SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 27, 1999
CREE RESEARCH, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction Identification Number)
of incorporation)
4600 Silicon Drive, Durham, North Carolina 27703
(Address of principal executive offices)
(919) 313-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0025 par value
(Title of Class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of August 2, 1999 was approximately $794,388,471 (based on the
closing sale price of $29.375 per share).
The number of shares of the registrant's Common Stock, $0.0025 par value per
share, outstanding as of August 2, 1999 was 29,258,464.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held November 2, 1999
are incorporated by reference into Part III.
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CREE RESEARCH, INC
FORM 10-K
For the Fiscal Year Ended June 27, 1999
INDEX
Part I Page
Item 1. Business........................................................3
Item 2. Properties.....................................................19
Item 3. Legal Proceedings..............................................19
Item 4. Submission of Matters to a Vote of Security Holders............19
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................................19
Item 6. Selected Financial Data........................................20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................21
Item 8. Financial Statements and Supplementary Data....................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...........................50
Part III
Item 10. Directors and Executive Officers of the Registrant.............50
Item 11. Executive Compensation.........................................50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................50
Item 13. Certain Relationships and Related Transactions.................50
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................51
SIGNATURES ...............................................................53
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PART I
Item 1. Business
INTRODUCTION
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Cree Research, Inc., a North Carolina corporation, was established in 1987 to
commercialize silicon carbide, or SiC, semiconductor wafers and devices. Today,
Cree is the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC and other wide bandgap compound
semiconductor products. Using its proprietary compound semiconductor technology,
the Company produces light emitting diodes, or LEDs, for use in automotive and
liquid crystal display, or LCD, backlighting, indicator lamps, full color LED
displays and other lighting applications. The Company also manufactures SiC
crystals used in the production of unique gemstone products and SiC wafers sold
for research directed to optoelectronics, microwave and power applications. Cree
has recently introduced the first of a family of radio frequency, or RF, and
microwave devices for use in wireless base stations, radar systems and other
commercial and military applications. These products are expected to be
available on a sample basis during fiscal 2000. SiC-based compound semiconductor
devices offer significant advantages over competing products based on silicon,
gallium arsenide, or GaAs, and other materials for certain electronic
applications. The Company has new product initiatives based on SiC, including
additional RF and microwave devices, larger and clearer crystals for moissanite
gemstones, blue laser diodes for optical storage applications and power devices
for power conversion or switching uses.
BACKGROUND
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Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon evolved as the dominant semiconductor material because it is relatively
easy to grow into large, single crystals and is suitable for fabricating
numerous electronic devices. Alternative materials, such as GaAs, have emerged
to enable the fabrication of new devices with characteristics that could not be
obtained using silicon, including certain RF, microwave, LED, laser and other
optoelectronic devices. However, GaAs, silicon and other widely used
semiconductor materials have certain physical and electronic characteristics
that limit their usefulness in many applications. For example, silicon and
GaAs-based semiconductors are not suitable for the fabrication of short
wavelength optoelectronic devices. In addition, the power handling capabilities
of silicon and GaAs-based microwave transistors can limit the power and
performance of microwave systems used in many commercial and military aerospace
applications. Furthermore, few silicon or GaAs devices can operate effectively
at temperatures above 400 degrees F. This is a major limitation in applications
such as advanced electronic systems for high power electric motors, jet engines
and satellites.
Substantial research and development efforts have been undertaken to explore the
properties of other potential semiconductor materials. These efforts have
identified few candidate materials that are capable of being grown as low defect
single crystals (a requirement in the production of most semiconductors) which
also possess physical and electronic properties that meaningfully increase
device performance over products fabricated from semiconductor materials in
general use. Of the few potential candidates, the properties of SiC make it an
excellent material for extending existing semiconductor device technology where
high power, high temperature or short wavelengths are important for performance.
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SiC OVERVIEW
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SiC has many physical characteristics that make the material very difficult to
produce. For example, in a typical semiconductor manufacturing process, the
semiconductor material is grown in single crystal form and sliced into wafers.
The wafers are then polished and chemically etched, coated with a thin film
containing controlled levels of impurities and fabricated into devices. Because
SiC can form many different atomic arrangements and must be grown at process
temperatures above 3,500 degrees F, it is difficult to grow large single
crystals that are homogeneous in structure. In addition, the high temperatures
required to grow SiC make the control of impurity levels in SiC crystals and
thin films difficult. "Micropipes," or small diameter holes, may appear in the
crystals during crystal growth, affecting the electrical integrity of the wafer
and reducing the usability of portions of the wafer for certain applications.
