-----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, J0SgLeKO3rA+cnCTGp5xl0orTEKx0STzFk1Cep/26GyP3WtLCf1KQHa6y6DkLULX e80/PZ7qgIZhtUq+DTljXQ== 0000950168-96-002211.txt : 19961118 0000950168-96-002211.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950168-96-002211 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREE RESEARCH INC /NC/ CENTRAL INDEX KEY: 0000895419 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 561572719 STATE OF INCORPORATION: NC FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21154 FILM NUMBER: 96666757 BUSINESS ADDRESS: STREET 1: 2810 MERIDIAN PKWY STE 176 CITY: DURHAM STATE: NC ZIP: 27713 BUSINESS PHONE: 9193615709 10-Q 1 CREE RESEARCH 10-Q UNITED STATES 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 30, 1996 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 incorporation or organization) (IRS Employer Identification No.)
2810 Meridian Parkway, Suite 108 Durham, North Carolina 27713 (Address of principal executive offices) (919)361-5709 (Registrant's telephone number) 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 As of October 21, 1996, 12,306,858 shares of the registrant's common stock, par value $0.005 per share, were outstanding. CREE RESEARCH, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. Consolidated Balance Sheets at September 30, 1996 (unaudited) and June 30, 1996 3 Consolidated Statements of Operations for the three months ended September 30, 1996 and 1995 (unaudited) 4 Consolidated Statements of Cash Flows for the three months ended September 30, 1996 and 1995 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements CREE RESEARCH, INC. CONSOLIDATED BALANCE SHEETS
September 30, June 30, 1996 1996 ------------ ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 6,270,573 $ 10,161,706 Short-term investments, held to maturity 1,788,890 1,787,271 Accounts receivable, net 9,258,426 6,393,394 Inventories 4,404,319 3,226,484 Prepaid expenses and other current assets 238,129 150,990 ------------ ------------ Total current assets 21,960,337 21,719,845 Long-term accounts receivable 877,797 464,253 Property and equipment, net 20,811,137 20,218,101 Patent and license rights, net 1,223,836 1,204,738 Other assets 61,714 61,714 Goodwill, net 117,358 127,692 ============ ============ Total assets $ 45,052,179 $ 43,796,343 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 2,067,390 $ 2,657,054 Accrued expenses 300,140 467,201 Total current liabilities 2,367,530 3,124,255 Long-term accrued expenses 172,103 -- Total liabilities 2,539,633 3,124,255 Commitments and contingencies Shareholders' equity: Common stock, $0.005 par value; 14,500,000 authorized; issued and outstanding 12,280,858 and 12,277,418, net of treasury shares, at September 30 and June 30, 1996 61,534 61,437 Additional paid-in capital 45,389,194 45,342,063 Accumulated deficit (2,787,679) (4,693,599) ------------ ------------ 42,663,049 40,709,901 Less: 20,000 and 10,000 shares of common stock in treasury, at cost, respectively (150,503) (37,813) ------------ ------------ Total shareholders' equity 42,512,546 40,672,088 ------------ ------------ Total liabilities and shareholders' equity $ 45,052,179 $ 43,796,343 ============ ============
The accompanying notes are an integral part of the financial statements. 3 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, ------------------------------ 1996 1995 -------------- --------------- Revenues Product revenues, net $ 2,751,683 $ 2,146,796 Contract revenues 2,067,125 1,212,599 License fee income 2,614,976 -- ------------ ------------ Total revenues 7,433,784 3,359,395 Cost of revenues 4,263,958 2,506,500 Gross margin 3,169,826 852,895 Operating expenses Research and development 113,289 84,333 Sales, general and administrative 1,086,405 663,668 ------------ ------------ Income from operations 1,970,132 104,894 Other income (expense) Interest income 147,557 91,653 Interest expense -- (2,858) ------------ ------------ Income before income taxes 2,117,689 193,689 Provision for income taxes 211,769 -- ------------ ------------ Net income $ 1,905,920 $ 193,689 ============ ============ Net income per share $ 0.15 $ 0.02 ============ ============ Weighted average shares outstanding 13,034,738 11,905,258 ============ ============
The accompanying notes are an integral part of the financial statements. 4 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended September 30, ---------------------------- 1996 1995 ----------- ------------ Operating activities: Net income $ 1,905,920 $ 193,689 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 737,328 302,175 Amortization of patent rights, write offs and other 42,347 29,341 Amortization of goodwill 10,334 10,334 Loss on write off of Eastern European Division assets 87,000 -- Non-cash compensation expense related to stock options -- 861 Changes in assets and liabilities: Accounts receivable (3,278,576) (439,752) Inventories (1,177,835) (398,553) Deferred costs on research contracts -- 81,006 Prepaid expenses and other assets (87,140) (67,166) Accounts payable, trade (788,433) (135,395) Accrued expenses 5,042 (94,406) ------------ ------------ Net cash used in operating activities (2,544,013) (517,866) Investing activities: Maturities of investment securities -- 1,996,092 Purchases of property and equipment (1,218,596) (1,987,309) Purchase of patent rights (63,063) (45,317) ------------ ------------ Net cash used in investing activities (1,281,659) (36,534) Financing activities: Repurchase of common stock (112,690) -- Net proceeds from issuance of common stock 47,229 14,753,248 ------------ ------------ Net cash (used in) provided by financing activities (65,461) 14,753,248 ------------ ------------ Net increase (decrease) in cash and cash equivalants (3,891,133) 14,198,848 Cash and cash equivalents: Beginning of period 10,161,706 3,748,422 ------------ ------------ End of period $ 6,270,573 $ 17,947,270 ============ ============
The accompanying notes are an integral part of the financial statements. 5 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - (Continued)
Three Months Ended September 30, -------- 1996 1995 --------- ---------- Supplemental schedule of non-cash investing and financing activities: $198,769 $1,331,110 Accounts payable recorded for purchases of equipment $ -- $ 546,480 Payable recorded for placement agent commissions $ -- $6,263,350 Subscription receivable for common stock
The accompanying notes are an integral part of the financial statements. 6 CREE RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The balance sheet as of September 30, 1996, the statements of operations for the three month periods ended September 30, 1996 and 1995, and the statements of cash flows for the three months ended September 30, 1996 and 1995, have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at September 30, 1996, and all periods presented, have been made. The balance sheet at June 30, 1996, 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 1996 Form 10-K. The results of operations for the period ended September 30, 1996, are not necessarily indicative of the operating results that may be attained for the entire fiscal year. 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 30, 1996 June 30, 1995 Raw materials $1,595,071 $1,308,766 Work-in-progress 1,253,885 947,785 Finished goods 1,555,363 969,933 ------------- ----------- $4,404,319 $3,226,484 ============= =========== License Fee Income On September 30, 1996, the Company entered into a license and technology transfer agreement and a related supply agreement with Shin-Etsu Handotai Co. Ltd. ("SEH") and other parties. Pursuant to these agreements, the Company granted SEH a license to use certain epitaxial and device fabrication process technology for the manufacture of the Company's super-bright blue light-emitting diode product and has agreed to supply silicon carbide wafers required to manufacture the licensed product. The license agreement provides for payment of a license fee and running royalties based on a percentage of sales of products made using the licensed technology. The license fee is payable in installments, with the first installment of $700,000 due upon execution of the agreement and additional $500,000 payments due December 31, 1996, March 31, 1997, June 30, 1997 and June 30, 1998. The Company recorded a long-term accrued expense of $186,000 payable June 30, 1998 to the third party that brokered the license agreement. Substantially all of the Company's obligations to transfer the licensed technology were performed at September 30, 1996, and the net present value of the license fee payments and commission was recognized at that time. Research and Development Cost Policy The Company benefits from research and development efforts sponsored by both government contracts and from internal corporate funding. Contracts are awarded to the Company to fund both short term and long term research projects. Contract revenues represent reimbursement by various U.S. Government entities of research and development costs and a portion of the Company's general and administrative expenses either on a cost plus or a cost share basis. The Company incurred research and development costs unabsorbed by contract research and grants totaling $113,000 and $84,000, for the three month periods ended September 30, 1996 and 1995, respectively. Contract revenues funded direct expenditures of $1,576,000 and $959,000, net of cost share, for the three month periods ended September 30, 1996 and 1995. These expenses and their related cost sharing component are classified as a cost of revenues. Also included in the cost of revenues is $120,000 and $83,000 for the three months ended September 30, 1996 and 1995, respectively, for research and development overhead recovery, net of cost share. Contract revenues provided additional funding totaling $148,000 and $133,000 through overhead rates for other operating expenses for the three month periods ended September 30, 1996 and 1995, respectively. The cost sharing component of contract revenues totaled $531,000 and $95,000 for the three months ended September 30, 1996 and 1995, respectively. Income Taxes The Company has provided an estimated tax provision based upon an effective rate of 10%. The estimated effective rate was based upon projections of income for the fiscal year and the Company's ability to utilize existing net operating loss carryforwards. However, the actual effective rate may vary depending upon actual pre-tax book income for the year. Reclassifications Reclassifications of certain amounts have been made to the September 30, 1995 consolidated statement of operations to conform to the fiscal 1997 presentation. These reclassifications had no effect on shareholders' equity, the results of operations or per share data. Subsequent Event The Company has been named as a defendant in a purported class action lawsuit filed October 25, 1996 in the U.S. District Court for the Middle District of North Carolina. Certain directors and officers of the Company are also named as defendants. The plaintiff seeks to represent a class of all persons who purchased the Company's common stock between February 1, 1996 and July 2, 1996 (the "Class Period"). The complaint asserts claims under the Securities Exchange Act of 1934, as well as claims of negligent misrepresentation and common law fraud, based upon alleged material misrepresentations and omission during the Class Period. The Company believes that the allegations of the complaint are without merit and intends to defend the suit vigorously. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Identifying Important Factors That Could Cause the Company's Actual Results to Differ From Those Projected in Forward Looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this document are advised that the document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company and its business. This document also identifies important factors which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include the Company's ability to increase production capacity and yield, price competition, other actions of competitors, infringement of intellectual property rights of the Company or others, the effects of government regulation, both foreign and domestic, availability of U.S. government funded research contracts, possible delays in the introduction of new products, customer acceptance of products or services and other factors. Other risk factors are discussed under "Risk Factors" described below. The cautionary statements made pursuant to the Private Securities Litigation Reform Act of 1995 above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of such Act. Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated by the forward looking statements. Results of Operations The Company's revenues of $7,434,000, represent a 121% increase over the same period in fiscal 1996. Included in the current period revenue is a one-time net license fee of $2,615,000. The license fee was earned pursuant to a license and technology transfer agreement entered into September 30, 1996 with Shin-Etsu Handotai Co. Ltd. ("SEH"). Pursuant to this agreement, the Company granted SEH a license to use certain expitaxial and device fabrication process technology for the manufacture of the Company's super-bright blue light-emitting diode ("LED") product. The license fee is payable in installments, with the first installment of $700,000 due upon execution of the agreement and additional $500,000 payments due December 31, 1996, March 31, 1997, June 30, 1997 and June 30, 1998. The Company recorded a long-term accrued expense of $186,000 payable June 30, 1998 to the third party that brokered the agreement. Substantially all of the Company's obligations to transfer the licensed technology were performed at September 30, 1996, and the net present value of the license fee payments and commission was recognized at that time. Product revenue increased 28% to $2,752,000 for the quarter ended September 30, 1996 compared to $2,147,000 for the same period in fiscal 1996. Product revenue is comprised of wafer products, LED sales and RCD's display sales. LED sales increased 73% to $1,204,000 for the quarter ended September 30, 1996 as compared to the same period in the prior year. Capacity increases and production yield improvements enabled the Company to significantly increase the number of LED's produced. The Company expects continued growth in LED product sales as the Company adds additional capacity to initially fill an order for a major customer. If the Company were unable to bring additional capacity on line in a timely manner or failed to continue the current trend of improving yields, the Company may be unable to deliver LED's according to schedule or at reasonable cost levels. This would negatively impact margins for the LED product and may cause the Company to post negative operating results. On September 6, 1996, the Company signed a Purchase Agreement with Siemens AG ("Siemens"), pursuant to which Siemens has agreed to purchase LED chips made using the Company's gallium nitride-on-silicon carbide technology. The agreement calls for shipments having an aggregate purchase price of approximately $6.5 million during the fiscal year ending June 30, 1997 and additional shipments aggregating approximately $5.5 million during the six-month period ending December 31, 1997, although these additional shipments are subject to cancellation at Siemens' election by making cancellation payments to the Company. The Purchase Agreement provides that the Company's supply obligations are subject to the condition that it have obtained and installed an additional epitaxial reactor system not later than November 1, 1996. The reactor, which is needed to augment existing capacity in order to meet the volume required by the Siemens' agreement, is presently scheduled to be delivered on November 18, 1996. As with other complex equipment, bringing the reactor to an operational status is subject to inherent uncertainties. However, the Company anticipates that the reactor will be in productive use in time to meet the shipment schedule under the Purchase Agreement. If the Company does encounter delays in bringing the reactor on-line, it could redeploy another system now used for research and development. In that event, the Company's program to develop a conductive buffer layer product could be delayed, which would delay the Company's efforts to reduce its LED production costs. Wafer sales contributed $1,218,000 to product revenues during the quarter ended September 30, 1996 representing a 37% increase