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 27, 1998
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, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 313-5300
(Registrant's telephone number, including area code)
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 January 19, 1999 was 13,004,469.
<PAGE>
CREE RESEARCH, INC.
FORM 10-Q
For the Quarter Ended December 27, 1998
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 27, 1998
(unaudited) and June 28, 1998 3
Consolidated Statements of Income for the three
and six months ended December 27, 1998 and
December 28, 1997 (unaudited) 4
Consolidated Statements of Cash Flow for the six
months ended December 27, 1998 and December 28, 1997
(unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 27, June 28,
1998 1998
------------ --------
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,769 $ 17,680
Marketable securities 905 657
Accounts receivable, net 12,110 10,479
Inventories 3,402 2,543
Deferred income tax 264 1,952
Prepaid expenses and other current assets 691 1,347
------------ --------
Total current assets 30,141 34,658
Property and equipment, net 44,972 36,476
Patent and license rights, net 1,641 1,525
Other assets 1,349 65
------------ --------
Total assets $ 78,103 $ 72,724
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 4,097 $ 5,595
Current maturities of long term debt 121 17
Accrued salaries and wages 550 391
Other accrued expenses 990 1,052
------------ --------
Total current liabilities 5,758 7,055
Long term liabilities:
Long term debt 9,879 8,650
Deferred income tax 2,477 2,154
------------ --------
Total long term liabilities 12,356 10,804
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at December 27, 1998 and 2,750
shares authorized at June 28, 1998; none
issued and outstanding
Common stock, par value $0.005; 30,000 shares 65 65
authorized at December 27, 1998 and 14,500
shares authorized at June 28, 1998; shares
issued and outstanding 12,920 and 12,989 at
December 27, 1998 and June 28, 1998,
respectively
Additional paid-in-capital 49,583 49,676
Retained earnings 10,341 5,124
------------ --------
Total shareholders' equity 59,989 54,865
============ ========
Total liabilities and shareholders' equity $ 78,103 $ 72,724
============ ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
<TABLE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- --------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue, net $12,805 $ 8,164 $23,525 $16,369
Contract revenue, net 1,233 1,942 2,792 3,944
------------ ------------ ------------ ------------
Total revenue 14,038 10,106 26,317 20,313
Cost of revenue:
Product revenue 6,377 4,946 11,792 10,365
Contract revenue 1,045 1,600 2,252 3,252
------------ ------------ ------------ ------------
Total cost of revenue 7,422 6,546 14,044 13,617
------------ ------------ ------------ ------------
Gross profit 6,616 3,560 12,273 6,696
Operating expenses:
Research and development 1,121 527 1,927 920
Sales, general and 1,450 850 2,668 1,985
administrative
Other expense 298 390 567 390
------------ ------------ ------------ ------------
Income from operations 3,747 1,793 7,111 3,401
Interest income, net 20 169 135 332
------------ ------------ ------------ ------------
Income before income 3,767 1,962 7,246 3,733
taxes
Income tax expenses 916 490 2,029 1,093
------------ ------------ ------------ ------------
Net income $ 2,851 $ 1,472 $ 5,217 $ 2,640
============ ============ ============ ============
Earnings per share:
Basic $0.22 $0.12 $0.41 $0.21
============= ============= ============ ============
Diluted $0.21 $0.11 $0.39 $0.20
============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
<TABLE>
CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<CAPTION>
Six Months Ended
-----------------------------
December 27, December 28,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $5,217 $2,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,341 2,067
Loss on disposal of property, equipment and 951 320
patents
Amortization of patent rights 56 50
Amortization and write off of goodwill -- 86
Proceeds from sale of marketable trading 489 --
securities
Purchase of marketable trading securities (232) (1,500)
Gain on marketable trading securities (116) --
Changes in operating assets and liabilities:
Accounts receivable (1,964) (2,258)
Inventories (859) 1,161
Prepaid expenses and other assets 1,004 148
Accounts payable, trade (3,073) (783)
Accrued expenses 420 889
------------ ------------
Net cash provided by operating activities 4,234 2,820
------------ ------------
Investing activities:
Purchase of property and equipment (10,380) (5,704)
Proceeds from sale of property and equipment 189 340
Purchase of patent rights (194) (200)
------------ ------------
Net cash used in investing activities (10,385) (5,564)
------------ ------------
Financing activities:
Proceeds from issuance of long-term debt 1,333 3,259
Net proceeds from issuance of common stock 2,527 2,139
Receipt of Section 16(b) common stock profits 594 --
Repurchase of common stock (3,214) --
------------ ------------
Net cash provided by financing activities 1,240 5,398
------------ ------------
Net (decrease) increase in cash and cash (4,911) 2,654
equivalents
Cash and cash equivalents:
Beginning of period 17,680 10,448
============= ============
End of period $ 12,769 $ 13,102
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest, net amounts $ 275 $ --
capitalized
============= ============
Cash paid for income taxes $ 1,396 $ 219
============= ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The consolidated balance sheet as of December 27, 1998, the consolidated
statements of income for the three and six months ended December 27, 1998 and
December 28, 1997, and the consolidated statements of cash flow for the six
months ended December 27, 1998 and December 28, 1997 have been prepared by the
Company and have not been audited. In the opinion of management, all normal and
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flow at December 27, 1998, and all periods
presented, have been made. The balance sheet at June 28, 1998 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 1998 Form 10-K. The results of
operations for the period ended December 27, 1998 are not necessarily indicative
of the operating results that may be attained for the entire fiscal year.
Accounting Policies
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13 week
period in fiscal 1999. In fiscal 1998, the Company changed its fiscal year from
the twelve months ending June 30, to the 52 week period ending on the last
Sunday in the month of June. The Company's current fiscal year will extend from
June 29, 1998 to June 27, 1999.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This statement requires certain securities
to be classified into three categories:
(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.
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<PAGE>
(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 December 27, 1998, with net
realized and unrealized gains and losses included in net earnings.
As of December 27, 1998, short-term investments consist of common stock holdings
in C3, Inc. ("C3"), the majority of which were purchased in November 1997 and
September 1998. The Company's CEO has, through a binding agreement, promised to
indemnify the Company for losses of up to $450,000 for the net difference
between the aggregate cash consideration paid by the Company for the shares of
C3 common stock and the cash proceeds received by the Company upon the sale of
C3 common stock. This indemnity covers losses that may result from the sale of
shares purchased in November 1997 and September 1998 below the purchase price
paid, offset by gains realized on shares acquired directly from C3 in January
1997 (see below). Payment of this obligation is due within ten days after
receipt by the CEO of the Company's written demand made pursuant to a vote of
the majority of the members of the Board of Directors other than the CEO.
Realized losses on shares of C3 stock sold by the Company were $254,000 and
$46,000, for fiscal 1998 and 1999, respectively. At December 27, 1998, a net
unrealized gain, including shares acquired directly from C3 (see below), of
$383,000 was recognized to bring the valuation of shares held to market.
Therefore, approximately $120,000 and $116,000 of other income was recorded for
the three and six months ended December 27, 1998, respectively. Approximately
$32,000 of net losses were recorded to other income (expense) in fiscal 1998.
Since the net unrealized gain on shares held exceeded realized losses on shares
sold, there was no receivable recorded from the CEO as of December 27, 1998.
In addition to the shares of C3 purchased in November 1997 and September 1998,
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 became eligible for sale under Rule 144 in
the third quarter of fiscal 1998.
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<PAGE>
Long Term Debt
The Company obtained a term loan from a commercial bank of up to $10,000,000 to
finance the purchase and upfit of a production facility and service and
warehouse buildings in November 1997. As of December 27, 1998 the entire
$10,000,000 loan was outstanding, including a current portion of $121,000 and a
long term amount of $9,879,000. 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.
During the three and six months ended December 27, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the three and six months ended
December 27, 1998 was $34,000 and $118,000, respectively.
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:
<TABLE>
<CAPTION>
December 27, June 28,
1998 1998
------------ ------------
(In thousands)
<S> <C> <C>
Raw materials $ 1,338 $ 999
Work-in-progress 1,220 752
Finished goods 844 792
------------ ------------
Total Inventory $ 3,402 $ 2,543
============ ============
</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.
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<PAGE>
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 Six Months Ended
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Net R&D costs $ - $ 161 $ - $ 281
Government funding - 311 - 598
============ ============ ============ ============
Total direct costs $ - $ 472 $ - $ 879
incurred
============ ============ ============ ============
</TABLE>
As of December 27, 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 revenue.
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 and
December 1997, contract amendments were executed that provided for enhanced
product specifications requested by Siemens and larger volume requirements,
respectively.
In September 1998, the Company and Siemens further amended the contract to
extend the Purchase Agreement with respect to shipments to be made on or after
June 29, 1998. The third amendment obligates the Company to ship, and Siemens to
purchase, stipulated quantities of both the conductive buffer and the new high
brightness LED chips and silicon carbide wafers through fiscal 1999. The
agreement also limits Siemens' right to defer shipments to 30% of scheduled
quantities for items to be shipped in more than 24 weeks after initial notice
and 10% of scheduled quantities for items to be shipped in more than 12 weeks
after initial notice. In both cases, Siemens would be required to accept all
product within 90 days of the original shipment date. Additionally, the
amendment provides for higher per unit prices early in the contract with
reductions in unit prices as the cumulative volume shipped increases.
In December 1998, the Company and Siemens further amended the contract to
include greater quantities of conductive buffer LED chips to be shipped during
fiscal 1999 and to extend the
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<PAGE>
contract for these shipments through September 1999. This amendment also
provides for higher per unit prices early in the contract with reductions in
unit prices as the cumulative volume shipped increases. As was the case with the
third amendment, these higher prices were negotiated by the Company to offset
higher per unit costs expected earlier in the contract.
Income Taxes
The Company has established an estimated tax provision based upon an effective
rate of 28%. The estimated tax rate was based on tax reduction strategies being
implemented by the Company. 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.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled.
The actual income tax expense attributable to earnings for the six months ended
December 27, 1998 differed from the amounts computed by applying the U.S.
Federal tax rate of 35% to pretax earnings as a result of the following:
<TABLE>
<CAPTION>
Amount Percent
-------------- --------------
(In thousands)
<S> <C> <C>
Federal income tax provision at statutory rate $ 2,536 35.0%
State tax provision 174 2.4
Decrease in income tax expense resulting from:
Foreign sales corporation (306) (4.2)
State tax incentives (167) (2.3)
Research and development credits (85) (1.2)
Change in valuation allowance (123) (1.7)
-------------- --------------
Income tax expense $ 2,029 28.0%
============== ==============
</TABLE>
The following are the components of the provision for income taxes for the six
months ended December 27, 1998 (in thousands):
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<PAGE>
Current:
Federal $ 1,182
State 175
---------
Total Current Portion 1,357
Deferred:
Federal 782
State (110)
---------
Total Deferred Portion 672
Net Provision $ 2,029
=========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 27, June 28,
1998 1998
------------- ------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 948 $1,304
Research tax credits 92 169
Compensation accruals 70 62
Inventory capitalization 130 120
Bad debt allowance 64 56
Alternative minimum tax 158 261
Foreign tax credit 153 270
State incentive credits 165 --
------------- ------------
Total gross deferred tax assets 1,780 2,242
Less valuation allowance (167) (290)
------------- ------------
Net deferred tax asset 1,613 1,952
Deferred tax liabilities:
Property and equipment, due to 2,477 2,154
depreciation
------------- ------------
Gross deferred tax liabilities 2,477 2,154
------------- ------------
Net deferred tax asset (liability) $(864) $(202)
============= ============
</TABLE>
The net change in the total valuation allowance for the six months ended
December 27, 1998 was $123,000. The primary reason for the reduction in the
valuation allowance for the six months ended December 27, 1998 was the
implementation of tax strategies to utilize these assets. Realization of
deferred tax assets associated with the NOL carryforwards is dependent upon the
Company generating sufficient taxable income prior to their expiration. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable earnings. However, the net deferred tax assets could be reduced in the
future if management's estimates of taxable income during the carryforward
period are significantly reduced.
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<PAGE>
As of December 27, 1998, the Company has net operating loss carryforwards for
federal purposes of $3,493,000 and $2,346,000 for state purposes. The
carryforward expiration period is 2011 to 2013 for federal tax purposes and from
2000 to 2003 for state purposes. The Company anticipates that each of these
carryforwards will be utilized by the end of the current fiscal year.
Earnings Per Share
The Company presents earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
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 128.
