<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission file number: 0-21154
CREE RESEARCH, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1572719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Silicon Drive Durham, NC 27703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 361-5709
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par value
$0.005 per share, as of April 17, 1998 was 13,046,421.
<PAGE>
CREE RESEARCH, INC.
FORM 10-Q
For the Quarter Ended March 29, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 29, 1998 (unaudited) and
June 30, 1997 3
Consolidated Statements of Income for the three and nine months ended
March 29, 1998 and March 31, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
March 29, 1998 and March 31, 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
PART 1- FINANCIAL INFORMATION
Item 1- Financial Statements
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's except per share amounts)
<TABLE>
<CAPTION>
March 29, June 30,
1998 1997
-------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $17,633 $10,448
Short term investments (trading security) 746 -
Accounts receivable, net 7,979 7,694
Inventories 2,577 3,949
Deferred income tax 1,830 1,830
Prepaid expenses and other current assets 668 466
-------------- ---------------
Total current assets 31,433 24,387
Long-term accounts receivable 55 54
Property and equipment, net 31,790 24,333
Patent and license rights, net 1,457 1,267
Other assets 9 96
-------------- ---------------
Total assets $64,744 $50,137
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $3,572 $2,248
Accrued salaries and wages 631 292
Other accrued expenses 2,411 834
-------------- ---------------
Total current liabilities 6,614 3,374
-------------- ---------------
Long-term debt 4,378 -
Non-current deferred income tax 1,638 1,638
-------------- ---------------
Total long term liabilities 6,016 1,638
-------------- ---------------
Shareholders' equity:
Common stock, $0.005 par value; 14,500 shares authorized; shares
issued and outstanding 13,046, and 12,523, at March 29,
1998, and June 30, 1997, respectively 65 62
Additional paid-in-capital 48,804 46,214
Retained earnings (accumulated deficit) 3,245 (1,151)
-------------- ---------------
Total shareholders' equity 52,114 45,125
-------------- ---------------
Total liabilities and shareholders' equity $64,744 $50,137
============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in 000's except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
March 29, March 31, March 29, March 31,
1998 1997 1998 1997
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue, net $8,929 $5,571 $25,298 $12,883
Contract revenue, net 1,742 1,395 5,685 4,996
License fee income - - - 2,615
------------- ------------- ------------ -------------
Total revenue 10,671 6,966 30,983 20,494
------------- ------------- ------------ -------------
Cost of revenue:
Product revenue 5,510 3,488 15,875 8,697
Contract revenue 1,430 1,244 4,679 4,462
------------- ------------- ------------ -------------
Total cost of revenue 6,940 4,732 20,554 13,159
------------- ------------- ------------ -------------
Gross margin 3,731 2,234 10,429 7,335
Operating expenses:
Research and development, net 367 485 1,287 1,247
Sales, general and administrative 1,041 1,079 3,026 3,049
Other expense 31 204 423 383
------------- ------------- ------------ -------------
Income from operations 2,292 466 5,693 2,656
Interest income, net 180 138 513 462
------------- ------------- ------------ -------------
Income before income taxes 2,472 604 6,206 3,118
Income tax expense 717 50 1,810 300
------------- ------------- ------------ -------------
Net income $1,755 $554 $4,396 $2,818
============= ============= ============ =============
Basic earnings per common share $0.13 $0.04 $0.34 $0.23
============= ============= ============ =============
Diluted earnings per common share $0.13 $0.04 $0.33 $0.22
============= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
March 29, March 31,
1998 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net income $4,396 $2,818
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,125 2,414
Loss on disposal of property and equipment 326 386
Loss on write off of patents - 129
Amoritization of patent rights 75 79
Amortization and write off of goodwill 86 31
Purchase of marketable trading security (1,500) -
Proceeds from sale of marketable trading security 421 -
Loss on marketable trading security 333 -
Changes in assets and liablilties:
Accounts receivable (286) (592)
Inventories 1,373 (1,761)
Prepaid expenses and other assets (201) (502)
Accounts payable, trade (699) (1,143)
Deferred revenue (2) (17)
Accrued expenses 1,915 730
------------- -------------
Net cash provided by operating activities 9,362 2,572
Investing activities:
Maturity of investment securities - 1,787
Purchases of property and equipment (9,346) (6,329)
Proceeds from sale of property and equipment 463 18
Purchase of patent rights (265) (188)
------------- -------------
Net cash used in investing activities (9,148) (4,712)
Financing activities:
Proceeds from issuance of long-term debt 4,378 -
Net proceeds from issuance of common stock 2,911 431
Repurchase of common stock (318) (113)
------------- -------------
Net cash provided by financing activities 6,971 318
Net increase (decrease) in cash and cash equivalents 7,185 (1,822)
============= =============
Cash and cash equivalents:
Beginning of period 10,448 10,162
============= =============
End of period $17,633 $8,340
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
Cree Research, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The balance sheet as of March 29, 1998, the statements of operations
for the three and nine month periods ended March 29, 1998 and March 31, 1997,
and the statements of cash flows for the nine months ended March 29, 1998 and
March 31, 1997 have been prepared by the Company and have not been audited. In
the opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows at March 29, 1998, and
all periods presented, have been made. The balance sheet at June 30, 1997 has
been derived from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's fiscal 1997 Form 10-K. The results of
operations for the period ended March 29, 1998 are not necessarily indicative of
the operating results that may be attained for the entire fiscal year.