over the same period in fiscal 1996. Additional sales were realized as a result of consistent demand for the Company's SiC wafers and the availability of additional crystal growth capacity as well as capacity improvements to other wafer processing areas. Display and module sales fell by 42% to $330,000 during the first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996. The decline is mainly attributable to a shortage of quality piece parts that the Company purchases from a vendor. Issues relating to quality supplies have been resolved and the Company expects to realize improved sales levels in the second quarter of fiscal 1997. Contract revenues increased 71% to 2,067,000 for the three months ended September, 30, 1996, as compared to the three months ended September 30, 1995. The increase is mainly attributable to an increased contract backlog and greater resource allocation to contract efforts. The Company's gross margin increased to 43% for the three month period ended September 30, 1996, compared to 25% for the same period in fiscal 1996. This increase was caused solely by the license fee income recognized in the current period. Without the license fee income gross margins would have been $555,000 or 12% for the current three month period, a decrease from 25% in the three months ended September 30, 1995. The decrease in gross margin, as adjusted, is mainly attributable to increased cost sharing on government contracts which increased from 8% of contract revenue to 26% of contract revenues and to a decline in margin on RCD's products. The Company benefits from research and development efforts sponsored by both U.S. Government contracts and from internal corporate funding. Contracts are awarded to the Company to fund both short term and long term research projects. Contract revenues represent reimbursement by various government entities for research and development costs and a portion of the Company's general and administrative expenses either on a cost plus or a cost share basis. Funding for projects with near term applications for the Company typically include a cost share component that the Company is responsible for absorbing as a cost of revenues. Projects that may not have readily available production applications or projects that relate to longer term development are normally awarded on a cost plus basis with built in margins of 7% to 10%. Contract revenues funded direct expenditures of $1,576,000 and $959,000, net of cost share, for the three month periods ended September 30, 1996 and 1995. These expenses and their related cost sharing component are classified as a cost of revenues. Also included in the cost of revenues is $120,000 and $83,000 for the three months ended September 30, 1996 and 1995, respectively, for research and development overhead recovery, net of cost share. Contract revenues provided additional funding totaling $148,000 and $133,000 through overhead rates for other operating expenses for the three month periods ended September 30, 1996 and 1995, respectively. The cost sharing component of contract revenues totaled $531,000 and $95,000 for the three months ended September 30, 1996 and 1995, respectively. The Company incurred research and development costs unabsorbed by contract revenues totaling $113,000 and $84,000, for the three month periods ended September 30, 1996 and 1995, respectively. Sales, general and administrative expenses increased by 64% to $1,086,000 for the three month period ending September 30, 1996 compared to the same period in fiscal 1996, respectively. The increase is attributable to a $172,000 selling expense related to the license fee income and to a loss of $180,000 for estimated expenses related to closing the Company's Eastern European Division. The Eastern European Division was a basic research division for some of the Company's material and device development work. The Company has decided to focus all of its research and development efforts at its domestic locations. The Company expects general and administrative expenses to increase as expenses are incurred to defend against a lawsuit recently commenced against the Company. See Part II, Item 1. Interest income increased from $92,000 to $148,000 for the three months ended September 30, 1996. The increase is attributable to higher investable cash balances available throughout the current three month period as a result of the Company's September, 1995, private equity placement. Liquidity and Capital Resources The Company's cash and current investment balance was $8,059,000 at September 30, 1996 and $11,949,000 at June 30, 1996. For the first three months of fiscal 1997, the Company's operations utilized $2,544,000. Funds employed in operations were used mainly to fund increasing receivables and inventory balances and decreasing trade payables relating to operating activities. For the same period in fiscal 1996, $518,000 was utilized by operations. The Company has historically experienced days sales outstanding higher than the general industry. For the three month period ended September 30, 1996 the Company's average days sales outstanding was 118 days compared to 102 days for the same period the previous year. For the benefit of isolating operating activity, all amounts relating to license fee agreements have been omitted from this calculation. The high days sales outstanding is primarily due to the timing of production and sales cycles which have generally resulted in a significant portion of product revenue being recognized and invoiced in the extreme later part of each quarter. Additionally, the Company has historically invoiced government contract revenues in the period following the period in which the revenue was recognized. The Company invested $1,219,000 for capital equipment during the first three months of fiscal 1997 compared to $1,987,000 in the prior year. Although significant expansion and reconfiguration of all production areas has occurred within the last fifteen months, substantial additional increases in funding will be required to further expand the Company's production capacity to meet current orders. It is anticipated that capital spending will remain elevated over the next six months and that the Company will spend approximately $3 to $4 million for such capital investments. The Company expects to finance these expenditures with $4 million in term debt. On October 17, 1996, the Company obtained a commitment letter from a bank for this funding. During the current period the Company repurchased 10,000 shares of common stock for the treasury for $113,000, net of shares issued under option agreements for $47,000, resulting in a net use of $65,000 for financing activities. The majority of the prior period's funding was provided by the Company's September 28, 1995, private placement which netted the Company approximately $17.5 million. $14.8 million of this funding was received by the Company in the quarter that ended September 30, 1995 with the remaining $2.7 million being received the first few days of the next quarter. The Company expects to continue to finance its operations and capital expenditures, including those of Real Color Displays, using internally generated funds and from the proceeds from the term debt facility. However, the Company is always evaluating competitive conditions in the industry and as a part of its ongoing strategy may seek additional funding sources as market conditions permit. Risk Factors Ownership of the Company's common stock is subject to a number of risks, including the following: Since the Company's inception, the Company has derived approximately half of its revenues from sales of products and the other half from funded research contracts. Over the same period, the Company estimates that approximately a third of its product sales have been made to customers for commercial applications with the balance being sold for evaluation purposes. A number of customers are still evaluating the blue LED, and on-going sales of significant volumes of products to these customers cannot be assured. There can also be no assurance that competitors will not introduce products that are competitive with or superior to the Company's blue LED. The Company periodically has experienced lower than anticipated production yields. Production yield problems in the future could have an adverse effect on the Company's operations. The Company manufactures several key components used in its crystal growth and expitaxial deposition processes and also depends, substantially, on its custom-manufactured processing equipment and systems. Should the Company experience protracted problems in the production of its key components or the operation of its proprietary manufacturing systems, its ability to deliver its products could be materially impacted. The Company is also dependent on single or limited source suppliers for a number of raw materials and components used in its SiC wafer products and LED's. An interruption in the supply of these items could cause the Company's manufacturing efforts to be hampered significantly and result in customer dissatisfaction. The Company relies on a small number of customers for the majority of its sales, and the loss of any one of these customers could have a material adverse effect on the business and prospects of the Company. The Company has and is expected to continue to have a substantial percentage of its sales from foreign companies, primarily in Japan, Korea, Taiwan, China and Europe. There can be no assurance that the Company's current intellectual property position will be enforceable in foreign countries to the extent it is enforceable in the United States. In addition, the Company's international sales may be subject to government controls and other risks, including export licenses, federal restrictions on the export of technology, changes in demand resulting from currency fluctuations, political instability, trade restrictions, changes in tariffs, and difficulties managing international operations and collecting accounts receivable. The patents and other proprietary rights of the Company may not prevent the competitors of the Company from developing noninfringing technology and products that are more attractive to customers than the technology and products of the Company. The technology and products of the Company could be determined to infringe the patents or other proprietary rights of others. To remain competitive, the Company must continue to invest substantial resources in research and development. The Company's prospects for long-term success are substantially dependent on its ability to continue increasing the performance of its blue LED product. The ability of the Company to compete effectively depends upon its ability to attract and retain highly-skilled engineering, scientific, manufacturing, marketing and managerial personnel. The Company has expanded its operations rapidly and operating results will be adversely affected if net sales do not increase sufficiently to compensate for the increase in operating expenses caused by this expansion. Over the last several years, the Company has been awarded a number of contracts from agencies of the United States government for purposes of developing SiC material and SiC-based semiconductor devices. Government policy is constantly changing, however, and there can be no assurance that the Company will enter into any additional government contracts or, if such contracts are entered into, that they will be profitable or produce contract revenues. In addition, there can be no assurance that after any such contracts are entered into, changing government regulations will not significantly alter the benefits of such contracts or arrangements that can be expected to inure to the Company. Cutbacks in or reallocations of federal spending, including changes which could be proposed or implemented in the future, could have a material, adverse impact on the Company's results of operations, as well as its ability to implement its research and development programs. The Company is subject to a variety of government regulations pertaining to discharges and other aspects of its manufacturing process. The Company believes that it is currently in full compliance with such regulations; however, any failure, whether intentional or inadvertent, to comply with such regulations could have an adverse effect on the Company's business. The market price of the Company's securities has been very volatile as a result of many factors, some of which are outside the control of the Company, including, but not limited to, quarterly variations in financial results, announcements by the Company, its competitors, customers, potential customers or government agencies and predictions by industry analysts, as well as general economic conditions. Sales by the Company's existing stockholders, trading by short sellers and other market factors may adversely affect the market price of the Company's securities. Any or all of these risks could have a material adverse affect on the market price of the securities of the Company. The Company's quarterly operating results have varied significantly as a result of a number of factors, including the timing and market acceptance of new product introductions by the Company, the timing of significant orders from and shipments to customers, non-recurring license fee income, and general domestic and international economic conditions. The Company's operating results may fluctuate in the future as a result of these and other factors, including the Company's success in developing, introducing, and shipping new products, its product mix, and the level of competition that it experiences. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company has been named as a defendant in a purported class action lawsuit filed October 25, 1996 in the U.S. District Court for the Middle District of North Carolina. Certain directors and officers of the Company are also named as defendants. The plaintiff seeks to represent a class of all persons who purchased the Company's common stock between February 1, 996 and July 2, 1996 (the "Class Period"). The complaint asserts claims under the Securities Exchange Act of 1934, as well as claims of negligent misrepresentation and common law fraud, based upon alleged material misrepresentations and omission during the Class Period. The Company believes that the allegations of the complaint are without merit and intends to defend the suit vigorously. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 10.54: License and Technology Transfer Agreement between the Company and Shin-Etsu Handotai Co. Ltd., dated September 30, 1996. Confidential treatment of this Exhibit is being requested pursuant to Rule 24 b-2. Exhibit 10.55: Supply Agreement between the Company and Shin-Etsu Handotai Co. Ltd. andSummitomo Corporation, dated September 30, 1996. Confidential treatment of this Exhibit is being requested pursuant to Rule 24 b-2. Exhibit 11: Computation of Earnings per Share (b) Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CREE RESEARCH, INC. Date: November 14, 1996 /s/ Alan J. Robertson -------------------- Alan J. Robertson, CFO and Secretary Date: Novermber 14, 1996 /s/ F. Neal Hunter ------------------------ F. Neal Hunter, President and Chief Executive Officer EX-10 2 EXHIBIT 10.54 Exhibit 10.54 [*] -- Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. LICENSE AND TECHNOLOGY TRANSFER AGREEMENT between CREE RESEARCH, INC. ("Licensor") and SHIN-ETSU HANDOTAI CO. LTD. ("Licensee") Dated September 30, 1996 TABLE OF CONTENTS 1. CONTRACT DOCUMENTS; DEFINITIONS............................................1 1.1. Documents.......................................................1 1.2. Definitions.....................................................1 2. LICENSE GRANT..............................................................3 2.1. Grant...........................................................3 2.2. Duration........................................................4 2.3. Exclusivity.....................................................4 2.4. Sublicenses.....................................................5 3. TECHNOLOGY TRANSFER........................................................6 3.1. Delivery of Documentation.......................................6 3.2. Technical Assistance............................................6 3.3. Targeted Process Yields.........................................6 3.4. Restricted Information..........................................6 4. LICENSE FEE AND ROYALTIES..................................................6 4.1. License Issue Fee...............................................6 4.2. Royalties.......................................................7 4.3. Record-Keeping and Reporting....................................7 4.4. Payment.........................................................8 5. ADDITIONAL LICENSE TERMS AND CONDITIONS....................................8 5.1. Cross-License to Covered Improvements...........................8 5.2. ************************........................................8 5.3. Right of First Refusal on Wafer Manufacturing License..........10 5.4. Representations and Warranties of Licensor.....................10 6. INFRINGEMENTS.............................................................11 6.1. Infringement by Third Parties..................................11 6.2. Infringement of Third Party Rights.............................12 7. CONFIDENTIAL INFORMATION..................................................13 7.1. Definition and Identification..................................13 7.2. Confidentiality Obligations....................................13 7.3. Survival.......................................................14 8. TERM AND TERMINATION......................................................14 8.1. Term...........................................................14 8.2. Termination....................................................14 8.3. Rights after Termination.......................................15 - i - 9. LIMITATION OF LIABILITY...................................................15 10. ADDITIONAL UNDERTAKINGS..................................................15 10.1. Confidentiality of Terms......................................15 10.2. Publicity.....................................................15 10.3. Patent Marking................................................15 10.4. Use of Trademarks, Etc........................................16 10.5. Export Regulation.............................................16 11. ASSIGNMENT...............................................................16 12. FORCE MAJEURE............................................................16 13. GENERAL..................................................................16 13.1. Notices.......................................................16 13.2. Authority; No Conflicting Obligations; Governmental Approval..17 13.3. Relationship of the Parties...................................17 13.4. Dispute Resolution............................................17 13.5. Severability..................................................17 13.6. Amendments; Waiver............................................18 13.7. Enforcement Costs.............................................18 13.8. Governing Law.................................................18 13.9. Construction..................................................18 13.10. United Nations Convention....................................18 13.11. Fair Trade Commission Action.................................18 13.12. Entire Agreement.............................................18 - ii - LICENSE AND TECHNOLOGY TRANSFER AGREEMENT LICENSE AND TECHNOLOGY TRANSFER AGREEMENT (this "Agreement"), made and effective as of the 30th day of September, 1996 (the "Effective Date"), by and between CREE RESEARCH, INC., a corporation organized and existing under the laws of the State of North Carolina and having offices at 2810 Meridian Parkway, Suite 176, North Carolina 27713, USA (referred to below as "Licensor"), and SHIN-ETSU HANDOTAI CO. LTD., a corporation organized and existing under the laws of Japan and having offices at Togin Bldg., 4-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100, Japan (referred to below as "Licensee"). Recitals WHEREAS, the parties have agreed on the terms and conditions under which Licensor will license technology to Licensee for the manufacture and sale of certain products and desire to memorialize such terms and conditions in this Agreement; 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 -- Licensed Products and Processes (b) Schedule 2 -- Excluded Technology (c) Schedule 3 -- Technology Transfer Services (d) Schedule 4 -- License Fee and Royalties (e) Attachment A -- C430-DH85 Product Specifications 1.2. Definitions. For purposes of this Agreement, the terms defined in this Section 1.2 shall have the meaning specified and such definitions shall apply to both singular and plural forms: (a) "Affiliates" of a designated corporation, company or other entity means all entities which control, are controlled by, or are under common control with the named entity, whether directly or through one or more intermediaries. For purposes of this definition "controlled" and "control" mean ownership of 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 7.1. (c) "Covered Improvements" means improvements to the Licensed Products or Licensed Processes, whether or not patentable and whether or not confidential, (i) which are described in Schedule 1 and are developed or acquired by either party or their respective Affiliates prior to the expiration or termination of this Agreement; and (iii) which such party is lawfully entitled to communicate to the other party for its use without breaching any restrictions on use or disclosure owed to third parties. (d) "Licensed Products" means LED die products conforming to the description set forth in Schedule 1. (e) "Licensed Processes" means the processes described in Schedule 1 which are necessary for the manufacture of Licensed Products. (f) "Licensed Rights" means the Subject Rights of Licensor. (g) "Net Sales" means (for all purposes including computing Net Sales of Licensed Products by Licensee and its Affiliates and computing Net Sales of goods by Licensor to Licensee and its Affiliates for use in the manufacture of Licensed Products) the invoice price less: (i) actual cost of freight charges, if any, separately stated in such invoice; (ii) standard cash trade discounts actually allowed, if any; (iii) any tax, duties or other governmental charges on the sale, transportation, or delivery which is separately stated on the invoice; and (iv) credit and cash refunds for damaged or returned goods. "Net Sales" does not include sales or other dispositions of Licensed Products by Licensee to its Affiliates, or transfers among Licensee's Affiliates, but does include all sales or other dispositions of Licensed Products by Licensee or its Affiliates to others. In computing Net Sales of Licensed Products by Licensee and its Affiliates, the following provisions also apply: (A) With respect to sales of Licensed Products made to any purchaser which does not deal at arm's length with the seller, or if Licensed Products are made available by Licensor or its Affiliates to any third party under circumstances in which no sale takes place, Net Sales shall be computed using the then current highest published list price of Licensee and its Affiliates for Licensed Products offered for sale or, if no such list price has been published, the average of the published list prices of equivalent products offered by other manufacturers (including Licensor). (B) If Licensed Products are sold in the form of combination products containing one or more products or parts in addition to the Licensed Products, Net Sales for such combination products shall be calculated by multiplying actual Net Sales of such combination products by the fraction A/(A+B), where A is the invoice price of the Licensed Product, if sold separately by Licensee or its Affiliate, and B is the invoice price of any other product or part in the combination, if sold separately by Licensee or its Affiliate. (C) If the other products or parts in the combination are not sold separately by Licensee, Net Sales for such combination products shall be calculated by multiplying actual Net Sales of such combination products by the fraction A/C where A is the invoice price of the Licensed Product if sold Page 2 separately by Licensee or its Affiliate and C is the invoice price of the combination product. (D) If neither the Licensed Products nor the combination product is sold separately by Licensee or its Affiliate, Net Sales for such combination products shall be calculated by multiplying actual Net Sales of such combination products by the fraction A/C where A is Licensee's and its Affiliates' total actual cost of the Licensed Products and C is Licensee's and its Affiliates' total actual cost of the combination product. (h) "Patent Rights" means, insofar as the same apply within the Territory with respect to the Licensed Products or Licensed Processes, those patents and patent applications which are listed on the separate schedule of patents and patent applications delivered by Licensor to Licensee concurrently with the execution of this Agreement, and all patents issuing from such patent applications including all divisions, reexaminations, reissues and continuations thereof. (i) "Subject Rights" means all intellectual property rights (including, by way of example, patents, patent applications, inventions, know-how, trade secrets, copyrights and Confidential Information, but excluding trademarks and trade names) protecting Subject Technology which rights are owned or controlled by a party or its Affiliates at the Effective Date or at any time during the term of this Agreement. "Controlled" as used with respect to Subject Rights means at least the degree of control needed to grant licenses of the scope and content granted in this Agreement. (j) "Subject Technology" means all information pertaining to the manufacture of Licensed Products, including know-how, trade secrets and inventions (whether patentable or not), owned or possessed by a party or its Affiliates at the Effective Date or at any time during the term of this Agreement; provided, however, that "Subject Technology" does not include information described in Schedule 2. (k) "Territory" means the country of Japan. 2. LICENSE GRANT 2.1. Grant. (a) Subject to the terms and conditions of this Agreement, Licensor hereby confers upon Licensee a license, under the Licensed Rights, to make, use and sell Licensed Products within the Territory and to use the Licensed Processes within the Territory for the manufacture of Licensed Products. (b) No license is conferred hereby to make, have made, use or sell articles which are not Licensed Products (other than as a step in the manufacture of Licensed Products) or to use the Licensed Processes for any purpose other than manufacture of the Licensed Products. Except as otherwise provided in Section 2.1(c) below, no license is conferred hereby to make, have made, use or sell Licensed Products outside the Territory or to use the Licensed Processes at any location outside the Territory. Without limiting the foregoing, the license does not include the right to (and Licensee agrees that it will not) sell substrates with epitaxial layers made using the Licensed Processes nor use such substrates for Page 3 any purpose other than the manufacture of Licensed Products. (c) Licensor and Licensee may from time to time agree in writing, on a customer by customer basis, that Licensee may sell Licensed Products to specific customers outside the Territory on a nonexclusive basis. Licensor and Licensee may from time to time agree in writing, on a country-by-country basis with respect to countries outside the Territory, that Licensee may make and use the Licensed Products and Licensed Processes within such country on a nonexclusive basis. Actions of Licensee in accordance with the terms and conditions of a written agreement which references this paragraph and is signed on behalf of the parties shall be considered licensed pursuant to this Section 2.1. Nothing in this Agreement shall be construed to obligate the parties to enter into any agreement under this paragraph. (d) Any sales of Licensed Products which Licensee is authorized to make to a customer outside the Territory pursuant to Section 2.1(c) may be made by Licensee or its Affiliates directly or through Sumitomo Corporation and its Affiliates. 2.2. Duration. The license granted under Section 2.1 shall commence on the Effective Date and, except as otherwise provided in Section 8.3, shall continue until the later of the expiration of the last-to-expire patent included in the Licensed Rights or for so long as any of the Subject Technology is used in the manufacture of the Licensed Products. 2.3. Exclusivity. (a) The license granted under Section 2.1 shall be exclusive within the Territory during the term of this Agreement as provided in this Section 2.3. (b) Licensor may sell Licensed Products to the Licensee or its Affiliates or pursuant to the Distributorship Agreement dated June 22, 1995 among Licensor, Licensee and the other parties named therein, as such agreement may be amended from time to time, but Licensor: (i) shall not otherwise retain any right to sell the Licensed Products within the Territory during the term of this Agreement; and (ii) shall not retain any right to make or use the Licensed Products within the Territory during the term of this Agreement, or to use the Licensed Processes within the Territory during the term of this Agreement for the manufacture of the Licensed Products. (c) Nothing in this Agreement shall prevent Licensor: (i) after the expiration or termination of this Agreement, from making, having made, using or selling Licensed Products within the Territory or using Licensed Processes within the Territory, (ii) at any time, from making, having made, using or selling Licensed Products outside the Territory or using Licensed Processes outside the Page 4 Territory, or (iii) at any time, from using Licensed Processes within the Territory for the manufacture of products other than LED products. (d) The exclusivity conferred hereby shall mean, except as otherwise provided in this Section 2.3, that: (i) Licensor warrants that it has not previously granted any license to any third party, with respect to Subject Technology owned by Licensor at the Effective Date, to make, have made, use or sell Licensed Products within the Territory during the term of this Agreement, or to use the Licensed Processes within the Territory during the term of this Agreement for the manufacture of Licensed Products; and (ii) Licensor covenants that it will not hereafter, with respect to Subject Technology owned by Licensor at the Effective Date, grant any license to any third party, ****************************** ******************************** to make, have made, use or sell Licensed Products within the Territory during the term of this Agreement, or to use the Licensed Processes within the Territory during the term of this Agreement for the manufacture of Licensed Products. (e) It is understood that Licensor has previously granted a nonexclusive license to a third party to make, have made, use and sell certain LED products (including the Licensed Products), subject to the limitation that such third party shall not sell blue LED die without Licensor's consent for any application other than a "chip-on-board" application. **************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************. 2.4. Sublicenses. (a) The rights licensed under Section 2.1 may be exercised by Licensee, or by any Affiliate of Licensee pursuant to a sublicense granted to the Affiliate in accordance with this Section 2.4, provided the Affiliate first agrees in writing with Licensor to hold all Confidential Information of Licensor in confidence under terms of this Agreement and otherwise to comply with all of the obligations imposed on Licensee under this Agreement. (b) Any sublicense shall be subject to the terms and conditions of this Agreement, and any act or omission by the sublicensee which would constitute a breach of this Agreement if done or omitted by Licensee shall be considered a breach of this Agreement by Licensee. Without limiting the foregoing, Licensee shall in all events remain responsible for the reporting and payment to Licensor of all royalties due with respect to sales by sublicensees. (c) Except as permitted by this Section 2.4, the rights licensed under Section 2.1 may not be sublicensed without the Licensor's prior consent, which the Licensor may Page 5 withhold in its sole discretion, and may not be transferred except as part of an assignment of this Agreement made in accordance with Article 11. 