting For Stock-Based Compensation", the Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and amendments in
accounting for its employee stock option plans. The Company has recorded
deferred compensation expense of $1.8 million, $1.0 million, and $100,000, for
the difference between the grant price and the deemed fair value of stock and
stock options granted for the years ended June 25, 2000, June 27, 1999, and June
28, 1998, respectively. Of this deferred compensation amount, $980,000,
$142,000, and $10,000 was amortized for the years ended June 25, 2000, June 27,
1999, and June 28, 1998, respectively.
As of June 25, 2000, the Company's Amended and Restated Equity Compensation Plan
(the "Plan") has authorized the grant of options for up to 6,880,000 shares of
the Company's common stock. All options granted have 10 year terms and vest and
become fully exercisable within 5 years. The Company had granted 192,000 options
with a 10 year term for shares of the Company's common stock under the Stock
Option Plan for Non-Employee Directors. This plan was terminated in November
1997 and all 192,000 options granted under this plan are now fully vested. At
June 25, 2000, there were also outstanding options to purchase 136,543 shares of
the Company's common stock pursuant to option agreements assumed in the
acquisition of Nitres, Inc. The Company's current stock plans provide for grants
of options with exercise prices equal to or exceeding fair market value on the
date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with weighted average risk free rates of interest of 6.24%
and 5.3%, for the years ended June 25, 2000 and June 27, 1999, respectively. The
volatility factor of the expected market price of the Company's common stock is
0.882 and the weighted-average expected life of the options was 7 years for
executives and directors and 5 years for other employees.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
Year ended (in 000's, except per share data)
--------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
------- -------- --------
Net income, as reported $30,520 $ 12,448 $ 6,243
Earnings per share, as reported:
Basic $0.93 $0.43 $0.23
Diluted $0.87 $0.41 $0.22
Pro forma net income, as adjusted 21,507 8,714 4,373
for SFAS 123
Pro forma earnings per share,
as adjusted for SFAS 123:
Basic $0.65 $0.30 $ 0.16
Diluted $0.61 $0.29 $ 0.15
The following table details the number of stock options outstanding and their
related exercise prices and weighted-average remaining contractual lives as of
June 25, 2000:
-48-
Weighted-Average
Remaining
Exercise Price Number of Options Contractual Life
-------------- ----------------- -----------------
$ 0.01 136,543 9 years
$ 1.56 16,000 4 years
$ 1.81 91,161 3 years
$ 1.88 9,668 1 year
$ 2.00 42,350 4 years
$ 2.19 12,000 4 years
$ 3.41 8,000 3 years
$ 3.69 12,000 4 years
$ 4.69 30,530 7 years
$ 5.13 13,200 7 years
$ 5.60 15,950 6 years
$ 6.49 544,250 7 years
$ 7.13 39,150 8 years
$ 7.19 124,210 6 years
$ 7.63 969,800 8 years
$ 7.88 72,000 6 years
$ 8.19 37,630 8 years
$ 8.38 8,000 8 years
$ 8.88 28,990 8 years
$ 9.38 54,300 7 years
$ 9.69 20,000 8 years
$12.32 90,000 8 years
$20.50 115,200 9 years
$22.60 125,745 9 years
$22.63 66,450 9 years
$33.56 208,500 9 years
$34.31 12,000 9 years
$37.75 468,000 9 years
$83.94 576,900 10 years
$104.94 141,000 10 years
-----------------
4,089,527
=================
Total Stock Option Activity - Year ended
-------------------------------------------------------------------------
June 25, 2000 June 27, 1999 June 28, 1998
Number of Weighted Number of Weighted Number of Weighted
Options Average Options Average Options Average
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- -------- --------- --------
Outstanding -
beginning of year 3,613 $ 8.14 2,410 $ 5.10 1,854 $ 2.38
Granted 1,753 51.45 1,712 10.85 1,084 6.99
Exercised (1,075) 5.13 (418) 3.63 (434) 3.90
Forfeited (201) 16.14 (91) 7.08 (94) 4.34
--------- -------- --------- -------- --------- --------
Outstanding -
end of year 4,090 $27.09 3,613 $ 8.14 2,410 $ 5.10
========= ======== ========= ======== ========= ========
Exercisable at
end of year 1,353 $ 5.98 1,478 $ 5.39 1,198 $ 4.20
========= ======== ========= ======== ========= ========
-49-
In connection with the Company's September 1995 private placement, the Company
issued 600,000 warrants, which have an exercise price of $13.62, which
represents fair value on the date of grant, and expire September 2000. Warrants
to purchase 27,000 and 342,000 shares of common stock were exercised during the
fiscal years ended June 25, 2000 and June 27, 1999, respectively. Warrants to
purchase 231,000 shares remain outstanding under this private placement as of
June 25, 2000. As of June 25, 2000, there were also outstanding warrants to
purchase 15,680 shares of the Company's common stock, at an exercise price of
$2.55 per share, which expire February 2007. These warrants were originally
issued by Nitres, Inc. in February 2000 and were assumed by the Company in its
acquisition of Nitres, Inc. in May 2000.