Accounting Policies
Change in Fiscal Year
On September 24, 1997, the Board of Directors of Cree Research, Inc.
changed the Company's fiscal year from the twelve months ending June 30 to a 52
or 53-week year ending on the last Sunday in the month of June. Accordingly, all
quarterly reporting will reflect a 13 week period in fiscal 1998, except that
the period ended September 28, 1997, which commenced July 1, 1997, reflects the
results of twelve weeks and five days. The Company's current fiscal year will
extend from July 1, 1997 to June 28, 1998.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:
6
<PAGE>
(a) Securities Held-to-Maturity- Debt securities that the entity has
the positive intent and ability to hold to maturity are reported
at amortized cost.
(b) Trading Securities- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included
in earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading
securities are reported at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component
of stockholders' equity.
The Company's short-term investments are comprised of equity securities
that are classified as trading securities, which are carried at their fair value
based upon quoted market prices of those investments at March 29, 1998, with net
realized and unrealized gains and losses included in net earnings.
As of March 29, 1998, short-term investments consist of common stock
holdings in C3, Inc. ("C3"), a portion of which were purchased in November 1997.
The Company's president has, through a binding agreement, promised to indemnify
the Company for up to $300,000 in losses that may result from the sale of shares
purchased in November 1997 below the purchase price paid. At March 29, 1998, the
Company had recorded a $300,000 receivable from the president (included in net
accounts receivable) based upon this agreement.
In addition to the shares of C3 purchased in November 1997, the Company
acquired 24,601 shares of C3 common stock in January 1997. These shares were
issued pursuant to an option C3 granted to the Company in 1995. The option gave
the Company the right to acquire, for an aggregate consideration of $500, one
percent of the outstanding common stock of C3. C3 retained the right to waive
the consideration and issue the stock at any time, which it elected to do in
January 1997. The shares issued pursuant to the option are restricted securities
within the meaning of Rule 144 under the Securities Act of 1933, which permits
the sale of such securities without registration if certain conditions are met.
The shares first become eligible for sale under Rule 144 in the third quarter of
fiscal 1998, at which time the Company recorded a one-time gain of $217,000 to
reflect these shares on its books at market value. A net $33,000 loss was
recorded in the third quarter to reflect total investment activity.
Significant Property Acquisition
In November 1997, the Company purchased real property consisting of
approximately thirty acres of land with a production facility of approximately
145,000 square feet and a total of approximately 35,000 square feet of service
and warehouse buildings. This property is located in Durham, North Carolina, in
the vicinity of the Research Triangle Park. The purchase price of the land and
buildings was $3,000,000.
7
<PAGE>
The Company moved most of its sales and administrative personnel to this
facility in January 1998. The Company anticipates it will relocate its other
operations to this facility over the next few quarters. The Company expects that
the relocation will be completed during fiscal 1999.
The Company obtained a term loan from a commercial bank of up to
$10,000,000 to finance the purchase and upfit of the facility. Approximately
$2,950,000 was disbursed under the loan in November 1997 to finance the
purchase, and additional proceeds under the loan are distributed to the Company
on a monthly basis based on actual expenditures incurred. Draws under the loan
agreement may be made only during an eighteen month period ending in May 1999.
The loan, which is collateralized by the purchased property, accrues interest at
a fixed rate of 8% and carries customary covenants, including the maintenance of
a minimum tangible net worth and other requirements. Accrued interest is due
monthly until May 1999, at which time the outstanding principal balance will be
amortized over twenty years until 2011, when the loan balance becomes due. At
March 29, 1998, long term borrowings associated with this loan were $4,378,000
leaving $5,622,000 unused and available.
During the three and nine months ended March 29, 1998, the Company
capitalized interest on funds used to construct property, plant and equipment in
connection with the newly acquired facility. Interest capitalized for the three
and nine months ended March 29, 1998, was $24,000 and $38,000, respectively.
