-----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, LTdNzvE9ESScu9lFBDFwryTNHolMMLXWGv2ZJlG1tZ1UJDbt/YsuC6S5gHMMwm/R 0gYnWyEVwduUI4mi03JKNg== 0000950168-98-001398.txt : 19980430 0000950168-98-001398.hdr.sgml : 19980430 ACCESSION NUMBER: 0000950168-98-001398 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980429 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: 0628 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21154 FILM NUMBER: 98604121 BUSINESS ADDRESS: STREET 1: 2810 MERIDIAN PKWY STE 176 CITY: DURHAM STATE: NC ZIP: 27713 BUSINESS PHONE: 9193615709 MAIL ADDRESS: STREET 1: 2810 MERIDIAN PKWY STREET 2: STE 176 CITY: DURHAM STATE: NC ZIP: 27713 10-Q 1 CREE RESEARCH, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission file number: 0-21154 CREE RESEARCH, INC. (Exact name of registrant as specified in its charter) North Carolina 56-1572719 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 Silicon Drive Durham, NC 27703 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (919) 361-5709 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X] Yes [ ] No The number of shares outstanding of the registrant's common stock, par value $0.005 per share, as of April 17, 1998 was 13,046,421. CREE RESEARCH, INC. FORM 10-Q For the Quarter Ended March 29, 1998 INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at March 29, 1998 (unaudited) and June 30, 1997 3 Consolidated Statements of Income for the three and nine months ended March 29, 1998 and March 31, 1997 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended March 29, 1998 and March 31, 1997 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
2 PART 1- FINANCIAL INFORMATION Item 1- Financial Statements CREE RESEARCH, INC. CONSOLIDATED BALANCE SHEETS (in 000's except per share amounts)
March 29, June 30, 1998 1997 -------------- --------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $17,633 $10,448 Short term investments (trading security) 746 - Accounts receivable, net 7,979 7,694 Inventories 2,577 3,949 Deferred income tax 1,830 1,830 Prepaid expenses and other current assets 668 466 -------------- --------------- Total current assets 31,433 24,387 Long-term accounts receivable 55 54 Property and equipment, net 31,790 24,333 Patent and license rights, net 1,457 1,267 Other assets 9 96 -------------- --------------- Total assets $64,744 $50,137 ============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $3,572 $2,248 Accrued salaries and wages 631 292 Other accrued expenses 2,411 834 -------------- --------------- Total current liabilities 6,614 3,374 -------------- --------------- Long-term debt 4,378 - Non-current deferred income tax 1,638 1,638 -------------- --------------- Total long term liabilities 6,016 1,638 -------------- --------------- Shareholders' equity: Common stock, $0.005 par value; 14,500 shares authorized; shares issued and outstanding 13,046, and 12,523, at March 29, 1998, and June 30, 1997, respectively 65 62 Additional paid-in-capital 48,804 46,214 Retained earnings (accumulated deficit) 3,245 (1,151) -------------- --------------- Total shareholders' equity 52,114 45,125 -------------- --------------- Total liabilities and shareholders' equity $64,744 $50,137 ============== ===============
The accompanying notes are an integral part of the consolidated financial statements. 3 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF INCOME (in 000's except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended ---------------------------- ----------------------------- March 29, March 31, March 29, March 31, 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Revenue: Product revenue, net $8,929 $5,571 $25,298 $12,883 Contract revenue, net 1,742 1,395 5,685 4,996 License fee income - - - 2,615 ------------- ------------- ------------ ------------- Total revenue 10,671 6,966 30,983 20,494 ------------- ------------- ------------ ------------- Cost of revenue: Product revenue 5,510 3,488 15,875 8,697 Contract revenue 1,430 1,244 4,679 4,462 ------------- ------------- ------------ ------------- Total cost of revenue 6,940 4,732 20,554 13,159 ------------- ------------- ------------ ------------- Gross margin 3,731 2,234 10,429 7,335 Operating expenses: Research and development, net 367 485 1,287 1,247 Sales, general and administrative 1,041 1,079 3,026 3,049 Other expense 31 204 423 383 ------------- ------------- ------------ ------------- Income from operations 2,292 466 5,693 2,656 Interest income, net 180 138 513 462 ------------- ------------- ------------ ------------- Income before income taxes 2,472 604 6,206 3,118 Income tax expense 717 50 1,810 300 ------------- ------------- ------------ ------------- Net income $1,755 $554 $4,396 $2,818 ============= ============= ============ ============= Basic earnings per common share $0.13 $0.04 $0.34 $0.23 ============= ============= ============ ============= Diluted earnings per common share $0.13 $0.04 $0.33 $0.22 ============= ============= ============ =============
