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UNITED STATES
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 30, 2002
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification Number)
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, $0.00125 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. [X]
The aggregate market value of common stock held by non-affiliates of the
registrant as of August 1, 2002 was approximately $1,019,706,031 (based on the
closing sale price of $14.49 per share).
The number of shares of the registrant's Common Stock, $0.00125 par value per
share, outstanding as of August 1, 2002 was 72,728,948.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held October 29, 2002
are incorporated by reference into Part III.
CREE, INC.
FORM 10-K
For the Fiscal Year Ended June 30, 2002
INDEX
Part I Page
----
Item 1. Business ............................................................................. 3
Item 2. Properties ........................................................................... 26
Item 3. Legal Proceedings .................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders .................................. 30
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................................................. 30
Item 6. Selected Financial Data .............................................................. 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................. 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................... 46
Item 8. Financial Statements and Supplementary Data .......................................... 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ................................................. 74
Part III
Item 10. Directors and Executive Officers of the Registrant ................................... 74
Item 11. Executive Compensation ............................................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................................................... 74
Item 13. Certain Relationships and Related Transactions ....................................... 74
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................... 75
SIGNATURES ......................................................................................... 77
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PART I
Item 1. Business
INTRODUCTION
Cree, Inc., a North Carolina corporation, was established in 1987 to
commercialize semiconductor wafers and devices made from silicon carbide, or
SiC. Today, we are the world-leader in developing and manufacturing compound
semiconductor materials and electronic devices made from SiC and a leading
developer and manufacturer of optoelectronic and electronic devices made from
gallium nitride, or GaN, and related materials. We also produce RF power
transistor components and modules for wireless infrastructure applications using
silicon-based bipolar and laterally diffused metal oxide semiconductor, or
LDMOS, process technologies. We operate our business in two segments, the Cree
segment, which consists of our SiC-based products and research contracts, and
the Cree Microwave segment, which consists of RF transistors and RF transistor
modules based on a silicon platform.
SiC and GaN-based devices offer technical advantages over competitive products
made from silicon, gallium arsenide, or GaAs, sapphire and other materials for
certain electronic applications. We use our wide bandgap compound semiconductor
technology to make enabling products such as near ultra-violet (products with
wavelengths between 380 and 410 nanometers), or UV, blue and green light
emitting diodes, or LEDs. We sell our LEDs to customers who package them for use
in applications such as wireless handsets, backlighting for automotive
dashboards and other consumer products. Other applications for our LEDs include
indoor and outdoor full color displays, such as video boards in arenas and
stadiums, billboards and message signs. Our LEDs are also used in traffic
signals, indicator lights for consumer or industrial equipment and miniature
white lights used for illumination applications. We have developed several
generations of LED products, including our MegaBright(TM) and XBright(TM) LEDs
released during fiscal 2002. Based on our own measurements, we believe that our
XBright(TM) product family includes the highest brightness (which is defined as
the optical power output from a chip at 20 milliamps of drive current) UV, blue
and green LEDs commercially available. All of our SiC-based GaN UV, blue and
green LEDs offer benefits to our customers over competing products, which
include a vertical chip structure, improved resistance to electrostatic
discharge and small size. We also manufacture SiC material products, including
SiC wafers, which we sell for use in manufacturing LEDs and power devices and
for research directed to optoelectronics (which includes LEDs and laser diodes),
microwave and power devices, and bulk SiC material, which we sell for use in
gemstone applications. The remainder of our Cree segment revenue is derived from
sales of laser diodes and power diodes, and sales from industrial contracts and
government contracts for research work performed for the U.S. Government.
Our entry into the wireless infrastructure market as a component supplier
occurred with our acquisition in December 2000 of the UltraRF business of
Spectrian Corporation, or Spectrian. We renamed the UltraRF business Cree
Microwave during fiscal 2002. Cree Microwave operates its own wafer fabrication
facility that utilizes silicon substrates to create bipolar and LDMOS devices to
produce high-power, high performance radio frequency, or RF, power
semiconductors for use in wireless infrastructure equipment.
We have new product initiatives aimed at developing LEDs with higher luminous
efficiency to expand our existing family of optoelectronic devices. We believe
that if certain significant milestones are achieved, the LED chips currently in
development may enable our customers to produce white lamps designed to compete
in the lighting market. Some of our customers are already offering early
illumination products using our devices. We also have new product initiatives
for RF and microwave transistors using
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SiC and GaN technology. We believe that these products may be useful in a
variety of applications, including power amplifiers for next generation wireless
infrastructure and solid state radar. In addition, we are developing and
sampling high power rectifiers for power conversion and switching uses, which we
believe will allow for more efficient use of energy in certain applications over
alternative silicon-based semiconductor solutions. We are working on the
development of a high-powered UV laser diode for use in next generation
high-density digital versatile disk, or DVD, and other optical storage
applications. At Cree Microwave, we are developing higher performance LDMOS
devices for next generation power amplifiers for base station infrastructure
applications.
BACKGROUND
Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon is the dominant semiconductor material because the technology has
evolved to the point where it can be grown into large, high quality single
crystals that are suitable for fabricating many 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 semiconductor devices. However, GaAs,
silicon and other commercially available semiconductor materials have physical
and electronic characteristics that limit their usefulness in certain
applications. For example, conventional silicon and GaAs-based semiconductors
have not demonstrated the ability to enable short wavelength (UV, blue or green)
LED or laser 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 certain commercial and military applications. With the
possibility of allowing higher power densities, SiC and GaN-based wireless
systems may use fewer transistors per base station with less complex circuitry,
which may result in a lower system cost. Furthermore, few silicon or GaAs
devices can operate effectively at temperatures above 400(degrees) Fahrenheit.
This is a significant limitation for applications such as advanced electronic
systems for high power electric motors and high frequency RF devices.
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. The
properties of SiC and GaN make them excellent materials for extending existing
semiconductor device technology where high power, high temperature or UV, blue
and green wavelengths are important for performance.
SiC AND GaN OVERVIEW
Wide bandgap semiconductors are an emerging class of semiconductors that enable
a variety of capabilities for solid state devices. Two of the most common wide
bandgap semiconductors are SiC and GaN. SiC is most commonly targeted for power
devices and RF devices, while GaN is generally targeted for optoelectronic
applications, as well as higher frequency microwave power devices. SiC makes an
excellent substrate for growing layers of GaN due to its material properties.
For GaN optoelectronic devices, conductive SiC substrates allow the fabrication
of vertical devices (a single contact on top and bottom), as opposed to the use
of insulating sapphire substrates where devices need both diode contacts placed
on the top of the die. This allows GaN-on-SiC LEDs to be smaller in size than
the two top contact devices made on sapphire. For high power GaN RF devices, the
high thermal conductivity of SiC allows for very efficient heat dissipation.
This is important for the high power densities generated in these devices.
SiC has many physical characteristics that make it difficult to produce. For
example, in a typical semiconductor manufacturing process, the semiconductor
material is grown as a single crystal and sliced
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into wafers. The wafers are then polished and chemically etched, coated with
thin crystalline films containing controlled levels of impurities and fabricated
into devices. Because SiC can form many different atomic arrangements and must
be grown at process temperatures above 3,500(degrees) Fahrenheit to achieve our
desired crystal structure, it is difficult to grow large single crystals that
have a homogeneous structure. In addition, the high temperatures required to
grow SiC make the control of impurity levels in SiC crystals and thin films
difficult. "Micropipes", or small diameter holes, may appear in the crystals
during their growth, affecting the electrical integrity of the wafer and
reducing the usability of portions of the wafer for certain applications.
Slicing and polishing SiC wafers is hindered by the intrinsic hardness of the
material. Similarly, its inherent chemical resistance makes SiC a difficult
material to etch.
The characteristics discussed below distinguish SiC and GaN from conventional
silicon and GaAs-based semiconductor materials, resulting in significant
advantages if production hurdles can be overcome.
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to ionize an
electron from the valence band to the conduction band. SiC and GaN are
classified as wide bandgap semiconductor materials, meaning that more energy is
required for ionization. Electronic devices made from these materials can
operate more efficiently and at much higher temperatures than devices made from
other common semiconductor materials. The wider energy bandgap also enables the
generation of shorter wavelength (UV, blue and green) light in optoelectronic
devices.
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 and GaN have much higher breakdown
electric fields than silicon or GaAs. This characteristic allows wide bandgap
devices to operate at much higher voltage levels. Additionally, it allows SiC
power devices to be significantly smaller while carrying the same or greater
power levels than comparable silicon and GaAs-based devices. This same advantage
holds true for SiC and GaN RF power devices.
HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This enables a SiC-based
device to operate at high power levels and still dissipate the excess heat
generated. It also enables efficient heat dissipation when used as a substrate
for GaN-based devices such as RF transistors.
HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC and GaN have "saturated electron
drift velocities" 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 and GaN-based microwave transistors that operate
at RF frequencies with significantly higher power density levels than current
silicon and GaAs-based devices.
ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. As a result, SiC can withstand much higher
electrical pulses and is more radiation-resistant than silicon or GaAs. SiC and
GaN are also extremely resistant to chemical breakdown and can operate in harsh
environments.
THE CREE SOLUTION
Some of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material a technical
challenge to produce. Through our 15 years of development and manufacturing
experience, we have succeeded in overcoming many of the difficulties involved in
processing SiC substrates for commercial use. We believe that our proprietary
process
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techniques and the inherent attributes of both SiC and GaN give our products
significant advantages over competing products for certain electronic
applications. These advantages include:
UV, BLUE AND GREEN LIGHT EMISSION. We produce high efficiency UV, blue and green
LEDs using GaN and other nitrides grown on SiC substrates. Most other
manufacturers of nitride-based LEDs currently use sapphire substrates, other
than Osram Opto Semiconductors GmbH, a subsidiary of Osram GmbH, or Osram, which
has licensed the ability to manufacture SiC-based devices and buys SiC wafers
for use in their manufacturing process, from us. The conductive properties of
SiC enable us to fabricate a single top contact LED chip that is smaller than
the "two top contact" products made by competitors who use sapphire substrates.
Our chips made with SiC substrates can be packaged the same way as red, green
and amber LED chips made from other materials that are widely used in the LED
industry. We believe that the single top contact design of our chip affords our
customers flexibility for certain package types. We are also continuing
development of nitride-based UV laser diodes grown on SiC. The principal
advantages of SiC over sapphire substrate materials for UV laser diodes are the
high thermal conductivity attributes of the material and the ability for the
material to be easily cleaved, providing an excellent surface for laser light
emission.
ENABLING SUBSTRATE PROPERTIES. The inherent attributes of SiC as a substrate
enable researchers to work on developing new optoelectronic, microwave and power
devices that offer significant advantages over competing products and which
could not be produced as effectively on other substrate materials. We
manufacture SiC wafers for both internal use and for sale to external
development programs to further new product development. The majority of our
current production is on two-inch diameter (50 millimeter) material. We also
have released three-inch diameter (75 millimeter) wafers and demonstrated a
four-inch diameter (100 millimeter) prototype wafer.
HIGH POWER RF AND MICROWAVE OPERATION. We have demonstrated SiC RF and microwave
transistors that can operate at much higher voltages than silicon or GaAs
because of SiC's high breakdown electric field, allowing much higher power
operation at high frequencies. Similar advantages exist for microwave devices
made using GaN on SiC substrates, which can also operate at much higher
frequencies than SiC-only devices. In fiscal 2000 we first began shipping sample
quantities of SiC RF devices which have potential applications in wireless
infrastructure systems. We have continued development efforts directed to
improving the performance and reliability of our SiC RF devices which has
increased their attractiveness to wireless system manufacturers. As the
performance of silicon-based LDMOS products continued to improve, we determined
that near term wireless infrastructure power transistors were likely to be
manufactured with silicon-based products rather than our SiC-based devices. As a
result, we acquired the business now comprising Cree Microwave in December 2000
to participate in the RF power transistor market in the near term. We believe
our SiC transistors will likely be more desirable for broadband amplifiers that
can cover the entire DCS/PCS/UMTS frequency band of 1.8-2.2 gigahertz, or GHz.
Additional applications include wide bandwidth military radio and test and
instrumentation equipment. In addition, we continue to develop GaN-based devices
for high frequency wireless infrastructure and other commercial and defense
related applications. We are also pursuing the development of monolithic
microwave integrated circuit, or "MMIC", power amplifiers in both SiC and GaN
for a variety of military applications.
HIGH POWER, HIGH VOLTAGE OPERATION. We are producing small quantities of a
product family of SiC Schottky diodes that have a greater breakdown voltage than
Schottky diodes made from other semiconductor materials currently available. We
believe our Schottky diodes offer inherent system benefits beyond these
competitive products because of the significant reduction of reverse recovery
current at similar breakdown voltages. We believe that our SiC power diodes
operate with significantly lower switching losses than those made with silicon
or GaAs, for the same breakdown voltage. In
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addition, we believe that our SiC power transistors under development operate
with lower resistive losses and lower switching losses than those made with
silicon or GaAs.
PRODUCTS
We operate our business in two segments, the Cree segment, which consists of our
SiC and GaN-based products, and the Cree Microwave segment, which consists of
silicon-based RF power transistor components and modules.
THE CREE SEGMENT:
UV, BLUE AND GREEN LEDs
LEDs are solid-state electronic components used in miniature packages in
everyday applications such as indicator lights on televisions, radios, 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 full-color electronic displays. In 1989 we introduced the first
commercially viable blue LED made using a SiC only design. Subsequently, we have
developed and released several generations of LED products, including UV, blue
and green LEDs made from GaN and related materials on SiC substrates. With the
initial release of our XBright(TM) LEDs in fiscal 2002, we believe we have
introduced the brightest commercially available UV, blue and green product
family of LEDs. Our customers are currently in the qualification stages of
packaging XBright(TM) chips and some have encountered challenges in qualifying
their packaging process. We target a ramp-up to commercial production levels
during the first half of fiscal 2003.
We will continue to work to improve the brightness of our UV, blue and green
chips to achieve higher performance than currently available. Over the next five
to ten years or perhaps longer, we believe these yet to be developed products
could be used to produce white lamps to compete with conventional lighting
products for certain applications. We believe that LEDs made using SiC
substrates offer important benefits over competitive devices using sapphire
substrates including:
- an industry standard vertical chip structure requiring a single wire
bond that permits more efficient LED assembly;
- a smaller area chip size; and
- higher performance in terms of brightness.
Presently, our LED chips are used for backlighting purposes in applications such
as wireless handsets and automotive dashboard lighting. They are also used in
white light products designed for specialty indoor illumination and for the
illumination of outdoor buildings and structures and in landscape lighting. In
addition, they are used in consumer products and office equipment as indicator
lighting, in full color video displays, such as arena replay screens, billboards
and moving message advertising and informational signs and as the green light in
traffic signals. Our standard brightness LED products, offered in blue
wavelengths only, are primarily used in indoor applications, automotive designs
or as indicator lights. Some customers manufacture solid-state LED components
that emit white light using our blue LEDs. Customers are also working to develop
white light components using our UV LEDs. By passing blue or UV LED light
through certain conversion materials such as phosphors, or by using blue in
combination with LEDs of other appropriate colors, white light emission can be
obtained from lamps made with blue or UV LEDs. We currently sell blue LED chips
to customers who produce packaged components that emit white light. Current
commercial applications of white LEDs using Cree's blue
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LEDs include backlighting applications for automobile dashboards and
instrumentation, backlighting for wireless handsets and early general
illumination applications. During fiscal 2002, we received our QS 9000
registration, which signifies that our quality systems met a set of requirements
established by international auto manufacturers.
We believe that our products are well positioned to take advantage of recent
trends in the wireless handset market. Although the global market for wireless
handsets may be flat to declining due to a slow global economy, we believe our
share of this market could increase as a result of changes in backlighting
applications. Handset manufacturers recently have begun to use blue or white
backlighting in new models, rather than traditional yellow-green backlighting
that has been common during the last several years. We believe that our chips
meet the blue and or white lighting characteristics that the market is now
demanding. In addition, we believe that the development of full color displays
for mobile handsets will increase demand for white LEDs in order to maximize the
effectiveness of the full color display.
We are focusing current development efforts on further improving the efficiency
as well as lowering our cost to manufacture our LEDs and improving other
performance characteristics of the devices for certain markets, such as thinner
chips and lower forward voltages. Responding to a market trend towards devices
with a lower forward voltage, we undertook major development initiatives during
fiscal year 2002 as we trailed sapphire-based LEDs in this important area for
new high-volume cell phone applications. The current "two top contact"
sapphire-based devices have certain advantages compared to our single top
contact design in terms of lower forward voltage and thinner chips. We believe
that increased brightness will continue to be necessary to develop new
applications and market opportunities for LEDs, and may eventually lead to
products marketed for commercial lighting applications. LED products represented
58%, 65% and 63% of our revenue for the fiscal years ended June 30, 2002, June
24, 2001 and June 25, 2000, respectively.
MATERIALS PRODUCTS
We manufacture SiC wafers for sale to corporate customers that use the wafers in
manufacturing products for optoelectronic and power device applications.
Corporate, government and university programs also buy wafers for research and
development directed to optoelectronic, microwave and high power devices. Our
SiC wafer products may be sold as a bare wafer or customized by adding epitaxial
films of SiC or GaN materials, depending upon the nature of the customer's
needs. Since the company's inception in 1987, we have worked continuously to
improve the quality of our SiC wafers while also increasing wafer diameter. In
October 1999, we introduced our first three-inch wafer and we have recently
expanded our product line of three-inch wafers, which are better suited for the
manufacture of power devices. We currently sell wafers to Osram and Infineon
Technologies AG, or Infineon, for the production of LED and power products,
respectively.
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to color, hardness and brilliance. We manufacture
SiC crystals in near colorless form for use in gemstone applications. We sell
SiC in bulk crystal form to Charles & Colvard, or C&C; a company founded to
produce and market gemstone products made from SiC crystals. C&C cuts and facets
the SiC crystals to fabricate gemstones targeted at customers who desire
alternative colorless, affordable, high-quality jewelry. Sales of gemstone
crystals have re-emerged as a stronger product line in the second half of fiscal
2002, due to heavier demand from C&C. Future demand for this product is
dependent on C&C's ability to cut, facet and effectively market its gemstone
products. Our SiC wafer products are marketed through executive sales while
materials used for gemstone applications are exclusively sold to C&C. Wafer and
other material products represented 13%, 14% and 26% of our revenue for the
fiscal years ended June 30, 2002, June 24, 2001 and June 25, 2000, respectively.
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POWER DEVICES
In fiscal 2002, we announced the commercial release of the first products in our
planned line of SiC-based power devices. Our initial products are 600-volt
Schottky diodes offered in limited quantities at 1, 4, 6 and 10 amp ratings.
During the first quarter of fiscal 2003, we have released a 20 amp device. We
are marketing these products to manufacturers of power conditioning and power
switching equipment as potential replacements for silicon-based power devices in
certain applications. SiC-based power devices have the potential to handle
significantly higher power densities than existing silicon-based devices and can
operate at significantly higher voltages with superior switching capabilities,
yielding power savings due to higher efficiency. Potential applications include
power factor correction and switch mode power supplies typically used in
telecommunications and computer servers, and heavy industrial uses. Other
applications include industrial motor controls, high frequency power supplies
and medical applications.
Revenue growth from these devices is dependent on the results of customer
evaluations of the Schottky diode device and whether the products are designed
into customer applications. We believe that revenue growth will be slow
initially because our technology is not a "drop in" replacement and is currently
much more expensive than silicon devices. In addition, with the slowdown of the
global economy, we believe many companies have reduced their research and
development budgets, which has impacted our growth. Finally, our Schottky
devices are a new technology, and it will take time to penetrate existing
markets. Power devices represented less than 1% of revenue for the fiscal years
ended June 30, 2002, June 24, 2001 and June 25, 2000.
RF AND MICROWAVE TRANSISTORS
During fiscal year 2002, we offered a new 10-watt transistor product made from
SiC to customers in prototype quantities. We believe that these products can be
used in a variety of power amplifier applications, including wireless
infrastructure, home-based subscriber units, digital broadcast and military
broadband radio applications. Revenue growth from sales of these devices is
dependent on the results of customer evaluations of SiC RF products, further
improvements in device performance, further expansion of our SiC RF product
family, and whether the products are designed into customer applications.
THE CREE MICROWAVE SEGMENT:
RF AND MICROWAVE TRANSISTORS
We believe that silicon bipolar and LDMOS technology is complementary to our SiC
and GaN-based microwave devices. Cree Microwave produces bipolar and LDMOS
devices made from silicon. These products enable us to provide an array of power
amplifier semiconductor devices designed to meet a broad spectrum of the
wireless infrastructure markets now and in the future. Cree Microwave offers
products for use in a range of systems. These systems include Advanced Mobile
Phone Services, or AMPS, Time Division Multiple Access, or TDMA, Code Division
Multiple Access, or CDMA, Global System for Mobile Communications, or GSM,
Universal Mobile Telephone Service, or UMTS and Enhanced Data Rates for GSM
Evolution, or EDGE systems. Cree Microwave is one of only a few major
manufacturers of LDMOS RF devices.
The market for cellular communications services has grown substantially during
the past decade due to decreasing prices for wireless handsets, increasing
competition among service providers and a greater availability of high quality
services. In recent quarters, the cellular communications market has been
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declining due to the global economic slowdown, which has caused carriers to
reduce infrastructure spending. However, we believe that significant long-term
market opportunities exist.
A typical wireless communication system comprises a geographic region containing
a number of cells, each of which contains a base station. The cells are
networked to form a service provider's coverage area. Each base station houses
the equipment that sends telephone calls to and from the switching office of the
local wire line telephone company and transmits and receives calls to the
wireless users within the cell. Base stations may be configured as single
carrier or multi-carrier designs.
Digital systems, which convert voice transmission into bits of electronic
information, enable data transmission among other things. The four dominant
digital transmission modulation formats for cellular networks include GSM, TDMA,
CDMA and EDGE systems and operate in frequency ranges from 900 megahertz, or
MHz, to 2400 MHz. These systems have a call capacity of three to eight times
that of analog networks. The implementation of these digital networks has
resulted in increased demand for network infrastructure equipment. Cree
Microwave is able to produce both bipolar and LDMOS products that are used in
the manufacture of power amplifiers for both analog and digital base stations.
Cree Microwave produces the semiconductor content of a power amplifier, which is
used in a base station to boost the power of a signal so that it can reach a
wireless phone or other device within a designated geography.
During fiscal 2002, we developed an amplifier module that incorporates our
LDMOS-based transistors and is designed to simplify the design and assembly of
power amplifiers using the LDMOS products. We believe that this module product
can deliver a lower system cost to our customer due to less costly packaging, a
smaller design and relative ease of manufacture for our customer.
RF products represented 16% and 11% of our revenue for the fiscal years ended
June 30, 2002 and June 24, 2001, respectively. The Cree Microwave business
segment was acquired from Spectrian in December 2000. The majority of sales from
this segment were to Spectrian during fiscal 2002 and 2001. The loss of or a
decline in sales to this customer would have a material adverse effect on this
segment.
