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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 27, 1999
CREE RESEARCH, 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 2, 1999 was approximately $794,388,471 (based on the
closing sale price of $29.375 per share).
The number of shares of the registrant's Common Stock, $0.0025 par value per
share, outstanding as of August 2, 1999 was 29,258,464.
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 November 2, 1999
are incorporated by reference into Part III.
CREE RESEARCH, INC
FORM 10-K
For the Fiscal Year Ended June 27, 1999
INDEX
Part I Page
Item 1. Business........................................................3
Item 2. Properties.....................................................19
Item 3. Legal Proceedings..............................................19
Item 4. Submission of Matters to a Vote of Security Holders............19
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................................19
Item 6. Selected Financial Data........................................20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................21
Item 8. Financial Statements and Supplementary Data....................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...........................50
Part III
Item 10. Directors and Executive Officers of the Registrant.............50
Item 11. Executive Compensation.........................................50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................50
Item 13. Certain Relationships and Related Transactions.................50
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................51
SIGNATURES ...............................................................53
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PART I
Item 1. Business
INTRODUCTION
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Cree Research, Inc., a North Carolina corporation, was established in 1987 to
commercialize silicon carbide, or SiC, semiconductor wafers and devices. Today,
Cree is the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC and other wide bandgap compound
semiconductor products. Using its proprietary compound semiconductor technology,
the Company produces light emitting diodes, or LEDs, for use in automotive and
liquid crystal display, or LCD, backlighting, indicator lamps, full color LED
displays and other lighting applications. The Company also manufactures SiC
crystals used in the production of unique gemstone products and SiC wafers sold
for research directed to optoelectronics, microwave and power applications. Cree
has recently introduced the first of a family of radio frequency, or RF, and
microwave devices for use in wireless base stations, radar systems and other
commercial and military applications. These products are expected to be
available on a sample basis during fiscal 2000. SiC-based compound semiconductor
devices offer significant advantages over competing products based on silicon,
gallium arsenide, or GaAs, and other materials for certain electronic
applications. The Company has new product initiatives based on SiC, including
additional RF and microwave devices, larger and clearer crystals for moissanite
gemstones, blue laser diodes for optical storage applications and power devices
for power conversion or switching uses.
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
numerous electronic devices. Alternative materials, such as 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
optoelectronic devices. However, GaAs, silicon and other widely used
semiconductor materials have certain physical and electronic characteristics
that limit their usefulness in many applications. For example, silicon and
GaAs-based semiconductors are not suitable for the fabrication of 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 commercial and military aerospace
applications. Furthermore, few silicon or GaAs devices can operate effectively
at temperatures above 400 degrees F. This is a major limitation in 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) which
also possess 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.
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SiC OVERVIEW
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SiC has many physical characteristics that make the material very 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 a thin film
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 F, 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 crystal growth, affecting the electrical integrity of the wafer
and reducing the usability of portions of the wafer for certain applications.
Furthermore, slicing and polishing SiC wafers is hindered by the intrinsic
hardness of the material. Similarly, its inherent chemical resistance makes SiC
a difficult material to etch.
Many of the same physical characteristics that make SiC difficult to produce
also make it an excellent material for certain semiconductor applications. The
following characteristics distinguish SiC from conventional silicon and
GaAs-based semiconductor materials, resulting in significant advantages for many
applications in which the production hurdles can be overcome:
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to move 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.
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. SiC is also extremely resistant to
chemical breakdown and can operate in hostile environments. As a result, SiC can
withstand much higher electrical pulses and is much more radiation-resistant
than silicon or GaAs.
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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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Through its proprietary technology and over 10 years of development and
manufacturing experience, Cree has succeeded in overcoming difficulties in
processing SiC for commercial use. The Company introduced its first product in
October 1989 and currently is the leading manufacturer of SiC wafers and
SiC-based blue and green LED products in the world. The Company believes that
its proprietary process techniques and the inherent attributes of SiC give Cree
significant advantages over competing products for certain electronic and
gemological applications. These advantages include:
BLUE AND GREEN LIGHT EMISSION. Cree produces high efficiency blue and green LEDs
using gallium nitride, or GaN, a wide bandgap material, and other nitrides grown
on SiC substrates. Most other manufacturers of nitride-based LEDs use sapphire
substrates. The conductive properties of SiC enable Cree to fabricate a simpler,
smaller LED chip as compared to competing LEDs grown on sapphire substrates.
Cree has also demonstrated and is continuing development of GaN-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. The Company
manufactures SiC wafers for both internal use and sale to external development
programs to further new product development. The Company continues to develop
larger substrates with lower defect densities, which should drive further device
development and strengthen SiC's economic advantages in certain applications.
GEMSTONE MATERIAL PROPERTIES. Cree manufactures 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. Cree
continues to develop larger and higher quality SiC crystals for this
application.
HIGH POWER RF AND MICROWAVE OPERATIONS. The Company has 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. Higher power SiC devices can allow the
fabrication of SiC-based RF 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. In the fourth quarter of fiscal 1999, the Company introduced
its first RF power transistor product, a SiC metal semiconductor field effect
transistor or MESFET device, which is the first in a planned family of RF power
transistor products designed for wireless and broadcast applications. The
Company is continuing development of additional RF and microwave devices for use
in wireless base stations, radar systems and other commercial and
defense-related applications.
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HIGH POWER, HIGH VOLTAGE OPERATION. Cree is 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, Cree believes that its 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 Cree's products are an outgrowth of its SiC technology. The following
chart illustrates the Company's existing products and user applications for
which these products are being used or marketed:
PRODUCT USER APPLICATIONS
Blue and green LEDs o Backlighting such as automotive
dashboards and LCDs, including wireless
handsets
o Large indoor full color displays, such as
arena video screens
o Large outdoor full color displays
o White light products to replace miniature
incandescent bulbs, such as those used in
automobile map lights
o Traffic signals
SiC wafers and crystals o Research and development for new
semiconductor applications (wafers)
o Gemstones (crystals)
SiC RF transistors and o Communication systems and other power
wireless base station applications
amplifiers
The Company's products are manufactured in a six-part process which includes:
SiC crystal growth, wafer slicing, polishing, epitaxial deposition, fabrication
and testing. 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 the Company's proprietary epitaxial deposition technology,
which essentially consists of growing 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 microwave chips are fabricated in a clean
room environment. The final steps include testing and packaging for shipment to
the customer. In manufacturing its products the Company depends substantially on
its custom-manufactured equipment and systems, some of which is manufactured
internally and some of which the Company acquires from third parties and
customizes itself.
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. Prior to the introduction of Cree's blue LED product in 1989, blue
LEDs could not be produced in volumes necessary
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for commercialization. Since then, Cree has developed several generations of
blue LED products, including a more robust conductive buffer chip that is easier
to build into lamps and has a lower unit price than competing products. The
commercial availability of the blue LED, together with red and green, has
enabled the development of full color LED lamps and video displays.
The Company believes that LEDs made from SiC substrates provide the following
benefits over those made with competing substrates: 1) an industry standard
vertical chip structure requiring a single wire bond that results in faster LED
assembly and reduced cost, 2) a smaller chip size compatible with industry
trends toward package miniaturization, 3) the industry's highest specification
for electrostatic discharge resistance that reduces the cost, engineering effort
and time to qualify LEDs at customer production sites and 4) a lower priced
outdoor capable product.
Presently, the Company's LED chips are used for backlighting purposes, such as
automotive dashboards and LCD displays, including wireless handsets. In
addition, they are used in office equipment indicator lighting, full color video
display technology, such as arena video replay boards, moving message
advertising and informational signs. The Company's standard blue LED products
are primarily used in indoor applications. In September 1998, the Company first
began shipping brighter blue and green LEDs that offer a lower cost, higher
efficiency LED solution for existing applications that require a higher
brightness. These products, which were introduced generally in May 1999, are
used for backlighting purposes, where low power consumption is critical, such as
LCD displays for wireless handset applications, and for traffic signals and
outdoor full color displays.
In November 1998, Cree announced a new product line built on its blue LED
products for use in solid-state white light applications. By passing blue or
near ultraviolet LED output through certain conversion materials such as
phosphors or polymers, blue light is converted into white light. Cree currently
sells blue LEDs to a customer who produces the white light conversion LED.
Commercial products incorporating Cree's chips for white light conversion are
backlighting applications for automobile dashboards and instrumentation and LCD
backlighting for wireless handsets. Other applications for white light LEDs
include miniature incandescent lighting, such as map lights, automobile trunk
lights and small flashlights.
The Company supplies blue and green LED chips to LED component manufacturers who
assemble the chip into a lamp and then manufacture solid-state lighting
components to supply OEMs. LED products represented 51%, 48% and 53% of our
revenue for the fiscal years ended June 27, 1999, June 28, 1998 and June 30,
1997, respectively.
MATERIALS PRODUCTS
Cree manufactures SiC wafers for sale to corporate, government and university
programs that use SiC for developing electronic components. SiC wafers are
distributed directly to these parties. These customers utilize the material 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, the Company has worked to improve the quality of its wafers while
increasing their size. During fiscal 1999, the Company achieved significant
improvement in wafer quality for its two-inch sized wafers. Cree is currently
developing a three-inch sized wafer product.
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, Cree manufactures SiC crystals in near colorless
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form for use in gemstones. The Company sells SiC crystals directly to C3 Inc.