7. LEASE COMMITMENTS
The Company currently leases five facilities. These facilities are comprised of
both office and manufacturing space. The first facility has a remaining lease
period of approximately one and one half years. The lease term for the second
facility began in September 1995 and a renewal option was exercised in September
1999. At June 25, 2000, the second facility lease has a remaining lease period
of approximately two years with an option to renew for an additional two years.
The leases for the third and fourth facilities expire in December 2000 and April
2001, respectively. The lease term on the fifth facility runs from month to
month. All of the remaining lease agreements provide for rental adjustments for
increases in property taxes, the consumer price index and general property
maintenance.
Rent expense associated with these and other expired leases totaled $420,000,
$478,000, and $562,000 for the years ended June 25, 2000, June 27, 1999, and
June 28, 1998, respectively. Future minimum rentals as of June 25, 2000 under
these leases are as follows:
Minimum Rental
Amount
Fiscal Years Ended (in 000s)
------------------ --------------
June 24, 2001 $383
June 30, 2002 207
June 30, 2003 12
--------------
Total $602
==============
8. LONG-TERM DEBT
In December 1998, Cree Lighting (previously Nitres, Inc.) received a $431,000
bridge loan from a group of investors to finance its working capital needs. The
bridge loan was made to Cree Lighting subject to conversion rights that would
cause conversion to shares of the Company's common stock in the event of a
financing or one year passing. At June 27, 1999, the investor bridge loan was
still outstanding. In February 2000, the $431,000 bridge loan was converted to
168,750 shares of the Company's common stock. In September 1997, Cree Lighting
purchased equipment on credit and issued a note to the equipment manufacturer
for $382,000. Payments on the note were made in quarterly installments beginning
in January 1998. At June 27, 1999, obligations under the equipment note were
approximately $48,000. The balance on the note was repaid in September 1999.
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $3.0 million was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
subsequent upfits, accrued interest at a
-50-
fixed rate of 8% and carried customary covenants, including the maintenance of a
minimum tangible net worth and other requirements. On February 17, 1999, the
entire $10.0 million indebtedness was repaid with proceeds received from the
public stock offering. Interest expense was $13,000, $282,000, and $93,000 for
the years ended June 25, 2000, June 27, 1999, and June 28, 1998, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The actual income tax expense for the years ended June 25, 2000, June 27, 1999,
and June 28, 1998 differed from the amounts computed by applying the U.S.