The following computation reconciles the differences between the basic and
diluted presentations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income $ 2,851 $ 1,472 $ 5,217 $ 2,640
Weighted average common shares 12,832 12,789 12,876 12,699
------------ ------------ ------------ ------------
Basic earnings per common share $ 0.22 $ 0.12 $ 0.41 $ 0.21
============ ============ ============ ============
Net income $ 2,851 $ 1,472 $ 5,217 $ 2,640
Diluted weighted average common
shares:
Common shares outstanding 12,832 12,789 12,876 12,699
Dilutive effect of stock options 1,002 847 665 823
and warrants
------------ ------------ ------------ ------------
Total diluted weighted average 13,834 13,636 13,541 13,552
common shares
------------ ------------ ------------ ------------
Diluted earnings per common share $ 0.21 $ 0.11 $0.39 $ 0.20
============ ============ ============ ============
</TABLE>
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS 128, these
common shares were not included in calculating diluted income per share. As of
December 27, 1998, there were no potential shares considered to be antidilutive.
For the three and six months ended December 28, 1997, there were 300,000 shares
that were not included in calculating diluted income per share because their
effect was antidilutive.
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<PAGE>
New Accounting Pronouncements
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 only impacts
financial statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all nonowner changes in equity that are excluded
from net income. This Statement has no financial statement impact for an
enterprise that has no items of other comprehensive income in any period
presented. During the three and six months ended December 27, 1998 and December
28, 1997, the Company had no items of other comprehensive income.
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 changes the way public companies report segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial statements to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The application of
the new rules does not have a significant impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, which statements
represent the Company's judgment concerning the future and are subject to risks
and uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"anticipate," "believe," "plan," "estimate," "expect," and "intend" or the
negative thereof or other variations thereof or comparable terminology. The
Company cautions that any such forward-looking statements are further qualified
by important factors that could cause the Company's actual operating results to
differ materially from those in the forward-looking statements, including, but
not limited to, fluctuations in our operating results, production yields in our
manufacturing processes, whether we can produce commercial quantities of high
brightness blue and green LEDs, our dependence on a few customers, whether we
can manage our growth effectively, assertion of intellectual property rights by
others, adverse economic conditions, and insufficient capital resources. See
Exhibit 99.1 for additional factors that could cause the Company's actual
results to differ.
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<PAGE>
Overview
Cree Research, Inc. is the world leader in developing and manufacturing
semiconductor materials and electronic devices made from silicon carbide
("SiC"). We recognize product revenue at the time of shipment or in accordance
with the terms of the relevant contract. We derive the largest portion of our
revenue from the sale of blue and green light emitting diode ("LED") products.
The Company offers LEDs at two brightness levels -- high brightness blue and
green products and standard blue products. The Company's LED devices are
utilized by end users for automotive backlighting, liquid crystal display
("LCD") backlighting (including use in wireless handsets), indicator lamps,
miniature white lights (such as replacements for miniature incandescent bulbs),
indoor sign and arena displays, outdoor full color stadium displays, traffic
signals and other lighting applications.
The high brightness products, which were introduced to the market in September
1998 in limited quantities, are currently being integrated into our
manufacturing facility for full production. During the first six months of
fiscal 1999, margins realized on the high brightness products were substantially
lower than those derived from our standard blue LED product, as the yield was
lower than the standard product. Historically, we have experienced low margins
with many new product introductions, and we are working to make improvements to
output and yield during the second half of fiscal 1999. We anticipate that the
high brightness products will contribute greater volumes as yield improvements
are obtained.
We believe that in order to increase market demand for all of our LED products,
we must continue to substantially lower average sales prices. Historically, we
have been successful in achieving lower costs for the standard blue product.
During the remainder of fiscal 1999, we plan to focus on reducing costs through
higher production yields and from higher volumes as fixed costs are spread over
a greater number of units.
We also derive revenue from the sale of advanced materials made from SiC that
are used primarily for research and development. We also sell SiC crystals to
C3, which incorporates them in gemstone applications. During late fiscal 1998
and the first six months of fiscal 1999, C3 purchased equipment from us, which
has more than doubled the capacity for the production of crystals for C3.
The balance of our revenue is derived from government contract funding. Under
various programs, U.S. Government entities further the development of our
technology by supplementing our research and development efforts. All resulting
technology obtained through these efforts remains our property after the
completion of the contract, subject to certain license rights retained by the
government. Contract revenue includes funding of direct research and development
costs and a portion of our general and administrative expenses and other
operating expenses for contracts under which funding is expected to exceed
direct costs over the life of the contract. For contracts under which direct
costs are anticipated to exceed amounts to be funded over the life of the
contract (i.e., certain cost share arrangements), direct costs are reported as
research and development expenses with related reimbursements recorded as an
offset to those expenses.
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<PAGE>
On September 24, 1997, the Board of Directors 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. The Company's 1998 fiscal year extended from July
1, 1997 to June 28, 1998.
Results of Operations
Three Months Ended December 27, 1998 and December 28, 1997
Revenue. Revenue increased 39% from $10.1 million in the second quarter of
fiscal 1998 to $14.0 million in the second quarter of fiscal 1999. This increase
was attributable to an increase in product revenue of 57% from $8.2 million in
the second quarter of fiscal 1998 to $12.8 million in the second quarter of
fiscal 1999. This rise in product revenue was a result of the 128% increase in
sales of our LED products in the second quarter of fiscal 1999 compared to the
second quarter of fiscal 1998. Growth in LED volume was due in part to the
introduction of the new high brightness devices, but mostly was a result of
strong demand for the standard brightness product. This volume increase was
partly offset by a 35% decline in the average sales price of the standard blue
LED chip during this same period. We believe that in order to increase volume,
we must continue to lower average sales prices.
Revenue attributable to sales of SiC materials was 88% higher in the second
quarter of fiscal 1999 than in the same period of fiscal 1998 due to a
significant increase in sales to C3 for gemstone applications. During the second
quarter of fiscal 1998, C3 was in initial stages of operation; therefore, unit
sales were limited. Revenue from sales of SiC wafers increased 48% in the second
quarter of fiscal 1999 as compared to the second quarter of fiscal 1998, due to
quality improvements in wafers, along with the availability of the larger
two-inch wafer during fiscal 1999. During the second quarter of fiscal 1999,
sales from our displays business declined 95% over the prior year period as we
have chosen to de-emphasize this product line. Contract revenue received from
U.S. Government agencies declined 36% during the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998, as a significant contract that
funded optoelectronic research was exhausted in early fiscal 1999.
Gross Profit. Gross margin climbed to 47% of revenue during the second quarter
of fiscal 1999 as compared to 35% during the second quarter of fiscal 1998. This
increase is predominantly attributable to design and manufacturing improvements
that occurred over the past year resulting in significant reductions in cost.
With the introduction of the new conductive buffer LED technology in the fourth
quarter of fiscal 1998, we were able to significantly lower costs of production
due to the fewer manufacturing steps required with the new chip structure and
improved yield. During the second quarter of fiscal 1998, we began to fabricate
devices on a larger two-inch wafer; however, we were still in the process of
establishing this new manufacturing design and had not achieved production
efficiency. In addition, the larger two inch wafer had not been in full
production for much of the period; therefore, average die yields during the
second quarter of fiscal 1998 were significantly lower. Wafer costs for SiC
material sales also declined 21% during the second quarter of fiscal 1999 over
the comparative period due to more efficient processes and improved yield.
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<PAGE>
Research and Development. Research and development expenses increased 113% in
the second quarter of fiscal 1999 to $1.1 million from $0.5 million in the
second quarter of fiscal 1998. Much of this increase was caused by significantly
higher costs for the initial development of the new high brightness LED
products. We anticipate that internal funding for the development of new
products will continue to grow in future periods, while we believe that
government funding for our development projects will remain constant or
decrease.
Sales, General and Administrative. Sales, general and administrative expenses
increased 71% in the second quarter of fiscal 1999 to $1.5 million from $0.9
million in the second quarter of fiscal 1998 due primarily to two insurance
events that were recorded in the second quarter of fiscal 1998. As a result of
the dismissal of a securities class action lawsuit in November 1997, we were
reimbursed $0.2 million for costs incurred in connection with the lawsuit. Most
of these expenses were recorded in fiscal 1997. In addition, we received a $0.2
million reimbursement of medical expenses due to a negotiated cost cap in a
partially self-funded insured health plan. As a result of our increased
profitability during the second quarter of fiscal 1999 over the second quarter
of fiscal 1998, the profit sharing accrual (which is based on 5% of net income)
has also grown $0.1 million. We anticipate that total sales, general and
administrative costs will increase in connection with the growth of our
business; however, we believe that as a percentage of revenue they will remain
constant or possibly decline.
Other (Income) Expense. Other expenses have decreased 24% to $0.3 million during
the second quarter of fiscal 1999 from $0.4 million for the second quarter of
fiscal 1998. In the second quarter of fiscal 1999, we realized impairments to
leasehold costs as a result of management's decision to move equipment from our
leased facility to our new manufacturing site. This was offset somewhat by
investment income recognized on stock held in C3. In the second quarter of
fiscal 1998, we had written off certain fixed assets that were impaired in
value. These write-downs exceeded the fiscal 1999 leasehold write-downs offset
by the investment income.
Interest Income, Net. Interest income, net has decreased 88% to $0.02 million in
the second quarter of fiscal 1999 from $0.2 million in the second quarter of
fiscal 1998 due to interest expense incurred. In November 1997, we obtained a
term loan from NationsBank to fund the acquisition and construction of our new
manufacturing facility in Durham, North Carolina. The majority of the interest
incurred in the second quarter of fiscal 1999 has been expensed.
Income Tax Expense. Income tax expense for the second quarter of fiscal 1999 was
$0.9 million compared to $0.5 million in the second quarter of fiscal 1998. This
increase resulted from increased profitability during the second quarter of
fiscal 1999 over fiscal 1998.
Six Months Ended December 27, 1998 and December 28, 1997
Revenue. Revenue increased 30% from $20.3 million in the first six months of
fiscal 1998 to $26.3 million in the first six months of fiscal 1999. This
increase was attributable to an increase in product revenue of 44% from $16.4
million in the first six months of fiscal 1998 to $23.5 million in the first six
months of fiscal 1999. This rise in product revenue was a result of the 128%
increase in sales of our LED products in the first six months of fiscal 1999
compared to
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<PAGE>
the first six months of fiscal 1998. Growth in LED volume was due in part to the
introduction of the new high brightness devices, but mostly was a result of
strong demand for the standard brightness product. This volume increase was
partly offset by a 40% decline in the average sales price of the standard blue
LED chip during this same period. We believe that in order to increase volume,
we must continue to lower average sales prices.
Revenue attributable to sales of SiC material was 84% higher in the first six
months of fiscal 1999 than in the same period of fiscal 1998 due to a
significant increase in sales to C3 for gemstone applications. During the first
six months of fiscal 1998, C3 was in initial stages of operation; therefore,
unit sales were limited. Revenue from sales of SiC wafers increased 43% in the
first six months of fiscal 1999 as compared to the first six months of fiscal
1998, due to quality improvements in wafers, along with the availability of the
larger two-inch wafer during fiscal 1999. During the first six months of fiscal
1999, sales from our displays business declined 96% over the prior year period
as we have chosen to de-emphasize this product line. Contract revenue received
from U.S. Government agencies declined 29% during the first six months of fiscal
1999 compared to the first six months of fiscal 1998, as a significant contract
that funded optoelectronic research was exhausted in early fiscal 1999.
Gross Profit. Gross margin climbed to 47% of revenue during the first six months
of fiscal 1999 as compared to 33% during the first six months of fiscal 1998.
This increase is predominantly attributable to design and manufacturing
improvements that occurred over the past year resulting in significant
reductions in cost. With the introduction of the new conductive buffer LED
technology in the fourth quarter of fiscal 1998, we were able to significantly
lower costs of production due to fewer manufacturing steps required with the new
chip structure and improved yield. During the first six months of fiscal 1998,
we introduced a smaller LED chip size and, in December 1997, we began to
fabricate devices on a larger two-inch wafer. As of December 1997, we were still
in the process of establishing these new manufacturing designs and had not
achieved production efficiency. In addition, the larger two inch wafer had not
been in full production for much of the period; therefore, average die yields
during the first six months of fiscal 1998 were significantly lower. Wafer costs
for SiC material sales also declined 47% during the first six months of fiscal
1999 over the comparative period due to more efficient processes and improved
yield.
Research and Development. Research and development expenses increased 109% in
the first six months of fiscal 1999 to $1.9 million from $0.9 million in the
first six months of fiscal 1998. Much of this increase was caused by
significantly higher costs for the initial development of the new high
brightness LED product. We anticipate that internal funding for the development
of new products will continue to grow in future periods, while we believe that
government funding for our development projects will remain constant or
decrease.