Furthermore, slicing and polishing SiC wafers is hindered by the intrinsic
hardness of the material. Similarly, its inherent chemical resistance makes SiC
a difficult material to etch.
Many of the same physical characteristics that make SiC difficult to produce
also make it an excellent material for certain semiconductor applications. The
following characteristics distinguish SiC from conventional silicon and
GaAs-based semiconductor materials, resulting in significant advantages for many
applications in which the production hurdles can be overcome:
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to move an
electron from the valence band to the conduction band. SiC is classified as a
"wide bandgap" semiconductor material, meaning that more energy is required for
ionization. Electronic devices made from this material can operate more
efficiently and at much higher temperatures than devices made from other common
semiconductor materials.
HIGH BREAKDOWN ELECTRIC FIELD. The "breakdown electric field" is the amount of
voltage per unit distance that a material can withstand and still effectively
operate as a semiconductor device. SiC has a much higher breakdown electric
field than silicon or GaAs. This characteristic allows SiC devices to operate at
much higher voltage levels. Additionally, it allows SiC power devices to be
significantly smaller while carrying the same as or greater power levels than
comparable silicon and GaAs-based devices.
HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This feature enables
SiC-based devices to operate at high power levels and still dissipate the excess
heat generated.
HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC has a "saturated electron drift
velocity" higher than that of silicon or GaAs. The saturated electron drift
velocity is the maximum speed at which electrons can travel through a material.
This characteristic, combined with a high breakdown electric field, allows the
fabrication of SiC-based microwave transistors that operate at significantly
higher power levels than current silicon and GaAs-based devices.
ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. SiC is also extremely resistant to
chemical breakdown and can operate in hostile environments. As a result, SiC can
withstand much higher electrical pulses and is much more radiation-resistant
than silicon or GaAs.
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GEMOLOGICAL APPEAL. In the gemstone industry, SiC is known as moissanite. Its
high refractive index and dispersion give it "diamond-like" sparkle or fire. In
addition, its hardness allows superior faceting and wear resistance compared to
many gemstone materials.
THE CREE SOLUTION
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Through its proprietary technology and over 10 years of development and
manufacturing experience, Cree has succeeded in overcoming difficulties in
processing SiC for commercial use. The Company introduced its first product in
October 1989 and currently is the leading manufacturer of SiC wafers and
SiC-based blue and green LED products in the world. The Company believes that
its proprietary process techniques and the inherent attributes of SiC give Cree
significant advantages over competing products for certain electronic and
gemological applications. These advantages include:
BLUE AND GREEN LIGHT EMISSION. Cree produces high efficiency blue and green LEDs
using gallium nitride, or GaN, a wide bandgap material, and other nitrides grown
on SiC substrates. Most other manufacturers of nitride-based LEDs use sapphire
substrates. The conductive properties of SiC enable Cree to fabricate a simpler,
smaller LED chip as compared to competing LEDs grown on sapphire substrates.
Cree has also demonstrated and is continuing development of GaN-based blue laser
diodes grown on SiC. The principal advantages of SiC over other substrate
materials for blue laser diodes are its high electrical and thermal conductivity
and its ability to be cleaved, providing an excellent surface for laser light
emission.
ENABLING SUBSTRATE PROPERTIES. The inherent attributes of SiC as a substrate
enable researchers to work on developing new optoelectronic, microwave and power
devices that offer significant advantages over competing products and which
could not be produced as effectively on other substrate materials. The Company
manufactures SiC wafers for both internal use and sale to external development
programs to further new product development. The Company continues to develop
larger substrates with lower defect densities, which should drive further device
development and strengthen SiC's economic advantages in certain applications.
GEMSTONE MATERIAL PROPERTIES. Cree manufactures SiC crystals that are used to
produce moissanite gemstones. The combination of SiC's optical properties (high
refractive index and dispersion) and robust material properties give these
gemstones both diamond-like sparkle or fire and hardness characteristics. Cree
continues to develop larger and higher quality SiC crystals for this
application.
HIGH POWER RF AND MICROWAVE OPERATIONS. The Company has demonstrated SiC RF and
microwave transistors that can operate at much higher voltages than silicon or
GaAs because of SiC's high breakdown electric field, allowing much higher power
operation at high frequencies. Higher power SiC devices can allow the
fabrication of SiC-based RF transmitters with less circuit complexity and higher
total output power. These same advantages exist for microwave devices made using
GaN on SiC substrates, which can also operate at much higher frequencies than
SiC-only devices. In the fourth quarter of fiscal 1999, the Company introduced
its first RF power transistor product, a SiC metal semiconductor field effect
transistor or MESFET device, which is the first in a planned family of RF power
transistor products designed for wireless and broadcast applications. The
Company is continuing development of additional RF and microwave devices for use
in wireless base stations, radar systems and other commercial and
defense-related applications.
