-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T765cpnU1vzNbrutcP8gD92qHzmMURoQJlmZ4rQUsuYupQKMx8SSosTtxEnC68Tm RcKI/rVfAPhC8oUNOy4sHw== /in/edgar/work/0000895419-00-000023/0000895419-00-000023.txt : 20001107 0000895419-00-000023.hdr.sgml : 20001107 ACCESSION NUMBER: 0000895419-00-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000924 FILED AS OF DATE: 20001103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREE INC CENTRAL INDEX KEY: 0000895419 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 561572719 STATE OF INCORPORATION: NC FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21154 FILM NUMBER: 753286 BUSINESS ADDRESS: STREET 1: 4600 SILICON DR CITY: DURHAM STATE: NC ZIP: 27703 BUSINESS PHONE: 9193615709 MAIL ADDRESS: STREET 1: 4600 SILICON DR STREET 2: STE 176 CITY: DURHAM STATE: NC ZIP: 27703 FORMER COMPANY: FORMER CONFORMED NAME: CREE RESEARCH INC /NC/ DATE OF NAME CHANGE: 19940224 10-Q 1 0001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 24, 2000 Commission file number: 0-21154 CREE, INC. (Exact name of registrant as specified in its charter) North Carolina 56-1572719 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 Silicon Drive Durham, North Carolina 27703 (Address of principal executive offices) (Zip Code) (919) 313-5300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X] Yes [ ] No The number of shares outstanding of the registrant's Common Stock, $0.0025 par value per share, as of October 17, 2000 was 35,708,296. CREE, INC. FORM 10-Q For the Quarter Ended September 24, 2000 INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at September 24, 2000 (unaudited) and June 25, 2000 3 Consolidated Statements of Income for the three months ended September 24, 2000 and September 26, 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the three months ended September 24, 2000 and September 26, 1999 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures of Market Risk 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements CREE, INC. CONSOLIDATED BALANCE SHEETS (In thousands) September 24, June 25, 2000 2000 ------------- ---------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 34,123 $ 103,843 Short-term investments held to maturity 206,094 142,461 Marketable securities 16,215 15,842 Accounts receivable, net 19,992 12,406 Interest receivable 5,826 3,893 Inventories 10,564 9,320 Deferred income taxes 139 -- Prepaid expenses and other current assets 3,741 1,254 ----------- ---------- Total current assets 296,694 289,019 Property and equipment, net 157,615 137,118 Long-term investments held to maturity 9,936 41,965 Deferred income taxes 10,624 10,624 Patent and license rights, net 2,373 2,324 Other assets 25,721 5,152 ----------- ---------- Total assets $ 502,963 $ 486,202 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 11,705 $ 14,204 Accrued salaries and wages 4,429 3,133 Other accrued expenses 10,142 5,725 ----------- ---------- Total current liabilities 26,276 23,062 Long term liabilities: Long term liability 400 -- ----------- ---------- Total long term liabilities 400 -- Shareholders' equity: Preferred stock, par value $0.01; -- -- 3,000 shares authorized at September 24, 2000 and June 25, 2000; none issued and outstanding Common stock, par value $0.0025; 88 88 60,000 shares authorized at September 24, 2000 and June 25, 2000; shares issued and outstanding 35,517 and 35,348 at September 24, 2000 and June 25, 2000, respectively Additional paid-in-capital 417,357 415,716 Deferred compensation expense (1,604) (1,755) Retained earnings 60,811 48,156 Accumulated other comprehensive (365) 935 income (loss), net of tax ----------- ---------- Total shareholders' equity 476,287 463,140 ----------- ---------- Total liabilities and $ 502,963 $ 486,202 shareholders' equity =========== ========== The accompanying notes are an integral part of the consolidated financial statements. 3 CREE, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended ------------------------------------- September 24, September 26, 2000 1999 --------------- --------------- Revenue: Product revenue, net $ 34,311 $ 18,248 Contract revenue, net 3,331 2,613 --------------- --------------- Total revenue 37,642 20,861 Cost of revenue: Product revenue, net 14,489 9,496 Contract revenue, net 2,587 1,888 --------------- --------------- Total cost of revenue 17,076 11,384 Gross profit 20,566 9,477 Operating expenses: Research and development 2,101 931 Sales, general and administrative 3,957 2,056 Other expense -- 101 --------------- --------------- Income from operations 14,508 6,389 Other non-operating expense 88 -- Interest income, net 4,783 553 --------------- --------------- Income before income taxes 19,203 6,942 Income tax expense 6,548 2,388 --------------- --------------- Net income 12,655 4,554 =============== =============== Earnings per share: Basic $ 0.36 $ 0.15 =============== =============== Diluted $ 0.34 $ 0.14 =============== =============== Shares used in per share calculation: Basic 35,406 31,185 =============== =============== Diluted 37,630 33,163 =============== =============== The accompanying notes are an integral part of the consolidated financial statements. 4 CREE, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) Three Months Ended -------------------------------- September 24, September 26, 2000 1999 --------------- --------------- Operating activities: Net income $ 12,655 $ 4,554 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,128 2,076 Loss on disposal of property and equipment -- 43 Amortization of patent rights 15 32 Purchase of marketable trading securities (5,028) -- Proceeds from sale of marketable securities 5,837 -- Gain on marketable trading securities (1,182) -- Deferred income taxes 1,479 (118) Tax benefits associated with stock options 4,500 2,520 Amortization of deferred compensation 151 68 Changes in operating assets and liabilities: Accounts and interest receivable (9,519) (1,083) Inventories (1,244) (74) Prepaid expenses and other assets (2,626) (11) Accounts payable, trade (2,499) (1,484) Accrued expenses (1,166) 1,593 --------------- --------------- Net cash provided by operating activities 5,501 8,116 --------------- --------------- Investing activities: Purchase of property and equipment (24,626) (9,773) Purchase of securities held to maturity (50,613) -- Proceeds from securities held to maturity 19,010 -- Purchase of patent rights (64) (98) Increase in other long-term assets (20,569) (171) --------------- --------------- Net cash used in investing activities (76,862) (10,042) --------------- --------------- Financing activities: Net repayments of long term debt -- (48) Net proceeds from issuance of common stock 1,641 1,072 --------------- --------------- Net cash provided by financing activities 1,641 1,024 --------------- --------------- Net decrease in cash and cash equivalents $ (69,720) $ (902) Cash and cash equivalents: Beginning of period $ 103,843 $ 42,545 --------------- --------------- End of period $ 34,123 $ 41,643 =============== =============== Supplemental disclosure of cash flow information: Cash paid for income taxes -- $ 63 The accompanying notes are an integral part of the consolidated financial statements. 5 CREE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The balance sheet as of September 24, 2000, the statements of operations for the three month periods ended September 24, 2000 and September 26, 1999, and the statements of cash flows for the three months ended September 24, 2000 and September 26, 1999 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at September 24, 2000, and all periods presented, have been made. The balance sheet at June 25, 2000 has been derived from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's fiscal 2000 Form 10-K. The results of operations for the period ended September 24, 2000 are not necessarily indicative of the operating results that may be attained for the entire fiscal year. Accounting Policies Business Combination On May 1, 2000 the Company acquired Nitres, Inc. in a business combination accounted for as a pooling of interests. Nitres, Inc., became a wholly owned subsidiary (Cree Lighting Company) of the Company through the exchange of 1,847,746 shares of the Company's common stock for all of the outstanding stock of Nitres, Inc. In addition, the Company assumed outstanding stock options and warrants, which after adjustment for the exchange represented a total of 152,223 options and warrants to purchase shares of Cree's common stock. All prior period consolidated financial statements have been restated to include the results of operations, financial position and cash flows of Nitres, Inc., as though Nitres, Inc. had been a part of the Company for all periods presented. Principles of Consolidation The consolidated financial statements include the accounts of Cree, Inc., and its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Cree Research FSC, Inc., Cree Funding LLC, Cree Employee Services Corporation and 6 Cree Technologies, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain 2000 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2001 presentation. These reclassifications had no effect on previously reported net income or 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. Accordingly, all quarterly reporting reflects a 13 week period in fiscal 2001 and fiscal 2000. The Company's current fiscal year extends from June 26, 2000 through June 24, 2001. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term and long-term investments, available for sale securities, accounts and interest receivable, accounts payable, debt, and other liabilities approximate fair value at September 24, 2000 and June 25, 2000. Investments Investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in Debt and Equity Securities". This statement requires certain securities to be classified into three categories: (a) Securities Held-to-Maturity- Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. (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. 