Goodwill
Goodwill shown on the statements represents the amount by which the
costs to acquire the net assets of the Real Color Displays subsidiary exceeded
their related fair value at acquisition. Based on a review of undiscounted cash
flows of the subsidiary anticipated over the remaining amortization period, the
Company determined that goodwill had been impaired. As a result, the Company
recorded a charge to eliminate the $66,000 net book value in the second quarter
of fiscal 1998. As required by generally accepted accounting principles, this
write-off, which was considered a change in accounting estimate, was included in
the results of operations.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined under the first-in, first-out (FIFO) method. Inventories consist of
the following:
8
<PAGE>
<TABLE>
<CAPTION>
March 29, 1998 June 30, 1997
(in 000's) (in 000's)
---------- ----------
<S> <C> <C>
Raw materials $1,025 $1,559
Work-in-progress 591 1,374
Finished goods 961 1,016
------ ------
Total Inventory $2,577 $3,949
------ ------
</TABLE>
Research and Development Accounting Policy
The U.S. Government provides funding for several of the Company's
current research and development efforts. The contract funding may be based on a
cost-plus or a cost-share arrangement. The amount of funding under each contract
is determined based on cost estimates that include direct costs, plus an
allocation for research and development, general and administrative and cost of
capital expenses. Cost-plus funding is determined based on actual costs plus a
set percentage margin. For cost-share contracts, the actual costs are divided
between the U.S. Government and the Company based on the terms of the contract.
The government's cost share is then paid to the Company. Activities performed
under these arrangements include research regarding silicon carbide and gallium
nitride materials. The contracts typically require submission of a written
report to document the results of such research.
The revenue and expense classification for contract activity is
determined based on the nature of the contract. For contracts where the Company
anticipates that funding will exceed direct costs over the life of the contract,
funding is reported as contract revenue and all direct costs are reported as
costs of contract revenue. For contracts under which the Company anticipates
that direct costs will exceed amounts to be funded over the life of the
contract, costs are reported as research and development expenses and related
funding as an offset of those expenses. The following table details information
about contracts for which direct expenses exceed funding by period as included
in research and development expenses:
<TABLE>
<CAPTION>
Three months ended (in 000's) Nine months ended (in 000's)
----------------------------- ----------------------------
March 29, March 31, March 29, March 31,
1998 1997 1998 1997
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Net R&D costs $ - $ 223 $281 $ 432
Government funding - 663 598 1,427
----------- ------ ---- ------
Total direct costs incurred $ - $ 886 $879 $1,859
</TABLE>
As of March 29, 1998, all funding under contracts where the Company
anticipates that direct costs will exceed amounts to be funded has been
exhausted. Therefore, the Company anticipates that all future funding under
existing contracts will be reflected as contract revenue while direct costs will
be reported as contract cost of sales.
9
<PAGE>
Significant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with
Siemens AG ("Siemens"), pursuant to which Siemens agreed to purchase LED chips
made with the Company's gallium nitride-on-silicon carbide technology. In April
1997, a contract amendment was executed that provided for enhanced product
specifications requested by Siemens.
In December 1997, the Company and Siemens further amended the contract
to extend shipments of blue light emitting diodes to Siemens through calendar
1998. The second amendment obligates the Company to ship, and Siemens to
purchase, stipulated quantities of the LED chip. These shipments are expected to
provide revenue in excess of $3.4 million for the remainder of the 1998 fiscal
year. Additional shipments anticipated for fiscal 1999 are subject to certain
rescheduling and cancellation provisions.
Income Taxes
The Company has established an estimated tax provision based upon an
effective rate of 29%. The estimated effective rate was based upon projections
of income for the fiscal year and the Company's ability to utilize remaining net
operating loss carryforwards and other tax credits. However, the actual
effective rate may vary depending upon actual pre-tax book income for the year
or other factors.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share", as of December 28, 1997. SFAS No. 128
required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented has
been restated to conform to the provisions of SFAS No. 128.
10
<PAGE>
The following computation reconciles the differences between the basic and
diluted presentations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
March 29, March 31, March 29, March 31,
1998 1997 1998 1997
(in 000's, (in 000's, (in 000's, (in 000's,
except per except per except per except per
share amounts) share amounts) share amounts) share amounts)
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income $1,755 $554 $4,396 $2,818
Weighted average common shares 13,028 12,326 12,808 12,300
--------------- ---------------- ---------------- ----------------
Basic earnings per common share $0.13 $0.04 $0.34 $0.23
=============== ================ ================ ================
Net income $1,755 $554 $4,396 $2,818
Weighted average common shares:
Common shares outstanding 13,028 12,326 12,808 12,300
Dilutive effect of stock options & 473 730 707 731
warrants
--------------- ---------------- ---------------- ----------------
Total weighted average common shares 13,501 13,056 13,515 13,031
Diluted earnings per common share $0.13 $0.04 $0.33 $0.22
=============== ================ ================ ================
</TABLE>
Potential common shares that would have the effect of increasing
diluted income per share are considered to be antidilutive. In accordance with
SFAS No. 128, these shares were not included in calculating diluted income per
share. Accordingly, 360,000 shares for the three and nine months ended March 29,
1998, and 637,000 shares for the three and nine months ended March 31, 1997,
were not included in calculating diluted income per share for the periods
presented.