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HIGH POWER, HIGH VOLTAGE OPERATION. Cree is developing SiC power diodes and
switches that are able to operate at higher power densities than currently used
semiconductor materials because of the much higher breakdown electric field of
SiC. In addition, Cree believes that its SiC power devices will be able to
operate with lower resistive losses and lower switching losses than those made
with silicon or GaAs.
PRODUCTS
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All of Cree's products are an outgrowth of its SiC technology. The following
chart illustrates the Company's existing products and user applications for
which these products are being used or marketed:
PRODUCT USER APPLICATIONS
Blue and green LEDs o Backlighting such as automotive
dashboards and LCDs, including wireless
handsets
o Large indoor full color displays, such as
arena video screens
o Large outdoor full color displays
o White light products to replace miniature
incandescent bulbs, such as those used in
automobile map lights
o Traffic signals
SiC wafers and crystals o Research and development for new
semiconductor applications (wafers)
o Gemstones (crystals)
SiC RF transistors and o Communication systems and other power
wireless base station applications
amplifiers
The Company's products are manufactured in a six-part process which includes:
SiC crystal growth, wafer slicing, polishing, epitaxial deposition, fabrication
and testing. SiC crystals are grown using a proprietary high temperature process
designed to produce uniform crystals in a single crystalline form. Crystals used
for moissanite gemstones exit the manufacturing process at this stage. Crystals
used for other products are then sliced into wafers. The wafers are polished and
then processed using the Company's proprietary epitaxial deposition technology,
which essentially consists of growing thin layers of SiC, GaN or other material
on the polished wafer, depending on the nature of the device under production.
SiC wafer products may leave the manufacturing process either after polishing or
epitaxy. Following epitaxy, LED and microwave chips are fabricated in a clean
room environment. The final steps include testing and packaging for shipment to
the customer. In manufacturing its products the Company depends substantially on
its custom-manufactured equipment and systems, some of which is manufactured
internally and some of which the Company acquires from third parties and
customizes itself.
BLUE AND GREEN LEDs
LEDs are solid-state chips used in miniature lamps in everyday applications such
as indicator lights on printers, computers and other equipment. LEDs generally
offer substantial advantages over small incandescent bulbs, including longer
life, lower maintenance cost and energy consumption, and smaller space
requirements. Groups of LEDs can make up single or multicolor electronic
displays. Prior to the introduction of Cree's blue LED product in 1989, blue
LEDs could not be produced in volumes necessary
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for commercialization. Since then, Cree has developed several generations of
blue LED products, including a more robust conductive buffer chip that is easier
to build into lamps and has a lower unit price than competing products. The
commercial availability of the blue LED, together with red and green, has
enabled the development of full color LED lamps and video displays.
The Company believes that LEDs made from SiC substrates provide the following
benefits over those made with competing substrates: 1) an industry standard
vertical chip structure requiring a single wire bond that results in faster LED
assembly and reduced cost, 2) a smaller chip size compatible with industry
trends toward package miniaturization, 3) the industry's highest specification
for electrostatic discharge resistance that reduces the cost, engineering effort
and time to qualify LEDs at customer production sites and 4) a lower priced
outdoor capable product.
Presently, the Company's LED chips are used for backlighting purposes, such as
automotive dashboards and LCD displays, including wireless handsets. In
addition, they are used in office equipment indicator lighting, full color video
display technology, such as arena video replay boards, moving message
advertising and informational signs. The Company's standard blue LED products
are primarily used in indoor applications. In September 1998, the Company first
began shipping brighter blue and green LEDs that offer a lower cost, higher
efficiency LED solution for existing applications that require a higher
brightness. These products, which were introduced generally in May 1999, are
used for backlighting purposes, where low power consumption is critical, such as
LCD displays for wireless handset applications, and for traffic signals and
outdoor full color displays.
In November 1998, Cree announced a new product line built on its blue LED
products for use in solid-state white light applications. By passing blue or
near ultraviolet LED output through certain conversion materials such as
phosphors or polymers, blue light is converted into white light. Cree currently
sells blue LEDs to a customer who produces the white light conversion LED.
