-----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, OboJuEmN71GQp4fp9LDmA7r5by/9igaazSOh1cHBNWQ27/eP/+Cf7ZJhboWPtfSf 2pdp5v72nTRJZHM5LLcKbA== 0000895419-99-000019.txt : 19991105 0000895419-99-000019.hdr.sgml : 19991105 ACCESSION NUMBER: 0000895419-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990926 FILED AS OF DATE: 19991104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREE RESEARCH INC /NC/ CENTRAL INDEX KEY: 0000895419 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [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: 99740701 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 10-Q 1 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 26, 1999 Commission file number: 0-21154 CREE RESEARCH, INC. (Exact name of registrant as specified in its charter) North Carolina 56-1572719 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 Silicon Drive Durham, 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, par value $0.0025 per share, as of October 14, 1999 was 29,499,599. CREE RESEARCH, INC. FORM 10-Q For the Quarter Ended September 26, 1999 INDEX Page No. PART I. FINANCIAL INFORMATION -------- Item 1. Financial Statements Consolidated Balance Sheets at September 26, 1999 (unaudited) and June 27, 1999.....................................3 Consolidated Statements of Operations for the three months ended September 26, 1999 and September 27, 1998 (unaudited).......................................................4 Consolidated Statements of Cash Flows for the three months ended September 26, 1999 and September 27, 1998 (unaudited).......5 Notes to Consolidated Financial Statements (unaudited)............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................11 Item 3. Quantitative and Qualitative Disclosures of Market Risk..........15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................16 SIGNATURES...............................................................17 EXHIBIT LIST.............................................................18 -2- CREE RESEARCH, INC. CONSOLIDATED BALANCE SHEETS (In thousands) September 26, June 27, 1999 1999 ------------- ---------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $41,226 $42,506 Marketable securities 3,727 6,145 Accounts receivable, net 16,900 16,285 Inventories 4,060 3,977 Deferred income taxes 296 296 Prepaid expenses and other current assets 571 558 ------------- ---------- Total current assets 66,780 69,767 Property and equipment, net 77,575 69,884 Patent and license rights, net 1,798 1,731 Deferred income taxes 2,827 2,827 Other assets 125 8 ============= ========== Total assets $ 149,105 $ 144,217 ============= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $5,406 $ 7,487 Accrued salaries and wages 2,043 819 Other accrued expenses 3,691 1,239 ------------- ---------- Total current liabilities 11,140 9,545 Long term liabilities: Long term liability 30 -- Deferred income taxes 4,650 4,650 ------------- ---------- Total long term liabilities 4,680 4,650 Shareholders' equity: Preferred stock, par value $0.01; 3,000 shares -- -- authorized at September 26, 1999 and June 27, 1999; none issued and outstanding Common stock, par value $0.0025; 60,000 shares 74 73 authorized at September 26, 1999 and June 27, 1999; shares issued and outstanding 29,500 and 29,258 at September 26, 1999 and June 27, 1999, respectively Additional paid-in-capital 112,180 111,136 Retained earnings 21,031 18,813 ------------- ---------- Total shareholders' equity 133,285 130,022 ============= ========== Total liabilities and shareholders' equity $ 149,105 $ 144,217 ============= ========== The accompanying notes are an integral part of the consolidated financial statements. -3- CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended ------------------------------ September 26, September 27, 1999 1998 ------------- ------------- Revenue: Product revenue, net $ 18,257 $ 10,720 Contract revenue, net 1,791 1,559 ------------- ------------- Total revenue 20,048 12,279 Cost of revenue: Product revenue, net 9,498 5,415 Contract revenue, net 1,136 1,207 -------------- ------------- Total cost of revenue 10,634 6,622 Gross profit 9,414 5,657 Operating expenses: Research and development 931 806 Sales, general and Administrative 1,927 1,218 Other expense 101 269 -------------- ------------- Income from operations 6,455 3,364 Interest income, net 569 115 -------------- ------------- Income before income taxes 7,024 3,479 Income tax expense 2,388 1,113 -------------- ------------- Net income 4,636 2,366 ============== ============= Other comprehensive income, net of tax Unrealized holding gain (loss) (2,418) -- ============== ============= Comprehensive income 2,218 2,366 ============== ============= Earnings per share: Basic $ 0.16 $ 0.09 ============== ============= Diluted $ 0.15 $ 0.09 ============== ============= Shares used in per share calculation: Basic 29,337 25,840 ============== ============= Diluted 31,214 26,498 ============== ============= The accompanying notes are an integral part of the consolidated financial statements. -4- CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) Three Months Ended -------------------------------- September 26, September 27, 1999 1998 -------------- -------------- Operating activities: Net income $4,636 $ 2,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,009 1,140 Loss on disposal of property and equipment 43 511 Amortization of patent rights 32 28 Purchase of marketable trading securities -- (234) Loss (gain) on marketable trading -- 67 securities Changes in operating assets and liabilities: Accounts receivable (615) (1,217) Inventories (83) (706) Prepaid expenses and other assets (130) 595 Accounts payable, trade (2,081) (2,452) Accrued expenses 3,707 1,119 -------------- -------------- Net cash provided by operating activities 7,518 1,217 -------------- -------------- Investing activities: Purchase of property and equipment (9,744) (4,006) Proceeds from sale of property and -- 10 equipment Purchase of patent rights (99) (91) -------------- -------------- Net cash used in investing activities (9,843) (4,087) -------------- -------------- Financing activities: Net proceeds from issuance of long term -- 1,281 debt Net proceeds from issuance of common stock 1,045 159 Repurchase of common stock -- (3,214) -------------- -------------- Net cash provided by financing 1,045 (1,774) activities -------------- -------------- Net increase in cash and cash equivalents $(1,280) $(4,644) Cash and cash equivalents: Beginning of period $42,506 $17,680 -------------- -------------- End of period $41,226 $13,036 ============== ============== Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts -- $ 112 capitalized -------------- -------------- Cash paid for income taxes $ 63 $ 164 ============== ============== The accompanying notes are an integral part of the consolidated financial statements. -5- CREE RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The balance sheet as of September 26, 1999, the statements of operations for the three month periods ended September 26, 1999 and September 27, 1998, and the statements of cash flows for the three months ended September 26, 1999 and September 27, 1998 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 26, 1999, and all periods presented, have been made. The balance sheet at June 27, 1999 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 1999 Form 10-K. The results of operations for the period ended September 26, 1999 are not necessarily indicative of the operating results that may be attained for the entire fiscal year. Accounting Policies Fiscal Year The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in the month of June. Accordingly, all quarterly reporting reflects a 13 week period in fiscal 2000 and fiscal 1999. The Company's current fiscal year extends from June 28, 1999 through June 25, 2000. Investments Investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). This statement requires certain securities to be classified into three categories: (a) Securities Held-to-Maturity- Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. (b) Trading Securities- Debt and equity securities that are bought and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. (c) Securities Available-for-Sale- Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. -6- As of September 26, 1999, the Company's short-term investments consisted of common stock holdings of Microvision, Inc. ("MVIS"). The Company purchased 268,600 common shares in a private equity transaction in May 1999 at a price of $16.75 per share. In August 1999, MVIS filed a registration statement for the Company's sale of these shares; however, Cree has agreed not to sell the shares until at least January 6, 2000. Since the Company is currently restricted from trading these shares and management views this transaction as an investment, the shares are accounted for as "available for sale" securities under SFAS 115. Therefore unrealized gains or losses are excluded from earnings and reported as a separate component of shareholders' equity. As of September 27, 1998, the Company's short-term investments consisted of common stock holdings in C3, Inc ("C3"), the majority of which were bought in November 1997. The Company also acquired additional shares of C3 in September 1998 and acquired 24,601 shares directly from C3 pursuant to the exercise of an option in January 1997. This investment was treated for accounting purposes as a trading security, with net realized and unrealized gains and losses included in net earnings. All common shares of C3 held by Cree were subsequently sold during fiscal 1999. Realized gains on shares of C3 stock sold during fiscal 1999 by the Company were $140,000. This amount was recorded as other income. As of September 27, 1998, the Company's Chief Executive Officer ("CEO") had promised to indemnify the Company for losses of up to $450,000 for the net difference between the aggregate cash consideration paid by Cree for the shares of C3 common stock and the cash proceeds received by Cree upon the sale of C3 common shares. At September 27, 1998, the Company had recorded a $450,000 receivable from the CEO (included in net accounts receivable) based upon this agreement for the net realized and unrealized losses on this investment. Since Cree sold its shares of C3 for a net gain, the indemnity has been terminated with no payments becoming due. Net unrealized losses on shares of C3 stock offset by the unrealized gain on shares acquired from C3 directly were $233,000 at September 27, 1998. Long Term Debt In November 1997, the Company entered into a term loan with a commercial bank for up to $10,000,000 to finance the purchase and upfit of the new main facility in Durham, North Carolina. Approximately $2,950,000 was disbursed under the loan to finance the initial purchase of the facility with the remaining proceeds disbursed on a monthly basis based on actual expenditures incurred. The loan, which was collateralized by the purchased property and subsequent upfits, accrued interest at a fixed rate of 8% and carried customary covenants, including the maintenance of a minimum tangible net worth and other requirements. As of September 27, 1998 the entire $10,000,000 loan was outstanding, including a current portion of $69,000 and a long term amount of $9,931,000. On February 17, 1999, the entire $10,000,000 indebtedness was repaid with proceeds received from a public stock offering. -7- During the three months ended September 27, 1998, the Company capitalized interest on