federal tax rate of 35% in fiscal 2000 and fiscal 1999, and 34% in fiscal 1998,
to pretax earnings as a result of the following:
Year Ending (in 000s)
----------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Federal income tax provision at
statutory rate $ 16,382 $ 6,174 $ 3,018
State tax provision 1,517 211 166
Increase (decrease) in income
tax expense resulting from:
Foreign sales corporation (1,682) (510) (214)
Decrease in valuation allowance -- (290) (358)
Research and development (258) (251) --
State tax credits -- (394) --
Non-deductible transaction costs 327 -- --
Other -- (48) (21)
-------- -------- --------
Income tax expense $ 16,286 $ 4,892 $ 2,591
======== ======= ========
The following are the components of the provision for income taxes for the years
ended June 25, 2000, June 27, 1999, and June 28, 1998:
Year Ending (in 000s)
------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Current:
Federal $ 856 $ 2,553 $ 699
Foreign Tax Withholding -- -- 50
State 200 300 269
-------- -------- --------
1,056 2,853 1,018
Deferred:
Federal 15,111 2,299 1,573
State 119 (260) --
-------- -------- --------
15,230 2,039 1,573
Net Provision $16,286 $ 4,892 $ 2,591
======== ======== ========
-51-
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
Year Ending (in 000s)
----------------------
June 25, June 27,
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards $11,641 $ 97
Research tax credits 785 420
Compensation 268 105
Inventory 202 126
Bad debt 93 65
Alternative minimum tax 1,690 1,513
Foreign tax credit 0 270
Other 526 527
-------- --------
Total gross deferred tax assets 15,205 3,123
Less valuation allowance -- --
-------- --------
Total net deferred tax assets 15,205 3,123
Deferred tax liabilities:
Marketable equity securities 658 658
Property and equipment depreciation 6,060 3,992
-------- --------
Gross deferred tax liabilities 6,718 4,650
-------- --------
Net deferred tax assets (liability) $ 8,487 $(1,527)
======= ========
As of June 25, 2000, the Company has net operating loss carryforwards for
federal purposes of $25 million and $38 million for state purposes. The net
operating losses have been generated from the tax benefits associated with stock
options, which have been accounted for as an addition to paid-in capital. The
state net economic loss carryforward will expire beginning in 2004 and federal
operating loss carryforwards will expire beginning in 2020.
10. EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") on
November 2, 1999. The Purchase Plan provides employees of the Company, and its
majority-owned subsidiaries, with an opportunity to purchase common stock
through payroll deductions. The purchase price is set at 85% of the lower of the
fair market value of common stock at the beginning of the participation period
or on a purchase date. Contributions are limited to 15% of an employee's
compensation. The participation periods have a 12 month duration, with new
participation periods beginning in November and May of each year. Each
participation period has two purchase dates, one in October and the other in
April. The first participation period began on November 2, 1999 and the first
purchase date was April 30, 2000. The Board of Directors has reserved 300,000
shares of common stock for issuance under the Purchase Plan. As of June 25,
2000, 22,639 shares of common stock had been purchased under the Purchase Plan.
11. RETIREMENT PLAN
The Company maintains an employee benefit plan (the "Plan") pursuant to Section
401(k) of the Internal Revenue Code. Under the Plan, there is no fixed dollar
amount of retirement benefits, and actual
-52-
benefits received by employees will depend on the amount of each employee's
account balance at the time of retirement. All employees are eligible to
participate under the Plan on the first day of a new fiscal quarter after date
of hire. The Pension Benefit Guaranty Corporation does not insure the Plan. The
Company may, at its discretion, make contributions to the Plan. However, the
Company did not make any contributions to the Plan during the years ended June
25, 2000, June 27, 1999, and June 28, 1998.
12. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share", as of December 28, 1997. SFAS No. 128 required the
Company to change its method of computing, presenting and disclosing earnings
per share information. All prior period data presented has been restated to
conform to the provisions of SFAS No. 128.
The following computation reconciles the differences between the basic and
diluted presentations:
Year ended (in 000's, except per share data)
--------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Basic:
Net income $ 30,520 $ 12,448 $ 6,243
======== ======== ========
Weighted average common shares 32,965 29,015 27,726
======== ======== ========
Basic earnings per share $0.93 $ 0.43 $ 0.23
======== ======== ========
Diluted:
Net income $ 30,520 $ 12,448 $ 6,243
======== ======== ========
Weighted average common shares
-basic 32,965 29,015 27,726
Dilutive effect of stock options
& warrants 2,252 1,417 1,261
-------- -------- --------
Weighted average common shares
-diluted 35,217 30,432 28,987
======== ======== ========
Diluted earnings per share $0.87 $ 0.41 $ 0.22
======== ======== ========
Potential common shares that would have the effect of increasing diluted
earnings per share are considered to be antidilutive. In accordance with SFAS
No. 128, these shares were not included in calculating diluted earnings per
share. As of June 25, 2000 and June 27, 1999, there were no potential shares
considered to be antidilutive. For the year ended June 28, 1998, there were
225,000 shares that were not included in calculating diluted earnings per share
because their effect was antidilutive.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issues Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-53-
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information called for in items 10 through 13 is incorporated by reference
from the Company's definitive proxy statement relating to its annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 2000.