The accompanying notes are an integral part of the consolidated financial statements. 4 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in 000's except per share amounts) (Unaudited)
Nine Months Ended ----------------------------------- March 29, March 31, 1998 1997 ------------- ------------- Operating activities: Net income $4,396 $2,818 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,125 2,414 Loss on disposal of property and equipment 326 386 Loss on write off of patents - 129 Amoritization of patent rights 75 79 Amortization and write off of goodwill 86 31 Purchase of marketable trading security (1,500) - Proceeds from sale of marketable trading security 421 - Loss on marketable trading security 333 - Changes in assets and liablilties: Accounts receivable (286) (592) Inventories 1,373 (1,761) Prepaid expenses and other assets (201) (502) Accounts payable, trade (699) (1,143) Deferred revenue (2) (17) Accrued expenses 1,915 730 ------------- ------------- Net cash provided by operating activities 9,362 2,572 Investing activities: Maturity of investment securities - 1,787 Purchases of property and equipment (9,346) (6,329) Proceeds from sale of property and equipment 463 18 Purchase of patent rights (265) (188) ------------- ------------- Net cash used in investing activities (9,148) (4,712) Financing activities: Proceeds from issuance of long-term debt 4,378 - Net proceeds from issuance of common stock 2,911 431 Repurchase of common stock (318) (113) ------------- ------------- Net cash provided by financing activities 6,971 318 Net increase (decrease) in cash and cash equivalents 7,185 (1,822) ============= ============= Cash and cash equivalents: Beginning of period 10,448 10,162 ============= ============= End of period $17,633 $8,340 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 5 Cree Research, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The balance sheet as of March 29, 1998, the statements of operations for the three and nine month periods ended March 29, 1998 and March 31, 1997, and the statements of cash flows for the nine months ended March 29, 1998 and March 31, 1997 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at March 29, 1998, and all periods presented, have been made. The balance sheet at June 30, 1997 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 1997 Form 10-K. The results of operations for the period ended March 29, 1998 are not necessarily indicative of the operating results that may be attained for the entire fiscal year. Accounting Policies Change in Fiscal Year On September 24, 1997, the Board of Directors of Cree Research, Inc. changed the Company's fiscal year from the twelve months ending June 30 to a 52 or 53-week year ending on the last Sunday in the month of June. Accordingly, all quarterly reporting will reflect a 13 week period in fiscal 1998, except that the period ended September 28, 1997, which commenced July 1, 1997, reflects the results of twelve weeks and five days. The Company's current fiscal year will extend from July 1, 1997 to June 28, 1998. Investments Investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments in Debt and Equity Securities". This statement requires certain securities to be classified into three categories: 6 (a) Securities Held-to-Maturity- Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost. (b) Trading Securities- Debt and equity securities that are bought and held principally for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings. (c) Securities Available-for-Sale- Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. The Company's short-term investments are comprised of equity securities that are classified as trading securities, which are carried at their fair value based upon quoted market prices of those investments at March 29, 1998, with net realized and unrealized gains and losses included in net earnings. As of March 29, 1998, short-term investments consist of common stock holdings in C3, Inc. ("C3"), a portion of which were purchased in November 1997. The Company's president has, through a binding agreement, promised to indemnify the Company for up to $300,000 in losses that may result from the sale of shares purchased in November 1997 below the purchase price paid. At March 29, 1998, the Company had recorded a $300,000 receivable from the president (included in net accounts receivable) based upon this agreement. In addition to the shares of C3 purchased in November 1997, the Company acquired 24,601 shares of C3 common stock in January 1997. These shares were issued pursuant to an option C3 granted to the Company in 1995. The option gave the Company the right to acquire, for an aggregate consideration of $500, one percent of the outstanding common stock of C3. C3 retained the right to waive the consideration and issue the stock at any time, which it elected to do in January 1997. The shares issued pursuant to the option are restricted securities within the meaning of Rule 144 under the Securities Act of 1933, which permits the sale of such securities without registration if certain conditions are met. The shares first become eligible for sale under Rule 144 in the third quarter of fiscal 1998, at which time the Company recorded a one-time gain of $217,000 to reflect these shares on its books at market value. A net $33,000 loss was recorded in the third quarter to reflect total investment activity. Significant Property Acquisition In November 1997, the Company purchased real property consisting of approximately thirty acres of land with a production facility of approximately 145,000 square feet and a total of approximately 35,000 square feet of service and warehouse buildings. This property is located in Durham, North Carolina, in the vicinity of the Research Triangle Park. The purchase price of the land and buildings was $3,000,000. 7 The Company moved most of its sales and administrative personnel to this facility in January 1998. The Company anticipates it will relocate its other operations to this facility over the next few quarters. The Company expects that the relocation will be completed during fiscal 1999. The Company obtained a term loan from a commercial bank of up to $10,000,000 to finance the purchase and upfit of the facility. Approximately $2,950,000 was disbursed under the loan in November 1997 to finance the purchase, and additional proceeds under the loan are distributed to the Company on a monthly basis based on actual expenditures incurred. Draws under the loan agreement may be made only during an eighteen month period ending in May 1999. The loan, which is collateralized by the purchased property, accrues interest at a fixed rate of 8% and carries customary covenants, including the maintenance of a minimum tangible net worth and other requirements. Accrued interest is due monthly until May 1999, at which time the outstanding principal balance will be amortized over twenty years until 2011, when the loan balance becomes due. At March 29, 1998, long term borrowings associated with this loan were $4,378,000 leaving $5,622,000 unused and available. During the three and nine months ended March 29, 1998, the Company capitalized interest on funds used to construct property, plant and equipment in connection with the newly acquired facility. Interest capitalized for the three and nine months ended March 29, 1998, was $24,000 and $38,000, respectively. Goodwill Goodwill shown on the statements represents the amount by which the costs to acquire the net assets of the Real Color Displays subsidiary exceeded their related fair value at acquisition. Based on a review of undiscounted cash flows of the subsidiary anticipated over the remaining amortization period, the Company determined that goodwill had been impaired. As a result, the Company recorded a charge to eliminate the $66,000 net book value in the second quarter of fiscal 1998. As required by generally accepted accounting principles, this write-off, which was considered a change in accounting estimate, was included in the results of operations. Inventories Inventories are stated at the lower of cost or market, with cost determined under the first-in, first-out (FIFO) method. Inventories consist of the following: 8
March 29, 1998 June 30, 1997 (in 000's) (in 000's) ---------- ---------- Raw materials $1,025 $1,559 Work-in-progress 591 1,374 Finished goods 961 1,016 ------ ------ Total Inventory $2,577 $3,949 ------ ------
Research and Development Accounting Policy The U.S. Government provides funding for several of the Company's current research and development efforts. The contract funding may be based on a cost-plus or a cost-share arrangement. The amount of funding under each contract is determined based on cost estimates that include direct costs, plus an allocation for research and development, general and administrative and cost of capital expenses. Cost-plus funding is determined based on actual costs plus a set percentage margin. For cost-share contracts, the actual costs are divided between the U.S. Government and the Company based on the terms of the contract. The government's cost share is then paid to the Company. Activities performed under these arrangements include research regarding silicon carbide and gallium nitride materials. The contracts typically require submission of a written report to document the results of such research. The revenue and expense classification for contract activity is determined based on the nature of the contract. For contracts where the Company anticipates that funding will exceed direct costs over the life of the contract, funding is reported as contract revenue and all direct costs are reported as costs of contract revenue. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses and related funding as an offset of those expenses. The following table details information about contracts for which direct expenses exceed funding by period as included in research and development expenses:
