-----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, GDScVyciT+9wi1NlMrxO6Logjl8i3XnIeiK8uKOLBafbraHgvbFcJTRS0AEzW45T 9iVZI1qcSyM4dAQx0NWDCQ== 0000950144-01-501743.txt : 20010510 0000950144-01-501743.hdr.sgml : 20010510 ACCESSION NUMBER: 0000950144-01-501743 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010325 FILED AS OF DATE: 20010509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREE INC 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: 1626889 BUSINESS ADDRESS: STREET 1: 4600 SILICON DR CITY: DURHAM STATE: NC ZIP: 27703 BUSINESS PHONE: 9193135300 MAIL ADDRESS: STREET 1: 4600 SILICON DR CITY: DURHAM STATE: NC ZIP: 27703-8475 FORMER COMPANY: FORMER CONFORMED NAME: CREE RESEARCH INC /NC/ DATE OF NAME CHANGE: 19940224 10-Q 1 g69133e10-q.txt CREE INC 1 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 March 25, 2001 Commission file number: 0-21154 CREE, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1572719 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 SILICON DRIVE DURHAM, NORTH CAROLINA 27703 (Address of principal executive offices) (Zip Code) (919) 313-5300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares outstanding of the registrant's common stock, par value $0.00125 per share, as of May 1, 2001 was 72,691,054. 2 CREE, INC. FORM 10-Q For the Quarter Ended March 25, 2001 INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at March 25, 2001 (unaudited) and June 25, 2000 3 Consolidated Statements of Operations for the three and nine months ended March 25, 2001 and March 26, 2000 (unaudited) 4 Consolidated Statements of Cash Flow for the nine months ended March 25, 2001 and March 26, 2000 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23
3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
March 25, June 25, 2001 2000 ----------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 117,102 $ 103,843 Short-term investments, held to maturity 77,984 142,461 Marketable securities, available for sale 9,644 15,842 Accounts receivable, net 31,540 12,406 Interest receivable 2,261 3,893 Inventories 15,853 9,320 Deferred income taxes 139 -- Prepaid expenses and other current assets 2,104 1,254 --------- --------- Total current assets 256,627 289,019 Property and equipment, net 215,853 137,118 Long-term investments held to maturity 7,971 41,965 Deferred income taxes 10,624 10,624 Patent and license rights, net 2,882 2,324 Intangible assets 85,736 -- Other assets 31,822 5,152 --------- --------- Total assets $ 611,515 $ 486,202 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 15,765 $ 14,204 Accrued salaries and wages 2,178 3,133 Deferred income taxes 15,785 455 Other accrued expenses 7,677 5,270 --------- --------- Total current liabilities 41,405 23,062 Long term liabilities: Long term liability 437 -- --------- --------- Total long term liabilities 437 -- Shareholders' equity: Preferred stock, par value $0.01; 3,000 shares authorized at March 25, 2001 and June 25, 2000; none issued and outstanding -- -- Common stock, par value $0.00125; 200,000 and 120,000 shares authorized at March 25, 2001 and June 25, 2000, respectively; shares issued and outstanding 72,686 and 70,696 at March 25, 2001 and June 25, 2000, respectively 90 88 Additional paid-in-capital 508,466 415,716 Deferred compensation expense (1,348) (1,755) Retained earnings 69,490 48,156 Accumulated other comprehensive (loss) income, net of tax (7,025) 935 --------- --------- Total shareholders' equity 569,673 463,140 --------- --------- Total liabilities and shareholders' equity $ 611,515 $ 486,202 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 CREE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
--------------------------- --------------------------- Three Months Ended Nine Months Ended --------------------------- --------------------------- March 25, March 26, March 25, March 26, 2001 2000 2001 2000 --------- --------- --------- --------- Revenue: Product revenue, net $ 48,042 $ 26,177 $ 119,940 $ 66,561 Contract revenue, net 5,323 3,351 12,561 8,641 --------- --------- --------- --------- Total revenue 53,365 29,528 132,501 75,202 Cost of revenue: Product revenue 23,819 10,971 54,471 30,542 Contract revenue 3,849 2,758 9,693 6,658 --------- --------- --------- --------- Total cost of revenue 27,668 13,729 64,164 37,200 --------- --------- --------- --------- Gross profit 25,697 15,799 68,337 38,002 Operating expenses: Research and development 3,627 2,246 8,023 5,088 Sales, general and administrative 5,105 2,969 12,072 7,792 Intangible asset amortization 2,280 -- 2,280 -- In-process research and development 17,400 -- 17,400 -- costs, one-time charge Other expense 158 1,169 220 1,261 --------- --------- --------- --------- (Loss) income from operations (2,873) 9,415 28,342 23,861 Other non operating income 162 495 63 495 Interest income, net 3,824 3,768 12,929 4,894 --------- --------- --------- --------- Income before income taxes 1,113 13,678 41,334 29,250 Income tax expense 6,295 4,716 20,000 10,087 --------- --------- --------- --------- Net (loss) income $ (5,182) $ 8,962 $ 21,334 $ 19,163 ========= ========= ========= ========= Other comprehensive (loss) income, net of tax: Unrealized holding (loss) gain on available for sales securities (1,010) 7,039 (7,960) 6,602 --------- --------- --------- --------- Comprehensive (loss) income $ (6,192) $ 16,001 $ 13,374 $ 25,765 ========= ========= ========= ========= (Loss) earnings per share: Basic $ (0.07) $ 0.13 $ 0.30 $ 0.30 ========= ========= ========= ========= Diluted $ (0.07) $ 0.12 $ 0.28 $ 0.28 ========= ========= ========= ========= Shares used in per share calculation: Basic 73,920 68,031 72,075 64,424 ========= ========= ========= ========= Diluted 73,920 73,122 75,818 68,844 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 5 CREE, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands)
Nine Months Ended ---------------------------- March 25, March 26, 2001 2000 ----------- --------- (Unaudited) Operating activities: Net income $ 21,334 $ 19,163 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of fixed assets 15,016 7,475 Loss on disposal of property, equipment and patents 221 1,212 Write-off of acquired in process research & development, one time charge 17,400 -- Amortization of patent rights 142 107 Amortization of goodwill 2,068 -- Amortization of other intangible assets 211 -- Issuance and amortization of deferred compensation 407 (1,462) Deferred income taxes 19,291 -- Purchase of marketable trading securities -- (1,786) Sale of marketable trading securities -- 2,280 Gain on sale of available for sale securities (1,379) (494) Changes in operating assets and liabilities: Accounts receivable, net (16,113) (8,360) Inventories (2,903) (3,105) Prepaid expenses and other assets (618) (624) Accounts payable, trade 693 (266) Accrued expenses and long-term liability 1,744 11,856 --------- --------- Net cash provided by operating activities 57,514 25,996 --------- --------- Investing activities: Acquisition fees for purchase transaction (1,908) -- Purchase of available for sale securities (10,318) (184,429) Proceeds from sale of available for sale securities 5,837 -- Purchase of property and equipment (88,193) (47,278) Purchase of securities held to maturity (116,528) -- Proceeds from securities held to maturity 214,998 -- Increase in other long-term assets (26,694) (3) Purchase of patent rights (700) (556) --------- --------- Net cash used in investing activities (23,506) (232,266) --------- --------- Financing activities: Net proceeds from the issuance of short-term debt -- 200 Repurchase of common stock (30,668) -- Net proceeds from issuance of common stock 9,919 271,827 --------- --------- Net cash (used in) provided by financing activities (20,749) 272,027 --------- --------- Net increase in cash and cash equivalents 13,259 65,757 Cash and cash equivalents: Beginning of period 103,843 42,545 --------- --------- End of period $ 117,102 $ 108,302 --------- --------- Supplemental disclosure of cash flow information: Cash paid for income taxes $ 611 $ 268 Common stock issued in connection with purchase business combination $ 113,500 $ -- ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 CREE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The consolidated balance sheet as of March 25, 2001, the consolidated statements of income for the three and nine months ended March 25, 2001 and March 26, 2000, and the consolidated statements of cash flow for the nine months ended March 25, 2001 and March 26, 2000 have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flow at March 25, 2001, and for all periods presented have been made. The balance sheet at June 25, 2000 has been derived