7 As of September 24, 2000, the Company's short-term investments held to maturity included $206.1 million consisting of $156.5 million in high-grade corporate bonds, $20.0 million in government securities, and $29.6 million in a closed end mutual fund investing in high grade corporate securities that mature within one year. The Company purchased the investments with a portion of the proceeds from its public stock offering in January 2000. The Company has the intent and ability to hold these securities until maturity; therefore, they are accounted for as "securities held-to-maturity" under SFAS 115. The securities are reported on the balance sheet at amortized cost, as a short-term investment with unpaid interest included in interest receivable. As of September 24, 2000, the Company's long-term investments held to maturity consisted of $9.9 million in high-grade corporate bond holdings that mature after September 24, 2001. The Company purchased the corporate bonds with a portion of the proceeds from the public stock offering in January 2000. The Company has the intent and ability to hold these securities until maturity; therefore, they are accounted for as "securities held-to-maturity" under SFAS 115. The securities are reported on the balance sheet at amortized cost, as a long-term held to maturity investment with unpaid interest included in interest receivable if interest is due in less than 12 months, and as a long-term other asset if interest is due in more than 12 months. At September 24, 2000, and September 26, 1999, the Company held a short-term equity investment in common stock of Microvision, Inc. ("MVIS"). The Company purchased 268,600 common shares in a private equity transaction in May 1999 at a price of $16.75 per share, or $4.5 million. Pursuant to an agreement signed March 17, 2000, the Company committed to increase its equity position in MVIS by investing an additional $12.5 million in MVIS common stock. This additional investment was completed on April 13, 2000, when the Company purchased 250,000 shares at a price of $50.00 per share. In June 2000, 162,600 MVIS shares were sold for $6.3 million, with a gain on sale recognized for $3.6 million. The Company has also purchased other securities for investment purposes. Management views these transactions as investments, and the shares are accounted for as "available for sale" securities under SFAS 115. Therefore unrealized gains or losses are excluded from earnings and are recorded in other comprehensive income, net of tax. During the first quarter of fiscal 2001, the Company purchased and sold marketable trading securities that resulted in the Company recording a realized gain on the sale of stock of $1.2 million. Inventories Inventories are stated at the lower of cost or market, with cost determined under the first-in, first-out (FIFO) method. Inventories consist of the following: 8 September 24, June 25, 2000 2000 --------------- ------------ (in thousands) Raw materials $ 2,339 $ 2,415 Work-in-process 3,396 3,094 Finished goods 4,829 3,811 --------------- ------------ Total Inventories $ 10,564 $ 9,320 =============== ============ Research and Development The U.S. Government provides funding through research contracts for several of the Company's current research and development efforts. The contract funding may be based on either a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and the cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. For the cost-share contracts, the actual costs are divided between the U.S. government and the Company based on the terms of the contract. The government's cost share is then paid to the Company. Activities performed under these arrangements include research regarding silicon carbide and gallium nitride materials. The contracts typically require the submission of a written report that documents the results of such research. The revenue and expense classification for contract activities is based on the nature of the contract. For contracts where the Company anticipates that funding will exceed direct costs over the life of the contract, funding is reported as contract revenue and all direct costs are reported as costs of contract revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding as an offset of those expenses. The following table details information about contracts for which direct expenses exceed funding by period as included in research and development expenses: Three months ended ---------------------------------- September 24, September 26, 2000 1999 --------------- -------------- (in thousands) Net research and development costs $ 136 $ 40 Government funding 347 67 --------------- -------------- Total direct costs incurred $ 483 $ 107 =============== ============== 9 Significant Sales Contract In July 2000, the Company entered into a new Purchase Agreement with Osram Opto Semiconductors GmbH & Co. ("Osram"), pursuant to which Osram agreed to purchase and the Company is obligated to ship certain quantities of both the standard brightness and the high brightness LED chips and silicon carbide wafers through September 2001. The agreement calls for certain quantities of standard brightness and high brightness LED chips to be delivered by month. In the event the Company is unable to ship at least 85% of the cumulative quantity due to have been shipped each month, Osram is entitled to liquidated damages of one percent per week of the purchase price of the delayed product, subject to a maximum of ten percent of the purchase price. If product shipments are delayed six weeks or more due to circumstances within the Company's control, then in lieu of liquidated damages, Osram may claim damages actually resulting from the delay up to forty percent of the purchase price of delayed products. The contract also gives Osram limited rights to defer shipments. For products to be shipped in more than 24 weeks after initial notice, Osram can defer 30% and 25% of standard brightness and high brightness LEDs, respectively. For products to be shipped in more than 12 weeks, but less than 24 weeks, Osram may defer 10% of scheduled quantities for both standard brightness and high brightness LEDs. In each case, Osram is required to accept all products within 90 days of the original shipment date. In all other cases, Osram may reschedule shipments only with the Company's mutual written agreement. Additionally, the Purchase Agreement provides for higher per unit prices early in the contract with reductions in unit prices being available as the cumulative volume shipped increases. The higher prices were negotiated by the Company to offset higher per unit costs expected earlier in the contract. Income Taxes The Company has established an estimated tax provision based upon an effective rate of 34%. The estimated effective rate was based upon projections of income for the fiscal year and the Company's ability to utilize remaining net operating loss carryforwards and other tax credits. However, the actual effective rate may vary depending upon actual pre-tax book income for the year or other factors. Earnings Per Share The Company presents earnings per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 required the Company to change its method of computing, presenting and disclosing earnings per share information. 10 The following computation reconciles the differences between the basic and diluted presentations: Three months ended ---------------------------------- September 24, September 26, 2000 1999 --------------- -------------- (in thousands, except per share data) Basic: Net income $ 12,655 $ 4,554 =============== ============== Weighted average common shares 35,406 31,185 =============== ============== Basic income per common share $ 0.36 $ 0.15 =============== ============== Diluted: Net income $ 12,655 $ 4,554 =============== ============== Weighted average common shares-basic 35,406 31,185 Dilutive effect of stock options and warrants 2,224 1,978 --------------- -------------- Weighted average common shares-diluted 37,630 33,163 =============== ============== Diluted income per common share $ 0.34 $ 0.14 =============== ============== Potential common shares that would have the effect of increasing diluted income per share are considered to be antidilutive. In accordance with SFAS No. 128, these shares were not included in calculating diluted income per share. Accordingly, 765,000 and 476,000 shares for the three months ended September 24, 2000 and September 26, 1999, respectively, were not included in calculating diluted income per share for the periods presented. New Accounting Pronouncements In June 1998, The Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in years beginning after June 15, 1999. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In the first quarter of fiscal 2001, the Company adopted SFAS 133. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Information set forth in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements represent the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results and financial position to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology such as "may," "will," "anticipate," "believe," "plan," "estimate," "expect," and "intend" or the negative thereof or other variations thereof or comparable terminology. The Company cautions that any such forward-looking statements are further qualified by important factors that could cause the Company's actual operating results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, fluctuations in our operating results, production yields in our manufacturing processes, whether we can produce greater quantities of high brightness blue and green LEDs, our dependence on a few customers, whether new customers will emerge, whether we can develop, introduce and create market demand for new products, whether we can ramp up manufacturing production of new products to meet demand, whether we can manage our growth effectively, assertion of intellectual property rights by others, adverse economic conditions, and insufficient capital resources. See Exhibit 99.1 for additional factors that could cause the Company's actual results to differ. Overview Cree, Inc. is the world leader in developing and manufacturing semiconductor materials and electronic devices made from silicon carbide ("SiC"). We recognize product revenue at the time of shipment or in accordance with the terms of the relevant contract. We derive the largest portion of our revenue from the sale of blue and green light emitting diode ("LED") products. The Company offers LEDs at two brightness levels -- high brightness blue and green products and standard blue products. Our LED devices are utilized by end users for automotive dashboard lighting, liquid crystal display ("LCD") backlighting, including wireless handsets and other consumer products, indicator lamps, miniature white lights, indoor signs and arena displays, outdoor full color displays, traffic signals and other lighting applications. The demand for high brightness products continued to be strong through the first quarter. During the first quarter of fiscal 2001, revenues derived from high brightness LED sales were greater than 80% of the total LED sales mix. The increase in demand for high brightness products was due to strong demand from customers. Unit shipments of the small-sized high brightness chips, designed for 12 handset applications, more than doubled during the first quarter and represented more than 15% of total LED volume in the first quarter of fiscal 2001. We have continued to make improvements to output and yield. During the first quarter of fiscal 2001, margins for high brightness LED products were strong due to improvements in yield. During the remainder of fiscal 2001, we plan to focus on reducing costs through higher production yields and from significantly higher volumes as fixed costs are spread over a greater number of units. We derive additional revenue from the sale of advanced materials made from SiC that are used primarily for research and development for new semiconductor applications. We also sell SiC crystals to Charles & Colvard ("C&C"), for use in gemstone applications. The balance of our revenue is derived from government and customer research contract funding. Under various programs, U.S. Government entities further the development of our technology by funding our research and development efforts. Results of Operations Three Months Ended September 24, 2000 and September 26, 1999 Revenue. For the quarter ended September 24, 2000, the Company reported revenue of $37.6 million reflecting an 80% increase in sales over the first quarter of fiscal 2000. First quarter product revenue of $34.3 million, which includes sales of light emitting diodes ("LEDs") and materials, increased 88% over the first quarter of fiscal 2000. Higher product revenue was primarily the result of LED revenue growth of 146% in the first quarter of fiscal 2001 as compared to the same period in the prior year. Much of this growth was attributed to a 120% increase in LED volumes over the comparable period with a substantially higher mix of high brightness blue and green LED products. The increase in high brightness unit volume was due to strong demand from customers and the