PRODUCTS UNDER DEVELOPMENT
THE CREE SEGMENT:
LEDs WITH HIGHER OUTPUT POWER
Cree Lighting, based in Goleta, California, is engaged in the development of new
LED device technology, with the goal of developing higher efficiency LEDs to
compete with incandescent and fluorescent lighting technology for conventional
lighting markets. During fiscal 2002, we more than doubled the typical
brightness of our LED products with the introduction of our XBright(TM) and
MegaBright(TM) products. In order to compete with incandescent and fluorescent
lighting technology for conventional lighting markets, the brightness of our
products will need to increase significantly over the brightness of our products
available today. We do not anticipate that our products can achieve the
necessary level of brightness in a cost competitive product over the next few
years; however, we believe we can achieve a greater level of brightness to
enable interim illumination applications, such as miniature incandescent
lighting replacements. One such interim step during fiscal 2002 was the
introduction of our XBright(TM) 900 Power Chip LED. At 900 x 900 microns nominal
gross die size, the XBright(TM) Power Chip is significantly larger than industry
standard (300 x 300 microns) LEDs and is the first large area version of our
XBright(TM) chip technology. These chips deliver more than 10 times the light
output at a higher current than our standard XBright(TM) chips and we believe
these high-power LEDs could help
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enable a new range of lighting applications. These chips will require our
customers to develop new packages to support these higher-powered chips. The
targeted application for these devices is the solid state illumination market.
BLUE AND UV LASER DIODES
We continue to focus on the development of blue and UV laser diodes. SiC has
inherent attributes, including its natural cleavability and high thermal
conductivity that make it an excellent substrate material for the development of
such short wavelength laser diodes. The storage capacity of optical disk drives
can be increased significantly by utilizing a laser diode capable of emitting
shorter wavelength light. We have shipped sample UV laser diodes, fabricated
from nitride materials deposited on SiC substrates, which have a shorter
wavelength than that of the red or infrared lasers used in applications today.
We believe that the shorter wavelength of UV light could potentially result in
storage capacity for optical disk drives that is significantly greater than the
capacity permitted by red light. We also believe that UV laser technology may be
used in miniature optical devices for compact sized electronics, such as digital
cameras. We have demonstrated a prototype UV laser with 3 milliwatts of power
and a projected lifetime of 10,000 hours. We believe that this laser meets the
current power requirement of a "read" laser; however, additional development is
required to commercialize this product. We continue to work on developing a
"read/write" UV laser, which will require approximately 30 milliwatts of
continuous wave, or CW, power, and we are targeting our first product to be
released for customer sampling during fiscal 2003. A consortium of DVD
manufacturers is currently creating standards for blue and UV laser devices
named the Blu-Ray Disc format. Once these standards are completed, we believe
that the demand for diodes that meet the standards may increase.
POWER DEVICES
We are developing additional prototype high power devices that we believe have
many potential uses. Such devices could be employed in applications involving
power conditioning as well as power switching. We intend to release higher
voltage Schottky products within the next fiscal year, targeted for motor
control and snubber applications. In fiscal 1999, we entered into a three-year
project with Kansai Electric Power Company, one of the largest power companies
in the world, for the development of SiC-based devices for use in power
transmission networks. This project was completed during fiscal 2002. During
this project we demonstrated record results with a 6 kV MOSFET
(metal-oxide-semiconductor field effect transistor) and a 5.5 kV junction field
effect transistor that had on-resistances that were 1/25th and 1/65th lower,
respectively, of the theoretical limit for an equivalent silicon device.
Additionally, high voltage SiC PIN diodes were demonstrated with blocking
voltages up to 19 kV, a 50% increase over our previous record and almost double
what is commercially available in silicon. We continue to work on higher power
devices such as Schottky and PIN diodes as well as power switches. However, we
are not planning to release PIN diodes or power switches suitable for power
transmission in the near term.
RF AND MICROWAVE DEVICES
We are currently developing additional SiC-based transistors that operate at
radio and microwave frequencies. We believe these devices will have applications
in future generation wireless base stations, solid-state broadcast systems, wide
bandwidth military radio, and radar search and detection equipment. These
SiC-based devices are targeted for frequencies from 30 MHz to 4 GHz. We believe
that future SiC transistors in development, with higher power density than
current silicon and GaAs-based devices, may allow wireless systems to operate
across a wider band and use fewer transistors per base station, resulting in
less complex circuitry, higher linearity, better efficiency and lower cost.
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We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher gain and/or higher frequency applications including
cellular base stations and solid-state radar systems. In December 2001, we
reported CW performance for GaN of 108 watts at 2 GHz, which we believe to be
the highest publicly reported CW power output for a single device at this
frequency. This demonstrates its potential for infrastructure applications. We
developed GaN MMICs that demonstrated 24 watts of power at 16 GHz. This power
level is higher than that achieved with equivalent GaAs-based devices. We do not
anticipate that a commercial device capable of emitting power at this level will
be available in the near term.
THE CREE MICROWAVE SEGMENT:
RF AND MICROWAVE DEVICES
We continue to enhance the capabilities of our silicon-based LDMOS products and
are working towards the release of next generation devices that we believe will
allow for more linearity and increased power and be comparable to the best in
class products of our competitors. We are targeting these products to be
available in fiscal 2003. We are also continuing to develop additional module
devices to meet advanced needs of our customers. The module configuration allows
us to produce more of the circuit for the power transistor and the product is
more competitively priced than our regular LDMOS devices because the module
configuration features a lower cost package compared with the traditional
ceramic package used for discrete devices. We are targeting these products to be
produced in commercial volumes in fiscal 2003. Additionally we are working with
certain customers on advanced modulation products.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS OF CUSTOMERS AND
ASSETS
For financial information about business segments, please see Note 2, "Summary
of Significant Accounting Policies and Other Matters" to our consolidated
financial statements included in Item 8 of this report. For financial
information about the geographical areas of customers, please see Note 2,
"Summary of Significant Accounting Policies and Other Matters" to our
consolidated financial statements included in Item 8 of this report. All of our
long-lived assets are currently maintained in the United States.
GOVERNMENT CONTRACT FUNDING
We derive a portion of our revenue from funding from research contracts with the
U.S. Government. For the fiscal years ended June 30, 2002, June 24, 2001 and
June 25, 2000, government funding represented 12%, 10% and 11% of total revenue,
respectively. These contracts typically cover work performed over several months
up to three years. These contracts may be modified or terminated at the
convenience of the government. Therefore, these programs may be subject to
government budgetary fluctuations. The contracts generally provide that we may
elect to retain title to inventions made in the course of research, with the
government obtaining a nonexclusive license to practice such inventions for
government purposes.
RESEARCH AND DEVELOPMENT
We invest significant resources in research and development aimed at improving
our semiconductor materials and developing new device and production technology.
Our core SiC materials research is directed to improving the quality and
diameter of our SiC substrates. We are also working to improve the quality of
the SiC and nitride epitaxial materials we grow to produce devices and to
improve device
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yields by reducing variability in our processes. These efforts are in addition
to on-going projects focused on brighter LEDs, higher power, higher linearity RF
and microwave devices, UV laser devices and higher power diodes and switches
discussed above.
We spent $51.2 million in fiscal 2002, $38.4 million in fiscal 2001 and $20.0
million in fiscal 2000 for direct expenditures relating to research and
development activities. Off-setting these expenditures were $19.5 million in
fiscal 2002, $19.0 million in fiscal 2001 and $12.7 million in fiscal 2000 of
U.S. Government funding for direct and indirect research and development
expenses. In addition, certain customers have also sponsored research activities
related to the development of new products. Customers contributed $9.0 million
in fiscal 2002, $11.9 million in fiscal 2001 and $5.5 million in fiscal 2000
towards our product research and development activities.
SALES AND MARKETING
We actively market our LED, wafer and power products through targeted
promotions, telemarketing, select advertising and attendance at trade shows. We
have a small direct sales force and senior management actively works with
customers around the world. We believe that this approach is preferable in view
of our current customer base and product mix, particularly since the production
of lamp and display products incorporating LED chips is concentrated among a
relatively small number of LED packaging manufacturers. Additionally, the sales
team has been expanded in fiscal 2002 to include sales offices in Hong Kong and
Japan.
In June 2002, we opened an office in Tokyo, Japan, through our subsidiary Cree
Japan, Inc., to bring our technology and engineering support closer to the
Japanese customer base. In connection with the opening of our new office,
Sumitomo Corporation, or Sumitomo, was named as our strategic partner to
distribute our products in Japan. Sumitomo has exclusive distribution rights in
Japan for our nitride LED chip products and SiC wafer products for a minimum of
three years. Our personnel in Japan will work with and support the sales
activities of the Sumitomo team dedicated to our product line.
We also use sales representatives to market our LED products in Hong Kong,
China, Taiwan and South Korea. However, as a result of the introduction of many
new products during fiscal 2002, we perceived the need for more frequent
interaction with our customers. As a result, we opened a Southeast Asian sales
office in Kowloon, Hong Kong, through our subsidiary Cree Asia-Pacific, Inc., to
facilitate business transactions and act as the liaison between our Asia Pacific
customers and our U.S. corporate office. Territorial responsibilities for the
Cree-Asia Pacific sales office include Hong Kong, China, Taiwan and Malaysia. In
addition, the Hong Kong sales office oversees the day-to-day administration of
our sales agents in Hong Kong and Taiwan as well as assisting our direct
customers in the region.
We sell SiC crystal materials for use in gemstone applications directly to C&C
under an exclusive supply agreement. We are using both direct sales and sales
representative arrangements to market RF products for Cree Microwave, including
a new distributor agreement signed with Arrow Manufacturing in fiscal 2002.
CUSTOMERS
During fiscal 2002, revenues from four customers, Osram, Spectrian, Sumitomo
(which represents sales to several Japanese customers) and the U.S. Government,
each accounted for more than 10% of total revenue. During fiscal 2002, we signed
new supply agreements with Osram and Sumitomo, which extend into fiscal 2003.
Spectrian is a customer of the Cree Microwave segment. During fiscal 2001,
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revenues from three customers, Osram, Sumitomo and Spectrian, each accounted for
more than 10% of total revenue. For the year ended June 25, 2000, revenue from
Osram, Sumitomo, C&C and the U.S. Government 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 and Other
Matters" to our consolidated financial statements included in Item 8 of this
report.
BACKLOG
As of June 30, 2002, we had a backlog believed to be firm of approximately
$138.7 million consisting of approximately $86.9 million of product orders and
$51.8 million under research contracts signed with the U.S. Government, for
which a portion of the contracted funds have not yet been appropriated. This
compares to a firm backlog as of June 24, 2001, of approximately $86.5 million
consisting of approximately $69.9 million of product orders and $16.6 million
under research contracts signed with the U.S. Government, a portion which had
not yet been funded through appropriations. Backlog could be adversely affected
if the U.S. Government exercises its rights to terminate the government
contracts or does not appropriate and allocate all of the funding contemplated
by the contracts. We believe the entire backlog could be filled during fiscal
2003, with the exception of approximately $9.7 million of product orders and
$23.9 million in U.S. Government funded contracts. The reported backlog amounts
include $16.2 million ordered from Spectrian under their supply agreement. If we
are not able to produce LDMOS 8 products that meet qualification specifications,
this amount of revenue may be reduced or may not be realized at all.
MANUFACTURING
Our SiC products are manufactured in a seven-part process, which include: SiC
crystal growth, wafer slicing, polishing, epitaxial deposition, fabrication,
testing and packaging. SiC crystals are grown using a high temperature process
designed to produce uniform crystals in a single crystalline form. Crystals used
for gemstones exit the manufacturing process at this stage. Crystals used for
other products are then sliced into wafers. The wafers are polished and then
processed using our epitaxial deposition processes, which require that we grow
thin layers of SiC, GaN or other materials 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,
power and RF chips are fabricated in a clean room environment. The final step
includes testing and sawing prior to shipment to the customer. Power chips are
then forwarded to a third party where they are assembled into industry standard
packages and returned to us prior to shipment to our customers. SiC RF
transistors are currently packaged and tested in our Durham, North Carolina
facility. However, we believe that this process will be transferred to the Cree
Microwave facility in Sunnyvale, California during fiscal 2003. In manufacturing
our products, we depend substantially on our custom-manufactured equipment and
systems, some of which are manufactured internally and some of which we acquire
from third parties and customize ourselves.
Cree Microwave produces both silicon LDMOS and silicon bipolar junction
transistor, or BJT, structures at its wafer fabrication facility in Sunnyvale,
California. Both product families use silicon wafers that are acquired from
third parties and the devices are fabricated in a clean room environment. The
clean room steps employ multiple stages of photolithography, diffusion, thin
film metal deposition and both wet and dry etch process in the manufacturing
cycle. Finished wafers are electrically tested and may be shipped to customers
at this point. Transistor die from wafers, which continue in the manufacturing
process, are assembled into thermally conductive packages or modules and tested
prior to shipment to customers.
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SOURCES OF RAW MATERIALS
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in our products, including certain key materials and
equipment used in our crystal growth, wafering, polishing, epitaxial deposition,
device fabrication and device assembly processes. We generally purchase these
limited source items pursuant to purchase orders and have limited guaranteed
supply arrangements with our suppliers. In addition, the availability of these
materials, components and equipment to us is dependent in part on our ability to
provide our suppliers with accurate forecasts of our future requirements. We
endeavor to maintain ongoing communication with our suppliers to guard against
interruptions in supply and, to date, generally have been able to obtain
adequate supplies in a timely manner from our existing sources. However, any
interruption in the supply of these key materials, components or equipment could
have a significant adverse effect on our operations.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and substantial foreign competition.
We believe that our Cree segment currently enjoys a favorable position in the
existing markets for SiC-based products and materials. We also believe that our
Cree Microwave segment can become competitive in the market for silicon-based
LDMOS devices if it succeeds in qualifying its most recently introduced LDMOS
devices for volume production. However, we face actual and potential competition
from a number of established domestic and international compound semiconductor
companies. Many of these companies have greater engineering, manufacturing,
marketing and financial resources than we have.
Our primary competition for our optoelectronic products comes from companies
that manufacture and or sell nitride based LED chips. We consider Nichia
Corporation, or Nichia, Toyoda Gosei Co. Ltd., or Toyoda, and Lumileds Lighting
LLC, a joint venture between Agilent Technologies and Philips Lighting to be our
primary competitors. These companies currently market LED products made using
nitride materials on sapphire substrates, and Nichia markets short wavelength
nitride-based laser diodes. In addition, American Xtal Technology, Epistar,
Arima, UEC and other Asian based companies in recent years have begun production
of UV, blue and green LEDs, all on sapphire substrates. We attempt to closely
monitor the progress of Taiwanese competitors. We believe that these new
competitors have had some success in securing new business over the last few
quarters and could potentially become significant competitors in the future.
Historically, some of our existing competitors have been more successful in the
market for outdoor display applications because, prior to the release of our
MegaBright(TM) and XBright(TM) products, some sapphire devices were brighter
than our LEDs. We believe our new MegaBright(TM) and XBright(TM) devices will
enable us to compete successfully in this market.
We believe our approach to manufacturing UV; blue and green LEDs using SiC
substrates enables us to offer a cost-effective chip design. Our customers'
desired product attributes for nitride based LEDs are generally price and the
brightness of the devices for the intended applications. At times other factors
such as size or forward voltage of the device are also competitive factors.
Osram, which licensed certain LED technology from us in 1995, is currently
producing LEDs using nitride materials on SiC substrates. Shin-Etsu Handotai Co.
Ltd. also licensed certain LED technology from us in 1996 but never began
commercial production under this license.
The market for SiC wafers also is becoming more competitive, as other companies
in recent years have begun to offer SiC wafer products or announced plans to do
so, including Sterling Semiconductors, II-VI, Sixon and other small
manufacturers. To our knowledge, none of these competitors are currently
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offering SiC wafers for use in device production, as their materials are
generally not considered to have production level quality. Our power devices,
which are currently available in limited quantities, compete with similar
devices offered by Infineon.
The markets served by Cree Microwave's LDMOS and bipolar products are
competitive. Motorola Incorporated, or Motorola, Infineon, which recently
acquired LDMOS capabilities from Telefonaktiebolaget LM Ericsson, and Royal
Philips Electronic NV, or Phillips, currently manufacture competing products.
Currently, we believe Motorola dominates the marketplace with over 80% market
share due to superior performance and pricing. Cree Microwave is targeting to
release a new line of improved LDMOS products during the first quarter of fiscal
2003 that is intended to be comparable with the performance of Motorola parts at
a competitive price.
PATENTS AND PROPRIETARY RIGHTS
We seek to protect our proprietary technology by applying for patents where
appropriate and in other cases by preserving the technology and related know-how
and information as trade secrets. We have also from time to time acquired,
through license grants or assignments, rights to patents on inventions
originally developed by others. At June 30, 2002, we owned or held exclusive
rights licensed under a total of 133 issued U.S. patents, subject in some cases
to nonexclusive license rights held by third parties. These patents expire
between 2007 and 2020. Two of these patents are jointly owned with a third
party. Twenty-six of these patents relate primarily to our Cree Microwave
segment. In addition, we own or hold exclusive license rights under
corresponding patents and patent applications in various foreign countries.
Among the patent licenses we hold are exclusive licenses granted by North
Carolina State University, or NCSU, to U.S. and corresponding foreign patents
and patent applications that relate to SiC materials and device technology and
to GaN growth technology. These licenses include rights under patents and patent
applications relating to processes for growing single crystal SiC and low defect
GaN materials. The licenses are worldwide, exclusive licenses to manufacture,
use and sell products and processes covered by the claims of patents issued on
applications filed by NCSU relating to the licensed inventions. The U.S.
Government holds a non-exclusive license to practice certain of the inventions
for government purposes. The licenses relating to the growth of bulk single
crystal SiC and to other SiC materials and device technology are fully-paid,
while the licenses relating to growth of low defect GaN materials require us to
pay NCSU royalties on sales of products made using the licensed processes.
The patents we have licensed from NCSU relating to bulk SiC growth expire
beginning in 2007, and we may face increased competition in the market for SiC
materials as these patents expire. In addition, in the event our licenses to the
U.S. patents owned by NCSU relating to SiC growth were to be terminated under
the terms of our license agreement, we could potentially be enjoined from
practicing the patented process. In that event the business of our entire Cree
segment could be disrupted since the segment is critically dependent on our
ability to manufacture bulk single crystal SiC material. Similarly, if our
license to the patents relating to growth of low defect GaN materials were to be
terminated, it could have a material adverse effect on our ability to produce
GaN-based laser diodes or other products manufactured using the patented
process.
We have also entered into license agreements with the licensing agencies of
other universities, and with other companies, under which we have obtained
exclusive or non-exclusive rights to practice inventions claimed in various
patents and applications issued or pending in the U.S. and other foreign
countries. We do not believe the financial obligations under these agreements,
or the loss of the licensed rights under any of these agreements, would have a
material adverse effect on our business, financial condition or
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results of operation. One of these license agreements includes license rights
granted to our Cree Lighting subsidiary by the Trustees of Boston University, or
Boston University, under certain U.S. patents and corresponding foreign patents
and patent applications which relate to the manufacture of certain GaN-based
structures on sapphire and other substrates. The license agreement with Boston
University grants Cree Lighting an exclusive, worldwide royalty-bearing license
under these patents and patent applications, subject to royalty payments and
other obligations under the license agreement. As described in Item 3 "Legal
Proceedings", at page 27, at June 30, 2002, Cree Lighting and Boston University
are parties to pending litigation in which they have alleged that Nichia and its
subsidiary, Nichia America Corporation, are infringing one of the licensed
patents. Termination of the license to this patent would end Cree Lighting's
right to assert the patent against future infringements.
For proprietary technology which is not patented or otherwise published, we seek
to protect the technology and related know-how and information as trade secrets
and to maintain it in confidence through appropriate non-disclosure agreements
with employees and others to whom the information is disclosed. There can be no
assurance that these agreements will provide meaningful protection against
unauthorized disclosure or use of our confidential information or that our
proprietary technology and know-how will not otherwise become known or
independently discovered by others. We also rely upon other intellectual
property rights such as trademarks and copyright where appropriate. We have
registered "Cree" and the Cree logo as a trademark for certain products in the
U.S. We have also applied for registration of several trademarks for our
products in the U.S. and other countries.
Because of rapid technological developments in the semiconductor industry, the
intellectual property position of any semiconductor materials or device
manufacturer, including Cree is subject to uncertainties and may involve complex
legal and factual issues. There can be no assurance that patents will be issued
on any of the pending applications owned or licensed to us or that claims
allowed in any patents issued or licensed to us will not be contested or
invalidated. There is likewise no assurance that patent rights owned or
exclusively licensed to us will provide significant commercial protection since
issuance of a patent does not prevent other companies from using alternative,
non-infringing technology. Further, we earn a material amount of our revenues in
overseas markets. While we hold and have applied for patent protection for
certain of our technologies in these markets, there can be no assurance that we
will obtain protection in all commercially significant foreign markets or that
our intellectual property rights will provide adequate protection in all such
markets.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. As of June 30, 2002, we were
parties to complex intellectual property litigation in the United States and
Japan with one of our competitors in the LED business, as described in Item 3
"Legal Proceedings", at page 27. We may become parties to other litigation in
the future to enforce our intellectual property rights or to defend against
claims of infringement. Such litigation can be protracted and costly and divert
the attention of key personnel. There can be no assurance that third parties
will not attempt to assert infringement claims against us with respect to our
current or future products. We from time to time receive correspondence
asserting that our products or processes are or may be infringing patents or
other intellectual property rights of others. Our practice is to investigate
such claims to determine whether the assertions have merit and, if so, we take
appropriate steps to seek to obtain a license or to avoid the infringement.
However, we cannot predict whether past or future assertions of infringement may
result in litigation or the extent to which such assertions may require us to
seek a license under the rights asserted or whether a license would be available
or available on acceptable terms. Likewise, we cannot predict the occurrence of
future assertions of infringement that may prevent us from selling products,
result in litigation or require us to pay damage awards.
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ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state and local provisions
enacted or adopted regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. These include statutory
and regulatory provisions under which we are responsible for the management of
hazardous materials we use and the disposition of hazardous wastes resulting
from our manufacturing processes. Failure to comply with such provisions,
whether intentional or inadvertent, could result in fines and other liabilities
to the government or third parties, injunctions requiring us to suspend or
curtail operations or other remedies, and could have a material adverse effect
on our business.
EMPLOYEES
As of June 30, 2002, we employed 893 people, including 678 in manufacturing
operations, 146 in research and development, and 69 in sales and general
administration. None of our employees are represented by a labor union or
subject to collective bargaining agreements.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
Described below are various risks and uncertainties that may affect our
business. These risks and uncertainties are not the only ones we face.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general may also affect our business. If any of the
risks described below actually occurs, our business, financial condition or
results of future operations could be materially and adversely affected.