Three months ended (in 000's) Nine months ended (in 000's) ----------------------------- ---------------------------- March 29, March 31, March 29, March 31, 1998 1997 1998 1997 ------------ --------- --------- --------- Net R&D costs $ - $ 223 $281 $ 432 Government funding - 663 598 1,427 ----------- ------ ---- ------ Total direct costs incurred $ - $ 886 $879 $1,859
As of March 29, 1998, all funding under contracts where the Company anticipates that direct costs will exceed amounts to be funded has been exhausted. Therefore, the Company anticipates that all future funding under existing contracts will be reflected as contract revenue while direct costs will be reported as contract cost of sales. 9 Significant Sales Contract In September 1996, the Company entered into a Purchase Agreement with Siemens AG ("Siemens"), pursuant to which Siemens agreed to purchase LED chips made with the Company's gallium nitride-on-silicon carbide technology. In April 1997, a contract amendment was executed that provided for enhanced product specifications requested by Siemens. In December 1997, the Company and Siemens further amended the contract to extend shipments of blue light emitting diodes to Siemens through calendar 1998. The second amendment obligates the Company to ship, and Siemens to purchase, stipulated quantities of the LED chip. These shipments are expected to provide revenue in excess of $3.4 million for the remainder of the 1998 fiscal year. Additional shipments anticipated for fiscal 1999 are subject to certain rescheduling and cancellation provisions. Income Taxes The Company has established an estimated tax provision based upon an effective rate of 29%. The estimated effective rate was based upon projections of income for the fiscal year and the Company's ability to utilize remaining net operating loss carryforwards and other tax credits. However, the actual effective rate may vary depending upon actual pre-tax book income for the year or other factors. Earnings Per Share The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", as of December 28, 1997. SFAS No. 128 required the Company to change its method of computing, presenting and disclosing earnings per share information. All prior period data presented has been restated to conform to the provisions of SFAS No. 128. 10 The following computation reconciles the differences between the basic and diluted presentations:
Three Months Ended Nine Months Ended --------------------------------- --------------------------------- March 29, March 31, March 29, March 31, 1998 1997 1998 1997 (in 000's, (in 000's, (in 000's, (in 000's, except per except per except per except per share amounts) share amounts) share amounts) share amounts) --------------- ---------------- ---------------- ---------------- Net income $1,755 $554 $4,396 $2,818 Weighted average common shares 13,028 12,326 12,808 12,300 --------------- ---------------- ---------------- ---------------- Basic earnings per common share $0.13 $0.04 $0.34 $0.23 =============== ================ ================ ================ Net income $1,755 $554 $4,396 $2,818 Weighted average common shares: Common shares outstanding 13,028 12,326 12,808 12,300 Dilutive effect of stock options & 473 730 707 731 warrants --------------- ---------------- ---------------- ---------------- Total weighted average common shares 13,501 13,056 13,515 13,031 Diluted earnings per common share $0.13 $0.04 $0.33 $0.22 =============== ================ ================ ================
Potential common shares that would have the effect of increasing diluted income per share are considered to be antidilutive. In accordance with SFAS No. 128, these shares were not included in calculating diluted income per share. Accordingly, 360,000 shares for the three and nine months ended March 29, 1998, and 637,000 shares for the three and nine months ended March 31, 1997, were not included in calculating diluted income per share for the periods presented. Contingencies The consolidated securities class action lawsuits previously pending against the Company and certain of its directors and officers in the U.S. District Court for the Middle District of North Carolina were dismissed with prejudice on November 28, 1997. The dismissal was pursuant to a stipulation of the named parties entered after the court granted the defendants' motions to dismiss the consolidated complaint for failure to state a claim. No payments were made to the plaintiffs to obtain the dismissal. By stipulating to the dismissal with prejudice, the plaintiffs waived any right to re-file the action or to appeal the court's order of dismissal. 