availability of additional capacity from our factory as a result of our facility and equipment expansion and yield improvements. Average LED sales prices paid by customers increased 12% in the first quarter of fiscal 2001 compared to the same quarter in the prior year due to the shift in sales mix to the higher priced high brightness LED products. During the first quarter of fiscal 2001, more than 80% of LED sales were attributed to the high brightness product. During the comparable period in fiscal 2000, less than 34% of LED sales were from the high brightness devices. The average sales price for the high brightness product declined 5% and 2% in the first quarter of fiscal 2001 and 2000, respectively, over the prior sequential quarter. We expect that in order to increase market demand for all of our LED products, we must continue to lower average sales prices, which is common to our industry. However, we are targeting strong growth for our LED revenue in fiscal 2001 to more than offset these lower prices with significantly higher volume, stemming from strong customer demand and our continued capacity expansion and yield improvements. We also plan to introduce a new ultra bright LED product targeted 13 for the second half of fiscal 2001 that is expected to offer two times the brightness of our high brightness devices. We believe this new product will drive a portion of the demand, however; if we are unable to meet the manufacturing ramp up of this product in the appropriate timeframe, revenue may be lower than anticipated. Wafer sales grew 53% in the first quarter of fiscal 2001 over the prior year. Much of this growth was attributed to a 121% increase in wafer volume over the comparable period due to strong demand for silicon carbide materials by the corporate and research communities. Overall, silicon carbide based material sales declined by 2% in the first quarter of fiscal 2001 compared to the same period of fiscal 2000. The decrease in revenue was attributable to lower gemstone sales. During fiscal 2000, C&C announced lower sales and higher inventory levels than anticipated. The Company agreed to allow C&C to reduce its purchase commitments for calendar 2000. While C&C remains optimistic about future business, we are targeting no revenue from gemstone materials in the second half of fiscal 2001. We believe that strong demand from our LED business will more than offset the reduction in gemstone sales. Contract revenue received from U.S. Government agencies increased 27% during the first quarter of fiscal 2001 as compared to the same quarter in the prior year. The additional revenue was anticipated as additional contract awards were received in late fiscal 2000 and in the first quarter of fiscal 2001. Gross Profit. Gross profit increased 117% to $20.6 million in the first quarter of fiscal 2001. Compared to the prior year, gross margins increased to 55% from 45% of revenue due to the successful execution of cost reduction programs combined with rising average sales prices for LEDs due to the shift in mix toward higher priced high brightness products during this timeframe. Lower product costs stem from higher throughput and manufacturing yield on LED and materials products, thereby lowering the cost per unit. In recent quarters, we have continued to be successful in reducing LED costs at a faster rate than average sales prices. For the remainder of fiscal 2001, we plan to continue the strategy of reducing costs through higher production yields and from significantly greater volumes as fixed costs are spread over a greater number of units. Research and Development. Research and development expenses for the three months ending September 24, 2000, increased 126% to $2.1 million from $0.9 million in the comparable prior year period. This was due to increases in internal research and development efforts for RF and microwave and optoelectronics programs. We believe that research and development expenses will continue to grow during the remainder of fiscal 2001 due to increased funding necessary to release future products; however, as a percentage of revenue, these expenses are targeted to remain relatively even. Sales, General and Administrative. Sales, general and administrative expenses for the three month period ended September 24, 2000 increased by 92% to $4.0 from $2.1 million in the same period in the prior year due primarily to the general growth in our business and additional legal expenses. For the remainder of fiscal 2001, we believe that total sales, general and administrative costs 14 will continue to increase in connection with the growth of our business; however, we believe that as a percentage of revenue they will remain constant or possibly decline. Other Expense. Other expense declined 100% to $0 in the first quarter from $101,000 in the same period of the prior year as the Company took asset write-offs during the first quarter of fiscal 2000. Other Non-Operating Expense. Other non-operating expenses for the three-month period ended September 24, 2000 was $88,000 compared to $0 in the prior year period, due to additional costs associated with the acquisition of Nitres, Inc. Interest Income, Net. Net interest income increased $4.2 million to $4.8 million in the first quarter of fiscal 2001 compared to $0.6 million in the prior year period. This was due to higher average cash balances being available in the first quarter of fiscal 2001 as a result of the public stock offering completed in January 2000. Higher interest rates in the first quarter of fiscal 2001 also increased interest income. Income Tax Expense. Income tax expense for the first quarter of fiscal 2001 was $6.5 million compared to $2.4 million in the first quarter of fiscal 2000. This increase resulted from increased profitability during the first quarter of fiscal 2001 over the same period of fiscal 2000. Our tax provision rate was 34% for both periods. Liquidity and Capital Resources We have funded our operations to date through sales of equity, bank borrowings and revenue from product and contract sales. As of September 24, 2000, we had working capital of $270.4 million, including cash, cash equivalents and short-term investments of $240.2 million. Net cash provided by operations was $5.5 million for the three months ended September 24, 2000 compared to $8.1 million that was generated during the comparative period in fiscal 2000. The decrease was primarily attributable to the timing of payments made and received. Accounts and interest receivable and other prepaid expenses increased $12.1 million due to increased product shipments combined with higher interest receivable related to higher yielding securities balances and other timing in the collection of invoices. Additional timing differences led to decreases of $3.7 million in accounts payable and accrued expense balances. Most of the $76.9 million used in investing activities in the first quarter of fiscal 2001 was related to the purchase of held to maturity investments. We also invested $24.6 million in capital expenditures during the first quarter compared to $9.8 million during the same period of the prior fiscal year. The majority of spending for capital expenditures was due to new equipment additions in our epitaxy, crystal growth, clean room, and package and test areas. The Company also continues construction on the 125,000 square foot facility expansion at the existing site that is scheduled to be completed by December 2000 and equipped during the next few quarters. The investment in long-term assets of $20.6 million represents the investments in Xemod, Inc. and other companies. Cash 15 provided by financing activities during fiscal 2001 related to the receipt of $1.6 million in proceeds from the exercise of stock options from the Company's employee stock option plan and the exercise of outstanding stock warrants. We may also issue additional shares of common stock for the acquisition of complementary businesses or other significant assets. From time to time we evaluate potential acquisitions of and investments in complementary businesses and anticipate continuing to make such evaluations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative Disclosures As of September 24, 2000, the Company maintains investments in equity securities that are treated for accounting purposes under SFAS 115 as "available for sale" securities. These investments are carried at fair market value based on quoted market prices of the investments as of September 24, 2000, with net unrealized gains or losses excluded from earnings and reported as a separate component of stockholder's equity. These investments are subject to market risk of equity price changes. Management views these stock holdings as investments; therefore, the shares are accounted for as "available for sale" securities under SFAS 115. The fair market value of these investments as of September 24, 2000, using the closing sale price as of September 22, 2000 was $16.2 million. During the first quarter of fiscal 2001, the Company invested some of the proceeds from its January 2000 public offering into other investments at fixed interest rates that vary by security. No other material changes in market risk were identified during the most recent quarter. Qualitative Disclosures Investments in the common stock of other public companies are subject to the market risk of equity price changes. While the Company can not predict or manage the future market price for such stock, management continues to evaluate its investment position on an ongoing basis. 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings On September 22, 2000 the Company filed a patent infringement lawsuit against Nichia Corporation and Nichia America Corporation in the United States District Court for the Eastern District of North Carolina. The lawsuit seeks enforcement of a patent relating to gallium nitride-based semiconductor devices manufactured using lateral epitaxial overgrowth (LEO) technology, which permits the growth of high quality gallium nitride-based materials useful in manufacturing certain laser diodes and other devices. The patent was issued to North Carolina State University in April 2000 and is licensed to Cree under a June 1999 agreement pursuant to which Cree obtained rights to a number of LEO and related techniques. In its complaint, Cree alleges that Nichia is infringing the patent by, among other things, importing, selling and offering for sale in the United States certain gallium nitride-based laser diodes covered by one or more claims of the patent. The lawsuit seeks damages and an injunction against infringement. North Carolina State University is a co-plaintiff in the action. Item 2. Changes in Securities During the three months ended September 24, 2000, the Company issued 54,696 shares of its common stock to the holders of outstanding warrants upon the exercise of such warrants in reliance on the exemption provided by section 4(2) of the Securities Act of 1933 as a private placement. The exercise price for 47,000 warrants was $13.62. The exercise price for 7,696 warrants was $2.55; however, these warrants were exercised on a net basis, and the Company received no cash upon the issuance of the shares. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Purchase Agreement between the Company and Osram Opto Semi- conductors Gmbh & Co. dated July 27, 2000. (1) 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule 99.1 Certain Business Risks and Uncertainties (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the quarter ended September 24, 2000. --------------------- (1) Confidential treatment of portions of this document has been requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. 