from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's fiscal 2000 Form 10-K. The consolidated results of operations for the periods ended March 25, 2001 are not necessarily indicative of the operating results that may be attained for the entire fiscal year. ACCOUNTING POLICIES Business Combination On May 1, 2000, the Company acquired Nitres, Inc. in a business combination accounted for as a pooling of interests. Nitres, Inc., became a wholly owned subsidiary (Cree Lighting Company) of the Company through the exchange of 3,695,492 shares of the Company's common stock for all of the outstanding stock of Nitres, Inc. In addition, the Company assumed outstanding stock options and warrants, which after adjustment for the exchange represented a total of 304,446 options and warrants to purchase shares of Cree's common stock. All prior period consolidated financial statements have been restated to include the results of operations, financial position and cash flows of Nitres, Inc., as though Nitres, Inc. had been a part of the Company for all periods presented. On December 29, 2000 the Company completed the acquisition of the UltraRF division of Spectrian Corporation, through the purchase of the assets of the business by Cree's wholly owned subsidiary, Ultra RF, Inc. ("UltraRF") in a business combination accounted for under the purchase method. Under the terms of the Asset Purchase Agreement, Ultra RF acquired substantially all of the net assets of the business from Spectrian Corporation in exchange for a total of 2,656,917 shares of Cree common stock valued at $113.5 million. Of the total shares issued, 191,094 shares were placed in escrow to secure Spectrian's representations, warranties and covenants under the Asset Purchase Agreement. The escrow period is one year, with 50% of the escrowed shares to be released after six months if there have been no indemnification claims. 7 The consolidated financial statements reflect the allocation of the purchase price to fair value of the assets acquired, including goodwill of $81.7 million and other intangible assets of $6.3 million. Goodwill is being amortized on a straight-line basis over ten years and other related intangibles are being amortized over five to eight years. In connection with the acquisition of the UltraRF business, the Company recognized a one-time charge of $17.4 million representing the write-off of the appraised value of certain acquired in-process research and development costs as of the acquisition date. UNAUDITED PRO FORMA SUMMARY The following unaudited pro forma summary for the nine months ended March 25, 2001 and March 26, 2000 presents the condensed consolidated results of operations as if the acquisition of UltraRF made during 2001 had occurred as of June 26, 2000 and June 28, 1999, respectively. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of June 26, 2000 or June 28, 1999 or of results that may occur in the future.
Nine Months Ended Nine Months Ended March 25, 2001 March 26, 2000 ----------------- ----------------- (In thousands, except per share amounts) Revenue $149,631 $98,897 Net income 18,244 17,541 Basic net income per share $ 0.25 $ 0.26 Diluted net income per share $ 0.24 $ 0.25
Principles of Consolidation The consolidated financial statements include the accounts of Cree, Inc., and its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Ultra RF, Inc., Cree Research FSC, Inc., Cree Funding LLC, Cree Employee Services Corporation, CI Holdings, Limited and Cree Technologies, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain fiscal 2000 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2001 presentation. These reclassifications had no effect on previously reported net income or shareholder's equity. Fiscal Year The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in the month of June. Accordingly, all quarterly reporting reflects a 13-week period in fiscal 2001 and fiscal 2000. The Company's current fiscal year extends from June 26, 2000 through June 24, 2001. 7 8 Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term and long-term investments, available for sale securities, accounts and interest receivable, accounts payable and other liabilities approximate fair values at March 25, 2001 and June 25, 2000. Investments Investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115, (SFAS No. 115) "Accounting for Certain Investments in Debt and Equity Securities". This statement requires certain securities to be classified into three categories: (a) Securities Held-to-Maturity -- Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. (b) Trading Securities -- Debt and equity securities that are bought and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. (c) Securities Available-for-Sale -- Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. As of March 25, 2001 and June 25, 2000, the Company's short-term investments held to maturity included $78.0 million and $142.5 million, respectively, in high-grade corporate bonds. The company purchased the investments with a portion of the proceeds from its public stock offering in January 2000. The Company has the intent and ability to hold these securities until maturity; therefore, they are accounted for as "securities held-to maturity" under SFAS 115. The securities are reported on the consolidated balance sheets at amortized cost, as a short-term investment with unpaid interest included in interest receivable. As of March 25, 2001 and June 25, 2000, the Company's long-term investments consisted of $8.0 million and $42.0 million, respectively, in high-grade commercial paper. The Company purchased the commercial paper with a portion of the proceeds from the public stock offering in January 2000. The Company has the intent and ability to hold these securities until maturity; therefore, they are accounted for as "securities held-to-maturity" under SFAS 115. The securities are reported on the balance sheet at amortized cost, as long-term marketable securities with unpaid interest included in accounts receivable if interest is due in less than 12 months, and as a long term receivable if interest is due in more that 12 months. At March 25, 2001 and June 25, 2000, the Company held a short-term equity investment in common stock of Microvision, Inc. ("MVIS"). The Company purchased 268,600 common 8 9 shares in a private equity transaction in May 1999 at a price of $16.75 per share, or $4.5 million. Pursuant to an agreement signed March 17, 2000, the Company committed to increase its equity position in MVIS by investing an additional $12.5 million in MVIS common stock. This additional investment was completed on April 13, 2000, when the Company purchased 250,000 shares at a price of $50.00 per share. In June 2000, 162,600 MVIS shares were sold for $6.3 million, with a gain for $3.6 million realized from the sale. The Company has also purchased other securities for investment purposes. Management views these transactions as investments, and the shares are accounted for as "available for sale" securities under SFAS 115. Therefore unrealized gains or losses are excluded from earnings and are recorded in other comprehensive income or loss, net of tax. During the three and nine months ended March 25, 2001, the Company realized gains of $199,000 and $1.4 million, respectively, from the sale of available-for-sale securities. During the three and nine months ended March 26, 2000, the Company realized gains of $494,000 and $494,000, respectively, from the sale of available-for-sale securities. For the three and nine months ended March 25, 2001, the Company had unrealized holding losses of $1.5 million and $12.1 million, respectively, associated with investments made in available for sale securities. 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:
March 25, June 25, 2001 2000 --------- --------- (In thousands) Raw materials $ 4,156 $ 2,415 Work-in-progress 6,568 3,094 Finished goods 5,129 3,811 --------- --------- Total Inventory $ 15,853 $ 9,320 ========= =========
Research and Development Agreements The U.S. Government provides funding through research contracts for several of the Company's current research and development ("R&D") efforts. The contract funding may be based on either a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and the cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. For the cost-share contracts, the actual costs are divided between the U.S. government and the Company based on the terms of the contract. The government's cost share is then paid to the Company. Activities performed under these arrangements include research regarding silicon carbide and gallium nitride materials. The contracts typically require the submission of a written report that documents the results of such research. The revenue and expense classification for contract activities is based on the nature of the contract. For contracts where the Company anticipates that funding will exceed direct costs over the life of the contract, funding is reported as 9 10 contract revenue and all direct costs are reported as costs of contract revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding as an offset of those expenses. The following table details information about contracts for which direct expenses exceed funding by period included in research and development expenses:
