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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 DECEMBER 31, 1996
Commission file number: 0-21154
CREE RESEARCH, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1572719
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
2810 MERIDIAN PARKWAY, SUITE 144
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 January 17, 1997, 12,310,502 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
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1996 (unaudited) and
June 30, 1996 3
Consolidated Statements of Operations for the three and six months
ended December 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
December 31, 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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
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Part 1- FINANCIAL INFORMATION
Item 1- Financial Statements
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------------ -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,686,940 $ 10,161,706
Short-term investments, held to maturity 1,579,343 1,787,271
Accounts receivable, net 6,318,221 6,393,394
Inventories 4,996,845 3,226,484
Prepaid expenses and other current assets 117,292 150,990
------------------ -------------------
Total current assets 21,698,641 21,719,845
Long-term accounts receivable 411,560 464,253
Property and equipment, net 23,382,320 20,218,101
Patent and license rights, net 1,265,068 1,204,738
Other assets 58,297 61,714
Goodwill, net 107,017 127,692
------------------ -------------------
Total assets $ 46,922,903 $ 43,796,343
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,784,126 $ 2,473,609
Deferred revenue 1,290,160 17,330
Accrued expenses 733,264 633,316
------------------ -------------------
Total current liabilities 3,807,550 3,124,255
Long-term accrued expenses 174,470 -
------------------ -------------------
Total liabilities 3,982,020 3,124,255
Shareholders' equity
Common stock, $0.005 par value; 14,500,000 shares authorized; shares
issued 12,307,502 and 12,277,418; net of treasury shares at
December 31 and June 30, 1996, respectively 61,637 61,437
Additional paid-in capital 45,459,580 45,342,063
Accumulated deficit (2,429,831) (4,693,599)
------------------ -------------------
43,091,386 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 42,940,883 40,672,088
------------------ -------------------
Total liablities and shareholders' equity $ 46,922,903 $ 43,796,343
================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Product revenue, net $ 4,560,996 $ 1,730,962 $ 7,312,679 $ 3,877,758
Contract revenue 2,297,877 1,182,818 4,365,002 2,395,417
License fee income - 1,423,160 2,614,976 1,423,160
---------------- ---------------- --------------- ----------------
Total revenue 6,858,873 4,336,940 14,292,657 7,696,335
Cost of revenues 5,302,689 2,928,809 9,431,515 5,355,858
Gross margin 1,556,184 1,408,131 4,861,142 2,340,477
Operating expenses
Research and development 181,131 214,069 522,552 377,853
Sales, general and administrative 1,062,945 701,163 1,969,350 1,378,364
---------------- ---------------- --------------- ----------------
Income from operations 312,108 492,899 2,369,240 584,260
Other income (expense)
Gain (loss) on disposal of property and equipment 92,126 - (179,126) 13,533
Interest income 179,378 341,921 326,935 433,574
Interest expense (2,366) (2,620) (2,366) (5,478)
---------------- ---------------- --------------- ----------------
Earnings before income taxes 396,994 832,200 2,514,683 1,025,889
Provision for income taxes 39,146 10,000 250,915 10,000
---------------- ---------------- --------------- ----------------
Net income $ 357,848 $ 822,200 $ 2,263,768 $ 1,015,889
================ ================ =============== ================
Net earnings per share $ 0.03 $ 0.07 $ 0.17 $ 0.09
================ ================ ================ ================
Weighted average shares outstanding 13,011,957 12,018,541 13,018,404 11,380,536
================= ================== ================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------------------
1996 1995
------------------- -------------------
<S> <C> <C>
Operating activities:
Net income $ 2,263,768 $ 1,015,889
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
(Gain) loss on disposal of property and equipment 179,126 (13,533)
Depreciation and amortization 1,546,461 612,127
Amortization of patent rights 48,014 63,625
Amortization of goodwill 20,675 20,667
Loss on write off of patents 20,274 -
Non-cash compensation expense related to stock options - 1,722
Changes in assets and liabilities:
Accounts receivable 75,173 (1,721,256)
Inventories (1,770,361) (657,347)
Deferred costs on research contracts - 81,006
Prepaid expenses and other assets 89,808 (71,772)
Accounts payable, trade (689,483) (157,686)
Deferred revenue 1,272,830 -
Accrued expenses and other liabilities 274,418 (72,555)
------------------- -------------------
Net cash provided by (used in) operating activities 3,330,703 (899,113)
Investing activities:
Maturity of investment securities 207,928 2,003,650
Purchases of property and equipment (4,889,806) (6,701,041)
Proceeds from sale of property and equipment - 50,000
Purchase of patent rights (128,618) (115,333)
------------------- -------------------
Net cash used in investing activities (4,810,496) (4,762,724)
Financing activities:
Repurchase of common stock (112,690) -
Net proceeds from issuance of common stock 117,717 20,746,571
------------------- -------------------
Net cash provided by financing activities 5,027 20,746,571
------------------- -------------------
Net increases (decreases) in cash and cash equivalants (1,474,766) 15,084,734
Cash and cash equivalents:
Beginning of period 10,161,706 3,748,422
------------------- -------------------
End of period $ 8,686,940 $ 18,833,156
=================== ===================
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)
Six Months Ended
December 31,
--------------------------------------------
1996 1995
------------------- -------------------
Supplemental schedule of non-cash investing and financing activities:
Accounts payable recorded for purchases of equipment $ 708,425 $ 1,104,065
Professional fees associated with equity transactions $ 19,000
Cash paid for interest $ 5,478
</TABLE>
The accompanying notes are an integral part of the financial statements.