Contingencies
The consolidated securities class action lawsuits previously pending
against the Company and certain of its directors and officers in the U.S.
District Court for the Middle District of North Carolina were dismissed with
prejudice on November 28, 1997. The dismissal was pursuant to a stipulation of
the named parties entered after the court granted the defendants' motions to
dismiss the consolidated complaint for failure to state a claim. No payments
were made to the plaintiffs to obtain the dismissal. By stipulating to the
dismissal with prejudice, the plaintiffs waived any right to re-file the action
or to appeal the court's order of dismissal.
11
<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 it
contains both statements of historical facts and forward looking statements.
Forward looking statements are subject to various risks and uncertainties which
could cause actual results to differ materially from those indicated by the
statements. Examples of forward looking statements include but are not limited
to (i) projections of revenues, income or loss, earnings per share, capital
expenditures, capital structure and other financial items, (ii) statements of
the plans and objectives of the Company or its management or Board of Directors,
including the introduction of new products or predictions of actions by
customers, suppliers or competitors, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying other statements
about the Company and its business.
This document also identifies important factors which could cause
actual results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the possibility the Company
may be unable to achieve lower unit product costs and develop new markets for
the conductive buffer LED product, gain a larger customer base for the company's
LED products, increase in production volumes, price products competitively,
maintain and increase product yields, obtain continued U.S. government funding
for research contracts, as well as possible delays in the introduction of new
products, customer acceptance of products and services, production problems that
may result from changes in its manufacturing processes made to accommodate new
products and product improvements and other factors discussed in the Company's
report on Form 10-K for the year ended June 30, 1997 and subsequent quarterly
reports.
Results of Operations
Cree Research, Inc. reported record sales of $10,671,000 for the third
quarter of fiscal 1998, which represents a 53% increase over the third quarter
of the prior year. On a year-to-date basis, revenue rose 51% to $30,983,000,
despite a $2,615,000 one time license fee that was included in fiscal 1997
results. Without this fee, revenue in the first nine months of fiscal 1998 would
have been 73% higher than in the corresponding prior year period. Product
revenue, which includes sales of light emitting diodes ("LEDs"), materials,
module display products and moving message signs, increased 60% and 96% over the
third quarter and first nine months of fiscal 1997, respectively. Results for
the third quarter and first nine months of fiscal 1998 reflect the change to a
13-week quarterly periods as discussed in the Notes to Consolidated Financial
Statements.
12
<PAGE>
As the Company's LED technology continues to evolve and mature, Cree
remains focused on delivering a low-priced, high-performance, LED product line
using its proprietary gallium nitride on silicon carbide technology. In order to
reduce prices to expand markets, Cree must first lower costs to retain
consistent margins per unit. During this fiscal year, the Company has
successfully introduced a smaller chip, a larger two inch wafer and finally a
new conductive buffer product. These changes have yielded a higher performance
LED product that on average cost 29% less to manufacture during the third
quarter than the LED chip produced during the third quarter of 1997. During the
fourth quarter, Cree anticipates the completion of the transition of its LED
manufacturing to the conductive buffer technology, which is expected to reduce
average costs further. The lower cost structure realized during the past year
has enabled Cree to also lower its average sales price, which has led to a
significantly higher unit volume. This greater unit volume has improved total
LED revenue, despite the lower price per unit. Greater volume, while maintaining
margins per unit, has been and will continue to be Cree's strategy in the LED
marketplace. Many current and potential customers for the Company's products are
based in Japan and Asia. Poor economic conditions in those countries may
adversely affect the Company's ability to increase sales volume.
As a result of the lower net sales price per unit, LED sales have
increased only slightly for the quarter ended March 29, 1998 compared to the
same period in the prior year. However, during the same time frame, LED unit
volume has increased over 50%. Year-to-date, LED sales revenue has increased
87% while unit volume has grown 126% over the first nine months of fiscal 1997.
Most of this increase resulted from the Purchase Agreement signed with Siemens
A.G. ("Siemens") in September 1996, which provided for an escalating volume of
shipments over time.