("C3"), a company which was founded to develop gemstone products from SiC
crystals. C3 cuts and polishes the product to fabricate diamond-like gemstones
targeted at customers who desire affordable high quality jewelry. During the
first half of fiscal 1999, Cree significantly expanded crystal growth capacity
for C3 to meet increased volume requirements. Cree has recently agreed to an
additional capacity expansion that is planned through the first half of fiscal
2000. The potential for increasing demand depends on Cree's ability to meet C3's
requirements for color, clarity and yield. Consequently, Cree has agreed to
focus development efforts on improving its manufacturing processes to increase
crystal size and volume, as well as to develop crystals with higher quality.
Future demand also is dependent on C3's ability to cut, facet and effectively
market its gemstone products. SiC produced for gemstone applications is
distributed directly to C3. Wafer and other material products represented 38%,
34% and 24% of our revenue for the fiscal years ended June 27, 1999, June 28,
1998 and June 30, 1997, respectively.
MICROWAVE TRANSISTORS
In June 1999, Cree announced the first of a family of SiC-based RF and microwave
transistor products designed to be a part of the power amplification process. A
second phase of transistor products is scheduled for release to production in
fiscal 2000. The Company expects that these products will be sold to a variety
of amplifier producers, including wireless base stations and digital broadcast
applications. While distribution of samples will commence in early fiscal 2000,
the Company believes that these products will be sold in limited quantities
during fiscal 2000, as design cycles for the target applications are generally
several months. There can be no assurance that such producers or other customers
will be able to develop applications in the near future that will require
commercial production of the Company's RF products or that such products will be
successful in the market.
PRODUCTS UNDER DEVELOPMENT
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The Company believes that the inherent physical characteristics of SiC make it
an excellent material for many new semiconductor applications. The Company is
dedicated to creating new applications using SiC and has products currently
under development in each of the areas described below. The following chart
illustrates the potential user applications for each area of product
development:
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
High power RF and o Amplifier systems for wireless applications,
microwave devices such as personal communication systems, or
PCS base stations and digital broadcast
o Radar systems
Power devices o Industrial motor controls
o Electric vehicles
o Lighting ballasts
o Factory robotics
o Locomotive applications
o Solid-state power transmission
Blue and ultraviolet o High density optical storage, such as CDs and
lasers DVDs
High temperature devices o Automotive and aerospace electronics
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HIGH POWER RF AND MICROWAVE DEVICES
The Company is currently developing SiC-based high power transistors that
operate at radio and microwave frequencies. The Company believes these devices
will have applications in wireless phone base stations, high power solid-state
broadcast systems for television and radio and radar search and detection
equipment.
In June 1999, Cree introduced the first of a family of RF and microwave
transistor products. As discussed above, the Company continues to develop other
SiC-based transistor devices that are expected for prototype distribution during
fiscal 2000. All of these products are designed to amplify power in several
applications. These devices are expected to be used for frequency band
applications from 400 megahertz to 2.5 gigahertz, including PCS base station
networks. The Company believes that SiC transistors offer advantages over
current silicon and GaAs-based devices for certain applications due to greater
output power per transistor. The higher output power available from SiC devices
is expected to allow wireless systems to use fewer transistors per base station
resulting in less complex circuitry and lower cost.
Cree is also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). During
fiscal 1999, the Company reported the demonstration of GaN on SiC transistors
that operated with an output power of 9.0 watts at 7.4 gigahertz. The Company
also reported a record high power density of 6.9 watts per millimeter at 10
gigahertz on smaller GaN devices. The Company believes this power density is the
highest publicly reported for a solid-state field-effect transistor operating in
this frequency range and is substantially higher than that achieved with
equivalent silicon or GaAs-based devices. The Company does not anticipate that a
commercial device capable of emitting power at this level will be available in
the near term.
POWER DEVICES
The Company is 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. In addition, SiC devices are expected to operate at
significantly higher temperatures and voltages with superior switching
capabilities. These devices are expected to yield substantial power savings due
to reductions in energy losses made possible by the devices' high 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, the Company 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.
BLUE AND ULTRAVIOLET LASER DIODES
The Company continues to focus on the development of blue and ultraviolet laser
diodes. SiC's inherent attributes, including its natural cleavability and high
thermal conductivity, make it an excellent material for blue laser applications.
The storage capacity of optical disk drives can be increased significantly by
utilizing a laser diode capable of emitting short wavelength light. The Company
has demonstrated a blue laser diode, fabricated from GaN and related materials
on SiC substrates, which has a shorter wavelength than that of the red or
infrared lasers used today. The Company believes that the shorter wavelength of
blue light could potentially result in storage capacity for optical disk drives
that is significantly greater
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than the capacity permitted by red light. This increased storage capacity could
lead to advances in CD-ROM data storage and audio and video compact disc
applications. Currently, the Company is the only U.S.-based firm to have
demonstrated the continuous wave operation of a blue laser diode at room
temperature on SiC; however, there is still substantial work needed to produce a
blue laser suitable for commercial applications. During fiscal 1999, Cree
entered into a one-year development agreement with Microvision, Inc. ("MVIS").
This agreement provides $2.6 million of funding for research in edge-emitting
LEDs and laser diodes. At MVIS' option, this agreement may be extended for an
additional year for $2.5 million.
HIGH TEMPERATURE DEVICES
In certain applications for microwave and power devices, the ability of SiC to
operate at higher temperatures than comparable silicon devices can be a major
advantage. Thus, Cree is currently developing high temperature versions of these
devices. These devices would be used for applications in high temperature
environments or environments with limited cooling or heat sinking, including
potential applications in the automotive, energy and aerospace industries. Cree
is also working on high temperature sensors, as well as analog and digital
circuits that could be used to amplify low level sensor signals directly in a
jet engine or other high ambient temperature environment. Such devices could
also find use in applications such as down hole drilling equipment. Although
Cree has developed prototype devices, additional development work is needed to
achieve commercial viability.
GOVERNMENT CONTRACT FUNDING
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Cree derives a portion of its revenue from funding from research contracts with
the U.S. government. For the fiscal years ended June 27, 1999, June 28, 1998 and
June 30, 1997, government funding represented 11%, 18% and 23% of total revenue,
respectively. These contracts typically cover work performed over several months
up to three years. While the U.S. government is interested in Cree's development
of SiC materials and SiC-based devices, there can be no assurance that the
Company will enter into any additional government contracts, or that they will
be profitable or produce contract revenue. In addition, there can be no
assurance that after any such contracts are entered into, changing government
regulations will not significantly alter the benefits of such contracts. These
contracts may be modified or terminated at the convenience of the government.
The contracts generally provide that Cree 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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The Company believes that its ability to maintain its position as a leading
supplier of SiC material and SiC-based semiconductor products, will depend on
its ability to enhance existing products and to continue developing new products
incorporating the latest improvements in SiC technology. Accordingly, the
Company is committed to investing significant resources in research and
development.
The Company continually conducts research aimed at improving the quality of its
crystals and wafers and enhancing its epitaxial film deposition (wafer coating)
process. Cree believes that these research and development efforts will benefit
all of the Company's products. The Company believes it can increase the diameter
of its wafers while lowering manufacturing costs and permitting the development
of more complex devices. Key determinants that will enable the manufacture of
more complex devices, such as power semiconductors, are the substrate quality
and wafer size. Epitaxial thickness, lower defect density and the elimination of
variation are important factors to yield improvement, marketability and lower
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cost. In moving to larger wafer sizes, the Company is focusing on how to
stabilize the process to repeatedly grow larger diameter crystals with minimal
defects. The two-inch wafer size, which Cree introduced in fiscal 1998, is
considered a minimum standard for certain fabrication and development
facilities. Cree is expected to produce three-inch wafers in fiscal 2000 and has
begun development of larger wafer sizes.
During fiscal years 1999, 1998 and 1997, the Company spent $9.4 million, $8.6
million and $9.7 million, respectively, for direct expenditures relating to
research and development activities. Offsetting these expenditures were $6.6
million, $8.2 million and $8.7 million, respectively, 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. During fiscal years 1999, 1998 and 1997, customers spent $4.5
million, $3.5 million and $66,000, respectively, for product research and
development activities.
SOURCES OF RAW MATERIALS
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The Company depends on a limited number of suppliers for certain raw materials,
components and equipment used in its SiC products and LEDs, including certain
key materials and equipment used in its crystal growth, wafering, polishing,
epitaxial deposition, device fabrication and device test processes. The Company
generally purchases these limited source items pursuant to purchase orders and
has no guaranteed supply arrangements with its suppliers. In addition, the
availability of these materials, components and equipment to the Company is
dependent in part on the Company's ability to provide its suppliers with
accurate forecasts of its future requirements. The Company endeavors to maintain
ongoing communication with its suppliers to guard against interruptions in
supply and, to date, generally has been able to obtain adequate supplies in a
timely manner from its existing sources. However, any interruption in the supply
of these key materials, components or equipment could have a significant adverse
effect on the Company's operation.
PATENTS AND PROPRIETARY RIGHTS
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The Company since its inception has been a leader in the development of SiC
materials and devices made using SiC. It seeks to protect its 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.
The Company has also from time to time acquired, through license grants or
assignments, rights to patents on inventions originally developed by others.
At August 2, 1999, the Company owned 46 issued U.S. patents. These patents
expire between 2008 and 2017. Forty-two of the patents are owned by the Company
alone and the remainder, which resulted from research and development agreements
with other firms, are owned jointly with the other parties to such agreements.
The Company also owns corresponding patents and patent applications in certain
foreign countries it considers significant or potentially significant markets.
In addition, the Company owns pending U.S. and foreign patent applications
relating to inventions developed by the Company or acquired from third parties.