17 SIGNATURES Pursuant to the requirements 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. Date: November 1, 2000 CREE, INC. /s/ Cynthia B. Merrell ---------------------------------------- Cynthia B. Merrell, Chief Financial Officer and Treasurer (Authorized Officer and Chief Financial and Accounting Officer) 18 EXHIBIT INDEX Exhibit No. 10.1 Purchase Agreement between the Company and Osram Opto Semi- conductors Gmbh & Co. dated July 27, 2000. (1) 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule 99.1 Risk Factors --------------------- (1) Confidential treatment of portions of this document has been requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. EX-10.1 2 0002.txt EXHIBIT 10.1 [ * ] - Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Commission Rule 24b-2. PURCHASE AGREEMENT between CREE, INC. Durham, North Carolina, USA ("Seller") and OSRAM OPTO SEMICONDUCTORS GMBH & CO. OHG Regensburg Federal Republic of Germany ("Purchaser") Dated July 27, 2000 PURCHASE AGREEMENT PURCHASE AGREEMENT (this "Agreement"), made and effective as of the 24th day of July, 2000 (the "Effective Date"), by and between CREE, INC. (hereinafter referred to as "Seller"), a corporation organized under the laws of the State of North Carolina, the United States of America, and OSRAM OPTO SEMICONDUCTORS GMBH & CO. OHG (hereinafter referred to as "Purchaser"), a joint venture organized under the laws of the Federal Republic of Germany. Recitals WHEREAS, Seller is engaged in the business, among others, of manufacturing and selling LED's in die form and silicon carbide (SiC) wafers; and WHEREAS, Purchaser is engaged in the business, among others, of manufacturing LED's packaged in lamp form and desires to purchase a quantity of LED die products and SiC wafers from Seller; and WHEREAS, the parties have agreed on the terms and conditions under which Seller will sell such LED's and wafers to Purchaser and desire to memorialize such terms in this Agreement; and NOW, THEREFORE, in consideration of the foregoing and the mutual obligations undertaken in this Agreement, the parties agree as follows: 1. CONTRACT DOCUMENTS; DEFINITIONS 1.1. Documents. The following documents are annexed to and made a part of this Agreement: (a) Schedule 1 - Quantity and Shipment Schedule (with Attachment A thereto) (b) Schedule 2 - Price and Payment Schedule (c) Schedule 3 - Product Specifications 1.2. Definitions. For purposes of this Agreement, the terms defined in this Section 1.2 shall have the meaning specified and such definitions shall apply to both singular and plural forms: (a) "Affiliates" of a designated corporation, company or other entity means all entities which control, are controlled by, or are under common control with the named entity, whether directly or through one or more intermediaries. For purposes of this definition "controlled" and "control" mean ownership of securities representing more than fifty percent (50%) of the voting capital stock or other interest having voting rights with respect to the election of the board of directors or similar governing authority. (b) "Confidential Information" shall have the meaning defined in Section 11.1. (c) "Product Specifications" means the specifications set forth or referenced in Schedule 3, as the same may be amended from time to time by mutual written - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 1 agreement of the parties or pursuant to the terms and conditions set forth in such schedule. (d) "Products" mean LED chips and silicon carbide substrates which conform to the applicable Product Specifications. Products supplied under this Agreement will be "GaN LEDs," "InGaN LEDs" and "SiC Wafers" as described in Schedule 3. 2. PURCHASE AND SALE 2.1. Purchase Commitment. (a) Purchaser will purchase from Seller and Seller will sell to Purchaser the quantity of Products shown in Schedule 1, subject to and in accordance with the terms and conditions of this Agreement. (b) Purchaser shall be entitled to cancel or otherwise reduce its purchase commitment under this Agreement, or to reschedule shipments of Products under this Agreement, only to the extent expressly permitted by Schedule 1. 2.2. Price. (a) The purchase price of the Products is set forth in Schedule 2. (b) The prices stated in this Agreement do not include transportation or insurance costs, or any sales, use, excise or other taxes, duties, fees or assessments imposed by any jurisdiction. (c) All applicable taxes, duties, fees or assessments imposed by any jurisdiction with respect to the purchase of the Products (other than taxes on Seller's net income) will be paid by Purchaser. Any taxes, duties, fees or assessments at any time paid by Seller which are to be paid by Purchaser under this Agreement shall be invoiced to Purchaser and reimbursed to Seller. 2.3. Payment Terms. (a) Purchaser will pay for Products to be purchased under this Agreement in accordance with the payment terms in Schedule 2. (b) Payment will be made in U.S. dollars by wire transfer to an account designated in writing by Seller, without reduction for any currency exchange or other charges. (c) Seller will provide Purchaser an invoice and/or shipping documentation for each shipment showing the quantity shipped, the applicable price, any amounts prepaid by Purchaser for the shipment, and any taxes, duties, fees or other assessments due from Purchaser with respect to the shipment. (d) Amounts not paid when due under this Agreement shall accrue interest at the rate of twelve percent (12%) per annum or, if less, the maximum rate permitted by law. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 2 3. DELIVERY 3.1. Purchase Orders; Forecasts. (a) Purchaser will submit written purchase orders evidencing its commitment to purchase Products prior to each scheduled shipment date set forth in Schedule 1. Purchase orders will specify the particular quantity of each Product type to be shipped. Purchase orders must be received at least sixty (60) days prior to the monthly period in which shipment is scheduled according to Schedule 1. (b) Purchase orders may be submitted by Purchaser or by its Affiliates acting on Purchaser's behalf and in its name. If Purchaser requests delivery of shipments to a location other than Regensburg, Germany, the personnel at such location shall be regarded as authorized to act on Purchaser's behalf with respect to scheduling and acceptance of shipments and other matters relating thereto. (c) The terms and conditions of this Agreement shall govern the purchase of Products under this Agreement notwithstanding any contrary provisions of any purchase order, order acknowledgment or other similar document issued by either party. Purchase orders issued under this Agreement are intended as an administrative convenience and, in the case of InGaN LEDs, to specify the selection of such Products, but the obligation to purchase Products under this Agreement is not conditioned upon issuance of a purchase order. (d) Together with each purchase order, Purchaser shall furnish Seller a nonbinding forecast of the mix of Products expected to be to ordered for delivery during the three months following the period covered by the purchase order. (e) Seller will, within ten (10) days after receipt of a purchase order submitted in accordance with the foregoing, issue a written order acknowledgment advising Purchaser of the scheduled shipment date(s) for the quantities ordered. 3.2. Shipment Schedule. (a) Seller will use all commercially reasonable efforts to ship Products in accordance with the shipment schedule set forth in Schedule 1. Seller reserves the right to ship quantities prior to the scheduled dates; provided, however, that no shipment shall be made such that Purchaser receives the shipment earlier than the calendar month immediately preceding the month such quantity was originally scheduled to be shipped. (b) Seller shall be deemed in default due to a delay in meeting the shipment schedule set forth in Schedule 1 only if, immediately after the last day of any calendar month specified therein, the cumulative quantity actually shipped by Seller is less than eighty-five percent (85%) of the cumulative quantity due to have been shipped. (c) In the event of a default by Seller as provided in Section 3.2((b)), Purchaser shall be entitled to liquidated damages of one percent (1%) per week of the purchase price of the delayed Products, subject to a maximum of ten percent (10%) of such purchase price. If Product shipments are delayed six weeks or more due to circumstances within Seller's reasonable control, then in lieu of the foregoing - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 4 liquidated damages Purchaser may claim damages actually resulting from the delay up to forty percent (40%) of the purchase price of the delayed Products. This paragraph states Purchaser's sole claim for damages resulting from Seller's delay in delivering Products. 3.3. Packaging. Seller will ship Products in Seller's standard packaging or packaged in such other manner as the parties may mutually agree in writing. 3.4. Manner of Shipment. Unless otherwise mutually agreed Products shall be shipped F.C.A. Seller's manufacturing facilities by delivery to a transportation company designated by Purchaser. Products shall be deemed delivered to Purchaser when delivered to the transportation company at the shipping point. Title and risk of loss or damage shall pass to Purchaser upon delivery. All transportation charges and expenses, including the cost of insurance against loss or damage in transit, shall be Purchaser's sole responsibility. Any such amounts paid by Seller will be invoiced to and paid by Purchaser. 4. NON-CONFORMING SHIPMENTS 4.1. Reporting of Claims. Except for warranty claims under Article 6, in the event any shipment does not conform to the ordered amount and type of Product or suffers other faults or defects clearly discernible upon reasonable inspection, such non-conformity will be reported in writing to Seller as soon as possible and in any event no later than forty-five (45) days after shipment of the Product to Purchaser. All other non-conformities in shipments shall be reported in writing to Seller promptly upon discovery. If not so reported, the non-conformity shall be deemed waived. 4.2. Remedies for Non-Conforming Shipments. Seller's sole obligation with respect to shipments determined to be non-conforming shall be, at its option, to replace the non-conforming Products (with shipment at Seller's expense) or to issue a credit to Purchaser in the amount of the price paid for such Products with interest calculated at the rate of twelve percent (12%) per annum from the date of payment to the date of credit. This paragraph states Seller's sole obligations with respect to non-conforming shipments. After acceptance of any shipment Purchaser's sole remedies for defects in such shipment shall be as provided in the warranty provisions of this Agreement. 4.3. Compliance with Instructions. In addition to such other duties as may be imposed by law, Purchaser will comply with all of Seller's reasonable instructions regarding rejected goods. If Purchaser incurs any expenses in complying with such instructions, Seller shall reimburse Purchaser for such expenses promptly upon receipt of Purchaser's written request therefor. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 4 5. TECHNICAL COOPERATION Seller and Purchaser agree to have their representatives meet in person from time to time, at mutually agreed upon times and locations but not more frequently than once each calendar quarter, X to discuss potential improvements in and the markets for the InGaN LEDs. 6. WARRANTIES 6.1. Limited Warranty. (a) Seller warrants to Purchaser that Products purchased from Seller under this Agreement will conform to and perform in accordance with the applicable Product Specifications. (b) This warranty is extended only to Purchaser and does not constitute a warranty to Purchaser's customers or any other person. This warranty shall not apply to any defect or failure to perform resulting in whole or in part from improper use, application, installation or operation, and Seller shall have no liability of any kind for failure of any equipment or other items in which the Products are incorporated. (c) All claims under this warranty must be reported in writing to Seller (with such report accompanied by the Product claimed to be defective, including the die "package" in the case of Products sold in die form) as soon as possible, but in any event no later than ***** days after shipment of the Products to Purchaser. If not so reported, such claims shall be waived. (d) Seller's sole obligation with respect to Products determined not to meet the terms of this warranty shall be, at its option, to replace such Products or to issue a credit or refund to Purchaser in the amount of the price received by Seller for the Products. This paragraph states the exclusive remedy against Seller with respect to breach of the warranty given herein or other alleged defects in the Products. 6.2. Warranty Disclaimer. THE WARRANTY IN SECTION 6.1 ABOVE IS GIVEN IN LIEU OF ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, OR IMPOSED BY STATUTE OR OTHERWISE. ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE AND MERCHANTABILITY ARE EXPRESSLY DISCLAIMED BY SELLER. 7. INDEMNIFICATION 7.1. By Seller. (a) Seller at its expense will defend any claim or judicial action brought against Purchaser by a third party, and indemnify Purchaser against any liability for infringement damages finally awarded in any such action, insofar as the same is based on a claim that Products purchased under this Agreement infringe any patent of such third party. (b) If any Products are held to be infringing and their use or sale enjoined, or if in the opinion of Seller any Products are likely to become the subject of such a claim of - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 5 infringement, Seller may, in its sole discretion and at its own expense, procure a license which will protect Purchaser against such claim without cost to Purchaser, replace Seller's inventory of Products with non-infringing Products, or require return of Products in Seller's inventory and refund the price paid by Purchaser for such Products. (c) Seller shall have no obligation hereunder for or with respect to claims, actions or demands alleging infringement that arise by reason of combination of noninfringing items with any items not supplied by Seller. (d) This Section 7.1 states the entire liability of Seller with respect to any claim of infringement. 7.2. Conditions of Indemnification. Seller's obligations under the foregoing indemnity are subject to the condition that the Purchaser give the Seller: (1) prompt written notice of any claim or action for which indemnity is sought; (2) complete control of the defense and settlement thereof by Seller; and (3) cooperation of the Purchaser in such defense. The obligations under the foregoing indemnity are also subject to the condition that the Purchaser not enter into any compromise or settlement or make any admission of liability without the prior written consent of the Seller. 8. LIMITATIONS OF LIABILITY Except as provided in article 7, neither Seller nor Purchaser will have any liability to the other for any consequential, incidental, indirect or special damages arising out of or in connection with this agreement or the use or performance of any Products, even if advised of the possibility of such damages. This limitation applies regardless of whether such claim is based on tort, contract, warranty, negligence, strict liability or any other theory. This limitation shall not apply to the extent liability is mandatory by law, as for example in cases of intent or gross negligence, and cannot be lawfully disclaimed. Additionally this limitation shall not apply to the extent Seller has a valid, enforceable and collectable claim against Seller's (Product) Liability Insurer to recover such damages under its product liability insurance coverage and is otherwise liable under the laws mentioned in Article 13.11. Nothing herein shall be construed to impose any obligation on Seller with respect to such insurance. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 6 9. FORCE MAJEURE Seller shall not be in default or liable for any delay or failure in performance of this Agreement due to strike, lockout, riot, war, fire, act of God, accident, delays caused by Purchaser or compliance with any law, regulation, order or direction, whether valid or invalid, of any governmental authority or instrumentality thereof or due to any causes beyond its reasonable control, whether similar or dissimilar to the foregoing and whether or not foreseen. Seller shall use all commercially reasonable efforts to avoid or remove such causes of non-performance or to limit the impact of the event on Seller's performance and shall continue performance with the utmost dispatch whenever such causes are removed. 10. TERMINATION 10.1. Termination upon Default or Insolvency. Either party may terminate this Agreement by giving written notice of termination to the other: (a) if the other party commits a material breach of its obligations under this Agreement and does not cure such breach within thirty (30) after receipt of written notice of the breach from the non-breaching party; or (b) if the other party becomes insolvent, or any voluntary or involuntary petition for bankruptcy or for reorganization is filed by or against the other party, or a receiver is appointed with respect to all or any substantial portion of the assets of the other party, or a liquidation proceeding is commenced by or against the other party; provided that, in the case of any involuntary petition or proceeding filed or commenced against a party, the same is not dismissed within sixty (60) days. 10.2. Effect of Termination. Nothing in this Article 10 shall affect, be construed or operate as a waiver of any right of the party aggrieved by any breach of this Agreement to recover any loss or damage incurred as a result of such breach, either before or after the termination hereof, subject, however, to the limitations expressly set forth in other Articles of this Agreement. 11. CONFIDENTIAL INFORMATION 11.1. Definition. "Confidential Information" means any information received by one party or its Affiliates (the "receiving party") from the other party or its Affiliates (the "disclosing party") which relates to the subject matter of this Agreement and which the receiving party has been informed or has a reasonable basis to believe is confidential to the disclosing party, unless such information: (1) was known to the receiving party prior to receipt from the disclosing party; (2) was lawfully available to the public prior to receipt from the disclosing party; (3) becomes lawfully available to the public after receipt from the disclosing party, through no act or omission on the part of the receiving party; (4) corresponds in substance to any information received in good faith by the receiving party from any third party without restriction as to confidentiality; or (5) is independently developed by an employee or agent of the receiving party who has not received or had access to such information. 11.2. Identification. Information which the disclosing party wishes to have treated as Confidential Information under this Agreement shall be identified at the time of disclosure as "confidential" by marking, or in the case of oral disclosures, shall be confirmed as such in writing within thirty (30) days following the oral disclosure. 11.3. Confidentiality Obligations. (a) Each party agrees to maintain Confidential Information received from the other in - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 7 confidence and neither use for any unauthorized purpose nor disclose such Confidential Information, without the prior written approval of the disclosing party, except for such disclosures as are required to comply with any order of a court or any applicable rule, regulation or law of any jurisdiction or as provided in Section 11.4. Confidential Information may be used only in the performance of this Agreement and for such other purposes as the disclosing party may authorize in writing. (b) In the event that a receiving party is required by judicial or administrative process to disclose Confidential Information of the disclosing party, it shall promptly notify the disclosing party and allow the disclosing party a reasonable time to oppose such process. (c) Within each party and their respective Affiliates, Confidential Information shall be disclosed only on a need-to-know basis. Each party shall protect Confidential Information of the other by using the same degree of care, but not less than a reasonable degree of care, to prevent unauthorized disclosure or use as that party uses to protect its own confidential information of like nature. (d) The foregoing obligations shall remain in force with respect to each item of Confidential Information for five (5) years following the date such information is first disclosed under this Agreement, notwithstanding any earlier termination of this Agreement. (e) Each party represents and warrants to the other that its employees, agents or consultants having access to any Confidential Information of the other party shall be subject to a valid, binding and enforceable agreement to maintain such Confidential Information in confidence. (f) Each party agrees upon request of the other party to return all Confidential Information received from the other party under this Agreement. 11.4. Terms of Agreement. Purchaser and Seller agree that the terms of this Agreement shall be treated as Confidential Information of each other subject to this Article 11; provided, however, that either party may, upon notice to the other, make such public disclosures regarding this Agreement as in the opinion of counsel for such party are required by applicable securities laws or regulations. 12. ADDITIONAL UNDERTAKINGS 12.1. Use of Trademarks, Etc. Neither party will, without the prior written consent of the other, (a) use in advertising, publicity or otherwise in connection with any Products sold under this Agreement, any trade name, trademark, trade device, service mark, or symbol owned by the other party or its Affiliates; or (b) represent, either directly or indirectly, that any product of such party or its Affiliates is a product manufactured by the other party or its Affiliates, or vice versa. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 8 12.2. Use of SiC Wafers. Purchaser agrees that it will not, without Seller's prior written consent, use SiC Wafers supplied under this Agreement in the bulk growth of silicon carbide or in the development of processes for bulk growth of silicon carbide, nor sell or otherwise transfer or make available any SiC Wafers to any other person or entity, including Purchaser's Affiliates, except as provided below. Purchaser may transfer SiC Wafers supplied under this Agreement to its Affiliates that are not engaged in the bulk growth of silicon carbide or in the development of processes for bulk growth of silicon carbide provided the Affiliate agrees to be bound by the restrictions stated in this paragraph. Purchaser will be responsible for any breach of the restrictions by its Affiliate. 