Our operating results and margins may fluctuate significantly.
Although we experienced significant revenue and earnings growth in past years,
we may not be able to sustain such growth or maintain our margins, and we may
experience significant fluctuations in our revenue, earnings and margins in the
future. For example, historically, the prices of our LEDs have declined based on
market trends. We have attempted to maintain our margins by constantly
developing improved or new products, which command higher prices or lower the
cost of LEDs. If we are unable to do so, our margins will decline. Our operating
results and margins may vary significantly in the future due to many factors,
including the following:
- our ability to develop, manufacture and deliver products in a timely
and cost-effective manner;
- variations in the amount of usable product produced during
manufacturing (our "yield");
- our ability to improve yields and reduce costs in order to allow lower
product pricing without margin reductions;
- our ability to ramp up production for our new LED products;
- our ability to produce higher brightness and more efficient LED
products that satisfy customer design requirements;
- our ability to develop new products that have specifications which
meet the evolving needs of our customers, including smaller and
thinner chips with lower forward voltage;
- our ability to complete customer product qualifications for our LDMOS
8 products and ramp up production of those products;
- changes in demand for our products and our customers' products;
- changes in competitive landscape such as high volume and low pricing
from Asian competitors;
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- declining average sales prices for our products;
- changes in the mix of products we sell;
- changes in manufacturing capacity and variations in the utilization of
that capacity; and
- damage to our manufacturing facility resulting from fire, flood, or
otherwise as we only have one site for SiC production.
These or other factors could adversely affect our future operating results and
margins. If our future operating results or margins are below the expectations
of stock market analysts or our investors, our stock price may decline.
If we experience poor production yields, our margins could decline and our
operating results may suffer.
Our SiC material products and our LED, power and RF device products are
manufactured using technologies that are highly complex. We manufacture our SiC
wafer products from bulk SiC crystals, and we use these SiC wafers to
manufacture our LED products and our SiC-based RF and power semiconductors. Our
Cree Microwave subsidiary manufactures its RF semiconductors on silicon wafers
purchased from others. During our manufacturing process, each wafer is processed
to contain numerous "die," which are the individual semiconductor devices, and
the RF power devices are further processed by incorporating them into a package
for sale as a packaged component. The number of usable crystals, wafers, die and
packaged components that result from our production processes can fluctuate as a
result of many factors, including but not limited to the following:
- impurities in the materials used;
- contamination of the manufacturing environment;
- equipment failure, power outages or variations in the manufacturing
process;
- losses from broken wafers or human errors; and
- defects in packaging.
We refer to the proportion of usable product produced at each manufacturing step
relative to the gross number that could be constructed from the materials used
as our manufacturing "yield." Since many of our manufacturing costs are fixed,
if our yields decrease, our margins could decline and our operating results
would be adversely affected. 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. In some instances, we may
offer products for future delivery at prices based on planned yield
improvements. Reduced yields or failure to achieve planned yield improvements
could significantly affect our future margins and operating results.
Our business and our ability to produce our products may be impaired by claims
we infringe intellectual property of others.
Vigorous protection and pursuit of intellectual property rights characterize the
semiconductor industry. These traits have resulted in significant and often
protracted and expensive litigation. Litigation to determine the validity of
patents or claims by third parties of infringement of patents or other
intellectual property rights could result in significant expense and divert the
efforts of our technical personnel and management, even if the litigation
results in a determination favorable to us. In the event of an adverse result in
such litigation, we could be required to:
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- pay substantial damages;
- indemnify our customers;
- stop the manufacture, use and sale of products found to be infringing;
- discontinue the use of processes found to be infringing;
- expend significant resources to develop non-infringing products and
processes; and/or
- obtain a license to use third party technology.
Where we consider it necessary or desirable, we may seek licenses under patents
or other intellectual property rights. However, we cannot be certain that
licenses will be available or that we would find the terms of licenses offered
acceptable or commercially reasonable. Failure to obtain a necessary license
could cause us to incur substantial liabilities and costs and to suspend the
manufacture of products. In addition, if adverse results in litigation made it
necessary for us to seek a license or to develop non-infringing products or
processes, there is no assurance we would be successful in developing such
products or processes or in negotiating licenses upon reasonable terms or at
all. Our results of operations, financial condition and business could be harmed
if such problems were not resolved in a timely manner.
Our distributor in Japan is presently a party to patent litigation in Japan
brought by Nichia, in which the plaintiff claims that certain of our LED
products infringe Japanese patents it owns. The complaints in the proceedings
seek injunctive relief that would prohibit our distributor from further sales of
these products in Japan. The district court ruled in our favor in both lawsuits,
but Nichia has appealed these rulings. An adverse result in either of these
cases would impair our ability to sell the particular LED products at issue in
Japan and could cause customers not to purchase other LED products from us in
Japan and elsewhere. Subject to contractual limitations, we have an obligation
to defend and indemnify our distributor for patent infringement claims.
We have also initiated patent infringement litigation in the United States
District Court for the Eastern District of North Carolina against Nichia and one
of its subsidiaries, asserting patent infringement with respect to certain
Nichia nitride-based semiconductor products, including laser diode products.
Nichia has responded with counterclaims alleging, among other things, patent
infringement claims against us based on four U.S. patents directed to nitride
semiconductor technology. In addition, Nichia alleges trade secret
misappropriation and related claims against Cree Lighting and a former Nichia
researcher who is now employed by Cree Lighting on a part-time basis and Cree.
The court has directed that the claims against Cree Lighting be transferred to
the United States District Court for the Central District of California. The
court has orally granted our motion for summary judgment in which we requested
dismissal of Nichia's trade secret and related claims against Cree. An adverse
result under Nichia's patent infringement counterclaims, which remain in the
case, may impair our ability to sell our LED and laser diode products and could
include a substantial damage award against us.
We also have been named as a defendant to a counterclaim of Nichia in a lawsuit
pending in the U.S. District Court for the Eastern District of Pennsylvania. The
complaint in the underlying action, which was brought by Rohm Co., Ltd., or Rohm
against Nichia Corporation and Nichia America Corporation, alleges that Nichia
is infringing certain U.S. patents owned by Rohm. Nichia's counterclaim alleges
that Rohm and we violated antitrust laws by conspiring to exclude Nichia from
the U.S. market for high brightness LEDs. The counterclaim seeks actual and
treble damages, attorneys' fees and court costs. We have moved to dismiss the
counterclaim for lack of personal jurisdiction.
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Our Cree Lighting subsidiary has also initiated litigation, now pending in the
United States District Court for the Eastern District of North Carolina against
Nichia and one of its subsidiaries asserting patent infringement with respect to
gallium nitride-based semiconductor technology useful in manufacturing certain
LEDs and laser diode devices. The lawsuit seeks damages and an injunction
against infringement.
We believe the claims asserted against our products in the Japanese cases and
the claims asserted against us in the U.S. cases are without merit, and we
intend to vigorously defend against the charges. However, we cannot be certain
that we will be successful, and litigation may require us to spend a substantial
amount of time and money and could distract management from our day-to-day
operations. Litigation costs to date in these cases have been substantial, and
variability in these costs could adversely affect our financial results. If any
of these cases were decided against us, the result would have a material adverse
effect on our operations and financial condition.
There are limitations on our ability to protect our intellectual property.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by NCSU, Boston University and others. The
licensed patents include patents relating to the SiC crystal growth process that
is central to our SiC materials and device business. 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. However, we cannot be
sure that patents will be issued on such applications or that our existing or
future patents will not be successfully contested by third parties. Also, since
issuance of a valid patent does not prevent other companies from using
alternative, non-infringing technology, we cannot be sure that any of our
patents (or patents issued to others and licensed to us) will provide
significant commercial protection.
In addition to patent protection, we also rely on trade secrets and other
non-patented proprietary information relating to our product development and
manufacturing activities. We try to protect this information through appropriate
efforts to maintain its secrecy, including requiring employees and third parties
to sign confidentiality agreements. We cannot be sure that these efforts will be
successful or that the confidentiality agreements will not be breached. We also
can not be sure that we would have adequate remedies for any breach of such
agreements or other misappropriation of our trade secrets, or that our trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
Where necessary, we may initiate litigation to enforce our patent or other
intellectual property rights, but there is no assurance that we will be
successful in any such litigation. Moreover, litigation may require us to spend
a substantial amount of time and money and could distract management from our
day-to-day operations.
If we are unable to produce adequate quantities of our MegaBright(TM) and
XBright(TM) LED products and improve our yields, our operating results may
suffer.
We believe that achieving higher volume production and lower production costs
for our MegaBright(TM) and XBright(TM) LED products will be important to our
future operating results. We must reduce costs of these products to avoid margin
reductions from the lower selling prices we may offer due to our competitive
environment and/or to satisfy prior contractual commitments. Achieving greater
volumes and lower costs requires improved production yields for these products.
We recently redesigned our XBright(TM) LED product to address certain
difficulties in packaging the devices identified by some customers following the
introduction of the product, and we are planning to manufacture the redesigned
products in
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volume. We may encounter manufacturing difficulties as we ramp up our capacity
to make these products. Our failure to produce adequate quantities and improve
the yields of these products could have a material adverse effect on our
business, results of operations and financial condition. In addition, our
customers may encounter difficulties with their manufacturing processes using
our XBright(TM) devices, which could increase product returns and impact
customer demand, each of which would have a material adverse effect on our
business, results of operations and financial condition.
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 larger high
quality substrates and epitaxy, high power RF and microwave devices, power
devices, blue laser diodes and higher brightness LED products. The successful
development and introduction of these products depends on a number of factors,
including the following:
- achievement of technology breakthroughs required to make commercially
viable devices;
- the accuracy of our predictions of market requirements and evolving
standards;
- acceptance of our new product designs;
- the availability of qualified development personnel;
- our timely completion of product designs and development;
- our ability to develop repeatable processes to manufacture new
products in sufficient quantities for commercial sales;
- our customers' ability to develop applications incorporating our
products; and
- 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 face risks of reduced revenue under our contract with Spectrian if we cannot
complete product qualification on a timely basis or ramp up production of our
LDMOS 8 products.
Revenues of our Cree Microwave segment are dependent on our amended Supply
Agreement with Spectrian. If we are unable to complete the full product
qualification process and ramp up production of our recently released LDMOS 8
products adequately, Spectrian may reduce the amount it purchases during the
applicable quarter under the agreement, subject to the satisfaction of certain
conditions. Consequently, our results of operations could be adversely affected
by further delays in qualifying our LDMOS 8 products. In addition, if we are
unable to supply other products that meet or exceed the specifications of
certain competitive parts designated by Spectrian, Spectrian may purchase those
products from other vendors. In that case, the purchased quantities will be
deducted from the minimum quantities required to be purchased from us under the
Supply Agreement. The resulting reduction in revenue could have an adverse
effect on our results of operations.
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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. For example, for fiscal 2002 our top five
customers (excluding government contracts and including Sumitomo, which
represents several Japanese customers) accounted for 64% 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 limit or 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.
When customers provide only limited advance notice of firm orders, our business
and results of operations may be adversely affected by changes in customer
demand.
We sell to our largest LED customer based on a rolling forecast of which only a
limited period reflects firm orders. Any change in this customer's demand or
forecast could have a material adverse impact on our business as the timing and
quantities of our production may not match demand or our overall demand may
decline. For example, we may be left with additional inventory on hand or we may
not have sufficient capacity to satisfy all of our contractual commitments,
which could have adverse consequences under our existing contracts.
Recently, we have experienced a trend towards smaller customers gaining design
wins from our larger customers for finished products incorporating our LEDs.
While in the short term, this trend may lead to increased sales to smaller
customers and an increase in the portion of our revenue that they represent, the
long term effects of this trend are uncertain. In addition, smaller customers
typically do not commit up front to purchase a specified volume over a long
period of time, which reduces our ability to predict and maintain a steady
stream of orders and revenue as sales to smaller customers increase as a
percentage of revenue.
The markets in which we operate are highly competitive.
The markets for our LED, laser and RF and microwave power semiconductor products
are highly competitive. New firms have begun offering UV, blue and green LEDs.
In the RF power semiconductor field, the products manufactured by Cree Microwave
compete with products offered by substantially larger competitors which have
dominated the market to date based on product quality and pricing. The market
for SiC wafers is also becoming competitive as other firms have in recent years
begun offering SiC wafer products or announced plans to do so. We also expect
significant competition for products we are currently developing, such as those
for use in microwave communications and power switching.
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. Or
competitors could invent disruptive technology that may make our products
obsolete. Any of these developments could have an adverse effect on our
business, results of operations and financial condition.
We face significant challenges managing our growth.
We have experienced a period of significant growth that has challenged our
management and other resources. We have grown from 248 employees on June 28,
1998 to 893 employees on June 30, 2002 and from revenues of $44.0 million for
the fiscal year ended June 28, 1998 to $155.4 million for the fiscal year ended
June 30, 2002. To manage our growth effectively, we must continue to:
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- implement and improve operating systems, which are effective and
efficient;
- maintain adequate manufacturing facilities and equipment to meet
customer demand;
- improve the skills and capabilities of our current management team;
- add experienced senior level managers; and
- attract and retain qualified people with experience in engineering,
design and technical marketing support.
We will spend substantial amounts of money in supporting our growth and may have
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development, and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business operating results and financial condition could be
adversely affected.
Performance of our investments in other companies could negatively affect our
financial condition.
From time to time, we have made investments in public and private companies that
engage in complementary businesses. Should the value of these investments
decline, the related write-down in value could have a material adverse effect on
our financial condition as reflected in our balance sheets. In addition, if the
decline in value is determined to be "other than temporary", the related
write-down could have a material adverse effect on our reported net income. For
example, in the fourth quarter of fiscal 2002 we recorded a non-operating charge
of $30.1 million (pre-tax) relating to the declines in the value of equity
investments determined to be "other than temporary" as a result of continued
depressed market conditions. Each of these investments is subject to the risks
inherent in the business of the company in which we have invested and to trends
affecting the equity markets as a whole. Our private company investments are
subject to additional risks relating to the limitations on transferability of
our interests due to the lack of a public market and to other transfer
restrictions. Our public company investments are subject to market risks and
also can be subject to contractual limitations on transferability. As a result,
we may not be able to reduce the size of our positions or liquidate our
investments when we deem appropriate to limit our downside risk.
Our operating results could be adversely affected if we encounter difficulty
transitioning production to a larger wafer size.
We are in the process of gradually shifting production of some products from
two-inch wafers, to two and one quarter and three-inch wafers. We must first
qualify our production processes on systems designed to accommodate the larger
wafer size, and some of our existing production equipment must be refitted for
the larger wafer size. Delays in this process could have an adverse effect on
our business. In addition, in the past we have experienced lower yields for a
period of time following a transition to a larger wafer size until use of the
larger wafer is fully integrated in production and we begin to achieve
production efficiency. We anticipate that we will experience similar temporary
yield reductions during the transition to the two and one quarter and three-inch
wafers, and we have factored this into our plan for production capacity. If this
transition phase takes longer than we expect or if we are unable to attain
expected yield improvements, our operating results may be adversely affected.
We rely on a few key suppliers.
-24-
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our 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 operations could be interrupted or hampered
significantly.
If government agencies or other customers discontinue or curtail their funding
for our research and development programs our business may suffer.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. Government contracts are
subject to the risk that the government agency may not appropriate and allocate
all funding contemplated by the contract. In addition, our government contracts
generally permit the contracting authority to terminate the contracts for the
convenience of the government, and the full value of the contracts would not be
realized if they are prematurely terminated. If government and customer funding
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.
If our products fail to perform or meet customer requirements, we could incur
significant additional costs.
The manufacture of our products involves highly complex processes. Our customers
specify quality, performance and reliability standards that we must meet. If our
products do not meet these standards, we may be required to replace or rework
the products. In some cases our products may contain undetected defects or flaws
that only become evident after shipment. We have experienced product quality,
performance or reliability problems from time to time. Defects or failures may
occur in the future. If failures or defects occur, we could:
- lose revenue;
- incur increased costs, such as warranty expense and costs associated
with customer support;
- experience delays, cancellations or rescheduling of orders for our
products;
- experience increased product returns;
- write-down existing inventory; or
- experience product returns.
We are subject to risks from international sales.
Sales to customers located outside the U.S. accounted for about 65%, 69% and 69%
of our revenue in fiscal 2002, 2001 and 2000, 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, trading restrictions, tariffs, trade
barriers and taxes. Also, U.S. Government export controls could restrict or
prohibit the exportation of products with defense 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, if we experience substantial changes in the
U.S. dollar currency exchange as compared to the Japanese yen, our sales
opportunities may be reduced as our primary competitors may offer more favorable
pricing. 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.
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If we fail to integrate acquisitions successfully, our business will be harmed.
We completed two strategic acquisitions during calendar year 2000. We will
continue to evaluate strategic opportunities available to us, and we may pursue
other product, technology or business acquisitions. Such acquisitions can
present many types of risks, including the following:
- we may fail to successfully integrate the operations and personnel of
newly acquired companies with our existing business;
- we may experience difficulties integrating our financial and operating
systems;
- our ongoing business may be disrupted or receive insufficient
management attention;
- we may not cost-effectively and rapidly incorporate acquired
technology;
- we may not be able to recognize cost savings or other financial
benefits we anticipated;
- acquired businesses may fail to meet our performance expectations;
- we may lose key employees of acquired businesses;
- we may not be able to retain the existing customers of newly acquired
operations;
- our corporate culture may clash with that of the acquired businesses;
and
- we may incur undiscovered liabilities associated with acquired
businesses that are not covered by indemnification we may obtain from
the seller.
We may not successfully address these risks or other problems that arise from
our recent or future acquisitions. In addition, in connection with future
acquisitions, we may issue equity securities that could dilute the percentage
ownership of our existing shareholders, we may incur debt and we may be required
to amortize expenses related to intangible assets that may negatively affect our
results or operations.
We depend on design trends in mobile phones to drive a large percentage of LED
demand.
Our results of operations could be adversely affected by reduced customer demand
for LED products for use in wireless handsets. We derive a significant portion
of our LED product revenue from sales to customers who use our LED products in
wireless handsets, and customer demand is dependent upon trends in the wireless
market. We believe the growth for the global market for wireless handsets has
slowed and may be declining. As a result, our ability to maintain or increase
our LED product revenue depends on the number of models into which customers
design our products. Also, design cycles in the handset industry are short, and
demand is volatile, which makes production planning difficult to forecast.
Item 2. Properties
We own our facilities in Durham, North Carolina where the business for our Cree
segment is conducted. In November 1997, we acquired our present manufacturing
facility, a 30-acre industrial site in Durham, North Carolina, which originally
consisted of a 139,000 square foot production building and 33,000 square feet of
service and warehouse buildings. In fiscal 2000 and fiscal 2002, we completed
two expansions that increased the size of these facilities by 42,000 square feet
and 147,000 square feet, respectively. During fiscal 1999 we purchased
approximately 80 acres of undeveloped land near our production facilities for
potential expansion purposes. We have installed a small electrical substation on
this site for use in transmitting power to our production facilities but have
not otherwise developed the
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land. During fiscal 2000, we purchased a 120,000 square foot building on 17.5
acres of land near our existing production site. We subsequently upfitted
approximately two-thirds of the building for use as meeting rooms and
administrative offices and as an employee services center.
We lease a separate building in Durham, North Carolina that was recently used by
our Cree segment for production of SiC-based RF and microwave devices and
related research and development. We have relocated these operations to our main
production site and no longer use the space. This lease expires in September
2002 and will not be renewed.
We lease through our Cree Japan subsidiary, a sales and marketing office in
Tokyo, Japan that is used to support our Japan distributor's sales of Cree
segment products. This three-year lease agreement expires in June 2005. We also
contract, through our Cree Asia-Pacific subsidiary, office space in Kowloon,
Hong Kong that is used in our Cree segment to provide sales and marketing
support in Southeast Asia. The agreement for use of this space expires in
February 2003 unless renewed by the parties.
The Cree Microwave facility is approximately 49,600 square feet of
administrative and manufacturing space located in Sunnyvale, California. We
sublease the premises from Spectrian through our Cree Microwave subsidiary,
which entered into the sublease agreement with Spectrian in December 2000 in
connection with our acquisition of the Cree Microwave business. Spectrian leased
the facility from its landlord in November 1996 for a 15-year term under lease
terms that included three options to extend the lease for up to an additional
fifteen years. Under the sublease between Cree Microwave and Spectrian, if
Spectrian exercises its option to extend the term of its master lease with its
landlord, Cree Microwave may also exercise an option to extend the sublease. We
have guaranteed the obligations of our subsidiary under the sublease.
Cree Lighting leases two facilities in Goleta, California for our Cree segment.
One facility, which covers 35,840 square feet, has a five-year lease that was
signed in August 2000 with an option to extend the lease for another five-year
period. This facility is used for research and development and administration.
Cree has guaranteed the obligations of its subsidiary under this lease. Cree
Lighting has sub-leased 10,217 square feet of this facility to a third party.
This two-year sub-lease agreement was entered into in October 2000 and was
terminated in July 2002. A new two-year sub-lease for 10,217 square feet with a
new tenant was entered into in July 2002 and will expire in July 2004. Cree
Lighting also leases an additional facility on a month to month basis that is
used for research and development. We have given notice to terminate this lease
in August 2002.
Item 3. Legal Proceedings
Foreign Legal Proceedings
Nichia Corporation v. Sumitomo Corporation: In December 1999, one of our
distributors, Sumitomo, was named in a lawsuit filed by Nichia in Japan in the
Tokyo District Court. The complaint in the proceeding was directed to our
standard brightness LED products and alleged that these products infringe a
Japanese patent owned by Nichia, Japanese Patent No. 2,918,139. The suit sought
a permanent injunction against further distribution of the products in Japan. We
intervened in the proceeding and filed a response denying the allegations of
infringement. In May 2001 the Tokyo District Court ruled in favor of Cree and
Sumitomo, finding no infringement, and dismissed the complaint. Nichia has
appealed the ruling to the Tokyo High Court.
In April 2000, Nichia commenced two additional lawsuits against Sumitomo in
Tokyo District Court in which it alleged that our high brightness LED products
infringe a second Japanese patent owned by
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Nichia, Japanese Patent No. 2,778,405. The suits sought preliminary and
permanent injunctions against further distribution of the products in Japan. We
intervened in the proceeding and filed responses denying the allegations of
infringement. In October 2001, following an adverse ruling in a separate case on
the validity of the patent, Nichia dismissed the complaint seeking a preliminary
injunction, leaving the complaint for a permanent injunction pending. In
December 2001 the Tokyo District Court ruled in favor of Cree and Sumitomo in
the remaining lawsuit, finding no infringement, and dismissed the complaint.
Nichia has appealed the ruling to the Tokyo High Court.