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CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The balance sheet as of December 31, 1996, the statements of operations
for the three and six month periods ended December 31, 1996 and 1995, and the
statement of cash flows for the six months ended December 31, 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 December 31, 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 December 31, 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:
December 31, 1996 June 30, 1996
Raw materials $2,286,000 $1,309,000
Work-in-progress 1,382,000 948,000
Finished goods 1,329,000 969,000
----------- ------------
$4,997,000 $3,226,000
========== ==========
Loan Availability
The Company has access to a term loan financing arrangement of up to $4,000,000
to facilitate the purchase of new equipment. The provisions of the loan were
agreed to in October and the Company has up to six months from that date to
exercise this option. The loan accrues interest at 8% and carries customary
covenants, namely the maintenance of a minimum tangible net worth and cash and
investment balances. Collateral would consist of a first position lien on
equipment purchased. As of December 31, 1996, there were no outstanding
borrowings under this facility.
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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 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.
The first and second installments totaling $1,200,000 were collected during the
second quarter of 1997, and additional $500,000 payments are due on 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 funding 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.
In accordance with the cost share provisions of the U.S. Government
contracts, the Company has incurred some direct manufacturing, and an allocated
portion of research and development and general and administrative costs, that
are not funded, totaling $366,000 and $897,000, for the three and six month
periods ended December 31, 1996, respectively. The Company spent $188,000 and
$283,000, respectively, in these same type of unfunded costs in the second
quarter and first six months of fiscal 1996.
Contract revenues from the U.S. Government contracts funded direct
manufacturing expenditures of $1,745,000 and $3,429,000, for the three and six
month periods ended December 31, 1996. Contract revenues also funded direct
expenditures of $826,000 and $1,784,000, for the three and six month periods
ended December 31, 1995. The related expenses, and the direct manufacturing
portion of unfunded costs (cost share amounts), are classified as a cost of
revenue.
Also included as contract revenue is the amount received from the
U.S. Government for research and development and general and administrative
costs associated with the contracts. For the three and six months ended December
31, 1996,
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the amounts reimbursed totaled $355,000 and $620,000, respectively. Comparable
amounts paid by contract funding in the prior year were $264,000 and $487,000.
The related expenses to this government funding and the unfunded portion of
costs (cost share amounts), appear as research and development and general and
administrative expenses.
Contract revenue also includes additional funding totaling $173,000
and $317,000, for the three and six month periods ended December 31, 1996, for
the profit element of cost-plus contracts and facilities cost of capital
reimbursement. Comparable amounts for fiscal 1996 are $23,000 and $125,000,
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 June 30,
1996 consolidated balance sheet and the statement of operations for the three
and six months ended December 31, 1995 to conform to the fiscal 1997
presentation. These reclassifications had no effect on shareholders' equity, the
results of operations or per share data.
Contingencies
The Company has been named as a defendant in a purported class
action lawsuit filed December 20, 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 omissions during the Class Period.
The claims asserted in the suit are substantially the same as those in the
complaint filed October 25, 1996 in the same court, which was described in the
Company's report on Form 10-Q filed for the period ended September 30, 1996. The
plaintiffs in the two actions have jointly moved that the actions be
consolidated. The Company believes that the allegations of both suits are
without merit and intends to defend them vigorously.