Three Months Ended Nine Months Ended -------------------------- -------------------------- March 25, March 26, March 25, March 26, 2001 2000 2001 2000 --------- --------- --------- --------- (In thousands) Net R&D costs $ 160 $ 164 $ 399 $ 298 Government funding 371 227 1,031 625 --------- --------- --------- --------- Total direct costs incurred $ 531 $ 391 $ 1,430 $ 923 ========= ========= ========= =========
Significant Sales Contracts In July 2000, the Company entered into a new Purchase Agreement with Osram Opto Semiconductors GmbH & Co. ("Osram"), pursuant to which Osram agreed to purchase and the Company is obligated to ship certain quantities of standard-brightness, high-brightness and ultra-bright LED chips and silicon carbide wafers through September 2001. The Osram agreement calls for certain quantities of standard-brightness, high-brightness and ultra-bright 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. These damages are calculated at 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 40% 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% of standard-brightness LED's and 25% of high-brightness and ultra-bright 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 standard-brightness, high-brightness and ultra-bright LEDs. In each case, Osram is required to accept all products within 90 days of the original shipment date. In all other cases, Osram may reschedule shipments only with the Company's mutual written agreement. Additionally, the Purchase Agreement provides for higher per unit prices early in the contract with reductions in unit prices being available as the cumulative volume shipped increases. The higher prices were negotiated by the Company to offset higher per unit costs expected earlier in the contract. In December 2000, the Company's subsidiary, UltraRF, entered into a Supply Agreement with Spectrian. Under this agreement, Spectrian has committed to purchase semiconductor components having a minimum aggregate purchase price of approximately $58.0 million during 10 11 the two years ended December 31, 2002. In addition, UltraRF agreed to allocate sufficient capacity to supply Spectrian with quantities in excess of its minimum commitment by up to 20%. The minimum purchase amounts are fixed for each quarter during the two-year term of the agreement, with the aggregate of the eight quarters equaling $58.0 million. Cree, UltraRF and Spectrian also entered into a development agreement, under which Spectrian has agreed to provide funding of $2.4 million during calendar 2001. This work will support development by Cree and UltraRF directed to improve high linearity and gain laterally diffused metal oxide semiconductors ("LDMOS") power modules, and silicon carbide based RF power transistors for potential use in Spectrian's power amplifier products. 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. Shareholders' Equity On January 18, 2001, the Company announced that its Board of Directors has authorized the repurchase of up to four million shares, or about five percent, of its outstanding common stock. Additionally, on March 22, 2001, the Company announced that its Board of Directors increased the repurchase limits under the stock repurchase program announced in January 2001 to include an additional three million shares, for a total of seven million shares of its outstanding common stock. As of March 25, 2001, the Company repurchased 1.85 million shares of its common stock at an average price of $16.58 per share. The Company expects to use available cash to finance purchases under the program, which extends to January 2002. At the discretion of the Company's management, the repurchase program can be implemented through open market or privately negotiated transactions. The Company will determine the time and extent of repurchases based on its evaluation of market conditions and other factors. In connection with the stock repurchase program, and in addition to the purchases described above, the Company sold put options covering an aggregate of 1.95 million shares for an aggregate premium of $2.9 million in January 2001. The options are exercisable on a specific date in the fourth quarter of fiscal 2001, at an average exercise price of $19.52 per share. The put options were sold to investment banks without registration in reliance on the exemption provided by Section 4 (2) of the Securities Act of 1933, as amended. Each transaction was privately negotiated with the purchaser, which was an accredited investor. (LOSS) EARNINGS PER SHARE The Company presents (loss) earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). 11 12 The following computation reconciles the differences between the basic and diluted presentations:
Three Months Ended Nine Months Ended -------------------------- -------------------------- March 25, March 26, March 25, March 26, 2001 2000(*) 2001 2000(*) --------- --------- --------- --------- (In thousands except per share amounts) Net (loss) income $ (5,182) $ 8,962 $ 21,334 $ 19,163 Weighted average common shares 73,920 68,031 72,075 64,424 --------- --------- --------- --------- Basic (loss) earnings per common share $ (0.07) $ 0.13 $ 0.30 $ 0.30 ========= ========= ========= ========= Net (loss) income $ (5,182) $ 8,962 $ 21,334 $ 19,163 Diluted weighted average common shares: Common shares outstanding 73,920 68,031 72,075 64,424 Dilutive effect of stock options and warrants -- 5,091 3,743 4,420 --------- --------- --------- --------- Total diluted weighted average common shares 73,920 73,122 75,818 68,844 --------- --------- --------- --------- Diluted (loss) earnings per common share $ (0.07) $ 0.12 $ 0.28 $ 0.28 ========= ========= ========= =========
(*) Weighted average shares and per share amounts have been adjusted for the two for one stock split effective December 1, 2000. In accordance with SFAS 128, 5,951,074 shares for the three and nine months ended March 25, 2001, respectively, were not included in calculating diluted (loss) income per share for the periods presented. For the three and nine months ended March 26, 2000, there were no potential shares considered antidilutive. The Company effected a two-for-one split of its common stock in December 2000. The stock split was effected by an amendment to the Company's Articles of Incorporation that became effective at the close of business on December 1, 2000. Each issued and unissued authorized share of common stock, $0.0025 par value per share, was automatically split into two whole shares of common stock, $0.00125 par value per share. On December 8, 2000, the Company issued to each holder of record of common stock a certificate evidencing the additional shares of common stock resulting from the stock split. All references in this document to common stock and per common share data have been adjusted to reflect the common stock split, unless otherwise stated. BUSINESS SEGMENTS The Company operates in two business segments, Cree and UltraRF. The Cree segment incorporates its proprietary technology to produce LEDs, silicon carbide wafers and government contract research. Products from this segment are used in automotive and liquid crystal display backlighting; indicator lamps, full color light emitting diode displays and other lighting applications as well as power applications and research. 12 13 The UltraRF segment designs, manufactures and markets a complete line of silicon based LDMOS and bipolar radio frequency power semiconductors, the critical component utilized in building power amplifiers for wireless infrastructure applications. Summarized financial information concerning the reportable segments for the three and nine months ended March 25, 2001 are shown in the following table. The "Other" column represents amounts excluded from specific segments such as interest income. In addition, the "Other" column also includes corporate assets such as cash and cash equivalents, short-term investments held to maturity, marketable securities, interest receivable and long-term investments held to maturity which have not been allocated to a specific segment.