funds used to construct property, plant and equipment in connection with the facility. Interest capitalized for the three months ended September 27, 1998, was $84,000. Inventories Inventories are stated at the lower of cost or market, with cost determined under the first-in, first-out (FIFO) method. Inventories consist of the following: September 26, June 27, 1999 1999 ------------- ------------- (in thousands) Raw materials $ 1,352 $ 1,290 Work-in-progress 1,193 1,675 Finished goods 1,515 1,012 ------------- ------------- Total Inventory $ 4,060 $ 3,977 ============= ============= Research and Development Accounting Policy The Company contracts with the U.S. government for many of its current research and development efforts. By entering into these contracts, the Company has most of its research and product development costs funded by the U.S. government. The contract funding may be based on a cost-plus or a cost-share arrangement. Pursuant to each contract, the amount of funding is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and the cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. For the cost-share contracts, the actual costs are divided between the U.S. government and the Company based on the terms of the contract. The government's cost share is then funded to the Company. The contracts typically require the submission of a written report that documents the results of such research. Funding on contracts under which the Company anticipates that funding will exceed direct costs over the life of the contract is recorded as contract revenue and related costs are reported as a cost of revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, direct costs are shown as research and development expenses and related funding as an offset of those expenses. The following table details information about contracts for which direct expenses exceed funding by period as reflected in the statements of operations: Three months ended ------------------------------ September 26, September 27, 1999 1998 ------------- ------------- (in thousands) Net research and development costs $ 40 $ -- Government funding 67 -- ============= ============ Total direct costs incurred $ 107 $ -- ============= ============ -8- Significant Sales Contract In September 1996, the Company entered into a Purchase Agreement with Siemens AG ("Siemens"), pursuant to which Siemens agreed to purchase LED chips made with the Company's gallium nitride-on-silicon carbide technology. In April 1997, December 1997 and September 1998, contract amendments were executed that provided for enhanced product specifications requested by Siemens and larger volume requirements, respectively. In December 1998, the Purchase Agreement was amended to provide for additional shipments of LED products through September 1999. The Purchase Agreement was subsequently assigned to an indirect subsidiary of Siemens, OSRAM Opto Semiconductors GMBH & Co. OHG ("Osram"), effective as of January 1, 1999. In August 1999, the Company entered into a new Purchase Agreement with Osram, pursuant to which Osram agreed to purchase and the Company is obligated to ship stipulated quantities of both the standard brightness and the high brightness LED chips and silicon carbide wafers through September 2000. 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 20% 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. Also, additional quantities of high brightness LEDs stipulated in the contract may be deferred to the next quarter with 60 days notice at the election of Osram. In all cases, Osram would be required to accept all products within 90 days of the original shipment date. 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. Depreciation The Company has changed its depreciation policy to reflect lower useful lives on new manufacturing equipment. The useful life has been reduced from 9 years to 5 years for all manufacturing equipment purchased since the beginning of fiscal year 2000. In management's estimate, this new policy was necessary due to the changes in estimated useful lives of new equipment caused by technology changes -9- anticipated with the future development of larger diameter wafers. Based on information available at this time, management estimates that the change in policy may reduce the Company's fiscal 2000 net income by approximately $660,000 or $0.02 per share, but actual results may vary. 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. All prior period data presented has been restated to conform to the provisions of SFAS No. 128. The following computation reconciles the difference between the basic and diluted presentations: Three Months Ended ---------------------------------- September 26, September 27, 1999 1998* ------------- ------------- (in thousands, except per share data) Basic: Net income $ 4,636 $2,366 ============= ============= Weighted average common shares 29,337 25,840 ============= ============= Basic income per common share $0.16 $ 0.09 ============= ============= Diluted: Net income $ 4,636 $2,366 ============= ============= Weighted average common shares-basic 29,337 25,840 Dilutive effect of stock options & 1,877 658 warrants ============= ============= Weighted average common shares-diluted 31,214 26,498 ============= ============= Diluted income per common share $0.15 $ 0.09 ============= ============= * Weighted average shares and per share amounts have been adjusted for the two for one stock split effective July 26, 1999. -10- 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, 476,000 and 1,040,000 shares for the three months ended September 26, 1999 and September 27, 1998, respectively, were not included in calculating diluted income per share for the periods presented. On July 13, 1999 the Company filed a Form 8-K announcing a two-for-one split of its common stock. The stock split was effected by an amendment to the Company's Articles of Incorporation that became effective at the close of business on July 26, 1999. With the effectiveness of the amendment, each issued and unissued authorized share of common stock, $0.005 par value per share, was automatically split into two whole shares of common stock, $0.0025 par value per share. On July 30, 1999, the Company issued to each holder of record of common stock a certificate evidencing the additional shares of common stock resulting from the stock split. All references in this document to common stock and per common share data have been adjusted to reflect the common stock split. Item 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 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 Research, Inc. is the world leader in developing and manufacturing semiconductor materials and electronic devices made from silicon carbide ("SiC"). 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. The high brightness products have now been integrated into our -11- manufacturing facility for full production. During the first quarter of fiscal 2000, revenues derived from high brightness LED sales were greater than 50% of the total LED sales mix. Historically, we have experienced low margins with many new product introductions, and have continued to make improvements to output and yield since the high brightness products were introduced in fiscal 1999. During the first quarter of fiscal 2000, margins for the high brightness LED products were reaching levels attained for the standard brightness product as improvements in yield contributed to a 16% reduction in costs from the fourth quarter of fiscal 1999. During the remainder of fiscal 2000, we plan to focus on reducing costs through higher production yields and from 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. We also sell SiC crystals to C3, which incorporates them in gemstone applications. The balance of our revenue is derived from government and customer research contract funding. Under various programs, U.S. Government entities provide funding to aid development of our technology. Results of Operations Three Months Ended September 26, 1999 and September 27, 1998 Revenue. For the quarter ended September 26, 1999, the Company reported revenue of $20,048,000 reflecting a 63% increase in revenue over the first quarter of fiscal 1999. First quarter product revenue of $18,257,000, which includes sales of light emitting diodes ("LEDs") and materials, increased 70% over the first quarter of fiscal 1999. Higher product revenue was primarily the result of LED revenue growth of 92% in the first quarter of fiscal 2000 as compared to the same period in the prior year. Much of this growth was attributed to a 121% increase in LED volumes over the comparable period with a substantially higher mix of high brightness blue and green LED products. During the first quarter of fiscal 2000, revenue from high brightness chips surpassed revenues from our standard brightness products. Average LED sales prices paid by customers declined 15% in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. During the remaining quarters of fiscal 2000, average sales prices for standard brightness and high brightness LED products are expected to remain stable or decline slightly at a slowed pace from reductions experienced in previous years. Management believes that increased volumes will offset any decline in average LED sales prices during the remaining quarters of fiscal 2000. LED shipments also increased as a result of the new Osram contract which calls for a 44% increase in chip shipments over the previous agreement and extends the Osram purchase commitment through the first quarter of fiscal 2001. While we believe that Osram will continue to be our largest customer during fiscal 2000, we expect that the percentage of revenue from this customer will decline as new customers emerge in Asia and Europe. However, there can be no assurance that revenue from new or existing customers will reduce the concentration of our total revenues derived from the Osram contract. -12- Revenue attributable to sales of SiC materials was 46% higher in the first quarter of fiscal 2000 than in the same period of fiscal 1999. The increased revenue was due to significant contributions made by the gemstone products and improvements in throughput and yield efficiency in wafer production. Gemstone product sales have benefited from the added capacity provided under the C3 supply agreement. Wafer volume has also increased as the Company continues to be successful in offering wafer products with lower defect densities, which enable customers to conduct advanced research for microwave and power applications. Contract revenue received from U.S. Government agencies increased 15% during the first quarter of fiscal 2000 as compared to the same quarter in the prior year. The additional revenue was anticipated as additional contract awards were received in late fiscal 1999 and in the first quarter of fiscal 2000. Gross Profit. The Company's gross margin was 47% for the three months ended September 26, 1999 as compared to 46% for the same period in the prior year. The sustained profitability stems from higher throughput and manufacturing yield on LED and materials products, thereby lowering the cost per unit and successfully matching or more than offsetting lower sales prices. The Company has also been successful in growing LED revenue by lowering prices and raising the volume of high brightness products. For the remainder of fiscal 2000, the Company plans to continue the strategy of seeking to lower LED costs and expects that the greatest cost saving benefits will be derived from greater volume