11 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 it contains both statements of historical facts and forward looking statements. Forward looking statements are subject to various risks and uncertainties which could cause actual results to differ materially from those indicated by the statements. Examples of forward looking statements include but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, 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 predictions of actions by customers, suppliers or competitors, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other 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 possibility the Company may be unable to achieve lower unit product costs and develop new markets for the conductive buffer LED product, gain a larger customer base for the company's LED products, increase in production volumes, price products competitively, maintain and increase product yields, obtain continued U.S. government funding for research contracts, as well as possible delays in the introduction of new products, customer acceptance of products and services, production problems that may result from changes in its manufacturing processes made to accommodate new products and product improvements and other factors discussed in the Company's report on Form 10-K for the year ended June 30, 1997 and subsequent quarterly reports. Results of Operations Cree Research, Inc. reported record sales of $10,671,000 for the third quarter of fiscal 1998, which represents a 53% increase over the third quarter of the prior year. On a year-to-date basis, revenue rose 51% to $30,983,000, despite a $2,615,000 one time license fee that was included in fiscal 1997 results. Without this fee, revenue in the first nine months of fiscal 1998 would have been 73% higher than in the corresponding prior year period. Product revenue, which includes sales of light emitting diodes ("LEDs"), materials, module display products and moving message signs, increased 60% and 96% over the third quarter and first nine months of fiscal 1997, respectively. Results for the third quarter and first nine months of fiscal 1998 reflect the change to a 13-week quarterly periods as discussed in the Notes to Consolidated Financial Statements. 12 As the Company's LED technology continues to evolve and mature, Cree remains focused on delivering a low-priced, high-performance, LED product line using its proprietary gallium nitride on silicon carbide technology. In order to reduce prices to expand markets, Cree must first lower costs to retain consistent margins per unit. During this fiscal year, the Company has successfully introduced a smaller chip, a larger two inch wafer and finally a new conductive buffer product. These changes have yielded a higher performance LED product that on average cost 29% less to manufacture during the third quarter than the LED chip produced during the third quarter of 1997. During the fourth quarter, Cree anticipates the completion of the transition of its LED manufacturing to the conductive buffer technology, which is expected to reduce average costs further. The lower cost structure realized during the past year has enabled Cree to also lower its average sales price, which has led to a significantly higher unit volume. This greater unit volume has improved total LED revenue, despite the lower price per unit. Greater volume, while maintaining margins per unit, has been and will continue to be Cree's strategy in the LED marketplace. Many current and potential customers for the Company's products are based in Japan and Asia. Poor economic conditions in those countries may adversely affect the Company's ability to increase sales volume. As a result of the lower net sales price per unit, LED sales have increased only slightly for the quarter ended March 29, 1998 compared to the same period in the prior year. However, during the same time frame, LED unit volume has increased over 50%. Year-to-date, LED sales revenue has increased 87% while unit volume has grown 126% over the first nine months of fiscal 1997. Most of this increase resulted from the Purchase Agreement signed with Siemens A.G. ("Siemens") in September 1996, which provided for an escalating volume of shipments over time. In December 1997, the Company and Siemens amended the Purchase Agreement to provide for additional shipments of LEDs to Siemens through calendar 1998. Additional shipments are scheduled for delivery in fiscal 1999, subject to certain rescheduling and cancellation terms. The amendment provides for initial pricing to continue at 1998 first quarter levels, with prices declining as units increase in the latter part of the