9
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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 and to reduce product unit costs, 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 risks 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 $6,859,000 for the three month period and
$14,293,000 for the six months ended December 31, 1996, represent a 58% and an
86% increase over the same periods in fiscal 1996, respectively. Included in the
current six
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month period, 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 blue
light-emitting diode ("LED") product. The license fee is payable in
installments. The first and second installments totaling $1,200,000 were
collected in the second quarter, and additional $500,000 payments are due on
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. Results for the three and six months ended December 31, 1995,
included one time net license fee revenue of $1,423,000. This license fee was
earned pursuant to a development license and supply agreement entered into
October 25, 1995 with Siemens A.G. ("Siemens") in which the Company granted
Siemens a license to use certain technology to manufacture blue LED products.
Product revenue increased 163% to $4,561,000 for the quarter ended
December 31, 1996 compared to $1,731,000 for the same period in fiscal 1996.
Product revenue also increased 89% to $7,313,000 for the six month period ended
December 31, 1996, compared to $3,878,000 for the same period in the previous
year. Product revenue is comprised of LED sales, wafer and other material sales,
module display products and Real Color Displays, Inc ("RCD") moving message sign
sales.
LED sales increased 551% for the quarter ended December 31, 1996 as
compared to the same period in the prior year. For the six months ended December
31, 1996, LED revenue increased 223% as compared to the same period in fiscal
1996.
Capacity increases and production yield improvements enabled the
Company to increase the number of LED's produced and shipped during the second
quarter. The Company's goal is to continue to increase the production output of
its DH-85 chip. If the Company is unable to bring additional capacity on line,
or fails 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, 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 deferral of up to six months,
and to cancellation at Siemens' election by making cancellation payments to the
Company. Substantially all of the LED sales of the
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Company during the second quarter, and substantially all of the backlog orders
of the Company, are pursuant to this agreement with Siemens. Consequently, the
Company is reliant on Siemens for sales of its primary product and a reduction
in sales to Siemens would have an adverse effect on the Company.
A primary goal of the Company is to attract additional LED
customers who order commercial volumes of LEDs as the Company expands its
production capabilities. If the Company is unable to expand its customer base,
its revenue and earnings growth potential would be adversely impacted by its
production expansion plans.
The Company believes that lower pricing for its DH-85 product is
necessary to significantly grow market demand, although there can be no
assurance that lower prices will result in increased sales revenues to the
Company. To offer lower pricing to customers, the Company must reduce unit costs
of production. The planned introduction of a conductive buffer layer chip, which
is currently under development. is expected to allow for significant reductions
in the manufacturing cost of the chip. If the Company is unable to manufacture
this new chip structure, its ability to reduce costs appreciably would be
impacted. This would probably impact market development and growth for the
Company's LED business.
Wafer sales increased 88% for the three months ending December 31,
1996, over the same period in the prior year. Year to date, wafer revenue has
grown 63%, over fiscal 1996 results. Additional sales were realized as a result
of greater demand for the Company's SiC wafers and the availability of
additional crystal growth capacity as well as capacity and yield improvements in
other processing areas.
Module sales provided revenue of $545,000 and $741,000 for the three
months and six months ended December 31, 1996. These figures compare to revenue
of $9,000 recorded in the second quarter of 1996, as this was a new business at
that time. RCD display moving message sign sales fell by 69% to $138,000 during
the second quarter of fiscal 1997 as compared to the second quarter of fiscal
1996. For the six months ended December 31, 1996, RCD display sign sales were
$272,000 compared to $1,006,000 recorded in the prior year. This significant
reduction in revenue is mainly attributable to a declining interest from our
customer base, as moving message signs are no longer "newer" technology.
Customers are now more interested in specific purpose static signs. The make up
of customers is also changing from small dealers and distributors to equipment
manufacturers. As a result of these changes, the Company continues to focus
increasing sales efforts on the module line of business.
Research contract revenues increased 94% to $2,298,000 for the three
month period, and 82% to $4,365,000 for the six month period ended December 31,
1996, as compared to fiscal 1996 results, respectively. This increase is mainly
attributable to management's commitment, and the U.S. Government's partnering
with new funding contracts, to the advancement of silicon carbide and gallium
nitride technology, primarily
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in blue laser, microwave and material development. Other silicon carbide
projects are also targeted.
The Company's gross margin was 23% and 34% for the three and six months
ended December 31, 1996, respectively. This compares to 32% and 30% for the same
time periods in fiscal 1996, respectively. License fee revenue is included in
both six month periods and the prior year second quarter gross margins. There
was no license fee revenue recorded in the second quarter of 1997. Without
license fees, gross margins would have been $2,246,000 or 19% for the current
six month period ended December 31, 1996, and (.5)% and 15%, respectively, for
the three and six month comparative periods in fiscal 1996. The overall increase
in margins, net of license fee revenue, results from higher throughput and yield
efficiency on LED and materials products, which is lowering the cost per unit.