Commercial products incorporating Cree's chips for white light conversion are
backlighting applications for automobile dashboards and instrumentation and LCD
backlighting for wireless handsets. Other applications for white light LEDs
include miniature incandescent lighting, such as map lights, automobile trunk
lights and small flashlights.
The Company supplies blue and green LED chips to LED component manufacturers who
assemble the chip into a lamp and then manufacture solid-state lighting
components to supply OEMs. LED products represented 51%, 48% and 53% of our
revenue for the fiscal years ended June 27, 1999, June 28, 1998 and June 30,
1997, respectively.
MATERIALS PRODUCTS
Cree manufactures SiC wafers for sale to corporate, government and university
programs that use SiC for developing electronic components. SiC wafers are
distributed directly to these parties. These customers utilize the material as
the basis for research in optoelectronic, microwave and high power devices. Each
order may be sold as a bare wafer or customized by adding epitaxial films,
depending upon the nature of the customer's development program. For the past
several years, the Company has worked to improve the quality of its wafers while
increasing their size. During fiscal 1999, the Company achieved significant
improvement in wafer quality for its two-inch sized wafers. Cree is currently
developing a three-inch sized wafer product.
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, Cree manufactures SiC crystals in near colorless
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form for use in gemstones. The Company sells SiC crystals directly to C3 Inc.
("C3"), a company which was founded to develop gemstone products from SiC
crystals. C3 cuts and polishes the product to fabricate diamond-like gemstones
targeted at customers who desire affordable high quality jewelry. During the
first half of fiscal 1999, Cree significantly expanded crystal growth capacity
for C3 to meet increased volume requirements. Cree has recently agreed to an
additional capacity expansion that is planned through the first half of fiscal
2000. The potential for increasing demand depends on Cree's ability to meet C3's
requirements for color, clarity and yield. Consequently, Cree has agreed to
focus development efforts on improving its manufacturing processes to increase
crystal size and volume, as well as to develop crystals with higher quality.
Future demand also is dependent on C3's ability to cut, facet and effectively
market its gemstone products. SiC produced for gemstone applications is
distributed directly to C3. Wafer and other material products represented 38%,
34% and 24% of our revenue for the fiscal years ended June 27, 1999, June 28,
1998 and June 30, 1997, respectively.
MICROWAVE TRANSISTORS
In June 1999, Cree announced the first of a family of SiC-based RF and microwave
transistor products designed to be a part of the power amplification process. A
second phase of transistor products is scheduled for release to production in
fiscal 2000. The Company expects that these products will be sold to a variety
of amplifier producers, including wireless base stations and digital broadcast
applications. While distribution of samples will commence in early fiscal 2000,
the Company believes that these products will be sold in limited quantities
during fiscal 2000, as design cycles for the target applications are generally
several months. There can be no assurance that such producers or other customers
will be able to develop applications in the near future that will require
commercial production of the Company's RF products or that such products will be
successful in the market.
PRODUCTS UNDER DEVELOPMENT
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The Company believes that the inherent physical characteristics of SiC make it
an excellent material for many new semiconductor applications. The Company is
dedicated to creating new applications using SiC and has products currently
under development in each of the areas described below. The following chart
illustrates the potential user applications for each area of product
development:
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
High power RF and o Amplifier systems for wireless applications,
microwave devices such as personal communication systems, or
PCS base stations and digital broadcast
o Radar systems
Power devices o Industrial motor controls
o Electric vehicles
o Lighting ballasts
o Factory robotics
o Locomotive applications
o Solid-state power transmission
Blue and ultraviolet o High density optical storage, such as CDs and
lasers DVDs
High temperature devices o Automotive and aerospace electronics
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HIGH POWER RF AND MICROWAVE DEVICES
The Company is currently developing SiC-based high power transistors that
operate at radio and microwave frequencies. The Company believes these devices
will have applications in wireless phone base stations, high power solid-state
broadcast systems for television and radio and radar search and detection
equipment.
In June 1999, Cree introduced the first of a family of RF and microwave
transistor products. As discussed above, the Company continues to develop other
SiC-based transistor devices that are expected for prototype distribution during
fiscal 2000. All of these products are designed to amplify power in several
applications. These devices are expected to be used for frequency band
applications from 400 megahertz to 2.5 gigahertz, including PCS base station
networks. The Company believes that SiC transistors offer advantages over
current silicon and GaAs-based devices for certain applications due to greater
output power per transistor. The higher output power available from SiC devices
is expected to allow wireless systems to use fewer transistors per base station
resulting in less complex circuitry and lower cost.