Rohm Co., Ltd. v Nichia Corporation: In July 2001, Rohm Co., Ltd., or Rohm,
filed a complaint against Nichia in the Tokyo District Court. Rohm seeks a
ruling that sales of its products that incorporate our standard brightness LED
products do not infringe the patent that was the subject of Nichia's December
1999 lawsuit, Japanese Patent No. 2,918,139. We intervened in this proceeding in
December 2001 to assist in showing that our standard brightness LED products do
not infringe the patent. The case remains pending before the district court.
Domestic Legal Proceedings
North Carolina State University and Cree, Inc. v. Nichia Corporation and others:
On September 22, 2000, NCSU and Cree commenced a patent infringement lawsuit
against Nichia and its subsidiary, Nichia America Corporation, or Nichia
America, in the U.S. District Court for the Eastern District of North Carolina.
The complaint seeks enforcement of a patent, U.S. Patent No. 6,051,849, relating
to GaN-based semiconductors manufactured using lateral epitaxial overgrowth
technology, which permits the growth of high quality GaN-based materials useful
in manufacturing certain laser diodes and other devices. The patent was issued
to NCSU in April 2000 and is licensed to Cree on an exclusive basis under an
agreement executed in June 1999.
In their answer to the complaint, Nichia and Nichia America denied infringement
and asserted a counterclaim seeking a declaratory judgment that the subject
patent is invalid and not infringed. Nichia further alleged in its counterclaim
that we are infringing four of its U.S. patents relating to nitride
semiconductor technology, U.S. Patent Nos. 5,306,662; 5,578,839; 5,747,832; and
5,767,581. Nichia also asserted misappropriation of trade secrets and related
claims against Cree and a former Nichia researcher now employed by one of our
subsidiaries, Cree Lighting, on a part-time basis. In addition, as subsequently
amended, Nichia's counterclaim named Cree Lighting as a counterclaim defendant
on trade secret and related claims and asserted claims under the Computer Fraud
and Abuse Act against the Cree Lighting employee.
We have replied to the patent infringement claims of Nichia's amended
counterclaim, denying any infringement and asserting a claim seeking a
declaratory judgement that the four Nichia patents at issue are invalid,
unenforceable and not infringed. The Cree Lighting employee and we have also
replied to the trade secret and related claims in the amended counterclaim,
denying any liability. We included with our reply a claim for damages in which
we have alleged that Nichia's actions in bringing the counterclaim for patent
infringement were not taken for any legitimate purpose and constitute unfair
competition in violation of North Carolina law.
In response to Nichia's amended counterclaim, the Cree Lighting employee named
as a counterclaim co-defendant also moved to dismiss the claims against him
under the Computer Fraud and Abuse Act. The court granted the motion in April
2002 and dismissed the claims, finding that Nichia had failed to state
claims upon which relief could be granted. Cree Lighting also moved to dismiss,
or in the alternative to transfer, Nichia's claims against it for lack of proper
venue. In March 2002 the court found that it lacked
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venue over the claims Nichia had asserted against Cree Lighting and directed
that the claims be transferred to the U.S. District Court for the Central
District of California.
In December 2000 Nichia America filed a motion for summary judgement seeking
dismissal of the patent infringement claims Cree and NCSU have asserted. In
support of the motion Nichia argued that the relevant claims of the patent, U.S.
Patent No. 6,051,849, which relate to certain lateral epitaxial overgrowth
technology, were invalid as a matter of law on grounds of indefiniteness. The
North Carolina district court denied the motion April 2002, and the claims NCSU
and we asserted under this patent remain pending.
In January 2002, Cree and the Cree Lighting employee named as a counterclaim
co-defendant moved for summary judgment dismissing Nichia's trade secret
misappropriation and related claims. The motion sought dismissal on the ground
that Nichia had failed to specify any trade secrets that would support the
claims. At a hearing in July 2002, the North Carolina district court orally
informed counsel that the court was granting the motion. Although a written
order confirming the ruling has not yet been entered, we understand that the
trade secret misappropriated claims against Cree and the Cree Lighting employee,
and at least some of the related non-patent claims, have been or will be
dismissed upon entry of a written order confirming the court's oral ruling.
Also in January 2002, Nichia moved to strike certain of our defenses to its
patent infringement claims and to preclude us from obtaining or using any
evidence concerning those defenses. Nichia alleged in support of the motion that
the defenses were based upon information improperly disclosed by the Cree
Lighting employee and counterclaim co-defendant. Nichia filed an amended motion
to strike in May 2002 in which it sought the same relief. At a hearing in July
2002, the court advised counsel orally that the motion to strike was denied. As
a result our patent infringement defenses Nichia challenged remain available to
us to prove in future proceedings in the case.
Although there can be no assurances of success, we believe the counterclaims
asserted in the North Carolina case are without merit and we intend to defend
against them vigorously.
Trustees of Boston University and Cree Lighting Company v. Nichia Corporation
and others: On May 3, 2001, Boston University and Cree Lighting commenced a
patent infringement lawsuit against Nichia and Nichia America in the U.S.
District Court for the Northern District of California. The defendants moved to
transfer the case to the U.S. District Court for the Eastern District of North
Carolina, and the case was transferred to the North Carolina district court in
October 2001.
In their complaint Boston University and Cree Lighting allege that Nichia and
Nichia America infringe a patent, U.S. Patent No. 5,686,738, relating to
GaN-based semiconductor technology useful in manufacturing certain LED and other
semiconductor devices. The patent was issued to Boston University in 1997 and is
licensed to Cree Lighting under a March 2001 agreement. In the complaint, Cree
Lighting and Boston University allege that the defendants are infringing the
patent by, among other things, importing, selling and offering for sale in the
United States certain GaN-based light emitting devices covered by one or more
claims of the patent. The complaint seeks damages and an injunction against
infringement.
Rohm Co. Ltd, v. Nichia Corporation and others: In November 2001, we were served
with pleadings in which Cree was named as a defendant to a counterclaim of
Nichia and Nichia America in a lawsuit pending in the U.S. District Court for
the Eastern District of Pennsylvania. The complaint in the underlying action,
which was brought by Rohm against Nichia and Nichia America, alleges that Nichia
is infringing certain U.S. patents owned by Rohm. Nichia's counterclaim, as
amended in December 2001,
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names both Rohm and us as counterclaim defendants and alleges that we violated
antitrust laws by conspiring with Rohm to exclude Nichia from the U.S. market
for high brightness LEDs. The counterclaim seeks actual and treble damages,
attorneys' fees and court costs. We have moved to dismiss the counterclaim for
lack of personal jurisdiction. Rohm has separately moved to dismiss certain
counts of the counterclaims, including those asserted against us, for failure to
state a claim on which relief can be granted. Both motions remain pending.
Although there can be no assurances of success, we believe the claims asserted
in the Pennsylvania case are without merit and we intend to defend against them
vigorously.
Other Litigation: We are also a party to certain other pending litigation
arising in the normal course of business. While we cannot predict the final
outcome of such litigation with certainty, we believe, based on consultation
with legal counsel, that the outcome of such other matters would not materially
affect our financial condition or results of operations.
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 2002.
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters
Common Stock Market Information. Our 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 sales 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 2002 FY 2001*
------- --------
High Low High Low
---- --- ---- ---
First Quarter $ 27.500 $ 14.090 $ 81.719 $ 42.375
Second Quarter 29.730 13.761 64.125 27.750
Third Quarter 33.320 12.400 40.500 14.870
Fourth Quarter 14.340 10.350 36.650 12.210
*As adjusted for the two-for-one split effective on December 1, 2000.
Holders and Dividends. There were approximately 718 holders of record of our
common stock as of August 1, 2002.
We have never paid cash dividends on our common stock and do not anticipate that
we 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, us from paying dividends on our common stock, but applicable
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state law may limit the payment of dividends. Our present policy is to retain
earnings, if any, to provide funds for the operation and expansion of our
business. There were no sales of unregistered securities during fiscal 2002.
Equity Compensation Plan information will be provided under Item 12.
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Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 30, 2002, June 24, 2001 and June 25, 2000 and the
consolidated balance sheet data at June 30, 2002 and June 24, 2001 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 27, 1999 and June 28, 1998 and the
consolidated balance sheet data at June 25, 2000, June 27, 1999 and June 28,
1998 are derived from audited consolidated financial statements not included
herein. All consolidated statement of operations and consolidated balance sheet
data shown below are adjusted to reflect the acquisition of Nitres, now known as
Cree Lighting, effective May 1, 2000. This transaction was accounted for under
the "pooling of interests" method. We acquired the business comprising the Cree
Microwave segment in December 2000. This transaction was accounted for under the
purchase method. All share amounts have been restated to reflect our two-for-one
stock splits effective July 26, 1999 and December 1, 2000.
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
----------------------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $ 136,230 $159,533 $ 96,742 $ 53,424 $ 34,891
Contract revenue, net 19,204 17,694 11,820 8,977 9,071
------- ------- ------- ------ ------
Total revenue 155,434 177,227 108,562 62,401 43,962
Net (loss) income ($101,723) $ 27,843 $ 30,520 $ 12,448 $ 6,243
Net (loss) income per share, basic ($ 1.40) $ 0.39 $ 0.46 $ 0.21 $ 0.11
Net (loss) income per share, diluted ($ 1.40) $ 0.37 $ 0.43 $ 0.20 $ 0.11
Weighted average shares outstanding:
Basic 72,718 72,243 65,930 58,030 55,452
Diluted 72,718 75,735 70,434 60,864 57,974
As of
----------------------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
Balance Sheet Data:
Working capital $151,851 $244,178 $265,957 $ 59,889 $28,265
Total assets 504,195 615,123 486,202 145,933 74,379
Long-term obligations -- -- -- 4,650 11,046
Shareholders' equity 482,104 589,097 463,142 131,003 55,905
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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, economic
and other risks and uncertainties, both known and unknown, 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.
Business Overview
We are the world leaders in developing and manufacturing compound semiconductor
materials and electronic devices made from SiC and a leading developer and
manufacturer of optoelectronic and electronic devices made from GaN and related
materials on SiC substrates. We derive the largest portion of our revenue from
the sale of near ultra-violet, or UV, blue and green light emitting diodes or
LEDs. We currently offer LEDs at three brightness levels:
- XBright(TM)UV, blue and green products;
- mid-brightness UV, blue and green products, which include
MegaBright(TM), UltraBright(TM) and high brightness InGaN devices; and
- standard brightness blue products.
Our LED devices are utilized by end users as a lighting source for wireless
handsets, automotive dashboard lighting, indicator lamps, miniature white
lights, indoor and outdoor full color displays and signs, traffic signals and
other lighting applications. We recognize product revenue at the time of
shipment in accordance with the terms of the relevant contract. When our
inventory is maintained at a consigned location, revenue is recognized when our
customer pulls products for their use. LED products represented 58% of our
revenue in fiscal 2002 and 65% in fiscal 2001.
During fiscal 2002 and fiscal 2001, approximately 16% and 11%, respectively, of
our revenue came from the sales of RF and microwave devices from our Cree
Microwave segment. These RF power transistors are the semiconductor content for
power amplifiers that are used in base stations for cellular networks. We also
derive revenue from the sale of advanced materials made from SiC that are used
for manufacturing LEDs and power devices by our customers, or for research and
development for new semiconductor applications. Sales of SiC material products
represented 13% of our revenue in fiscal 2002 and approximately 14% during
fiscal 2001. We received no significant revenues from sales of power devices or
SiC based RF devices in fiscal 2002 or fiscal 2001.
The balance of our revenue, 12% for fiscal 2002 and 10% in fiscal 2001 is
derived from contract funding. Under various programs, U.S. Government entities
further the development of our technology by funding our research and
development efforts. Contract revenue includes funding for 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
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the contract, we report direct costs as research and development expenses with
related reimbursements recorded as an offset to those expenses.
Fiscal 2002 Overview
We completed the introduction of our MegaBright(TM) LED line during fiscal 2002
with the commercial release of three new products: the MegaBright(TM) UV device,
the traffic signal green device and the true green device used for display signs
and other lighting applications. The MegaBright(TM) blue device was released in
the fourth quarter of fiscal 2001. The UV device offers an alternative path to
white light compared to the MegaBright(TM) blue LED. Some customers prefer a
blue LED covered with a yellow-emitting phosphor to create white light. Other
customers believe the UV LED with red, green and blue-emitting phosphors
provides a preferable white light emission. Combining a red, green and blue LED,
or a blue and yellow LED, in an appropriate package are other means of creating
white light solid state lamps. A traffic signal made of green LEDs offers lower
power consumption at 6-12 watts versus 85-150 watts for an incandescent bulb in
certain cases. Consequently, municipalities and other government organizations
are choosing to install LED traffic signals due to reduced energy consumption
resulting in lower electricity bills and reduced maintenance costs due to the
longer lifetimes of LEDs. Applications for the true green device target full
color indoor and outdoor video displays including sports stadiums and large
advertising panels. The use of blue and green LEDs in full-color outdoor signs
is a well-established market, and one of the primary applications for nitride
LEDs. The MegaBright(TM) product line was an important revenue stream for fiscal
2002 and has replaced some demand for our older high brightness products. Our
high brightness product line had the biggest percentage decline in revenue
compared to fiscal 2001. For fiscal 2003, we will combine results for our
MegaBright(TM), UltraBright(TM) and high brightness devices for reporting
purposes and reflect these sales as our mid-brightness products. During the
fourth quarter of fiscal 2002, our mid-brightness chips comprised 88% of LED
sales.
We also introduced the XBright(TM) family of LEDs during fiscal 2002. This new
product family delivers to our customers increased brightness by approximately
40 percent over the MegaBright(TM) family of LEDs. Target applications for the
XBright(TM) devices include miniature white lights, traffic signals and video
screens. The XBright(TM) LED technology incorporates a flip chip design and
utilizes the optical benefits of SiC while maintaining the vertical structure
advantages of a single top contact. This allows for a standard size chip similar
to our other devices. We offer a complete product family of XBright(TM) LEDs:
UV, blue, traffic green and true green. During the fourth quarter of fiscal
2002, we continued to work through packaging difficulties encountered by some of
our customers in using our XBright(TM) products. As a result, XBright(TM) LEDs
comprised only 1% of LED revenue in the quarter. We modified the chip after its
initial introduction in response to customer packaging suggestions, and we
target to increase the sales volume of this product in the first half of fiscal
2003. Customer interest in the product remains strong, as we believe the
XBright(TM) chip is the brightest (which is defined as the optical power output
from a chip at 20 milliamps of drive current based on our internal measurement)
nitride LED currently available in the marketplace.
Shipments of our standard brightness devices remained stable in fiscal 2002 in
comparison to fiscal 2001 and were supported by automotive and indicator light
designs. During the fourth quarter of fiscal 2002, standard brightness products
were approximately 11% of LED revenue.
Revenue from Cree Microwave was $24.8 million during fiscal 2002. Our biggest
challenge for Cree Microwave will be to diversify our Spectrian-concentrated
business. However, due to the weak economic environment for microwave devices
and the long qualification process for our products, we believe that this
diversification will develop over many quarters. In the near term, our goal is
to complete qualification of the new laterally diffused metal oxide
semiconductor, or LDMOS 8 products during the
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first quarter of fiscal 2003. If we fail to attain this goal, revenue from this
segment will likely decline in future quarters. Our Supply Agreement with
Spectrian, Cree Microwave's largest customer, allows the customer to reduce its
purchase obligations significantly.
Overall, for fiscal 2002, materials revenue declined 19% over the prior year due
to a 57% reduction in gemstone sales and a 6% decrease in wafer sales. Sales of
material for use in gemstones were lower in the current year as Charles &
Colvard, or C&C, our sole customer for such materials, had built up inventory in
fiscal 2001 as their sales slowed. During fiscal 2002, wafer volume for our
material sales increased 8% while average sales prices declined 12% year over
year due to greater sales to volume customers using our product for commercial
applications.
Government contract revenue increased 9% in fiscal 2002 over the prior year as
we received several new contract awards during fiscal 2002. Our government
contract backlog exceeds $51.0 million as of June 30, 2002, and we target
contract revenue to increase during fiscal 2003 due to these new awards, subject
to the government's ability to terminate or reduce funding under the contracts.
During the past year, we utilized a greater proportion of our equipment and
infrastructure to perform research and development work to support the
commercialization of new products as reflected in the introduction of our
MegaBright(TM) and XBright(TM) products. We believe that, over the next several
quarters, this production capacity will be required to support the growth in
demand generated by our customers' recent design wins incorporating our
products. During fiscal 2003, we target to increase our throughput, subject to
the acceptance of our products by our customers and market conditions. As volume
throughput rises, our cost of LED chips and unit wafer costs are anticipated to
decline as fixed costs are spread over more units.
Critical Accounting Policies.
The following discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. In preparing our financial statements, we must make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies include those policies that are reflective of
significant judgments and uncertainties, which potentially could produce
materially different results under different assumptions and conditions. We
believe that our critical accounting policies are limited to those described
below.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill. We have
approximately $330.3 million of long-lived assets as of June 30, 2002, including
approximately $211.7 million related to fixed assets and $64.2 million in
long-term investments held to maturity. In addition to the original cost of
these assets, their recorded value is impacted by a number of our policy
elections, including estimated useful lives, salvage values and in 2002,
impairment charges. In accordance with SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", or SFAS 121,
we record impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets have been impaired. In making these
determinations, the Company utilizes certain assumptions, including, but not
limited to: (i) estimations of the fair market value of the assets, and (ii)
estimations of future cash flows expected to be generated by these assets, which
are based on additional assumptions such as asset utilization, length of service
the asset will be used in the Company's operations
-35-
and estimated salvage values. During 2002, we determined certain property and
equipment was impaired under SFAS 121 and as a result, we recorded impairment
charges of $19.0 million.
In addition, during the third quarter of 2002, we completed an impairment
analysis of the intangible assets and goodwill related to the acquisition of
Cree Microwave. This analysis was performed due to significant changes in
business conditions at the operating segment. First, Cree Microwave amended its
supply agreement with Spectrian effective March 31, 2002, which resulted in a
significant reduction in quarterly revenue expectations. In addition, Cree
Microwave's outlook for acquiring additional customers in the near term weakened
due to the deteriorating economic conditions and long product qualification
cycles. Also, many of the products that Spectrian indicated it would purchase in
the future have not yet been released to production. Under the amended supply
agreement, if Cree Microwave is not able to produce LDMOS 8 devices qualified
for Spectrian's applications in a timely manner, revenue from Spectrian may be
significantly reduced after the June 2002 quarter. As a result of this
impairment analysis, the remaining balance of intangible assets and goodwill of
$76.5 million was deemed fully impaired and was written off.
Accounting for Marketable and Non-Marketable Equity Securities. We classify our
marketable securities that are not trading or "held-to-maturity" securities as
"available-for-sale". We carry these investments at fair value, based on quoted
market prices, and unrealized gains and losses, net of taxes, are included in
accumulated other comprehensive income, which is reflected as a separate
component of shareholders' equity. Realized gains and losses are recognized when
realized upon sale or disposition or when declines in value are deemed to be
other than temporary in accordance with SFAS 115 "Accounting for Certain Debt
and Equity Securities". We have a policy in place to review our equity holdings
on a regular basis to evaluate whether or not each security has experienced an
"other-than-temporary" decline in fair value. Our policy requires, among other
things, a review of each of the companies' cash position, earnings/revenue
outlook, stock price performance, liquidity, ability to raise capital and
management/ownership. Based on this review, if we believe that an
"other-than-temporary" decline exists in the value of one of our marketable
equity securities, it is our policy to write down these equity investments to
the market value. The related write-down will then be recorded as an investment
loss on our consolidated statements of operations. During 2002, we recorded an
"other-than-temporary" investment loss of $22.0 million related to our
available-for-sale marketable securities based primarily on sustained reductions
in stock price performance.
We also make strategic investments in the equity of privately held companies.
Since we do not have the ability to exercise significant influence over the
operations of these companies, these investment balances are carried at cost and
accounted for using the cost method of accounting. Since the shares of stock we
received in these investments are not publicly traded, there is no established
market for these securities. We have a policy in place to review the fair value
of these investments on a regular basis to evaluate the carrying value of such
investments. This policy includes, but is not limited to, reviewing each of the
companies' cash position, financing needs, earnings/revenue outlook, operational
performance, management/ownership changes, and competition. The evaluation
process is based on information that we request from the privately held
companies. This information is not subject to the same disclosure regulations as
U.S. public companies, and as such, the basis for these evaluations is subject
to the timing and the accuracy of the data received from these companies. If we
believe that the carrying value of an investment is at an amount in excess of
fair value, it is our policy to record a write-down of the investment. This
write-down is estimated based on the information described above, and it is
recorded as an investment loss on our consolidated statements of operations.
During 2002, we recorded a write-down on these investments of $20.4 million,
representing our best estimate of "other-than-temporary" declines in value based
on a review of those factors described above. Estimating the fair value of
non-marketable
-36-
investments in early-stage technology companies is inherently subjective and may
contribute to significant volatility in our reported results of operations.
Inventories. Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method. We evaluate our ending
inventories for excess quantities, impairment of value and obsolescence. This
evaluation includes analysis of sales levels by product and projections of
future demand based upon input received from our customers, sales team and
management estimates. We generally reserve for inventories on hand that are
greater than twelve months old, unless there is an identified need for the
inventory. In addition, we write off inventories that are considered obsolete
based upon changes in customer demand, manufacturing process changes that result
in existing inventory obsolescence or new product introductions, which eliminate
demand for existing products. Remaining inventory balances are adjusted to
approximate the lower of our manufacturing cost or market value. If future
demand or market conditions are less favorable than our projections, additional
inventory write-downs may be required and would be reflected in cost of sales in
the period the revision is made. We evaluate the adequacy of these reserves
quarterly. In the third quarter of fiscal 2002, we recorded a $4.5 million
reserve at our Cree Microwave segment for non-LDMOS and older LDMOS devices as a
result of contract negotiations with Spectrian that identified these devices as
obsolete. In the fourth quarter of fiscal 2002, we recorded inventory
write-downs of $690,000 related to our initial shipments of the XBright(TM)
family of products due to a packaging issue identified by some of our customers.
Revenue Recognition and Accounts Receivable. Revenue on product sales is
recognized when persuasive evidence of an arrangement exists, such as when a
purchase order or contract is received from the customer, the price is fixed,
title to the goods has changed and there is a reasonable assurance of collection
of the sales proceeds. We obtain written purchase authorizations from our
customers for a specified amount of product at a specified price and consider
delivery to have occurred at the time of shipment. In some cases our inventory
is maintained at a consigned location, in that situation, revenue is recognized
as our customer pulls inventory for their use. We provide our customers with a
limited right of return. Revenue is recognized at shipment or when product is
pulled from consigned inventory, and we record a reserve for sales returns. We
make estimates of potential future product returns related to current period
product revenue. We analyze historical returns, current economic trends and
changes in customer demand and acceptance of our products when evaluating the
adequacy of the allowance for sales returns. Significant judgments and estimates
made by management are used in connection with establishing the allowance for
sales returns. Material differences may result in the amount and timing of our
revenue for any period if management made different judgments or utilized
different estimates. The allowance for sales returns at June 30, 2002 was
$455,000.