In December 1997, the Company and Siemens amended the Purchase
Agreement to provide for additional shipments of LEDs to Siemens through
calendar 1998. Additional shipments are scheduled for delivery in fiscal 1999,
subject to certain rescheduling and cancellation terms. The amendment provides
for initial pricing to continue at 1998 first quarter levels, with prices
declining as units increase in the latter part of the year. These contractual
reductions in the average selling price to Siemens will continue to pressure the
company to lower production costs. The transition of all LED production to the
conductive buffer product in the fourth quarter is essential to achieving these
cost reductions. The conductive buffer LED chip, which made up only 6% of
production in the third quarter, improves efficiency in the epitaxial and wafer
fabrication manufacturing processes. In addition, the Company remains optimistic
that it can improve the manufacturing yields, which will also contribute to
overall cost reduction. However, there can be no assurance that these
efficiencies will be achieved.
The other key effort for successful execution of Cree's LED strategy
will be to focus efforts on obtaining additional LED customers. If the Company
is unable to expand its customer base, its revenue and earnings growth may be
adversely impacted. The conductive buffer technology is expected to increase the
Company's manufacturing capacity. The Company is seeking additional customers to
absorb this capacity.
13
<PAGE>
Management continues to believe that market growth for this product remains
dependent on its ability to substantially lower pricing. The Company has
recently introduced the conductive buffer product to Asia and has received
positive feedback. This product, which is 50% brighter than the Company's prior
product, but which remains less bright than a higher priced competing product,
is expected to drive increased volume, however, significant impact may only be
achieved through reduced pricing. The Company continues to gain understanding of
customer price points while balancing cost opportunities . There can be no
assurance that Cree will increase its customer base, achieve lower costs or
maintain similar margins, or that the conductive buffer product will be accepted
by customers. In addition, changes in the manufacturing processes could result
in unexpected problems that could lower production during the transition period.
Material products sales have shown the most dramatic increase in the
recent quarter due to contributions made by the gemstone and microwave
technologies. Overall, sales of material products grew 140% and 112%,
respectively, for the three and nine months ended March 29, 1998, over the same
periods in the prior year. Material sales have also grown due to an increase in
wafer shipments and greater funding from the Company's Development Agreement
with C3. Under these agreements, C3 pays the Company its costs, plus a specified
margin on certain costs, for work directed to developing improved processes for
the manufacture of colorless material for use in gemstones. This research is
particularly important as it also funds the development of larger diameter
crystals, which is expected to assist the Company in manufacturing larger
diameter silicon carbide wafers for semiconductor applications. Total C3 sales
now comprise over 10% of product revenue year-to-date. Wafer volume has also
increased as a result of the Company's success in offering wafer products with
lower defect densities, which enable customers to conduct advanced research for
microwave and power applications, and in part due to increased interest in SiC
materials in the semiconductor industry. Microwave products also contributed to
the overall revenue mix during the quarter as a result of work performed under a
development agreement executed in December 1997 with a corporate customer. This
work is particularly important as the Company's strategy to achieve significant
top line revenue growth in future years depends on the introduction of microwave
products.
Year-to-date, revenue contributions from the display modules and moving
messages sign products were 92% higher, despite a disappointing third quarter
that included a return of a significant sale made to an Asian customer that
ceased business operations. Prior year third quarter results also included a
significant product return reflected in this year over year comparison.
Research contract revenue and cost of contract revenue increased 25%
and 15%, respectively, during the third quarter of fiscal 1998 as compared to
the prior year quarter. Likewise, contract revenue and cost of contract revenue
for the nine month periods increased 14% and 5% year over year, due to a change
in mix of work being performed under cost-share contract arrangements. Under
cost-share contracts, where direct costs
14
<PAGE>
incurred are expected to exceed government funding, funding is recorded as an
offset to research and development expenses and related direct expenses are
recorded as research and development expenses. Conversely, when government
funding is anticipated to be higher than direct costs incurred, funding is
recorded as contract revenue and direct expenses are reflected as costs of
contract revenue. During the first half of fiscal 1998, resources were moved
from the cost-share arrangements to other work, as funding under the cost-share
transactions was exhausted. As a result, contract revenue and costs of contract
revenue were higher.
The Company's product gross margin was 38% for the three months ended
March 29, 1998. The margin was reduced by a $300,000 inventory write-down taken
on displays products. Without this adjustment, margins would have been 42% for
the third quarter of 1998 as compared to 37% reported in the third quarter of
the prior year. Product gross margins were 37% of revenue for the nine months
ended March 29, 1998, due to $453,000 in inventory write-downs related to
displays products. Without this adjustment, margins would have been 39% for the
period compared to 32% experienced in fiscal 1997. The overall growth in
profitability stems from higher throughput and manufacturing yield on LED and
materials products, thereby lowering the cost per unit. While the Company has
demonstrated a lower per unit cost during the past year, much of this success
was due to a combination of higher volumes processed as a result of the Siemens
contract and technology contributions stemming from a smaller sized chip, and a
larger two inch wafer. Improvements in yields have also reduced unit costs for
material products.