Sales, General and Administrative. Sales, general and administrative expenses
increased 34% in the first six months of fiscal 1999 to $2.7 million from $2.0
million in the first six months of fiscal 1998 due primarily to two insurance
events that were recorded in the second quarter of fiscal 1998. As a result of
the dismissal of a securities class action lawsuit in November 1997,
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<PAGE>
we were reimbursed $0.2 million for costs incurred in connection with the
lawsuit. Most of these expenses were recorded in fiscal 1997. In addition, we
received a $0.2 million reimbursement of medical expenses due to a negotiated
cost cap in a partially self-funded insured health plan. As a result of our
increased profitability during the first six months of fiscal 1999 over the
first six months of fiscal 1998, the profit sharing accrual (which is based on
5% of net income) has also grown $0.2 million. We anticipate that total sales,
general and administrative costs will increase in connection with the growth of
our business; however, we believe that as a percentage of revenue they will
remain constant or possibly decline.
Other (Income) Expense. Other expenses have increased 45% to $0.6 million during
the first six months of fiscal 1999 from $0.4 million for the first six months
of fiscal 1998. In the first six months of fiscal 1999, we realized impairments
to leasehold costs as a result of management's decision to move equipment from
our leased facility to our new manufacturing site. This was offset somewhat by
income recognized under our equipment build-out agreement with C3. In 1998, we
sold to C3 equipment manufactured by us at cost plus a reasonable overhead
allocation. The overhead allocation was recorded as "Other income."
Interest Income, Net. Interest income, net has decreased 59% to $0.1 million in
the first six months of fiscal 1999 from $0.3 million in the first six months of
fiscal 1998 due to interest expense incurred. In November 1997, we obtained a
term loan from NationsBank to fund the acquisition and construction of our new
manufacturing facility in Durham, North Carolina. While much of the interest was
capitalized during the last half of fiscal 1998, the majority of the interest
incurred in the first six months of fiscal 1999 has been expensed.
Income Tax Expense. Income tax expense for the first six months of fiscal 1999
was $2.0 million compared to $1.1 million in the first six months of fiscal
1998. This increase resulted from increased profitability during the first six
months of fiscal 1999 over fiscal 1998. Our effective tax rate during the first
six months of fiscal 1999 was 28% compared to 29% in the first six months of
fiscal 1998.
Liquidity and Capital Resources
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of December 27, 1998, we had
working capital of approximately $24.4 million, including $13.7 million in cash
and cash equivalents and marketable securities.
Operating activities generated $4.2 million in cash during the first six months
of fiscal 1999. This was attributable primarily to net income of $5.2 million
and other non-cash expenses of $3.3 million. These amounts were partly offset by
an increase of $2.0 million in accounts receivable, a $0.9 million rise in
inventory and a $3.1 million decrease in accounts payable.
Most of the $10.4 million of cash used by investing activities in the first six
months of fiscal 1999 was related to expenditures associated with the continued
construction of our new
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<PAGE>
manufacturing facility in Durham, North Carolina. We also increased
manufacturing capacity by adding new equipment to support the epitaxial
deposition and clean room fabrication processes.
The $1.2 million of cash provided by financing activities in the first six
months of fiscal 1999 related primarily to the receipt of $1.8 million and $0.7
million in proceeds from the exercise of stock warrants and stock options from
the Company's employee stock option plan, respectively. In addition, $0.6
million was received from a Director as payment of profits from a short-swing
transaction in our securities and $1.3 million was funded as the final draw from
the long term debt arrangement with NationsBank. We currently have a $10.0
million loan outstanding from NationsBank. We expect to pay off this loan with
the proceeds from our secondary stock offering described in the registration
statement on Form S-3 filed by the Company with the Securities and Exchange
Commission on January 14, 1999. These cash proceeds were offset by a $3.2
million cash outlay for the repurchase of our common stock. This stock was
repurchased at an average price of $13.68. The stock warrants exercised were
distributed in connection with the Company's September 1995 private placement
and have an exercise price of $27.23. As of December 28, 1998, warrants remained
outstanding to purchase 234,575 shares; these warrants will expire in September
2000.
We are currently engaged in construction activities related to a new clean room
fabrication facility. We also intend to expand our facility for new crystal
growth and test and packaging areas in calendar 1999. These additions will allow
the Company to consolidate all LED and wafer manufacturing facilities to one
site with improved manufacturing capabilities. In addition, in order to keep
pace with anticipated growth in LED and wafer sales and provide expanded
facilities for our new microwave product line, the Company anticipates a second
phase of expansion to facilities and infrastructure to begin in early fiscal
2000. We anticipate total costs for these expenses to be between $15 and $18
million. Estimates for equipment costs related to this expansion total between
$15 and $17 million. We plan to fund these capital projects from the proceeds of
our secondary stock offering. In addition, we are in the process of purchasing a
79-acre site close to our present facility for $1.5 million. We anticipate that
internally generated cash plus the proceeds of the secondary stock offering will
be sufficient to fund our capital requirements for the next 12 months.
Impact of the Year 2000
State of Readiness
We have adopted a Year 2000 compliance plan and formed a team of information
technology professionals assigned the task of identifying and resolving any Year
2000 issues that may affect our business. Our compliance plan has four phases:
inventory, assessment, remediation and testing. We have completed an inventory
for all of our computer systems, computer related equipment and equipment with
embedded processors, as well as our products, and are in the process of
assessing those systems. We have completed this assessment with respect to
approximately 80% of our systems and expect to complete our assessment of the
remaining systems by February 1999. In addition, we have determined that our
products are of a nature that they are not subject to failure as a result of
Year 2000 issues. Although we cannot control
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<PAGE>
whether and how third parties will address the Year 2000 issue, we also are in
the process of contacting critical vendors and suppliers to assess their ability
to ensure smooth delivery of products without disruptions caused by Year 2000
problems. In the course of our assessment, we have not yet identified any Year
2000 issues that would affect our ability to do business; however, our
assessment is not complete, and there can be no assurance that there are no Year
2000 issues that may affect us. Once we complete the assessment phase, we will
prioritize and implement necessary repairs or replacements to equipment and
software to achieve Year 2000 compliance. We expect to complete this phase by
March 1999. The final phase will consist of a testing program for all repairs.
We anticipate that all testing will be completed by April 1999.
Costs
We have not prepared estimates of costs to remediate Year 2000 problems;
however, based on currently available information, including the results of our
assessment to date and our replacement schedule for equipment, we do not believe
that the costs associated with Year 2000 compliance will have a material adverse
effect on our business, results of operations or financial condition.
Year 2000 Risks
Although we believe that our Year 2000 compliance plan is adequate to address
Year 2000 concerns, there can be no assurance that we will not experience
negative consequences as a result of undetected defects or the non-compliance of
third parties with whom we interact. Furthermore, there can be no assurance that
there will not be a delay in, or increased costs associated with, the
implementation of corrections as the Year 2000 compliance plan is performed,
such as unexpected costs of correcting equipment that has not yet been fully
evaluated. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
We believe that our greatest risk stems from the potential non-compliance of our
suppliers. We depend on a limited number of suppliers for certain raw materials,
components and equipment necessary for the manufacture of our products.
Accordingly, if those suppliers are unable to process or fill our orders or
otherwise interact with us because of Year 2000 problems, we could experience
material adverse effects to our business. We are in the process of assessing the
Year 2000 status of our suppliers and are investigating alternative sources of
supply. As a consequence of our dependence on limited sources of supply, we
generally maintain a significant inventory of certain critical materials and
require suppliers to keep certain amounts of inventory available for us;
however, there can be no assurance that we will have enough materials on hand to
continue production without interruption in the event one or more of our
suppliers experiences Year 2000 problems that affect its (their) ability to
supply us. Any supply chain disruptions would affect our ability to manufacture
our products which could result in material adverse consequences to our
business, results of operations and financial condition.
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<PAGE>
Contingencies
We have not yet developed a contingency plan to address what would happen in the
event we are unable to address the Year 2000 issue. The contingency plan is
expected to be completed after the inquiry of vendors and customers is
completed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes in market risk have been identified during the most recent
quarter.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders convened on November 3, 1998. The
following proposals were introduced and voted upon:
PROPOSAL NO. 1 -- Election of Directors
Votes Votes
Name For Withheld
------------------- ----------- ------------
F. Neal Hunter 11,740,086 203,680
Calvin H. Carter, Jr. 11,870,286 73,480
John W. Palmour 11,869,286 74,480
Walter L. Robb 11,853,486 90,280
Michael W. Haley 11,738,686 205,080
Dolph W. von Arx 11,722,686 221,080
James E. Dykes 11,715,486 228,280
PROPOSAL NO.2 -- Amendment and Restatement of Articles of Incorporation
FOR 7,543,630
AGAINST 595,781
ABSTAINED 41,635
BROKER NON-VOTES 3,762,720
PROPOSAL NO.3 -- To ratify the selection of Ernst & Young LLP as auditors for
the fiscal year ending June 27, 1999
FOR 11,613,306
AGAINST 13,091
ABSTAINED 28,369
BROKER NON-VOTES 289,000
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<PAGE>
The matters listed above are described in detail in the Company's definitive
proxy statement dated October 1, 1998, for the Annual Meeting of Shareholders
held on November 3, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------------------------------------------------------------
10.1 Amended and Restated Equity Compensation Plan effective
December 7, 1998
10.16 Fourth Amendment to Purchase Agreement between the Company and
Siemens AG dated December 16, 1998 (1)
10.17 Second Amended and Restated Indemnity Agreement between the
Company and F. Neal Hunter dated September 25, 1998
27 Financial Data Schedule
99.1 Risk Factors
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended December 27, 1998.
- ----------------------
(1)Confidential treatment of portions of this document is being requested
pursuant to Rule 24b-2 of the Securities and Exchange Commission.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: January 28, 1999 /s/ Cynthia B. Merrell
----------------------------------------
Cynthia B. Merrell
Chief Financial Officer and Treasurer
(Authorized Officer and Chief Financial
and Accounting Officer)
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EXHIBIT 10.1
CREE RESEARCH, INC.
AMENDED AND RESTATED
EQUITY COMPENSATION PLAN
(formerly the Cree Research, Inc.
Employee Stock Option Plan)
ARTICLE I - GENERAL PROVISIONS
1.1 The Plan is designed, for the benefit of the Company, to attract and
retain for the Company personnel of exceptional ability; to motivate such
personnel through added incentives to make a maximum contribution to the
Company; to develop and maintain a highly competent management team; and
to be competitive with other companies with respect to executive
compensation.
1.2 Awards under the Plan may be made to Participants in the form of (i)
Incentive Stock Options; (ii) Nonqualified Stock Options; (iii) Restricted
Stock; and (iv) Other Stock-Based Awards and such other forms of
equity-based compensation as may be provided and are permissible under
this Plan and the law.
1.3 The Cree Research, Inc. Employee Stock Option Plan was initially adopted
effective August 2, 1989, was amended and restated in the form of the Plan
effective as of July 1, 1995 (the "Effective Date"), was again amended and
restated effective September 17, 1996, and was again amended effective
September 1, 1997. This amendment and restatement of the Plan shall be
effective as of December 7, 1998.
ARTICLE II - DEFINITIONS
Except where the context otherwise indicates, the following definitions
apply:
2.1 "Act" means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended. All citations to sections of the Act or rules
thereunder are to such sections or rules as they may from time to time be
amended or renumbered.
2.2 "Agreement" means the written agreement evidencing each Award granted to a
Participant under the Plan.
2.3 "Award" means an award granted to a Participant in accordance with the
provisions of the Plan, including, but not limited to, a Stock Option,
Restricted Stock, Other Stock-Based Awards, or any combination of the
foregoing.
2.4 "Board" means the Board of Directors of Cree Research, Inc.
2.5 "Change in Control" means the occurrence of an event defined in Section
9.1 of the Plan.
<PAGE>
2.6 "Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.
2.7 "Committee" means the Compensation Committee of the Board or such other
committee consisting of two or more members of the Board as may be
appointed by the Board to administer this Plan pursuant to Article III.
Committee members may also be appointed for such limited purposes as may
be provided by the Board.