Cree UltraRF Other Total -------- -------- -------- -------- (In thousands) Three Months Ended March 25, 2001 Revenue $ 44,064 $ 9,301 $ 0 $ 53,365 Income (loss) before income taxes 14,735 (17,446) 3,824 1,113 Assets $293,807 $102,746 $214,962 $611,515
Cree UltraRF Other Total -------- -------- -------- -------- (In thousands) Nine Months Ended March 25, 2001 Revenue $123,200 $ 9,301 $ 0 $132,501 Income (loss) before income taxes 45,851 (17,446) 12,929 41,334 Assets $293,807 $102,746 $214,962 $611,515
13 14 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 our judgment concerning the future and are subject to risks and uncertainties that could cause our 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. We caution that such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those forward-looking statements. These factors include, but are not limited to, uncertainties regarding economic condition; risks from increased competition; uncertainty whether we can achieve our targets for increased yields and cost reductions needed to permit lower product pricing without margin reductions; risks associated with the production ramp-up for our ultra-bright LED chips, including the possibility of unexpected delays, increased costs and manufacturing difficulties or less than expected market acceptance; risks associated with the planned release of new products under development, including the possibility we will be unable to develop and manufacture commercially viable versions of such products; the risk of variability in our manufacturing processes that can adversely affect yields and product performance; uncertain product demand; concentration of our business among few customers; whether we can manage our growth and integrate acquired businesses effectively; uncertainty whether our intellectual property rights will provide meaningful protection; the possibility of adverse results in our pending intellectual property litigation and general economic conditions. See Exhibit 99.1 for further discussion of factors that could cause our actual results to differ. Overview Cree, Inc. is the world leader in developing and manufacturing semiconductor materials and electronic devices made from silicon carbide ("SiC") and gallium nitride ("GaN"). We recognize product revenue at the time of shipment or in accordance with the terms of the relevant contract. We derive the largest portion of our revenue from the sale of blue and green light emitting diode ("LED") products. We offer LEDs at three brightness levels: ultra-bright blue and green devices, high-brightness blue and green products and standard-brightness blue products. Our LED devices are utilized by end users for automotive dashboard lighting, liquid crystal display ("LCD") backlighting, including wireless handsets and other consumer products, indicator lamps, miniature white lights, indoor sign and arena displays, outdoor full color displays, traffic signals and other lighting applications. We introduced our new ultra-bright LED products in the second quarter of fiscal 2001. We believe the ultra-bright products are two-times brighter than our high-brightness devices, and they will replace some of the demand for our older products over time. The ultra-bright chips are priced slightly higher than the high-brightness devices; therefore, the cost per lumen of brightness to the customer has been substantially reduced with the introduction of this product. As a result, during the third quarter of fiscal 2001, revenues derived from ultra-bright LED 14 15 products increased from 8% of our total LED revenue in the second quarter of fiscal 2001 to 39% of revenue in the third quarter of fiscal 2001. During the third quarter of fiscal 2001, our high-brightness chips comprised the largest portion of our revenue at 42% of LED sales. However, these sales have declined as a percentage of total LED revenue from 79% in the quarter ended December 2000 due to the sales of our new ultra-bright products. Revenues from the standard-brightness products were fairly flat as a percentage of our LED sales mix during the third quarter of fiscal 2001. Over the next few quarters, LED revenue mix by product is targeted to remain near the same range as the March 2001 quarter. We anticipate that new designs targeted to be ready for sale in the first half of fiscal 2002 will create a greater demand for our ultra-bright devices. In addition, we announced a new LED product design, our megabright chip, that we target to be released in volume production in June 2001. We believe this product offers two-times the brightness of our ultra-bright devices and will likely benefit customers who provide outdoor displays, automotive designs, PDA's and solid state illumination products. In addition, we are in the later stages of developing a new ultra violet ("UV") LED product that we are targeting to be available beginning in the first half of fiscal 2002 in limited quantities for white light conversion applications. Through the first nine-months of fiscal 2001, average sales prices for LEDs have declined 20%. We target average sales prices for these products to decline at a rate of 25% to 30% for the entire fiscal year. We derive additional revenue from the sale of advanced materials made from SiC that are used primarily for research and development for new semiconductor applications. During the third quarter of fiscal 2001, sales of SiC wafers increased by 120% over the third quarter of fiscal 2000. Strong demand from the corporate and research communities is driving this growth, including new interest in SiC for microwave and power devices from certain customers. During the quarter, we continued process refinement to lower costs of two-inch product while improving quality and manufacturing processes for three-inch material. We continue to expand our epitaxial capabilities for three-inch production of nitride and SiC based products. For some RF and power products it is critical that we get these processes on line so that we can deliver devices at the proper price point and margins. There was no revenue from gemstone sales during the third quarter of fiscal 2001. During the quarter ended March 25, 2001, UltraRF exceeded our revenue expectation at $9.3 million. In the long term, UltraRF's success will depend on the rate at which we diversify our Spectrian-concentrated business. However, we experienced a strong quarter from Spectrian, with sales extending beyond the minimum purchase requirements in our contract. We believe the LDMOS product line will enable growth of our products to customers other than Spectrian. These products focus on multi-carrier applications and may allow for new design wins. The balance of our revenue is derived from government and customer research contract funding. We continue to focus on cost reduction as one of our highest priorities. During the past twelve months, we maximized our capacity and have invested in additional plant and equipment and other infrastructure that has increased our overall cost base. We anticipate that we will use much of this equipment and infrastructure in the near term to perform research and development work 15 16 to support the commercialization and growth of future products. We are also now thoroughly examining our cost structure and identifying ways to minimize costs through vendor negotiations, process improvements and other efficiencies and to increase overall yields. We believe that a successful cost reduction program will be critical to meeting our profit objectives over the next several quarters. RESULTS OF OPERATIONS Three Months Ended March 25, 2001 and March 26, 2000 Revenue. Revenue grew 81% from $29.5 million in the third quarter of fiscal 2000 to $53.4 million in the third quarter of fiscal 2001. This increase was attributable to a rise in product revenue of 84% from $26.2 million in the third quarter of fiscal 2000 to $48.0 million in the third quarter of fiscal 2001. Without the acquisition of Ultra RF, revenue for the third quarter would have increased 49% over the prior year comparative results. Much of the increase in revenue for our core business unit resulted from demand for our LED and silicon carbide wafer products. LED chip volume increased 127% over units delivered in the third quarter of last year. Our new ultra-bright LED products showed the highest percentage gain over the December 2000 quarter as unit shipments increased more than five times. Ultra bright products, which are approximately two times brighter than our high-brightness chips, made up more than 24% of our total chip volume and 39% of total LED revenue during the quarter. The ultra bright products will likely continue to replace some of the demand for older devices, as new customer product qualifications are completed. As a result of the growth of these products, our high-brightness chips declined sequentially from 71% in the December 2000 quarter to 42% of LED sales for the March 2001 quarter. Sales of our standard-brightness chips continued to be strong in the third quarter of fiscal 2001 as volume increased 153% over the same quarter in the prior year due to the timing of demand for automotive applications, displays and indicator lights. Average LED sales prices declined 27% in the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000, and 6% sequentially, due to expected contractual volume discounts given to customers. SiC wafer sales increased 120% in the third quarter of fiscal 2001 compared to the same period of fiscal 2000. This is due to demand from the corporate and research communities, including new interest in SiC for microwave and power devices from certain customers and other customers now using our SIC wafers for commercial production. Wafer units have increased 148%, while average sales prices have declined 11% in the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000. Sales of gemstone products declined 100% during the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000, as there were no sales to Charles & Colvard ("C&C") during the March 2001 quarter. We anticipate little to no revenue from this customer over the next several quarters. Revenue from our newly acquired UltraRF subsidiary was $9.3 million during the March 2001 quarter, which was relatively unchanged from results reported by UltraRF as a division of Spectrian Corporation in the December 2000 quarter. UltraRF continues to ramp its production of LDMOS products currently being shipped for next generation wireless base station applications while working on new customer design wins. We acquired Ultra RF in December 2000; therefore, there were no sales for this unit in the comparable March 2000 quarter. 