year. These contractual reductions in the average selling price to Siemens will continue to pressure the company to lower production costs. The transition of all LED production to the conductive buffer product in the fourth quarter is essential to achieving these cost reductions. The conductive buffer LED chip, which made up only 6% of production in the third quarter, improves efficiency in the epitaxial and wafer fabrication manufacturing processes. In addition, the Company remains optimistic that it can improve the manufacturing yields, which will also contribute to overall cost reduction. However, there can be no assurance that these efficiencies will be achieved. The other key effort for successful execution of Cree's LED strategy will be to focus efforts on obtaining additional LED customers. If the Company is unable to expand its customer base, its revenue and earnings growth may be adversely impacted. The conductive buffer technology is expected to increase the Company's manufacturing capacity. The Company is seeking additional customers to absorb this capacity. 13 Management continues to believe that market growth for this product remains dependent on its ability to substantially lower pricing. The Company has recently introduced the conductive buffer product to Asia and has received positive feedback. This product, which is 50% brighter than the Company's prior product, but which remains less bright than a higher priced competing product, is expected to drive increased volume, however, significant impact may only be achieved through reduced pricing. The Company continues to gain understanding of customer price points while balancing cost opportunities . There can be no assurance that Cree will increase its customer base, achieve lower costs or maintain similar margins, or that the conductive buffer product will be accepted by customers. In addition, changes in the manufacturing processes could result in unexpected problems that could lower production during the transition period. Material products sales have shown the most dramatic increase in the recent quarter due to contributions made by the gemstone and microwave technologies. Overall, sales of material products grew 140% and 112%, respectively, for the three and nine months ended March 29, 1998, over the same periods in the prior year. Material sales have also grown due to an increase in wafer shipments and greater funding from the Company's Development Agreement with C3. Under these agreements, C3 pays the Company its costs, plus a specified margin on certain costs, for work directed to developing improved processes for the manufacture of colorless material for use in gemstones. This research is particularly important as it also funds the development of larger diameter crystals, which is expected to assist the Company in manufacturing larger diameter silicon carbide wafers for semiconductor applications. Total C3 sales now comprise over 10% of product revenue year-to-date. Wafer volume has also increased as a result of the Company's success in offering wafer products with lower defect densities, which enable customers to conduct advanced research for microwave and power applications, and in part due to increased interest in SiC materials in the semiconductor industry. Microwave products also contributed to the overall revenue mix during the quarter as a result of work performed under a development agreement executed in December 1997 with a corporate customer. This work is particularly important as the Company's strategy to achieve significant top line revenue growth in future years depends on the introduction of microwave products. Year-to-date, revenue contributions from the display modules and moving messages sign products were 92% higher, despite a disappointing third quarter that included a return of a significant sale made to an Asian customer that ceased business operations. Prior year third quarter results also included a significant product return reflected in this year over year comparison. Research contract revenue and cost of contract revenue increased 25% and 15%, respectively, during the third quarter of fiscal 1998 as compared to the prior year quarter. Likewise, contract revenue and cost of contract revenue for the nine month periods increased 14% and 5% year over year, due to a change in mix of work being performed under cost-share contract arrangements. Under cost-share contracts, where direct costs 14 incurred are expected to exceed government funding, funding is recorded as an offset to research and development expenses and related direct expenses are recorded as research and development expenses. Conversely, when government funding is anticipated to be higher than direct costs incurred, funding is recorded as contract revenue and direct expenses are reflected as costs of contract revenue. During the first half