12.3. Resale of Products. Purchaser agrees that it will not, without Seller's prior written consent, sell or otherwise transfer or make available LED Products supplied under this Agreement to any other person or entity, including Purchaser's Affiliates, in the form of LED die or in any form other than lamp or other packaged form, except as provided below or permitted with respect to the sale of LED die for chip-on-board solutions by the Development, License and Supply Agreement between the Seller and Siemens AG dated October 25, 1995 (which agreement was assigned to and assumed by Purchaser pursuant to the Transformation Agreement between Siemens AG, Seller and Purchaser effective January 1, 1999). Purchaser may transfer such LED Products to its Affiliates in die form for packaging provided the Affiliate agrees to be bound by the restrictions stated in this paragraph. Purchaser will be responsible for any breach of the restrictions by its Affiliate. If Purchaser's inventories of LED Products supplied under this Agreement exceed its demand for packaged LEDs, or if due to technical reasons Purchaser is unable to supply packaged LEDs in a form that meets a particular customer's requirements, then at Purchaser's request Seller will in good faith discuss with Purchaser the possibility of giving its consent to the resale of LED Products in die form in that circumstance. 13. GENERAL 13.1. Notices. All notices under this Agreement shall be in writing and sent by prepaid airmail post, by reputable courier service, or by facsimile or electronic message (with a confirmation copy concurrently dispatched by prepaid airmail post or courier service), to the addresses of the respective parties as set forth by their signatures below or to such other address as the party may hereafter specify by written notice so given. Notices shall be effective upon receipt at the location of the specified address. 13.2. Authority; No Conflicting Obligations. Each party warrants that its has all requisite power and authority to enter into and perform this Agreement, and that it has no agreement with any third party or commitments or obligations which conflict in any way with its obligations hereunder. 13.3. Relationship of the Parties. The relationship of Purchaser and Seller under this Agreement is intended to be that of independent contractors. Nothing herein shall be construed to create any partnership, joint - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 9 venture or agency relationship of any kind. Neither party has any authority under this Agreement to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking with any third party. 13.4. Assignment. Except as expressly provided for in this Agreement, neither this Agreement nor any right or obligations hereunder shall be assignable by either party without the prior written consent of the other party and any purported assignment without such consent shall be void. Either party may assign this Agreement without such consent in connection with the sale or transfer of all or substantially all of the assets of the assigning party. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment shall relieve any party of responsibility for the performance of its obligations hereunder. 13.5. Dispute Resolution. Any disputes or claims arising from this Agreement or its breach shall be submitted to and resolved exclusively by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration shall be conducted by three (3) arbitrators appointed in accordance with such rules. The place of arbitration shall be in Geneva, Switzerland. An award rendered in the arbitration shall be final and binding upon the parties and judgment may be entered thereon in any court of competent jurisdiction. 13.6. Severability. If any provision of this Agreement is found invalid or unenforceable, the remaining provisions will be given effect as if the invalid or unenforceable provision were not a part of this Agreement. 13.7. Amendments; Waiver. This Agreement may not be amended except in a writing signed by the authorized representatives of both parties. No waiver of any provision of this Agreement shall be effective unless made in writing and signed by the party sought to be charged therewith. The failure of either party to enforce any provision of this Agreement shall not constitute or be construed as a waiver of such provision or of the right to enforce it at a later time. 13.8. No Implied License. Nothing in this Agreement shall be construed to convey any license under any patent, copyright, trademark or other proprietary rights owned or controlled by either party, whether relating to the Products sold or any other matter. 13.9. Export Regulation. Purchaser shall comply in all respects with all laws and regulations of the United States government or any agency thereof pertaining to exports. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 10 13.10. Enforcement Costs. The prevailing party in any arbitration or judicial action brought to enforce the provisions of this Agreement shall be entitled to recover its costs and expenses, including reasonable attorneys' fees, incurred in filing and prosecuting or defending such action. 13.11. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of Switzerland, without regard to conflicts of laws principles. 13.12. Construction. The captions contained in this Agreement are for reference only and shall not be used in its construction or interpretation. The provisions of this Agreement shall be construed and interpreted fairly to both parties without regard to which party drafted the same. 13.13. United Nations Convention. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. 13.14. Entire Agreement. This Agreement sets forth the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements and understandings between the parties, whether oral or written, relating to such subject matter. * * * * * - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 11 IN WITNESS WHEREOF, the parties, through their respective duly authorized officers, have executed this Agreement to be effective as of the Effective Date set out in the preamble hereto. CREE, INC. OSRAM OPTO SEMICONDUCTORS GMBH & CO. By By -------------------------------- -------------------------------- F. Neal Hunter, Chairman & CEO R. Mueller, President & CEO Date Date -------------------------------- -------------------------------- By -------------------------------- Robert Wittgen, CFO Date -------------------------------- Address for Notices Address for Notices Cree, Inc. OSRAM Opto Semiconductors GmbH & Co.OHG 4600 Silicon Drive Wernerwerkstr. 2 Durham, North Carolina 27703 93049 Regensburg USA Germany Attention: President Attention: President Fax No: +1 (919) 313-5403 Fax No: +49 341 202 2207 - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 12 SCHEDULE 1 Quantity and Shipment Schedule A. Quantity Commitment. 1. During the period commencing October 1, 2000 and ending September 23, 2001, Purchaser will purchase from Seller the quantities of each Product type shown below: GaN LEDs ***** InGaN LEDs - Standard size ***** InGaN LEDs - Small size ***** InGaN LEDs - Aton technology ***** SiC Wafers ***** (50 mm dia.) 2. The InGaN LED - Aton technology part referenced above has not been developed by Seller nor qualified by Purchaser. Purchaser's obligation to buy and Seller's obligation to sell such Product under this Agreement are subject to the condition that the parties mutually agree in writing on specifications for the Product. The parties shall cooperate diligently and in good faith with the goal of Seller developing the Product, Purchaser qualifying the Product and the parties reaching mutual agreement on specifications for the Product such that shipments of the Product may commence under this Agreement beginning October 1, 2000. Seller will endeavor to deliver engineering samples and preliminary specifications by August 31, 2000. Failure of the parties to agree on specifications for such Product shall not give either party the right to terminate this Agreement. B. Shipment Schedule. 1. The shipment schedule is as follows: ------------------------------------------------------------------ Quarterly (13-Week) Period Ending ------------------------------------- Product 12/24/00 3/25/01 6/24/01 9/23/01 ================================================================== GaN LEDs ***** ***** ***** ***** InGaN LEDs - Standard size ***** ***** ***** ***** InGaN LEDs - Small size ***** ***** ***** ***** InGaN LEDs - Aton technology ***** ***** ***** ***** SiC Wafers ***** ***** ***** ***** ------------------------------------------------------------------ 2. Subject to the provisions of this Agreement, unless otherwise mutually agreed the quarterly amounts shown above will be shipped in three shipments on the last day of the fourth, eighth and final week of each quarterly period. The mix of Products for each shipment shall be in accordance with Attachment A to this Schedule 1 except that Purchaser may, by written notice to Seller given not less than ninety (90) days prior to the scheduled shipment date, specify a different mix of InGaN LEDs, provided that: (a) the aggregate purchase price for all InGaN LEDs to be shipped in each quarterly period is not less than the aggregate for such quarter under Attachment A; and (b) Seller has manufacturing capacity available to produce the requested mix. Seller will advise Purchaser in writing, within fifteen (15) days after receipt of Purchaser's notice specifying a different mix, whether Seller has manufacturing capacity available to produce the - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 13 requested mix. Seller will use its best commercially reasonable efforts to supply the requested mix. C. Rescheduling. 1. Purchaser may without charge reschedule shipments of quantities of GaN LEDs under the following terms: (a) for quantities scheduled to be shipped more than twenty-four (24) weeks following Seller's receipt of written notice from Purchaser requesting rescheduling, Purchaser may reschedule up to thirty percent (30%) of such quantity for up to ninety (90) days after the originally scheduled shipment date but not later than December 23, 2001; and (b) for quantities scheduled to be shipped more than twelve (12) weeks but within twenty-four (24) weeks following Seller's receipt of written notice from Purchaser requesting rescheduling, Purchaser may reschedule up to ten percent (10%) of such quantity for up to ninety (90) days after the originally scheduled shipment date but not later than December 23, 2001. 2. Purchaser may without charge reschedule shipments of quantities of InGaN GaN LEDs under the following terms: (a) for quantities scheduled to be shipped more than twenty-four (24) weeks following Seller's receipt of written notice from Purchaser requesting rescheduling, Purchaser may reschedule up to twenty-five percent (25%) of such quantity for up to ninety (90) days after the originally scheduled shipment date but not later than December 23, 2001; and (b) for quantities scheduled to be shipped more than twelve (12) weeks but within twenty-four (24) weeks following Seller's receipt of written notice from Purchaser requesting rescheduling, Purchaser may reschedule up to ten percent (10%) of such quantity for up to ninety (90) days after the originally scheduled shipment date but not later than December 23, 2001. 3. In all other cases Purchaser may reschedule shipments only with Seller's mutual written agreement. 