and higher yield efficiency on the high brightness products. Lower costs also have been achieved on wafer products due to improved efficiency. Margins from gemstone products have also improved due to higher yields. Research and Development. Research and development expenses for the three months ending September 26, 1999, increased 16% over the comparable prior year period. This was due to increases in internal research and development efforts not included in the scope of government contract funding. In addition, spending under the MVIS contract was higher than funding received. Sales, General and Administrative. Sales, general and administrative expenses for the three month period ended September 26, 1999 increased by 58% over the same period in the prior year due to increased costs to support the growth of business. Overall as a percentage of revenue, S,G&A costs remain at 10% of revenue in the first quarter compared to the first quarter of fiscal 1999. These costs as a percentage of revenue are expected to remain comparable for the remainder of fiscal 2000. Other (Income) Expense. The Company continues to perform under an agreement with C3 to sell equipment manufactured by the Company to C3 at cost plus a comparable overhead allocation to those incurred from government contracts. The overhead allocation was recorded as "other operating income"; however, the amount was more than offset by unrelated asset writeoffs for both the first quarter of fiscal 2000 and 1999, respectively. Interest Income, Net. Net interest income increased by $454,000 in the first quarter over the first quarter of fiscal 1999. This was due primarily to the investment of cash proceeds from the public stock offering in February 1999. In addition, a portion of the proceeds from the public stock offering were used to -13- repay the $10,000,000 loan commitment in the third quarter of fiscal 1999; therefore, no interest expense was incurred in the first quarter of fiscal 2000. Interest expense incurred with the loan commitment was capitalized as a part of the construction improvements made to the facility in fiscal 1999. When certain manufacturing operations were moved to the new site in the first quarter of fiscal 1999, portions of the interest associated with the completed work were expensed. For the first quarter of 1999 total interest incurred was $196,000 with only $84,000 being eligible for capitalization, and therefore $112,000 was expensed. Income Tax Expense. Income tax expense for the first quarter of fiscal 2000 was $2,388,000 compared to $1,113,000 in the first quarter of fiscal 1999. This increase resulted from increased profitability during the first quarter of fiscal 2000 over the same period of fiscal 1999. Liquidity and Capital Resources Net cash provided by operations was $7,518,000 for the three months ended September 26, 1999 compared with $1,217,000 generated during the comparative period in fiscal 1999. The increase was primarily attributable to higher profitability, and was supplemented by timing differences and the net increase in accounts payable and accrued expenses. The Company invested $9,843,000 in capital expenditures during the first three months of fiscal 2000 compared to $4,087,000 during the same period in the prior year. The majority of the increase in spending was due to new equipment additions to increase manufacturing capacity in the crystal growth and epitaxy areas. The Company also continues to expand facilities at the production site near Research Triangle Park, North Carolina. Cash provided by financing activities during fiscal 2000 related to the receipt of $1,045,000 in proceeds from the exercise of stock options from the Company's employee stock option plan. The Company is presently reviewing capital requirements for fiscal 2000 and beyond and may seek additional financing alternatives in the future. Although the Company from time to time evaluates potential acquisitions of and investments in complementary businesses and anticipates continuing to make such evaluations, the Company has no present commitments or agreements with respect to the acquisition of or investment in another business other than its equity interest in MVIS. At September 27, 1998, the Company had a loan outstanding for $10,000,000 from a commercial bank to finance portions of the upfit of the production facility. The final draw to this loan was made during the first quarter of 1999 for $1,281,000. The loan was subsequently paid off in the third quarter of fiscal 1999. The Company also committed $3,214,000 during the first quarter of fiscal 1999 to repurchase Company stock. Impact of the Year 2000 State of Readiness We have evaluated all of our internal software, embedded systems and products against Year 2000 concerns and believe that our products and businesses will not be substantially affected by the advent of the year 2000. We have completed a Year 2000 compliance plan that included four phases: inventory, assessment, -14- remediation and testing. A detailed inventory of all computers and related systems was completed and all critical upgrades were finished for all computers that were non-Year 2000 compliant. All factory-dependent computers were also tested and are Year 2000 compliant. Although we cannot control whether and how third parties will address the Year 2000 issue, we have now contacted critical vendors and have been informed that they have the ability to ensure smooth delivery of products without disruptions caused by Year 2000 problems. Based on the responses of these vendors to our survey, we believe that all vendors are either substantially Year 2000 compliant or that any noncompliance will not have a material effect on our operations. Costs We do not believe that the costs associated with Year 2000 compliance have had a material adverse effect on our business, results of operations, or financial condition. As of September 26, 1999, this project is complete. Year 2000 risks Although we believe that our planning efforts are adequate to address our Year 2000 concerns, there can be no assurance that we will not experience negative consequences and material costs as a result of undetected errors or defects in the technology used in our internal systems. Also, there is no assurance that the systems of third parties on which we rely will be made compliant on a timely basis. If realized, these risks could result in an adverse effect on our business, results of operations and financial condition. We believe that our greatest risk stems from the potential non-compliance of our suppliers. We depend on a limited number of suppliers for certain raw materials, components and equipment necessary for the manufacture of our products. Accordingly, if those suppliers are unable to process or fill our orders or otherwise interact with us because of Year 2000 problems, we could experience material adverse effects to our business. While our critical suppliers have informed us that they do not anticipate any disruption as a result of Year 2000 problems, we are investigating alternate sources of supply. As a consequence of our dependence on limited sources of supply, we generally maintain a significant inventory of certain critical materials and require suppliers to keep certain amounts of inventory available for us. There can be no assurance that we will have enough materials on hand to continue production without interruption in the event one or more of our suppliers experiences Year 2000 problems that affect its (their) ability to supply us. Any supply chain disruptions would affect our ability to manufacture our products, which could result in material adverse consequences to our business, results of operations and financial condition. Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk have been identified during the most recent quarter. -15- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Equity Compensation Plan, as amended and restated August 24, 1999 10.2 Purchase Agreement between the Company and Osram Opto Semiconductors GmbH & Co. dated August 30, 1999. (1) 27 Financial Data Schedule 99.1 Certain Business Risks and Uncertainties (b) Reports on Form 8-K: On July 13, 1999 the Company filed a Form 8-K announcing a two-for-one split of its common stock to be effective at the close of business on July 26, 1999. - ------------------ (1) Confidential treatment of portions of this document is being requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. -16- SIGNATURES Pursuant to the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CREE RESEARCH, INC. Date: November 4, 1999 /s/ Cynthia B. Merrell -------------------------------------------- Cynthia B. Merrell, Chief Financial Officer and Treasurer (Authorized Officer and Chief Financial and Accounting Officer) -17- EXHIBIT INDEX Exhibit No. - ------- 10.1 Equity Compensation Plan, as amended and restated August 24, 1999 10.2 Purchase Agreement between the Company and Osram Opto Semiconductors GmbH & Co. dated August 30, 1999. (1) 27 Financial Data Schedule 99.1 Certain Business Risks and Uncertainties - ------------------- (1) Confidential treatment of portions of this document is being requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. -18- EX-10.1 2 EQUITY COMPENSATION PLAN EXHIBIT 10.1 CREE RESEARCH, INC. EQUITY COMPENSATION PLAN (As amended and restated August 24, 1999) ARTICLE I - GENERAL PROVISIONS 1.1 The Plan is designed, for the benefit of the Company, to attract and retain for the Company personnel of exceptional ability; to motivate such personnel through added incentives to make a maximum contribution to the Company; to develop and maintain a highly competent management team; and to be competitive with other companies with respect to executive compensation. 1.2 Awards under the Plan may be made to Participants in the form of Incentive Stock Options and Nonqualified Stock Options. 1.3 The Cree Research, Inc. Equity Compensation Plan was initially adopted effective August 2, 1989, was amended and restated in the form of the Plan effective as of July 1, 1995 (the "Effective Date") and has been most recently amended and restated effective as of August 18, 1999. ARTICLE II - DEFINITIONS Except where the context otherwise indicates, the following definitions apply: 2.1 "Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. All citations to sections of the Act or rules thereunder are to such sections or rules as they may from time to time be amended or renumbered. 2.2 "Agreement" means the written agreement evidencing each Award granted to a Participant under the Plan. 2.3 "Award" means an award granted to a Participant in accordance with the provisions of the Plan, including an Incentive Stock Option or a Nonqualified Stock Option. 2.4 "Board" means the Board of Directors of Cree Research, Inc. 2.5 "Change in Control" means the occurrence of an event defined in Section 7.1 of the Plan. 2.6 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. 2.7 "Committee" means the Compensation Committee of the Board or such other committee consisting of two or more members of the Board as may be appointed by the Board to administer this Plan pursuant to Article III. Committee members may also be appointed for such limited purposes as may be provided by the Board. 