2.8 "Company" means Cree Research, Inc., a North Carolina corporation, and its
successors and assigns. The term "Company" shall include any corporation
which is a member of a controlled group of corporations (as defined in
Section 414(b) of the Code, as modified by Section 415(h) of the Code)
which includes the Company; any trade or business (whether or not
incorporated) which is under common control (as defined in Section 414(c)
of the Code, as modified by Section 415(h) of the Code) with the Company;
any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Section 414(m) of the Code) which
includes the Company; and any other entity required to be aggregated with
the Company pursuant to regulations under Section 414(o) of the Code. With
respect to all purposes of the Plan, including, but not limited to, the
establishment, amendment, termination, operation and administration of the
Plan, Cree Research, Inc. shall be authorized to act on behalf of all
other entities included within the definition of "Company".
2.9 "Disability" means (I) with respect to a Participant who is eligible to
participate in the Company's program of long-term disability insurance, a
condition with respect to which the Participant is entitled to commence
benefits under such program of long-term disability insurance, and (ii)
with respect to any Participant (including a Participant who is eligible
to participate in the Company's program of long-term disability
insurance), a disability as determined under procedures established by the
Committee or in any Award.
2.10 "Discount Stock Options" means Nonqualified Stock Options which provide
for an exercise price of less than the Fair Market Value of the Stock at
the date of the Award.
2.11 "Early Retirement" shall mean retirement from active employment with the
Company, with the express consent of the Committee, pursuant to early
retirement provisions established by the Committee or in any Award.
2.12 "Eligible Participant" means any employee of the Company, as shall be
determined by the Committee, as well as any other person, including
directors, whose participation the Committee determines is in the best
interest of the Company, subject to limitations as may be provided by the
Code, the Act or the Committee.
2.13 "Fair Market Value" means, with respect to any given day, the following:
(i) If the Stock is not listed for trading on a national securities
exchange but is listed on the NASDAQ National Market System or the
NASDAQ Small-Cap Market System, then the Fair Market Value shall be
the last sale price of the Stock on the date of reference if a minimum
<PAGE>
of 100 shares are traded on such date or, if less than 100 shares are
traded on such date, then the last sale price of the Stock as of the
last date on which at least 100 shares were traded, in either case as
reported by the NASDAQ National Market System or the NASDAQ Small-Cap
Market System, as the case may be.
(ii) If the Stock is listed for trading on any national securities
exchange, then the Fair Market Value shall be the closing price of the
Stock on such exchange on the date of reference if a minimum of 100
shares are traded on such date or, if less than 100 shares are traded
on such date, then the closing price of the Stock on such exchange as
of the last date on which at least 100 shares were traded.
The Committee may establish an alternative method of determining Fair
Market Value.
2.14 "Incentive Stock Option" means a Stock Option granted under Article IV of
the Plan, and as defined in Section 422 of the Code.
2.15 "Nonqualified Stock Option" means a Stock Option granted under Article V
of the Plan.
2.16 "Normal Retirement" shall mean retirement from active employment with the
Company on or after age 65, or pursuant to such other requirements as may
be established by the Committee or in any Award.
2.17 "Option Grant Date" means, as to any Stock Option, the latest of:
(a) the date on which the Committee takes action to grant the Stock Option
to the Participant;
(b) the date the Participant receiving the Stock Option becomes an
employee of the Company, to the extent employment status is a
condition of the grant or a requirement of the Code or the Act; or
(c) such other date (later than the dates described in (a) and (b)
above) as the Committee may designate.
2.18 "Participant" means an Eligible Participant to whom an Award has been
granted and who has entered into an Agreement evidencing the Award.
2.19 "Plan" means the Cree Research, Inc. Equity Compensation Plan as set forth
herein, and, as further amended or amended and restated from time to time.
2.20 "Restricted Stock" means an Award of Stock under Article VII of the Plan,
which Stock is issued with the restriction that the holder may not sell,
transfer, pledge, or assign such Stock and with such other restrictions as
the Committee, in its sole discretion, may impose, including without
limitation, any restriction on the right to vote such Stock, and the right
to receive any cash dividends, which restrictions may lapse separately or
in combination at such time or times, in installments or otherwise, as the
Committee may deem appropriate.
<PAGE>
2.21 "Restriction Period" means the period commencing on the date an Award of
Restricted Stock is granted and ending on such date as the Committee shall
determine.
2.22 "Retirement" shall mean Early Retirement or Normal Retirement.
2.23 "Stock" means shares of the Common Stock of Cree Research, Inc., par value
$.005 per share, as may be adjusted pursuant to the provisions of Section
3.9.
2.24 "Stock Option" means an Award under Article IV or V of the Plan of an
option to purchase Stock. A Stock Option may be either an Incentive Stock
Option or a Nonqualified Stock Option.
2.25 "Termination of Employment" means the discontinuance of employment of a
Participant with the Company for any reason. The determination of whether
a Participant has discontinued employment shall be made by the Committee
in its discretion. In determining whether a Termination of Employment has
occurred, the Committee may provide that service as a consultant or
service with a business enterprise in which the Company has a significant
ownership interest shall be treated as employment with the Company. The
Committee shall have the discretion, exercisable either at the time the
Award is granted or at the time the Participant terminates employment, to
establish as a provision applicable to the exercise of one or more Awards
that during the limited period of exercisability following Termination of
Employment, the Award may be exercised not only with respect to the number
of shares of Stock for which it is exercisable at the time of the
Termination of Employment but also with respect to one or more subsequent
installments for which the Award would have become exercisable had the
Termination of Employment not occurred.
ARTICLE III - ADMINISTRATION
3.1 This Plan shall be administered by the Committee. The Committee, in its
discretion, may delegate to one or more of its members such of its powers
as it deems appropriate. The Committee also may limit the power of any
member to the extent necessary to comply with any law. Members of the
Committee shall be appointed originally, and as vacancies occur, by the
Board, to serve at the pleasure of the Board. The Board may serve as the
Committee, if by the terms of the Plan all Board members are otherwise
eligible to serve on the Committee.
3.2 The Committee shall meet at such times and places as it determines. A
majority of its members shall constitute a quorum, and the decision of a
majority of those present at any meeting at which a quorum is present
shall constitute the decision of the Committee. A memorandum signed by all
of its members shall constitute the decision of the Committee without
necessity, in such event, for holding an actual meeting.
3.3 The Committee shall have the exclusive right to interpret, construe and
administer the Plan, to select the persons who are eligible to receive an
Award, and to act in all matters pertaining to the granting of an Award
and the contents of the Agreement evidencing the Award, including without
limitation, the determination of the number of Stock Options, shares of
Stock subject to an Award, and the form, terms, conditions and duration of
each Award, and any amendment thereof consistent with the provisions of
the Plan. All acts, determinations and decisions of the Committee made or
<PAGE>
taken pursuant to grants of authority under the Plan or with respect to
any questions arising in connection with the administration and
interpretation of the Plan, including the severability of any and all of
the provisions thereof, shall be conclusive, final and binding upon all
Participants, Eligible Participants and their beneficiaries.
3.4 The Committee may adopt such rules, regulations and procedures of general
application for the administration of this Plan, as it deems appropriate.
3.5 The number of shares of Stock which are available for Award under the Plan
shall be Two Million Five Hundred Forty Thousand (2,540,000) shares or any
larger number of shares of Stock that, subsequent to the date this Plan is
adopted, may be authorized for issuance by the Company. Such shares of
Stock shall be made available from authorized and unissued shares. If, for
any reason, any shares of Stock awarded or subject to purchase under the
Plan are not delivered or purchased, or are reacquired by the Company, for
reasons including, but not limited to, a forfeiture of Restricted Stock or
termination, expiration or cancellation of a Stock Option, or any other
termination of an Award without payment being made in the form of Stock,
whether or not Restricted Stock, such shares of Stock shall not be charged
against the aggregate number of shares of Stock available for Awards under
the Plan, and may again be available for Award under the Plan.
3.6 Each Award granted under the Plan shall be evidenced by a written
Agreement. Each Agreement shall be subject to and incorporate, by
reference or otherwise, the applicable terms and conditions of the Plan,
and any other terms and conditions, not inconsistent with the Plan, as may
be imposed by the Committee.
3.7 The Company shall not be required to issue or deliver any certificates for
shares of Stock prior to:
(a) the listing of such shares on any stock exchange on which the Stock
may then be listed; and
(b) the completion of any registration or qualification of such shares of
Stock under any federal or state law, or any ruling or regulation of
any government body which the Company shall, in its discretion,
determine to be necessary or advisable.
3.8 All certificates for shares of Stock delivered under the Plan shall also
be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange
upon which the Stock is then listed and any applicable federal or state
laws, and the Committee may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such restrictions. In
making such determination, the Committee may rely upon an opinion of
counsel for the Company.
3.9 Subject to the restrictions on Restricted Stock, as provided in Article
VII of the Plan and in the Restricted Stock Agreement, each Participant
who receives an Award of Restricted Stock shall have all of the rights of
a shareholder with respect to such shares of Stock, including the right to
vote the shares to the extent, if any, such shares possess voting rights
<PAGE>
and receive dividends and other distributions. Except as provided
otherwise in the Plan or in an Agreement, no Participant awarded a Stock
Option shall have any right as a shareholder with respect to any shares of
Stock covered by his or her Stock Option prior to the date of issuance to
him or her of a certificate or certificates for such shares of Stock.
3.10 If any reorganization, recapitalization, reclassification, stock split-up,
stock dividend, or consolidation of shares of Stock, merger or
consolidation of the Company or sale or other disposition by the Company
of all or a portion of its assets, any other change in the Company's
corporate structure, or any distribution to shareholders other than a cash
dividend results in the outstanding shares of Stock, or any securities
exchanged therefor or received in their place, being exchanged for a
different number or class of shares of Stock or other securities of the
Company, or for shares of Stock or other securities of any other
corporation; or new, different or additional shares or other securities of
the Company or of any other corporation being received by the holders of
outstanding shares of Stock, then equitable adjustments shall be made by
the Committee in:
(a) the limitation on the aggregate number of shares of Stock that may
be awarded as set forth in Section 3.5 of the Plan;
(b) the number and class of Stock that may be subject to an Award, and
which have not been issued or transferred under an outstanding
Award;
(c) the purchase price to be paid per share of Stock under outstanding
Stock Options; and
(d) the terms, conditions or restrictions of any Award and Agreement,
including the price payable for the acquisition of Stock; provided,
however, that all adjustments made as the result of the foregoing in
respect of each Incentive Stock Option shall be made so that such
Stock Option shall continue to be an Incentive Stock Option, as
defined in Section 422 of the Code.
3.11 In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee
shall be indemnified by the Company against reasonable expenses, including
attorney's fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any
appeal therein, to which they or any of them may be a party by reason of
any action taken or failure to act under or in connection with the Plan or
any Award granted thereunder, and against all amounts paid by them in
settlement thereof, provided such settlement is approved by independent
legal counsel selected by the Company, or paid by them in satisfaction of
a judgment or settlement in any such action, suit or proceeding, except as
to matters as to which the Committee member has been negligent or engaged
in misconduct in the performance of his duties; provided, that within 60
days after institution of any such action, suit or proceeding, a Committee
member shall in writing offer the Company the opportunity, at its own
expense, to handle and defend the same.
3.12 The Committee may require each person purchasing shares of Stock pursuant
to a Stock Option or other Award under the Plan to represent to and agree
with the Company in writing that he is acquiring the shares of Stock
without a view to distribution thereof and/or that he has met such other
requirements as the Committee determines may be applicable to such
<PAGE>
purchase. The certificates for such shares of Stock may include any legend
which the Committee deems appropriate to reflect any restrictions on
transfer.
3.13 The Committee shall be authorized to make adjustments in performance based
criteria or in the terms and conditions of other Awards in recognition of
unusual or nonrecurring events affecting the Company or its financial
statements or changes in applicable laws, regulations or accounting
principles. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Agreement in the manner and
to the extent it shall deem desirable to carry it into effect. In the
event the Company shall assume outstanding employee benefit awards or the
right or obligation to make future such awards in connection with the
acquisition of another corporation or business entity, the Committee may,
in its discretion, make such adjustments in the terms of Awards under the
Plan as it shall deem appropriate.
3.14 The Committee shall have full power and authority to determine whether, to
what extent and under what circumstances, any Award shall be canceled or
suspended if (a) the Participant, without the consent of the Committee,
while employed by the Company or after termination of such employment,
becomes associated with, employed by, renders services to, or owns any
interest in, other than any insubstantial interest, as determined by the
Committee, any business that is in competition with the Company as
determined by the Committee in its discretion; or (b) is terminated for
cause as determined by the Committee in its discretion.
ARTICLE IV - INCENTIVE STOCK OPTIONS
4.1 Each provision of this Article IV and of each Incentive Stock Option
granted hereunder shall be construed in accordance with the provisions of
Section 422 of the Code, and any provision hereof that cannot be so
construed shall be disregarded.