Cree is also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). During
fiscal 1999, the Company reported the demonstration of GaN on SiC transistors
that operated with an output power of 9.0 watts at 7.4 gigahertz. The Company
also reported a record high power density of 6.9 watts per millimeter at 10
gigahertz on smaller GaN devices. The Company believes this power density is the
highest publicly reported for a solid-state field-effect transistor operating in
this frequency range and is substantially higher than that achieved with
equivalent silicon or GaAs-based devices. The Company does not anticipate that a
commercial device capable of emitting power at this level will be available in
the near term.
POWER DEVICES
The Company is developing prototype high power devices that have many potential
uses. Such devices could be employed in applications involving power
conditioning as well as power switching. SiC-based power devices have the
potential to handle significantly higher power densities than existing
silicon-based devices. In addition, SiC devices are expected to operate at
significantly higher temperatures and voltages with superior switching
capabilities. These devices are expected to yield substantial power savings due
to reductions in energy losses made possible by the devices' high efficiency.
Potential applications include power drive components for electric vehicles,
lighting ballast components, industrial motor controls and power conditioning
for high voltage power transmission. In early fiscal 1999, the Company entered
into a three-year project with Kansai Electric Power Company, one of the largest
power companies in the world, for development of SiC-based devices for use in
power transmission networks.
BLUE AND ULTRAVIOLET LASER DIODES
The Company continues to focus on the development of blue and ultraviolet laser
diodes. SiC's inherent attributes, including its natural cleavability and high
thermal conductivity, make it an excellent material for blue laser applications.
The storage capacity of optical disk drives can be increased significantly by
utilizing a laser diode capable of emitting short wavelength light. The Company
has demonstrated a blue laser diode, fabricated from GaN and related materials
on SiC substrates, which has a shorter wavelength than that of the red or
infrared lasers used today. The Company believes that the shorter wavelength of
blue light could potentially result in storage capacity for optical disk drives
that is significantly greater
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than the capacity permitted by red light. This increased storage capacity could
lead to advances in CD-ROM data storage and audio and video compact disc
applications. Currently, the Company is the only U.S.-based firm to have
demonstrated the continuous wave operation of a blue laser diode at room
temperature on SiC; however, there is still substantial work needed to produce a
blue laser suitable for commercial applications. During fiscal 1999, Cree
entered into a one-year development agreement with Microvision, Inc. ("MVIS").
This agreement provides $2.6 million of funding for research in edge-emitting
LEDs and laser diodes. At MVIS' option, this agreement may be extended for an
additional year for $2.5 million.
HIGH TEMPERATURE DEVICES
In certain applications for microwave and power devices, the ability of SiC to
operate at higher temperatures than comparable silicon devices can be a major
advantage. Thus, Cree is currently developing high temperature versions of these
devices. These devices would be used for applications in high temperature
environments or environments with limited cooling or heat sinking, including
potential applications in the automotive, energy and aerospace industries. Cree
is also working on high temperature sensors, as well as analog and digital
circuits that could be used to amplify low level sensor signals directly in a
jet engine or other high ambient temperature environment. Such devices could
also find use in applications such as down hole drilling equipment. Although
Cree has developed prototype devices, additional development work is needed to
achieve commercial viability.
GOVERNMENT CONTRACT FUNDING
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Cree derives a portion of its revenue from funding from research contracts with
the U.S. government. For the fiscal years ended June 27, 1999, June 28, 1998 and
June 30, 1997, government funding represented 11%, 18% and 23% of total revenue,
respectively. These contracts typically cover work performed over several months
up to three years. While the U.S. government is interested in Cree's development
of SiC materials and SiC-based devices, there can be no assurance that the
Company will enter into any additional government contracts, or that they will
be profitable or produce contract revenue. In addition, there can be no
assurance that after any such contracts are entered into, changing government
regulations will not significantly alter the benefits of such contracts. These
contracts may be modified or terminated at the convenience of the government.
The contracts generally provide that Cree may elect to obtain title to
inventions made in the course of research, with the government retaining a
nonexclusive license to practice such inventions for government purposes.
RESEARCH AND DEVELOPMENT
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The Company believes that its ability to maintain its position as a leading
supplier of SiC material and SiC-based semiconductor products, will depend on
its ability to enhance existing products and to continue developing new products
incorporating the latest improvements in SiC technology. Accordingly, the
Company is committed to investing significant resources in research and
development.