of fiscal 1998, resources were moved from the cost-share arrangements to other work, as funding under the cost-share transactions was exhausted. As a result, contract revenue and costs of contract revenue were higher. The Company's product gross margin was 38% for the three months ended March 29, 1998. The margin was reduced by a $300,000 inventory write-down taken on displays products. Without this adjustment, margins would have been 42% for the third quarter of 1998 as compared to 37% reported in the third quarter of the prior year. Product gross margins were 37% of revenue for the nine months ended March 29, 1998, due to $453,000 in inventory write-downs related to displays products. Without this adjustment, margins would have been 39% for the period compared to 32% experienced in fiscal 1997. The overall growth in profitability stems from higher throughput and manufacturing yield on LED and materials products, thereby lowering the cost per unit. While the Company has demonstrated a lower per unit cost during the past year, much of this success was due to a combination of higher volumes processed as a result of the Siemens contract and technology contributions stemming from a smaller sized chip, and a larger two inch wafer. Improvements in yields have also reduced unit costs for material products. For the three months ended March 29, 1998, research and development costs decreased 24% over the third quarter of the prior year. These lower costs resulted from higher direct costs associated with cost-share contracts being incurred during the prior year. Work under these cost-share contracts was completed during the first half of fiscal 1998; therefore, there are no comparative cost-share program charges in the third quarter of 1998. For the nine month comparative periods, research and development costs are 3% higher due to heavier cost-share program charges incurred in the first half of 1998. Sales, general and administrative expenses for the three month period ended March 29, 1998, decreased by 4% over the same period in the prior year due to depreciation and rent savings experienced as a result of the move to the new facility and lower legal fees as the Company was defending the securities class action lawsuit in 1997. Year-to-date expenses remained flat due to increases in expenses being offset by two one time insurance payments to the Company. As a result of the dismissal of the securities class action lawsuits (see "Contingencies" in the Notes to the Financial Statements), the Company was reimbursed $216,000 by its insurance carrier for costs incurred in defense of the lawsuit. In addition, as a result of a negotiated cost cap, the Company received a $220,000 reimbursement of medical expenses that were incurred during the year under a partially self insured health plan. 15 Included in "Other expense" year-to-date is a loss incurred on the disposal of certain fixed assets and the write-off of $66,000 for the remaining value of goodwill associated with the acquisition of the Real Color Displays subsidiary. The Company's income tax provision has increased to 29% from a 5% effective rate experienced during 1997. This higher rate results from the utilization of net operating loss carryforwards during fiscal 1997. Liquidity and Capital Resources Net cash provided by operations was $9,362,000 for the nine months ended March 29, 1998 compared with $2,572,000 generated during the comparative period in fiscal 1997. The increase was primarily attributable to higher profitability, lower inventory and greater accrued expenses primarily arising from increased income tax liability. The Company invested $9,346,000 in capital items during the first nine months of fiscal 1998 compared to $6,329,000 during the same period in the prior year. The majority of the increase in spending was due to the acquisition of a new production facility near Research Triangle Park, North Carolina. The total capital outlay for this facility and associated upfit is estimated to be approximately $10,000,000 to $15,000,000. A $3,000,000 initial investment was made to purchase the property, with the upfit expected to take place over the next nine to twelve months. The Company has a loan commitment of up to $10,000,000 from a commercial bank to finance a portion of these expenditures. As of March 29, 1998, approximately $4,378,000 had been drawn against this loan. All other capital investments made during 1998 are expected to be financed through cash provided by operations and cash on hand. For the year, cash on hand has also increased by $2,911,000 as a result of stock option and warrant exercises. The Company believes it has sufficient capital resources to fund its business operations. However, the Company is presently evaluating alternatives for financing the development of new applications of its technology, including its blue laser technology. 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None b) Reports on Form 8-K: None. 17 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: April 29, 1998 /s/F. Neal Hunter ----------------------------------------------- F. Neal Hunter, President and Chief Executive Officer /s/ Cynthia B. Merrell ----------------------------------------------- Cynthia B. Merrell, Chief Financial Officer 18 EX-27 2 EXHIBIT 27.1