4.2 Incentive Stock Options shall be granted only to Eligible Participants who
are in the active employment of the Company, each of whom may be granted
one or more such Incentive Stock Options for a reason related to his
employment at such time or times determined by the Committee following the
Effective Date through the date which is ten (10) years following the
Effective Date, subject to the following conditions:
(a) The Incentive Stock Option price per share of Stock shall be set in
the Agreement, but shall not be less than 100% of the Fair Market
Value of the Stock on the Option Grant Date. If the Eligible
Participant owns more than 10% of the outstanding Stock (as determined
pursuant to Section 424(d) of the Code) on the Option Grant Date, the
Incentive Stock Option price per share shall not be less than 110% of
the Fair Market Value of the Stock on the Option Grant Date.
(b) Subject to any conditions on exercise set forth in the corresponding
Agreement, the Incentive Stock Option may be exercised in whole or in
part from time to time within ten (10) years from the Option Grant
Date (five (5) years if the Eligible Participant owns more than 10% of
the Stock on the Option Grant Date), or such shorter period as may be
specified by the Committee in the Award; provided, that in any event,
the Incentive Stock Option shall lapse and cease to be exercisable
upon a Termination of Employment or within such period following a
<PAGE>
Termination of Employment as shall have been specified in the
Incentive Stock Option Agreement, which period shall not exceed three
months unless:
(i) employment shall have terminated as a result of death or
Disability, in which event such period shall not exceed one
year after the date of death or Disability; or
(ii) death shall have occurred following a Termination of
Employment and while the Incentive Stock Option was still
exercisable, in which event such period shall not exceed one
year after the date of death;
provided, further, that such period following a Termination of
Employment shall in no event extend the original exercise period of
the Incentive Stock Option.
(c) To the extent the aggregate Fair Market Value, determined as of the
Option Grant Date, of the shares of Stock with respect to which
Incentive Stock Options (determined without regard to this subsection)
are first exercisable during any calendar year by any Eligible
Participant exceeds $100,000, such options shall be treated as
Nonqualified Stock Options granted under Article V.
(d) The Committee may adopt any other terms and conditions which it
determines should be imposed for the Incentive Stock Option to qualify
under Section 422 of the Code, as well as any other terms and
conditions not inconsistent with this Article IV as determined by the
Committee. If, for any reason, an Incentive Stock Option fails to meet
the requirements of Section 422 of the Code, the Option shall
automatically be deemed a Nonqualified Stock Option granted under
Article V herein.
(e) The maximum number of shares of Stock subject to Incentive Stock
Option Awards hereunder shall be the total number of shares authorized
for issuance under the Plan pursuant to Section 3.5.
4.3 The Committee may at any time offer to buy out for a payment in cash,
Stock or Restricted Stock an Incentive Stock Option previously granted,
based on such terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer is made.
4.4 If the Incentive Stock Option Agreement so provides, the Committee may
require that all or part of the shares of Stock to be issued upon the
exercise of an Incentive Stock Option shall take the form of Restricted
Stock, which shall be valued on the date of exercise, as determined by the
Committee, on the basis of the Fair Market Value of such Restricted Stock
determined without regard to the deferral limitations and/or forfeiture
restrictions involved.
<PAGE>
ARTICLE V - NONQUALIFIED STOCK OPTIONS
5.1 One or more Stock Options may be granted as Nonqualified Stock Options to
Eligible Participants to purchase shares of Stock at such time or times
determined by the Committee, following the Effective Date, subject to the
terms and conditions set forth in this Article V.
5.2 The Nonqualified Stock Option price per share of Stock shall be
established in the Agreement and may be less than or greater than 100%
of the Fair Market Value at the time of the grant.
5.3 The Nonqualified Stock Option may be exercised in full or in part from
time to time within such period as may be specified by the Committee or in
the Agreement; provided, that, in any event, the Nonqualified Stock Option
shall lapse and cease to be exercisable upon a Termination of Employment
or within such period following a Termination of Employment as shall have
been specified in the Nonqualified Stock Option Agreement, which period
shall not exceed three months unless:
(i) employment shall have terminated as a result of death or Disability,
in which event such period shall not exceed one year after the date
of death or Disability; or
(ii) death shall have occurred following a Termination of Employment and
while the Nonqualified Stock Option was still exercisable, in which
event such period shall not exceed one year after the date of death;
provided, further, that such period following a Termination of Employment
shall in no event extend the original exercise period of the Nonqualified
Stock Option.
5.4 The Nonqualified Stock Option Agreement may include any other terms and
conditions not inconsistent with this Article V or in Article VI, as
determined by the Committee.
ARTICLE VI - INCIDENTS OF STOCK OPTIONS
6.1 Each Stock Option shall be granted subject to such terms and conditions,
if any, not inconsistent with this Plan, as shall be determined by the
Committee, including any provisions as to continued employment as
consideration for the grant or exercise of such Stock Option and any
provisions which may be advisable to comply with applicable laws,
regulations or rulings of any governmental authority.
6.2 Except as provided below, a Stock Option shall be exercisable during the
lifetime of the Participant only by him or his guardian or legal
representative and shall not be transferable by the Participant other than
(i) by will or by the laws of descent and distribution, or (ii) to the
extent otherwise allowed by applicable law, pursuant to a qualified
domestic relations order as defined by the Code and the Employee
Retirement Income Security Act of 1974, as amended, or the rules
thereunder. However, the Committee may, in its sole discretion, either
pursuant to an Agreement or otherwise, permit a Participant to transfer a
Nonqualified Stock Option by gift or other donative transfer without
payment of consideration, conditioned upon and subject to compliance with
all applicable law (including, but not limited to, securities law).
<PAGE>
6.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid
for in such amounts, at such times and upon such terms as shall be
determined by the Committee, subject to limitations set forth in the Stock
Option Agreement. Without limiting the foregoing, the Committee may
establish payment terms for the exercise of Stock Options which permit the
Participant to deliver shares of Stock, or other evidence of ownership of
Stock satisfactory to the Company, with a Fair Market Value equal to the
Stock Option price as payment.
6.4 No cash dividends shall be paid on shares of Stock subject to unexercised
Stock Options. The Committee may provide, however, that a Participant to
whom a Stock Option has been granted which is exercisable in whole or in
part at a future time for shares of Stock shall be entitled to receive an
amount per share equal in value to the cash dividends, if any, paid per
share on issued and outstanding Stock, as of the dividend record dates
occurring during the period between the date of the grant and the time
each such share of Stock is delivered pursuant to exercise of such Stock
Option. Such amounts (herein called "dividend equivalents") may, in the
discretion of the Committee, be:
(a) paid in cash or Stock either from time to time prior to, or at the
time of the delivery of, such Stock, or upon expiration of the Stock
Option if it shall not have been fully exercised; or
(b) converted into contingently credited shares of Stock, with respect
to which dividend equivalents may accrue, in such manner, at such
value, and deliverable at such time or times, as may be determined
by the Committee.
Such Stock, whether delivered or contingently credited, shall be charged
against the limitations set forth in Section 3.5.
6.5 The Committee, in its sole discretion, may authorize payment of interest
equivalents on dividend equivalents which are payable in cash at a future
time.
6.6 In the event of Disability or death, the Committee, with the consent of
the Participant or his legal representative, may authorize payment, in
cash or in Stock, or partly in cash and partly in Stock, as the Committee
may direct, of an amount equal to the difference at the time between the
Fair Market Value of the Stock subject to a Stock Option and the option
price in consideration of the surrender of the Stock Option.
6.7 If a Participant is required to pay to the Company an amount with respect
to income and employment tax withholding obligations in connection with
exercise of a Nonqualified Stock Option, and/or with respect to certain
dispositions of Stock acquired upon the exercise of an Incentive Stock
Option, the Committee, in its discretion and subject to such rules as it
may adopt, may permit the Participant to satisfy the obligation, in whole
or in part, by making an irrevocable election that a portion of the total
Fair Market Value of the shares of Stock subject to the Nonqualified Stock
Option and/or with respect to certain dispositions of Stock acquired upon
the exercise of an Incentive Stock Option, be paid in the form of cash in
lieu of the issuance of Stock and that such cash payment be applied to the
satisfaction of the withholding obligations. The amount to be withheld
shall not exceed the statutory minimum federal and state income and
employment tax liability arising from the Stock Option exercise
transaction.
<PAGE>
6.8 The Committee may permit the voluntary surrender of all or a portion of
any Stock Option granted under the Plan to be conditioned upon the
granting to the Participant of a new Stock Option for the same or a
different number of shares of Stock as the Stock Option surrendered, or
may require such surrender as a condition precedent to a grant of a new
Stock Option to such Participant. Subject to the provisions of the Plan,
such new Stock Option shall be exercisable at the such price, during such
period and on such other terms and conditions as are specified by the
Committee at the time the new Stock Option is granted. Upon surrender, the
Stock Options surrendered shall be canceled and the shares of Stock
previously subject to them shall be available for the grant of other Stock
Options.
ARTICLE VII - RESTRICTED STOCK
7.1 Restricted Stock Awards may be made to certain Participants as an
incentive for the performance of future services that will contribute
materially to the successful operation of the Company. Awards of
Restricted Stock may be made either alone, in addition to or in tandem
with other Awards granted under the Plan and/or cash payments made outside
of the Plan.
7.2 With respect to Awards of Restricted Stock, the Committee shall:
(a) determine the purchase price, if any, to be paid for such Restricted
Stock, which may be equal to or less than par value and may be zero,
subject to such minimum consideration as may be required by
applicable law;
(b) determine the length of the Restriction Period;
(c) determine any restrictions applicable to the Restricted Stock such
as service or performance, other than those set forth in this
Article VII;
(d) determine if the restrictions shall lapse as to all shares of
Restricted Stock at the end of the Restriction Period or as to a
portion of the shares of Restricted Stock in installments during the
Restriction Period; and
(e) determine if dividends and other distributions on the Restricted
Stock are to be paid currently to the Participant or paid to the
Company for the account of the Participant.
7.3 Awards of Restricted Stock must be accepted within a period of 60 days, or
such shorter period as the Committee may specify, by executing a
Restricted Stock Agreement and paying whatever price, if any, is required.
The prospective recipient of a Restricted Stock Award shall not have any
rights with respect to such Award, unless such recipient has executed a
Restricted Stock Agreement and has delivered a fully executed copy thereof
to the Committee, and has otherwise complied with the applicable terms and
conditions of such Award.
7.4 Except when the Committee determines otherwise, or as otherwise provided
in the Restricted Stock Agreement, if a Participant terminates employment
with the Company for any reason before the expiration of the Restriction
<PAGE>
Period, all shares of Restricted Stock still subject to restriction shall
be forfeited by the Participant and shall be reacquired by the Company.
7.5 Except as otherwise provided in this Article VII or in the corresponding
Agreement, no shares of Restricted Stock received by a Participant shall
be sold, exchanged, transferred, pledged, hypothecated or otherwise
disposed of during the Restriction Period.
7.6 To the extent not otherwise provided in a Restricted Stock Agreement, in
cases of death, Disability or Retirement or in cases of special
circumstances, the committee, if it finds that a waiver would be
appropriate, may elect to waive any or all remaining restrictions with
respect to such Participant's Restricted Stock.
7.7 In the event of hardship or other special circumstances of a Participant
whose employment with the Company is involuntarily terminated, the
Committee may waive in whole or in part any or all remaining restrictions
with respect to any or all of the Participant's Restricted Stock, based on
such factors and criteria as the Committee may deem appropriate.
7.8 The certificates representing shares of Restricted Stock may either:
(a) be held in custody by the Company until the Restriction Period
expires or until restrictions thereon otherwise lapse, and the
Participant shall deliver to the Company a stock power endorsed in
blank relating to the Restricted Stock; and/or
(b) be issued to the Participant and registered in the name of the
Participant, and shall bear an appropriate restrictive legend and
shall be subject to appropriate stop-transfer orders.
7.9 Except as provided in this Article VII, a Participant receiving a
Restricted Stock Award shall have, with respect to the shares of
Restricted Stock covered by any Award, all of the rights of a shareholder
of the Company, including the right to vote the shares to the extent, if
any, such shares possess voting rights and the right to receive any
dividends; provided, however, the Committee may require that any dividends
on such shares of Restricted Stock shall be automatically deferred and
reinvested in additional Restricted Stock subject to the same restrictions
as the underlying Award, or may require that dividends and other
distributions on Restricted Stock shall be paid to the Company for the
account of the Participant. The Committee shall determine whether interest
shall be paid on such amounts, the rate of any such interest, and the
other terms applicable to such amounts.