The Company continually conducts research aimed at improving the quality of its
crystals and wafers and enhancing its epitaxial film deposition (wafer coating)
process. Cree believes that these research and development efforts will benefit
all of the Company's products. The Company believes it can increase the diameter
of its wafers while lowering manufacturing costs and permitting the development
of more complex devices. Key determinants that will enable the manufacture of
more complex devices, such as power semiconductors, are the substrate quality
and wafer size. Epitaxial thickness, lower defect density and the elimination of
variation are important factors to yield improvement, marketability and lower
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cost. In moving to larger wafer sizes, the Company is focusing on how to
stabilize the process to repeatedly grow larger diameter crystals with minimal
defects. The two-inch wafer size, which Cree introduced in fiscal 1998, is
considered a minimum standard for certain fabrication and development
facilities. Cree is expected to produce three-inch wafers in fiscal 2000 and has
begun development of larger wafer sizes.
During fiscal years 1999, 1998 and 1997, the Company spent $9.4 million, $8.6
million and $9.7 million, respectively, for direct expenditures relating to
research and development activities. Offsetting these expenditures were $6.6
million, $8.2 million and $8.7 million, respectively, of U.S. government funding
for direct and indirect research and development expenses. In addition, certain
customers have also sponsored research activities related to the development of
new products. During fiscal years 1999, 1998 and 1997, customers spent $4.5
million, $3.5 million and $66,000, respectively, for product research and
development activities.
SOURCES OF RAW MATERIALS
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The Company depends on a limited number of suppliers for certain raw materials,
components and equipment used in its SiC products and LEDs, including certain
key materials and equipment used in its crystal growth, wafering, polishing,
epitaxial deposition, device fabrication and device test processes. The Company
generally purchases these limited source items pursuant to purchase orders and
has no guaranteed supply arrangements with its suppliers. In addition, the
availability of these materials, components and equipment to the Company is
dependent in part on the Company's ability to provide its suppliers with
accurate forecasts of its future requirements. The Company endeavors to maintain
ongoing communication with its suppliers to guard against interruptions in
supply and, to date, generally has been able to obtain adequate supplies in a
timely manner from its existing sources. However, any interruption in the supply
of these key materials, components or equipment could have a significant adverse
effect on the Company's operation.
PATENTS AND PROPRIETARY RIGHTS
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The Company since its inception has been a leader in the development of SiC
materials and devices made using SiC. It seeks to protect its proprietary
technology by applying for patents where appropriate and in other cases by
preserving the technology and related know-how and information as trade secrets.
The Company has also from time to time acquired, through license grants or
assignments, rights to patents on inventions originally developed by others.
At August 2, 1999, the Company owned 46 issued U.S. patents. These patents
expire between 2008 and 2017. Forty-two of the patents are owned by the Company
alone and the remainder, which resulted from research and development agreements
with other firms, are owned jointly with the other parties to such agreements.
The Company also owns corresponding patents and patent applications in certain
foreign countries it considers significant or potentially significant markets.
In addition, the Company owns pending U.S. and foreign patent applications
relating to inventions developed by the Company or acquired from third parties.
The Company holds an exclusive license from North Carolina State University
("N.C. State") to 10 U.S. patents, and to corresponding foreign patents and
applications, that relate to SiC materials and device technology, including a
process to grow single crystal SiC. The license was granted pursuant to an
agreement executed by the Company and N.C. State in 1987. This license gave the
Company a worldwide, fully paid, exclusive license to manufacture, use and sell
products and processes covered by
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the claims of patent applications filed by N.C. State relating to the licensed
inventions. Ten U.S. patents were subsequently issued with respect to the
applications, with expiration dates between 2007 and 2009. Twelve of the foreign
applications have been issued with expiration dates from 2006 to 2013. The U.S.
government holds a non-exclusive license to practice the inventions for
government purposes.
The Company has also entered into other license agreements with N.C. State, and
with the licensing agencies of other universities, under which the Company has
obtained rights to practice inventions claimed in various patent applications
pending in the U.S. and other foreign countries.
For proprietary technology which is not patented or otherwise published, the
Company seeks to protect the technology and related know-how and information as
trade secrets and to maintain it in confidence through appropriate
non-disclosure agreements with employees and others to whom the information is
disclosed. There can be no assurance that these agreements will provide
meaningful protection against unauthorized disclosure or use of the Company's
confidential information or that our proprietary technology and know-how will
not otherwise become known or independently discovered by others. The Company
also relies upon other intellectual property rights such as copyright where
appropriate.