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 funding 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. 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%.
For financial statement purposes, costs associated with government
contract research, appear as cost of revenues for the direct manufacturing
portion (including the cost share component), research and development for
indirect labor and related costs and general and administrative expenses for
overhead costs. For the six months ended December 31, 1996, research and
development costs include a one time write off of $93,000 for the closure of 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.
Sales, general and administrative expenses increased by 52% to
$1,063,000 and 43% to $1,969,000 for the three and six month periods ending
December 31, 1996, compared to the same period in fiscal 1996, respectively. For
the quarter, the increase is attributable to overall cost increases to support
the growth of the Company and greater legal fees associated with the defense of
the pending securities class action lawsuit (see Part II, Item 1). Year to date,
expenditures are ahead of the prior year due to a combination of the net present
value of the $186,000 brokerage fee ($172,000) associated with the license fee
revenue recorded in the first quarter, and other cost increases to support the
growth of the business. The Company expects sales, general and administrative
expenses to continue to rise in future periods, as it anticipates increasing
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its marketing efforts to find new customers for the blue LED product, and
heavier costs in connection with the defense of the above mentioned legal
action.
During the three months ended December 31, 1996, the Company
retired two research oriented silicon carbide epitaxial reactors that will be
used in the future for spare parts. The total write-off related to this
retirement was $92,000. During the first quarter of 1997, the Company also
retired equipment associated with the closing of the Eastern European Division.
The total write off of this equipment was $87,000.
Interest income decreased $163,000 and $107,000, when comparing the
three and six month periods ending December 31, 1996 to the three and six month
periods ending December 31, 1995. This decrease is attributable to lower
investable cash balances available throughout the current periods. The Company
concluded a private equity placement in September, 1995, that increased
available cash in fiscal 1996. Much of this cash has now been invested in plant
and equipment.
Liquidity and Capital Resources
The Company's cash and current investment balance was $10,266,000 at
December 31, 1996 and $11,949,000 at June 30, 1996. For the first six months of
fiscal 1997, the Company's operations generated $3,331,000 in cash. Funds
employed in operations were used mainly to fund increasing inventory balances
and decreasing trade payables relating to operating activities. For the same
period in fiscal 1996, $899,000 was utilized by operations.
During the quarter, the Company focused on reducing the amount of trade
accounts receivable outstanding. During the three months ended December 31,
1996, accounts receivable balances were reduced by $2,940,000.
The Company invested $4,890,000 in capital equipment during the first
six months of fiscal 1997 compared to $6,701,000 in the prior year. Although
significant expansion and reconfiguration of many production areas has occurred
within the last eighteen months, substantial additional increases in funding
will be required to further expand the Company's production capacity to meet
orders and enhance productivity. It is anticipated that capital spending will
remain elevated over the next six months and that the Company will spend
approximately $5 million to $6 million for capital investments primarily in the
crystal growth, epitaxial and clean room areas. The Company expects to finance
these expenditures with cash generated from operations, current available cash
and a $4 million term loan. On October 17, 1996, the Company obtained a
commitment letter from a bank for this term loan. As of December 31, 1996, there
were no outstanding borrowings under this facility.
During the current six month period, the Company repurchased 10,000
shares of common stock for the treasury for $113,000, and issued shares under
option agreements for $118,000, resulting in a net increase of $5,000 for
financing activities. The majority of
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the prior period's funding was provided by the Company's September 28, 1995,
private placement which netted the Company approximately $17.5 million and funds
received in connection with option exercises.
The Company expects to continue to finance its operations and capital
expenditures, using internally generated funds and from the proceeds from the
term debt facility. However, the Company continually evaluates 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 research purposes. A
number of customers are still evaluating the long term usefulness of 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 and reduce unit costs to desired levels
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 presently is almost solely reliant on a supply agreement with
Siemens A.G. as a customer for its DH-85 blue LED chip. 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 to 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
15
<PAGE>
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.
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.
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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in a purported class action
lawsuit filed December 20, 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 omissions during the Class Period.
The claims asserted in the suit are substantially the same as those
in the complaint filed October 25, 1996 in the same court, which was described
in the Company's report on Form 10-Q filed for the period ended September 30,
1996. The plaintiffs in the two actions have jointly moved that the actions be
consolidated. The Company believes that the allegations of both suits are
without merit and intends to defend them vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders convened on November
12, 1996. The meeting was held at Cree Research, Inc. located at 2810 Meridian
Parkway, Durham, North Carolina. At the meeting there were 10,243,415 shares of
common stock of the Company present in person and by proxy representing, a
quorum of the 12,300,858 common stock shares outstanding and entitled to vote as
of the September 23, 1996 record date.