For the three months ended March 29, 1998, research and development
costs decreased 24% over the third quarter of the prior year. These lower costs
resulted from higher direct costs associated with cost-share contracts being
incurred during the prior year. Work under these cost-share contracts was
completed during the first half of fiscal 1998; therefore, there are no
comparative cost-share program charges in the third quarter of 1998. For the
nine month comparative periods, research and development costs are 3% higher due
to heavier cost-share program charges incurred in the first half of 1998.
Sales, general and administrative expenses for the three month period
ended March 29, 1998, decreased by 4% over the same period in the prior year due
to depreciation and rent savings experienced as a result of the move to the new
facility and lower legal fees as the Company was defending the securities class
action lawsuit in 1997. Year-to-date expenses remained flat due to increases in
expenses being offset by two one time insurance payments to the Company. As a
result of the dismissal of the securities class action lawsuits (see
"Contingencies" in the Notes to the Financial Statements), the Company was
reimbursed $216,000 by its insurance carrier for costs incurred in defense of
the lawsuit. In addition, as a result of a negotiated cost cap, the Company
received a $220,000 reimbursement of medical expenses that were incurred during
the year under a partially self insured health plan.
15
<PAGE>
Included in "Other expense" year-to-date is a loss incurred on the
disposal of certain fixed assets and the write-off of $66,000 for the remaining
value of goodwill associated with the acquisition of the Real Color Displays
subsidiary.
The Company's income tax provision has increased to 29% from a 5%
effective rate experienced during 1997. This higher rate results from the
utilization of net operating loss carryforwards during fiscal 1997.
Liquidity and Capital Resources
Net cash provided by operations was $9,362,000 for the nine months
ended March 29, 1998 compared with $2,572,000 generated during the comparative
period in fiscal 1997. The increase was primarily attributable to higher
profitability, lower inventory and greater accrued expenses primarily arising
from increased income tax liability.
The Company invested $9,346,000 in capital items during the first
nine months of fiscal 1998 compared to $6,329,000 during the same period in the
prior year. The majority of the increase in spending was due to the acquisition
of a new production facility near Research Triangle Park, North Carolina. The
total capital outlay for this facility and associated upfit is estimated to be
approximately $10,000,000 to $15,000,000. A $3,000,000 initial investment was
made to purchase the property, with the upfit expected to take place over the
next nine to twelve months. The Company has a loan commitment of up to
$10,000,000 from a commercial bank to finance a portion of these expenditures.
As of March 29, 1998, approximately $4,378,000 had been drawn against this loan.
All other capital investments made during 1998 are expected to be financed
through cash provided by operations and cash on hand. For the year, cash on hand
has also increased by $2,911,000 as a result of stock option and warrant
exercises.
The Company believes it has sufficient capital resources to fund its
business operations. However, the Company is presently evaluating alternatives
for financing the development of new applications of its technology, including
its blue laser technology.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
b) Reports on Form 8-K:
None.
17
<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: April 29, 1998 /s/F. Neal Hunter
-----------------------------------------------
F. Neal Hunter, President and
Chief Executive Officer
/s/ Cynthia B. Merrell
-----------------------------------------------