Accruals for Liabilities and Warranties. At times, we must make estimates for
the amount of costs that have been incurred but not yet billed for general
services, including legal and accounting fees, costs pertaining to our
self-funded medical insurance, warranty costs at Cree Microwave and other
expenses. Many of these expenses are estimated based on historical experience or
averages and information gained directly from the service providers. Material
differences may result in the amount and timing of our expenses for any period
if management made different judgments or utilized different estimates.
Valuation of Deferred Tax Assets. As of June 30, 2002, the Company had $28.5
million recorded as deferred tax assets. These assets were recorded as a result
of tax benefits associated with the $143.9 million of significant charges taken
in fiscal 2002. These charges were recorded for the write-off of property and
equipment, the impairment of goodwill and intangible assets at Cree Microwave
and other charges resulting from the downturn in business and the "other than
temporary" charges taken on our investments. We did not record a reserve against
these deferred tax assets as we target a return to
-37-
profitable operations over the next several periods and target being able to use
the deferred tax assets in their entirety.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgement in its application. There
are also areas in which management's judgement in selecting any available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto included in this Annual
Report on Form 10-K which contain a discussion of our accounting policies and
other disclosures required by accounting principles generally accepted in the
United States.
Results of Operations
The following table shows our consolidated statement of operations data
expressed as a percentage of total revenue for the periods indicated:
Years Ended
--------------------------------------------------------
June 30, 2002 June 24, 2001 June 25, 2000
---------------- --------------- ----------------
Revenue:
Product revenue, net ................ 87.6% 90.0% 89.1%
Contract revenue, net ............... 12.4 10.0 10.9
---------------- --------------- ----------------
Total revenue ................... 100.0 100.0 100.0
Cost of Revenue:
Product revenue, net ................ 50.3 43.3 40.0
Contract revenue, net ............... 8.9 7.3 8.2
---------------- --------------- ----------------
Total cost of revenue ........... 59.2 50.6 48.2
---------------- --------------- ----------------
Gross margin ............................. 40.8 49.4 51.8
Operating expenses:
Research and development ............ 18.0 7.3 6.5
Sales, general and administrative ... 16.5 10.2 10.2
Intangible asset amortization ....... 4.4 2.6 --
In-process research and development
costs ............................ -- 9.8 --
Other expense ....................... 62.6 -- 1.2
---------------- --------------- ----------------
(Loss) income from operations ............ (60.7) 19.5 33.9
Other non-operating (expense) income ..... (26.9) -- 0.6
Interest income, net ..................... 3.7 8.8 8.6
---------------- --------------- ----------------
(Loss) income before income taxes ........ (83.9) 28.3 43.1
Income tax (benefit) expense ............. (18.5) 12.6 15.0
---------------- --------------- ----------------
Net (loss) income ........................ (65.4%) 15.7% 28.1%
================ =============== ================
Fiscal Years Ended June 30, 2002 and June 24, 2001
-38-
Revenue. Revenue declined 12% to $155.4 million in fiscal 2002 from $177.2
million in fiscal 2001. This decrease was attributable to lower product revenue,
which declined 15% to $136.2 million in fiscal 2002 from $159.5 million in
fiscal 2001. Excluding results of Cree Microwave, due to its mid-year
acquisition in fiscal 2001, revenue for fiscal 2002 would have decreased 17%
over the prior year comparative results. Much of the decrease in revenue from
our traditional business resulted from lower average selling prices for our LED
and SiC wafer products.
Average LED sales prices declined 24% for the twelve months ended June 2002
compared to the prior year. This decrease was related to contractual volume
discounts given to customers and increasing price competitiveness in the
marketplace due to weakness in the worldwide economy. We believe that the
overall demand for nitride LEDs declined during our fiscal 2002. However, our
overall market share has recently increased as a result of our lower pricing and
the introduction of higher brightness products. For fiscal 2002, our LED chip
volume increased 5% over prior year shipments. The introduction of the
MegaBright(TM) UV, blue, and green products in fiscal 2002 has generated new
design wins for our customers. The MegaBright(TM) product is approximately two
times brighter than our previous generation devices and is similar to the
brightness that is currently offered by our primary competitors. Prior to the
introduction of the MegaBright(TM) product line, our products were not as bright
as those offered by our competition. The MegaBright(TM) product line was not
fully introduced until February 2002, when our green devices were released.
These products have replaced some existing demand for our previous generation
high brightness devices; however, due to the product's higher performance, it
has also generated new demand, particularly in the mobile handset market. We
believe that volume shipments of the MegaBright(TM) product will increase in
fiscal 2003 due to new design wins primarily in the mobile handset market.
Several large wireless phone manufacturers have recently introduced new products
that feature a blue backlight of the keypad and, at times, a blue color for the
display. In addition, newer designs now offer white backlighting for full color
screens that require white LEDs. We believe that our products are featured in
several of these models of phones, and blue and white backlit phones have grown
significantly as a percentage of handsets currently offered by major
manufacturers. We also believe that the blue and white LEDs have replaced a
portion of the yellow-green LEDs that have traditionally backlit mobile
handsets. Our products will also target new automotive designs in fiscal 2003 as
well as other consumer product applications.
During fiscal 2002, we also introduced our new XBright(TM) families of LEDs,
including UV, blue and green devices. These products offer approximately 40%
higher brightness than our MegaBright(TM) products, and we believe they are
currently the highest brightness UV, blue and green products available in the
market place. We completed the introduction of these devices in the second half
of fiscal 2002. These devices did not contribute significantly to revenue in
fiscal 2002, as we continue to work with customers to optimize our chip design
in packaged solutions. We are targeting these products to be more significant to
revenue in fiscal 2003 for high brightness applications such as display signs,
traffic signals and lighting applications.
-39-
Shipments of our standard brightness products were flat in fiscal 2002 in
comparison to the prior year due to stable demand for automotive and indicator
light applications. We target that our LED revenue may grow significantly in our
first quarter of fiscal 2003 as compared to the fourth quarter of fiscal 2002,
due to increased volume shipments. We also believe that average sales prices for
LEDs will decline in fiscal 2003. However, we are targeting unit shipments to
grow at a faster rate than average sales price declines, and as a result, we
target higher revenue in fiscal 2003 over fiscal 2002. LED revenue visibility
beyond the first quarter of fiscal 2003 is limited due to short lead times given
to us by customers. In addition, we must complete additional improvements to our
chip design and performance in order to succeed with our LED revenue targets for
fiscal 2003.
Revenue from Cree Microwave increased 29% to $24.8 million in fiscal 2002 from
$19.2 million in fiscal 2001. The increase in revenue represents an additional
six months of sales for the segment due to our mid-year acquisition of Cree
Microwave from Spectrian in fiscal 2001. Our average quarterly revenue in fiscal
2002 was lower than fiscal 2001 due to the current market environment for
wireless infrastructure spending. Product mix shifted to LDMOS during fiscal
2002, which comprised 54% of microwave revenue, an increase of 13% from fiscal
2001. Revenue attributable to bipolar devices was 45% and 1% related to other
products during fiscal 2002. Over 90% of Cree Microwave revenues were derived
from shipments to Spectrian in fiscal 2002 as well as fiscal 2001. Overall, our
average sales prices for this business segment were fairly stable with quarterly
average volume being reduced in fiscal 2002 as compared to fiscal 2001. Cree
Microwave continues to work with Spectrian to qualify and deliver new LDMOS 8
products for next generation wireless base station applications. If we are
unable to deliver qualified LDMOS 8 products to Spectrian on a timely basis, the
amount of our contractual supply agreement with Spectrian may be reduced
significantly. Specifically, until we complete the qualification of LDMOS 8
parts and the parts are accepted by Spectrian, we anticipate minimal revenue
from this segment of our business. If our revenue is reduced substantially, it
could have an adverse effect on our results of operations for this segment of
business. We continue to work on new customer design wins; however, due to long
product qualification cycles in the RF industry, progress in this area will
require a longer time commitment. As a result of continued weakness in market
conditions for wireless infrastructure spending, combined with a reduced supply
agreement with Spectrian that calls for a remaining $16.3 million of revenue
through June 2003, we target revenue from this segment to decline in fiscal 2003
from fiscal 2002.
Overall, for fiscal 2002, materials revenue declined 19% over the prior year due
to a 57% reduction in gemstone sales and a 6% decrease in wafer sales. SiC wafer
sales decreased 6% from the prior year due to lower pricing for wafers sold to
corporate and research communities, including certain customers using our wafers
for commercial production. Wafer units sold increased 8%, while average sales
prices declined 12% due to a higher mix of volume sales related to wafers used
in commercial production. For fiscal 2003, we target wafer sales revenue to be
even with fiscal 2002 results. Sales of gemstone products declined 57% during
fiscal 2002 as compared to fiscal 2001. During the fourth quarter of fiscal
2002, we experienced a modest recovery in revenue from C&C and target revenue
improvement from this customer during fiscal 2003.
Contract revenue received from U.S. Government agencies and non-governmental
customers increased 9% during fiscal 2002 compared to fiscal 2001, due to
additional contract awards. We anticipate that contract revenue will increase
during fiscal 2003 as a result of new contract awards received in the second
half of fiscal 2002.
Gross Profit. Gross profit decreased 28% to $63.4 million in fiscal 2002 from
$87.5 million in fiscal 2001. Compared to the prior year, gross margins declined
from 49% to 41% of revenue. In fiscal 2002,
-40-
gross profit included a $5.1 million charge relating to an inventory write-off
and other related costs that were recorded as a part of the downsizing of Cree
Microwave's operations. Without this adjustment, gross profit and gross margin
for fiscal 2002 would have been $68.5 million and 44%, respectively. Lower
margins resulted from a combination of lower revenue and reduced profitability
for LED and wafer products and lower profitability at Cree Microwave related to
weak demand for RF devices. LED margins declined due to average sales prices
decreasing at a faster rate than average costs. During fiscal 2002, LED average
sales prices declined 24%, which was in line with our plans, while costs were
only 16% lower. LED costs did not decline as quickly as revenue due to reduced
worldwide demand for UV, blue and green LED products, which put pressure on
average sales prices and lowered our factory throughput. Because a significant
portion of our factory cost is fixed, lower throughput typically results in
higher costs per unit produced. In addition, our LED costs per unit were higher
due to inefficiencies typically associated with new product introductions as we
released both the MegaBright(TM) and XBright(TM) family of products during the
year. In our fourth quarter of fiscal 2002, we had product returns and inventory
write-downs that netted to a $948,000 reduction in gross profit related to
packaging issues identified by some customers after the release of the
XBright(TM) family of products. We have redesigned our XBright(TM) chips and are
planning to manufacture the products in volume in the first half of fiscal 2003.
Despite the lower throughput of volume and new product inefficiencies, we were
still able to reduce LED costs by 16% due to improved yield, cost cutting
measures and other efficiencies.
Gross margins at Cree Microwave were 19% during fiscal 2002 and were impacted by
the $5.1 million write-off of inventory discussed above. Excluding this write
down, gross margin would have been 40% of revenue for the Cree Microwave segment
compared to 44% in fiscal 2001. Low factory throughput due to reduced sales
volumes and the qualification of LDMOS 8 has significantly impacted our cost per
unit. Our greatest opportunity to improve margins would be in yield improvements
and the achievement of greater throughput levels in our factory.
For fiscal 2003, we target gross margins to improve slightly as a result of
higher throughput in our Durham, North Carolina facility as well as improved
yields due to higher anticipated volume. Depending on our success with the
introduction of the LDMOS 8 devices at Cree Microwave, our margins for that
segment may increase, remain stable or may decline.
Research and Development. Research and development expenses increased 116% in
fiscal 2002 to $28.0 million from $13.0 million in fiscal 2001. The increase in
research and development spending supported our MegaBright(TM) and XBright(TM)
product lines; our large chip LED devices as well as new higher brightness LED
research programs. In addition, we funded development of our next generation
LDMOS, SiC and GaN microwave devices, our Schottky diode power program and our
UV lasers. While research and development spending increased, customer support
of certain programs decreased, thereby further increasing costs. Finally, the
mid-year acquisition of Cree Microwave during fiscal 2001 also contributed to
the higher spending variance. Without the impact of Cree Microwave, research and
development spending would have increased 99% over the prior year. We believe
our research and development during fiscal 2002 is critical to our future
revenue growth. For example, we target that more than 70% of our revenue goal
for fiscal 2003 will be met with technology developed in fiscal 2002. We believe
that internal funding for the development of new products will stabilize during
fiscal 2003.
Sales, General and Administrative. Sales, general and administrative expenses
increased 41% in fiscal 2002 to $25.6 million from $18.1 million in fiscal 2001.
The increase in expenses was due mostly to costs associated with ongoing
intellectual property litigation. In addition, costs were higher due to the mid
year acquisition of Cree Microwave during fiscal 2001, higher premiums for
directors' and officers' insurance and greater spending to support the growth of
the business. Without the impact of Cree
-41-
Microwave, sales and general and administrative expenses would have increased by
38% year over year. For fiscal 2003, we target that sales, general and
administrative costs to remain stable depending on developments in our ongoing
patent litigation.
Intangible Asset Amortization and In-Process Research and Development Costs.
Intangible asset amortization increased 49% to $6.8 million during fiscal 2002
from $4.5 million during fiscal 2001. Nine months of intangible asset
amortization was included in fiscal 2002 and six months of amortization was
included in fiscal 2001 resulting from the acquisition of Cree Microwave in
December 2000. Intangible asset amortization ceased during the fourth quarter of
fiscal 2002. An analysis of goodwill and other intangible assets indicated that
the carrying values of such assets had been fully impaired under Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121) (see
"Other Expense"). Prior to the write-off of goodwill and intangible assets, we
were amortizing these assets over periods ranging from five to ten years.
As a result of the acquisition of Cree Microwave in December 2000, we recorded a
charge of $17.4 million in the third quarter of fiscal 2001 associated with
acquired in-process research and development costs.
Other Expense. Other expense increased to $97.2 million during fiscal 2002 from
$62,000 in fiscal 2001. This charge was primarily made up of a $76.5 million
charge for goodwill and intangible assets relating to Cree Microwave in response
to several impairment indicators. Cree Microwave amended its supply agreement
with Spectrian in the third quarter of fiscal 2002, which reduced quarterly
revenue expectations. Also, many of the products that Spectrian indicated that
it would purchase in the future have not yet been released to production. Under
the amended supply agreement with Spectrian, if Cree Microwave is not able to
produce LDMOS 8 devices in a timely manner, revenue from Spectrian may be
significantly reduced after the June 2002 quarter. In addition, the outlook for
acquiring additional customers in the near term has decreased due to the
weakened economy and the long qualification cycles. Due to the change in outlook
for business at Cree Microwave and the reduction in expected revenue per
quarter, we performed an asset impairment analysis under SFAS 121. As a result
of this analysis, the full amount of goodwill and intangible assets of $76.5
million was written off and recorded as other expense on our consolidated
statements of operations. Also included in other expense was $875,000 related to
severance payments and other expenses related to the downsizing in the Cree
Microwave business. In addition, a $19.0 million write-off of property and
equipment was recorded to reflect changes in technology that resulted in their
obsolescence.
Other Non-Operating (Loss) Income. Other non-operating (loss) income was a loss
of $41.8 million in fiscal 2002 compared to $82,000 of income in fiscal 2001.
The fiscal 2002 loss was attributable to a $42.4 million write-down of
investments made in publicly traded and privately held equity securities. For
publicly traded securities, we reclassified other comprehensive losses from
equity to non-operating losses in our consolidated statements of operations and
recorded additional write-downs for the "other-than-temporary" declines in the
market value of these investments as the stock market has sustained significant
declines in value. In the case of privately held investments, many of the
companies were experiencing deteriorating financial conditions and/or an
inability to raise additional capital, which represented significant indicators
of value impairment. The fiscal 2002 other non-operating loss was partially
offset by a $558,000 gain on the sale of marketable securities during the second
quarter of fiscal 2002.
During fiscal 2001, a $4.6 million write-down was taken to establish a reserve
for investments made in privately held companies that were considered to have an
"other than temporary" impairment to value. In
-42-
addition, we made a one-time pledge of a charitable contribution of $1.2 million
to the University of California at Santa Barbara to endow a Cree chair in solid
state lighting and displays and for other uses. Finally, a $100,000 charge was
recorded related to one-time charges for expenses incurred for the acquisition
of Nitres. These charges were offset by a $6.0 million gain on the sale of
marketable securities during the year.
Interest Income, net. Interest income, net has decreased 64% to $5.7 million in
fiscal 2002 from $15.7 million in fiscal 2001 due to significantly lower
interest rates available in fiscal 2002. In addition, slightly lower cash
amounts were available as $20.3 million was used to repurchase our own stock
during fiscal 2002.
Income Tax (Benefit) Expense. Income tax (benefit) expense for fiscal 2002 was a
benefit of $28.7 million compared to an expense of $22.3 million in fiscal 2001.
The fiscal 2002 income tax benefit resulted from significant charges of $143.9
million taken during the year. These charges included the write-off of property
and equipment due to changes in technology, the impairment of goodwill and
intangible assets at Cree Microwave and other charges relating to the downturn
in business, and an "other than temporary" decline in fair value of marketable
and privately held securities. Our effective tax rate during fiscal 2002 was 22%
compared to 33% in fiscal 2001. At June 30, 2002, we also maintained $28.5
million of deferred tax assets that were not reserved for by us as we target to
return to profitable operations over the next several periods and target being
able to use the assets in their entirety.
The minimum amount of future taxable income that will be required to realize
existing deferred tax assets is approximately $66 million, $20 million of which
will need to occur within the next 20 years to offset existing net operating
losses. The new tax act, "The Job Creation and Workers' Assistance Act of 2002"
will allow us to recover past alternative minimum tax that has been paid. This
amount has been recorded as a tax receivable. The new legislation also allows us
more favorable depreciation. Historically, reported taxable income has been
significantly lower than income reported for financial reporting purposes. The
primary reasons for this difference are the timing differences for depreciation,
stock option deductions for tax purposes, other tax planning strategies, and
impairment charges expensed for financial accounting purposes, which are not tax
deductible.
Fiscal Years Ended June 24, 2001 and June 25, 2000
Revenue. Revenue grew 63% to $177.2 million in fiscal 2001 from $108.6 million
in fiscal 2000. This increase was attributable to higher product revenue, which
rose 65% to $159.5 million in fiscal 2001 from $96.7 million in fiscal 2000.
Without the acquisition of Cree Microwave in December 2000, revenue for fiscal
2001 would have increased 46% over the prior year comparative results. Much of
the increase in revenue from our traditional business resulted from demand for
our LED and SiC wafer products. LED chip volume increased 104% over units
delivered in the prior year. The largest increase occurred as a result of the
introduction of our UltraBright(TM) product line in fiscal 2001. During fiscal
2000 only our high brightness and standard brightness product lines were
available for sale. Our standard brightness products also increased 65% in
fiscal 2001 in terms of units shipped over the prior year due to strong demand
for automotive and indicator light applications. Average LED sales prices
declined 18% for the twelve months ended June 2001 compared to the prior year
average due to expected contractual volume discounts given to customers.
SiC wafer sales increased 71% over the prior year due to demand from corporate
and research customers, including certain customers using our wafers for
commercial production. Wafer units sold increased 107%, while average sales
prices declined 16% due to a higher mix of volume sales related to wafers
-43-
used in commercial production. Sales of gemstone products declined 63% during
fiscal year 2001 as compared to fiscal 2000 due to inventory reduction efforts
at C&C.
Revenue from Cree Microwave was $19.2 million for fiscal 2001. This represents
six months of sales for the unit as it was acquired in December 2000 and
accounted for using the purchase method of accounting. Since we acquired Cree
Microwave in December 2000, there were no sales for this unit in fiscal 2000.
Contract revenue received from U.S. Government agencies and non-governmental
customers increased 50% during fiscal 2001 compared to fiscal 2000, due to
additional contract awards. Seven new contract awards were received during
fiscal 2001.
Gross Profit. Gross profit increased 56% to $87.5 million in fiscal 2001 from
$56.2 million in fiscal 2000. Compared to the prior year, gross margins declined
from 52% to 49% of revenue. Lower margins resulted from a combination of reduced
profitability for LED devices and the acquisition of Cree Microwave. LED margins
declined due to average sales prices decreasing at a faster rate than average
costs. During fiscal 2001 average LED costs declined 11% while average sales
prices were reduced 18%. LED costs did not decline as quickly as revenue due to
lower yields as a result of new product introductions and chip modifications
made to our products in the second half of the year. In addition, factory
throughput was reduced during the fourth quarter of fiscal 2001, which resulted
in higher costs per chip. The margins for Cree Microwave averaged 44% as a
percentage of revenue due to the competitive environment for LDMOS chips. Cree
Microwave was 11% of total revenue in fiscal 2001.
Research and Development. Research and development expenses increased 84% in
fiscal 2001 to $13.0 million from $7.1 million in fiscal 2000. Much of this
increase resulted from the acquisition of Cree Microwave, as well as greater
investment made for research in the RF and microwave, power and optoelectronic
programs. Without the acquisition of Cree Microwave, research and development
expenses would have increased 62% over the prior year.
Sales, General and Administrative. Sales, general and administrative expenses
increased 63% in fiscal 2001 to $18.1 million from $11.1 million in fiscal 2000.
This increase in expenses is due to the acquisition of Cree Microwave and
greater spending to support the overall growth of the business, as well as costs
associated with ongoing intellectual property litigation. Without the
acquisition of Cree Microwave, sales, general and administrative expenses would
have increased 44% over the prior year.
Intangible Asset Amortization and In-Process Research and Development Costs. The
purchase of Cree Microwave generated goodwill and other intangible assets, which
will be amortized over periods ranging from five to ten years. In addition, as a
result of the acquisition of Cree Microwave, we recorded a one-time charge of
$17.4 million in the third quarter of fiscal 2001 associated with acquired
in-process research and development costs.
Other Expense. Other expense decreased 95% to $62,000 during fiscal 2001 from
$1.3 million in fiscal 2000. The decrease was attributable to fewer fixed asset
disposals.
Other Non-Operating Income. Other non-operating income decreased 88% to $82,000
in fiscal 2001 from $656,000 in fiscal 2000. This decrease was attributable to a
$4.6 million write down taken in the fourth quarter of fiscal 2001 to establish
a reserve for investments made in private companies that was considered to be an
"other-than-temporary" decline in fair value. In addition, we made a one-time
pledge of a charitable contribution of $1.2 million to the University of
California at Santa Barbara to endow a Cree chair in solid state lighting and
displays, and for other uses, in the first quarter of fiscal 2001.
-44-
Finally, a $100,000 charge was recorded related to one-time charges for expenses
incurred for the acquisition of Nitres. These charges were offset by a $6.0
million gain on the sale of investment securities during the year. During fiscal
2000, a $4.1 million gain was recognized on the sale of securities. This gain
combined with one-time proceeds from an insurance recovery of $400,000, more
than offset a $3.8 million one-time charge for expenses incurred with the
acquisition of Nitres.