3. TECHNOLOGY TRANSFER 3.1. Delivery of Documentation. Licensor will provide Licensee documentation describing the Subject Technology in such reasonable detail and to such an extent as is adequate for competent technical personnel experienced in epitaxial deposition and device fabrication generally to understand the Subject Technology and to manufacture the Licensed Products. The documentation will disclose all matters which, at the time of delivery, are known or believed by Licensor's technical personnel, responsible for its own manufacture of Licensed Products, to have a material effect on the yield or repeatability of the Licensed Processes and which are not obvious to competent technical personnel experienced in epitaxial deposition and device fabrication generally. The documentation to be delivered pursuant to this Section 3.1 is listed in Schedule 3 and will be delivered in accordance with the schedule set forth in Schedule 3. 3.2. Technical Assistance. Licensor shall provide technical assistance to Licensee in connection with the manufacture of the Licensed Products in the manner and subject to the terms and conditions set forth in Schedule 3. 3.3. Targeted Process Yields. In providing documentation and technical assistance required by this Article 3, and subject to the limitations on the commitment of the time of Licensor's personnel set forth in Schedule 3, Licensor will endeavor to assist Licensee in achieving on average, measured during one (1) calendar month, a die yield per wafer which is not less than *********************** of the Licensor's average die yield per wafer in manufacturing Licensed Products during the preceding six (6) calendar months. It is understood that Licensor makes no warranty and provides no other assurance that such yields can in fact be achieved. Licensor shall permit Licensee's duly authorized representative, reasonably acceptable to Licensor, to examine Licensor's records of its die yield per wafer at all reasonable business hours to the extent and insofar as it is necessary to verify the accuracy of the average die yield per wafer reported by Licensor to Licensee for purposes of this paragraph. 3.4. Restricted Information. Nothing in this Article 3 shall be construed to require Licensor to grant Licensee access to, or otherwise to disclose to Licensee, any information held by Licensor under restrictions on use or disclosure which preclude disclosure to third parties. 4. LICENSE FEE AND ROYALTIES 4.1. License Issue Fee. (a) In consideration of the license conferred by Section 2.1, Licensee shall pay Licensor a license issue fee of Two Million Seven Hundred Thousand Dollars Page 6 ($2,700,000) (U.S). (b) The license issue fee shall be due and payable in installments in the amounts and on the dates specified in Schedule 4. (c) The license issue fee shall be considered fully earned at the Effective Date of this Agreement. Thereafter Licensee's obligation to pay the issue fee shall be unconditional, not subject to set-off or deduction of any kind, and shall survive any termination or expiration of this Agreement. 4.2. Royalties. (a) Licensee shall pay to Licensor, for all sales of Licensed Products made by Licensee and its sublicensees during the period specified in Schedule 4, a royalty equal to the percentage specified in Schedule 4 multiplied times the difference between (i) the Net Sales of Licensed Products by Licensee and its sublicensees minus (ii) the Net Sales to Licensee and its sublicensees of materials supplied by Licensor for use in the manufacture of Licensed Products. (b) Upon payment in full of the license issue fee due under Section 4.1, and all royalties accrued during the period specified in Schedule 4, the license conferred by Section 2.1 shall be fully paid such that no further royalties shall be due with respect to sales of the Licensed Products thereafter. (c) Royalties shall accrue on sales of Licensed Products made during the period specified in Schedule 4 notwithstanding any earlier termination of this Agreement. This Article 4 shall survive any termination of this Agreement so as to cover sales of Licensed Products made thereafter on which royalties are due under the terms hereof. Survival of this Article 4 shall not be construed as conferring any additional license, whether express or implied, respect to the Licensed Rights. (d) In the event that, prior to expiration of the royalty period specified in Schedule 4, all patents included in the Licensed Rights shall have expired or been finally adjudged by a court of competent jurisdiction to be invalid, and no patent applications included in the Licensed Rights remain pending, the parties shall in good faith negotiate an appropriate adjustment in the royalty rate applicable to sales of Licensed Products made thereafter. 4.3. Record-Keeping and Reporting. (a) Licensee shall keep and shall cause its sublicensees to keep true and accurate books of account concerning the Licensed Products. Licensee shall render a statement within thirty (30) days after the end of each calendar quarter setting forth the quantity of the Licensed Products sold during the during the quarter and the Net Sales and amount of royalties due thereon. The royalties due shall be paid in U.S. Dollars simultaneously with the sending of the statement. The amount of royalty first calculated in Japanese Yen shall be converted into U.S. Dollars at the T/T selling price rate quoted by Tokyo-Mitsubishi Bank as of five (5) working days prior to the date of remittance. (b) Licensee shall permit Licensor's duly authorized representative, reasonably acceptable to Licensee, to examine the above-mentioned books of account Page 7 relating to the Licensed Products at all reasonable business hours to the extent and insofar as it is necessary to verify the accuracy of the statement rendered by the Licensee pursuant to Section 4.3(a) above. (c) Licensor shall have the right to designate a firm of certified public accountants, reasonably acceptable to Licensee, to audit the above-mentioned books of account relating to the Licensed Products in order to ascertain the accuracy of the statement rendered by the Licensee pursuant to Section 4.3(a) above. The expense of the audit shall be Licensor's unless the audit shall demonstrate a discrepancy (in Licensee's favor) greater than five percent (5%) between the royalties reported and paid and those which were actually due, in which event the audit expenses shall be borne by Licensee. 4.4. Payment. (a) All payments under this Article 4 shall be made in U.S. dollars by wire transfer deposited to Licensor's credit at such U.S. bank as Licensor may from time to time designate. (b) All taxes levied in accordance with the tax laws of Japan, or any other country in which Licensed Products are sold under this Agreement, on any payments to be made by the Licensee to the Licensor hereunder (not including any taxes on Licensee's net income) shall be borne by the Licensor. When, pursuant to such tax laws, the Licensee is required to withhold such taxes and pay them to the taxing authority on the Licensor's behalf, the Licensee is hereby authorized to withhold and deduct such taxes from the applicable payments to the Licensor, provided that the Licensee shall furnish the Licensor with the tax receipts or other evidence showing the payment of such taxes. (c) Any amounts to be paid under this Agreement which are not paid at the later of the date due or the expiration of any stated grace period shall accrue interest from the date due until the date paid at a rate equal to one percent (1%) plus the prime rate as published by the Chase Manhattan Bank (N.A.), New York, New York or any successor bank thereof. 5. ADDITIONAL LICENSE TERMS AND CONDITIONS 5.1. Cross-License to Covered Improvements. If either party or its Affiliates develops or acquires any Covered Improvements prior to the expiration or termination of this Agreement, it will promptly disclose such Covered Improvements to the other party, and the other party and its Affiliates shall be deemed to have an irrevocable, nonexclusive license to practice the same for the purpose of making, using and selling Licensed Products. The license shall not include the right to grant sublicenses. The license shall be royalty-free, except as otherwise provided in this Agreement with respect to Licensed Products sold by Licensee and its Affiliates. It is understood that neither party makes any warranty or provides any other assurance that any improvements will in fact be made. 5.2. ************************. (a) Licensor and Licensee each agree that it will not, and will not allow its Affiliates, Page 8 during the term of this Agreement or at any time thereafter, to assert against the other party or its Affiliates any Subject Rights on account of the manufacture, use or sale by such other party or its Affiliates of **************************** **************************** on silicon carbide substrates, provided that such substrates are manufactured by Licensor or its Affiliates or acquired from third parties in accordance with Section 5.2(e). (b) Nothing in this Agreement shall obligate either party to transfer or disclose to the other information concerning the design, manufacture or other aspects of ************************************************** where such information is not necessary to the manufacture of the Licensed Products. (c) Except as otherwise provided in Section 5.2(d), this Section 5.2 constitutes a covenant to refrain from asserting certain rights and not the grant of a license, and nothing herein shall encumber the Subject Rights of either party or bind any assignee thereof. (d) In the event that either party or its Affiliates are joint owners with any third party of Subject Rights which the third party owner is entitled assert contrary to Section 5.2(a), then the party to this Agreement which jointly owns such rights shall grant the other party and its Affiliates a royalty-free, nonexclusive license as provided in this paragraph, if and to the extent the terms of such joint ownership permit such licensing. The license shall be effective during the term of this Agreement, shall not include the right to grant sublicenses, and shall grant the right to practice such Subject Rights to make, use and sell **************** ************************************** on silicon carbide substrates, provided that such substrates are manufactured by Licensor or its Affiliates or acquired from third parties in accordance with Section 5.2(e). (e) If a third party supplier (other than an Affiliate of Licensee) extends a bona fide written offer to supply silicon carbide substrates to Licensee or its Affiliates for use in manufacturing **************************************************** as described in this Section 5.2, Licensee and its Affiliates may purchase the quantity offered by such supplier pursuant to the offer, provided that (i) such third party substrates meet or exceed the specifications of the corresponding product offered by Licensor; (ii) Licensee gives Licensor written notice of the terms of the third party offer and Licensor does not, within thirty (30) days thereafter, agree to supply such quantity at the price and in accordance with the delivery schedule and other terms and conditions stated in the third party offer, and (iii) the aggregate quantity of such substrates (measured by nominal wafer area) purchased by Licensee and its Affiliates from third party suppliers during each period of twelve months following the Effective Date of this Agreement does not exceed the aggregate quantity purchased from Licensor during such period. Without limiting the foregoing, if in Licensee's view such substrate products offered by Licensor are noncompetitive with substrates offered by other suppliers in respect of price or specifications, or Licensor is unable to deliver substrates adequate to meet Licensee's requirements for use in manufacturing ********* **************************************************, and in either case Licensee furnishes Licensor reasonably adequate evidence of such facts, then upon Licensee's request representatives of the parties shall meet and in good faith discuss and endeavor to agree upon an appropriate amendment to this Section Page 9 5.2(e) or other action to address Licensee's reasonable concerns. 5.3. Right of First Refusal on Wafer Manufacturing License. (a) Licensor agrees that it will not, during the first three (3) years of the term of this Agreement, grant to any third party (other than an Affiliate of Licensor) any license to manufacture silicon carbide substrates (including but not limited to bulk growth of silicon carbide, any polish, wafering, wafer refinishing or other pre-epitaxial process) within the Territory except in compliance with this Section 5.3(a). Licensor will first offer the license to Licensee in writing. If Licensee does not accept the offer by written notice of acceptance received by Licensor within ninety (90) days after Licensee receives the offer, Licensor may at any time thereafter grant the license to any third party provided that the terms of the license are no more favorable than those previously offered to Licensee. (b) Each party agrees that it will not, during the first three (3) years of the term of this Agreement, grant to any third party (other than its Affiliates), or permit its Affiliates to grant to any third party (other than another Affiliate), any license to make, use, sell or otherwise practice any Other LED Technology (as defined below) within the Territory in the case of Licensor, or outside the Territory in the case of Licensee, except in compliance with this Section 5.3(b). The party desiring to grant such license (the "offering party") shall first offer the license to the other party in writing (the "other party"). If the other party does not accept the offer by written notice of acceptance received by the offering party within thirty (30) days after the other party received the offer, the offering party may at any time thereafter grant the license to any third party, provided that the terms of the license are no more favorable than those previously offered to the other party. For purposes of this Section 5.3(b), the term "Other LED Technology" means: (i) improvements to blue LED die which are not within the definition of Licensed Products and Covered Improvements; (ii) technology for ***********************; and (iii) other LED product technology. 5.4. Representations and Warranties of Licensor. (a) Licensor warrants and represents: Page 10 (i) that it has the entire right, title and interest in and to the Patent Rights; (ii) that to the best of its knowledge there are no known outstanding claims or licenses or other encumbrances upon such Patent Rights, except as otherwise disclosed in Section 2.3(e); (iii) that the Patent Rights are the only patents or patent applications now owned or controlled by the Licensor which cover the Licensed Products and/or the making, using or selling of the Licensed Products within the Territory; and (iv) that Licensor has no information which would, in its opinion, render any of the claims of any of the Patent Rights invalid and/or unenforceable. (b) Licensor warrants and represents that it has no knowledge of any patent, Japan or foreign (other than the Patent Rights) owned or controlled by anyone which: (i) covers the Licensed Products, and/or (ii) would prevent the Licensee from making, using or selling the Licensed Products. (c) Licensor warrants and represents that it has full right and authority to disclose all Subject Technology which is disclosed to Licensee hereunder and to grant to Licensee the right to use said Subject Technology within the Territory as provided in this Agreement, and further warrants that it is aware of no claim in or to any present Subject Technology nor any residuary right therein by any third party whether governmental agency, educational institution, corporation or private person. (d) Licensor further warrants that the Subject Technology to be furnished to Licensee pursuant to Article 3 shall be the same as that used by Licensor for the manufacture of Licensed Products at the time of furnishing thereof. 