The Company holds an exclusive license from North Carolina State University
("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 was granted pursuant to an
agreement executed by the Company and N.C. State in 1987. This license gave the
Company a worldwide, fully paid, exclusive license to manufacture, use and sell
products and processes covered by
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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 for
government purposes.
The Company has also entered into other license agreements with N.C. State, and
with the licensing agencies of other universities, under which the Company has
obtained rights to practice inventions claimed in various patent applications
pending in the U.S. and other foreign countries.
For proprietary technology which is not patented or otherwise published, the
Company seeks 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 the Company's
confidential information or that our proprietary technology and know-how will
not otherwise become known or independently discovered by others. The Company
also relies 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
that of the Company 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 the Company or
that claims allowed by any patents issued or licensed to the Company will not be
contested or invalidated. In the past, the U.S. patent that the Company licenses
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 the Company could lose patent
protection in Europe for this particular method.
There is likewise no assurance that patent rights owned or exclusively licensed
to the Company will provide significant commercial protection since issuance of
a patent does not prevent other companies from using alternative, non-infringing
technology. Further, the Company earns a material amount of its revenues in
overseas markets. While the Company holds and has applied for patent protection
for certain of its technologies in these markets, there can be no assurance that
it will obtain protection in all commercially significant foreign markets or
that the Company's intellectual property rights will provide adequate protection
in all such markets.
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 the Company's intellectual property rights or to defend
the Company 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 the Company with respect to our current or future products. The Company
has been notified from time to time of assertions that its products or processes
may be infringing patents or other intellectual property rights of others. We
cannot predict the occurrence of future assertions of infringement or the extent
to which such assertions may require the Company to seek a license under the
rights asserted. Likewise, we cannot predict the occurrence of future assertions
that may prevent the Company from selling products or result in litigation.
-12-
SALES AND MARKETING
- -------------------
The Company actively markets its products through targeted mailings,
telemarketing, select advertising and attendance at trade shows. The Company
generally uses an executive sales approach, relying predominantly on the efforts
of senior management and a small direct sales staff for worldwide product sales.
The Company believes that this approach is preferable in view of its 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, the Company departs from this approach
for sales to certain Asian countries. In Japan, the Company markets its LED
products and SiC wafers through its distributors Sumitomo Corporation
("Sumitomo") and Shin-Etsu Handotai Co. Ltd. ("Shin-Etsu"). The Company also
uses sales representatives to market its LED products in Hong Kong, China and
Korea. The Company sells SiC crystal materials for use in gemstone applications
directly to C3 under an exclusive supply agreement.
CUSTOMERS
- ---------
During fiscal 1999, revenues from Siemens A.G., C3 and the Department of Defense
each accounted for more than 10% of total revenue. The loss of Siemens, C3, or
the Department of Defense's business would have a material adverse effect on the
results of operations if the Company were unable to replace the lost revenue.
For the year ended June 28, 1998, revenue from Siemens, C3 and the Department of
Defense each accounted for more than 10% of total revenue. For the year ended
June 30, 1997, Siemens and the Department of Defense revenues 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 the Company's consolidated financial statements included in Item 8 of this
report.
BACKLOG
- -------
As of June 27, 1999, the Company had a firm backlog of approximately $37.1
million consisting of approximately $25.6 million of product orders and $11.5
million of executed research contracts with the U.S. Government. Some of the
funds for executed research contracts with the U.S. Government have been awarded
but may not be appropriated. This compares to a firm backlog level of $12.6
million as of June 28, 1998, which consisted of approximately $7.2 million of
product orders and approximately $5.4 million of executed research contracts
with the U.S. Government. We expect the entire backlog to be filled during
fiscal 2000, with the exception of approximately $5.6 million in U.S. government
funded contracts.
COMPETITION
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. The
Company believes that it currently enjoys a favorable position in the existing
markets for SiC-based products and materials primarily as a result of its
proprietary SiC-based technology. However, the Company faces 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 the Company.
The Company's primary competition for the blue and green LED products comes from
companies that market blue and green LEDs fabricated on sapphire substrates.
These competitors market blue and green
-13-
LED products that are as bright or brighter than the Company's high brightness
blue and green LED devices. These companies have historically been successful 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. Cree believes its brighter blue and green LEDs will enable it to
compete successfully in this market because they can be used in the same
applications at a lower cost than competing products.
The Company believes that its approach to manufacturing blue and green LEDs from
SiC substrates offers a more cost-effective design and process than its
competitors. Cree's smaller chip design, which is compatible with industry
trends for package miniaturization, enables the diode to use less material and
permits more devices to be fabricated on each wafer processed, lowering the cost
per unit. In addition, the Company's 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, Cree's SiC-based devices
can withstand a much higher level of electrostatic discharge ("ESD") than
existing sapphire-based products and therefore are more suitable for
applications that require high ESD emission ratings, such as automotive
applications.
The Company believes that other firms (including certain of our customers) may
seek to enter the blue and green LED market in the future. For example, Siemens
and Shin-Etsu have licensed certain of our LED technology, which may facilitate
their entrance into our LED markets. We believe that Siemens is currently
producing LEDs using Cree's licensed technology. 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.
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 27, 1999, the Company employed 390 people, all of which are located
in the United States. None of the Company's employees are represented by a labor
union or subject to collective bargaining agreements. The Company believes
relations with its 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.
-14-
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 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 products are manufactured using technologies that are highly complex.
Our customers incorporate our products into high volume applications such as
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.
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.
-15-
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 radio
frequency and microwave devices, power devices, blue laser diodes and high
temperature devices. 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; 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 1999 our top five customers accounted for 81% 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.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The market for our products is highly competitive. Although we believe our
SiC-based LEDs offer substantial advantages, competitors currently sell blue and
green LEDs made from sapphire wafers that
-16-
are brighter than the high brightness LEDs we currently produce. In addition, we
believe that other firms (including certain of our customers) may seek to enter
the blue and green LED market in the future. For example, Siemens and Shin-Etsu
license certain of our LED technology, which may facilitate their entrance into
our LED markets. 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.
Also, other firms may develop new or enhanced products that are more effective
than those of the Company. These firms may develop technology that produces
commercial products with characteristics similar to SiC-based products, but at a
lower cost. Many existing and potential competitors have far greater financial,
marketing and other resources than we do. We believe that present and future
competitors will aggressively pursue the development and sale of competing
products. 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 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.
LIMITATIONS ON THE PROTECTION OF 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. The licensed patents give us
rights to our SiC crystal growth process. The issued U.S. patents we own will
expire between 2008 and 2017. The expiration dates on the U.S. patents we
license from N.C. State run from 2007 to 2009. We have obtained a number of
corresponding patents and patent applications in certain foreign jurisdictions.
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 any other patents will be issued on such
applications or that our patents will not be contested. In the past, the U.S.
patent that the Company licenses 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
the Company could lose
-17-
patent protection in Europe for this particular method. Also, because 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.
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 predict
the extent to which we may be required 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 ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 62%, 74% and 79%
of our revenue in fiscal 1999, 1998 and 1997, 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, future 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 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.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES.
We are evaluating all of our internal computers, computer equipment and other
equipment with embedded technology against Year 2000 concerns. Although we
believe our planning efforts are adequate to address our Year 2000 concerns, it
is still possible that we could experience negative consequences and material
cost caused by undetected errors or defects in the technology used in our
internal systems. Our most significant Year 2000 risk is that the systems of
other parties on which we rely, specifically our key suppliers, will not be
compliant on a timely basis. Any disruption in delivery of supplies to us that
is caused by a third party's failure to address Year 2000 issues would affect
our ability to manufacture our products, which could result in a material
adverse effect on our business, operating results and financial condition. At
this time, we are unable to estimate the most likely worst-case effects of the
arrival of the Year 2000.
-18-
Item 2. Properties
The Company operates its own facilities in Durham, North Carolina. Direct
control over SiC crystal growth, wafering, epitaxial deposition, device
fabrication and test operations allows the Company to shorten its product design
and production cycles and to protect its proprietary technology and processes.
In November 1997, the Company acquired its 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. Cree is currently constructing an addition to the main production
facility containing 42,000 square feet. The Company also recently purchased a
79-acre site close to its present facility for potential future expansion.
The Company currently leases space for some of its manufacturing facilities,
which occupy 21,900 square feet in Durham, North Carolina. This lease expires in
December 2001. In addition, the Company also leases approximately 13,200 square
feet in a separate building in Durham, North Carolina, that is expected to be
used for research and development projects. This lease expires in August 2000.
The Company also leases a small administrative office. This lease expires in
December 1999.
Item 3. Legal Proceedings
The Company is not a party to any material litigation and is not aware of any
pending or threatened litigation that could have a material adverse effect
either upon the Company's business, operating results or financial condition.
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 1999.
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 1999* FY 1998*
-------- --------
High Low High Low
---- --- ---- ---
First Quarter $ 8.750 $ 5.250 $10.250 $ 5.875
Second Quarter $23.500 $ 6.813 $14.750 $ 7.813
Third Quarter $26.625 $15.125 $9.813 $ 6.750
Fourth Quarter $36.688 $18.625 $8.813 $ 7.000
*As adjusted for the two-for-one split effective on July 26, 1999.
-19-
Holders and Dividends. There were approximately 387 holders of record of the
Company's common stock as of August 2, 1999.
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.
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 27, 1999, June 28, 1998 and June 30, 1997, and the
consolidated balance sheet data at June 27, 1999 and June 28, 1998 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, 1996 and 1995 and the consolidated
balance sheet data at June 30, 1997, 1996 and 1995 are derived from audited
consolidated financial statements not included herein. All share amounts have
been restated to reflect the Company's two-for-one stock split effective July
26, 1999.