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 9-MOS JUN-28-1998 JUN-28-1998 DEC-29-1997 JUL-01-1997 MAR-29-1998 MAR-29-1998 17,633 17,633 746 746 8,136 8,136 157 157 2,577 2,577 31,433 31,433 41,339 41,339 9,550 9,550 64,744 64,744 6,614 6,614 0 0 0 0 0 0 48,869 48,869 3,245 3,245 64,744 64,744 10,671 30,983 10,671 30,983 6,940 20,554 8,379 25,290 0 0 0 0 (180) (513) 2,472 6,206 717 1,810 1,755 4,396 0 0 0 0 0 0 1,755 4,396 0.13 0.34 0.13 0.33 EPS-BASIC
EX-27 3 EXHIBIT 27.2
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 6-MOS JUN-28-1998 JUN-28-1998 SEP-29-1997 JUL-01-1997 DEC-28-1997 DEC-28-1997 13,102 13,102 1,225 1,225 10,383 10,383 157 157 2,788 2,788 29,488 29,488 36,810 36,810 8,788 8,788 58,991 58,991 4,189 4,189 0 0 0 0 0 0 48,416 48,416 1,489 1,489 58,991 58,991 10,106 20,313 10,106 20,313 6,546 13,617 8,313 16,912 0 0 0 0 (169) (332) 1,962 3,733 490 1,093 1,472 2,640 0 0 0 0 0 0 1,472 2,640 0.12 0.21 0.11 0.20 EPS-BASIC
EX-27 4 EXHIBIT 27.3
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS JUN-28-1998 JUL-01-1997 SEP-28-1997 12,919 0 8,760 196 3,215 26,945 32,359 7,950 52,815 4,057 0 0 0 47,102 18 52,815 10,207 10,207 7,072 8,600 0 0 (164) 1,771 602 1,169 0 0 0 1,169 0.09 0.09 EPS-BASIC
EX-27 5 EXHIBIT 27.4
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 12-MOS JUN-30-1997 JUN-30-1997 APR-01-1997 JUL-01-1996 JUN-30-1997 JUN-30-1997 10,448 10,448 0 0 7,910 7,910 216 216 3,949 3,949 24,387 24,387 31,310 31,310 6,977 6,977 50,137 50,137 3,374 3,374 0 0 0 0 0 0 46,276 46,276 (1,151) (1,151) 50,137 50,137 8,479 28,973 8,479 28,973 5,935 19,094 8,023 25,860 0 0 0 0 (144) (607) 602 3,720 (123) 177 725 3,543 0 0 0 0 0 0 725 3,543 0.05 0.28 0.05 0.27 EPS-BASIC
EX-27 6 EXHIBIT 27.5
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 9-MOS JUN-30-1997 JUN-30-1997 JAN-01-1997 JUL-01-1996 MAR-31-1997 MAR-31-1997 8,340 8,340 0 0 7,226 7,226 195 195 4,987 4,987 20,691 20,691 31,136 31,136 6,940 6,940 46,969 46,969 2,985 2,985 0 0 0 0 0 0 45,683 45,683 (1,875) (1,875) 46,969 46,969 6,965 20,494 6,965 20,494 4,732 13,159 6,500 17,838 0 0 0 0 (138) (462) 603 3,118 50 300 554 2,818 0 0 0 0 0 0 554 2,818 0.04 0.23 0.04 0.22 EPS-BASIC
EX-27 7 EXHIBIT 27.6
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 6-MOS JUN-30-1997 JUN-30-1997 SEP-30-1996 JUL-01-1996 DEC-31-1996 DEC-31-1996 8,687 8,687 1,579 1,579 6,452 6,452 134 134 4,997 4,997 21,699 21,699 31,870 31,870 8,488 8,488 46,923 46,923 3,808 3,808 0 0 0 0 0 0 45,521 45,521 (2,430) (2,430) 46,923 46,923 6,539 13,528 6,539 13,528 4,917 8,427 6,319 11,338 0 0 0 0 (177) (325) 397 2,515 39 251 358 2,264 0 0 0 0 0 0 358 2,264 0.03 0.18 0.03 0.17 EPS-BASIC
EX-27 8 EXHIBIT 27.7
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS JUN-30-1997 JUL-01-1996 SEP-30-1996 6,271 1,789 9,332 74 4,404 21,960 28,878 7,980 45,052 2,368 0 0 0 45,451 (2,787) 45,052 6,989 6,989 3,510 5,019 0 0 (148) 2,118 212 1,906 0 0 0 1,906 0.16 0.15 EPS-BASIC
EX-27 9 EXHIBIT 27.8
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 12-MOS JUN-30-1996 JUN-30-1996 APR-01-1996 JUL-01-1995 JUN-30-1996 JUN-30-1996 10,162 10,162 1,787 1,787 6,443 6,443 50 50 3,226 3,226 21,720 21,720 27,374 27,374 7,156 7,156 43,796 43,796 3,124 3,124 0 0 0 0 0 0 45,403 45,403 (4,693) (4,693) 43,796 43,796 4,563 15,057 4,563 15,057 4,546 11,489 5,737 15,681 0 0 0 0 (185) (867) (987) 243 (10) 0 (977) 243 0 0 0 0 0 0 (977) 243 (0.08) 0.02 (0.08) 0.02 EPS-BASIC
EX-27 10 EXHIBIT 27.9
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 9-MOS JUN-30-1996 JUN-30-1996 JAN-01-1996 JUL-01-1995 MAR-31-1996 MAR-31-1996 14,624 14,624 1,800 1,800 5,662 5,662 17 17 3,191 3,191 25,560 25,560 23,891 23,891 6,454 6,454 44,848 44,848 3,327 3,327 0 0 0 0 0 0 45,275 45,275 (3,716) (3,716) 44,848 44,848 3,618 10,494 3,618 10,494 2,535 6,943 3,669 9,945 0 0 0 0 (254) (682) 204 1,230 0 10 204 1,220 0 0 0 0 0 0 204 1,220 0.02 0.10 0.02 0.10 EPS-BASIC
EX-27 11 EXHIBIT 27.10
5 0000895419 CREE RESEARCH, INC. 1,000 3-MOS 12-MOS JUN-30-1995 JUN-30-1995 APR-01-1995 JUL-01-1994 JUN-30-1995 JUN-30-1995 3,748 3,748 2,089 2,089 3,622 3,622 22 22 1,677 1,677 11,391 11,391 12,047 12,047 5,591 5,591 20,924 20,924 1,421 1,421 0 0 0 0 0 0 24,439 24,439 (4,936) (4,936) 20,924 20,924 1,250 9,000 1,250 9,000 (148) 6,017 1,141 9,478 0 0 0 0 (361) (461) 208 (17) 0 0 208 (17) 0 0 0 0 0 0 208 (17) 0.02 0.00 0.02 0.00 EPS-BASIC
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