Interest Income, net. Interest income, net has increased 67% to $15.7 million in
fiscal 2001 from $9.4 million in fiscal 2000 due to higher average cash balances
being available in fiscal 2001 as a result of the public stock offering
completed in January 2000. Higher interest rates in fiscal 2001 also contributed
to increased interest income.
Income Tax Expense. Income tax expense for fiscal 2001 was $22.3 million
compared to $16.3 million in fiscal 2000. This increase resulted from increased
profitability during fiscal 2001 over fiscal 2000, as adjusted for the cost of
in-process research and development which is non-deductible in the current
period for tax purposes. Our effective tax rate during fiscal 2001 was 33%
compared to 35% in fiscal 2000.
Liquidity and Capital Resources
We have funded our operations to date through sales of equity, bank borrowings
and from product and contract gross profits. As of June 30, 2002, we had working
capital of $151.8 million, including $106.1 million in cash, cash equivalents
and short-term investments held to maturity. As of June 30, 2002, we invested
$64.2 million in long term securities held to maturity in order to receive a
higher interest rate on our cash. Operating activities generated $39.1 million
in fiscal 2002 compared with $74.8 million generated during fiscal 2001. This
decrease was primarily attributable to a $31.2 million increase in deferred
income tax assets that was generated from the $143.9 million in pretax charges
taken in fiscal 2002. Depreciation and amortization increased by $13.0 million
in fiscal 2002, due to new equipment purchased primarily in fiscal 2001. Tax
benefits from stock options were also $4.3 million lower in fiscal 2002. These
inflows of cash were partly offset by a $2.8 million increase in inventory due
to increased shipments anticipated for early fiscal 2003 and inventory being
maintained at an offsite location, and a $3.8 million increase to prepaid
expenses mostly for higher insurance premiums.
Cash used by investing activities in fiscal 2002 was $116.9 million. Net
investments of $51.8 million were made in securities held to maturity and $13.8
million was invested in available for sale securities. $41.7 million was
invested in property and equipment and in additional deposits for property and
equipment. The majority of the increase in spending was due to new equipment
additions to increase manufacturing capacity in our epitaxy, clean room and
package and test areas. Finally, $9.1 million was invested in other long-term
assets during fiscal 2002 and reflects strategic investments made in private
companies.
Cash used in financing activities included common stock repurchases of 1.49
million shares of our common stock on the open market for $20.3 million or an
average cost of $13.63 per share. This was partially offset by the receipt of
$7.2 million for the exercise of stock options and shares issued under our
employee stock purchase program.
We target approximately $50.0-60.0 million in capital spending for fiscal 2003.
We anticipate that the majority of the expenditures will be made for new
equipment and will be funded by cash from operations. We may also issue
additional shares of common stock for the acquisition of complementary
-45-
businesses or other significant assets. From time to time, we evaluate potential
acquisitions of and investments in complementary businesses and anticipate
continuing to make such evaluations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures:
As of June 30, 2002, we maintain investments in equity securities that are
treated for accounting purposes under SFAS 115 as "available-for-sale"
securities. These investments are normally carried at fair market value based
upon the quoted market price of that investment at the end of the reporting
period, with net unrealized gains or losses excluded from earnings and reported
as a separate component of shareholder's equity. It is our policy to write down
these equity investments to their market value and record the related write-down
as an investment loss on our consolidated statements of operations when the
investment has an "other-than-temporary" decline in value. At June 30, 2002, we
believe that an "other-than-temporary" decline existed in our marketable equity
securities and we recorded an "other-than-temporary" investment loss of $22.0
million related to our available for sale marketable securities. These
investments are subject to market risk of equity price changes. Management views
these stock holdings as an investment; therefore, the shares are accounted for
as "available for sale" securities under SFAS 115. The fair market value of
these investments as of June 30, 2002, using the closing sale price as of June
28, 2002, was $6.0 million. These equity securities are held for purposes other
than trading. Our equity portfolio consists of securities with characteristics
that most closely match the Nasdaq National Market. The Nasdaq Composite Index
has shown a 72% decline over the past two years, therefore if there was a 72%
adverse change in the market prices, our portfolio would decrease in value by
$4.3 million.
An adverse movement of equity market prices would also have an impact on our
portfolio of non-marketable strategic equity securities, although the impact
cannot be directly quantified. Such a movement and the related underlying
economic conditions would negatively affect the prospects of the companies we
invest in, their ability to raise additional capital and the likelihood of our
being able to realize our investments through liquidity events such as initial
public offerings, mergers and private sales. At June 30, 2002, our
non-marketable strategic equity securities had a carrying amount of $16.0
million.
We have invested some of the proceeds from our January 2000 public offering into
high-grade corporate debt, commercial paper, government securities and other
investments at fixed interest rates that vary by security. At June 30, 2002, the
Company had $157.6 million invested in these securities. We currently have no
debt outstanding.
Qualitative Disclosures:
Our investments in publicly traded equity securities are subject to the market
risk of equity price changes. While we cannot predict or manage the future
market price for such stock, management continues to evaluate our investment
position on an on-going basis.
-46-
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors .............................................................. 48
Consolidated Balance Sheets as of June 30, 2002 and June 24, 2001 ........................... 49
Consolidated Statements of Operations for the years ended June 30, 2002, June 24, 2001 and
June 25, 2000 ............................................................................... 50
Consolidated Statements of Cash Flow for the years ended June 30, 2002, June 24, 2001 and
June 25, 2000 ............................................................................... 51
Consolidated Statements of Shareholders' Equity for the years ended June 30, 2002,
June 24, 2001 and June 25, 2000 ............................................................. 52
Notes to Consolidated Financial Statements .................................................. 53
-47-
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cree, Inc.
We have audited the accompanying consolidated balance sheets of Cree, Inc. as of
June 30, 2002 and June 24, 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended June 30, 2002. 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 in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cree,
Inc. at June 30, 2002 and June 24, 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2002, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
July 24, 2002
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CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30, June 24,
2002 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 73,744 $ 164,562
Short-term investments held to maturity 32,396 36,965
Marketable securities available for sale 6,008 6,675
Accounts receivable, net 34,592 34,850
Interest receivable 2,083 1,270
Inventories, net 17,966 15,202
Deferred income taxes 1,122 4,172
Prepaid expenses and other current assets 5,994 2,220
----------- ------------
Total current assets 173,905 265,916
Property and equipment, net 211,685 226,920
Goodwill and intangible assets, net -- 83,282
Long-term investments held to maturity 64,225 7,971
Deferred income taxes 27,365 --
Patent and license rights, net 4,251 3,246
Other assets 22,764 27,788
----------- ------------
Total assets $ 504,195 $ 615,123
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 13,075 $ 14,147
Accrued salaries and wages 4,010 2,435
Other accrued expenses 4,969 5,156
----------- ------------
Total current liabilities 22,054 21,738
Long term liabilities:
Deferred income taxes -- 3,850
Other long-term liabilities 37 438
----------- ------------
Total long-term liabilities 37 4,288
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares authorized at
June 30, 2002 and June 24, 2001; none issued and outstanding -- --
Common stock, par value $0.00125; 200,000 shares authorized at
June 30, 2002 and June 24, 2001; 72,729 and 72,907 shares issued
and outstanding at June 30, 2002 and June 24, 2001, respectively 90 91
Additional paid-in-capital 508,432 518,781
Deferred compensation (696) (1,211)
(Accumulated deficit) retained earnings (25,722) 76,001
Accumulated other comprehensive loss, net of tax -- (4,565)
----------- ------------
Total shareholders' equity 482,104 589,097
----------- ------------
Total liabilities and shareholders' equity $ 504,195 $ 615,123
=========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
-49-
CREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
--------------------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
------------------- ------------------ -----------------
Revenue:
Product revenue, net $ 136,230 $ 159,533 $ 96,742
Contract revenue, net 19,204 17,694 11,820
------------------- ------------------ -----------------
Total revenue 155,434 177,227 108,562
Cost of revenue:
Product revenue, net 78,249 76,734 43,399
Contract revenue, net 13,827 12,967 8,963
------------------- ------------------ -----------------
Total cost of revenue 92,076 89,701 52,362
------------------- ------------------ -----------------
Gross profit 63,358 87,526 56,200
Operating expenses:
Research and development 28,026 12,980 7,054
Sales, general and administrative 25,618 18,111 11,091
Intangible asset amortization 6,765 4,537 --
In-process research and development costs -- 17,400 --
Impairment charges and other expense 97,223 62 1,305
------------------- ------------------ -----------------
(Loss) income from operations (94,274) 34,436 36,750
Other non-operating (expense) income (41,848) 82 656
Interest income, net 5,708 15,668 9,400
------------------- ------------------ -----------------
(Loss) income before income taxes (130,414) 50,186 46,806
Income tax (benefit) expense (28,691) 22,343 16,286
------------------- ------------------ -----------------
Net (loss) income ($101,723) $ 27,843 $ 30,520
=================== ================== =================
(Loss) earnings per share:
Basic ($1.40) $ 0.39 $ 0.46
=================== ================== =================
Diluted ($1.40) $ 0.37 $ 0.43
=================== ================== =================
Shares used in per share calculation:
Basic 72,718 72,243 65,930
=================== ================== =================
Diluted 72,718 75,735 70,434
=================== ================== =================
The accompanying notes are an integral part of the consolidated financial
statements.
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CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Year Ended
--------------------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
-------------- --------------- ---------------
Operating activities:
Net (loss) income ($ 101,723) $ 27,843 $ 30,520
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 32,400 21,948 10,803
Loss on retirement of property and equipment and
patents 18,298 134 1,256
Amortization of patent rights 293 194 145
Amortization of intangible assets 6,796 4,537 --
Amortization of premium on securities held to maturity 157 -- --
Write-off of goodwill and other intangible assets 76,488 -- --
Acquired in-process research & development -- 17,400 --
Write-down of long-term investments 20,377 4,600 --
Purchase of marketable trading securities (1,546) (17,498) (1,786)
Proceeds from sale of marketable trading securities 2,104 23,498 2,280
Gain on marketable trading securities (558) (6,000) (494)
Loss (gain) on available for sale securities 22,028 -- (3,567)
Deferred income taxes (31,200) 13,514 (11,617)
Income tax benefits from stock option exercises 2,712 7,022 27,336
Amortization of deferred compensation 515 544 980
Changes in operating assets and liabilities:
Accounts and interest receivable (555) (18,432) (91)
Inventories (2,764) (2,035) (5,334)
Prepaid expenses and other current assets (3,773) (735) (263)
Other long-term assets (833) -- --
Accounts payable, trade (1,073) (924) 6,447
Accrued expenses and other liabilities 987 (842) 6,356
-------------- --------------- ---------------
Net cash provided by operating activities 39,130 74,768 62,971
-------------- --------------- ---------------
Investing activities:
Purchase of available for sale securities (13,761) -- (12,500)
Proceeds from sale of available for sale securities -- -- 6,291
Costs associated with the acquisition of Cree
Microwave -- (1,946) --
Purchase of securities held to maturity (118,807) (7,971) (195,883)
Proceeds from maturities of securities held to
maturity 66,965 147,461 11,457
Purchase of and deposits for property and equipment (41,635) (106,194) (78,047)
Proceeds from sale of property and equipment 721 123 --
Purchase of patent rights (1,318) (1,150) (727)
Increase in other long-term assets (9,051) (26,910) (5,141)
-------------- --------------- ---------------
Net cash (used in) provided by investing
activities (116,886) 3,413 (274,550)
-------------- --------------- ---------------
Financing activities:
Net repayment of long-term debt -- -- (47)
Net proceeds from issuance of common stock 7,235 10,346 272,924
Net proceeds from sale of put options -- 2,860 --
Repurchase of common stock (20,297) (30,668) --
-------------- --------------- ---------------
Net cash (used in) provided by financing
activities (13,062) (17,462) 272,877
-------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (90,818) 60,719 61,298
Cash and cash equivalents:
Beginning of year 164,562 103,843 42,545
-------------- --------------- ---------------
End of year $ 73,744 $ 164,562 $ 103,843
============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ -- $ -- $ 13
============== =============== ===============
Cash paid for income taxes $ 1,901 $ 1,492 $ 272
============== =============== ===============
Non-cash investing and financing activities:
Deferred compensation $ 515 $ 544 $ 1,768
============== =============== ===============
Conversion of note payable to common stock $ -- $ -- $ 431
============== =============== ===============
Issuance of common stock in connection with the
acquisition of Cree Microwave $ -- $ 113,717 $ --
============== =============== ===============
The accompanying notes are an integral part of the consolidated
financial statements.
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CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, JUNE 24, 2001 AND JUNE 25, 2000
(In thousands)
(Accumulated Accumulated
Common Additional Deficit) Other Total
Stock Paid-in Deferred Retained Comprehensive Shareholders'
Par Value Capital Compensation Earnings Income/(Loss) Equity
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 27, 1999 $ 77 $ 113,268 $ (967) $ 17,638 $ 987 $ 131,003
Common stock options and warrants
exercised for cash, 954 shares 3 6,750 6,753
Employees granted stock options, 137
shares 785 (785) --
Employees granted stock, 171 shares 983 (983) --
Common stock warrants granted, 16 shares 31 31
Loan converted to common stock, 169
shares 431 431
Issuance of common stock for cash, 3,289
shares 8 266,132 266,140
Income tax benefits from stock option
exercises 27,336 27,336
Amortization of deferred compensation 980 980
Net income 30,520 30,520
Unrealized loss on securities available
for sale, net of tax of $27 (52) (52)
-------------
Comprehensive income 30,468
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 25, 2000 88 415,716 (1,755) 48,158 935 463,142
Common stock options and warrants
exercised for cash, 870 shares 2 7,368 7,370
Issuance of common stock for cash, 113
shares 2,976 2,976
Issuance of common stock in connection
with purchase business combination,
2,657 shares 3 113,505 113,508
Purchase and retirement of 1,850
treasury shares (2) (30,666) (30,668)
Income tax benefits from stock option
exercises 7,022 7,022
Amortization of deferred compensation 544 544
Premium Received Put Option buy back 2,860 2,860
Net income 27,843 27,843
Unrealized loss on securities available
for sale, net of tax of $3,667 (5,500) (5,500)
---------------
Comprehensive income 22,343
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 24, 2001 91 518,781 (1,211) 76,001 (4,565) 589,097
Common stock options exercised for cash,
1,053 shares 1 4,229 4,230
Issuance of common stock for cash, 245
shares 3,005 3,005
Purchase and retirement of 1,489
treasury shares (2) (20,295) (20,297)
Income tax benefits from stock option
exercises 2,712 2,712
Amortization of deferred compensation 515 515
Net loss (101,723) (101,723)
Unrealized losses on securities
available for sale, net of taxes of
$3,174 (11,253) (11,253)
Losses on available for sale securities
reclassified from other comprehensive
income, net of taxes of $6,210 due to an
other than temporary decline in value 15,818 15,818
---------------
Comprehensive loss (97,158)
----------- ------------- -------------- ------------- ---------------- ---------------
Balance at June 30, 2002 $ 90 $ 508,432 $ (696) $ (25,722) $ -- $ 482,104
=========== ============= ============== ============= ================ ===============
The accompanying notes are an integral part of the consolidated financial
statements.
-52-
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. NATURE OF BUSINESS
Cree, Inc., the "Company," or "Cree," a North Carolina corporation, develops,
manufactures, and markets silicon carbide ("SiC") and gallium nitride ("GaN")
based semiconductor materials and devices as well as radio frequency ("RF") and
microwave devices made from silicon. Revenues are primarily derived from the
sale of near ultra-violet, ("UV"), blue and green light emitting diodes
("LEDs"), SiC based materials and RF and microwave devices. The Company markets
its UV, blue and green LED chip products principally to customers who
incorporate them into packaged lamps for resale to original equipment
manufacturers. The Company also sells SiC material products primarily to
corporate, government, and university research laboratories. RF and microwave
devices are sold primarily to power amplifier manufacturers. In addition, the
Company is engaged in a variety of research programs related to the advancement
of SiC and GaN process technology and the development of electronic and
optoelectronic devices that take advantage of these materials' unique physical
and electronic properties. The Company has historically recovered the costs of a
significant portion of its research and development efforts from revenues on
contracts with agencies of the U.S. Federal government.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Microwave, Inc. ("Cree Microwave"), Cree
Lighting Company ("Cree Lighting"), Cree Research FSC, Inc. ("FSC"), Cree
Funding, LLC ("Cree Funding"), Cree Employee Services Corporation, Cree
Technologies, Inc., CI Holdings, Limited, Cree Asia-Pacific, Inc and Cree Japan,
Inc. All material intercompany accounts and transactions have been eliminated in
consolidation.
Business Combination
On December 29, 2000, the Company completed the acquisition of the Cree
Microwave division (formerly known as UltraRF) of Spectrian Corporation, or
Spectrian, through the purchase of assets of the business by Cree's wholly owned
subsidiary, Cree Microwave, Inc. in a business combination accounted for using
the purchase method. Under the terms of the Asset Purchase Agreement, Cree
Microwave acquired substantially all of the net assets of the business from
Spectrian in exchange for a total of 2,656,917 shares of Cree common stock
valued at $113.5 million. Of the total shares issued, 191,094 shares were placed
in escrow and proceeds from the sale of such shares were retained in escrow to
secure Spectrian's representations, warranties and covenants under the Asset
Purchase Agreement. Under the terms of the escrow arrangement, one-half of the
funds were released to Spectrian in June 2001 and the balance was released in
December 2001 because no claims were made against the escrowed assets. The
results of operations of Cree Microwave have been included in the consolidated
results of the Company since the date of acquisition.
In connection with the acquisition of the Cree Microwave business, the Company
recognized a one-time charge of $17.4 million during fiscal 2001 representing
the write-off of the appraised value of certain acquired in-process research and
development costs as of the acquisition date.
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Pro Forma Summary Data
The following pro forma summary data for the twelve months ended June 24, 2001
presents the consolidated results of operations as if the acquisition of Cree
Microwave made during 2001 had occurred as of June 26, 2000. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisition been made as of
June 26, 2000 or of results that may occur in the future.
Year Ended June 24, 2001
(in 000's except per share
data)
--------------------------
Pro forma revenue $ 194,357
Pro forma net income 42,065
Pro forma basic net income per share $ 0.58
Pro forma diluted net income per share $ 0.56
On May 1, 2000, the Company acquired Nitres, Inc. ("Nitres") in a business
combination accounted for as a pooling of interests. Nitres, became a wholly
owned subsidiary (Cree Lighting Company) of the Company through the exchange of
3,695,492 shares of the Company's common stock for all of the outstanding stock
of Nitres. In addition, the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 304,446
options and warrants to purchase shares of Cree's common stock. The accompanying
consolidated financial statements for fiscal 2000 are based on the assumption
that the companies were combined for the full year. All prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Nitres, as though Nitres had
been a part of the Company for all periods presented.
Reconciliation of Previously Reported Operations - Selected Financial Data
The following table reflects the summarized results of operations of the
separate companies for the nine months ended March 26, 2000, the nearest
practical reporting period prior to the business combination on May 1, 2000. In
addition, a reconciliation of the amounts of net sales and net income previously
reported with restated amounts is included.
-54-
(Unaudited)
Nine months ended
March 26, 2000
(in 000's)
-------------------
Net sales and other revenue:
As previously reported by Cree, Inc. $ 72,342
Nitres, Inc. 2,887
Elimination of intercompany transactions (27)
-------------------
As restated $ 75,202
===================
Net income (loss):
As previously reported by Cree, Inc. $ 19,575
Nitres, Inc. (392)
Elimination of intercompany transactions (20)
-------------------
As restated $ 19,163
===================
Elimination of Prior Intercompany Transactions
Prior to May 1, 2000, the Company and Nitres, in the normal course of business,
entered into certain transactions for the purchase and sale of merchandise.
These intercompany transactions have been eliminated in the accompanying
restated consolidated financial statements.
Business Segments
The Company operates in two business segments, Cree and Cree Microwave. The Cree
segment incorporates its proprietary technology to produce wide bandgap compound
semiconductors using SiC and GaN. Products from this segment are sold for use in
cellular handsets, automotive backlighting, indicator lamps, full color LED
displays and other lighting applications as well as microwave and power
applications. The Cree segment also sells SiC material products to corporate,
government and university research laboratories and generates revenue from
contracts with agencies of the U.S. Federal government.
The Cree Microwave segment designs, manufactures and markets a line of
silicon-based laterally diffused metal oxide semiconductors, or LDMOS and
bipolar radio frequency power semiconductors and modules, the critical component
utilized in building power amplifiers for wireless infrastructure applications.
Summarized financial information concerning the reportable segments as of and
for the years ended June 30, 2002 and June 24, 2001 is shown in the following
table. The "Other" column represents amounts excluded from specific segments
such as interest income and write-downs for investments made in publicly and
privately held equity securities. In addition, the "Other" column also includes
corporate assets such as cash and cash equivalents, short-term investments held
to maturity, marketable securities, interest receivable and long-term
investments held to maturity which have not been allocated to a specific
segment.
-55-
As of and for the Year Ended Cree
June 30, 2002 (in 000's) Cree Microwave Other Total
------------------------------------------------- --------------- ---------------- ---------------- ---------------
Revenue $ 130,639 $ 24,795 $ -- $ 155,434
Depreciation and amortization 30,168 2,232 -- 32,400
Loss before income taxes (4,891) (89,384) (36,139) (130,414)
Assets $ 289,921 $ 19,187 $ 195,087 $ 504,195
As of and for the Year Ended Cree
June 24, 2001 (in 000's) Cree Microwave Other Total
------------------------------------------------- --------------- ---------------- ---------------- ---------------
Revenue $ 157,999 $ 19,228 $ -- $ 177,227
Depreciation and amortization 20,991 957 -- 21,948
Income (loss) before income taxes 51,743 (17,225) 15,668 50,186
Assets $ 298,495 $ 99,185 $ 217,443 $ 615,123
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following is a summary of the Company's consolidated quarterly results
of operations for each of the fiscal years ended June 30, 2002 and June
24, 2001 (in thousands, except per share data).
September 23, December 23, March 24, June 30, Fiscal Year
2001 2001 2002 2002 2002
---------------------------------- ------------------------------------------------
Net revenue $43,166 $ 41,092 $ 33,376 $ 37,800 $ 155,434
Cost of revenue 23,262 21,717 24,999 22,098 92,076
Net income (loss) $ 6,460 $(17,376) $(68,286) $(22,521) $(101,723)
Earnings (loss) per share:
Basic $ 0.09 ($0.24) ($0.94) ($0.31) ($1.40)
Diluted $ 0.09 ($0.24) ($0.94) ($0.31) ($1.40)
September 24, December 24, March 25, June 24, Fiscal Year
2000 2000 2001 2001 2001
-------------- ------------- ------------ ------------- ------------
Net revenue $37,642 $ 41,494 $ 53,365 $ 44,726 $ 177,227
Cost of revenue 17,076 19,420 27,668 25,537 89,701
Net income (loss) $12,655 $ 13,861 $ (5,182) $ 6,509 $ 27,843
Earnings (loss) per share:
Basic $ 0.18 $ 0.19 ($0.07) $ 0.09 $ 0.39
Diluted $ 0.17 $ 0.18 ($0.07) $ 0.09 $ 0.37
Reclassifications
Certain 2001 and 2000 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 2002 presentation.