Because of rapid technological developments in the semiconductor industry, the
patent position of any semiconductor materials or device manufacturer, including
that of the Company is subject to uncertainties and may involve complex legal
and factual issues. Consequently, there can be no assurance that patents will be
issued on any of the pending applications owned or licensed to the Company or
that claims allowed by any patents issued or licensed to the Company will not be
contested or invalidated. In the past, the U.S. patent that the Company licenses
from N.C. State relating to growth of SiC was subject to a reissue proceeding;
however, that patent was successfully reissued. Currently, a corresponding
European patent is being opposed, which means that the Company could lose patent
protection in Europe for this particular method.
There is likewise no assurance that patent rights owned or exclusively licensed
to the Company will provide significant commercial protection since issuance of
a patent does not prevent other companies from using alternative, non-infringing
technology. Further, the Company earns a material amount of its revenues in
overseas markets. While the Company holds and has applied for patent protection
for certain of its technologies in these markets, there can be no assurance that
it will obtain protection in all commercially significant foreign markets or
that the Company's intellectual property rights will provide adequate protection
in all such markets.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. Litigation may be necessary in
the future to enforce the Company's intellectual property rights or to defend
the Company against claims of infringement, and such litigation can be
protracted and costly and divert the attention of key personnel. There can be no
assurance that third parties will not attempt to assert infringement claims
against the Company with respect to our current or future products. The Company
has been notified from time to time of assertions that its products or processes
may be infringing patents or other intellectual property rights of others. We
cannot predict the occurrence of future assertions of infringement or the extent
to which such assertions may require the Company to seek a license under the
rights asserted. Likewise, we cannot predict the occurrence of future assertions
that may prevent the Company from selling products or result in litigation.
-12-
<PAGE>
SALES AND MARKETING
- -------------------
The Company actively markets its products through targeted mailings,
telemarketing, select advertising and attendance at trade shows. The Company
generally uses an executive sales approach, relying predominantly on the efforts
of senior management and a small direct sales staff for worldwide product sales.
The Company believes that this approach is preferable in view of its current
customer base and product mix, particularly since the production of lamp and
display products incorporating LED chips is concentrated among a relatively
small number of manufacturers. However, the Company departs from this approach
for sales to certain Asian countries. In Japan, the Company markets its LED
products and SiC wafers through its distributors Sumitomo Corporation
("Sumitomo") and Shin-Etsu Handotai Co. Ltd. ("Shin-Etsu"). The Company also
uses sales representatives to market its LED products in Hong Kong, China and
Korea. The Company sells SiC crystal materials for use in gemstone applications
directly to C3 under an exclusive supply agreement.
CUSTOMERS
- ---------
During fiscal 1999, revenues from Siemens A.G., C3 and the Department of Defense
each accounted for more than 10% of total revenue. The loss of Siemens, C3, or
the Department of Defense's business would have a material adverse effect on the
results of operations if the Company were unable to replace the lost revenue.
For the year ended June 28, 1998, revenue from Siemens, C3 and the Department of
Defense each accounted for more than 10% of total revenue. For the year ended
June 30, 1997, Siemens and the Department of Defense revenues each accounted for
more than 10% of total revenue. For financial information about foreign and
domestic sales, please see Note #2, "Summary of Significant Accounting Policies"
to the Company's consolidated financial statements included in Item 8 of this
report.
BACKLOG
- -------
As of June 27, 1999, the Company had a firm backlog of approximately $37.1
million consisting of approximately $25.6 million of product orders and $11.5
million of executed research contracts with the U.S. Government. Some of the
funds for executed research contracts with the U.S. Government have been awarded
but may not be appropriated. This compares to a firm backlog level of $12.6
million as of June 28, 1998, which consisted of approximately $7.2 million of
product orders and approximately $5.4 million of executed research contracts
with the U.S. Government. We expect the entire backlog to be filled during
fiscal 2000, with the exception of approximately $5.6 million in U.S. government
funded contracts.
COMPETITION
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. The
Company believes that it currently enjoys a favorable position in the existing
markets for SiC-based products and materials primarily as a result of its
proprietary SiC-based technology. However, the Company faces actual and
potential competition from a number of established domestic and international
compound semiconductor companies. Many of these companies have greater
engineering, manufacturing, marketing and financial resources than the Company.
The Company's primary competition for the blue and green LED products comes from
companies that market blue and green LEDs fabricated on sapphire substrates.