16 17 Contract revenue received from U.S. Government agencies and non-governmental customers increased 59% during the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000 due to additional contract awards received. During the past 12 months, our Cree Lighting subsidiary, and we were awarded 12 new government funded contracts. In addition, certain prior year rate adjustments were recorded which increased revenue in the March 2001 quarter. Gross Profit. Gross profit increased 63% to $25.7 million in the third quarter of fiscal 2001 compared to $15.8 million in the third quarter of fiscal 2000. Compared to the prior year, gross margin decreased to 48% from 54% of revenue. Lower margins resulted from the combination of the UltraRF business, where gross margins were 42% of revenue for the third quarter of fiscal 2001. Margins were lower for this unit due to one-time adjustments to record costs associated with acquired inventory at fair value in accordance with the purchase method of accounting, in addition to other adjustments to costs. Without these adjustments, margins at UltraRF would have been 49%. Our product margin, excluding UltraRF, would have been 53% of revenue for the March 2001 quarter. The LED line also realized lower profitability due to contractual declines in average sales prices combined with flat costs. In the March 2001 quarter, we made chip modifications to certain LED products that we believe will improve our competitive advantage for new design wins. We believe the challenges involved with learning this new process were mostly overcome during the third quarter of fiscal 2001, therefore, we target improved yields for our LED products in the fourth quarter of 2001. Wafer costs for SIC material sales were also flat in the third quarter of fiscal 2001, compared to results in the third quarter of fiscal 2000. Research and Development. Research and development expenses increased 64% or $1.4 million in the third quarter of fiscal 2001 to $3.6 million from $2.2 million in the third quarter of fiscal 2000. Increased spending for research and development results from the combination of UltraRF expenses and increased internal funding to support microwave and optoelectronic programs. Without the addition of UltraRF expenses, research and development costs would have increased 32% from the third quarter of fiscal 2000. Internal funding for programs is targeted to accelerate in the next several months as we increase our efforts to develop new products that we believe will improve our competitive position and create new opportunities for the use of silicon carbide and gallium nitiride in the marketplace. Sales, General and Administrative. Sales, general and administrative expenses increased 76% or $2.2 million in the third quarter of fiscal 2001 to $5.1 million from $3.0 million in the third quarter of fiscal 2000, due to the combination of UltraRF expenses and significant legal costs primarily associated with patent litigation. Excluding UltraRF results, selling, general and administrative expenses would have been 37% higher, which is directly attributed to costs incurred during the March 2001 quarter in connection with ongoing intellectual property litigation. Intangible Assets Amortization and In-Process Research and Development Costs. As a result of the acquisition of UltraRF, we generated goodwill and other intangible assets, which will be amortized over periods ranging from five to 10 years. In addition, due to the combination with Ultra RF, we recorded a one-time charge of $17.4 million in the third quarter of fiscal 2001 associated with acquired in-process research and development costs. 17 18 Other (Income) Expense. Other expense decreased to $158,000 during the third quarter of fiscal 2001 from $1.2 million recognized for the third quarter of fiscal 2000. This decrease is attributable to the disposal of fewer fixed assets during the quarter. Other Non Operating Income (Loss). Other non-operating income declined $333,000 to $162,000 for the third quarter of fiscal 2001 due to reduced gains from the sale of trading securities being recognized. Interest Income, Net. Interest income, net has remained constant at $3.8 million for the third quarter of fiscal 2001 and fiscal 2000. Income Tax Expense. Income tax expense for the third quarter of fiscal 2001 was $6.3 million compared to $4.7 million in the third quarter of fiscal 2000. The increase in income tax expense resulted from higher income before income taxes, adjusted for acquired in-process research and development charges, which were not deductible for tax purposes during the third quarter of fiscal 2001. The income tax provision rate was 34% for both periods. Nine Months Ended March 25, 2001 and March 26, 2000 Revenue. Revenue increased 76% from $75.2 million in the first nine months of fiscal 2000 to $132.5 million in the first nine months of fiscal 2001. This increase resulted from a rise in product revenue of 80% from $66.6 million in the first nine months of fiscal 2000 to $119.9 million in the first nine months of fiscal 2001. Greater product revenue was largely a result of the 100% increase in sales of our LED products in the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000. Our high-brightness LED products experienced the heaviest demand; however, units sold of our standard-brightness chips also increased 38% during the comparative period. Overall LED chip volume grew 135% in the first nine months of fiscal 2001 over units shipped in the first nine months of fiscal 2000, while our average sales prices for LEDs sold during each period declined 15% due to expected contractual volume discounts. SiC wafer sales increased 72% in the first nine months of fiscal 2001 compared to the same period of fiscal 2000, due to heavy demand from the corporate and research communities, including new interest in SiC for microwave and power devices from certain customers. Wafer units have increased 122%, while average sales prices have declined 15% in the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000. Average sales prices declined due to a shift in mix to high volume products now used by our customers in their commercial production applications. Revenue attributable to sales of SiC material used in the gemstone business was 58% lower in the first nine months of fiscal 2001 than in the same period of fiscal 2000. This decline was due to C&C ramping up their gemstone business in the first half of fiscal 2000, while reducing their orders in fiscal 2001 as they balance their inventory. We anticipate little to no revenue from the gemstone business over the next several quarters. Revenue from UltraRF increased 100% during the first nine months of fiscal 2001 compared to the same period in fiscal 2000, as we acquired the UltraRF business in a purchase transaction on December 29, 2000. 18 19 Contract revenue received from U.S. Government agencies and customers increased 45% during the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000. Contract revenue grew over the same period of the prior year due to new contract awards, increases in funding under existing programs and rate adjustments recorded. During the 12 months ended March 2001, our Cree Lighting Company subsidiary and we were awarded 12 new government funded contracts. Gross Profit. Gross profit increased 80% from $38.0 million in the first nine months of fiscal 2000 to $68.3 million in the first nine months of fiscal 2001. This increase is due primarily to the rise in LED sales. Margin on LED products also improved in the nine months ending March 2001 as compared to the same period in the prior year as average LED sales prices were reduced 15% while average LED costs were 16% lower due to higher throughput and manufacturing yield on high-brightness LEDs. Margins on wafer products declined during the first nine months of fiscal 2001 compared to the same period in the prior year as average sales prices decreased 15% while costs were reduced 12%. Research and Development. Research and development expenses increased 57% in the first nine months of fiscal 2001 to $8.0 million from $5.1 million in the first nine months of fiscal 2000. Much of this increase resulted from the acquisition of UltraRF, as well as a greater investment made for research in the RF and microwave, power and optoelectronics programs. We believe that internal funding for the development of new products will continue to grow especially in the next few quarters. Sales, General and Administrative. Sales, general and administrative expenses increased 55% in the first nine months of fiscal 2001, to $12.1 million, from $7.8 million in the first nine months of fiscal 2000. This increase in expenses is due to the acquisition of Ultra RF and greater spending to support the overall growth of the business, as well as costs associated with ongoing intellectual property litigation. Intangible Asset Amortization and In-Process Research and Development Costs. The purchase of UltraRF generated goodwill and other intangible assets, which will be amortized over periods ranging from five to 10 years. In addition, as a result of the acquisition of UltraRF, we recorded a one-time charge of $17.4 million in the third quarter of 2001 associated with acquired in-process research and development costs Other (Income) Expense. Other expense decreased to $220,000 during the first nine months of fiscal 2001 from $1.3 million for the first nine months of fiscal 2000. The decrease was attributable to fewer fixed asset disposals. Other Non Operating Income (Loss). Other non-operating income declined $432,000 to $ 63,000 for the first nine months of fiscal 2001 due to reduced gains from the sale of trading securities being recognized. Interest Income, Net. Interest income, net increased 163% to $12.9 million in the first nine months of fiscal 2001 from $4.9 million in the first nine months of fiscal 2000. This was due to higher average cash balances being available in the first nine months of fiscal 2001 as a result of the public stock offering completed in January 2000. Higher interest rates in the first nine months of fiscal 2001 also improved interest income. 