7.10 If and when the Restriction Period expires without a prior forfeiture of
the Restricted Stock subject to such Restriction Period, unrestricted
certificates for such shares shall be delivered to the Participant;
provided, however, that the Committee may cause such legend or legends to
be placed on any such certificates as it may deem advisable under the
rules, regulations and other requirements of the Securities and Exchange
Commission and any applicable federal or state law.
7.11 In order to better ensure that Award payments actually reflect the
performance of the Company and the service of the Participant, the
Committee may provide, in its sole discretion, for a tandem
performance-based or other Award designed to guarantee a minimum value,
<PAGE>
payable in cash or Stock to the recipient of a Restricted Stock Award,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
ARTICLE VIII - OTHER STOCK-BASED AWARDS
8.1 Other awards that are valued in whole or in part by reference to, or are
otherwise based on, Stock ("Other Stock-Based Awards"), including without
limitation, convertible preferred stock, convertible debentures,
exchangeable securities, phantom stock and Stock awards or options valued
by reference to book value or performance, may be granted either alone or
in addition to or in tandem with Stock Options or Restricted Stock granted
under the Plan and/or cash awards made outside of the Plan.
Subject to the provisions of the Plan, the Committee shall have authority
to determine the Eligible Participants to whom and the time or times at
which such Awards shall be made, the number of shares of Stock subject to
such Awards, and all other conditions of the Awards. The Committee also
may provide for the grant of shares of Stock upon the completion of a
specified Performance Period.
The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
8.2 Other Stock-Based Awards made pursuant to this Article VIII shall be
subject to the following terms and conditions:
(a) Subject to the provisions of this Plan and the Agreement, shares of
Stock subject to Awards made under this Article VIII may not be sold,
assigned, transferred, pledged or otherwise encumbered prior to the
date on which the shares are issued, or, if later, the date on which
any applicable restriction, performance or deferral period lapses.
(b) Subject to the provisions of this Plan and the Agreement and unless
otherwise determined by the Committee at the time of the Award, the
recipient of an Award under this Article VIII shall be entitled to
receive, currently or on a deferred basis, interest or dividends or
interest or dividend equivalents with respect to the number of shares
covered by the Award, as determined at the time of the Award by the
Committee, in its sole discretion, and the Committee may provide that
such amounts, if any, shall be deemed to have been reinvested in
additional Stock or otherwise reinvested.
(c) Any Award under this Article VIII and any Stock covered by any such
Award shall vest or be forfeited to the extent so provided in the
Agreement, as determined by the Committee, in its sole discretion.
(d) Upon the Participant's Retirement, Disability or death, or in cases of
special circumstances, the Committee may, in its sole discretion,
waive in whole or in part any or all of the remaining limitations
imposed hereunder, if any, with respect to any or all of an Award
under this Article VIII.
<PAGE>
(e) Each Award under this Article VIII shall be confirmed by, and subject
to the terms of, an Agreement.
(f) Stock, including securities convertible into Stock, issued on a
bonus basis under this Article VIII may be issued for no cash
consideration.
8.3 Other Stock-Based Awards may include a phantom stock Award, which is
subject to the following terms and conditions:
(a) The Committee shall select the Eligible Participants who may receive
phantom stock Awards. The Eligible Participant shall be awarded a
phantom stock unit, which shall be the equivalent to a share of Stock.
(b) Under an Award of phantom stock, payment shall be made on the dates or
dates as specified by the Committee or as stated in the Agreement and
phantom stock Awards may be settled in cash, Stock, or some
combination thereof as determined by the Committee in its sole
discretion.
(c) The Committee shall determine such other terms and conditions of each
Award as it deems necessary in its sole discretion.
ARTICLE IX - CHANGE IN CONTROL
9.1 A "Change in Control" shall be deemed to have occurred upon the happening
of any of the following events:
(a) Any "Person" as defined in Section 3(a)(9) of the Act, including a
"group" (as that term is used in Sections 13(d)(3) and 14(d)(2) of the
Act), but excluding the Company (as defined in Section 2.8 of this
Plan) and any employee benefit plan sponsored or maintained by the
Company (including any trustee of such plan acting as trustee), who
together with its "affiliates" and "associates" (as those terms are
defined in Rule 12b-2 under the Act) becomes the "Beneficial Owner"
(within the meaning of Rule 13d-3 under the Act) of 20% or more of the
then-outstanding shares of Stock or the combined voting power of the
then-outstanding securities of the Company entitled to vote generally
in the election of its directors. For purposes of calculating the
number of shares or voting power held by such Person and its
affiliates and associates under this Section 9.1(a), there shall be
excluded any securities acquired by such Person or its affiliates or
associates directly from the Company.
(b) A sale or other disposition of all or substantially all of the
Company's assets is consummated, other than such a sale or disposition
that would not have constituted a Change of Control under subsection
(d) below had it been structured as a merger or consolidation.
(c) The shareholders of the Company approve a definitive agreement or plan
to liquidate the Company.
<PAGE>
(d) A merger or consolidation of the Company with and into another entity
is consummated, unless immediately following such transaction (1) more
than 50% of the members of the governing body of the surviving entity
were Incumbent Directors (as defined in subsection (e) below) at the
time of execution of the initial agreement providing for such
transaction, (2) no "Person" (as defined in Section 9.1(a) above),
together with its "affiliates" and "associates" (as defined in Section
9.1(a) above), is the "Beneficial Owner" (as defined in Section 9.1(a)
above), directly or indirectly, of 20% or more of the then-outstanding
equity interests of the surviving entity or the combined voting power
of the then-outstanding equity interests of the surviving entity
entitled to vote generally in the election of members of its governing
body, and (3) more than 50% of the then-outstanding equity interests
of the surviving entity and the combined voting power of the
then-outstanding equity interests of the surviving entity entitled to
vote generally in the election of members of its governing body is
"Beneficially Owned", directly or indirectly, by all or substantially
all of the individuals and entities who were the "Beneficial Owners"
of the shares of Stock immediately prior to such transaction in
substantially the same proportions as their ownership immediately
prior to such transaction.
(e) During any period of 24 consecutive months during the existence of the
Plan, the individuals who, at the beginning of such period, constitute
the Board (the "Incumbent Directors") cease for any reason other than
death to constitute at least a majority thereof; provided, however,
that a director who was not a director at the beginning of such 24
month period shall be deemed to have satisfied such 24 month
requirement, and be an Incumbent Director, if such director was
elected by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent
Directors either actually, because they were directors at the
beginning of such 24 month period, or by prior operation of this
Section 9.1(e), but excluding for this purpose any such individual
whose initial assumption of office is in connection with an actual or
threatened election context subject to Rule 14a-11 of Regulation 14A
promulgated under the Act or other actual or threatened solicitation
of proxies or consents by or on behalf of a "Person" (as defined in
Section 9.1(a) above) other than the Board.
9.2 In the event of a Change in Control: (a) any or all then outstanding Stock
Options having an Option Grant Date on or before January 31, 1999, to the
extent not previously fully vested and exercisable, shall automatically
become fully vested and, except to the extent such Options are cashed out
pursuant to Section 9.4 below, exercisable effective immediately prior to
the Change in Control; and (b) outstanding Stock Options having an Option
Grant Date after January 31, 1999 shall vest and become exercisable only
to the extent and in such manner as is provided in the applicable
Agreement evidencing the Stock Option.
9.3 In the event of a Change in Control, the restrictions applicable to Awards
of Restricted Stock or Other Stock-Based Awards shall automatically lapse
effective immediately prior to the Change in Control, in which case,
subject to the requirements of applicable law, the Company shall remove
all restrictive legends and stop-transfer orders applicable to the
certificates for such shares of Stock and deliver such certificates to the
Participants in whose names they are registered.
<PAGE>
9.4 Upon the occurrence of a Change in Control, the Committee may in its sole
discretion and consistent with the requirements of applicable law decide
to cash-out the value of all outstanding Stock Options, Restricted Stock
and Other Stock-Based Awards, in each case to the extent vested pursuant
to Sections 9.2 and/or 9.3 above or otherwise, on the basis of the "Change
in Control Price" (as defined in Section 9.5) less the exercise price
under such Award (if any) as of the date such Change in Control is
determined to have occurred or such other date prior to the Change in
Control as the Committee may determine.
9.5 For purposes of Section 9.4, "Change in Control Price" means the highest
price per share of Stock paid in any transaction reported on the exchange
on which the Stock is then traded or on the NASDAQ National Market System
or the NASDAQ Small-Cap Market System, as the case may be, or paid or
offered in any bona fide transaction related to a Change in Control, at
any time during the 120 day period immediately preceding the occurrence of
the Change in Control, as determined by the Committee.
9.6 The Committee is authorized to take such actions that are not inconsistent
with Sections 9.2, 9.3, 9.4 and 9.5 above as the Committee determines to
be necessary or advisable, and fair and equitable to Participants, with
respect to an Award in the event of a Change in Control. Such action may
include, but shall not be limited to, establishing, amending or waiving
the forms, terms, conditions and duration of an Award and the Agreement,
so as to provide for earlier, later, extended or additional times for
exercise or payment, differing methods for calculating payments and
alternate forms and amounts of payment. The Committee may take such
actions pursuant to this Section 9.6 by adopting rules and regulations of
general applicability to all Participants or to certain categories of
Participants, by including, amending or waiving terms and conditions in an
Award and the Agreement, or by taking action with respect to individual
Participants.
ARTICLE X - AMENDMENT AND TERMINATION
10.1 The Board, upon recommendation of the Committee, or otherwise, at any time
and from time to time, may amend or terminate the Plan. To the extent
required by Code Section 422, no amendment, without approval by the
Company's shareholders, shall:
(a) alter the group of persons eligible to participate in the Plan;
(b) except as provided in Section 3.5, increase the maximum number of
shares of Stock or Stock Options which are available for Awards under
the Plan;
(c) extend the period during which Incentive Stock Option Awards may be
granted beyond the date which is ten (10) years following the
Effective Date.
(d) limit or restrict the powers of the Committee with respect to the
administration of this Plan;
(e) change the definition of an Eligible Participant for the purpose of an
Incentive Stock Option or increase the limit or the value of shares of
Stock for which an Eligible Participant may be granted an Incentive
Stock Option;
<PAGE>
(f) materially increase the benefits accruing to Participants under this
Plan;
(g) materially modify the requirements as to eligibility for participation
in this Plan; or
(h) change any of the provisions of this Article X.
10.2 No amendment to or discontinuance of this Plan or any provision thereof by
the Board or the shareholders of the Company shall, without the written
consent of the Participant, adversely affect, as shall be determined by
the Committee, any Award previously granted to such Participant under this
Plan; provided, however, the Committee retains the right and power to:
(a) annul any Award if the Participant is terminated for cause as
determined by the Committee;
(b) provide for the forfeiture of shares of Stock or other gain under an
Award as determined by the Committee for competing against the
Company; and
(c) convert any outstanding Incentive Stock Option to a Nonqualified Stock
Option.
10.3 If a Change in Control has occurred, no amendment or termination shall
impair the rights of any person with respect to an outstanding Award as
provided in Article IX.
ARTICLE XI - MISCELLANEOUS PROVISIONS
11.1 Nothing in the Plan or any Award granted hereunder shall confer upon any
Participant any right to continue in the employ of the Company, or to
serve as a director thereof, or interfere in any way with the right of the
Company to terminate his or her employment at any time. Unless
specifically provided otherwise, no Award granted under the Plan shall be
deemed salary or compensation for the purpose of computing benefits under
any employee benefit plan or other arrangement of the Company for the
benefit of its employees unless the Company shall determine otherwise. No
Participant shall have any claim to an Award until it is actually granted
under the Plan. To the extent that any person acquires a right to receive
payments from the Company under the Plan, such right shall, except as
otherwise provided by the Committee, be no greater than the right of an
unsecured general creditor of the Company. All payments to be made
hereunder shall be paid from the general funds of the company, and no
special or separate fund shall be established and no segregation of assets
shall be made to assure payment of such amounts, except as provided in
Article VII with respect to Restricted Stock and except as otherwise
provided by the Committee.
11.2 The Company may make such provisions and take such steps as it may deem
necessary or appropriate for the withholding of any taxes which the
Company is required by any law or regulation of any governmental
authority, whether federal, state or local, domestic or foreign, to
withhold in connection with any Stock Option or the exercise thereof, or
in connection with any other type of equity-based compensation provided
hereunder or the exercise thereof, including, but not limited to, the
withholding of payment of all or any portion of such Award or another
Award under this Plan until the Participant reimburses the Company for the
<PAGE>
amount the Company is required to withhold with respect to such taxes, or
canceling any portion of such Award or another Award under this Plan in an
amount sufficient to reimburse itself for the amount it is required to so
withhold, or selling any property contingently credited by the Company for
the purpose of paying such Award or another Award under this Plan, in
order to withhold or reimburse itself for the amount it is required to so
withhold.