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
--------------------------------------------
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $53,464 $34,891 $ 19,823 $ 9,689 $ 5,989
Contract revenue, net 6,586 7,640 6,535 3,945 3,011
License fee income -- -- 2,615 1,423 --
--------------------------------------------
Total revenue 60,050 42,531 28,973 15,057 9,000
Income (loss) from continuing 12,702 6,275 3,542 243 (17)
operations
Net income per share, basic $0.47 $0.24 $0.14 $0.01 $0.00
Net income per share, dilutive $0.45 $0.23 $0.13 $0.01 $0.00
Weighted average shares 28,432 26,987 26,251 25,230 20,734
outstanding
Years Ended
--------------------------------------------
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $60,222 $27,603 $21,013 $18,596 $ 9,971
Total assets 144,217 72,724 50,137 43,796 20,924
Long-term obligations 4,650 10,804 1,638 -- --
Shareholders' equity $130,022 $54,865 $45,125 $40,672 $19,504
-20-
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 leaders 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 51% of our revenue in fiscal 1999 and 48%
in fiscal 1998.
We also derive revenue from the sale of advanced materials made from SiC that
are used primarily for research and development. We also sell SiC crystals to
C3, which incorporates them in gemstone applications. During late fiscal 1998
and fiscal 1999, C3 purchased equipment from us, which has more than doubled the
capacity for the production of crystals for C3. Sales of advanced materials made
from SiC represented 38% of our revenue in fiscal 1999 and approximately 34%
during fiscal 1998.
The balance of our revenue, 11% for fiscal 1999 and 18% for fiscal 1998 is
derived from government contract funding. Under various programs, U.S.
Government entities further the development of our technology by supplementing
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.
In June 1999, Cree announced the first of a family of RF and microwave
transistor products made from SiC and designed for use in a variety of power
amplification processes. A second phase of transistor products is expected to be
available in fiscal 2000. The Company expects that these products will be
marketed to a variety of amplifier producers, including wireless base stations
and digital broadcast applications. While distribution of samples will commence
in early fiscal 2000, during fiscal 2000 the Company believes that these
products will be sold in limited quantities as design cycles for the target
applications are generally several months. There can be no assurance that
customers will be able to
-21-
develop applications in the near future that will require commercial production
of the Company's RF products or that such products will be successful in the
market.
RESULTS OF OPERATIONS
- ---------------------
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
YEARS ENDED
-----------------------------------
June 27, June 28, June 30,
1999 1998 1997
-------- -------- --------
Revenue:
Product revenue, net...... 89.0% 82.0% 68.4%
Contract revenue, net..... 11.0 18.0 22.6
License fee income........ -- -- 9.0
-------- -------- --------
Total revenue.......... 100.0 100.0 100.0
Cost of Revenue:
Product revenue, net...... 44.9 51.1 46.2
Contract revenue, net..... 8.2 14.7 19.7
-------- -------- --------
Total cost of revenue.. 53.1 65.8 65.9
-------- -------- --------
Gross margin................. 46.9 34.2 34.1
Operating expenses:
Research and development.. 7.4 4.2 6.3
Sales, general and
administrative........... 10.1 9.6 14.9
Other expense............. 1.8 1.2 2.2
-------- -------- --------
Income from operations.... 27.6 19.2 10.7
Interest income, net......... 1.8 1.7 2.1
-------- -------- --------
Income before income taxes 29.4 20.9 12.8
Income tax expense........... 8.2 6.1 0.6
-------- -------- --------
Net income................ 21.2% 14.8% 12.2%
======== ======== ========
FISCAL YEARS ENDED JUNE 27, 1999 AND JUNE 28, 1998
Revenue
Revenue grew 41% from $42.5 million in fiscal 1998 to $60.1 million in fiscal
1999. This increase was attributable to higher product revenue, which rose 53%
from $34.9 million in fiscal 1998 to $53.5 million in fiscal 1999. 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. While we continue to improve our manufacturing
process and yields on our high 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 are particularly attractive to the
marketplace due to our low prices and
-22-
industry standard vertical structure. During fiscal 1999, LED volume grew 160%
while average sales prices declined 38%.
We expect that in order to increase market demand for all of our LED products,
we must continue to lower average sales prices, although pricing is anticipated
to be more stable in fiscal year 2000 than prior years. Historically, we have
been successful in matching lower sales prices with lower costs. During fiscal
2000, we plan to focus on reducing costs through higher production yields and
from greater volumes as fixed costs are spread over a greater number of units.
In September 1996, we entered into an agreement with Siemens where Siemens
agreed to purchase our blue LED chips. In December 1998, this agreement was
amended to provide for additional shipments of LED products through September
1999 and was assigned to an indirect subsidiary of Siemens, OSRAM Opto
Semiconductors GmbH & Co. ("Osram"), effective as of January 1, 1999. This
contract calls for declining prices based on an increase in the number of units
shipped. This pricing structure is common with customers in the semiconductor
industry and prior agreements with Siemens. Siemens (including its Osram
subsidiary) accounted for 37% of our revenue for fiscal 1999 and 40% in fiscal
1998. We are currently negotiating a new purchase agreement with Osram.
Our high brightness LED products, which were introduced during fiscal 1999,
continue to be ramped up to high volume production in our manufacturing
facility. During the fourth quarter of fiscal 1999, revenue from high brightness
products made up more than 25% of total LED revenue. We believe sales from these
products will surpass our standard brightness product during fiscal year 2000;
however, there can be no assurance that the product volume will increase or
yield improvements will be made to do so.
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 C3
for gemstone applications and strong demand for wafer products. During fiscal
1998, C3 was in 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 have chosen to discontinue this product line. Contract revenue
received from U.S. Government agencies also declined 14% during fiscal 1999
compared to fiscal 1998, as a significant contract that funded optoelectronic
research was exhausted in early fiscal 1999. We anticipate contract revenue to
increase slightly in fiscal 2000 as additional contract awards have been
received in late fiscal 1999.
Gross Profit
Gross margin climbed to 47% of revenue during fiscal 1999 as compared to 34%
during fiscal 1998. This increase is predominantly attributable to design and
manufacturing improvements that occurred over the past year 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.
-23-
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. Historically, we have
experienced lower margins with many new product introductions. While we continue
to make improvements to output and yield, the high brightness products may
continue to pressure margins in the short term if we are not able to meet our
yield objectives.
Average wafer costs for SiC material sales also declined 32% during fiscal 1999
over the comparative period due to more efficient processes and improved yield.
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 are incurred under this contract, funding from MVIS
is offset against these expenses. During fiscal 1999, approximately $0.5 million
of funding from MVIS was offset against research and development expenses. The
remaining $2.1 million of funding is anticipated to be applied to research and
development expenses in fiscal 2000. We expect that including the offset of MVIS
funds in fiscal 2000, research and development expenses will remain relatively
stable compared to fiscal 1999 amounts.
Sales, General and Administrative
Sales, general and administrative expenses increased 47% in fiscal 1999 to $6.1
million from $4.1 million in the 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 $0.4 million. As a result of the dismissal of a
securities class action lawsuit in November 1997, we were reimbursed $0.2
million for costs incurred in connection with the lawsuit. Most of these
expenses were recorded in fiscal 1997. In addition, we received a $0.2 million
reimbursement of medical expenses due to a negotiated cost cap in a partially
self-funded insured health plan. Also as a result of our increased profitability
during fiscal 1999 over fiscal 1998, the profit sharing accrual (which was based
on 5% of operating income) has grown $0.4 million. We anticipate that total
sales, general and administrative costs will increase in connection with the
growth of our business; however, we believe that as a percentage of revenue they
will remain constant or possibly decline.
Other Expense
Other expense increased 107% to $1.1 million during fiscal 1999 from $0.5
million 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 the Company. These write-offs were slightly offset by income
recognized under our equipment build-out agreement with C3. In fiscal 1998 and
1999, we sold equipment manufactured by us to C3 at cost plus an overhead
allocation equivalent to that recognized on our government contracts. The
reimbursement by C3 of actual manufacturing costs was recorded as a reduction in
fixed assets, while the overhead allocation portion of the funds offset "Other
expense."
-24-
Interest Income, net
Interest income, net has increased 45% to $1.1 million in fiscal 1999 from $0.7
million 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.
FISCAL YEARS ENDED JUNE 28, 1998 AND JUNE 30, 1997
Revenue
Revenue increased 47% from $29.0 million in fiscal 1997 to $42.5 million in
fiscal 1998. A significant portion of the rise was attributable to the 132%
increase in LED volume sold pursuant to an amendment to the purchase agreement
with Siemens. This agreement and two subsequent amendments provided $6.8 million
in additional revenue in fiscal 1998 over fiscal 1997. This significant increase
in volume sold was offset by a 32% decline in our average sales price per LED
sold.
Wafer and other materials revenue increased 110% in fiscal 1998 over fiscal 1997
due to a 29% increase in wafer volume associated with greater interest in the
worldwide research community for SiC-based products, as well as revenues from
C3. C3 activity grew as a result of the execution in July 1997 of the new supply
agreement and development agreement. Revenues for the displays business
increased 37% in fiscal 1998 over fiscal 1997 due to increased interest among
customers for indoor video displays.