6. INFRINGEMENTS 6.1. Infringement by Third Parties. (a) Each party shall advise the other promptly upon becoming aware of any infringement by a third party of any Patent Right within the Territory. The Licensor shall, within reasonable limits and at its own discretion, promptly take such action (legal or otherwise) as is required to restrain such infringement. The Licensee shall cooperate fully with the Licensor, at the latter's reasonable expense, in the Licensor's effort to restrain such infringement. The Licensee may be represented by counsel of its own selection at its own expense in any suit or proceeding brought to restrain such infringement, but the Licensor shall have the right to control the suit or proceeding and obtain all benefits in the recoveries resulting from such suit or proceeding, whether by judgment, award, decree or settlement. (b) If, within sixty (60) days of the Licensee's giving notice to the Licensor of any third party infringement within the Territory, the Licensor fails to institute an Page 11 infringement action or proceeding that the Licensee reasonably feels is required, the Licensee shall have the right at its own discretion at any time thereafter to institute an action or proceeding in the Territory for infringement of any of the claim or claims of the Patent Rights. It is agreed that in such event the Licensee or its sublicensee may institute any such suit in its own name or in the names of each party to this Agreement (subject, in the case of Licensor, to its prior written consent which shall not be unreasonably withheld) and the Licensee shall bear the expense of any such suit or suits and shall obtain all of the benefits in the recoveries resulting therefrom, whether by judgment, award, decree or settlement. Should the Licensee bring any such suit or proceeding, the Licensor shall cooperate in all reasonable ways with the Licensee in such suit or proceeding at the Licensee's expense. (c) Both the parties hereto may mutually agree to bear equally the costs and expenses in any such suit or proceeding. If the parties so agree, they shall share equally in any and all benefits in the recovery whether by judgment, award, decree or settlement. 6.2. Infringement of Third Party Rights. (a) If any third party claims or institutes legal action against the Licensee alleging that the manufacture, sale, or use of the Licensed Products under the license conferred by this Agreement infringes patent rights of such third party, the Licensee shall promptly notify the Licensor in writing of such claim or action. (b) Upon such notice, the Licensor and the Licensee shall consult and discuss whether it would be reasonable to bring or defend any suit or proceeding concerning infringement of a third party's patent in the Territory or whether other measures should be undertaken in order to avoid the time and expense inherent in any such suit or proceeding. Both parties shall have the right to participate, at their own expense and through counsel of their own choosing, in any settlement discussions relating to, or the defense of, any claim of infringement lodged as a consequence of the Licensee's marketing of Licensed Products within the Territory under the license conferred by this Agreement. (c) Should the Licensee or its sublicensees be required either by judgment, award or decree, or by settlement consented to by the Licensor (which consent shall not be unreasonably withheld) to make royalty payments to a third party (other than an Affiliate of Licensee) as a consequence of any claim that the Licensee's or its sublicensees' marketing of the Licensed Products in a country within the Territory, under the license conferred by this Agreement, infringes patent rights of such third party, it is agreed that the running royalties due and payable to the Licensor under this Agreement for the manufacture, use and sale of the Licensed Products in such country shall be reduced by an amount equal to that which the Licensee or its sublicensees are required to pay said third party; provided, that (i) Licensee promptly notifies Licensor in writing of any such claim of infringement, (ii) Licensee cooperates fully with the Licensor, at the Licensee's expense, in the defense thereof, and (iii) Licensee allows the Licensor to control the defense to such claim and any settlement discussions relating thereto. Page 12 7. CONFIDENTIAL INFORMATION 7.1. Definition and Identification. (a) "Confidential Information" means any information concerning the Subject Technology received by one party (the "receiving party") from the other party or its Affiliates (the "disclosing party"), including but not limited to processes and process parameters, methods, practices, techniques, designs, technical plans, algorithms, computer programs and related documentation, supplier lists, marketing plans, research and development strategies, evaluation of relevant technologies, and any other information relating to the development, design, engineering, testing, manufacture, marketing, use of, or to methods and apparatus related to the manufacture or use of, the Licensed Products, which the receiving party has been informed or has a reasonable basis to believe is confidential to the disclosing party. (b) "Confidential Information" shall not extend to information which: (i) was known to the receiving party prior to receipt from the disclosing party; (ii) was lawfully available to the public prior to receipt from the disclosing party; (iii) becomes lawfully available to the public after receipt from the disclosing party, through no act or omission on the part of the receiving party; (iv) corresponds in substance to any information received in good faith by the receiving party from any third party without restriction as to confidentiality; or (v) is independently developed by an employee or agent of the receiving party who has not received or had access to such information. (c) 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. However, if not so identified, the receiving party before making use of any such information that could reasonably be assumed to be Confidential Information for any purpose, other than exercise of the licenses granted hereunder or the performance of this Agreement, shall inquire of the disclosing party as to the status of such information and shall designate and treat the same as Confidential Information if so requested. (d) In the event that visiting personnel are present on the premises of the host party, all information of the host party received or learned by the visiting personnel shall be treated as Confidential Information of the host party, regardless of whether such information is related to the Subject Technology or marked or otherwise identified as confidential. 7.2. Confidentiality Obligations. (a) Each party agrees to maintain received Confidential Information in confidence and not to use such Confidential Information for any purpose other than exercise of the licenses granted hereunder and the performance of this Agreement. Neither party shall disclose any Confidential Information without the prior written approval of the disclosing party, except as required to comply with any order of a court or any applicable rule, regulation or law of any jurisdiction or as provided in Section 10.1. In the event that a receiving party is required by judicial or Page 13 administrative process to disclose Confidential Information of the disclosing party, it shall promptly notify the disclosing party and to the extent permitted by the circumstances allow the disclosing party a reasonable time to oppose such process. (b) 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. Within each party and their respective Affiliates, Confidential Information shall be disclosed only to employees to whom disclosure is reasonably necessary to the exercise of the licenses granted hereunder or the performance of this Agreement. Each party shall limit the number of copies made of any item of received Confidential Information. (c) Each party shall appropriately notify each employee, agent or consultant to whom any disclosure of received Confidential Information is made and shall obtain their agreement that they will maintain Confidential Information in confidence in accordance with the provisions set forth herein. Each party represents and warrants to the other that its employees, agents and consultants to whom any disclosure of received Confidential Information is made shall be subject to a valid, binding and enforceable agreement to maintain such Confidential Information in confidence in accordance with the provisions set forth herein. 7.3. Survival. The obligations of confidentiality set forth in this Article 7 shall continue for so long as the Confidential Information continues to come within the definition thereof set forth in Section 7.1 and shall survive the expiration or any termination of this Agreement. 8. TERM AND TERMINATION 8.1. Term. (a) This Agreement shall become effective on the Effective Date first above written. (b) This Agreement shall continue to be effective for a period of seven (7) years from the Effective Date, unless this Agreement is sooner terminated pursuant to other provisions of this Agreement. 8.2. Termination. If one or more of the following events shall have occurred and be continuing: (a) one party shall at any time commit a breach of any of the terms and conditions of this Agreement, or the Supply Agreement executed concurrently herewith, and shall fail to remedy such breach within thirty (30) days after written notice thereof from the other party; or (b) one party shall be dissolved, liquidated or declared insolvent or bankrupt; or (c) any representation or warranty made by one party in this Agreement shall prove to have been incorrect or misleading in any material respect when made; Page 14 then and in any such event, the other party shall have the right forthwith to terminate this Agreement by written notice thereof to the defaulting party, to take effect immediately upon such notice, without prejudice to any other rights and remedies conferred by this Agreement or by law. 8.3. Rights after Termination. After termination, each party shall retain the right to use Subject Technology licensed to it hereunder to make, use and sell Licensed Products in accordance with the terms and conditions and subject to the limitations set forth in this Agreement, except that in case of termination for breach pursuant to Section 8.2 the breaching party shall not retain nor have such rights and except that in case of termination under Section 13.11 neither party shall retain nor have such rights. 9. LIMITATION OF LIABILITY Except as expressly provided otherwise in this Agreement, neither party shall under any circumstances be liable to the other for indirect, incidental, special or consequential damages (including, but not limited to, loss of profits, revenue or business) resulting from or in any way related to this Agreement, or the termination of this Agreement, or arising out of or alleged to have arisen out of breach of this Agreement or the exercise of any license granted hereunder. This limitation applies regardless of whether such damages are sought based on breach of contract, warranty, negligence, strict liability or other legal theory. Without limiting the foregoing, except as expressly provided otherwise in this Agreement, Licensor shall have no liability whatsoever to Licensee or any third parties for or on account of any injury, loss or damage, of any kind or nature, sustained by, or any damage assessed or asserted against, or any other liability incurred by or imposed upon Licensee or any other person or entity, arising out of or in connection with or resulting from the manufacture, use or sale of the Licensed Products or use of the Licensed Processes or other Subject Technology, or any advertising or other promotional activities with respect to any of the foregoing. 10. ADDITIONAL UNDERTAKINGS 10.1. Confidentiality of Terms. The parties agree that the terms of this Agreement shall be treated as Confidential Information of each other subject to Article 7; 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. 10.2. Publicity. The parties agree to cooperate in the preparation of a mutually acceptable joint press release announcing the relationship established hereby, to be issued promptly following execution of this Agreement, but shall otherwise make no public announcement regarding the terms of this Agreement. 10.3. Patent Marking. Licensee agrees to use reasonable efforts to ensure that Licensed Products sold by it and its sublicensees are marked in accordance with applicable patent laws with the number of Page 15 any appropriate patents included in the Licensed Rights. 10.4. Use of Trademarks, Etc. Licensee agrees that it will not, without the prior written consent of Licensor, (i) use in advertising, publicity or otherwise in connection with any Licensed Products sold under this Agreement, any trade name, trademark, trade device, service mark, or symbol owned by Licensor or its Affiliates; or (ii) represent, either directly or indirectly, that any product of Licensee or its sublicensees is a product manufactured by Licensor or its Affiliates, or vice versa. 10.5. Export Regulation. Licensee agrees to comply in all respects with all applicable laws and regulations of the United States government or any agency thereof pertaining to exports. 11. ASSIGNMENT Neither this Agreement nor any of the rights or obligations created herein is assignable by either of the parties hereto without the prior written consent of the other party, except to a successor to its entire business or of substantially all of its assets relating to the manufacture, use, sale or other disposal of the Licensed Products, provided, however, that any such assignment shall require the delivery to the other party of the assignee's written agreement to accept such assignment and be bound by this Agreement. Any purported assignment in violation of this paragraph shall be void. No assignment shall relieve the assignor of responsibility for the performance of its obligations hereunder. 12. FORCE MAJEURE If the performance of this Agreement or any obligations under this Agreement is prevented, restricted, or interfered with by reason of fire, flood, explosion, or other casualty, accident, or act of God; strikes or labor disturbances; war, whether declared or not, or other violence; sabotage; any law, or order, proclamation, regulation, ordinance, demand, or requirement of any government agency; or any other event beyond the reasonable control of the parties, whether similar or dissimilar to the foregoing and whether or not foreseen, the affected party, upon giving prompt notice to the other party, shall be excused from such performance to the extent of such prevention, restriction or interference. The affected party shall use its reasonable efforts to avoid or remove such cause of non-performance or to limit the impact of the event on such party's performance and shall continue performance with the utmost dispatch whenever such causes are removed. 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 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. Page 16 13.2. Authority; No Conflicting Obligations; Governmental Approval. (a) 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. Each party agrees during the term of this Agreement not to enter into any agreement, commitment or obligation in conflict with its obligations under this Agreement. (b) Each party warrants to the other that all approvals of any governmental agency required for such party to enter into and perform its obligations under this Agreement have been obtained prior to the execution hereof. 13.3. Relationship of the Parties. The relationship of the parties 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. 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 San Francisco, California. 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. The arbitrators shall apply the laws specified in this Agreement in determining the rights, obligations and liabilities of the parties and shall not have the power to alter, modify, amend, add to or subtract from any term or provision of this Agreement nor to rule upon or grant any extension, renewal or continuance of this Agreement, nor to award damages or other remedies expressly prohibited by this Agreement, nor to grant injunctive relief, including interim relief, of any nature, notwithstanding any contrary provisions of the Rules of Conciliation and Arbitration specified above. If, under applicable law, this arbitration provision is not enforceable as to a particular claim brought by one party against the other, then legal proceedings involving only that claim may be instituted solely in the United States District Court of the Eastern District of North Carolina or, if such court may not exercise jurisdiction, a court of the State of North Carolina. For all purposes of this Agreement, all parties hereby irrevocably consent to the jurisdiction of such court and waive any defense based on improper or inconvenient venue or lack of personal jurisdiction. 13.5. 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. Page 17 13.6. 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. 