2.8 "Company" means Cree Research, Inc., a North Carolina corporation, and its successors and assigns. The term "Company" shall include any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code, as modified by Section 415(h) of the Code) which includes the Company; any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code, as modified by Section 415(h) of the Code) with the Company; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Company; and any other entity required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code. With respect to all purposes of the Plan, including, but not limited to, the establishment, amendment, termination, operation and administration of the Plan, Cree Research, Inc. shall be authorized to act on behalf of all other entities included within the definition of "Company." 2.9 "Disability" means (i) with respect to a Participant who is eligible to participate in the Company's program of long-term disability insurance, a condition with respect to which the Participant is entitled to commence benefits under such program of long-term disability insurance, and (ii) with respect to any Participant (including a Participant who is eligible to participate in the Company's program of long-term disability insurance), a disability as determined under procedures established by the Committee or in any Award. 2.10 "Early Retirement" shall mean retirement from active employment with the Company, with the express consent of the Committee, pursuant to early retirement provisions established by the Committee or in any Award. 2.11 "Eligible Participant" means any employee of the Company, as shall be determined by the Committee, as well as any other person, including directors, whose participation the Committee determines is in the best interest of the Company, subject to limitations as may be provided by the Code, the Act or the Committee. 2.12 "Fair Market Value" means, with respect to any given day, the following: (a) If the Stock is not listed for trading on a national securities exchange but is listed on the Nasdaq National Market or The Nasdaq Small-Cap Market of The Nasdaq Stock Market, then the Fair Market Value shall be the last sale price of the Stock on the date of reference, as reported by the Nasdaq-Amex Reporting Service, or such other source as the Board deems reliable. (b) If the Stock is listed for trading on any national securities exchange, then the Fair Market Value shall be the closing price of the Stock on such exchange on the date of reference. The Committee may establish an alternative method of determining Fair Market Value. 2.13 "Incentive Stock Option" means a Stock Option granted under Article IV of the Plan, and as defined in Section 422 of the Code. 2.14 "Nonqualified Stock Option" means a Stock Option granted under Article V of the Plan. 2.15 "Normal Retirement" shall mean retirement from active employment with the Company on or after age 65, or pursuant to such other requirements as may be established by the Committee or in any Award. 2.16 "Option Grant Date" means, as to any Stock Option, the latest of: (a) the date on which the Committee takes action to grant the Stock Option to the Participant; (b) the date the Participant receiving the Stock Option becomes an employee of the Company, to the extent employment status is a condition of the grant or a requirement of the Code or the Act; or (c) such other date (later than the dates described in (a) and (b) above) as the Committee may designate. 2.17 "Participant" means an Eligible Participant to whom an Award has been granted and who has entered into an Agreement evidencing the Award. 2.18 "Plan" means the Cree Research, Inc. Equity Compensation Plan as set forth herein and as further amended or amended and restated from time to time. 2.19 "Retirement" shall mean Early Retirement or Normal Retirement. 2.20 "Stock" means shares of the Common Stock of Cree Research, Inc., par value $.0025 per share, as may be adjusted pursuant to the provisions of Section 3.10. 2.21 "Stock Option" means an Award under Article IV or V of the Plan of an option to purchase Stock. A Stock Option may be either an Incentive Stock Option or a Nonqualified Stock Option. 2.22 "Termination of Employment" means the discontinuance of employment of a Participant with the Company for any reason. The determination of whether a Participant has discontinued employment shall be made by the Committee in its discretion. In determining whether a Termination of Employment has occurred, the Committee may provide that service as a consultant or service with a business enterprise in which the Company has a significant ownership interest shall be treated as employment with the Company. The Committee shall have the discretion, exercisable either at the time the Award is granted or at the time the Participant terminates employment, to establish as a provision applicable to the exercise of one or more Awards that during the limited period of exercisability following Termination of Employment, the Award may be exercised not only with respect to the number of shares of Stock for which it is exercisable at the time of the Termination of Employment but also with respect to one or more subsequent installments for which the Award would have become exercisable had the Termination of Employment not occurred. ARTICLE III - ADMINISTRATION 3.1 This Plan shall be administered by the Committee. The Committee, in its discretion, may delegate to one or more of its members such of its powers as it deems appropriate. The Committee also may limit the power of any member to the extent necessary to comply with any law. Members of the Committee shall be appointed originally, and as vacancies occur, by the Board, to serve at the pleasure of the Board. The Board may serve as the Committee, if by the terms of the Plan all Board members are otherwise eligible to serve on the Committee. 3.2 The Committee shall meet at such times and places as it determines. A majority of its members shall constitute a quorum, and the decision of a majority of those present at any meeting at which a quorum is present shall constitute the decision of the Committee. A memorandum signed by all of its members shall constitute the decision of the Committee without necessity, in such event, for holding an actual meeting. 3.3 The Committee shall have the exclusive right to interpret, construe and administer the Plan, to select the persons who are eligible to receive an Award, and to act in all matters pertaining to the granting of an Award and the contents of the Agreement evidencing the Award, including without limitation, the determination of the number of Stock Options, shares of Stock subject to an Award, and the form, terms, conditions and duration of each Award, and any amendment thereof consistent with the provisions of the Plan. All acts, determinations and decisions of the Committee made or taken pursuant to grants of authority under the Plan or with respect to any questions arising in connection with the administration and interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all Participants, Eligible Participants and their beneficiaries. 3.4 The Committee may adopt such rules, regulations and procedures of general application for the administration of this Plan, as it deems appropriate. 3.5 The number of shares of Stock which are available for Award under the Plan shall be Six Million Eight Hundred Eighty Thousand (6,880,000). Such shares of Stock shall be made available from authorized and unissued shares. If, for any reason, any shares of Stock awarded or subject to purchase under the Plan are not delivered or purchased, or are reacquired by the Company, for reasons including, but not limited to, a termination, expiration or cancellation of a Stock Option, such shares of Stock shall not be charged against the aggregate number of shares of Stock available for Awards under the Plan, and may again be available for Award under the Plan. 3.6 Each Award granted under the Plan shall be evidenced by a written Agreement. Each Agreement shall be subject to and incorporate, by reference or otherwise, the applicable terms and conditions of the Plan, and any other terms and conditions, not inconsistent with the Plan, as may be imposed by the Committee. 3.7 The Company shall not be required to issue or deliver any certificates for shares of Stock prior to: (a) the listing of such shares on any stock exchange on which the Stock may then be listed; and (b) the completion of any registration or qualification of such shares of Stock under any federal or state law, or any ruling or regulation of any government body which the Company shall, in its discretion, determine to be necessary or advisable. 3.8 All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. In making such determination, the Committee may rely upon an opinion of counsel for the Company. 3.9 Except as provided otherwise in the Plan or in an Agreement, no Participant awarded a Stock Option shall have any right as a shareholder with respect to any shares of Stock covered by his or her Stock Option prior to the date of issuance to him or her of a certificate or certificates for such shares of Stock. 3.10 If any reorganization, recapitalization, reclassification, stock split-up, stock dividend, or consolidation of shares of Stock, merger or consolidation of the Company or sale or other disposition by the Company of all or a portion of its assets, any other change in the Company's corporate structure, or any distribution to shareholders other than a cash dividend results in the outstanding shares of Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of Stock or other securities of the Company, or for shares of Stock or other securities of any other corporation; or new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding shares of Stock, then equitable adjustments shall be made by the Committee in: (a) the limitation on the aggregate number of shares of Stock that may be awarded as set forth in Section 3.5 of the Plan; (b) the number and class of Stock that may be subject to an Award, and which have not been issued or transferred under an outstanding Award; (c) the terms, conditions or restrictions of any Award and Agreement, including the price payable for the acquisition of Stock; provided, however, that all adjustments made as the result of the foregoing in respect of each Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option, as defined in Section 422 of the Code; and (d) the limitations on grants of Stock Options set forth in Section 6.9 of the Plan. 3.11 In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted thereunder, and against all amounts paid by them in settlement thereof, provided such settlement is approved by independent legal counsel selected by the Company, or paid by them in satisfaction of a judgment or settlement in any such action, suit or proceeding, except as to matters as to which the Committee member has been negligent or engaged in misconduct in the performance of his duties; provided, that within 60 days after institution of any such action, suit or proceeding, a Committee member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. 3.12 The Committee may require each person purchasing shares of Stock pursuant to an Award under the Plan to represent to and agree with the Company in writing that he is acquiring the shares of Stock without a view to distribution thereof and/or that he has met such other requirements as the Committee determines may be applicable to such purchase. The certificates for such shares of Stock may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. 3.13 The Committee shall be authorized to make adjustments in performance-based criteria or in the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Agreement in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. 