These reclassifications had no effect on previously reported net income or
shareholders' equity.
Fiscal Year
The Company's fiscal year is a 52 or 53-week period ending on the last
Sunday in the month of June. Fiscal 2002 was a 53-week year that ended on
June 30, 2002.
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Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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 30, 2002 and June 24, 2001, and the reported amounts of revenues and
expenses during the years ended June 30, 2002, June 24, 2001 and June 25, 2000.
Actual amounts could differ from those estimates.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, such as when a purchase order or contract is received from
the customer, the price is fixed, title of the goods has transferred and there
is a reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. If inventory is maintained at a consigned location, revenue is
recognized when our customer pulls product for their use. We provide our
customers with a limited right of return. Revenue is recognized at shipment, and
we record a reserve for sales returns. Revenue from government contracts is
recorded on the percentage-of-completion method as expenses per contract are
incurred.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the development of the Company's technology. The applicable contracts
generally provide that the Company may elect to retain ownership of inventions
made in performing the work, subject to a non-transferable, non-exclusive
license retained by the government to practice the inventions for government
purposes. Contract revenue includes funding of direct research and development
costs and a portion of the Company's general and administrative expenses and
other operating expenses for contracts under which funding is expected to exceed
direct costs over the life of the contract. The specific reimbursement
provisions of the contracts, including the portion of the Company's general and
administrative expenses and other operating expenses that are reimbursed, vary
by contract. Such reimbursements are recorded as contract revenue. For contracts
under which the Company anticipates that direct costs will exceed amounts to be
funded over the life of the contract (i.e., certain cost share arrangements),
the Company reports direct costs as research and development expenses with
related reimbursements recorded as an offset to those expenses.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term and long-term
investments, available for sale securities, accounts and interest receivable,
accounts payable, debt, and other liabilities approximate fair values at June
30, 2002 and June 24, 2001.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). 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.
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(b) Trading Securities- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in
earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading securities
are reported at fair value with unrealized gains or losses excluded
from earnings and reported as a separate component of shareholders'
equity.
At June 30, 2002, the Company held marketable equity securities
available-for-sale of two public companies. At June 30, 2002, the Company owned
356,000 common shares in the first public company at an average cost of $40.10
per share, or a total cost of $14.3 million. These shares were purchased through
two transactions between May 1999 and April 2000. In June 2000, 162,600 shares
were sold for $6.3 million, with a gain on the sale recognized for $3.6 million.
The fair market value of the remaining shares held as of June 30, 2002 was $1.9
million.
At June 30, 2002, the Company owned 691,000 common shares in the second public
company at an average cost of $19.91 per share, or a total cost of $13.8
million. These shares were purchased between June 2001 and October 2001. The
fair market value of these shares as of June 30, 2002 was $4.1 million.
Management views these transactions as strategic investments and the shares are
accounted for as "available-for-sale" securities under SFAS 115. The Company
carries these investments at fair value, based on quoted market prices, and
unrealized gains and losses, net of taxes, are included in accumulated other
comprehensive income (loss), which is reflected as a separate component of
shareholders' equity. Realized gains and losses are recognized upon sale or when
declines in value are deemed to be "other than temporary" on our consolidated
statements of operations. The Company reviews equity holdings on a regular basis
to evaluate whether or not each security has experienced an
"other-than-temporary" decline in fair value. This policy requires, among other
things, a review of each of the companies' cash position, earnings\revenue
outlook, stock price performance, liquidity, ability to raise capital and
management\ownership. Based on this review, if the Company determines that an
"other-than-temporary" decline exists in the value of one of our marketable
equity securities, it is the Company's policy to write-down these equity
investments to the respective market value. The related write-down will then be
recorded as an investment loss on the Company's consolidated statements of
operations. As of June 30, 2002, the Company believed that an
"other-than-temporary" decline in market value had occurred in both of these
marketable equity investments. Accordingly, the Company has written down these
equity investments to their market values as of June 30, 2002 and recorded the
unrealized losses previously recorded as comprehensive items as a non-operating
loss on our consolidated statements of operations. The total amount of the
charge to non-operating expenses in the consolidated statements of operations
for the year ended June 30, 2002 relating to these investments was $22.0
million. One of the companies the Company invested in funded a research and
development project for custom LEDs and lasers. The amount of funding received
by the Company was $4.4 million; $4.7 million and $3.1 million for the fiscal
years ended June 30, 2002, June 24, 2001 and June 25, 2000, respectively. The
amount of the research and development funding received from the company was
recorded as an offset to research and development expense. The Company does not
anticipate additional funding from this company.
As of June 30, 2002, the Company's short-term investments held to maturity
included $32.4 million in high-grade corporate bonds and other debt securities
that mature within one year. As of June 24, 2001, the Company's short-term
investments held to maturity totaled $36.9 million consisting of high-grade
corporate bonds. The Company purchased these investments with a portion of the
proceeds from its public stock offering in January 2000. The Company has the
intent and ability to hold these securities until maturity; therefore, they are
accounted for as "securities held-to-maturity" under SFAS 115. The
-58-
securities are reported on the consolidated balance sheets at amortized cost, as
a short-term investment with unpaid interest included in interest receivable.
As of June 30, 2002, the Company's long-term investments held to maturity
consisted of $64.2 million in high-grade corporate bond holdings and other debt
securities that mature after June 29, 2003. As of June 24, 2001, the Company's
long-term investments held to maturity consisted of $7.9 million in high-grade
corporate bond holdings. The Company purchased the corporate bonds with a
portion of the proceeds from the public stock offering in January 2000. The
Company has the intent and ability to hold these securities until maturity;
therefore, they are accounted for as "securities held-to-maturity" under SFAS
115. The securities are reported on the consolidated balance sheets at amortized
cost, as a long-term held to maturity investment with unpaid interest included
in interest receivable if interest is due in less than 12 months, and as a
long-term other asset if interest is due in more than 12 months. These
investments mature over periods ranging from 13 months to 2 years.
As of June 30, 2002, the Company maintained $16.0 million of net investments in
privately held companies, which are included in other assets on the consolidated
balance sheet. Since the Company does not have the ability to exercise
significant influence over the operations of these companies, these investment
balances are carried at cost and accounted for using the cost method of
accounting. Because the shares of stock the Company received in these
investments are not publicly traded, there is no established market for these
securities. The Company has a policy to review the fair value of these
investments on a regular basis to evaluate the carrying value of such
investments. This policy includes, but is not limited to, reviewing each of the
companies' cash position, financing needs, earnings\revenue outlook, operational
performance, management\ownership changes and competition. The evaluation
process is based on information requested from the privately held companies by
the Company. This information is not subject to the same disclosure regulations
as U.S. public companies, and as such, the basis for these evaluations is
subject to the timing and the accuracy of the data received from these
companies. If the Company determines that the carrying value of an investment is
at an amount in excess of fair value, it is the Company's policy to record a
write-down of the investment. This write-down is estimated based on the
information described above, and it is recorded as an investment loss on the
Company's consolidated statements of operations. During fiscal 2002 and fiscal
2001, the Company recognized write-downs of these investments of $20.4 million
and $4.6 million, respectively, representing the Company's best estimate of
"other-than-temporary" declines in value. Two of the companies we invested in
funded research and development projects. One of the projects was for brighter
LEDs; the other project was for SiC RF transistors. The total amount of funding
received by the Company was $3.5 million, $5.2 million and $0 for the fiscal
years ended June 30, 2002, June 24, 2001 and June 25, 2000, respectively. The
amount of the research and development funding received from the companies was
recorded as an offset to research and development expense. We anticipate
$500,000 of additional funding in fiscal 2003 under the remaining program.
During the first half of fiscal 2002, the Company purchased 150,000 common
shares in a public company at an average cost of $10.31 per share, or a total
cost of $1.5 million. These shares were purchased between September 2001 and
October 2001. The Company sold all of these common shares in November 2001 and
December 2001 at an average price of $14.03 per share, or total proceeds of $2.1
million. The sale of these marketable trading securities resulted in the Company
recording a realized gain on the sale of stock of $558,000. These securities
were classified as trading securities due to the short time they were owned by
the Company. During fiscal 2001, the Company purchased and sold marketable
available-for-sale securities that resulted in the Company recording a realized
gain on the sale of stock of $6.0 million, using the specific identification
method of cost determination for such investments.
-59-
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out (FIFO) method. It is the Company's policy to
record a reserve against inventory once it has been determined that conditions
exist which may not allow the Company to sell the inventory for its intended
purpose, the inventory's value is determined to be less than cost, or it is
obsolete. The charge for the inventory reserves is recorded in cost of revenue
on the statement of operations. In the event the Company later sells inventory
that had been covered by a specific inventory reserve, the sale is recorded at
the actual selling price and the related cost of goods sold at the full
inventory cost. The Company evaluates inventory levels quarterly against sales
forecasts on a part-by-part basis and evaluates its overall inventory risk.
Reserves are adjusted to reflect inventory values in excess of forecasted sales
as well as overall inventory risk assessed by management.
As of June 30, 2002, the Company maintained a $2.3 million reserve for
inventory. Of the total reserve amount, $1.8 million is attributable to the Cree
Microwave segment and $477,000 is attributable to the Cree segment.
The majority of the reserve at Cree Microwave was recorded during the third
quarter of fiscal 2002, due to information that was obtained during contract
negotiations with Spectrian, its significant customer, regarding specific order
needs over the next several quarters. Spectrian has purchased more than 90% of
the products sold by Cree Microwave since it was acquired from Spectrian in
December 2000. During these contract negotiations, Spectrian indicated that it
would only purchase the latest generation LDMOS devices from Cree Microwave
after the fourth quarter of fiscal 2002. As a result, the Company fully reserved
for inventories of non-LDMOS and other older devices deemed unsaleable in the
third quarter of fiscal 2002. The Company disposed of a portion of this
inventory during the fourth quarter of fiscal 2002, and the remainder will be
disposed of within the next twelve months.
In the fourth quarter of fiscal 2002, the Company had inventory write-downs of
$690,000 related to a packaging issue identified by some customers for the
XBright(TM) family of products. At June 30, 2002, the Cree segment reserve
consisted of $477,000 for raw materials, LED and wafer finished goods inventory.
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
forty years. Leasehold improvements are amortized over the lesser of the asset
life or the life of the related lease. Expenditures for repairs and maintenance
are charged to expense as incurred. The costs for major renewals and
improvements are capitalized and depreciated over their estimated useful lives.
The cost and related accumulated depreciation of the assets are removed from the
accounts upon disposition and any resulting gain or loss is reflected in
operations. During the years ended June 30, 2002, June 24, 2001 and June 25,
2000, the Company recorded $19.0 million, $100,000 and $1.3 million,
respectively, as losses on retirement or impairments of property and equipment
reflected in other operating expense on the consolidated statements of
operations.
During October 1999, the Company entered into two agreements with Charles and
Colvard, or C&C, to sell crystal growth equipment manufactured by the Company to
C&C at cost plus a reasonable overhead allocation. As a result of these
transactions, the Company recognized $227,000 in fiscal 2000 as "other operating
income" for the overhead allocation portion of the sales price. In May 2000, the
Company agreed to purchase all of the crystal growth equipment previously sold
to C&C for a purchase price of $5.0 million, which was less than the Company's
direct cost to manufacture the equipment.
-60-
In the second quarter of fiscal 2000, the Company completed a 42,000 square foot
facility expansion at its production site near Research Triangle Park, North
Carolina. In the third quarter of fiscal 2000, the Company purchased a 120,000
square foot facility on 17.5 acres of land adjacent to the existing production
site. The Company uses this facility for general and administrative purposes as
well as for general employee services functions. The cost to acquire this
facility was $8.1 million. In addition, in fiscal 2002, the Company completed
construction of a 147,000 square foot expansion of its main facility.
During fiscal 2000, the Company changed its depreciation policy to reflect lower
useful lives on new manufacturing equipment. The useful lives have been reduced
from nine years to five years for all manufacturing equipment purchased since
the beginning of fiscal year 2000. In management's estimate, this new policy was
necessary due to the changes in estimated useful lives of new equipment caused
by technology changes anticipated with the future development of larger diameter
wafers. Management estimates that the change in policy reduced the Company's
fiscal 2000 net income by $889,000 or $0.03 per share.
Impairment of Property and Equipment
In accordance with SFAS 121, the Company reviews long-lived assets for
impairment based on changes in circumstances that indicate their carrying
amounts may not be recoverable. During the year ended June 30, 2002, the Company
recorded impairment charges for property and equipment totaling $19.0 million
related to assets to be disposed of, which is included as an other operating
expense on the consolidated statements of operations. These impairment charges
were due to technology decisions or changes resulting in the obsolescence of the
assets. All of these assets were sold or disposed of by June 30, 2002.
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
over the lesser of 20 years from the date of patent application or over the
license period. The related amortization expense was $293,000, $194,000 and
$145,000 for the years ended June 30, 2002, June 24, 2001 and June 25, 2000,
respectively. Total accumulated amortization for patents and license rights was
approximately $1.3 million and $990,000 at June 30, 2002 and June 24, 2001,
respectively.
Goodwill and Intangible Assets
During the third quarter of fiscal 2002, the Company determined that business
conditions for its Cree Microwave segment had changed due to several factors.
First, Cree Microwave amended its supply agreement with Spectrian effective
March 31, 2002, which resulted in a significant reduction in quarterly revenue
expectations. In addition, Cree Microwave's outlook for acquiring additional
customers in the near term weakened due to the deteriorating economic conditions
and long product qualification cycles. Also, many of the products that Spectrian
initially indicated it would purchase in the future have not yet been released
to production. Under the amended supply agreement, if Cree Microwave is not able
to produce LDMOS 8 devices qualified for Spectrian's applications in a timely
manner, revenue from Spectrian may be significantly reduced after the June 2002
quarter. If our revenue declines significantly, it would have an adverse effect
on our results of operations from this segment of business. Based on these
impairment indicators, the Company performed an asset impairment analysis in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of". As a result of this analysis, the
remaining balance of goodwill and intangible assets of $76.5 million was deemed
to be fully impaired, and was written off during the third quarter of fiscal
2002. This write-
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off was recorded as "other expense" on the consolidated statements of
operations. See "Significant Sales Contracts" for further discussion of the
Spectrian contract.
Prior to the impairment charge that was recorded during the third quarter of
fiscal 2002, intangible assets included goodwill, current technology and
workforce-in-place associated with the acquisition of Cree Microwave accounted
for under the purchase method in December 2000. Goodwill was capitalized at
$81.5 million and represented the excess of cost over the fair value of assets
acquired and was amortized using the straight-line method over ten years.
Current technology and workforce-in-place represented assets have been assigned
values of $5.5 million and $800,000, respectively. These intangibles were being
amortized under the straight-line method over eight and five years,
respectively. During the first three-quarters of fiscal 2002, prior to the
impairment charge, the expense for intangible asset amortization was $6.8
million. During fiscal 2001, the Company recorded $4.5 million of intangible
asset amortization.
Research and Development
The U.S. Government provides funding through research contracts for several of
the Company's current research and development efforts. The contract funding may
be based on either a cost-plus or a cost-share arrangement. The amount of
funding under each contract is determined based on cost estimates that include
direct costs, plus an allocation for research and development, general and
administrative and the cost of capital expenses. Cost-plus funding is determined
based on actual costs plus a set percentage margin. For the cost-share
contracts, the actual costs are divided between the U.S. Government and the
Company based on the terms of the contract. The government's cost share is then
paid to the Company. Activities performed under these arrangements include
research regarding SiC and GaN materials and devices. The contracts typically
require the submission of a written report that documents the results of such
research, as well as some material deliverables.
The revenue and expense classification for contract activities is based on the
nature of the contract. For contracts where the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is reported as
contract revenue and all direct costs are reported as costs of contract revenue.
For contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, costs are reported as
research and development expenses and related funding as an offset of those
expenses. The following table details information about contracts for which
direct expenses exceeded funding by period as included in research and
development expenses:
Year Ended (in 000's)
-----------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
---------------- ---------------- ---------------
Net research and development costs $ 17 $ 435 $ 538
Government funding 276 1,306 868
---------------- ---------------- ---------------
Total direct costs incurred $ 293 $ 1,741 $ 1,406
================ ================ ===============
Customers contributed $9.0 million in fiscal 2002, $11.9 million in fiscal 2001
and $5.5 million in fiscal 2000 toward product research and development
activities. In addition, customers are committed to spend an additional $462,000
in fiscal 2003 for research and development activities.
-62-
Credit Risk, Major Customers and Major Suppliers
Financial instruments, which may subject the Company to a concentration of
credit risk, consist principally of short-term and long-term investments,
marketable securities, cash equivalents and accounts receivable. Short-term and
long-term investments consist primarily of high-grade corporate debt, commercial
paper, government securities and other investments at interest rates that vary
by security. The Company's cash equivalents consist primarily of money market
funds. Certain bank deposits may at times be in excess of the FDIC insurance
limits.
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 its contract revenue
from contracts with the U.S. Government. Approximately 18% and 10% of the
Company's accounts receivable balance at June 30, 2002 and June 24, 2001,
respectively, was due from the U.S. Government. The Company had amounts due from
Osram Opto Semiconductors GmbH, or Osram totaling 13% and 18%, of accounts
receivable balances at June 30, 2002 and June 24, 2001, respectively. The
Company had amounts due from Spectrian totaling 8% and 9% of accounts receivable
balances at June 30, 2002 and June 24, 2001, respectively. The Company had
amounts due from Sumitomo Corporation totaling 9% and 14% of accounts receivable
balances at June 30, 2002 and June 24, 2001, respectively.
The Company has derived its product and contract revenue from sales in the
United States, Malaysia, Other Asian countries, and Europe based on ship-to
locations for our products as follows:
Year ended
------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
---- ---- ----
United States ................................... 35% 31% 31%
Malaysia ........................................ 23% 17% 16%
Other Asian Countries ........................... 34% 45% 48%
Europe .......................................... 8% 7% 5%
One customer accounted for 19%, 25%, and 26% of revenue for fiscal 2002, 2001,
and 2000, respectively. A second customer accounted for 14%, 22%, and 25% of
revenue for fiscal 2002, 2001, and 2000, respectively. A third customer
accounted for 2%, 3%, and 15% of revenue for fiscal 2002, 2001, and 2000,
respectively. A fourth customer accounted for 16%, 11%, and 0% of revenue fiscal
2002, 2001, and 2000, respectively. The U.S. Government accounted for 12%, 9%,
and 11% of revenues during fiscal 2002, 2001, and 2000, respectively.
The Company depends on single or limited source suppliers for a number of raw
materials and components used in its products. Any interruption in the supply of
these key materials or components could have a significant adverse effect on the
Company's operations.
Over 90% of Cree Microwave revenues were derived from shipments to Spectrian in
fiscal 2002 as well as fiscal 2001. The Company's supply contract with Spectrian
commits them to a minimum purchase level of $16.3 million in fiscal 2003. If the
Company is unable to deliver qualified LDMOS 8 products; the amount of the
contractual supply agreement with Spectrian may be reduced significantly.
-63-
(Loss) Earnings Per Share
Basic (loss) earnings per common share is computed using the weighted average
number of common stock shares outstanding. Diluted (loss) earnings per common
share is computed using the weighted average number of common stock shares
outstanding adjusted for the incremental shares attributed to outstanding
options and warrants to purchase common stock, unless such incremental shares
would be antidilutive.
Accounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), no compensation expense 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 123 "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
establishes fair value as the measurement basis for equity instruments issued in
exchange for goods or services and stock-based compensation plans. Fair value
may be measured using quoted market prices, option-pricing models or other
reasonable estimation methods. SFAS 123 permits the Company to choose between
adoption of the fair value based method or disclosing pro forma net (loss)
income information. The Statement is effective for transactions entered into
after December 31, 1995. The Company continues to account for stock-based
compensation in accordance with APB 25, as amended, and provides the pro forma
disclosures required by SFAS 123.
Income Taxes
Income taxes have been accounted for using the liability method in accordance
with FASB Statements of Financial Accounting Standards 109 "Accounting for
Income Taxes". Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts.
Contingencies
The Company is involved in various legal proceedings related to the protection
of its intellectual property. Although the final resolution of these matters
cannot be determined, management's opinion is that the final outcome of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
3. ACCOUNTS RECEIVABLE, NET
The following is a summary of the components of accounts receivable, net:
Year Ended (in 000's)
-------------------------------------
June 30, 2002 June 24, 2001
---------------- ------------------
Billed trade receivables $32,708 $31,982
Unbilled contract receivables 2,339 3,218
---------------- ------------------
35,047 35,200
Allowance for sales returns (455) (350)
---------------- ------------------
Total accounts receivable, net $34,592 $34,850
================ ==================
-64-
The following table summarizes the changes in the Company's allowance for sales
returns for the years ended June 30, 2002, June 24, 2001 and June 25, 2000:
Year Ended (in 000's)
------------------------------------------------------------------
June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ ------------------
Balance at beginning of year $350 $ 250 $ 175
Charges to cost and expenses 105 100 75
------------------ ------------------ ------------------
Balance at end of year $455 $ 350 $ 250
================== ================== ==================
4. INVENTORY, NET
The following is a summary of inventory:
Year Ended (in 000's)
------------------------------------
June 30, June 24,
2002 2001
--------------- -----------------
Raw materials $ 3,908 $ 4,538
Work-in-progress 6,629 6,206
Finished goods 9,724 5,251
--------------- -----------------
20,261 15,995
Inventory reserve (2,295) (793)
--------------- -----------------
Total inventory, net $17,966 $15,202
=============== =================
The following table summarizes the changes in the Company's inventory reserve
for the years ended June 30, 2002, June 24, 2001 and June 25, 2000:
Year Ended (in 000's)
------------------------------------------------------------------
June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ ------------------
Balance at beginning of year $ 793 $ -- $ --
Charges to cost and expenses 6,234 1,293 --
Disposals (write-offs to reserve) (4,732) (500) --
------------------ ------------------ ------------------
Balance at end of year $ 2,295 $ 793 $ --
================== ================== ==================
5. PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment:
Year ended (in 000's)
-----------------------------------------
June 30, 2002 June 24, 2001
----------------- -----------------
Office furnishings and safety systems $ 5,170 $ 3,755
Land and buildings 93,148 61,804
Machinery and equipment 149,723 131,110
Computer hardware and software 5,810 3,865
Leasehold improvements 5,735 4,106
---------------- ----------------
259,586 204,640
Accumulated depreciation (69,830) (44,234)
---------------- ----------------
189,756 160,406
Construction in progress 21,929 66,514
---------------- ----------------
Property & Equipment, net $ 211,685 $ 226,920
================ ================
-65-
Depreciation and amortization of property and equipment totaled $32.4 million;
$21.9 million and $10.8 million for the years ended June 30, 2002, June 24, 2001
and June 25, 2000, respectively.