11.3 The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by
any United States government or regulatory agency as may be required.
11.4 The terms of the Plan shall be binding upon the Company, and its
successors and assigns.
11.5 Neither a Stock Option, nor any other type of equity-based compensation
provided for hereunder, shall be transferable except as provided for
herein. Unless otherwise provided by the Committee or in an Agreement,
transfer restrictions shall only apply to Incentive Stock Options as
required in Article IV and to the extent otherwise required by federal or
state securities laws. If any Participant makes such a transfer in
violation hereof, any obligation of the Company shall forthwith terminate.
11.6 This Plan and all actions taken hereunder shall be governed by the laws of
the State of North Carolina.
11.7 The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor
of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver shares of Stock or payments in lieu of or with
respect to Awards hereunder; provided, however, that, unless the Committee
otherwise determines with the consent of the affected Participant, the
existence of such trusts or other arrangements is consistent with the
"unfunded" status of the Plan.
11.8 Each Participant exercising an Award hereunder agrees to give the
Committee prompt written notice of any election made by such Participant
under Section 83(b) of the Code, or any similar provision thereof.
11.9 If any provision of this Plan or an Agreement is or becomes or is deemed
invalid, illegal or unenforceable in any jurisdiction, or would disqualify
the Plan or any Agreement under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform
to applicable laws or if it cannot be construed or deemed amended without,
in the determination of the Committee, materially altering the intent of
the Plan or the Agreement, it shall be stricken and the remainder of the
Plan or the Agreement shall remain in full force and effect.
EXHIBIT 10.16
[*] --Certain information omitted and filed separately with the Commission
pursuant to a confidential treatment request under Commission Rule 24b-2.
FOURTH AMENDMENT
TO PURCHASE AGREEMENT
FOURTH AMENDMENT (this "Amendment"), dated and effective as of the 16th day of
December, 1998 (the "Effective Date"), to the PURCHASE AGREEMENT dated September
6, 1996 , as amended by the FIRST AMENDMENT dated April 22, 1997, as further
amended by the SECOND AMENDMENT dated December 9, 1997, and as further amended
by the THIRD AMENDMENT dated September 8, 1998 (as thus amended, the "Purchase
Agreement" or "Agreement"), between CREE RESEARCH, INC. ("Seller"), a
corporation organized under the laws of the State of North Carolina, the United
States of America, and SIEMENS AKTIENGESELLSCHAFT ("Purchaser"), a corporation
organized under the laws of the Federal Republic of Germany. As used in this
Amendment, capitalized terms not defined herein which are defined in the
Purchase Agreement shall have the meaning defined in the Purchase Agreement.
In consideration of the mutual provisions below the parties hereby agree as
follows:
1. In Second Amended Schedule 1 annexed to the Third Amendment to this
Agreement, the first sentence of Paragraph A(1) is amended to increase the
number of GaN LEDs to be purchased during the year ending June 27, 1999
from ************ die to *********** die. In addition, the following is
added at the end of such Paragraph A(1): "Purchaser will also purchase from
Seller, during the period commencing June 28, 1999 and ending September 26,
1999, an additional *********** GaN LED die."
2. In Second Amended Schedule 1 annexed to the Third Amendment to this
Agreement, the shipment schedule for GaN LED die in Paragraph B(1) is
revised as follows (with no change being made to the shipment schedule
given in such paragraph for other Products):
-------------------------------------------------------------------------
Quarterly (13-Week) Period Ending
------------------------------------------------------
Product* 9/27/98 12/27/98 3/29/99 6/27/99 9/26/99
=========================================================================
GaN LED die (in K) ****** ** ****** ****** ****** ******
-------------------------------------------------------------------------
* As described in Third Amended Schedule 3.
** ****** was included in June 1998 shipments.
3. In Second Amended Schedule 2 annexed to the Third Amendment to this
Agreement, the price schedule for GaN LEDs in the Paragraph (A)(1) is
revised as follows:
-------------------------------------------
Incremental Quantities Unit Price (US$)
-------------------------------------------
0 to ****** $******
-------------------------------------------
****** to ****** $******
-------------------------------------------
****** to ****** $******
-------------------------------------------
****** to ****** $******
-------------------------------------------
****** to ****** $******
-------------------------------------------
Greater than ****** $******
-------------------------------------------
<PAGE>
4. The Purchase Agreement as previously amended shall govern the prices and
other terms applicable to Products shipped prior to the Effective Date of
this Amendment; such prices are final and no adjustment is made by this
Amendment. Except as amended hereby, the terms and conditions of the
Purchase Agreement shall continue in effect.
IN WITNESS WHEREOF, the parties, through their respective duly authorized
officers, have executed this Amendment to be effective as of the Effective Date
set out in the preamble hereto.
CREE RESEARCH, INC. SIEMENS AKTIENGESELLSCHAFT
By /s/ F. Neal Hunter By /s/ R. Mueller
------------------------------- ---------------------------------
F. Neal Hunter, President R. Mueller, President, Opto
Semiconductors
Date Date
------------------------------- ---------------------------------
By /s/ C. Hagan
---------------------------------
C. Hagen, Vice President-
Finance & Admin.
Date 16.12.98
---------------------------------
EXHIBIT 10.17
SECOND AMENDED AND RESTATED
INDEMNITY AGREEMENT
SECOND AMENDED AND RESTATED INDEMNITY AGREEMENT (this "Agreement"), made
and entered into as of this the 25th day of September, 1998, by F. NEAL HUNTER,
an individual residing in Durham County, North Carolina ("Hunter"), and CREE
RESEARCH, INC., a North Carolina corporation ("Cree").
W I T N E S S E T H:
WHEREAS, Hunter serves as Cree's President and Chief Executive Officer,
and as a member and Chairman of its Board of Directors, and holds a substantial
number of shares of Cree's common stock: and
WHEREAS, Cree acquired 24,601 shares of the common stock of C3, Inc., a
North Carolina corporation ("C3"), pursuant to an Assignment Agreement between
Cree and C3 dated June 28, 1995 which gave Cree the right to acquire one percent
of the outstanding common stock of C3 for $500 but permitted C3 to waive the
consideration and issue the stock at any time, which C3 elected to do in January
1997; and
WHEREAS, C3 conducted an initial public offering of its common stock in
November 1997 and, pursuant to Hunter's direction after consultation with its
Board of Directors, Cree purchased 100,000 shares in the offering, at the
offering price of $15 per share, based upon the judgment that the market price
of the shares would likely increase and that the purchase would thus enhance
Cree's value; and
WHEREAS, Cree has continued to monitor and evaluate its C3 holdings and
has engaged in market transactions in C3 common stock since C3's public offering
in 1997; and
WHEREAS, due to a decline in the market price of C3 stock and in order to
avoid having Cree record a loss as a result of its C3 holdings, Hunter entered
into an agreement with Cree on December 28, 1997 under which he promised to
indemnify Cree against any losses that might result from the sale of its C3
stock, up to a maximum of $300,000 (such agreement is referred to herein as the
"Original Agreement"); and
WHEREAS, Hunter and Cree entered into an amendment and restatement of the
Original Agreement on June 26, 1998 which increased the maximum amount of
Hunter's obligation to $400,000 and made certain other modifications (such
amendment and restatement of the Original Agreement is referred to herein as the
"First Amended Agreement");
WHEREAS, Hunter has reached an agreement with Cree to increase further the
maximum amount of his indemnity and to modify the First Amended Agreement in
certain other respects; and
<PAGE>
WHEREAS, Hunter and Cree desire to memorialize their understanding and
agreement by amending and restating the provisions of the First Amended
Agreement as set forth below;
NOW, THEREFORE, for and in consideration of the foregoing premises and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound hereby, Hunter and Cree
agree that the First Amended Agreement is hereby amended and restated to read as
follows:
1. As used in this Agreement the following terms shall have the meaning
indicated:
(a) "Measurement Date" means the date on which Hunter receives a
written demand for payment under this Agreement in accordance with paragraph 4
below.
(b) "Fair Market Value" of the C3 common stock means, with respect
to a given Measurement Date,
(i) the last sale price reported on the Measurement Date (or,
if none, on the nearest preceding trading day) on (A) The Nasdaq Stock Market,
if the stock is listed on The Nasdaq Stock Market on the Measurement Date, or
(B) if the stock is not then listed on The Nasdaq Stock Market, then on the
principal exchange on which the stock is then listed, or
(ii) if the stock is not then listed on any exchange, then the
fair market value on the Measurement Date (A) as determined by mutual agreement
of the parties or (B) if the parties are unable to reach such agreement within
thirty days after the Measurement Date, then as determined by a panel of three
arbitrators appointed in accordance with the arbitration rules of the American
Arbitration Association.
2. Subject to the terms and conditions of this Agreement Hunter will pay
Cree an amount equal to:
(a) the excess, if any, of (x) the aggregate cash consideration paid
by or due from Cree for shares of C3 common stock acquired at any time on or
before the Measurement Date over (y) the aggregate cash proceeds received by or
due to Cree for shares of C3 common stock sold at any time on or before the
Measurement Date; less
(b) the Fair Market Value of shares of C3 common stock held by Cree
at the close of business on the Measurement Date.
3. Commissions and other trading expenses shall be disregarded for
purposes of this Agreement.
4. Payment of amounts due under this Agreement shall be made within ten
(10) days after receipt by Hunter of Cree's written demand therefor. The demand
must be made pursuant to the vote or written consent of a majority of the
members of the Board of Directors of Cree other than Hunter.
<PAGE>
5. Hunter's maximum liability under this Agreement shall in no event
exceed Four Hundred Fifty Thousand Dollars ($450,000.00).
6. This Agreement shall be binding upon and inure to the benefit of
Hunter and his heirs, personal representatives, successors and assigns and upon
Cree and its successors and assigns. This Agreement shall be governed by the
laws of the State of North Carolina. This Agreement shall not be amended except
in a document executed on behalf of both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement and affixed
their respective seals hereto as of the date first stated in the preamble above.
/s/ F. Neal Hunter (SEAL)
---------------------------------------
F. Neal Hunter
CREE RESEARCH, INC.
(CORPORATE SEAL)
Attest: By: /s/ Charles M. Swoboda
-------------------------------------
Charles M. Swoboda, Vice President
/s/ Adam H. Broome
- ------------------------------
Adam H. Broome, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895419
<NAME> CREE RESEARCH, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> DEC-27-1998
<EXCHANGE-RATE> 1
<CASH> 12,769
<SECURITIES> 905
<RECEIVABLES> 12,261
<ALLOWANCES> 151
<INVENTORY> 3,402
<CURRENT-ASSETS> 30,141
<PP&E> 56,989
<DEPRECIATION> 12,017
<TOTAL-ASSETS> 78,103
<CURRENT-LIABILITIES> 5,758
<BONDS> 0
0
0
<COMMON> 49,648
<OTHER-SE> 10,341
<TOTAL-LIABILITY-AND-EQUITY> 59,989
<SALES> 26,317
<TOTAL-REVENUES> 26,317
<CGS> 14,044
<TOTAL-COSTS> 19,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (115)
<INCOME-PRETAX> 7,246
<INCOME-TAX> 2,029
<INCOME-CONTINUING> 5,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,217
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.39
</TABLE>
EXHIBIT 99.1
RISK FACTORS
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general may also impair our business operations. If any
of the following risks actually occurs, our business, financial condition or
results of future operations could be materially and adversely affected.
Our Operating Results May Fluctuate Significantly and We May Not Be Able to
Maintain Our Existing Growth Rate.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates and we may experience
significant fluctuations in our revenue and earnings in the future. Our
operating results will depend on many factors, including the following:
- our ability to develop, manufacture and deliver products in a timely
and cost-effective manner;
- whether we encounter low levels of usable product produced during each
manufacturing step (our "yield");
- our ability to expand our production of Silicon Carbide ("SiC") wafers
and devices;
- demand for our products;
- demand for our customers' products;
- competition; and
- general industry and global economic conditions.
Our future operating results could be adversely affected by these or other
factors. If our future operating results are below the expectations of stock
market analysts or our investors, our stock price may decline.
If We Experience Poor Production Yields, Our Operating Results May Suffer.
Our SiC products are manufactured using technologies that are highly complex.