-54-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial statements and financial statement schedule - the
financial statements and reports of independent auditors are filed as part
of this report (see index to Consolidated Financial Statements at Part II
Item 8 on page 30 of this Form 10-K). The financial statement schedules are
not included herein as they are either not applicable or are included as
part of the consolidated financial statements.
(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws, as amended (1)
4.1 Specimen Common Stock Certificate (1)
10.1 Equity Compensation Plan, as amended and restated
August 24, 1999 (2) *
10.2 Stock Option Plan for Non-Employee Directors (terminated
as to future grants pursuant to Board action dated
September 1, 1997) (3) *
10.3 Management Incentive Compensation Program - Fiscal Year
2000 Plan (1) *
10.4 License Agreement between the Company and North Carolina
State University dated December 3, 1987 (4)
10.5 Amendment to License Agreement between the Company and
North Carolina State University dated September 11, 1989 (4)
10.6 Development, License and Supply Agreement between the
Company and Siemens A.G. dated October 24, 1995 (5)
10.7 Purchase Agreement between the Company and Siemens A.G.
dated September 6, 1996 (6)
10.8 First Amendment to Purchase Agreement between the Company
and Siemens A.G. dated April 22, 1997 (7)
10.9 Second Amendment to Purchase Agreement between the Company
and Siemens A.G. dated December 9, 1997 (8)
10.10 Third Amendment to Purchase Agreement between the Company
and Siemens A.G.dated September 8, 1998 (9)
10.11 Fourth Amendment to Purchase Agreement between the Company
and Siemens A.G. dated December 16, 1998 (10)
10.12 Transformation Agreement with Siemens A.G. and OSRAM Opto
Semiconductors GmbH & Co. OHG effective January 1, 1999 (11)
10.13 Purchase Agreement between the Company and Osram Opto Semi-
conductors GmbH & Co. dated August 30, 1999 (2)
10.14 Merger Agreement dated as of April 10, 2000 among Cree,
Inc., Crystal Acquisition, Inc., Nitres, Inc. and share-
holders of Nitres, Inc. listed on signature pages thereto
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
23.2 Consent of Independent Accountants
27.1 Financial Data Schedule (for SEC use only)
99.1 Report of Independent Auditors
-55-
(1) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 333-94013, and
declared effective by the Securities and Exchange Commission on January 13,
2000.
(2) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on November 4, 1999.
(3) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-8, Registration No. 33-98958, and
effective with the Securities and Exchange Commission on November 3, 1995.
(4) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form SB-2, Registration No. 33-55998, and
declared effective by the Securities and Exchange Commission on February 8,
1993.
(5) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 33-98728, and
declared effective by the Securities and Exchange Commission on December
27, 1995. Confidential treatment of portions of this exhibit was granted by
the Securities and Exchange Commission pursuant to Rule 24b-2 by order
dated December 29, 1995.
(6) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on September 30, 1996. Confidential treatment of portions of
this exhibit was granted by the Securities and Exchange Commission pursuant
to Rule 24b-2 by order dated November 21, 1996.
(7) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on May 2, 1997. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated June 26, 1997.
(8) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 12, 1998.
(9) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on October 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated November 23, 1998.
(10) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 28, 1999. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 24, 1999.
(11) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on August 12, 1999.
* Compensatory Plan
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Company
during the three months ended June 25, 2000.
-56-
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, INC.
Date: August 10, 2000
By: /s/ F. Neal Hunter
--------------------------------
F. Neal Hunter
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ F. Neal Hunter Chairman of the Board and August 10, 2000
- ---------------------------- Chief Executive Officer
F. Neal Hunter
/s/ Cynthia B. Merrell Chief Financial Officer August 10, 2000
- ----------------------------
Cynthia B. Merrell
/s/ Calvin H. Carter, Jr. Director August 10, 2000
- ----------------------------
Calvin H. Carter, Jr., Ph.D.
/s/ James E. Dykes Director August 10, 2000
- ----------------------------
James E. Dykes
/s/ Michael W. Haley Director August 10, 2000
- ----------------------------
Michael W. Haley
/s/ John W. Palmour Director August 10, 2000
- ----------------------------
John W. Palmour, Ph.D
/s/ Walter L. Robb Director August 10, 2000
- ----------------------------
Walter L. Robb, Ph.D.
Director August 10, 2000
- ----------------------------
Dolph W. von Arx
-57-