6. ACCRUED EXPENSES
The following table reflects the components of other accrued expenses:
Year ended (in 000's)
-------------------------------------
June 30, 2002 June 24, 2001
---------------- ----------------
Accrued legal fees $1,806 $1,356
Accrued taxes 945 1,357
Deferred revenue 741 91
Other accrued liabilities 1,477 2,352
---------------- ----------------
Total accrued expenses $4,969 $5,156
================ ================
7. SHAREHOLDERS' EQUITY
On January 18, 2001, Cree announced that its Board of Directors had authorized
the repurchase of up to four million shares of its outstanding common stock
through January 2002. Additionally, on March 22, 2001, Cree announced that its
Board of Directors had increased the repurchase limits under the stock
repurchase program announced in January 2001 to include an additional three
million shares. In February 2002, the Board of Directors approved the renewal of
this program through January 2003. During fiscal year ended June 30, 2002, the
Company repurchased 1.5 million shares at an average price of $13.63 per share
with an aggregate value of approximately $20.3 million. Since the inception of
the stock repurchase program, Cree has repurchased 3.3 million shares of its
common stock at an average price of $15.26 per share, with an aggregate value of
$51.0 million.
The Company intends to use available cash to finance purchases under the
program. At the discretion of the Company's management, the repurchase program
can be implemented through open market or privately negotiated transactions. The
Company will determine the time and extent of repurchases based on its
evaluation of market conditions and other factors.
On January 20, 2000, the Company completed a public offering of 6,578,000 shares
of its common stock. The price received in the offering was $42.56 per share.
The Company received net aggregate proceeds of approximately $266.1 million
after deducting underwriting discounts and commissions and estimated offering
costs. The net proceeds are being used primarily for manufacturing facility
expansion and purchase of additional equipment, the acquisition of an additional
facility, research and development, and general corporate purposes.
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30,000,000 shares of common stock, with a par value of
$0.005 per share, and 3,000,000 shares of preferred stock, with a par value of
$0.01 per share. The preferred stock may be issued in one or more classes or
series with the number of shares, designation, relative rights, preferences, and
limitations of each class or series to be determined by resolution of the Board
of Directors. The Articles of Incorporation were amended, effective at the close
of business on July 26, 1999, to effect a two-for-one split of the common stock.
Effective November 14, 2000 the Articles of Incorporation were amended to
-66-
increase the authorized number of common shares to 100,000,000, with a par value
of $0.0025. In addition, the Company split its stock again on December 1, 2000.
As a result, as of December 1, 2000, the Articles of Incorporation authorize the
Company to issue up to 200,000,000 shares of common stock, with a par value of
$0.00125 per share. The amendments did not change the number of authorized
shares or other provisions relating to the preferred stock. On July 30, 1999 and
December 1, 2000, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the two common stock splits.
On May 29, 2002, the Company's board of directors adopted a shareholder rights
plan, pursuant to which stock purchase rights were distributed to shareholders
at a rate of one right with respect to each share of common stock held of record
as of June 10, 2002. The rights plan is designed to enhance the board's ability
to prevent an acquirer from depriving shareholders of the long-term value of
their investment and to protect shareholders against attempts to acquire the
Company by means of unfair or abusive takeover tactics. The rights become
exercisable based upon certain limited conditions related to acquisitions of
stock, tender offers and certain business combinations involving the Company.
The Company amended the Articles of Incorporation to designate 200,000 shares of
preferred stock as "Series A Preferred Stock" in connection with the
implementation of a shareholders' rights plan. At June 30, 2002, rights to
purchase 100,000 shares of Preferred Stock had been distributed to shareholders.
At June 30, 2002, the Company had reserved a total of 18,202,000 shares of its
common stock and 100,000 shares of its Series A preferred stock for future
issuance as follows:
Number of shares
----------------
For exercise of outstanding common stock options 14,684,000
For future common stock option awards 3,355,000
For possible future issuance to employees under the
Employee Stock Purchase Plan 163,000
---------------------
Total common shares reserved 18,202,000
=====================
Series A Preferred Stock reserved for exercise of rights
issued under shareholders' rights plan 100,000
=====================
8. EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (the "ESPP") on November 2,
1999. The ESPP provides employees of the Company, and its majority-owned
subsidiaries, with an opportunity to purchase common stock through payroll
deductions. The purchase price is set at 85% of the fair market value of common
stock at the beginning of the participation period, or 85% of the price on the
purchase date, whichever is lower. Contributions are limited to 15% of an
employee's compensation. The participation periods have a 12 month duration,
with new participation periods beginning in November and May of each year. Each
participation period has two purchase dates, one in October and the other in
April. The Board of Directors has reserved 600,000 shares of common stock for
issuance under the ESPP. As of June 30, 2002, 437,305 shares of common stock had
been purchased under the ESPP.
9. STOCK OPTIONS AND STOCK WARRANTS
The Company has stock option plans to provide incentives to eligible employees,
officers, and directors in the form of incentive stock options and non-qualified
stock options. The Board of Directors determines the option price (not to be
less than fair market value) at the date of grant. Options, particularly those
assumed or exchanged as a result of acquisitions, have various vesting schedules
and
-67-
expiration dates. The majority of options vest and become exercisable over three
to five years and have seven to ten year terms.
Stock option activity during the periods ending as indicated is as follows (in
000's, except per share data):
June 30, 2002 June 24, 2001 June 25, 2000
-------------------------- -------------------------- ----------------------------
Number Weighted Number Weighted Number Weighted
of Average Of Average Of Average
Options Price Options Price Options Price
---------- ------------ ---------- ------------ ---------- -------------
Outstanding -
beginning of year 13,522 $ 26.93 8,180 $ 13.55 7,226 $ 4.07
Granted 3,375 $ 20.48 6,566 $ 41.41 3,506 $ 25.73
Exercised (1,054) $ 4.01 (797) $ 5.19 (2,150) $ 2.57
Forfeited (1,159) $ 42.50 (427) $ 33.80 (402) $ 8.07
---------- ---------- ---------
Outstanding - end of year 14,684 $ 25.86 13,522 $ 26.93 8,180 $ 13.55
========== ========== =========
Exercisable - end of year 5,947 $ 20.39 3,878 $ 11.83 2,706 $ 2.99
========== ========== =========
As permitted by SFAS 123, the Company has elected to follow APB 25 and related
interpretations and amendments in accounting for its employee stock option
plans. In connection with the options obtained through the acquisition of
Nitres, the Company had deferred compensation of $696,000, $1.2 million, and
$1.8 million at June 30, 2002, June 24, 2001, and June 25, 2000, respectively.
This amount represents the difference between the grant price and the deemed
fair value of stock and stock options granted previously. Of this deferred
compensation, $515,000, $501,000, and $980,000 was amortized for the years ended
June 30, 2002, June 24, 2001, and June 25, 2000, respectively.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
Company computes fair value for this purpose using the Black-Scholes pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's options have characteristics significantly different
from traded options, and the input assumptions used in the model can materially
affect the fair value estimate. The assumptions used in this model to estimate
fair value and resulting values are as follows:
Stock Option Plans ESPP
-------------------------------------- ---------------------------------------
June 30, June 24, June 25, June 30, June 24, June 25,
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ---------
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 4.6% 5.4% 6.2% 2.2% 5.0% 5.6%
Expected volatility 90.0% 90.0% 88.0% 90.0% 90.0% 88.0%
Expected life (in years) 4.8 5.7 5.2 0.8 0.8 0.8
Weighted-average fair
value per share $14.52 $31.51 $24.99 $6.50 $16.73 $12.67
-68-
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
Year Ended (in 000's, except per share data)
----------------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
----------------- ----------------- ---------------
Net (loss) income, as reported $ (101,723) $ 27,843 $ 30,520
Basic (loss) earnings per share as reported $ (1.40) $ 0.39 $ 0.46
Diluted (loss) earnings per share as reported $ (1.40) $ 0.37 $ 0.43
Pro forma net (loss) income $ (162,305) $ (21,737) $ 21,507
Pro forma basic net (loss) income per share $ (2.23) $ (0.30) $ 0.33
Pro forma diluted net (loss) income per share $ (2.23) $ (0.29) $ 0.31
Selected information regarding stock options as of June 30, 2002 follows (in
000's, except per share data):
Options Outstanding Options Exercisable
------------------------------------------------------------------------ --------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Life Average Average
Range of Exercise Number of in Exercise Number of Exercise
Prices Options Years Price Options Price
--------------------- ------------- -------------- ------------ --------------- -------------
$ 0.01 - $ 4.84 2,856 5.4 $ 3.35 2,445 $ 3.40
$ 6.16 - $ 12.49 881 6.7 $ 10.38 328 $ 8.48
$ 13.89 - $ 19.10 2,127 7.0 $ 16.85 712 $ 18.30
$ 20.24 - $ 33.50 4,475 6.7 $ 24.91 821 $ 26.58
$ 34.63 - $ 71.53 4,345 8.1 $ 49.17 1,641 $ 45.91
------------- ---------------
14,684 6.9 $ 25.89 5,947 $ 20.39
============= ===============
In connection with the Company's September 1995 private placement, the Company
issued warrants to purchase 1.2 million shares of the Company's common stock.
These warrants had a 5-year term and an exercise price of $6.81 per share, which
represents fair value on the date of grant. Warrants to purchase 462,000, and
54,000, shares of common stock were exercised during the fiscal years ended June
24, 2001, and June 25, 2000, respectively. As of June 24, 2001, all warrants
issued under this private placement had been exercised. In conjunction with the
Company's acquisition of Nitres in May 2000, the Company assumed outstanding
warrants that had been previously issued by Nitres in February 2000. These
warrants had a 7-year term and an exercise price of $1.28 per share. During the
year ended June 24, 2001, the remaining warrants to purchase 31,360 shares of
the Company's common stock were exercised.
10. LEASE COMMITMENTS
The Company currently leases six facilities. These facilities are comprised of
both office and manufacturing space. The lease term for the first facility began
in September 1995 and a renewal option was exercised in September 1999. The
lease on this facility expires in September 2002. The lease for the second
facility runs month to month with a 90-day termination clause, which has been
exercised, and will terminate in August 2002. The third facility lease expires
in approximately three years. The fourth facility has a remaining sub-lease term
for approximately nine and one-half years. The lease for the fifth facility
expires in June 2005. The lease for the sixth facility expires in February 2003.
All of the remaining lease agreements provide for rental adjustments for
increases in base rent (up to specific limits) property taxes and general
property maintenance.
-69-
Rent expense associated with these and other expired leases totaled $1.7
million, $1.2 million and $420,000 for the years ended June 30, 2002, June 24,
2001, and June 25, 2000, respectively. Sublease income was $224,000, $166,000
and $0 for the years ended June 30, 2002, June 24, 2001 and June 25, 2000,
respectively. Future minimum rentals as of June 30, 2002 under these leases are
as follows:
Minimum Rental
Amount
Fiscal Years Ended (in 000's)
----------------------------- ---------------------
June 29, 2003 $ 1,732
June 27, 2004 1,697
June 26, 2005 1,697
June 25, 2006 1,029
June 24, 2007 907
Thereafter 4,006
---------------------
Total $ 11,068
=====================
Income generated from subleases is targeted to be $185,000 and $191,000 for the
fiscal years ended June 29, 2003 and June 27, 2004, respectively.
11. LONG-TERM DEBT
In December 1998, Cree Lighting (previously Nitres) received a $431,000 bridge
loan from a group of investors to finance its working capital needs. The bridge
loan was made to Cree Lighting subject to conversion rights that would result in
conversion to shares of Nitres common stock in the event of a financing or one
year passing. In February 2000, the $431,000 bridge loan was converted to shares
of Nitres common stock, which were converted into 168,750 shares of the
Company's common stock at the time of the Company's acquisition of Nitres in May
2000.
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $3.0 million was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
subsequent upfits, accrued interest at a fixed rate of 8% and carried customary
covenants, including the maintenance of a minimum tangible net worth and other
requirements. On February 17, 1999, the entire $10.0 million indebtedness was
repaid with proceeds received from the public stock offering. Interest expense
was $0, $0 and $13,000 for the years ended June 30, 2002, June 24, 2001 and June
25, 2000, respectively.
12. INCOME TAXES
The Company accounts for its income taxes under the provisions of SFAS 109.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
-70-
The actual income tax expense for the years ended June 30, 2002, June 24, 2001,
and June 25, 2000, differed from the amounts computed by applying the U.S.
federal tax rate of 35% to pretax earnings as a result of the following:
Year Ended (in 000's)
--------------------------------------------------------------
June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ ------------------
Federal income tax provision at statutory rate ($45,644) $ 17,565 $ 16,382
State tax provision (3,009) 1,439 1,517
Increase (decrease) in income tax expense resulting
from:
Foreign sales corporation -- (2,108) (1,682)
Investments 20,562 -- --
Research and development (600) (538) (258)
Amortization -- (203) --
In process research and development -- 6,090 --
Non-deductible transaction costs -- -- 327
Other -- 98 --
------------------ ------------------ ------------------
Income tax (benefit) expense ($28,691) $ 22,343 $ 16,286
================== ================== ==================
The following are the components of the provision for income taxes for the years
ended June 30, 2002, June 24, 2001 and June 25, 2000:
Year Ended (in 000's)
--------------------------------------------------------------
Current: June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ ------------------
Federal ($2,200) $ 7,111 $ 856
State - 832 200
------------------ ------------------ ------------------
(2,200) 7,943 1,056
Deferred:
Federal (23,482) 13,988 15,111
State (3,009) 412 119
------------------ ------------------ ------------------
(26,491) 14,400 15,230
Net Provision ($28,691) $ 22,343 $ 16,286
================== ================== ==================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
-71-
Year Ended (in 000's)
June 30, 2002 June 24, 2001 June 25, 2000
------------------ ------------------ --------------------
Current deferred tax asset (liability):
Compensation $ 522 $ 491 $ 268
Inventory 374 544 202
Bad debt 230 129 93
Marketable equity securities and other (4) 3,008 (1,018)
------------------ ------------------ --------------------
Net current deferred tax asset (liability) 1,122 4,172 (455)
Non current deferred tax asset (liability):
Alternative minimum tax -- 2,295 1,690
Net operating loss carryforwards 9,059 421 11,641
Research tax credits 2,869 2,369 785
Fixed assets (12,763) (7,925) (6,060)
Goodwill 31,501 -- --
State tax credits and other (3,301) (1,010) 2,568
------------------ ------------------ --------------------
Net non current deferred tax asset
(liability) 27,365 (3,850) 10,624
------------------ ------------------ --------------------
Net deferred tax asset $ 28,487 $ 322 $ 10,169
================== ================== ====================
As of June 30, 2002, the Company has Federal net operating loss carryforwards of
approximately $20.0 million and state net economic loss carryovers of
approximately $26.0 million. The Federal net operating loss will begin to expire
in 2021. The state net economic loss carryforward will expire beginning in 2011.
Research and development tax credits begin to expire in 2011. State incentive
tax credits begin to expire in 2004.
13. RETIREMENT PLAN
The Company maintains an employee benefit plan (the "Plan") pursuant to Section
401(k) of the Internal Revenue Code. Under the Plan, there is no fixed dollar
amount of retirement benefits, and actual benefits received by employees will
depend on the amount of each employee's account balance at the time of
retirement. All employees are eligible to participate under the Plan on the
first day of a new fiscal month after date of hire. The Pension Benefit Guaranty
Corporation does not insure the Plan. The Company may, at its discretion, make
contributions to the Plan. However, the Company did not make any contributions
to the Plan during the years ended June 30, 2002, June 24, 2001 and June 25,
2000.
14. (LOSS) EARNINGS PER SHARE
The following computation reconciles the differences between the basic and
diluted earnings per share presentations:
Year Ended (in 000's, except per share data)
----------------------------------------------------------
June 30, June 24, June 25,
2002 2001 2000
------------------ ---------------- ----------------
Basic:
Net (loss) income ($ 101,723) $ 27,843 $ 30,520
================== ================ ================
Weighted average common shares 72,718 72,243 65,930
================== ================ ================
Basic (loss) earnings per share ($ 1.40) $ 0.39 $ 0.46
================== ================ ================
Diluted:
Net (loss) income ($ 101,723) $ 27,843 $ 30,520
================== ================ ================
Weighted average common shares-basic 72,718 72,243 65,930
Dilutive effect of stock options & warrants -- 3,492 4,504
------------------ ---------------- ----------------
Weighted average common shares-diluted 72,718 75,735 70,434
================== ================ ================
Diluted (loss) earnings per share ($ 1.40) $ 0.37 $ 0.43
================== ================ ================
-72-
Potential common shares that would have the effect of increasing diluted
earnings per share are considered to be antidilutive. In accordance with
Statement of Financial Accounting Standards 128, "Earnings Per Share", and these
shares were not included in calculating diluted earnings per share. For the year
ended June 30, 2002, there were 10.4 million shares considered to be
antidilutive. As of June 24, 2001 there were 6.4 million shares that were not
included in calculating diluted earnings per share because their effect was
antidilutive. As of June 25, 2000, there were no potential shares considered to
be antidilutive.
15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards. 141,
"Business Combinations," ("SFAS 141) and Statement of Financial Accounting
Standards 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over the useful life. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years
beginning after December 15, 2001, and will be adopted by the Company in fiscal
2003. The Company does not expect the adoption of SFAS 141 and SFAS 142 to have
a material impact on the Company's results of operations, financial position, or
cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires an
entity to record a liability for an obligation associated with the retirement of
an asset at the time that the liability is incurred. This is done by
capitalizing the cost as part of the carrying value of the related asset and
depreciating it over the remaining useful life of that asset. The standard is
effective for financial statements for fiscal years beginning after June 15,
2002 and will be adopted by the Company in fiscal 2003. The Company does not
expect the adoption of SFAS 143 to have a material impact on the Company's
results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards
144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS"). SFAS 144 addresses how and when to measure
impairment on long-lived assets and how to account for long-lived assets that an
entity plans to dispose of either through sale, abandonment, exchange or
distribution to owners. The new provisions supersede SFAS 121, which addressed
asset impairment and certain provisions of APB Opinion 30 related to reporting
the effects of the disposal of a business segment. This pronouncement requires
expected future operating losses from discontinued operations to be recorded in
the period in which the losses are incurred rather than the measurement date.
Under SFAS 144, more dispositions may qualify for discontinued operations
treatment in the income statement. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company will adopt SFAS 144 in fiscal 2003. The Company does not expect
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the adoption of SFAS 144 to have a material impact on the Company's results of
operations, financial position, or cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB 30. SFAS 145 also amends Statement 13 to
require certain modifications to capital leases be treated as a sale-leaseback
and modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). In addition, SFAS 145 rescinded Statement 44
addressing the accounting for intangible assets of motor carriers and made
numerous technical corrections. SFAS 145 is effective for all fiscal years
beginning after May 15, 2002 and will be adopted by the Company on July 1, 2003.
The Company does not expect the adoption of SFAS 145 to have a material impact
on the Company's results of operations, financial position, or cash flows.
In July 2002, the FASB issued Statement of Financial Accounting Standards 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146, which nullified EITF Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS 146 to have a material impact on the Company's results of operations,
financial position, or cash flows.
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 2002.
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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 7 on page 39 of this Form 10-K). The financial statement schedules are
not included in this item 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
3.2 Bylaws, as amended (1)
4.1 Specimen Common Stock Certificate
4.2 Rights Agreement dated as of May 30, 2002 between the Company and
American Stock Transfer & Trust Company, including the form of
Rights Certificate and the Summary of Rights to Purchase Preferred
Stock, attached thereto as Exhibits B and C, respectively (2)
10.1 Equity Compensation Plan, as amended and restated December 1, 2000
(3) *
10.2 Stock Option Plan for Non-Employee Directors (terminated as to
future grants pursuant to Board action dated September 1, 1997)
(4) *
10.3 Nitres, Inc. 1999 Stock Option/Issuance Plan * (terminated as to
future grants following the aquisation of Nitres, Inc. by the
Registrant effective May 1, 2000)
10.4 2001 Nonqualified Stock Option Plan *
10.5 Fiscal 2001 Stock Option Bonus Plan * (plan expired September 30,
2001)
10.6 Fiscal 2002 Stock Option Bonus Plan * (plan expires September 30,
2002)
10.7 Management Incentive Compensation Program - Fiscal Year 2001 Plan
(3) *
10.8 Fiscal 2002 Management Incentive Plan (5) *
10.9 Employment Agreement, dated as of December 1, 2000, between the
Company and M. Todd Tucker (6) *
10.10 License Agreement between the Company and North Carolina State
University dated December 3, 1987 (7)
10.11 Amendment to License Agreement between the Company and North
Carolina State University dated September 11, 1989 (7)
10.12 Sublease agreement, dated December 29, 2000, between Zoltar
Acquisition Inc. (now Cree Microwave, Inc.) and Spectrian
Corporation (8)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
(1) 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 27, 2001.
(2) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form 8-A with the Securities and Exchange
Commission on May 30, 2002.
(3) 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 February 2, 2001.
(4) 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.
(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 February 5, 2002.
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(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 November 2, 2001.
(7) 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.
(8) Incorporated by reference herein. Filed as an exhibit to the Company's
Current Report filed on Form 8-K with the Securities and Exchange Commission
on January 12, 2001.
* Management Contract or Compensatory Plan
(b) Reports on Form 8-K.
On May 30, 2002 the Company filed a Form 8-K announcing a dividend
distribution of one preferred stock purchase right for each outstanding
share of the Company's common stock, $.00125 par value to shareholders of
record at the close of business on June 10, 2002.
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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, INC.
Date: August 16, 2002
By: /s/ Charles M. Swoboda
------------------------
Charles M. Swoboda
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 of Directors August 16, 2002
F. Neal Hunter
/s/ Charles M. Swoboda
- ---------------------------------- Chief Executive Officer and August 16, 2002
Charles M. Swoboda Director
/s/ Cynthia B. Merrell
- ---------------------------------- Chief Financial Officer and August 16, 2002
Cynthia B. Merrell Chief Accounting Officer
/s/ James E. Dykes
- ---------------------------------- Director August 16, 20020
James E. Dykes
/s/ William J. O'Meara
- ---------------------------------- Director August 16, 2002
William J. O'Meara
/s/ John W. Palmour, Ph.D.
- ---------------------------------- Director August 16, 2002
John W. Palmour, Ph.D.
/s/ Robert J. Potter, Ph.D.
- ---------------------------------- Director August 16, 2002
Robert J. Potter, Ph.D.
/s/ Dolph W. von Arx
- ---------------------------------- Director August 16, 2002
Dolph W. von Arx
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