Contract revenue increased 17% to $7.6 million during fiscal 1998 as compared to
fiscal 1997, as a result of a change in the mix of funding from available
contracts. Contracts funded for fiscal 1997 included a higher amount of proceeds
recognized under two cost-share arrangements. For these arrangements, funds are
recorded as a reduction in research and development expense rather than as
contract revenue. As funds associated with these two programs were exhausted
during fiscal 1998, we shifted our resources to programs under a cost-plus or
catalog price arrangement, in which funding is recorded as contract revenue.
Therefore contract revenue was higher in fiscal 1998 than 1997.
Included in revenue for fiscal 1997 is a one-time license fee of $2.6 million.
This license fee was earned pursuant to a License and Technology Transfer
Agreement entered into in September 1996 with Shin-Etsu. Pursuant to this
agreement, we granted Shin-Etsu a license to use certain epitaxial and device
fabrication process technology for the manufacture of our blue LED product. We
did not record any license fee revenue during fiscal 1998.
-25-
Gross Profit
Our gross profit increased 47% to $14.6 million in fiscal 1998 over fiscal 1997.
Our gross margin was 34% for both fiscal 1998 and fiscal 1997. License fees,
which have no corresponding cost, were included in fiscal 1997 results. Without
license fee revenue, gross profit would have been $7.3 million or 28% of revenue
for fiscal 1997. The overall increase in gross profit in fiscal 1998 resulted
from higher revenue and lower LED and material costs per unit. The lower LED and
wafer costs were recognized due to higher throughput, which more effectively
utilized capacity and yield efficiencies. The greater throughput enabled us to
spread fixed cost investments over a larger volume of product. Greater yield in
LED applications resulted from a combination of a new smaller die size and a new
larger two-inch diameter wafer and in the fourth quarter of fiscal 1998, the
introduction of the conductive buffer technology. Yield was also higher for LED
and materials due to plant processing efficiency and a higher quality of wafer
materials used in these products.
The cost of contract revenue has increased in fiscal 1998 over fiscal 1997, due
to the change in the mix of funding from available contracts. Costs for fiscal
1997 included a higher amount of expenses recognized under two cost-share
arrangements. For these arrangements, costs are recorded as research and
development expenses rather than cost of contract revenue. When funding under
these two contracts was completed in the second quarter of fiscal 1998, all
resources were shifted to cost-plus and catalog priced contracts, where expenses
are recorded as a cost of contract revenue.
Research and Development
Research and development costs decreased by 3% to approximately $1.8 million in
fiscal 1998 from approximately $1.8 million in fiscal 1997 due to a reduction in
work performed under two cost-share contracts to further the blue laser
research. These cost-share contracts concluded during the first half of fiscal
1998. Additionally, research and development costs for fiscal 1997 included a
one-time write-off of $0.1 million for the closure of our Eastern European
Division, located in St. Petersburg, Russia.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased 4% to $4.1 million for
fiscal 1998 from $4.3 million in fiscal 1997 due to the receipt of two one-time
insurance payments. As a result of the dismissal in November 1997 of a
securities class action lawsuit filed in October 1996, we were reimbursed $0.2
million from our insurance carrier for costs incurred in defense of the suit. In
addition, as a result of a negotiated cost cap, we received a $0.2 million
reimbursement of medical expenses that were incurred under a partially
self-funded insured health plan. As a percentage of revenue, these costs have
decreased to 10% in fiscal 1998 from 15% in fiscal 1997.
Other Expense
In fiscal 1998, other expenses included a net loss recorded on the write-down of
leasehold improvements, the disposal of certain other fixed assets and a
write-off of $66,000 for the remaining value of goodwill associated with the
acquisition of the Real Color Displays subsidiary. In addition, we entered into
an agreement with C3 to sell equipment manufactured by us at cost plus a
reasonable overhead allocation. The overhead allocation was recorded as "Other
income;" however, the amount was more than offset by leasehold write-offs
associated with the move to our new facility and other asset disposals. Other
expense for fiscal 1997 was higher than that recorded in fiscal 1998 as large
fixed asset write-downs
-26-
were recorded as the result of a physical plant inventory. These write-downs
were greater than those recorded in fiscal 1998.
Interest Income, net
Interest income, net increased by $0.1 million in fiscal 1998 over fiscal 1997
due to higher investable cash balances available in fiscal 1998. Cash balances
were higher in fiscal 1998 as we generated approximately $12.1 million from
operations compared to approximately $6.1 million in fiscal 1997.
Income Tax Expense
Our effective income tax rate increased to 29% for fiscal 1998 from a 5%
effective rate during fiscal 1997. The lower rate for fiscal 1997 resulted from
the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. On February 17, 1999, we completed
our public stock offering and raised approximately $45.3 million, net of
offering expenses and the repayment of long-term debt. There were no selling
shareholders. The Company expects that the majority of these funds will continue
to be used to expand facilities and equipment capacity. The remainder will be
used for general corporate purposes, including working capital and potential
acquisitions of or investments in complementary businesses. The Company may also
issue additional shares of common stock for the acquisition of complementary
businesses or other significant assets. Although the Company from time to time
evaluates potential acquisitions of and investments in businesses and
anticipates continuing to make such evaluations, the Company has no present
commitments or agreements with respect to the acquisition or investment in
another business. As of June 27, 1999, we had working capital of approximately
$60.2 million, including $48.7 million in cash and cash equivalents and
marketable securities.
Operating activities generated $19.9 million in cash during fiscal 1999. This
was attributable primarily to net income of $12.7 million, other non-cash
expenses of $7.2 million, $3.5 million in deferred income tax benefits and $2.7
million for tax benefits associated with stock options. These amounts were
partly offset by an increase of $6.2 million in accounts receivable and a $1.4
million rise in inventory.
Most of the $45.3 million of cash used in investing activities in fiscal 1999
was related to expenditures associated with the construction of our new
manufacturing facility in Durham, North Carolina and increased manufacturing
capacity in the crystal growth, epitaxial, clean room and pack and test areas.
The Company also invested $4.5 million to acquire an investment in the common
stock of MVIS.
The $50.1 million of cash provided by financing activities in fiscal 1999
related primarily to the receipt of $61.4 million related to proceeds from the
public stock offering and the exercise of stock warrants and stock options from
the Company's employee stock option plan. This significant inflow of cash was
partly offset by the $10.0 million payoff of long term debt and a $3.2 million
repurchase of common stock. This stock was repurchased at an average price of
$6.84 per share. 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 27, 1999 warrants remained outstanding to purchase 258,000 shares;
these warrants will expire in September 2000.
-27-
We are currently engaged in construction activities related to a new packaging
area and the expansion of our crystal growth department. These additions, which
are expected to be completed by calendar year end, will allow us to consolidate
all LED and wafer manufacturing facilities to one site with improved
manufacturing capabilities. In order to grow existing products and provide
expanded facilities for our new microwave product line, we anticipate a second
phase of expansion to facilities and infrastructure to begin in fiscal 2000. We
anticipate total costs for these expenses to be between $15 and $20 million.
Estimates for equipment costs related to this expansion also total between $15
and $20 million. We plan to fund these capital projects with internally
generated cash plus cash on hand.
IMPACT OF THE YEAR 2000
State of Readiness
We have evaluated all of our internal software, embedded systems and products
against Year 2000 concerns and believe that our products and businesses will not
be substantially affected by the advent of the year 2000. We have completed a
Year 2000 compliance plan that included four phases: inventory, assessment,
remediation and testing. A detailed inventory of all computers and related
systems was completed and all critical upgrades were finished for all computers
that were non-Year 2000 compliant. All factory-dependent computers were also
tested and are now Year 2000 compliant. The only other remaining steps include a
network patch that impacts our utilities and the conversion of the electronic
mail system. We do not believe that these conversions are business critical.
Individual software installations are also being reviewed. These remaining areas
should be completed no later than September 1999.
Although we cannot control whether and how third parties will address the Year
2000 issue, we have now contacted critical vendors and suppliers and have been
informed that they have the ability to ensure smooth delivery of products
without disruptions caused by Year 2000 problems. Based on the responses of
these vendors to our survey, we believe that our vendors are either
substantially Year 2000 compliant or that any noncompliance will not have a
material effect on our operations. We have now received assurances from 95% of
these vendors. We anticipate that the remaining vendors also will be able to
ensure delivery of product; however, we do not expect that this assessment will
be complete until September 1999.
Costs
We do not believe that the costs associated with Year 2000 compliance have had a
material adverse effect on our business, results of operations or financial
condition. As of June 27, 1999, this project is substantially complete and we do
not anticipate that we will incur any material costs in winding up the project.
Year 2000 Risks
Although we believe that our planning efforts are adequate to address our Year
2000 concerns, there can be no assurance that we will not experience negative
consequences and material costs as a result of undetected errors or defects in
the technology used in our internal systems. Also, there is no assurance that
the systems of third parties on which we rely will be made compliant on a timely
basis. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
-28-
We believe that our greatest risk stems from the potential non-compliance of our
suppliers. We depend on a limited number of suppliers for certain raw materials,
components and equipment necessary for the manufacture of our products.
Accordingly, if those suppliers are unable to process or fill our orders or
otherwise interact with us because of Year 2000 problems, we could experience
material adverse effects to our business. We are in the process of assessing the
Year 2000 status of our suppliers and are investigating alternate sources of
supply. As a consequence of our dependence on limited sources of supply, we
generally maintain a significant inventory of certain critical materials and
require suppliers to keep certain amounts of inventory available for us. There
can be no assurance that we will have enough materials on hand to continue
production without interruption in the event one or more of our suppliers
experiences Year 2000 problems that affect its (their) ability to supply us. Any
supply chain disruptions would affect our ability to manufacture our products,
which could result in material adverse consequences to our business, results of
operations and financial condition.