13.7. 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. 13.8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without regard to conflicts of laws principles. 13.9. 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. 13.10. United Nations Convention. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. 13.11. Fair Trade Commission Action. In the event that the Fair Trade Commission of Japan should advise or recommend modification, amendment and/or deletion of any terms and conditions of this Agreement pursuant to the "Law relating to Prohibition of Private Monopoly and Methods of Preserving Fair Trade" of Japan, Licensee shall immediately inform Licensor in writing of such advice or recommendation and the parties hereto agree to negotiate in good faith to modify, amend, and/or delete the terms and conditions concerned in this Agreement in accordance with the said advice or recommendation. In the event that the parties are unable to agree in writing within thirty (30) days after Licensee informs Licensor of the action of the Fair Trade Commission, either of the parties hereto may upon written notice to the other terminate this Agreement without incurring any liability. 13.12. 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. Page 18 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. SHIN-ETSU HANDOTAI CO. LTD. By /s/ F. Neal Hunter By /s/ Ryuichi Hiraishi ---------------------------- ------------------------- Name F. Neal Hunter Name Ryuichi Hiraishi --------------------------- ------------------------- Title President Title Director --------------------------- ------------------------- Date September 30, 1996 Date --------------------------- ------------------------- Address for Notices Address for Notices Cree Research, Inc. Shin-Etsu Handotai Co. Ltd. 2810 Meridian Parkway, Suite 176 Togin Bldg. Durham, North Carolina 27713 4-2, Marunouchi 1-chome, Chiyoda-ku USA Tokyo 100, Japan Attention: President Attention: Director, Compound Fax No: (919) 361-4630 Semiconductor Division Fax No: 03-3214-0017 IN WITNESS WHEREOF, SUMITOMO CORPORATION, a corporation organized and existing under the laws of Japan, and SUMITOMO CORPORATION OF AMERICA, a corporation organized and existing under the laws of the State of New York, acting through their respective duly authorized officers, have executed this Agreement below and, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, do hereby covenant and agree to be bound in the same manner as the parties hereto by the provisions of Article 7 and Section 10.1 of this Agreement. SUMITOMO CORPORATION OF AMERICA SUMITOMO CORPORATION By /s/ Toshiaki Hatsuo By /s/ K. Takaishi --------------------------- ---------------------------- Name Toshiaki Hatsuo Name K. Takaishi -------------------------- -------------------------- Title Senior Vice President & Gen. Mgr. Title General Manager ----------------------------------- ------------------------ Date September 30, 1996 Date Electronic Materials ------------------------------------ & Equipment Dept. -------------------------- Address for Notices Address for Notices Sumitomo Corporation of America Sumitomo Corporation 345 Park Avenue 2-2, Hitotsubashi 1-chome, Chiyoda-ku New York, New York 10154 Tokyo 100, Japan USA General Manager Attention: Michael Vitale Attention: Electronic Materials & ------------------------ Equipment Dept. ------------------------- Fax No: 415-984-3365 Fax No: 03-3217-6802 --------------------------- ---------------- Page 19 SCHEDULE 1 Licensed Products and Processes A. Licensed Products The Licensed Products are blue LED die products which: (1) are made on silicon carbide substrates, (2) contain epitaxial layers comprised solely of Al(X)Ga(1-X)N, (3) contain an insulating buffer between the substrate and the epitaxial layers, and (4) are produced using the Licensed Processes (not including any Excluded Technology as described in Schedule 2). The Licensed Products include but are not limited to those conforming to the specifications for Licensor's DH-85 LED die product as set forth in Attachment A hereto. The Licensed Products shall also include any improved version thereof made by Licensor during the term of this Agreement where the improvements consist of Covered Improvements. B. Licensed Processes The Licensed Processes are (i) the processes necessary to perform MOCVD epitaxial deposition on silicon carbide substrates as a step in manufacturing the Licensed Products and (ii) the processes necessary to fabricate and test the Licensed Products on silicon carbide substrates having epitaxially deposited layers. The Licensed Processes include the processes described above only insofar as the same are in use by Licensor at the Effective Date and as they may be improved by Licensor during the term of this Agreement to allow the manufacture of Licensed Products that incorporate Covered Improvements. C. Covered Improvements The Covered Improvements consist of the substitution of a conductive buffer layer for the insulating buffer layer used between the silicon carbide substrate and the gallium nitride layers in the Licensed Product and any improvements made to the Licensed Processes to allow for the manufacture of Licensed Products containing such a conductive buffer layer. SCHEDULE 2 Excluded Technology "Subject Technology" as used in this Agreement does not include any information concerning: 1. Bulk growth of silicon carbide. 2. Any polish, wafering, wafer refinishing or other pre-epitaxial process other than wafer surface preparation steps necessary to manufacture Licensed Products. 3. Any epitaxial deposition process other than those necessary to manufacture the Licensed Products. 4. Any laser diode technology. 5. Design, manufacture or other aspects of *********************************************************** where such information is not necessary to the manufacture of the Licensed Products. 6. Any information other than information which a party is lawfully entitled to communicate to the other party for its use without breaching any restrictions on use or disclosure owed to third parties. SCHEDULE 3 Technology Transfer Services A. Technical Documentation Promptly following the Effective Date of this Agreement and in any event not later than the number of days after the Effective Date specified in the following schedule, Licensor will deliver to Licensee the following documentation describing the Subject Technology: Not later than sixty (60) days after the Effective Date: 1. Listing of equipment manufactured by third parties (including the manufacturer and model designation) used by Licensor to perform epitaxial deposition on SiC substrates as a step in manufacturing the Licensed Products 2. Listing of equipment manufactured by third parties (including the manufacturer and model designation) used by Licensor fabricate the Licensed Products on coated substrates. 3. Descriptions and/or drawings and parts listings for any modifications made by Licensor to the equipment listed in Items 1 and 2 above for purposes of manufacturing the Licensed Products, including a description of any special maintenance needs of such modified equipment known to Licensor. 4. Descriptions and/or drawings and parts listings for any custom-built equipment used by Licensor in the Licensed Processes, including a description of any special maintenance needs of such equipment known to Licensor. 5. Drawings depicting the layout of those portions of Licensor's production facilities in which the Licensed Processes are performed. 6. Descriptions of the Licensed Processes, including all process parameters and equipment settings used by Licensor in performing the Licensed Processes, and the specifications of all substrates, both with and without epitaxial coatings, used by Seller for its own internal production of Licensed Products. Not later than one hundred eighty (180) days after the Effective Date: 7. Descriptions of all standard testing procedures performed by Licensor on Licensed Products before shipment. 8. Such documents (if any) as Licensor may have prepared to meet the requirements of the ISO-9000 standard with respect to the manufacturing operations for the Licensed Products. B. Technical Assistance with Chip Fabrication Process 1. Prior to ordering equipment necessary for chip fabrication, representatives of Licensee will visit Licensor's facilities and shall be permitted access to those portions of the facilities in which Licensor fabricates and tests Licensed Products. Such access shall be permitted for the purpose of observing operation of the Licensed Processes. There shall be one (1) such visit, which shall include up to four (4) Licensee representatives and shall extend up to five (5) working days. 2. Representatives of Licensee will visit Licensor's facilities for the purpose of training Licensee's personnel for the start-up of Licensee's operations with respect to fabrication and testing of Licensed Products. There shall be one (1) such visit, which shall include up to four (4) Licensee representatives and shall extend up to five (5) working days. 3. Representatives of Licensor will visit Licensee's facilities to provide technological assistance for the manufacture of Licensed Products. There shall be one (1) such visit, which shall include up to two (2) Licensor representatives and shall extend up to five (5) working days. C. Technical Assistance with Epitaxial Deposition Process 1. Prior to ordering equipment necessary for epitaxial deposition, representatives of Licensee will visit Licensor's facilities and shall be permitted access to those portions of the facilities in which Licensor performs epitaxial deposition the manufacture of Licensed Products. Such access shall be permitted for the purpose of observing operation of the Licensed Processes. There shall be one (1) such visit, which shall include up to four (4) Licensee representatives and shall extend up to five (5) working days. 2. A representative of Licensee experienced in epitaxial deposition will visit Licensor's facilities for the purpose of being trained in the operation of the MOCVD reactor and other equipment used for epitaxial deposition in manufacturing Licensed Products. There shall be one (1) such visit, which shall extend up to six (6) weeks. 3. If requested by Licensee, and subject to mutual agreement of the parties as to price, delivery and other terms, Licensor will acquire and deliver to Licensee an MOCVD reactor for use in manufacturing Licensed Products. Prior to delivery to Licensee, Licensor shall make or have the manufacturer make all modifications necessary for use of the reactor in manufacturing Licensed Products and will make the modified reactor available for inspection by Licensee of its performance at a site within the United States. Upon acceptance of the modified reactor by Licensee, Licensor will arrange for the manufacturer to deliver and install the reactor at Licensee's facilities. 4. Representatives of Licensor will visit Licensee's facilities to provide technological assistance with manufacturing epitaxial wafers as a step in manufacturing the Licensed Products. There shall be one (1) such visit, which shall include up to two (2) Licensor representatives and shall extend up to ten (10) working days. D. Terms and Conditions Applicable to Visits Visits by one party's representatives to the facilities of the other party pursuant to this Schedule shall be conducted in accordance with and subject to the following: 1. Visits shall be scheduled at Licensor's and Licensee's mutual convenience. Licensee shall make a request to Licensor at least fifteen (15) days in advance of the proposed visit for each visit to be scheduled. 2. Each party may require that representatives of the other party granted access to its facilities agree in writing to maintain all Confidential Information learned during the visit in confidence under terms at least as strict as those provided in this Agreement. Each party reserves the right to preclude or restrict photographing of its facilities during visits. 3. In connection with such visits each party shall be solely responsible for: (a) all salaries, travel and related expenses of its visiting personnel; and (b) any injury or damage sustained by them whether or not in connection with such visit; and (c) any damage or injury which may be caused by them to the visited facilities or its employees by reason of their negligence or intentional misconduct. SCHEDULE 4 License Fee and Royalties A. License Issue Fee The license issue fee to be paid under Section 4.1 shall be due and payable in installments in the amounts and on the dates shown below: Upon execution of this Agreement $ 700,000 December 31, 1996 $ 500,000 March 31, 1997 $ 500,000 June 30, 1997 $ 500,000 June 30, 1998 $ 500,000 The installment payments may be paid without interest at any time within thirty (30) days after the date due. B. Royalties The royalties to be paid under Section 4.2 shall be due with respect to all sales of Licensed Products by Licensee and its Affiliates and any other sublicensees during the period ending seven (7) years after the Effective Date of this Agreement. The royalty shall be equal to ***************** percent (**********%) multiplied times the difference between (i) the Net Sales of Licensed Products by Licensee and its sublicensees minus (ii) the Net Sales to Licensee and its sublicensees of materials supplied by Licensor for use in the manufacture of Licensed Products. Sample quantities (up to an aggregate of 50,000 die) sold prior to the commencement of commercial production of Licensed Products by Licensee will not be subject to the royalty. Such sales shall nonetheless be reported on the reports to be submitted under Section 4.3. Information in attachment omitted in its entirety and ATTACHMENT A filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. C430-DH85 PRODUCT SPECIFICATIONS EX-10 3 EXHIBIT 10.55 [*] -- Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. SUPPLY AGREEMENT between CREE RESEARCH, INC. ("Seller") SHIN-ETSU HANDOTAI CO. LTD. ("Purchaser") and SUMITOMO CORPORATION SUMITOMO CORPORATION OF AMERICA ( collectively, "Sumitomo") Dated September 30, 1996 TABLE OF CONTENTS 1. CONTRACT DOCUMENTS; DEFINITIONS........................1 1.1. Documents...................................1 1.2. Definitions.................................1 2. PURCHASE AND SALE......................................2 2.1. Purchase of Products........................2 2.2. Price.......................................3 2.3. Payment Terms...............................3 3. ORDERING, SHIPMENT AND DELIVERY........................3 3.1. Orders......................................3 3.2. Shipment....................................3 3.3. Packaging...................................4 3.4. Manner of Shipment..........................4 4. NON-CONFORMING SHIPMENTS...............................4 4.1. Reporting of Claims.........................4 4.2. Remedies for Non-Conforming Shipments.......4 4.3. Compliance with Instructions................4 5. WARRANTIES.............................................4 5.1. Limited Warranty............................4 5.2. Warranty Disclaimer.........................5 6. LIMITATIONS OF LIABILITY...............................5 7. CONFIDENTIAL INFORMATION...............................5 7.1. Definition and Identification...............5 7.2. Confidentiality Obligations.................6 7.3. Survival....................................6 8. TERM AND TERMINATION...................................6 8.1. Term........................................7 8.2. Termination.................................7 8.3. Effect of Termination.......................7 9. ADDITIONAL UNDERTAKINGS................................7 9.1. Confidentiality of Terms....................7 9.2. Publicity...................................7 9.3. Record-Keeping..............................7 9.4. Export Regulation...........................8 -i- 10. ASSIGNMENT............................................8 11. FORCE MAJEURE.........................................8 12. GENERAL...............................................8 12.1. Notices....................................8 12.2. Authority; No Conflicting Obligations......9 12.3. Relationship of the Parties................9 12.4. Dispute Resolution.........................9 12.5. Severability...............................9 12.6. Amendments; Waiver.........................9 12.7. No Implied License........................10 12.8. Enforcement Costs.........................10 12.9. Governing Law.............................10 12.10. Construction.............................10 