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)
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North Carolina 56-1572719
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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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.
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CREE RESEARCH, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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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
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
1996 1996
------------ -------------
(unaudited)
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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
============ ============
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The accompanying notes are an integral part of the financial statements.
3
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
Three Months Ended
September 30,
------------------------------
1996 1995
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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
============ ============
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The accompanying notes are an integral part of the financial statements.
4
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
September 30,
----------------------------
1996 1995
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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
============ ============
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The accompanying notes are an integral part of the financial statements.
5
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) - (Continued)
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Three Months Ended
September 30,
--------
1996 1995
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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
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The accompanying notes are an integral part of the financial statements.
6
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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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
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
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
($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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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;
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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
--------------------------- ----------------
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<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
[*] -- 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
<PAGE>
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
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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-
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
CREE RESEARCH, INC.
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
1996 1995
--------------------------------------------------------------------------
Primary Fully Diluted Primary Fully Diluted
---------------- ------------------ ---------------- --------------------
<S> <C>
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
============= =============== ============= ===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,271
<SECURITIES> 1,789
<RECEIVABLES> 10,210
<ALLOWANCES> 74
<INVENTORY> 4,404
<CURRENT-ASSETS> 21,960
<PP&E> 28,791
<DEPRECIATION> 7,980
<TOTAL-ASSETS> 45,052
<CURRENT-LIABILITIES> 2,368
<BONDS> 0
0
0
<COMMON> 45,451
<OTHER-SE> (2,938)
<TOTAL-LIABILITY-AND-EQUITY> 45,052
<SALES> 7,434
<TOTAL-REVENUES> 7,434
<CGS> 4,264
<TOTAL-COSTS> 5,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,118
<INCOME-TAX> 212
<INCOME-CONTINUING> 1,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1906
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