Cynthia B. Merrell, Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-28-1998 JUN-28-1998
<PERIOD-START> DEC-29-1997 JUL-01-1997
<PERIOD-END> MAR-29-1998 MAR-29-1998
<CASH> 17,633 17,633
<SECURITIES> 746 746
<RECEIVABLES> 8,136 8,136
<ALLOWANCES> 157 157
<INVENTORY> 2,577 2,577
<CURRENT-ASSETS> 31,433 31,433
<PP&E> 41,339 41,339
<DEPRECIATION> 9,550 9,550
<TOTAL-ASSETS> 64,744 64,744
<CURRENT-LIABILITIES> 6,614 6,614
<BONDS> 0 0
0 0
0 0
<COMMON> 48,869 48,869
<OTHER-SE> 3,245 3,245
<TOTAL-LIABILITY-AND-EQUITY> 64,744 64,744
<SALES> 10,671 30,983
<TOTAL-REVENUES> 10,671 30,983
<CGS> 6,940 20,554
<TOTAL-COSTS> 8,379 25,290
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (180) (513)
<INCOME-PRETAX> 2,472 6,206
<INCOME-TAX> 717 1,810
<INCOME-CONTINUING> 1,755 4,396
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,755 4,396
<EPS-PRIMARY> 0.13<F1> 0.34<F1>
<EPS-DILUTED> 0.13 0.33
<FN>
EPS-BASIC
</FN>
</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-28-1998 JUN-28-1998
<PERIOD-START> SEP-29-1997 JUL-01-1997
<PERIOD-END> DEC-28-1997 DEC-28-1997
<CASH> 13,102 13,102
<SECURITIES> 1,225 1,225
<RECEIVABLES> 10,383 10,383
<ALLOWANCES> 157 157
<INVENTORY> 2,788 2,788
<CURRENT-ASSETS> 29,488 29,488
<PP&E> 36,810 36,810
<DEPRECIATION> 8,788 8,788
<TOTAL-ASSETS> 58,991 58,991
<CURRENT-LIABILITIES> 4,189 4,189
<BONDS> 0 0
0 0
0 0
<COMMON> 48,416 48,416
<OTHER-SE> 1,489 1,489
<TOTAL-LIABILITY-AND-EQUITY> 58,991 58,991
<SALES> 10,106 20,313
<TOTAL-REVENUES> 10,106 20,313
<CGS> 6,546 13,617
<TOTAL-COSTS> 8,313 16,912
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (169) (332)
<INCOME-PRETAX> 1,962 3,733
<INCOME-TAX> 490 1,093
<INCOME-CONTINUING> 1,472 2,640
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,472 2,640
<EPS-PRIMARY> 0.12<F1> 0.21<F1>
<EPS-DILUTED> 0.11 0.20
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-28-1997
<CASH> 12,919
<SECURITIES> 0
<RECEIVABLES> 8,760
<ALLOWANCES> 196
<INVENTORY> 3,215
<CURRENT-ASSETS> 26,945
<PP&E> 32,359
<DEPRECIATION> 7,950
<TOTAL-ASSETS> 52,815
<CURRENT-LIABILITIES> 4,057
<BONDS> 0
0
0
<COMMON> 47,102
<OTHER-SE> 18
<TOTAL-LIABILITY-AND-EQUITY> 52,815
<SALES> 10,207
<TOTAL-REVENUES> 10,207
<CGS> 7,072
<TOTAL-COSTS> 8,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (164)
<INCOME-PRETAX> 1,771
<INCOME-TAX> 602
<INCOME-CONTINUING> 1,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,169
<EPS-PRIMARY> 0.09<F1>
<EPS-DILUTED> 0.09
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> APR-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 10,448 10,448
<SECURITIES> 0 0
<RECEIVABLES> 7,910 7,910
<ALLOWANCES> 216 216
<INVENTORY> 3,949 3,949
<CURRENT-ASSETS> 24,387 24,387
<PP&E> 31,310 31,310
<DEPRECIATION> 6,977 6,977
<TOTAL-ASSETS> 50,137 50,137
<CURRENT-LIABILITIES> 3,374 3,374
<BONDS> 0 0
0 0
0 0
<COMMON> 46,276 46,276
<OTHER-SE> (1,151) (1,151)
<TOTAL-LIABILITY-AND-EQUITY> 50,137 50,137
<SALES> 8,479 28,973
<TOTAL-REVENUES> 8,479 28,973
<CGS> 5,935 19,094
<TOTAL-COSTS> 8,023 25,860
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (144) (607)
<INCOME-PRETAX> 602 3,720
<INCOME-TAX> (123) 177
<INCOME-CONTINUING> 725 3,543
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 725 3,543
<EPS-PRIMARY> 0.05<F1> 0.28<F1>
<EPS-DILUTED> 0.05 0.27
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 8,340 8,340
<SECURITIES> 0 0
<RECEIVABLES> 7,226 7,226
<ALLOWANCES> 195 195
<INVENTORY> 4,987 4,987
<CURRENT-ASSETS> 20,691 20,691
<PP&E> 31,136 31,136
<DEPRECIATION> 6,940 6,940
<TOTAL-ASSETS> 46,969 46,969
<CURRENT-LIABILITIES> 2,985 2,985
<BONDS> 0 0
0 0
0 0
<COMMON> 45,683 45,683
<OTHER-SE> (1,875) (1,875)
<TOTAL-LIABILITY-AND-EQUITY> 46,969 46,969
<SALES> 6,965 20,494
<TOTAL-REVENUES> 6,965 20,494
<CGS> 4,732 13,159
<TOTAL-COSTS> 6,500 17,838
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (138) (462)
<INCOME-PRETAX> 603 3,118
<INCOME-TAX> 50 300
<INCOME-CONTINUING> 554 2,818