12.11. United Nations Convention................10 12.12. Fair Trade Commission Action.............10 12.13. Entire Agreement.........................10 -ii- SUPPLY AGREEMENT SUPPLY AGREEMENT (this "Agreement"), made and effective as of the 30th day of September, 1996 (the "Effective Date"), by and between CREE RESEARCH, INC., a corporation organized and existing under the laws of the State of North Carolina and having offices at 2810 Meridian Parkway, Suite 176, North Carolina 27713, USA (referred to below as "Seller"); SHIN-ETSU HANDOTAI CO. LTD., a corporation organized and existing under the laws of Japan and having offices at Togin Bldg., 4-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100, Japan (referred to below as "Purchaser"); SUMITOMO CORPORATION, a corporation organized and existing under the laws of Japan and having offices at 2-2, Hitotsubashi 1-chome, Chiyoda-ku, Tokyo 100, Japan (referred to below as "SC"); and SUMITOMO CORPORATION OF AMERICA, a corporation organized and existing under the laws of the State of New York and having offices at 345 Park Avenue, New York, New York 10154 (referred to below as "SCOA") (SC and SCOA being referred to below collectively as "Sumitomo"). Recitals WHEREAS, concurrently with the execution of this Agreement, Seller and Purchaser have entered into a License and Technology Transfer Agreement (the "License Agreement") pursuant to which Seller has licensed certain technology to Purchaser for the manufacture and sale of LED die products defined in the License Agreement as the "Licensed Products"; and WHEREAS, the parties have agreed on the terms and conditions under which Seller will supply certain substrates, both with and without epitaxial coatings, for use by Purchaser in manufacturing the Licensed Products under the License Agreement, and the parties desire to memorialize such terms and conditions in this Agreement; and WHEREAS, pursuant to separate arrangements between Purchaser and Sumitomo, Sumitomo has undertaken to act on behalf of Purchaser in purchasing products from Seller under this Agreement and exporting such products to Purchaser; 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 Commitment (b) Schedule 2 -- Price 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 7.1. (c) "License Agreement" means the License and Technology Transfer Agreement between Seller and Purchaser executed concurrently with this Agreement, as the same may be amended from time to time by mutual written agreement of the parties thereto. (d) "Licensed Products" shall have the meaning defined in the License Agreement. (e) "Product Specifications" means the specifications of Products Seller uses for its own internal production of Licensed Products or such other specifications as the parties may mutually agree upon in writing from time to time. Seller will deliver to Purchaser the specifications Seller uses for its own internal production of Licensed Products as part of the documentation to be delivered pursuant to Paragraph A(6) of Schedule 3 of the License Agreement. (f) The specifications for all Products supplied under this Agreement shall in all events be of at least the same quality as those Seller then uses for its own internal production of Licensed Products. (g) "Products" means Bare Wafers and Epi Wafers, collectively. "Bare Wafers" means silicon carbide wafers, without epitaxial coatings, which conform to the applicable Product Specifications. "Epi Wafers" means silicon carbide wafers, with epitaxial coatings, which conform to the applicable Product Specifications. 2. PURCHASE AND SALE 2.1. Purchase of Products. (a) Subject to and in accordance with the terms and conditions of this Agreement, Purchaser will purchase from Seller, and Seller will sell to Purchaser, the applicable percentage specified in Schedule 1 of all Products required by Purchaser and its Affiliates for the manufacture of Licensed Products during the term hereof. (b) Purchaser will provide to Seller, not later than ninety (90) days before the beginning of each calendar quarter, a forecast of the quantity of Products required by Purchaser and its Affiliates during that quarter and the immediately succeeding quarter and showing the percentage to be purchased under this Agreement in accordance with Schedule 1. The first quarter included in each forecast will constitute a binding commitment to purchase at least eighty percent (80%) of the quantities projected to be purchased under this Agreement. The second quarter will be nonbinding. In the event this Agreement is terminated in accordance with Section 8.2 due to a breach or other event of default with respect to Seller, Purchaser shall have no further obligation under the commitment provided for in this paragraph. (c) All sales of Products under this Agreement shall be made by Seller to SC or SCOA, and SC and SCOA (as the case may be) shall export the same solely to Purchaser for use by Purchaser in accordance with this Agreement. Products Page 2 purchased under this Agreement shall be used by Purchaser and its Affiliates in the manufacture of Licensed Products pursuant to the License Agreement and shall not be resold or used for any other purpose without Seller's prior written consent, which Seller may withhold in its sole discretion. 2.2. Price. (a) The purchase price of Products shall be determined as set forth in Schedule 2. (b) The prices stated in this Agreement do not include transportation costs, or the cost of insurance against loss or damage in transit, all of which shall be the responsibility of Sumitomo and Purchaser. Any such amounts paid by Seller with the prior consent of SC or SCOA will be invoiced to SC or SCOA (as the case may be) and reimbursed to Seller. (c) The prices stated in this Agreement do not include sales, use, excise or other taxes, duties, fees or assessments imposed by any jurisdiction. All such amounts imposed with respect to the purchase of the Products (other than taxes on Seller's net income) will be the responsibility of Sumitomo and Purchaser, and any such amounts paid by Seller will be invoiced to SC or SCOA (as the case may be) and reimbursed to Seller. 2.3. Payment Terms. (a) Products purchased under this Agreement will be invoiced to SC or SCOA, whichever submitted the order. Payment shall be made, in accordance with the terms set forth in Schedule 2, in U.S. dollars by wire transfer to an account designated in writing by Seller, without reduction for any currency exchange, wire transfer or other similar charges. (b) Any amounts to be paid under this Agreement which are not paid at the later of the date due or the expiration of any stated grace period shall accrue interest from the date due until the date paid at a rate equal to one percent (1%) plus the prime rate as published by the Chase Manhattan Bank (N.A.), New York, New York or any successor bank thereof. 3. ORDERING, SHIPMENT AND DELIVERY 3.1. Orders. All sales of Products under this Agreement shall be made pursuant to written purchase orders submitted by SC or SCOA to Seller and accepted in writing by Seller. The terms and conditions of this Agreement shall govern the purchase of all Products hereunder notwithstanding any contrary provisions of such purchase orders. Purchase orders must be received at least forty-five (45) days prior to the requested shipping date. 3.2. Shipment. Seller will use all commercially reasonable efforts to ship Products in accordance with the shipping dates requested in orders submitted in accordance with Section 3.1. If Seller fails to ship ordered Products within thirty (30) days after a shipping date agreed to in writing by Seller, Purchaser may at any time upon written notice to Seller cancel the unshipped portion of such order. Seller's obligations to fill orders under this Agreement Page 3 shall be subject to Article 11 and all other provisions of this Agreement. 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. Products shall be shipped F.O.B. Seller's manufacturing facilities. Products shall be deemed delivered when delivered to the transportation company at the shipping point. Title and risk of loss or damage shall pass to SC or SCOA (whichever submitted the order) upon delivery. 4. NON-CONFORMING SHIPMENTS. 4.1. Reporting of Claims. Except for warranty claims under Article 5, in the event any shipment does not conform to the ordered amount and type of Product or is otherwise non-conforming in a manner discoverable upon reasonable inspection (such as, by way of illustration, broken wafers), such non-conformity will be reported in writing to Seller as soon as possible and in any event no later than thirty (30) days after the date Products are delivered to the carrier at Seller's facilities. In all other cases, the non-conformity shall be reported in writing no later than ninety (90) days after such delivery date. Any non-conformity not reported as required by this paragraph 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 SC or SCOA, as the case may be, in the amount of the price paid for such Products with interest calculated at the rate specified in Section 2.3 from the date of payment to the date of credit. This paragraph states the exclusive remedy of Sumitomo and Purchaser with respect to non-conforming shipments. After acceptance of any shipment the 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, Sumitomo and Purchaser will comply with all of Seller's reasonable instructions regarding rejected goods. If Sumitomo or Purchaser incurs any expenses in complying with such instructions, including without limitation shipping expenses incurred in returning any rejected goods to Seller, Seller shall reimburse such expenses promptly upon receipt of a written request therefor. 5. WARRANTIES 5.1. Limited Warranty. (a) Seller warrants to Sumitomo and Purchaser that Products purchased from Seller under this Agreement will meet the applicable Product Specifications. Page 4 (b) This warranty is extended only to Sumitomo and Purchaser and does not constitute a warranty to any other person. This warranty shall not apply to any defect or failure to perform resulting in whole or in part from improper use or application, and Seller shall have no liability of any kind for failure of or defects in any items manufactured using the Products. (c) All claims under this warranty must be reported in writing to Seller (with such report accompanied by the Product claimed to be defective) as soon as possible, but in any event no later than three hundred sixty (360) days after the date Products are delivered to the carrier at Seller's facilities. 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 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. (e) This Section 5.1, as limited by Section 5.2 and other applicable terms and conditions of this Agreement, shall survive the expiration or any termination of this Agreement with respect to Products purchased prior to such expiration or termination. 5.2. Warranty Disclaimer. THE WARRANTY IN SECTION 5.1 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. 6. LIMITATIONS OF LIABILITY No party will have any liability to the others for any consequential, incidental, indirect or special damages arising out of or in connection with this Agreement (including, but not limited to, loss of profits, revenue or business) resulting from or in any way related to this Agreement, or the termination of this Agreement, or arising out of or alleged to have arisen out of breach of 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 damages are sought based on breach of contract, warranty, negligence, strict liability or other legal theory. 7. CONFIDENTIAL INFORMATION 7.1. Definition and Identification. (a) "Confidential Information" means any information concerning the transactions covered by this Agreement received by a party (the "receiving party") from another 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. (b) "Confidential Information" shall not extend to information: (1) was known to the receiving party prior to receipt from the disclosing party; (2) was lawfully available Page 5 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. (c) 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. However, if not so identified, the receiving party before making use of any such information that could reasonably be assumed to be Confidential Information for any purpose, other than the performance of this Agreement, shall inquire of the disclosing party as to the status of such information and shall designate and treat the same as Confidential Information if so requested. 7.2. Confidentiality Obligations. (a) Each party agrees to maintain received Confidential Information in confidence and not to use such Confidential Information for any purpose other than the performance of this Agreement. Neither party shall disclose any Confidential Information without the prior written approval of the disclosing party, except as required to comply with any order of a court or any applicable rule, regulation or law of any jurisdiction or as provided in Section 9.1. 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 to the extent permitted by the circumstances allow the disclosing party a reasonable time to oppose such process. (b) 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. Within each party, Confidential Information shall be disclosed only to employees to whom disclosure is reasonably necessary to the performance of this Agreement. Each party shall limit the number of copies made of any item of received Confidential Information. (c) Each party shall appropriately notify each employee, agent or consultant to whom any disclosure of received Confidential Information is made and shall obtain their agreement that they will maintain Confidential Information in confidence in accordance with the provisions set forth herein. Each party represents and warrants to the others that its employees, agents and consultants to whom any disclosure of received Confidential Information is made shall be subject to a valid, binding and enforceable agreement to maintain such Confidential Information in confidence in accordance with the provisions set forth herein. 7.3. Survival. The obligations of confidentiality set forth in this Article 7 shall continue for so long as the Confidential Information continues to come within the definition thereof set forth in Section 7.1 and shall survive the expiration or any termination of this Agreement. Page 6 8. TERM AND TERMINATION 8.1. Term. The term of this Agreement shall commence on the Effective Date and, unless earlier terminated in accordance with Section 8.2, shall continue for a period ending seven (7) years after the Effective Date. 8.2. Termination. Either of the parties may terminate this Agreement by giving written notice of termination to the other parties (for purposes of this Section 8.2 the phrase "either of the other parties" shall mean, with respect to termination by Seller, any of the Purchaser or SC or SCOA, and shall mean, with respect to a termination by any of the Purchaser or SC or SCOA, Seller alone): (a) if either of the other parties commits a material breach of its obligations under this Agreement or the License Agreement and does not cure such breach within thirty (30) after receipt of written notice of the breach from the nonbreaching party (which notice shall give reasonable particulars of the breach and of the intention of the party serving the notice to terminate this Agreement unless the breach is cured); or (b) if either of the other parties becomes insolvent, or any voluntary or involuntary petition for bankruptcy or for reorganization is filed by or against either of the other parties, or a receiver is appointed with respect to all or any substantial portion of the assets of either of the other parties, or a liquidation proceeding is commenced by or against either of the other parties; 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. 8.3. Effect of Termination. Except as expressly provided otherwise in this Agreement, no termination of this Agreement shall release a party from any liability or obligation which has theretofore accrued and remains to be performed as of the date of such termination. 9. ADDITIONAL UNDERTAKINGS 9.1. Confidentiality of Terms. The parties agree that the terms of this Agreement shall be treated as Confidential Information of each other subject to Article 7; 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. 