Contingencies
We have not yet developed a contingency plan to address what the Company should
do if we are unable to address the Year 2000 issue. We expect the contingency
plan to be in place after the inquiry of vendors and customers is completed.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures:
As of June 27, 1999, 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 27, 1999, 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 these shares
from MVIS in a private placement and has agreed not to sell the shares until at
least January 6, 2000; however, MVIS filed a registration statement in August
1999 covering the Company's sale of these shares. Since the Company is currently
restricted from trading these shares and management views this transaction as an
investment, the shares are accounted for as "available for sale" securities
under SFAS 115. The fair market value of this investment as of June 27, 1999,
using the closing sale price as of June 25, 1999, was $6.1 million, representing
268,600 shares.
During fiscal 1999, the Company repaid the term loan that was outstanding as of
June 28, 1998. The Company currently has no debt outstanding, therefore, Cree is
no longer subject to interest rate risk.
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.
-29-
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors..............................................31
Report of Independent Accountants...........................................32
Consolidated Balance Sheets as of June 27, 1999 and June 28, 1998...........33
Consolidated Statements of Operations for the years ended June 27, 1999,
June 28, 1998 and June 30, 1997.............................................34
Consolidated Statements of Cash Flow for the years ended June 27, 1999,
June 28, 1998 and June 30, 1997.............................................35
Consolidated Statements of Shareholders' Equity for the years ended
June 27, 1999, June 28, 1998 and June 30, 1997..............................36
Notes to Consolidated Financial Statements..................................37
-30-
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cree Research, Inc.
We have audited the accompanying consolidated balance sheet of Cree Research,
Inc. and subsidiaries as of June 27, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year 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 audit. The consolidated financial statements of Cree
Research, Inc. and subsidiaries as of and for the two year period ended June 28,
1998 were audited by other auditors whose report dated July 22, 1998 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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
Research, Inc. and subsidiaries as of June 27, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
accordance with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
July 23, 1999
-31-
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Cree Research, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows present fairly, in all material respects, the financial position of Cree
Research, Inc. and subsidiaries at June 28, 1998, and the results of their
operations and their cash flows for the years ended June 28, 1998 and June 30,
1997, in conformity with generally accepted accounting principles. 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. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998
-32-
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 27, June 28,
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 42,506 $ 17,680
Marketable securities 6,145 657
Accounts receivable, net 16,285 10,479
Inventories 3,977 2,543
Deferred income taxes 296 1,952
Prepaid expenses and other current assets 558 1,347
--------- ---------
Total current assets 69,767 34,658
Property and equipment, net 69,884 36,476
Patent and license rights, net 1,731 1,525
Deferred income taxes 2,827 --
Other assets 8 65
--------- ---------
Total assets $144,217 $ 72,724
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 7,487 $ 5,595
Current maturities of long term debt -- 17
Accrued salaries and wages 819 391
Other accrued expenses 1,239 1,052
--------- ---------
Total current liabilities 9,545 7,055
Long term liabilities:
Long term debt -- 8,650
Deferred income taxes 4,650 2,154
--------- ---------
Total long term liabilities 4,650 10,804
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at June 27, 1999 and 2,750 shares
authorized at June 28, 1998; none issued and
outstanding
Common stock, par value $0.0025; 60,000 shares 73 65
authorized at June 27, 1999 and 29,000 shares
authorized at June 28, 1998; shares issued and
outstanding 29,258 and 25,978 at June 27, 1999
and June 28, 1998, respectively
Additional paid-in-capital 111,136 49,676
Retained earnings 18,813 5,124
--------- ---------
Total shareholders' equity 130,022 54,865
--------- ---------
Total liabilities and shareholders' equity $144,217 $ 72,724
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-33-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
June 27, June 28, June 30,
1999 1998 1997
--------- -------- --------
Revenue:
Product revenue, net $ 53,464 $34,891 $19,823
Contract revenue, net 6,586 7,640 6,535
License fee income -- -- 2,615
--------- -------- --------
Total revenue 60,050 42,531 28,973
Cost of revenue:
Product revenue, net 26,977 21,727 13,388
Contract revenue, net 4,943 6,252 5,707
--------- -------- --------
Total cost of revenue 31,920 27,979 19,095
Gross profit 28,130 14,552 9,878
Operating expenses:
Research and development 4,443 1,774 1,826
Sales, general and administrative 6,064 4,131 4,301
Other expense 1,041 502 639
--------- -------- --------
Income from operations 16,582 8,145 3,112
Interest income, net 1,060 730 607
--------- -------- --------
Income before income taxes 17,642 8,875 3,719
Income tax expense 4,940 2,600 177
--------- -------- --------
Net income $12,702 $ 6,275 $ 3,542
========= ======== ========
Other comprehensive income, net of tax
Unrealized holding gains 987 -- --
========= ======== ========
Comprehensive income $13,689 $ 6,275 $ 3,542
========= ======== ========
Earnings per share:
Basic $0.47 $0.24 $0.14
========= ======== ========
Diluted $0.45 $0.23 $0.13
========= ======== ========
Shares used in per share calculation:
Basic 27,015 25,726 24,911
========= ======== ========
Diluted 28,432 26,987 26,251
========= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-34-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)
June 27, June 28, June 30,
1999 1998 1997
-------- -------- --------
Operating activities:
Net income $ 12,702 $ 6,275 $ 3,542
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 5,382 4,217 3,356
Loss on disposal of property and
equipment 1,602 719 631
Loss on write off of patents 51 17 141
Amortization of patent rights 117 102 108
Amortization and write off of goodwill -- 86 41
Purchase of marketable trading
securities (233) (1,500) --
Proceeds from sale of marketable
trading securities 1,421 421 --
Loss (gain) on marketable trading
securities (141) 32 --
Deferred income taxes 3,494 394 (192)
Income tax benefits from stock
option exercises 2,672 1,791 96
Changes in operating assets and liabilities:
Accounts receivable (6,196) (2,398) (891)
Inventories (1,434) 1,406 (723)
Prepaid expenses and other assets (1,981) (882) (262)
Accounts payable, trade 1,892 1,092 (226)
Accrued expenses 598 320 476
-------- -------- --------
Net cash provided by operating activities 19,946 12,092 6,097
-------- -------- --------
Investing activities:
Maturity of investment securities -- -- 1,787
Purchase of available for sale
security (4,500) -- --
Purchase of property and equipment (40,578) (15,287) (8,115)
Proceeds from sale of property and
equipment 186 463 13
Purchase of patent rights (374) (377) (310)
-------- -------- --------
Net cash used in investing
activities (45,266) (15,201) (6,625)
-------- -------- --------
Financing activities:
Net proceeds from issuance of long
term debt 1,350 8,667 --
Net repayment of long term debt (10,000) -- --
Net proceeds from issuance of common
stock 61,415 2,936 926
Receipt of Section 16(b) common
stock profits 594 -- --
Repurchase of common stock (3,213) (1,262) (112)
-------- -------- --------
Net cash provided by financing
activities 50,146 10,341 814
-------- -------- --------
Net increase in cash and cash equivalents $ 24,826 $ 7,232 $ 286
Cash and cash equivalents:
Beginning of year $ 17,680 $ 10,448 $10,162
-------- -------- --------
End of year $ 42,506 $ 17,680 $10,448
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of
amounts capitalized $ 257 $ 74 $ --
-------- -------- --------
Cash paid for income taxes $ 2,175 $ 336 $ 300
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-35-
CREE RESEARCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDING JUNE 27, 1999, JUNE 28, 1998 AND JUNE 30, 1997
(In Thousands)
Total
Common Additional Share-
Stock Paid-in Retained Treasury holders'
Par Value Capital Earnings Stock Equity
--------- ---------- --------- --------- --------
Balance at June 30, 1996 $ 61 $45,342 $(4,693) $ (38) $ 40,672
Common stock options
exercised for cash, 104
shares................... 160 160
Common stock warrants
exercised for cash, 406
shares................... 1 766 767
Purchase of common stock
for the treasury, 20 shares (112) (112)
Retirement of 40 treasury
shares................... (150) 150 --
Income tax benefits from
stock option exercises... 96 96
Net income............... 3,542 3,542
--------- ---------- --------- --------- --------
Balance at June 30, 1997 62 46,214 (1,151) -- 45,125
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
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
Net income............... 6,275 6,275
--------- ---------- --------- --------- --------
Balance at June 28, 1998 65 49,676 5,124 -- 54,865
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
Issuance of common stock
for cash 2,990 shares... 7 55,240 55,247
Purchase of common stock
for the treasury, 2,990
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
Other comprehensive income,
net of tax............... 987 987
Net income............... 12,702 12,702
--------- ---------- --------- --------- --------
Balance at June 27, 1999 $ 73 $111,136 $ 18,813 $ -- $130,022
========= ========== ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-36-
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree Research, 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 light emitting diodes, and
silicon carbide based materials. The Company markets its blue 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 these contracts with agencies of the Federal
government. This funding is recorded as contract revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Cree Research,
Inc., and its wholly-owned subsidiaries, Real Color Displays, Inc. ("RCD"), Cree
Research FSC, Inc. ("FSC"), and Cree Technologies, Inc. ("Tech"). All material
intercompany accounts and transactions have been eliminated in consolidation.
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 52-week 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 27, 1999 and June 28,
1998, and the reported amounts of revenues and expenses during the years ended
June 27, 1999, June 28, 1998 and June 30, 1997. Actual amounts could differ from
those estimates.