3.14 The Committee shall have full power and authority to determine whether, to what extent and under what circumstances, any Award shall be canceled or suspended if the Participant (a) without the consent of the Committee, while employed by the Company or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in, other than any insubstantial interest, as determined by the Committee, any business that is in competition with the Company as determined by the Committee in its discretion; or (b) is terminated for cause as determined by the Committee in its discretion. ARTICLE IV - INCENTIVE STOCK OPTIONS 4.1 Each provision of this Article IV and of each Incentive Stock Option granted hereunder shall be construed in accordance with the provisions of Section 422 of the Code, and any provision hereof that cannot be so construed shall be disregarded. 4.2 Incentive Stock Options shall be granted only to Eligible Participants who are in the active employment of the Company, each of whom may be granted one or more such Incentive Stock Options for a reason related to his or her employment at such time or times determined by the Committee following the Effective Date through the date which is ten (10) years following the Effective Date, subject to the following conditions: (a) The Incentive Stock Option price per share of Stock shall be set in the Agreement, but shall not be less than 100% of the Fair Market Value of the Stock on the Option Grant Date. If the Eligible Participant owns more than 10% of the outstanding Stock (as determined pursuant to Section 424(d) of the Code) on the Option Grant Date, the Incentive Stock Option price per share shall not be less than 110% of the Fair Market Value of the Stock on the Option Grant Date. (b) Subject to any conditions on exercise set forth in the corresponding Agreement, the Incentive Stock Option may be exercised in whole or in part from time to time within ten (10) years from the Option Grant Date (five (5) years if the Eligible Participant owns more than 10% of the Stock on the Option Grant Date), or such shorter period as may be specified by the Committee in the Award; provided, that in any event, the Incentive Stock Option shall lapse and cease to be exercisable upon a Termination of Employment or within such period following a Termination of Employment as shall have been specified in the Incentive Stock Option Agreement, which period shall not exceed three months unless: (i) employment shall have terminated as a result of death or Disability, in which event such period shall not exceed one year after the date of death or Disability; or (ii) death shall have occurred following a Termination of Employment and while the Incentive Stock Option was still exercisable, in which event such period shall not exceed one year after the date of death; provided, further, that such period following a Termination of Employment shall in no event extend the original exercise period of the Incentive Stock Option. (c) To the extent the aggregate Fair Market Value, determined as of the Option Grant Date, of the shares of Stock with respect to which Incentive Stock Options (determined without regard to this subsection) are first exercisable during any calendar year by any Eligible Participant exceeds $100,000, such options shall be treated as Nonqualified Stock Options granted under Article V. (d) The Committee may adopt any other terms and conditions which it determines should be imposed for the Incentive Stock Option to qualify under Section 422 of the Code, as well as any other terms and conditions not inconsistent with this Article IV as determined by the Committee. If, for any reason, an Incentive Stock Option fails to meet the requirements of Section 422 of the Code, the Option shall automatically be deemed a Nonqualified Stock Option granted under Article V herein. 4.3 The Committee may at any time offer to buy out for a payment in cash, or Stock an Incentive Stock Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. 4.4 If the Incentive Stock Option Agreement so provides, the Committee may require that all or part of the shares of Stock to be issued upon the exercise of an Incentive Stock Option shall take the form of restricted stock, which shall be valued on the date of exercise, as determined by the Committee, on the basis of the Fair Market Value of such restricted stock without regard to the limitations on transfer and forfeiture restrictions involved. ARTICLE V - NONQUALIFIED STOCK OPTIONS 5.1 One or more Stock Options may be granted as Nonqualified Stock Options to Eligible Participants to purchase shares of Stock at such time or times determined by the Committee, following the Effective Date, subject to the terms and conditions set forth in this Article V. 5.2 The Nonqualified Stock Option price per share of Stock shall be established in the Agreement and shall not be less than 100% of the Fair Market Value at the time of the grant. 5.3 The Nonqualified Stock Option may be exercised in full or in part from time to time within such period as may be specified by the Committee or in the Agreement; provided, that, in any event, the Nonqualified Stock Option shall lapse and cease to be exercisable upon a Termination of Employment or within such period following a Termination of Employment as shall have been specified in the Nonqualified Stock Option Agreement, which period shall not exceed three months unless: (i) employment shall have terminated as a result of death or Disability, in which event such period shall not exceed one year after the date of death or Disability; or (ii) death shall have occurred following a Termination of Employment and while the Nonqualified Stock Option was still exercisable, in which event such period shall not exceed one year after the date of death; provided, further, that such period following a Termination of Employment shall in no event extend the original exercise period of the Nonqualified Stock Option. 5.4 The Nonqualified Stock Option Agreement may include any other terms and conditions not inconsistent with this Article V or in Article VI, as determined by the Committee. ARTICLE VI - INCIDENTS OF STOCK OPTIONS 6.1 Each Stock Option shall be granted subject to such terms and conditions, if any, not inconsistent with this Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Stock Option and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. 6.2 Except as provided below, a Stock Option shall be exercisable during the lifetime of the Participant only by him or his guardian or legal representative and shall not be transferable by the Participant other than (i) by will or by the laws of descent and distribution, or (ii) to the extent otherwise allowed by applicable law, pursuant to a qualified domestic relations order as defined by the Code and the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. However, the Committee may, in its sole discretion, either pursuant to an Agreement or otherwise, permit a Participant to transfer a Nonqualified Stock Option by gift or other donative transfer without payment of consideration, conditioned upon and subject to compliance with all applicable law (including, but not limited to, securities law). 6.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Committee, subject to limitations set forth in the Stock Option Agreement. Without limiting the foregoing, the Committee may establish payment terms for the exercise of Stock Options which permit the Participant to deliver shares of Stock, or other evidence of ownership of Stock satisfactory to the Company, with a Fair Market Value equal to the Stock Option price as payment. 6.4 No cash dividends shall be paid on shares of Stock subject to unexercised Stock Options. The Committee may provide, however, that a Participant to whom a Stock Option has been granted which is exercisable in whole or in part at a future time for shares of Stock shall be entitled to receive an amount per share equal in value to the cash dividends, if any, paid per share on issued and outstanding Stock, as of the dividend record dates occurring during the period between the date of the grant and the time each such share of Stock is delivered pursuant to exercise of such Stock Option. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (a) paid in cash or Stock either from time to time prior to, or at the time of the delivery of, such Stock, or upon expiration of the Stock Option if it shall not have been fully exercised; or (b) converted into contingently credited shares of Stock, with respect to which dividend equivalents may accrue, in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such Stock, whether delivered or contingently credited, shall be charged against the limitations set forth in Sections 3.5 and 6.9 hereof. 6.5 The Committee, in its sole discretion, may authorize payment of interest equivalents on dividend equivalents which are payable in cash at a future time. 6.6 In the event of Disability or death, the Committee, with the consent of the Participant or his legal representative, may authorize payment, in cash or in Stock, or partly in cash and partly in Stock, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Stock subject to a Stock Option and the option price in consideration of the surrender of the Stock Option. 6.7 If a Participant is required to pay to the Company an amount with respect to income and employment tax withholding obligations in connection with exercise of a Nonqualified Stock Option, and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, the Committee, in its discretion and subject to such rules as it may adopt, may permit the Participant to satisfy the obligation, in whole or in part, by making an irrevocable election that a portion of the total Fair Market Value of the shares of Stock subject to the Nonqualified Stock Option and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, be paid in the form of cash in lieu of the issuance of Stock and that such cash payment be applied to the satisfaction of the withholding obligations. The amount to be withheld shall not exceed the statutory minimum federal and state income and employment tax liability arising from the Stock Option exercise transaction. 6.8 The Committee may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Stock as the Stock Option surrendered, or may require such surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at such price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted. Upon surrender, the Stock Options surrendered shall be canceled and the shares of Stock previously subject to them shall be available for the grant of other Stock Options. 