9.2. Publicity. The parties agree to cooperate in the preparation of a mutually acceptable joint press release announcing the relationship established hereby, to be issued promptly following execution of this Agreement, but shall otherwise make no public announcement regarding the terms of this Agreement. Page 7 9.3. Record-Keeping. Purchaser shall keep and maintain, and shall cause its Affiliates to keep and maintain, sufficient records to demonstrate that Purchaser has complied with the obligations under this Agreement to purchase from Seller the specified percentage of the requirements of Purchaser and its Affiliates for Products required for use in the manufactured of Licensed Products. Purchaser shall permit Seller's duly authorized representative, reasonably acceptable to Purchaser, to examine such records at all reasonable business hours to the extent and insofar as it is necessary to verify compliance with the purchase commitment under this Agreement. Seller shall have the right to designate a firm of certified public accountants, reasonably acceptable to Purchaser, to audit such records to the extent and insofar as it is necessary to verify compliance with the purchase commitment under this Agreement. The expense of the audit shall be Seller's unless the audit shall demonstrate a discrepancy (in Purchaser's favor) greater than five percent (5%) between the quantities actually purchased hereunder and those which were due to be purchased, in which event the audit expenses shall be borne by Purchaser. 9.4. Export Regulation. Sumitomo and Purchaser shall comply in all respects with all laws and regulations of the United States government or any agency thereof pertaining to exports. 10. ASSIGNMENT Neither this Agreement nor any of the rights or obligations created herein is assignable by any of the parties hereto without the prior written consent of the other parties, except that Seller or Purchaser may assign this Agreement to any permitted assignee of the License Agreement; provided, however, that any such assignment shall require the delivery to the other parties of the assignee's written agreement to accept such assignment and be bound by this Agreement. Any purported assignment in violation of this paragraph shall be void. No assignment shall relieve the assignor of responsibility for the performance of its obligations hereunder. 11. FORCE MAJEURE If the performance of this Agreement or any obligations under this Agreement is prevented, restricted, or interfered with by reason of fire, flood, explosion, or other casualty, accident, or act of God; strikes or labor disturbances; war, whether declared or not, or other violence; sabotage; any law, or order, proclamation, regulation, ordinance, demand, or requirement of any government agency; or any other event beyond the reasonable control of the parties, whether similar or dissimilar to the foregoing and whether or not foreseen, the affected party, upon giving prompt notice to the other parties, shall be excused from such performance to the extent of such prevention, restriction or interference. The affected party shall use its reasonable efforts to avoid or remove such cause of non-performance or to limit the impact of the event on such party's performance and shall continue performance with the utmost dispatch whenever such causes are removed. 12. GENERAL 12.1. Notices. All notices under this Agreement shall be in writing and sent by prepaid airmail post, by reputable courier service, or by facsimile message (with a confirmation copy concurrently dispatched by prepaid airmail post or courier service), to the addresses of the respective Page 8 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. 12.2. Authority; No Conflicting Obligations. (a) 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. (b) Each party warrants to the other that all approvals of any governmental agency required for such party to enter into and perform its obligations under this Agreement have been obtained prior to the execution hereof. 12.3. Relationship of the Parties. The relationship of the parties 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. No party has any authority under this Agreement to assume or create any obligations on behalf of or in the name of any other party or to bind any other party to any contract, agreement or undertaking with any third party, except that SC and SCOA are authorized to act on behalf of the Purchaser as contemplated by this Agreement. 12.4. 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 San Francisco, California. 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. The arbitrators shall apply the laws specified in this Agreement in determining the rights, obligations and liabilities of the parties and shall not have the power to alter, modify, amend, add to or subtract from any term or provision of this Agreement nor to rule upon or grant any extension, renewal or continuance of this Agreement, nor to award damages or other remedies expressly prohibited by this Agreement, nor to grant injunctive relief, including interim relief, of any nature, notwithstanding any contrary provisions of the Rules of Conciliation and Arbitration specified above. If, under applicable law, this arbitration provision is not enforceable as to a particular claim brought by one party against the other, then legal proceedings involving only that claim may be instituted solely in the United States District Court of the Eastern District of North Carolina or, if such court may not exercise jurisdiction, a court of the State of North Carolina. For all purposes of this Agreement, all parties hereby irrevocably consent to the jurisdiction of such court and waive any defense based on improper or inconvenient venue or lack of personal jurisdiction. 12.5. 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. Page 10 12.6. Amendments; Waiver. This Agreement may not be amended except in a writing signed by the authorized representatives of the 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. 12.7. 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. 12.8. 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. 12.9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without regard to conflicts of laws principles. 12.10. 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. 12.11. United Nations Convention. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. 12.12. Fair Trade Commission Action. In the event that the Fair Trade Commission of Japan should advise or recommend modification, amendment and/or deletion of any terms and conditions of this Agreement pursuant to the "Law relating to Prohibition of Private Monopoly and Methods of Preserving Fair Trade" of Japan, Purchaser and Sumitomo shall immediately inform Seller in writing of such advice or recommendation and the parties hereto agree to negotiate in good faith to modify, amend, and/or delete the terms and conditions concerned in this Agreement in accordance with the said advice or recommendation. In the event that the parties are unable to agree in writing within thirty (30) days after Purchaser and Sumitomo inform Seller of the action of the Fair Trade Commission, any of the parties hereto may upon written notice to the others terminate this Agreement without incurring any liability. Page 10 12.13. 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. (The remainder of this page is intentionally left blank.) Page 11 IN WITNESS WHEREOF, the parties, through their respective duly authorized officers, have executed this Agreement to be effective as of the Effective Date set out in the preamble hereto. CREE RESEARCH, INC. By /s/ F. Neal Hunter --------------------------------- Name F. Neal Hunter -------------------------------- Title President ------------------------------ Date September 30, 1996 ----------------------------- Address for Notices Cree Research, Inc. 2810 Meridian Parkway, Suite 176 Durham, North Carolina 27713 USA Attention: President Fax No: (919) 361-4630 SUMITOMO CORPORATION OF AMERICA By /s/ Toshiaki Hatsuo ------------------------------- Name Toshiaki Hatsuo ----------------------------- Title Senior Vice President & Gen. Mgr. ---------------------------------- Date September 30, 1996 ---------------------------------- Address for Notices Sumitomo Corporation of America 345 Park Avenue New York, New York 10154 USA Attention: Michael Vitale ------------------- Fax No: 415-984-3365 ---------------------- SHIN-ETSU HANDOTAI CO. LTD. By /s/ Ryuichi Hiraishi ------------------------- Name Ryuichi Hiraishi ----------------------- Title Director ---------------------- Date ------------------------ Address for Notices Shin-Etsu Handotai Co. Ltd. Togin Bldg. 4-2, Marunouchi 1-chome, Chiyoda-ku Tokyo 100, Japan Attention: Director, Compound Semiconductor ---------------------------------- Fax No: 03-3214-0017 Division ---------------------------------- SUMITOMO CORPORATION By /s/ K. Takaishi --------------------------- Name K. Takaishi ------------------------ Title General Manager ------------------------ Date Electronic Materials & Equipment Dept. ------------------------------------------ Address for Notices Sumitomo Corporation 2-2, Hitotsubashi 1-chome, Chiyoda-ku Tokyo 100, Japan General Manager Attention: Electronic Materials & Equipment Dept. --------------------------------------- Fax No: 03-3217-6802 ---------------- Page 12 SCHEDULE 1 Quantity Commitment A. Epi Wafers Purchaser, acting through SC or SCOA, will purchase from Seller the percentage specified below of all Epi Wafers required by Purchaser and its Affiliates for the manufacture of Licensed Products during the term of this Agreement: Agreement Year* % of Requirements Year 1 *****% Year 2 ***** % Year 3 ***** % Year 4 ***** % Year 5 ***** % Year 6 ***** % Year 7 ***** % *As used in this Agreement, "Agreement Year" refers to the successive twelve-month periods commencing with the Effective Date, and "Year 1," "Year 2," "Year 3" and so forth refer to the first, second, third, etc. of the Agreement Years. B. Bare Wafers 1. Subject to Paragraph 2 below, Purchaser, acting through SC or SCOA, will purchase from Seller ********************* % of all Bare Wafers required by Purchaser and its Affiliates for the manufacture of Licensed Products during the term of this Agreement. 2. If in Purchaser's view Seller's Bare Wafer products become noncompetitive with substrates offered by other suppliers in respect of price or specifications, or Seller is unable to deliver Bare Wafers adequate to meet Purchaser's requirement under this Agreement, and in either case Purchaser furnishes Seller reasonably adequate evidence of such facts, then upon Purchaser's request representatives of the parties shall meet and in good faith discuss and endeavor to agree upon an appropriate amendment to this Agreement or other action to address Purchaser's reasonable concerns. 3. Without limiting Paragraph 2 above, if during Year 4 through Year 7 any third party supplier (other than an Affiliate of Purchaser) extends a bona fide written offer to supply Bare Wafers under terms and conditions at least as favorable to Purchaser as those contained in this Agreement but at a price lower than the price charged by Seller hereunder, Purchaser may purchase the quantity offered by such supplier pursuant to the offer, provided that (i) such third party substrates meet or exceed the applicable Product Specifications under this Agreement, (ii) Purchaser gives Seller written notice of the terms of the third party offer and Seller does not, within thirty (30) days thereafter, agree to supply such quantity under the terms and conditions of this Agreement but at the price and in accordance with the delivery schedule stated in the third party offer, and (iii) the aggregate quantity of such substrates (measured by nominal wafer area) purchased by Purchaser and its Affiliates from third party suppliers during each Agreement Year does not exceed the aggregate quantity purchased from Seller during such period. Page 13 SCHEDULE 2 Price A. Epi Wafers 1. The prices for Epi Wafers purchased under this Agreement will be as follows: Price Per Nominal Agreement Year* Wafer Area (US$)** Year 1 $ ******** per wafer Year 2 $ ******** per sq. in. Year 3 $ ******** per sq. in. Year 4 $ ******** per sq. in. Year 5 $ ******** per sq. in. Year 6 $ ******** per sq. in. Year 7 $ ******** per sq. in. *As defined in Schedule 1. **Seller will deliver wafers in the diameter then being used by Seller for its own internal production of Licensed Products. In Year 1 the price will be the same regardless of the wafer diameter. The wafer diameter in Year 1 will not be less than 1.6 inches. 2. The prices in Paragraph 1 above are firm and may be revised only upon mutual agreement, except that if Seller's fully-loaded manufacturing costs during Years 6 or Year 7, divided by 0.5, are greater than the price listed above Seller may charge a higher price up to a maximum of $******** per square inch for purchases during such year. B. Bare Wafers 1. The anticipated prices for Bare Wafers purchased under this Agreement are as follows: Price Per Nominal Agreement Year Wafer Area (US$)* Year 1 $ ******** per wafer Year 2 $ ******** per sq. in. Year 3 $ ******** per sq. in. Year 4 $ ******** per sq. in. Year 5 $ ******** per sq. in. Year 6 $ ******** per sq. in. Year 7 $ ******** per sq. in. *Seller will deliver wafers in the diameter then being used by Seller for its own internal production of Licensed Products. In Year 1 the price will be the same regardless of the wafer diameter. The wafer diameter in Year 1 will not be less than 1.6 inches. 2. Except for the prices for Year 1, which are firm, the foregoing are estimated prices only. Actual prices applicable to each year will be negotiated and agreed upon in writing in advance of such year. The obligation of the parties to purchase and sell Bare Wafers during each Agreement Year is subject to the condition that the parties mutually agree as to the price applicable to such purchases. In negotiating the price each year, the parties shall not be bound by the prices stated in this Agreement and shall not be bound by the prices agreed to with respect to any prior year. 3. Seller will extend to Purchaser its "most favored customer" pricing for Bare Wafers, meaning that the prices applicable to orders for Bare Wafers under this Agreement will be the lowest price at which Seller at any time prior to shipment of such order has sold Bare Wafers to any customer in the world for use in manufacturing Licensed Products. C. Other Price and Payment Terms 1. Except as otherwise provided in Paragraph B(3) above, the applicable price will be the price in effect at the time of receipt of the order under Section 3.1, provided that the order requests delivery within ninety (90) days from the order date. In all other cases the applicable price will be the price in effect at the time of shipment. 2. Purchases will be invoiced upon shipment. Invoiced amounts will be due and payable thirty (30) days from the invoice date. 3. At the time the prices set forth in this Schedule 2 were determined the exchange rate between Japanese yen and U.S. dollars was a ratio of 110 Japanese yen per one U.S. dollar. In the event the exchange rate increases or decreases more than twenty percent (20%) from such ratio, the parties shall in good faith discuss adjustments to the prices stated in this Schedule 1. No such adjustments will be effective unless mutually agreed upon writing. EX-11 4 EXHIBIT 11 CREE RESEARCH, INC. EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended September 30, 1996 1995 -------------------------------------------------------------------------- Primary Fully Diluted Primary Fully Diluted ---------------- ------------------ ---------------- -------------------- Weighted average shares outstanding: Common stock 12,281,563 12,281,563 10,644,660 10,644,660 Shares available under options and warrants 753,175 786,230 1,260,598 1,260,598 ------------- --------------- ------------- ------------------- Weighted average common and common equivalent shares outstanding 13,034,738 13,067,793 11,905,258 11,905,258 ============= =============== ============= =================== Net income 1,905,920 1,905,920 193,689 193,689 ============= =============== ============= =================== Earnings per share $ 0.15 $ 0.15 $ 0.02 $ 0.02 ============= =============== ============= ===================
EX-27 5 EXHIBIT 27
5 0000895419 CREE RESEARCH INC. 1,000 U.S. DOLLARS 3-MOS JUN-30-1997 JUL-1-1996 SEP-30-1996 1 6,271 1,789 10,210 74 4,404 21,960 28,791 7,980 45,052 2,368 0 0 0 45,451 (2,938) 45,052 7,434 7,434 4,264 5,464 0 0 0 2,118 212 1,906 0 0 0 1906 .15 .15
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