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. License fee income is recognized when the transfer of licensed
technology is completed.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the furthering of the development of the Company's technology by
supplementing the Company's research and
-37-
development efforts. 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 $2,700,000. As of June 27, 1999, all license fees have 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.
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.
Marketable Securities
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:
(a) Securities Held-to-Maturity- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in
earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading
securities are reported at fair value with unrealized gains or losses
excluded from earnings and reported as a separate component of
shareholders' equity.
As of June 27, 1999, the Company's short-term investments consisted of common
stock holdings of Microvision, Inc. ("MVIS"). The Company purchased 268,600
common shares in a private equity transaction in May 1999 at a price of $16.75
per share. In August 1999, MVIS filed a registration statement for the Company's
sale of these shares; however, Cree has agreed not to sell the shares until at
least January 6, 2000. Since the Company is currently restricted from trading
these shares and management views this transaction as an investment, the shares
are accounted for as "available for sale"
-38-
securities under SFAS 115. Therefore unrealized gains or losses are excluded
from earnings and reported as a separate component of shareholders' equity.
As of June 28, 1998, the Company's short-term investments consisted of common
stock holdings in C3, Inc ("C3"), the majority of which were bought in November
1997. The Company also acquired additional shares of C3 in September 1998 and
acquired 24,601 shares directly from C3 pursuant to the exercise of an option in
January 1997. This investment was treated for accounting purposes as a trading
security, with net realized and unrealized gains and losses included in net
earnings. All common shares of C3 held by Cree were subsequently sold during
fiscal 1999. Realized gains on shares of C3 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.
As of June 28, 1998, the Company's president had promised to indemnify the
Company for losses up to $300,000, plus the lesser of $100,000 or the net
difference between the per share selling price and $9.375 per share for all
shares of C3 common stock sold by Cree. As a result, at June 28, 1998, the
Company had recorded a $390,000 receivable from the president based upon this
agreement for the net realized and unrealized losses on this investment. Since
Cree sold its shares of C3 for a net gain, the indemnity has been terminated
with no payments becoming due.
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:
June 27, June 28,
1999 1998
in (000)s in (000)s
--------- ---------
Raw materials $ 1,290 $ 999
Work-in-progress 1,675 752
Finished goods 1,012 792
--------- ---------
$ 3,977 $2,543
========= =========
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.
The Company has entered into two agreements with C3 to sell crystal growth
equipment manufactured by the Company to C3 at cost plus a reasonable overhead
allocation. As a result of these transactions, the Company has recognized an
overhead allocation of $473,000 and $332,000, in fiscal 1999 and fiscal 1998,
respectively, as "other operating income".
-39-
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 $3,000,000. The Company has now moved the majority of its
employees and production to this facility.
The Company assesses the realizability of the carrying value of its investment
in property and equipment whenever events or changes in circumstance 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 27, 1999, the Company has not recorded any impairment in the carrying
value of its property and equipment.
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 to 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 $117,000,
$102,000 and $108,000 for the years ended June 27, 1999, June 28, 1998 and June
30, 1997, respectively. Total accumulated amortization for patents was
approximately $669,000 and $560,000 at June 27, 1999 and June 28, 1998,
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.
Research and Development Policy
The Company contracts with the U.S. government for many of its current research
and development efforts. By entering into these contracts, the Company has most
of its research and product development costs funded by the U.S. government. The
contract funding may be based on a cost-plus or a cost-share arrangement.
Pursuant to each contract, the amount of funding 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 funded to the Company. The contracts typically
require the submission of a written report that documents the results of such
research.
Funding on contracts under which the Company anticipates that funding will
exceed direct costs over the life of the contract is recorded as contract
revenue and related costs are reported as a cost of revenue.
-40-
For contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, direct costs are shown 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 reflected in the statements of
operations:
Year ended (in 000s)
June 27, June 28, June 30,
1999 1998 1997
-------- -------- --------
Net research and development costs $ -- $ 276 $ 671
Government funding -- 601 2,186
-------- -------- --------
Total direct costs incurred $ -- $ 877 $ 2,857
======== ======== ========
As of June 28, 1998, all funding under contracts where the Company anticipates
that direct costs will exceed amounts to be funded has been exhausted.
Therefore, the Company anticipates that all future funding under existing
contracts will be reflected as contract revenue while direct costs will be
reported as contract cost of revenue.
Interest Capitalization
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 the newly acquired facility. Interest capitalized for the fiscal
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 cash equivalents and accounts receivable.
The Company's cash equivalents consist of commercial paper. 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 10% and 18%, respectively, of the Company's accounts receivable
balance at June 27, 1999 and June 28, 1998 was due from the Department of
Defense. In addition, the Company had amounts due from Siemens A.G. (or its
indirect subsidiary, Osram) totaling 35% and 37%, of accounts receivable
balances at June 27, 1999 and June 28, 1998, respectively. At June 27, 1999 and
June 28, 1998, the Company had amounts due from C3 totaling 17% and 23%,
respectively, of accounts receivable balances.
The Company has derived its product revenue from sales primarily in the United
States, the Far East, and Europe as follows:
Year Ended
1999 1998 1997
---- ---- ----
United States....... 38% 26% 21%
Far East............ 50% 49% 33%
Europe.............. 11% 24% 44%
Other............... 1% 1% 2%
-41-
One customer accounted for 37%, 40% and 31% of revenue for fiscal 1999, 1998 and
1997, respectively. Another customer accounted for 19%, 11% and 2% of revenue
for fiscal 1999, 1998 and 1997, respectively. The Department of Defense
accounted for 100%, 93% and 99% of contract revenues during fiscal 1999, 1998,
and 1997, 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 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 ("FAS 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. FAS 123 permits the Company to choose
between adoption of 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 provide only the pro forma disclosures required by FAS 123.
3. ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
June 27, 1999 June 28, 1998
(in 000s) (in 000s)
------------- -------------
Trade receivables $ 14,685 $ 8,971
Other short term receivables 1,775 1,659
------------- --------------
16,460 10,630
Allowance for doubtful accounts (175) (151)
------------- --------------
Total accounts receivable $ 16,285 $ 10,479
============= ==============
-42-
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 27, 1999, June 28, 1998 and June 30,
1997:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Balance at beginning of year $ 151 $ 216 $ 50
Charges to cost and expenses 24 50 190
Deductions (write-offs to reserve) -- (115) (24)
--------- --------- ---------
Balance at end of year $ 175 $ 151 $ 216
========= ========= =========
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
June 27, June 28,
1999 1998
(in 000s) (in 000s)
--------- ---------
Office equipment and furnishings $ 1,948 $ 1,372
Land & Buildings 21,031 3,501
Machinery and equipment 46,199 28,136
Leasehold improvements 1,549 4,697
--------- ---------
70,727 37,706
Accumulated depreciation (13,311) (10,304)
--------- ---------
57,416 27,402
Construction in progress 12,468 9,074
--------- ---------
Net Property & Equipment $69,884 $36,476
========= =========
Depreciation and amortization of property and equipment totaled $5,382,000,
$4,217,000 and $3,356,000 for the years ended June 27, 1999, June 28, 1998 and
June 30, 1997, respectively.
5. SHAREHOLDERS' EQUITY
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.
All share numbers have been restated to give effect to the 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
-43-
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.
6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by FAS 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's Amended and Restated Equity Compensation Plan has authorized the
grant of options for up to 5,400,000 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. 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
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the 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 5.3%
and 5.6%, for the years ended June 27, 1999 and June 28, 1998, respectively. The
volatility factor of the expected market price of the Company's common stock is
1.174 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:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Net income, as reported $ 12,702 $ 6,275 $3,542
Pro forma net income, as adjusted 8,968 4,405 1,418
for FAS 123
Pro forma earnings per share:
Basic $ 0.33 $ 0.17 $ 0.05
Diluted $ 0.32 $ 0.16 $ 0.05
The following table details the number of stock options outstanding and their
related exercise prices as of June 27, 1999:
-44-
Number of Options Outstanding as of June 27, 1999
Weighted-Average
Exercise Price Number of Options Contractual Life
-------------- ----------------- ----------------
$ 0.21 2,866 1 year
$ 1.56 16,000 5 years
$ 1.81 322,584 4 years
$ 1.88 10,668 1 year
$ 2.00 87,200 5 years
$ 2.19 12,000 5 years
$ 3.41 8,000 4 years
$ 3.69 12,000 5 years
$ 4.69 38,800 8 years
$ 5.13 21,400 8 years
$ 5.60 26,900 7 years
$ 6.49 752,200 8 years
$ 7.13 46,000 9 years
$ 7.19 330,950 6 years
$ 7.63 1,189,800 9 years
$ 7.88 96,000 7 years
$ 8.19 38,400 9 years
$ 8.38 10,000 9 years
$ 8.88 33,600 9 years
$ 9.38 71,800 8 years
$ 9.69 20,000 9 years
$12.32 114,000 9 years
$20.50 134,400 10 years
$22.60 139,600 10 years
$22.63 78,000 10 years
-----------------
3,613,168
Total Option Activity
-------------------------------------------------------------
June 27, 1999 June 28, 1998 June 30, 1997
Weighted Weighted Weighted
Options Average Options Average Options Average
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- -------- --------- --------
Outstanding -
beginning of year 2,410 $ 5.10 1,854 $ 2.38 1,264 $ 2.20
Granted 1,712 $10.85 1,084 $ 6.99 762 $ 6.78
Exercised (418) $ 3.63 (434) $ 3.90 (104) $ 1.54
Forfeited (91) $ 7.08 (94) $ 4.34 (68) $ 4.03
--------- --------- ---------
Outstanding -
end of year 3,613 $ 8.14 2,410 $ 5.10 1,854 $ 2.38
Exerciseable at
end of year 1,478 $ 5.39 1,198 $ 4.20 1,404 $ 3.72
-45-
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 342,000 shares of common stock were exercised during the fiscal year
ended June 27, 1999. Warrants to purchase 258,000 shares remain outstanding as
of June 27, 1999 and represent the only warrants outstanding.