6.9 The following limitations shall apply to grants of Stock Options: (a) No Participant shall be granted, in any fiscal year of the Company, Options to purchase more than 200,000 Shares. (b) In connection with his or her initial service, a Participant may be granted Stock Options to purchase up to an additional 200,000 Shares that shall not count against the limit set forth in Section 6.9(a) above. ARTICLE VII - CHANGE IN CONTROL 7.1 A "Change in Control" shall be deemed to have occurred upon the happening of any of the following events: (a) Any "Person" as defined in Section 3(a)(9) of the Act, including a "group" (as that term is used in Sections 13(d)(3) and 14(d)(2) of the Act), but excluding the Company (as defined in Section 2.8 of this Plan) and any employee benefit plan sponsored or maintained by the Company (including any trustee of such plan acting as trustee), who together with its "affiliates" and "associates" (as those terms are defined in Rule 12b-2 under the Act) becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under the Act) of 20% or more of the then-outstanding shares of Stock or the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of its directors. For purposes of calculating the number of shares or voting power held by such Person and its affiliates and associates under this Section 7.1(a), there shall be excluded any securities acquired by such Person or its affiliates or associates directly from the Company. (b) A sale or other disposition of all or substantially all of the Company's assets is consummated, other than such a sale or disposition that would not have constituted a Change of Control under subsection (d) below had it been structured as a merger or consolidation. (c) The shareholders of the Company approve a definitive agreement or plan to liquidate the Company. (d) A merger or consolidation of the Company with and into another entity is consummated, unless immediately following such transaction (1) more than 50% of the members of the governing body of the surviving entity were Incumbent Directors (as defined in subsection (e) below) at the time of execution of the initial agreement providing for such transaction, (2) no "Person" (as defined in Section 7.1(a) above), together with its "affiliates" and "associates" (as defined in Section 7.1(a) above), is the "Beneficial Owner" (as defined in Section 7.1 (a) above), directly or indirectly, of 20% or more of the then-outstanding equity interests of the surviving entity or the combined voting power of the then-outstanding equity interests of the surviving entity entitled to vote generally in the election of members of its governing body, and (3) more than 50% of the then-outstanding equity interests of the surviving entity and the combined voting power of the then-outstanding equity interests of the surviving entity entitled to vote generally in the election of members of its governing body is "Beneficially Owned", directly or indirectly, by all or substantially all of the individuals and entities who were the "Beneficial Owners" of the shares of Stock immediately prior to such transaction in substantially the same proportions as their ownership immediately prior to such transaction. (e) During any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24 month period shall be deemed to have satisfied such 24 month requirement, and be an Incumbent Director, if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually, because they were directors at the beginning of such 24 month period, or by prior operation of this Section 7.1 (e), but excluding for this purpose any such individual whose initial assumption of office is in connection with an actual or threatened election context subject to Rule 14a-11 of Regulation 14A promulgated under the Act or other actual or threatened solicitation of proxies or consents by or on behalf of a "Person" (as defined in Section 7.1(a) above) other than the Board. 7.2 In the event of a Change in Control: (a) any or all then outstanding Stock Options having an Option Grant Date on or before January 31, 1999, to the extent not previously fully vested and exercisable, shall automatically become fully vested and, except to the extent such Options are cashed out pursuant to Section 7.3 below, exercisable effective immediately prior to the Change in Control; and (b) outstanding Stock Options having an Option Grant Date after January 31, 1999 shall vest and become exercisable only to the extent and in such manner as is provided in the applicable Agreement evidencing the Stock Option. 7.3 Upon the occurrence of a Change in Control, the Committee may in its sole discretion and consistent with the requirements of applicable law decide to cash-out the value of all outstanding Stock Options, in each case to the extent vested pursuant to Sections 7.2 above or otherwise, on the basis of the "Change in Control Price" (as defined in Section 7.4) less the exercise price under such Award (if any) as of the date such Change in Control is determined to have occurred or such other date prior to the Change in Control as the Committee may determine. 7.4 For purposes of Section 7.3, "Change in Control Price" means the highest price per share of Stock paid in any transaction reported on the exchange on which the Stock is then traded or on the Nasdaq Stock Market, as the case may be, or paid or offered in any bona fide transaction related to a Change in Control, at any time during the 120 day period immediately preceding the occurrence of the Change in Control, as determined by the Committee. 7.5 The Committee is authorized to take such actions that are not inconsistent with Sections 7.2, 7.3 and 7.4 above as the Committee determines to be necessary or advisable, and fair and equitable to Participants, with respect to an Award in the event of a Change in Control. Such action may include, but shall not be limited to, establishing, amending or waiving the forms, terms, conditions and duration of an Award and the Agreement, so as to provide for earlier, later, extended or additional times for exercise or payment, differing methods for calculating payments and alternate forms and amounts of payment. The Committee may take such actions pursuant to this Section 7.5 by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in an Award and the Agreement, or by taking action with respect to individual Participants. ARTICLE VIII - AMENDMENT AND TERMINATION 8.1 The Board, upon recommendation of the Committee, or otherwise, at any time and from time to time, may amend or terminate the Plan. To the extent required by Code Section 422, no amendment, without approval by the Company's shareholders, shall: (a) alter the group of persons eligible to participate in the Plan; (b) except as provided in Section 3.5, increase the maximum number of shares of Stock or Stock Options which are available for Awards under the Plan; (c) extend the period during which Incentive Stock Option Awards may be granted beyond the date which is ten (10) years following the Effective Date. (d) limit or restrict the powers of the Committee with respect to the administration of this Plan; (e) change the definition of an Eligible Participant for the purpose of an Incentive Stock Option or increase the limit or the value of shares of Stock for which an Eligible Participant may be granted an Incentive Stock Option; (f) materially increase the benefits accruing to Participants under this Plan; (g) materially modify the requirements as to eligibility for participation in this Plan; or (h) change any of the provisions of this Article VIII. 8.2 No amendment to or discontinuance of this Plan or any provision thereof by the Board or the shareholders of the Company shall, without the written consent of the Participant, adversely affect, as shall be determined by the Committee, any Award previously granted to such Participant under this Plan; provided, however, the Committee retains the right and power to: (a) annul any Award if the Participant is terminated for cause as determined by the Committee; (b) provide for the forfeiture of shares of Stock or other gain under an Award as determined by the Committee for competing against the Company; and (c) convert any outstanding Incentive Stock Option to a Nonqualified Stock Option. 8.3 If a Change in Control has occurred, no amendment or termination shall impair the rights of any person with respect to an outstanding Award as provided in Article VII. ARTICLE IX - MISCELLANEOUS PROVISIONS 9.1 Nothing in the Plan or any Award granted hereunder shall confer upon any Participant any right to continue in the employ of the Company, or to serve as a director thereof, or interfere in any way with the right of the Company to terminate his or her employment at any time. Unless specifically provided otherwise, no Award granted under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Company for the benefit of its employees unless the Company shall determine otherwise. No Participant shall have any claim to an Award until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall, except as otherwise provided by the Committee, be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the company, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as otherwise provided by the Committee. 9.2 The Company may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option or the exercise thereof, including, but not limited to, the withholding of payment of all or any portion of such Award or another Award under this Plan until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or canceling any portion of such Award or another Award under this Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Company for the purpose of paying such Award or another Award under this Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. 9.3 The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any United States government or regulatory agency as may be required. 9.4 The terms of the Plan shall be binding upon the Company, and its successors and assigns. 9.5 No award shall be transferable except as provided for herein. Unless otherwise provided by the Committee or in an Agreement, transfer restrictions shall only apply to Incentive Stock Options as required in Article IV and to the extent otherwise required by federal or state securities laws. If any Participant makes such a transfer in violation hereof, any obligation of the Company shall forthwith terminate. 9.6 This Plan and all actions taken hereunder shall be governed by the laws of the State of North Carolina. 9.7 The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver shares of Stock or payments in lieu of or with respect to Awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 9.8 Each Participant exercising an Award hereunder agrees to give the Committee prompt written notice of any election made by such Participant under Section 83(b) of the Code, or any similar provision thereof. 9.9 If any provision of this Plan or an Agreement is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Agreement, it shall be stricken and the remainder of the Plan or the Agreement shall remain in full force and effect. EX-10.2 3 OSRAM PURCHASE AGREEMENT EXHIBIT 10.2 [ * ] - Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Commission Rule 24b-2. PURCHASE AGREEMENT between CREE RESEARCH, INC. Durham, North Carolina, USA ("Seller") and OSRAM OPTO SEMICONDUCTORS GMBH & CO. OHG Regensburg Federal Republic of Germany ("Purchaser") Dated August 30, 1999 PURCHASE AGREEMENT PURCHASE AGREEMENT (this "Agreement"), made and effective as of the 30th day of August, 1999 (the "Effective Date"), by and between CREE RESEARCH, 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 corporation 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 (with Attachments A, B and C thereto) 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 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) "License Agreement" means the Development, License and Supply Agreement between 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. (d) "Product Specifications" means the specifications set forth in Schedule 3, as the same may be amended from time to time by mutual written agreement of the parties or pursuant to the terms and conditions set forth in such schedule. (e) "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. 