19 20 Income Tax Expense. Income tax expense for the first nine months of fiscal 2001 was $20.0 million compared to $10.1 million in the first nine months of fiscal 2000. This increase resulted from higher profitability during the first nine months of fiscal 2001 over the same period in fiscal 2000, as adjusted for the cost of in-process research and development which is non-deductible in the current period. Our income tax provision rate was 34% for both periods. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date through sales of equity, bank borrowings and revenue from product and contract sales. As of March 25, 2001, we had working capital of $215.2 million, including $204.7 million in cash and short-term investments. Operating activities generated cash of $57.5 million for the first nine months of fiscal 2001 compared with $26.0 million generated during the comparative period in fiscal 2000. This increase was primarily attributable to higher profitability. Most of the $23.5 million used in investing activities in the first nine months of fiscal 2001 was related to the purchase of securities held to maturity of $116.5 million. In addition, we spent $88.1 million in capital expenditures during the first nine months of fiscal 2001 compared to $47.0 million during the same period in the prior fiscal year. The majority of the increase in spending was due to new equipment additions to increase manufacturing capacity in our epitaxy, cleanroom and package and test areas. We are also nearing the completion of a 125,000 square foot facility expansion at our production site near Research Triangle Park, North Carolina. The increase in other long-term assets of $26.7 million in the first nine months of fiscal 2001 represents strategic investments made in private companies. Proceeds of $215.0 million from the sale of securities held to maturity were used to fund these investing activities. Cash used in the financing activities included a common stock repurchase of 1,850,000 shares on the open market for $30.7 million. In addition, we received $9.9 million in proceeds from the exercise of stock options from our employee stock option plan and the exercise of outstanding stock warrants. We may issue additional shares of common stock for the acquisition of complementary businesses or other significant assets. From time to time we evaluate potential acquisitions of and investments in complementary businesses and anticipate continuing to make such evaluations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE DISCLOSURES As of March 25, 2001, the Company maintains investments in equity securities that are treated for accounting purposes under SFAS 115 as ""available for sale" securities. These investments are carried at fair market value based on quoted market prices of the investments as of March 25, 2001, with net unrealized gains or losses excluded from earnings and reported as a separate component of stockholder's equity. These investments are subject to market risk of equity price changes. Management views these stock holdings as investments; therefore, the shares are 20 21 accounted for as "available for sale" securities under SFAS 115. The fair market value of these investments as of March 25, 2001, using the closing sale price of March 23, 2001, was $9.6 million. During the first nine months of fiscal 2001, the Company invested some of the proceeds from its January 2000 public offering in other investments at fixed interest rates that vary by security. No other material changes in market risk were identified during the most recent quarter. QUALITATIVE DISCLOSURES Investments in the common stock of other public companies are subject to the market risk of equity price changes. While the Company can not predict or manage the future market price for such stock, management continues to evaluate its investment position on an ongoing basis. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in the Company's reports on Form 10Q filed November 3, 2000 and February 2, 2001, the Company and North Carolina State University ("NCSU") commenced a patent infringement lawsuit on September 22, 2000 against Nichia Corporation and Nichia America Corporation in the United States District Court for the Eastern District of North Carolina. In their answer to the complaint, Nichia Corporation and Nichia America Corporation denied infringement and asserted counterclaims seeking a declaratory judgement that the subject patent is invalid, and non infringed. Nichia America Corporation also moved on December 11, 2000, for partial summary judgement seeking a determination that the subject patent is invalid. The Company and NCSU have opposed the motion, which remains pending. Nichia Corporation also asserted counterclaims alleging that the Company is infringing four U.S. patents relating to nitride semiconductor technology and further asserting misappropriation of trade secrets and related claims against the Company and a former Nichia Corporation researcher now employed by a Company subsidiary, Cree Lighting Company, on a part-time basis. On February 20, 2001, the Company and its counterclaim codefendant moved to dismiss the non-patent counterclaims on the grounds that Nichia Corporation failed to allege a basis for subject matter jurisdiction and failed to state a claim upon which relief may be granted. The motion also seeks dismissal of certain counterclaims on forum non-conveniens grounds. On February 20, 2001, the Company also replied to the patent infringement counterclaims, denying any infringement and asserting a claim seeking a declaratory judgement that the four patents at issue are invalid, unenforceable and not infringed. The Company also added a claim for damages in which it alleges that Nichia Corporation's actions in asserting the patent infringement counterclaims were not made for any legitimate purpose and constitute unfair competition in violation of North Carolina law. On April 2, 2001, Nichia Corporation moved to leave to file an amended answer and counterclaim that seeks to address jurisdictional concerns, to add Cree Lighting Company as a counterclaim defendant and to add federal statutory claims under the Computer Fraud and Abuse Act against the Cree Lighting Company employee previously added as a party. The motion for leave to file the amended answer and counterclaim has been opposed and remains pending. 21 22 Motions of the parties for protective orders have been denied so discovery is proceeding, except that the court has stayed discovery as to damages and willful infringement issues pending ruling on a motion filed by the Company and NCSU seeking to have the proceedings bifurcated into separate liability and damages phases. Although there can be no assurances of success, the Company believes the counterclaims asserted in the North Carolina case are without merit and intends to defend against them vigorously. As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 2000, the Company has also intervened in three patent infringement lawsuits filed in Tokyo District Court by Nichia Corporation against one of the Company's distributors. The complaint in one of these cases, filed in December 1999, alleges that the Company's standard brightness LED products infringe a Japanese patent owned by Nichia Corporation. The court has closed proceedings in the case and is scheduled to render its decision during the fourth quarter of fiscal 2001. Although there can be no assurances of success, the Company's management believes the claims asserted in the Japanese lawsuits are without merit and intends to defend the Company's products against them vigorously. ITEM 2. CHANGES IN SECURITIES In January 2001, the Company sold put options covering an aggregate of 1.95 million shares of its common stock. The sale of the put options is described in the Notes to Consolidated Financial Statements (unaudited) included in Part I, Item I of this report and such description is incorporated by reference into this Part II, Item 2. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) 99.1 Certain Business Risks and Uncertainties (b) Reports on Form 8-K: On March 19, 2001 the Company amended its Form 8-K dated December 29, 2000 to report financial results associated with the acquisition of Ultra RF, Inc. 22 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CREE, INC. Date: May 9, 2001 /s/ Cynthia B. Merrell ---------------------------------------------- Cynthia B. Merrell Chief Financial Officer and Treasurer (Authorized Officer and Chief Financial and Accounting Officer) 23 EX-99.1 2 g69133ex99-1.txt CERTAIN BUSINESS RISKS & UNCERTAINTIES 1 EXHIBIT 99.1 CERTAIN BUSINESS RISKS AND UNCERTAINTIES Described below are various risks and uncertainties that may affect our business. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us, that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general may also affect our business. If any of the risks described below actually occurs, our business, financial condition or results of future operations could be materially and adversely affected. OUR OPERATING RESULTS AND MARGINS MAY FLUCTUATE SIGNIFICANTLY. Although we have had significant revenue and earnings growth in recent years, we may not be able to sustain such growth or maintain our margins, and we may experience significant fluctuations in our revenue, earnings and margins in the future. Our operating results and margins may vary significantly in the future due to many factors, including the following: - our ability to develop, manufacture and deliver products in a timely and cost-effective manner; - variations in the amount of usable product produced during manufacturing (our "yield"); - our ability to improve yields and reduce costs in order to allow lower product pricing without margin reductions; - our ability to expand our production capacity for our new LED products; - our ability to produce higher brightness and more efficient LED products that satisfy customer design requirements; - demand for our products and our customers' products; - declining average sales prices for our products; - changes in the mix of products we sell; and - changes in manufacturing capacity and variations in the utilization of that capacity. These or other factors could adversely affect our future operating results and margins. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price may decline. IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR MARGINS COULD DECLINE AND OUR OPERATING RESULTS MAY SUFFER. Our silicon carbide (SiC) material products and our LED and RF device products are manufactured using technologies that are highly complex. We manufacture our SiC wafer products from bulk SiC crystals, and we use these SiC wafers to manufacture our LED products and SiC-based RF power semiconductors. Our UltraRF subsidiary manufactures its RF power semiconductors on silicon wafers purchased from others. During manufacturing, each wafer is processed to contain numerous "die," which are the individual semiconductor devices, and the RF power devices are further processed by incorporating them into a package for sale as a packaged component. The number of usable crystals, wafers, die and packaged components that result from our production processes can fluctuate as a result of many factors, including but not limited to the following: - impurities in the materials used; - contamination of the manufacturing environment; 2 - equipment failure, power outages or variations in the manufacturing process; - losses from broken wafers or other human error; and - defects in packaging. We refer to the proportion of usable product produced at each manufacturing step relative to the gross number that could be constructed from the materials used as our manufacturing "yield." Because many of our manufacturing costs are fixed, if our yields decrease our margins could decline and our operating results would be adversely affected. In the past, we have experienced difficulties in achieving acceptable yields on new products, which has adversely affected our operating results. We may experience similar problems in the future and we cannot predict when they may occur or their severity. In some instances, we also offer products for future delivery at prices based on planned yield improvements. Reduced yields or failure to achieve planned yield improvements could significantly affect our future margins and operating results. OUR BUSINESS AND OUR ABILITY TO PRODUCE OUR PRODUCTS MAY BE IMPAIRED BY CLAIMS WE INFRINGE INTELLECTUAL PROPERTY OF OTHERS. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to: - pay substantial damages; - indemnify our customers; - stop the manufacture, use and sale of products found to be infringing; - discontinue the use of processes found to be infringing; - expend significant resources to develop non-infringing products and processes; and/or - obtain a license to use third party technology. Where we consider it necessary or desirable, we may seek licenses under patents or other intellectual property rights. However, we cannot be certain that licenses will be available or that we would find the terms of licenses offered acceptable or commercially reasonable. Failure to obtain a necessary license could cause us to incur substantial liabilities and costs and to suspend the manufacture of products. In addition, if adverse results in litigation made it necessary for us to seek a license or to develop non-infringing products or processes, there is no assurance we would be successful in developing such products or processes or in negotiating licenses upon reasonable terms or at all. Our results of operations, financial condition and business could be harmed if such problems were not resolved in a timely manner. Our distributor in Japan is presently a party to patent litigation in Japan, brought by Nichia Corporation, in which the plaintiff claims that certain of our LED products infringe two Japanese patents it owns. The complaints in the proceedings seek injunctive relief that would prohibit our distributor from further sales of these products in Japan. An adverse result in these cases would impair our ability to sell both our standard brightness and high brightness LED products in Japan and could cause customers not to purchase other LED products from us. Subject to contractual limitations, we have an obligation to indemnify our distributor for patent infringement claims. 3 We have also initiated patent infringement litigation in the United States against Nichia Corporation and one of its subsidiaries, asserting patent infringement with respect to certain Nichia nitride semiconductor products, including laser diode products. Nichia has responded with counterclaims alleging, among other things, patent infringement claims against us based on four U.S. patents directed to nitride semiconductor technology and trade secret misappropriation and related claims against us and a former Nichia researcher who is now employed by of one of our subsidiaries on a part-time basis. An adverse result under Nichia's counterclaims would impair our ability to sell our LED products and could include a substantial damage award against us. We believe the claims asserted against our products in the Japanese cases and the counterclaims asserted by the defendants in the U.S. case are without merit, and we intend to vigorously defend against the charges. However, we cannot be certain that we will be successful, and litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. If all of these cases were decided against us, the result would have a material adverse effect on our operations and financial condition. THERE ARE LIMITATIONS ON OUR ABILITY TO PROTECT OUR BUSINESS THROUGH INTELLECTUAL PROPERTY RIGHTS. Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us by N.C. State and others. The licensed patents include patents relating to the SiC crystal growth process that is central to our SiC materials and device business. We intend to continue to file patent applications in the future, where appropriate, and to pursue such applications with U.S. and foreign patent authorities, but we cannot be sure that patents will be issued on such applications or that our existing or future patents will not be successfully contested. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents (or patents issued to others and licensed to us) will provide significant commercial protection. In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information with confidentiality agreements with our employees and other parties. We cannot be sure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others. Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights, but there is no assurance that we will be successful in any such litigation. Moreover, litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS AND ULTRA BRIGHT LEDs WITH IMPROVED YIELDS, OUR OPERATING RESULTS MAY SUFFER. We believe that higher volume production and lower production costs for our high brightness and ultra bright blue and green LEDs will be important to our future operating results. We must reduce costs of these products to avoid margin reductions from the lower selling prices we may 4 offer to meet the competition and prior contractual commitments. Achieving greater volumes and lower costs requires improved manufacturing yields for these products. In addition, in the case of our ultra bright LED products, we only recently begun manufacturing these products in volume and may encounter delays and manufacturing difficulties as we ramp up our capacity to make these products. Failure to produce adequate quantities and improve the yields of our high brightness and ultra bright LED products could have a material adverse effect on our business, results of operations and financial condition. OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY. Our future success will depend on our ability to develop new SiC solutions for existing and new markets. We must introduce new products in a timely and cost-effective manner, and we must secure production orders from our customers. The development of new SiC products is a highly complex process, and we have historically experienced delays in completing the development and introduction of new products. Products currently under development include high power RF and microwave devices, power devices, blue laser diodes, high temperature devices and higher brightness LED products. The successful development and introduction of these products depends on a number of factors, including the following: - achievement of technology breakthroughs required to make commercially viable devices; - the accuracy of our predictions of market requirements and evolving standards; - acceptance of our new product designs; - the availability of qualified development personnel; - our timely completion of product designs and development; - our ability to develop repeatable processes to manufacture new products in sufficient quantities for commercial sales; - our customers' ability to develop applications incorporating our products; and - acceptance of our customers' products by the market. If any of these or other factors become problematic, we may not be able to develop and introduce these new products in a timely or cost-efficient manner. WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PART OF OUR REVENUES. Historically, a substantial portion of our revenue has come from large purchases by a small number of customers. We expect that trend to continue. For example, for fiscal 2000 our top five customers accounted for 82% of our total revenue. Accordingly, our future operating results depend on the success of our largest customers and on our success in selling large quantities of our products to them. The concentration of our revenues with a few large customers makes us particularly dependent on factors affecting those customers. For example, if demand for their products decreases, they may stop purchasing our products and our operating results will suffer. If we lose a large customer and fail to add new customers to replace lost revenue, our operating results may not recover. WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING FACILITY.In order to increase production at our new facility, we must add critical new equipment, move existing equipment and complete the construction and upfit of buildings. Expansion activities such as these are subject to a number of risks, including 5 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 markets for our LED and RF power semiconductor products are highly competitive. Our competitors currently sell LEDs made from sapphire wafers that are brighter than the high brightness LEDs we currently produce and similar in brightness to our newest ultra bright LED products. In addition, new firms have begun offering or announced plans to offer blue and green LEDs. In the RF power semiconductor field, both the products manufactured by our UltraRF subsidiary and our SiC-based RF devices compete with products offered by substantially larger competitors. The market for SiC wafers is also becoming competitive as other firms have in recent years begun offering SiC wafer products or announced plans to do so. We also expect significant competition for products we are currently developing, such as near ultraviolet LEDs targeted for the solid state white lighting market. We expect competition to increase. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations and financial condition. WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH. We have experienced a period of significant growth that has strained our management and other resources. We have grown from 188 employees on December 31, 1996 to 680 employees on June 25, 2000 and from revenues of $44.0 million for the fiscal year ended June 28, 1998 to $108.6 million for the fiscal year ended June 25, 2000. In December 2000, we added another 139 employees in connection with our acquisition of the assets of the UltraRF business from Spectrian Corporation. To manage our growth effectively, we must continue to: - implement and improve operation systems; - maintain adequate manufacturing facilities and equipment to meet customer demand; - add experienced senior level managers; and - attract and retain qualified people with experience in engineering, design and technical marketing support. We will spend substantial amounts of money in supporting our growth and may incur additional unexpected costs. Our systems, procedures or controls may not be adequate to support our operations, and we may not be able to expand quickly enough to exploit potential market opportunities. Our future operating results will also depend on expanding sales and marketing, research and development, and administrative support. If we cannot attract qualified people or manage growth effectively, our business, operating results and financial condition could be adversely affected. OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS TRANSITIONING PRODUCTION TO A LARGER WAFER SIZE. 6 We currently plan to begin gradually shifting production of some products from two-inch wafers to three-inch wafers in fiscal 2002. We must first qualify our production processes on systems designed to accommodate the larger wafer size, and some of our existing production equipment must be refitted for the larger wafer size. Delays in this process could have an adverse effect on our business, particularly on our ability to sell some of our RF and power products at a competitive price. In addition, in the past we have experienced lower yields for a period of time following a transition to a larger wafer size until use of the larger wafer is fully integrated in production and we begin to achieve production efficiency. We anticipate that we will experience similar temporary yield reductions during the transition to the three-inch wafers, and we have factored this into our plan for production capacity. If this transition phase takes longer than we expect or if we are unable to attain expected yield improvements, our operating results may be adversely affected. WE RELY ON A FEW KEY SUPPLIERS. We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our 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. IF OUR PRODUCTS FAIL TO PERFORM OR MEET CUSTOMER REQUIREMENTS, WE COULD INCUR SIGNIFICANT ADDITIONAL COSTS. The manufacture of our products involves highly complex processes. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases our products may contain undetected defects that only become evident after shipment. We have experienced product quality, performance or reliability problems from time to time. Defects or failures may occur in the future. If failures or defects occur, we could: - lose revenue; - incur increased costs such as warranty expense and costs associated with customer support; - experience delays, cancellations or rescheduling of orders for our products; or - experience increased product returns. WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES. 7 Sales to customers located outside the U.S. accounted for about 69%, 59% and 58% of our revenue in fiscal 2000, 1999 and 1998, respectively. We expect that revenue from international sales will continue to be a significant part of our total revenue. International sales are subject to a variety of risks, including risks arising from currency fluctuations, trends in use of the Euro, trading restrictions, tariffs, trade barriers and taxes. Also, U.S. Government or military export restrictions could limit or prohibit sales to customers in certain countries because of their uses in military or surveillance applications. Because all of our foreign sales are denominated in U.S. dollars, our products become less price competitive in countries with currencies that are low or are declining in value against the U.S. dollar. Also, we cannot be sure that our international customers will continue to place orders denominated in U.S. dollars. If they do not, our reported revenue and earnings will be subject to foreign exchange fluctuations. IF WE FAIL TO INTEGRATE ACQUISITIONS SUCCESSFULLY, OUR BUSINESS WILL BE HARMED. We completed two strategic acquisitions during calendar year 2000. We will continue to evaluate strategic opportunities available to us and we may pursue other product, technology or business acquisitions. Such acquisitions can present many types of risks, including the following: - we may fail to successfully integrate the operations and personnel of newly acquired companies with our existing business; - we may experience difficulties integrating our financial and operating systems; - our ongoing business may be disrupted or receive insufficient management attention; - we may not cost effectively and rapidly incorporate acquired technology; - we may not be able to recognize cost savings or other financial benefits we anticipated; - acquired businesses may fail to meet our performance expectations; - we may lose key employees of acquired businesses; - we may not be able to retain the existing customers of newly acquired operations; - our corporate culture may clash with that of the acquired businesses; and - we may incur undiscovered liabilities associated with acquired businesses that are not covered by indemnification we may obtain from the seller. We may not successfully address these risks or other problems that arise from our recent or future acquisitions. In addition, in connection with future acquisitions, we may issue equity securities that could dilute the percentage ownership of our existing stockholders, we may incur debt and we may be required to amortize expenses related to intangible assets that may negatively affect our results of operations. -----END PRIVACY-ENHANCED MESSAGE-----