The following proposals were introduced and voted upon:
PROPOSAL NO.1
Election of Directors
Vote Percent of Votes Percent of
Names For Votes Cast Withheld Votes Cast
F. Neal Hunter 10,160,697 99.19% 82,718 .81%
Calvin H. Carter, Jr 10,160,697 99.19% 82,718 .81%
Walter L. Robb 10,160,697 99.19% 82,718 .81%
Michael W. Haley 10,160,297 99.19% 83,118 .81%
Dolph W. von Arx 10,160,297 99.19% 83,118 .81%
James E. Dykes 10,147,363 99.06% 96,052 .94%
John W. Palmour 10,160,697 99.19% 82,718 .81%
17
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Percent of Shares
Votes Cast Outstanding
<S> <C> <C>
PROPOSAL NO.2
Amended and Restated Equity Compensation Plan
8,687,841 votes were cast FOR 92.6% 70.6%
600,823 votes were cast AGAINST 6.4% 4.9%
96,063 votes were ABSTAINED 1.0% .8%
TOTAL VOTES CAST 9,384,727
PROPOSAL NO. 3
Retaining Current Auditors
9,988,110 votes were cast FOR 97.5% 81.2%
29,949 votes were cast AGAINST .3% .2%
225,356 votes were ABSTAINED 2.2% 1.8%
TOTAL VOTES CAST 10,243,415
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11: Computation of Earnings per Share
(b) Reports on Form 8-K:
None.
18
<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: February 4, 1997 /s/Alan J. Robertson
---------------- ---------------------------
Alan J. Robertson, Chief
Financial Officer and
Secretary
Date: February 4, 1997 /s/F. Neal Hunter
---------------- ---------------------------
F. Neal Hunter, President and
Chief Executive Officer
21
</TABLE>
CREE RESEARCH, INC.
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
1996 1995
____________________________ _________________
Primary Fully Diluted Primary Fully Diluted
_________ _____________ ________ _____________
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding:
Common Stock 12,292,179 12,292,179 11,896,988 11,896,988
Shares Available Under Options
and Warrants 719,778 719,778 121,553 121,553
---------- ---------- ---------- ----------
Weighted Average Common and Common
Equivalent Shares Outstanding 13,011,957 13,011,957 12,018,541 12,018,541
---------- ---------- ---------- -----------
Net Income 357,848 357,848 822,200 822,200
---------- ---------- ---------- -----------
Earnings per Share $ 0.03 $ 0.03 $ 0.07 $ 0.07
---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended December 31,
1996 1995
____________________________ _________________
Primary Fully Diluted Primary Fully Diluted
_________ _____________ ________ _____________
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding:
Common Stock 12,286,871 12,286,871 11,269,291 11,269,291
Shares Available Under Options
and Warrants 731,553 746,174 111,245 111,245
---------- ---------- ---------- ----------
Weighted Average Common and Common
Equivalent Shares Outstanding 13,018,404 13,033,045 11,380,536 11,380,536
---------- ---------- ---------- -----------
Net Income 2,263,768 2,263,768 1,015,889 1,015,889
---------- ---------- ---------- -----------
Earnings per Share $ 0.17 $ 0.17 $ 0.09 $ 0.09
---------- ---------- ---------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> OCT-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 8,687 8,687
<SECURITIES> 1,579 1,579
<RECEIVABLES> 6,864 6,864
<ALLOWANCES> 134 134
<INVENTORY> 4,997 4,997
<CURRENT-ASSETS> 21,699 21,699
<PP&E> 31,870 31,870
<DEPRECIATION> 8,488 8,488
<TOTAL-ASSETS> 46,923 46,923
<CURRENT-LIABILITIES> 3,808 3,808
<BONDS> 0 0
0 0
0 0
<COMMON> 45,371 45,371
<OTHER-SE> (2,430) (2,430)
<TOTAL-LIABILITY-AND-EQUITY> 46,923 46,923
<SALES> 6,859 14,293
<TOTAL-REVENUES> 6,859 14,293
<CGS> 5,303 9,432
<TOTAL-COSTS> 6,547 11,923
<OTHER-EXPENSES> 92 179
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2 2
<INCOME-PRETAX> 397 2,515
<INCOME-TAX> 39 251
<INCOME-CONTINUING> 358 2,264
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 358 2,264
<EPS-PRIMARY> $0.03 $0.17
<EPS-DILUTED> $0.03 $0.17
</TABLE>