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. Concurrently with the execution of this Agreement, Purchaser has delivered or will deliver its purchase orders to Seller for the quantities to be shipped during the first two monthly (four-week) periods of the first quarterly period shown in Schedule 1. All other 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 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. 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, 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 (Attachments A, B and C to Schedule 3). (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 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 a 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 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. 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 as 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 or any other agreement between the parties (including but not limited to the License 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. 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") 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 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. (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. 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 by the License Agreement. 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 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. 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. 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 RESEARCH, INC. OSRAM OPTO SEMICONDUCTORS GMBH & CO. By /s/ F. Neal Hunter By /s/ N. Hiller ------------------------------- --------------------------------- F. Neal Hunter, Chairman & CEO N. Hiller, General Manager Date August 31, 1999 Date August 31, 1999 ------------------------------- --------------------------------- By /s/ W. Maier --------------------------------- W. Maier, Purchasing Manager Date August 31, 1999 --------------------------------- Address for Notices Address for Notices Cree Research, Inc. OSRAM Opto Semiconductors GmbH & Co. OHG 4600 Silicon Drive Wernerwerkstr. 2 Durham, North Carolina 27703 93049 Regensburg USA Germany Attention: F. Neal Hunter, Chairman Attention: N. Hiller and W. Maier Fax No: +1 (919) 361-5456 Fax No: 49 341 202 2207 SCHEDULE 1 Quantity and Shipment Schedule A. Quantity Commitment. 1. During the period commencing the Effective Date of this Agreement and ending September 24, 2000 Purchaser will purchase from Seller the quantities of each Product type shown below: GaN LEDs ********** InGaN LEDs (std. size) ********** InGaN LEDs (small size) ********** SiC Wafers ********** (50 mm dia.) 2. The "small size" InGaN LED 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 January 1, 2000. Seller will endeavor to deliver engineering samples and preliminary specifications by August 31, 1999 and qualification samples and proposed final specifications by September 30, 1999. Failure of the parties to agree on specifications for such Product shall not give either party the right to terminate this Agreement. 3. Subject to the conditions set forth above Purchaser has committed to purchase small size LEDs for use in fulfilling Purchaser's delivery obligations to a specific customer which Purchaser has identified separately to Seller (the "End Customer"). If the End Customer ceases purchasing InGaN LEDs from Purchaser, Purchaser may, by giving Seller not less than ninety (90) days prior written notice, change all quantities of small size InGaN LEDs scheduled for shipment under this Agreement after the effective date of such notice to quantities of standard size InGaN LEDs having the same aggregate purchase price as the quantities of small size InGaN LEDs to have been purchased hereunder. B. Shipment Schedule. 1. The shipment schedule is as follows: Quarterly (13-Week) Period Ending ------------------------------------------- Product 12/26/99 3/26/00 6/25/00 9/24/00 -------------------------------------------------------------------- GaN LEDs ******* ******* ******* ******* InGaN LEDs (std. size) ******* ******* ******* ******* InGaN LEDs (small size) ******* ******* ******* ******* 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. Unless otherwise mutually agreed or specified in purchase orders timely submitted in accordance with this Agreement, the mix of Products for each shipment shall be in accordance with Attachment A to this Schedule 1. Unless otherwise mutually agreed, the quantity of green InGaN LEDs purchased under this Agreement in any quarterly period shall not exceed the quantities of ***** nm and ***** nm InGaN LEDs for the period shown on Attachment A by more than ********* percent (****%). 3. Purchaser may without charge reschedule shipments of quantities of GaN LEDs shown above 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 24, 2000; 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 24, 2000. 4. Purchaser may without charge reschedule shipments of up to the quantity of InGaN LED Products shown below from the quarterly (13-week) period indicated to the next succeeding quarterly (13-week) period, provided Seller receives written notice from Purchaser requesting such rescheduling not later than sixty (60) days prior to the beginning of the quarterly period in which the quantities were originally scheduled for shipment. Quarterly (13-Week) Period Ending --------------------------------- Product 3/26/00 6/25/00 9/24/00 ------------------------------------------------------------ InGaN LEDs (std. size) ******* ******* ******* InGaN LEDs (small size) ******* ******* ******* 5. Purchaser may without charge reschedule shipments of quantities of InGaN GaN LEDs, excluding the quantities shown in the preceding paragraph, 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 percent (20%) of such quantity for up to ninety (90) days after the originally scheduled shipment date but not later than December 24, 2000; 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 24, 2000. 6. In all other cases Purchaser may reschedule shipments only with Seller's mutual written agreement. 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. SCHEDULE 1 - ATTACHMENT A
Chip (1) Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Total GaN Total *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** InGaN: **** nm - Total *** *** *** *** *** *** *** *** *** *** *** *** *** Standard Size *** *** *** *** *** *** *** *** *** *** *** *** *** **** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** **** nm - Total *** *** *** *** *** *** *** *** *** *** *** *** *** Small Size *** *** *** *** *** *** *** *** *** *** *** *** *** **** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** **** nm Total *** *** *** *** *** *** *** *** *** *** *** *** *** **** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** **** nm Total *** *** *** *** *** *** *** *** *** *** *** *** *** **** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** **** nm Total *** *** *** *** *** *** *** *** *** *** *** *** *** **** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** **** nm Total *** *** *** *** *** *** *** *** *** *** *** *** *** **** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Up-Potential (Confirmed) InGaN - Standard Total *** *** *** *** *** *** *** *** *** *** *** *** *** Size (2) InGaN - Small Total *** *** *** *** *** *** *** *** *** *** *** *** *** Size (3) (1) Total per product and per destination. (2) **** nm unless otherwise specified in order. (3) **** nm.
SCHEDULE 2 Price and Payment Schedule A. Prices. 1. Prices shall be determined as follows, subject to Paragraph (A)(2) of this Schedule 2: GaN LEDs: Incremental Quantities Unit Price (US$) ------------------------------------------- 0 to ***** $***** ***** to ***** $***** ***** and greater $***** InGaN LEDs (std. size): Unit Price (US$) ---------------------------------- Incremental Quantities Std. Specification ** (All InGaN LEDs) InGaN LEDs* ******** ------------------------------------------------------------ ***** to ***** $***** $***** ***** to ***** $***** $***** ***** to ***** $***** $***** ***** and greater $***** $***** * Part Nos. **********, **********, **********, ********** **********, and **********. **Applicable only to ************ parts scheduled for shipment after December 26, 1999. InGaN LEDs (small size): Incremental Quantities Unit Price (US$) ------------------------------------------- 0 to ***** $***** ***** to ***** $***** ***** and greater $***** SiC Wafers: Incremental Quantities Unit Price (US$) ------------------------------------------- ***** to ***** $***** ***** 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. 2. 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" on the shipment date. 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 of shipment, for rates quoted in New York the preceding business day for trading among banks in amounts of $1 million or more. Percentage Euro-Dollar Exchange rate Price Adjustment --------------------------------------------------------------------- Equal to or greater 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 **** +****% B. Payment Terms. Products will be invoiced upon shipment. Invoices shall be due and payable within twenty (20) days from the invoice date. SCHEDULE 3 Product Specifications A. GaN LEDs. The GaN LEDs subject to this Agreement are Seller's part number *********** and have the product specifications set forth in Attachment A. B. InGaN LEDs. 1. The standard size InGaN LEDs subject to this Agreement are identified by Seller's part numbers as follow and have the product specifications set forth in Attachment B: *************** *************** *************** *************** *************** The specifications for the ************************ part require a dominant wavelength of ********. Purchaser may elect to substitute a part, identified as special part number ************************, with the same specifications as the ************************ part except that the dominant wavelength shall be ********. Seller will supply Purchaser engineering samples of the ******* part without charge not later than September 1, 1999. Purchaser must give Seller written notice of its election to substitute the ******* part on or before November 1, 1999; otherwise, the election shall lapse unless otherwise agreed mutually in writing. If Purchaser timely elects to substitute the ******* part, Seller shall not be obligated to ship any ************************ parts under this Agreement after December 26, 1999. 2. Product Specifications for the small size InGaN LED shall be mutually agreed upon in writing by the parties. C. SiC Wafers. Product Specifications for the SiC Wafers are set forth in Attachment C. SCHEDULE 3 - ATTACHMENT A Information in attachment omitted in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. SCHEDULE 3 - ATTACHMENT B Information in attachment omitted in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. SCHEDULE 3 - ATTACHMENT C Information in attachment omitted in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. EX-27 4 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 Research, Inc. 1,000 U.S. DOLLARS 3-MOS JUN-25-2000 JUN-28-1999 SEP-26-1999 1 41,226 3,727 17,075 175 4,060 66,780 92,639 15,064 149,105 11,140 0 0 0 112,254 21,031 149,105 20,048 20,048 10,634 13,593 0 0 (569) 7,024 2,388 4,636 0 0 0 4,636 0.16 0.15