Our customers incorporate our products into high volume applications such as
automotive dashboards, wireless handsets, full color video displays and
gemstones, and they insist that our products meet exact specifications for
quality, performance and reliability.
The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including the
following:
<PAGE>
- impurities in the materials used;
- contamination of the manufacturing environment;
- equipment failure, power outages or variations in the manufacturing
process;
- losses from broken wafers or other human error; and
- defects in packaging.
Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected. For this reason, we are
constantly trying to improve our yields.
In the past, we have experienced difficulties in achieving acceptable yields on
new products, which has adversely affected our operating results. We may
experience similar problems in the future and we cannot predict when they may
occur or their severity. These problems could significantly affect our future
operating results.
If We Are Unable to Produce Adequate Quantities of Our High Brightness Blue and
Green LEDs, Our Operating Results May Suffer.
We are currently beginning the manufacture of commercial quantities of high
brightness blue and green LEDs, and as a result we have incurred certain fixed
costs. We believe that high volume production of these products will be
important to our future operating results. Achieving greater volumes requires
improved production yields for these products. Successful production of these
products is subject to a number of risks, including the following:
- our ability to consistently manufacture these products in volumes large
enough to cover our fixed costs and satisfy our customers' requirements;
- our ability to improve our yields and reduce the costs associated with
the manufacture of these products; and
- whether these products gain market acceptance.
Our inability to produce adequate quantities of our high brightness blue and
green products would have a material adverse effect on our business, results of
operations and financial condition.
Our Operating Results Are Substantially Dependent on the Development of New
Products Based on Our Core SiC Technology.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development
<PAGE>
and introduction of new products. Products currently under development include
high power radio frequency and microwave devices, power devices, blue laser
diodes and high temperature devices. The successful development and introduction
of these products depends on a number of factors, including the following:
- achievement of technology breakthroughs required to make commercially
viable devices;
- the accuracy of our predictions of market requirements and evolving
standards;
- acceptance of our new product designs;
- the availability of qualified development personnel;
- our timely completion of product designs and development;
- our ability to develop repeatable processes to manufacture new products
in sufficient quantities for commercial sales; and
- acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.
We Depend on a Few Large Customers.
Historically, a substantial portion of our revenue has come from large purchases
by a small number of customers. We expect that trend to continue. For example,
for fiscal 1998 our top five customers accounted for 81% of our total revenue.
For the six months ended December 27, 1998, our top five customers accounted for
79% of our total revenue. (These percentages consider sales to a distributor as
sales to one customer). Sales to Siemens AG during both periods accounted for
40% of our total revenue. In addition, sales to C3, Inc. accounted for 11% of
our total revenue in fiscal 1998 and 18% of our total revenue in the six months
ended December 27, 1998. Accordingly, our future operating results depend on the
success of our largest customers and on our success in selling large quantities
of our products to them.
The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may stop purchasing our products and
our operating results will suffer. If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.
We Face Challenges Relating to Expansion of Our Production and Manufacturing
Facility.
In order to increase production at our new facility, we must add critical new
equipment, move existing equipment and complete the remaining phases of building
out the facility. We are in the process of completing this build-out and expect
to construct additional facilities in the future. Expansion activities such as
these are subject to a number of risks, including the following:
<PAGE>
- unforeseen environmental or engineering problems relating to existing
or new facilities;
- unavailability or late delivery of the advanced, and often customized,
equipment used in the production of our products;
- unavailability of funds necessary for expansion;
- work stoppages and delays; and
- delays in bringing production equipment on-line.
These and other risks may affect the ultimate cost and timing of the build-out
of our existing facility, as well as the construction of new facilities, which
could adversely affect our business, results of operations and financial
condition.
The Ongoing Operation of Our Manufacturing Facility Is Critical to Our Business.
In November 1997, we acquired our present principal facility in Durham, North
Carolina, which includes a total of 172,000 square feet. The ongoing operation
of this facility is crucial to our strategy of expanding our manufacturing
capacity to meet demand for our SiC products now and in the future.
We began commercial production of products from this facility in August 1998. We
expect that production from the facility will increase throughout the remainder
of fiscal 1999 and into fiscal 2000. A number of factors will affect the
successful operation of this facility and our business, including the following:
- demand for our products;
- our production yields;
- our ability to generate revenues in amounts that cover the significant
fixed costs of operating our facility;
- our ability to hire, train and manage qualified production personnel;
and
- our inability to use all or a significant portion of our facility for
prolonged periods of time for any reason -- for example, a fire or
explosion caused by our use of combustible chemicals and high temperatures
during certain of our manufacturing processes.
We Face Significant Challenges Managing Our Rapid Growth.
We are experiencing a period of significant growth that will continue to place a
great strain on our management and other resources. We have grown from 188
employees on December 31, 1996 to 297 employees on December 27, 1998 and from
revenues of $29.0 million for the fiscal
<PAGE>
year ended June 30, 1997 to $42.5 million for the fiscal year ended June 28,
1998. To manage our growth effectively, we must continue to:
- implement and improve operational systems;
- maintain adequate physical plant, manufacturing facilities and
equipment to meet customer demand;
- add experienced senior level managers; and
- attract and retain qualified people with experience in engineering,
design, technical marketing and support.
We will spend substantial amounts of money in connection with our rapid growth
and may have additional unexpected costs. Our systems, procedures or controls
may not be adequate to support our operations, and we may not be able to expand
quickly enough to exploit potential market opportunities. Our future operating
results will also depend on expanding sales and marketing, research and
development, and administrative support. If we cannot attract qualified people
or manage growth effectively, our business, operating results and financial
condition could be adversely affected.
The Markets In Which We Operate Are Highly Competitive.
The market for our products is highly competitive. Although we believe our
SiC-based LEDs offer substantial advantages, competitors currently sell blue and
green LEDs made from sapphire wafers that are brighter than the high brightness
LEDs we currently produce. In addition, we believe that other firms (including
certain of our customers) may seek to enter the blue and green LED market in the
future. For example, Siemens AG and Shin-Etsu Handotai Co. Ltd. license certain
of our LED technology, which may facilitate their entrance into our LED markets.
The market for SiC wafers is also becoming competitive as other firms have in
recent years begun offering SiC wafer products or announced plans to do so.
Also, other firms may develop new or enhanced products that are more effective
than any that we have developed or may develop. These firms may develop
technology that produces commercial products with characteristics similar to
SiC-based products, but at a lower cost. Many existing and potential competitors
have far greater financial, marketing and other resources than we do. We believe
that present and future competitors will aggressively pursue the development and
sale of competing products. We also expect significant competition for products
we are currently developing, such as those for use in microwave communications.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.
<PAGE>
We Rely on a Few Key Suppliers.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our SiC products, including key materials
and equipment used in critical stages of our manufacturing processes. We
generally purchase these limited source items with purchase orders, and we have
no guaranteed supply arrangements with such suppliers. If we were to lose such
key suppliers, our manufacturing efforts could be hampered significantly.
Although we believe our relationship with our suppliers is good, we cannot
assure you that we will continue to maintain good relationships with such
suppliers or that such suppliers will continue to exist.
If Government Agencies or Other Customers Discontinue Their Funding for Our
Research and Development of SiC Technology, Our Business May Suffer.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could be
adversely affected.
We Depend Heavily on Key Personnel.
Our success depends in part on keeping key technical and management personnel.
For example, some of the equipment used in the production of our products must
be modified before it is put to use and only a limited number of employees
possess the expertise needed to perform these modifications. Furthermore, the
number of individuals with experience in the production of SiC and related
products is limited, and our future success depends in part on retaining those
individuals who are already employees.
We must also continue to attract qualified personnel. The competition for
qualified personnel is intense, and the number of people with the experience
that we need is limited. We cannot be sure that we will be able to continue to
attract and retain other skilled personnel in the future.
Limitations on the Protection of Our Intellectual Property.
Our intellectual property position is based on patents exclusively licensed to
us by North Carolina State University, also known as N.C. State, and on patents
owned by us. The licensed patents give us rights to our SiC crystal growth
process. The expiration dates on the U.S. patents we license from N.C. State run
from 2007 to 2009. We also own 43 U.S. patents relating to various aspects of
our technology and have other patent applications pending. The issued U.S.
patents we own expire between 2008 and 2016. We have obtained (or licensed from
N.C. State) a number of patents covering these same technologies in key foreign
jurisdictions.
We intend to continue to file patent applications in the future, where
appropriate, and to pursue such applications with U.S. and foreign patent
authorities, but we cannot be sure that any other patents will be issued on such
applications or that our patents will not be contested. In the past, one of the
important patents we license from N.C. State relating to crystal growth was
subject to re-examination in the U.S. but we prevailed in the proceeding.
Currently, the corresponding
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European patent is being challenged, which means that we could lose patent
protection in certain European countries for this particular method. There is no
assurance that other of our patents will not be contested. Also, because
issuance of a valid patent does not prevent other companies from using
alternative, non-infringing technology, we cannot be sure that any of our
patents (or patents issued to N.C. State or other parties and licensed to us)
will provide significant commercial protection.
In addition to patent protection, we also rely on trade secrets, technical
know-how and other unpatented proprietary information relating to our product
development and manufacturing activities. We try to protect this information
with confidentiality agreements with our employees and other parties. We cannot
be sure that these agreements will not be breached, that we would have adequate
remedies for any breach or that our trade secrets and proprietary know-how will
not otherwise become known or independently discovered by others.
Our Operations Could Infringe Upon the Intellectual Property Rights of Others.
Particular aspects of our technology could be found to infringe the claims of
other existing or future patents. Other companies may hold or obtain patents on
inventions or may otherwise claim proprietary rights to technology necessary to
our business. We cannot predict the extent to which we may be required to seek
licenses.
We Are Subject to Risks From International Sales.
Sales to customers located outside the U.S. accounted for about 69% of our
revenue in fiscal 1996, about 79% of our revenue in fiscal 1997, about 74% of
our revenue in fiscal 1998 and about 62% of our revenue in the first six months
of fiscal 1999.
We expect that revenue from international sales will continue to be a
significant part of our total revenue. International sales are subject to a
variety of risks, including risks arising from currency fluctuations, the
emergence of the Euro, trading restrictions, tariffs, trade barriers and taxes.
Also, future U.S. Government or military export restrictions could limit or
prohibit sales of our products to customers in certain countries because of
their uses in military or surveillance applications.
Because all of our foreign sales are denominated in U.S. dollars, our products
become less price competitive in countries with currencies that are low or are
declining in value against the U.S. dollar. Also, we cannot be sure that our
international customers will continue to place orders denominated in U.S.
dollars. If they do not, our reported revenue and earnings will be subject to
foreign exchange fluctuations.
We Are Subject to Stringent Environmental Regulation.
We are subject to a variety of government regulations pertaining to chemical and
waste discharges and other aspects of our manufacturing process. For example, we
are responsible for the management of the hazardous materials we use and
disposal of hazardous waste resulting from our manufacturing process. The proper
handling and disposal of such hazardous material and waste requires us to comply
with certain government regulations. We believe we are in full
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compliance with such regulations as of the date of this filing, but any failure,
whether intentional or inadvertent, to comply with such regulations could have
an adverse effect on our business. In addition, these regulations may affect our
ability to expand or change our manufacturing facility.
Our Stock Price is Volatile.
The market price of our common stock has been and may continue to be subject to
wide fluctuations. Factors affecting our stock price may include:
- variations in operating results from quarter to quarter;
- changes in earning estimates by analysts;
- market conditions in the industry; and
- general economic conditions.
Our stock price has fluctuated widely. For example, between November 1997 and
January 1998 the price of our common stock dropped from approximately $29.50 to
$13.50 per share. Between August 1998 and January 11, 1999, the price of our
common stock rose from approximately $10.50 to $53.25 per share. Consequently,
the current market price of our common stock may not be indicative of future
market prices.
We Face Risks Concerning Year 2000 Issues.
We are evaluating all of our internal computers, computer equipment and other
equipment with embedded technology against Year 2000 concerns. Although we
believe our planning efforts are adequate to address our Year 2000 concerns, it
is still possible that we could experience negative consequences and material
costs caused by undetected errors or defects in the technology used in our
internal systems. Our most significant Year 2000 risk is that the systems of
other parties on which we rely, specifically our key suppliers, will not be
compliant on a timely basis. Any disruption in delivery of supplies to us that
is caused by a third party's failure to address Year 2000 issues would affect
our ability to manufacture our products, which could result in a material
adverse effect on our business, operating results and financial condition.
At this time, we are unable to estimate the most likely worst-case effects of
the arrival of the Year 2000 and we do not have a contingency plan for any
unanticipated negative effects.