7. LEASE COMMITMENTS
The Company currently leases three facilities. These facilities are comprised of
both office and manufacturing space. The first facility has a remaining lease
period of approximately two and one half years. The lease term for the second
facility began in September 1995. This facility has a remaining lease period of
approximately one-year with two options to renew for a total of four additional
years. The lease for the third facility expires in December 1999. All of these
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 $430,000,
$522,000 and $549,000 for the years ended June 27, 1999, June 28, 1998, and June
30, 1997, respectively. Future minimum rentals as of June 27, 1999 under these
leases are as follows:
Minimum Rental
Fiscal Years Ended Amount
(in 000s)
------------------ --------------
June 25, 2000 $ 312
June 24, 2001 247
June 30, 2002 119
-----
Total $ 678
=====
8. LONG-TERM DEBT
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10,000,000 to finance the purchase and upfit of the new main facility
in Durham, North Carolina. Approximately $2,950,000 was disbursed under the loan
to finance the initial purchase of the facility with the remaining proceeds
disbursed on a monthly basis based on actual expenditures incurred. The loan,
which was collateralized by the purchased property and subsequent upfits,
accrued interest at a fixed rate of 8% and carried customary covenants,
including the maintenance of a minimum tangible net worth and other
requirements. On February 17, 1999, the entire $10,000,000 indebtedness was
repaid with proceeds received from the public stock offering. At June 28, 1998,
short term and long term borrowings associated with this loan were $17,000 and
$8,650,000, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of FAS 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
-46-
settled. Under FAS 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 29, 1999, June 28, 1998,
and June 30, 1997 differed from the amounts computed by applying the U.S.
federal tax rate of 35% in fiscal 1999, and 34% in fiscal 1998 and 1997, to
pretax earnings as a result of the following:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Federal income tax provision at $ 6,174 $ 3,018 $ 1,265
statutory rate
State tax provision 211 166 193
Increase (decrease) in income tax
expense resulting from:
Foreign sales corporation (510) (214) --
Decrease in valuation allowance (290) (358) (1,279)
Research and development (251) -- --
State tax credits (394) -- --
Other -- (12) (2)
--------- --------- ---------
Income tax expense $ 4,940 $ 2,600 $ 177
========= ========= =========
The following are the components of the provision for income taxes for the years
ended June 27, 1999, June 28, 1998 and June 30, 1997:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Current:
Federal $ 2,553 $ 699 $ 54
Foreign Tax Withholding -- 50 220
State 300 269 95
--------- --------- ---------
2,853 1,018 369
Deferred:
Federal 2,347 1,582 (442)
State (260) -- 250
--------- --------- ---------
2,087 1,582 (192)
Net Provision $ 4,940 $ 2,600 $ 177
========== ========= =========
-47-
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
June 27, 1999 June 28, 1998
(in 000s) (in 000s)
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 97 $ 1,304
Research tax credits 420 169
Compensation 105 62
Inventory 126 120
Bad debt 65 56
Alternative minimum tax 1,513 261
Foreign tax credit 270 270
Other 527 --
------------- -------------
Total gross deferred tax assets 3,123 2,242
Less valuation allowance -- (290)
------------- -------------
Total net deferred tax assets 3,123 1,952
Deferred tax liabilities:
Marketable equity securities 658 --
Property and equipment depreciation 3,992 2,154
------------- -------------
Gross deferred tax liabilities 4,650 2,154
------------- -------------
Net deferred tax liability $ (1,527) $ (202)
============= =============
The net change in the total valuation allowance for the years ended June 27,
1999 and June 28, 1998 was $290,000. The primary reason for the reduction in the
valuation allowance in 1999 and 1998 was the greater likelihood of the
utilization of future tax benefits from net operating loss ("NOL")
carryforwards. Realization of deferred tax assets associated with the NOL
carryforwards is dependent upon the Company generating sufficient taxable income
prior to their expiration. Management believes that there is a risk that certain
of the state NOL carryforwards may expire unused and, accordingly, has
established a valuation allowance against them. Although realization is not
assured for the remaining deferred tax assets, management believes it is more
likely than not that they will be realized through future taxable earnings.
However, the net deferred tax assets could be reduced in the future if
management's estimates of taxable income during the carryforward period are
significantly reduced.
As of June 27, 1999, the Company has net operating loss carryforwards for
federal purposes of $75,000 and $1,400,000 for state purposes. The carryforward
expiration period is 2011 to 2019 for federal tax purposes and from 2000 to 2004
for state purposes.
10. 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 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
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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
27, 1999, June 28, 1998 or June 30, 1997.
11. 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:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Basic:
Net income $ 12,702 $ 6,275 $ 3,542
========= ========= =========
Weighted average common shares 27,015 25,726 24,911
========= ========= =========
Basic income per common share $ 0.47 $ 0.24 $ 0.14
========= ========= =========
Diluted:
Net income $ 12,702 $ 6,275 $ 3,542
========= ========= =========
Weighted average common
shares-basic 27,105 25,726 24,911
Dilutive effect of stock options
& warrants 1,417 1,261 1,340
--------- --------- ---------
Weighted average common
shares-diluted 28,432 26,987 26,251
========= ========= =========
Diluted income per common share $ 0.45 $ 0.23 $ 0.13
========= ========= =========
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. As of
June 27, 1999, there were no potential shares considered to be antidilutive. For
the years ended June 28, 1998 and June 30, 1997, there were 225,000 and 574,000
shares, respectively, that were not included in calculating diluted income per
share because their effect was antidilutive.
12. NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 only impacts
financial statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all non-owner changes in equity that are excluded
from net income. For fiscal 1999, the Company reports accumulated gains on
available-for-sale investment securities that are accumulated in shareholders'
equity as an item of other comprehensive income. At the time of the sale, any
previously recognized gains or losses that were accumulated in shareholders'
equity would be reversed in comprehensive income and then recognized as an
element of net income. For the year ended June 28, 1998, the Company had no
items of other comprehensive income.
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In fiscal 1999, the Company adopted Statement of Financial Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 changes the way public companies report segment information in
annual financial statements and also require those companies to report selected
segment information in interim financial statements to shareholders. SFAS 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The application of the new rules does not
have a significant impact on the Company's financial statements as the Company
only operates in a single segment.
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. 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.
13. SUBSEQUENT EVENT
On July 13, 1999 the Company filed a Form 8-K announcing a two-for-one split of
its common stock. The stock split was effected by an amendment to the Company's
Articles of Incorporation that became effective at the close of business on July
26, 1999. With the effectiveness of the amendment, each issued and unissued
authorized share of common stock, $0.005 par value per share, was automatically
split into two whole shares of common stock, $0.0025 par value per share. On
July 30, 1999, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the common stock split.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 1999.
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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 July 26, 1999
3.2 Bylaws, as amended May 28, 1999
4.1 Specimen Common Stock Certificate adopted July 21, 1999
10.1 Amended and Restated Equity Compensation Plan, as amended June 28,
1999*
10.2 Stock Option Plan for Non-Employee Directors (terminated as to
future grants pursuant to Board action dated September 1, 1997) (1)*
10.3 License Agreement between the Company and North Carolina State
University dated December 3, 1987 (2)
10.4 Amendment to License Agreement between the Company and North
Carolina State University dated September 11, 1989 (2)
10.5 Development, License and Supply Agreement between the Company and
Siemens A.G. dated October 24, 1995 (3)
10.6 Purchase Agreement between the Company and Siemens A.G. dated
September 6, 1996 (4)
10.7 First Amendment to Purchase Agreement between the Company and
Siemens A.G. dated April 22, 1997 (5)
10.8 Second Amendment to Purchase Agreement between the Company and
Siemens A.G. dated December 9, 1997 (6)
10.9 Third Amendment to Purchase Agreement between the Company and
Siemens A.G. dated September 8, 1998 (7)
10.10 Fourth Amendment to Purchase Agreement between the Company and
Siemens A.G. dated December 16, 1998 (8)
10.11 Transformation Agreement with Siemens A.G. and OSRAM Opto
Semiconductors GmbH & Co. OHG effective January 1, 1999
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of Registrant (9)
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
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(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(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 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.
(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 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.
(9) 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 19, 1998.
* Compensatory Plan
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CREE RESEARCH, INC.
Date: August 11, 1999
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 August 11, 1999
- ----------------------------
F. Neal Hunter
/s/ Cynthia B. Merrell Chief Financial Officer August 11, 1999
- ----------------------------
Cynthia B. Merrell
/s/ Calvin H. Carter, Jr. Director August 11, 1999
- ----------------------------
Calvin H. Carter, Jr., Ph.D.
/s/ James E. Dykes
- ---------------------------- Director August 11, 1999
James E. Dykes
/s/ Michael W. Haley Director August 11, 1999
- ----------------------------
Michael W. Haley
/s/ John W. Palmour Director August 11, 1999
- ----------------------------
John W. Palmour, Ph.D
/s/ Walter L. Robb
- ---------------------------- Director August 11, 1999
Walter L. Robb, Ph.D.
/s/ Dolph W. von Arx Director August 11, 1999
- ----------------------------
Dolph W. von Arx
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