4. Purchaser's notice requesting rescheduling must specify the quantity to be deferred and the date on which shipment is to be made. Subject to the foregoing, a shipment may be rescheduled any number of times under this Paragraph (C). - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 14 SCHEDULE 1 - ATTACHMENT A CONFIDENTIAL TREATEMENT ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ - -------------------------------------------------------------------------------- ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ - -------------------------------------------------------------------------------- ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ ------------------------------------------------------------- ------ **** **** **** **** **** **** **** **** **** **** **** **** **** **** ------------------------------------------------------------- ------ - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 15 SCHEDULE 2 Price and Payment Schedule A. Prices. Prices shall be determined as follows, subject to Paragraph (B) of this Schedule 2: 1. GaN LEDs (Part No. *****) ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== 0 to ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ 2. InGaN LEDs - Standard size (a) Blue: Part Nos. ***** and ***** ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ (b) Green: Part Nos. ***** and ***** ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ 3. InGaN LEDs - Small size (a) Blue: Part No. ***** ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 16 (b) Green: Part No. ****** * ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ *Specifications for the ***** part shall be mutually agreed upon in writing by the parties. 4. InGaN LEDs - Aton technology* (a) Blue (part no. to be determined) ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ (b) Green (part no. to be determined) ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ *Specification for the Aton technology parts shall be mutually agreed upon in writing by the parties. 5. SiC Wafers ------------------------------------- ------------------------ Incremental Quantities Unit Price (US$) ===================================== ======================== ***** ***** ***** to ***** ***** ***** to ***** ***** ***** and greater ***** ------------------------------------- ------------------------ The parties acknowledge that the reduction in per unit prices reflects Seller's expectation that it will improve manufacturing yields and reduce per unit cost. B. Exchange Rate Adjustments. Purchaser and Seller will share the risk of currency exchange rate fluctuations, as provided in this paragraph, for units shipped pursuant to Schedule 1. The unit price for such shipments shall be adjusted by the applicable percentage below according to the value of the "Euro-Dollar Exchange Rate" calculated as of the last day of Seller's fiscal month in which the units were shipped. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 17 (Seller's fiscal months are the periods ending on Sunday of the fourth, eighth and final week of each of Seller's fiscal quarters. Seller's fiscal quarters in which shipments are scheduled under this Agreement are the 13-week periods ending on the dates shown in Paragraph (B)(2) of Schedule 1.) For purposes of this paragraph, the "Euro-Dollar Exchange Rate" means the average of the foreign exchange rates for Euros per U.S. Dollar, as published in the Wall Street Journal during the thirty (30) calendar days preceding the date as of which the calculation is to be made, for rates quoted in New York the preceding business day for trading among banks in amounts of $1 million or more. ------------------------------------------------------------------------- Euro-Dollar Exchange rate Percentage Price Adjustment ========================================================================= Equal to or greater than ***** -***** Equal to or greater than ***** and less than ***** -***** Equal to or greater than ***** and less than ***** -***** Greater than ***** and less than ***** no adjustment Equal to or less than ***** and greater than ***** +***** Equal to or less than ***** and greater than ***** +***** Equal to or less than ***** +***** ------------------------------------------------------------------------- C. Payment Terms. Products will be invoiced upon shipment at the prices determined under Paragraph (A) of this Schedule 2, prior to any adjustment pursuant to Paragraph (B). Invoices shall be due and payable within twenty (20) days from the invoice date. Within fifteen (15) days after the end of each fiscal quarter of Seller, Seller will issue Purchaser a credit or debit memorandum, as the case may be, reflecting all adjustments required by Paragraph (B) with respect to shipments made during the quarter. Purchaser may apply the amount of any such credit memoranda against unpaid invoices due to Seller and shall pay Seller the amount of such debit memoranda in the same manner as invoices. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 18 SCHEDULE 3 Product Specifications A. GaN LEDs. The GaN LEDs subject to this Agreement are Seller's part number *****, and the applicable product specifications are those set forth in Seller's ISO 9000-controlled specifications for such Product as in effect on the Effective Date of this Agreement, copies of which have been provided to Purchaser prior to execution of this Agreement. B. InGaN LEDs. 1. The standard size and small size InGaN LEDs subject to this Agreement are identified by Seller's part numbers shown below. The applicable product specifications are those set forth in Seller's ISO 9000-controlled specifications for such Products as in effect on the Effective Date of this Agreement, copies of which have been provided to Purchaser prior to execution of this Agreement, except as otherwise noted below. ****** ** ****** ** ****** ****** ** ****** ****** * *The specifications for the ***** part shall be mutually agreed upon in writing by the parties. **The minimum radiant flux of *****, ***** and ***** parts shall be as shown below for the period in which the unit is shipped: ------------------------------------------------------------------ Minimum Radiant Flux ------------------------------------------------- Quarterly (13-Week) Period Ending ------------------------------------------------- Part No. 12/24/00 3/25/01 6/24/01 9/23/01 ================================================================== ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ------------------------------------------------------------------ 2. Product Specifications for the Aton technology InGaN LED shall be mutually agreed upon in writing by the parties, with a target of ***** increase in radiant flux and a ***** increase in forward voltage (Vf) from Seller's standard specifications for the corresponding non-Aton technology Products, as set forth in Seller's ISO 9000-controlled specifications as in effect on the Effective Date of this Agreement. C. SiC Wafers. The SiC Wafers subject to this Agreement are Seller's part number ***** and the applicable product specifications are those set forth in Seller's ISO 9000-controlled specifications for such Product as in effect on the Effective Date of this Agreement, copies of which have been provided to Purchaser prior to execution of this Agreement. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 19 The parties will cooperate in evaluating the substitution of Purchaser's internal specifications as the Product Specifications applicable under this Agreement and will negotiate in good faith a mutually acceptable written agreement effecting such substitution and any necessary adjustments to Purchaser's specifications. Failure of the parties to agree on such substitute specifications for any Products, or on any other Product Specifications required to be mutually agreed upon pursuant to this Agreement, shall not give either party the right to terminate this Agreement. D. Seller acknowledges Purchaser's desire that Seller reduce the forward voltages (Vf max.) for all colors from ***** to *****. Seller shall use its best commercially reasonable efforts to develop such improved parts prior to *****. - -------------------------------------------------------------------------------- July 27, 2000 Purchase Agreement Page 20 EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000895419 Cree, Inc. 1,000 U.S. DOLLARS 3-MOS JUN-24-2001 JUN-26-2000 SEP-24-2000 1 34,123 222,309 26,068 250 10,564 296,694 184,378 26,763 502,963 26,276 0 0 0 415,841 60,446 476,287 37,642 37,642 17,076 23,134 0 0 (4,783) 19,203 6,548 12,655 0 0 0 12,655 0.34 0.36
EX-27.2 4 0004.txt RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000895419 Cree, Inc. 1,000 U.S. DOLLARS 3-MOS JUN-25-2000 JUN-28-1999 SEP-26-1999 1 41,643 3,727 17,466 175 4,060 68,019 94,272 15,488 151,620 12,208 0 0 0 113,518 20,785 151,620 20,861 20,861 11,384 14,371 101 0 (553) 6,942 2,388 4,554 0 0 0 4,554 0.15 0.14
EX-99.1 5 0005.txt CERTAIN BUSINESS RISKS AND UNCERTAINTIES EXHIBIT 99.1 Certain Business Risks and Uncertainties Described below are various risks and uncertainties that may affect our business. The risks and uncertainties described below 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 impair our business operations. If any of the following risks 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 AND WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING GROWTH RATE. Although we have had significant revenue and earnings growth in recent quarters, we may not be able to sustain these growth rates or maintain our margins, and we may experience significant fluctuations in our revenue, earnings and margins in the future. Our operating results and margins will depend on many factors, including the following: o our ability to develop, manufacture and deliver products in a timely and cost-effective manner; o whether we encounter low levels of usable product produced during each manufacturing step (our "yield"); o our ability to expand our production of SiC wafers and devices; o our ability to produce higher brightness products; o demand for our products or our customers' products; o competition; and o general industry and global economic conditions. Our future operating results and margins could be adversely affected by these or other factors. 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 and RF device products are manufactured using technologies that are highly complex. Our customers incorporate our products into high volume applications such as automotive dashboards; wireless handsets, full color video displays and gemstones, and they insist that our products meet exact specifications for quality, performance and reliability. The number of usable crystals, wafers and devices that result from our production processes can fluctuate as a result of many factors, including but not limited to the following: o impurities in the materials used; o contamination of the manufacturing environment; o equipment failure, power outages or variations in the manufacturing process; o losses from broken wafers or other human error; and o defects in packaging. Because many of our manufacturing costs are fixed, if our yields decrease, our margins could decline and our operating results would be adversely affected. For this reason, we are constantly trying to improve our yields. In the past, we have experienced difficulties in achieving acceptable yields on new products, which has adversely affected our operating results. We may experience similar problems in the future and we cannot predict when they may occur or their severity. These problems could significantly affect our future margins and operating results. THERE ARE LIMITATIONS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY. Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us by N.C. State and others. The licensed patents include patents relating to our SiC crystal growth process. We intend to continue to file patent applications in the future, where appropriate, and to pursue such applications with U.S. and foreign patent authorities, but we cannot be sure that patents will be issued on such applications or that our existing or future patents will not be successfully contested. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents (or patents issued to others and licensed to us) will provide significant commercial protection. In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information with confidentiality agreements with our employees and other parties. We cannot be sure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others. IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDs, OUR OPERATING RESULTS MAY SUFFER. We believe that higher volume production of high brightness blue and green LEDs will be important to our future operating results. Achieving greater volumes requires improved production yields for these products. Successful production of these products is subject to a number of risks, including the following: o our ability to consistently manufacture these products in volumes large enough to cover our fixed costs and satisfy our customers' requirements; and o our ability to improve our yields and reduce the costs associated with the manufacture of these products. Our inability to produce adequate quantities of our high brightness blue and green products would have a material adverse effect on our business, results of operations and financial condition. OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY. Our future success will depend on our ability to develop new SiC solutions for existing and new markets. We must introduce new products in a timely and cost-effective manner, and we must secure production orders from our customers. The development of new SiC products is a highly complex process, and we have historically experienced delays in completing the development and introduction of new products. Products currently under development include high power RF and microwave devices, power devices, blue laser diodes, high temperature devices and higher brightness LED products. The successful development and introduction of these products depends on a number of factors, including the following: o achievement of technology breakthroughs required to make commercially viable devices; o the accuracy of our predictions of market requirements and evolving standards; o acceptance of our new product designs; o the availability of qualified development personnel; o our timely completion of product designs and development; o our ability to develop repeatable processes to manufacture new products in sufficient quantities for commercial sales; o our customers' ability to develop applications incorporating our products; and o acceptance of our customers' products by the market. If any of these or other factors become problematic, we may not be able to develop and introduce these new products in a timely or cost-efficient manner. WE DEPEND ON A FEW LARGE CUSTOMERS. Historically, a substantial portion of our revenue has come from large purchases by a small number of customers. We expect that trend to continue. For example, for fiscal 2000 our top five customers accounted for 82% of our total revenue. Accordingly, our future operating results depend on the success of our largest customers and on our success in selling large quantities of our products to them. The concentration of our revenues with a few large customers makes us particularly dependent on factors affecting those customers. For example, if demand for their products decreases, they may stop purchasing our products and our operating results will suffer. If we lose a large customer and fail to add new customers to replace lost revenue, our operating results may not recover. WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING FACILITY. In order to increase production at our new facility, we must add critical new equipment, move existing equipment and complete the construction and upfit of buildings. Expansion activities such as these are subject to a number of risks, including unforeseen environmental or engineering problems relating to existing or new facilities or unavailability or late delivery of the advanced, and often customized, equipment used in the production of our products, and delays in bringing production equipment on-line. These and other risks may affect the construction of new facilities, which could adversely affect our business, results of operations and financial condition. THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE. The market for our products is highly competitive. Our competitors currently sell blue and green LEDs made from sapphire wafers that are brighter than the high brightness LEDs we currently produce. In addition, new firms have begun offering or announced plans to offer blue and green LEDs. The market for SiC wafers is also becoming competitive as other firms have in recent years begun offering SiC wafer products or announced plans to do so. We also expect significant competition for products we are currently developing, such as those for use in microwave communications. We expect competition to increase. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations and financial condition. WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH. We have experienced a period of significant growth that has strained our management and other resources. We have grown from 188 employees on December 31, 1996 to 680 employees on June 25, 2000 and from revenues of $44.0 million for the fiscal year ended June 28, 1998 to $108.6 million for the fiscal year ended June 25, 2000. To manage our growth effectively, we must continue to: o implement and improve operation systems; o maintain adequate manufacturing facilities and equipment to meet customer demand; o add experienced senior level managers; and o attract and retain qualified people with experience in engineering, design, technical marketing support. We will spend substantial amounts of money in supporting our growth and may have additional unexpected costs. Our systems, procedures or controls may not be adequate to support our operations, and we may not be able to expand quickly enough to exploit potential market opportunities. Our future operating results will also depend on expanding sales and marketing, research and development, and administrative support. If we cannot attract qualified people or manage growth effectively, our business, operating results and financial condition could be adversely affected. OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE. Beginning in fiscal 2001, we plan to begin shifting LED production from two-inch wafers to three-inch wafers. We must first qualify our production processes on systems designed to accommodate the larger wafer size, and some of our existing production equipment must be refitted for the larger wafer size. Delays in this process could have an adverse effect on our business. In addition, in the past we have experienced lower yields for a period of time following a transition to a larger wafer size until use of the larger wafer is fully integrated in Production and we begin to achieve production efficiency. We anticipate that we will experience similar temporary yield reductions during the transition to the three-inch wafers, and we have factored this into our plan for production capacity. If this transition phase takes longer than we expect or if we are unable to attain expected yield improvements, our operating results may be adversely affected. WE RELY ON A FEW KEY SUPPLIERS. We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our SiC products, including key materials and equipment used in critical stages of our manufacturing processes. We generally purchase these limited source items with purchase orders, and we have no guaranteed supply arrangements with such suppliers. If we were to lose such key suppliers, our manufacturing efforts could be hampered significantly. Although we believe our relationship with our suppliers is good, we cannot assure you that we will continue to maintain good relationships with such suppliers or that such suppliers will continue to exist. IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER. In the past, government agencies and other customers have funded a significant portion of our research and development activities. If this support is discontinued or reduced, our ability to develop or enhance products could be limited and our business; results of operations and financial condition could be adversely affected. OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary right to technology necessary to our business. We cannot assure you that third parties will not attempt to assert infringement claims against us with respect to our current or future products, including our core products. We cannot predict the extent to which such assertions may require us to seek licenses or, if required, whether such licenses will be offered or offered on acceptable terms or that disputes can be resolved without litigation. Litigation to determine the validity of infringement, or claims alleged by third parties, could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not the litigation is ultimately determined in our favor. We cannot predict the occurrence of future intellectual property claims that may prevent us from selling products, result in litigation or give rise to indemnification obligations or damage claims. IF AN ADVERSE JUDGMENT IS ENTERED IN THE PENDING PATENT LITIGATION IN JAPAN, OUR BUSINESS MAY SUFFER. Our distributor in Japan is currently a party to patent litigation in Japan, brought by Nichia, in which Nichia claims that our LED products infringe two Japanese patents it owns. The complaints in the proceedings seek injunctive relief that would prohibit our distributor from further sales of our LED products in Japan. A result adverse to the distributor in these cases would impair our ability to sell both our standard brightness and high brightness LED products in Japan. Subject to contractual limitations, we have an obligation to indemnify our distributor for certain patent infringement claims. WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES. Sales to customers located outside the U.S. accounted for about 69%, 59% and 58% of our revenue in fiscal 2000, 1999 and 1998, respectively. We expect that revenue from international sales will continue to be a significant part of our total revenue. International sales are subject to a variety of risks, including risks arising from currency fluctuations, trends in use of the Euro, trading restrictions, tariffs, trade barriers and taxes. Also, U.S. Government or military export restrictions could limit or prohibit sales to customers in certain countries because of their uses in military or surveillance applications. Because all of our foreign sales are denominated in U.S. dollars, our products become less price competitive in countries with currencies that are low or are declining in value against the U.S. dollar. Also, we cannot be sure that our international customers will continue to place orders denominated in U.S. dollars. If they do not, our reported revenue and earnings will be subject to foreign exchange fluctuations. -----END PRIVACY-ENHANCED MESSAGE-----