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 554 2,818
<EPS-PRIMARY> 0.04<F1> 0.23<F1>
<EPS-DILUTED> 0.04 0.22
<FN>
EPS-BASIC
</FN>
</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-30-1997 JUN-30-1997
<PERIOD-START> SEP-30-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 8,687 8,687
<SECURITIES> 1,579 1,579
<RECEIVABLES> 6,452 6,452
<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> 45,521 45,521
<OTHER-SE> (2,430) (2,430)
<TOTAL-LIABILITY-AND-EQUITY> 46,923 46,923
<SALES> 6,539 13,528
<TOTAL-REVENUES> 6,539 13,528
<CGS> 4,917 8,427
<TOTAL-COSTS> 6,319 11,338
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (177) (325)
<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<F1> 0.18<F1>
<EPS-DILUTED> 0.03 0.17
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,271
<SECURITIES> 1,789
<RECEIVABLES> 9,332
<ALLOWANCES> 74
<INVENTORY> 4,404
<CURRENT-ASSETS> 21,960
<PP&E> 28,878
<DEPRECIATION> 7,980
<TOTAL-ASSETS> 45,052
<CURRENT-LIABILITIES> 2,368
<BONDS> 0
0
0
<COMMON> 45,451
<OTHER-SE> (2,787)
<TOTAL-LIABILITY-AND-EQUITY> 45,052
<SALES> 6,989
<TOTAL-REVENUES> 6,989
<CGS> 3,510
<TOTAL-COSTS> 5,019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (148)
<INCOME-PRETAX> 2,118
<INCOME-TAX> 212
<INCOME-CONTINUING> 1,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,906
<EPS-PRIMARY> 0.16<F1>
<EPS-DILUTED> 0.15
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> APR-01-1996 JUL-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 10,162 10,162
<SECURITIES> 1,787 1,787
<RECEIVABLES> 6,443 6,443
<ALLOWANCES> 50 50
<INVENTORY> 3,226 3,226
<CURRENT-ASSETS> 21,720 21,720
<PP&E> 27,374 27,374
<DEPRECIATION> 7,156 7,156
<TOTAL-ASSETS> 43,796 43,796
<CURRENT-LIABILITIES> 3,124 3,124
<BONDS> 0 0
0 0
0 0
<COMMON> 45,403 45,403
<OTHER-SE> (4,693) (4,693)
<TOTAL-LIABILITY-AND-EQUITY> 43,796 43,796
<SALES> 4,563 15,057
<TOTAL-REVENUES> 4,563 15,057
<CGS> 4,546 11,489
<TOTAL-COSTS> 5,737 15,681
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (185) (867)
<INCOME-PRETAX> (987) 243
<INCOME-TAX> (10) 0
<INCOME-CONTINUING> (977) 243
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (977) 243
<EPS-PRIMARY> (0.08)<F1> 0.02<F1>
<EPS-DILUTED> (0.08) 0.02
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JAN-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1996
<CASH> 14,624 14,624
<SECURITIES> 1,800 1,800
<RECEIVABLES> 5,662 5,662
<ALLOWANCES> 17 17
<INVENTORY> 3,191 3,191
<CURRENT-ASSETS> 25,560 25,560
<PP&E> 23,891 23,891
<DEPRECIATION> 6,454 6,454
<TOTAL-ASSETS> 44,848 44,848
<CURRENT-LIABILITIES> 3,327 3,327
<BONDS> 0 0
0 0
0 0
<COMMON> 45,275 45,275
<OTHER-SE> (3,716) (3,716)
<TOTAL-LIABILITY-AND-EQUITY> 44,848 44,848
<SALES> 3,618 10,494
<TOTAL-REVENUES> 3,618 10,494
<CGS> 2,535 6,943
<TOTAL-COSTS> 3,669 9,945
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (254) (682)
<INCOME-PRETAX> 204 1,230
<INCOME-TAX> 0 10
<INCOME-CONTINUING> 204 1,220
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 204 1,220
<EPS-PRIMARY> 0.02<F1> 0.10<F1>
<EPS-DILUTED> 0.02 0.10
<FN>
EPS-BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1995
<PERIOD-START> APR-01-1995 JUL-01-1994
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 3,748 3,748
<SECURITIES> 2,089 2,089
<RECEIVABLES> 3,622 3,622
<ALLOWANCES> 22 22
<INVENTORY> 1,677 1,677
<CURRENT-ASSETS> 11,391 11,391
<PP&E> 12,047 12,047
<DEPRECIATION> 5,591 5,591
<TOTAL-ASSETS> 20,924 20,924
<CURRENT-LIABILITIES> 1,421 1,421
<BONDS> 0 0
0 0
0 0
<COMMON> 24,439 24,439
<OTHER-SE> (4,936) (4,936)
<TOTAL-LIABILITY-AND-EQUITY> 20,924 20,924
<SALES> 1,250 9,000
<TOTAL-REVENUES> 1,250 9,000
<CGS> (148) 6,017
<TOTAL-COSTS> 1,141 9,478
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (361) (461)
<INCOME-PRETAX> 208 (17)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 208 (17)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 208 (17)
<EPS-PRIMARY> 0.02<F1> 0.00<F1>
<EPS-DILUTED> 0.02 0.00
<FN>
EPS-BASIC
</FN>
</TABLE>