EX-99.1 5 CERTAIN BUSINESS RISKS AND UNCERTAINTIES EXHIBIT 99.1 CERTAIN BUSINESS RISKS AND UNCERTAINTIES Described below are various risks and uncertainties that may affect the Company's business, financial condition or results of operation. 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 firms in our industry or business in general may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition or results of operations could be materially and adversely affected. OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING GROWTH RATE. Although we have had significant revenue and earnings growth in recent quarters, we may not be able to sustain these growth rates and we may experience significant fluctuations in our revenue and earnings in the future. Our operating results will depend on many factors, including the following: o our ability to develop, manufacture and deliver products in a timely and cost-effective manner; o whether we encounter low levels of usable product produced during each manu- facturing step (our "yield"); o our ability to expand our production of SiC wafers and devices; o demand for our products or our customers' products; o competition; and o general industry and global economic conditions. Our future operating results could be adversely affected by these or other factors. If our future operating results are below the expectations of stock market analysts or our investors, our stock price may decline. IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER. Our SiC products are manufactured using technologies that are highly complex. Our customers incorporate our products into high volume applications such as automotive dashboards, wireless handsets, full color video displays and gemstones, and they insist that our products meet exact specifications for quality, performance and reliability. The number of usable crystals, wafers and devices that result from our production processes can fluctuate as a result of many factors, including but not limited to the following: o impurities in the materials used; o contamination of the manufacturing environment; o equipment failure, power outages or variations in the manufacturing process; o losses from broken wafers or other human error; and o defects in packaging. Because many of our manufacturing costs are fixed, if our yields decrease our operating results would be adversely affected. For this reason, we are constantly trying to improve our yields. In the past, we have experienced difficulties in achieving acceptable yields on new products, which has adversely affected our operating results. We may experience similar problems in the future and we cannot predict when they may occur or their severity. These problems could significantly affect our future operating results. IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDs, OUR OPERATING RESULTS MAY SUFFER. We believe that higher volume production of high brightness blue and green LEDs will be important to our future operating results. In addition, our current contract with our largest LED customer provides that the customer is entitled to recover liquidated damages, or in some cases actual damages, if we default in meeting delivery commitments. 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 larger diameter SiC wafers, high power radio frequency and microwave devices, power devices, blue laser diodes and high temperature devices. The successful development and introduction of these products depends on a number of factors, including the following: o achievement of technology breakthroughs required to make commercially viable devices; o the accuracy of our predictions of market requirements and evolving standards o acceptance of our new product designs; o the availability of qualified development personnel; o our timely completion of product designs and development; o our ability to develop repeatable processes to manufacture new products in sufficient quantities for commercial sales; and o acceptance of our customers' products by the market. If any of these or other factors become problematic, we may not be able to develop and introduce these new products in a timely or cost-efficient manner. WE DEPEND ON A FEW LARGE CUSTOMERS. Historically, a substantial portion of our revenue has come from large purchases by a small number of customers. We expect that trend to continue. For example, for fiscal 1999 our top five customers accounted for 81% of our total revenue. Accordingly, our future operating results depend on the success of our largest customers and on our success in selling large quantities of our products to them. The concentration of our revenues with a few large customers makes us particularly dependent on factors affecting those customers. For example, if demand for their products decreases, they may stop purchasing our products and our operating results will suffer. If we lose a large customer and fail to add new customers to replace lost revenue, our operating results may not recover. WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING FACILITY. In order to increase production at our new facility, we must add critical new equipment, move existing equipment and complete the construction and upfit of buildings. Expansion activities such as these are subject to a number of risks, including unforeseen environmental or engineering problems relating to existing or new facilities or unavailability or late delivery of the advanced, and often customized, equipment used in the production of our products, and delays in bringing production equipment on-line. These and other risks may affect the construction of new facilities, which could adversely affect our business, results of operations and financial condition. THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE. The market for our products is highly competitive. Although we believe our SiC-based LEDs offer substantial advantages, competitors currently sell blue and green LEDs made from sapphire wafers that are brighter than the high brightness LEDs we currently produce. In addition, we believe that other firms (including certain of our customers) may seek to enter the blue and green LED market in the future. For example, Siemens and Shin-Etsu license certain of our LED technology, which may facilitate their entrance into our LED markets. The market for SiC wafers is also becoming competitive as other firms have in recent years begun offering SiC wafer products or announced plans to do so. Also, other firms may develop new or enhanced products that are more effective than those of the Company. These firms may develop technology that produces commercial products with characteristics similar to SiC-based products, but at a lower cost. Many existing and potential competitors have far greater financial, marketing and other resources than we do. We believe that present and future competitors will aggressively pursue the development and sale of competing products. We also expect significant competition for products we are currently developing, such as those for use in microwave communications. We expect competition to increase. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations and financial condition. WE RELY ON A FEW KEY SUPPLIERS. We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our SiC products, including key materials and equipment used in critical stages of our manufacturing processes. We generally purchase these limited source items with purchase orders, and we have no guaranteed supply arrangements with such suppliers. If we were to lose such key suppliers, our manufacturing efforts could be hampered significantly. Although we believe our relationship with our suppliers is good, we cannot assure you that we will continue to maintain good relationships with such suppliers or that such suppliers will continue to exist. IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER. In the past, government agencies and other customers have funded a significant portion of our research and development activities. If this support is discontinued or reduced, our ability to develop or enhance products could be limited and our business, results of operations and financial condition could be adversely affected. LIMITATIONS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY. Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us by N.C. State, including a licensed patent 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 any other patents will be issued on such applications or that our patents will not be contested. In the past, the U.S. patent that the Company licenses from N.C. State relating to growth of SiC was subject to a reissue proceeding; however, that patent was successfully reissued. Currently, a corresponding European patent is being opposed, which means that the Company could lose patent protection in Europe for this particular method. Also, because issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents (or patents issued to others and licensed to us) will provide significant commercial protection. In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information with confidentiality agreements with our employees and other parties. We cannot be sure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others. OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business. We cannot predict the extent to which we may be required to seek licenses or, if required, whether such licenses will be offered or offered on acceptable terms or that disputes can be resolved without litigation. Litigation to determine the validity of infringement claims alleged by third parties could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not the litigation is ultimately determined in our favor. WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES. Sales to customers located outside the U.S. accounted for about 62%, 74% and 79% of our revenue in fiscal 1999, 1998 and 1997, respectively. We expect that revenue from international sales will continue to be a significant part of our total revenue. International sales are subject to a variety of risks, including risks arising from currency fluctuations, the emergence of the Euro, trading restrictions, tariffs, trade barriers and taxes. Also, U.S. export restrictions could limit or prohibit shipments of some products to certain countries or purchasers because of potential uses in military applications or because of other national security or similar concerns. Because all of our foreign sales are denominated in U.S. dollars, our products become less price competitive in countries with currencies that are low or are declining in value against the U.S. dollar. Also, we cannot be sure that our international customers will continue to place orders denominated in U.S. dollars. If they do not, our reported revenue and earnings will be subject to foreign exchange fluctuations. WE FACE RISKS CONCERNING YEAR 2000 ISSUES. We are evaluating all of our internal computers, computer equipment and other equipment with embedded technology against Year 2000 concerns. Although we believe our planning efforts are adequate to address our Year 2000 concerns, it is still possible that we could experience negative consequences and material cost caused by undetected errors or defects in the technology used in our internal systems. Our most significant Year 2000 risk is that the systems of other parties on which we rely, specifically our key suppliers, will not be compliant on a timely basis. Any disruption in delivery of supplies to us that is caused by a third party's failure to address Year 2000 issues would affect our ability to manufacture our products, which could result in a material adverse effect on our business, operating results and financial condition. At this time, we are unable to estimate the most likely worst-case effects of the arrival of the Year 2000. -----END PRIVACY-ENHANCED MESSAGE-----