These competitors market blue and green
-13-
<PAGE>
LED products that are as bright or brighter than the Company's high brightness
blue and green LED devices. These companies have historically been successful in
the market for outdoor display applications because of the brightness demands of
outdoor displays, as well as the decreased price sensitivity of the outdoor
display market. Cree believes its brighter blue and green LEDs will enable it to
compete successfully in this market because they can be used in the same
applications at a lower cost than competing products.
The Company believes that its approach to manufacturing blue and green LEDs from
SiC substrates offers a more cost-effective design and process than its
competitors. Cree's smaller chip design, which is compatible with industry
trends for package miniaturization, enables the diode to use less material and
permits more devices to be fabricated on each wafer processed, lowering the cost
per unit. In addition, the Company's industry standard vertical chip structure
allows manufacturers to package the LED on the same production line as other
green, amber and red LEDs, eliminating the need for special equipment necessary
for chips made from sapphire substrates. Furthermore, Cree's SiC-based devices
can withstand a much higher level of electrostatic discharge ("ESD") than
existing sapphire-based products and therefore are more suitable for
applications that require high ESD emission ratings, such as automotive
applications.
The Company believes that other firms (including certain of our customers) may
seek to enter the blue and green LED market in the future. For example, Siemens
and Shin-Etsu have licensed certain of our LED technology, which may facilitate
their entrance into our LED markets. We believe that Siemens is currently
producing LEDs using Cree's licensed technology. 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.
ENVIRONMENTAL REGULATION
- ------------------------
The Company is subject to a variety of governmental 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 dispose 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 compliance
with such regulations, but any failure to comply, whether intentional or
inadvertent, could have an adverse effect on our business.
EMPLOYEES
- ---------
As of June 27, 1999, the Company employed 390 people, all of which are located
in the United States. None of the Company's employees are represented by a labor
union or subject to collective bargaining agreements. The Company believes
relations with its employees are strong.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
- ----------------------------------------
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.
-14-
<PAGE>
Our operating results will depend on many factors, including the following:
o our ability to develop, manufacture and deliver products in a timely
and cost-effective manner;
o whether we encounter low levels of usable product produced during each
manufacturing step (our "yield");
o our ability to expand our production of SiC wafers and devices;
o demand for our products or our customers' products;
o competition; and
o 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 but
not limited to the following:
o impurities in the materials used;
o contamination of the manufacturing environment;
o equipment failure, power outages or variations in the manufacturing
process;
o losses from broken wafers or other human error; and
o 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 LEDs, OUR
OPERATING RESULTS MAY SUFFER.
We believe that higher volume production of high brightness blue and green LEDs
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:
o our ability to consistently manufacture these products in volumes large
enough to cover our fixed costs and satisfy our customers' requirements;
and
o our ability to improve our yields and reduce the costs associated with the
manufacture of these products.
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.
-15-
<PAGE>
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 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:
o achievement of technology breakthroughs required to make commercially
viable devices;
o the accuracy of our predictions of market requirements and evolving
standards;
o acceptance of our new product designs; o the availability of qualified
development personnel;
o our timely completion of product designs and development;
o our ability to develop repeatable processes to manufacture new products in
sufficient quantities for commercial sales; and
o 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 1999 our top five customers accounted for 81% of our total revenue.
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 construction and upfit of
buildings. Expansion activities such as these are subject to a number of risks,
including unforeseen environmental or engineering problems relating to existing
or new facilities or unavailability or late delivery of the advanced, and often
customized, equipment used in the production of our products, and delays in
bringing production equipment on-line. These and other risks may affect the
construction of new facilities, which could adversely affect our business,
results of operations and financial condition.
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
-16-
<PAGE>
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 and Shin-Etsu
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 those of the Company. 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.
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.
LIMITATIONS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by N.C. State. The licensed patents give us
rights to our SiC crystal growth process. The issued U.S. patents we own will
expire between 2008 and 2017. The expiration dates on the U.S. patents we
license from N.C. State run from 2007 to 2009. We have obtained a number of
corresponding patents and patent applications in certain 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, the U.S.
patent that the Company licenses from N.C. State relating to growth of SiC was
subject to a reissue proceeding; however, that patent was successfully reissued.
Currently, a corresponding European patent is being opposed, which means that
the Company could lose
-17-
<PAGE>
patent protection in Europe for this particular method. 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 others and licensed to us) will provide significant commercial
protection. In addition to patent protection, we also rely on trade secrets and
other non-patented 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.
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 or, if required, whether
such licenses will be offered or offered on acceptable terms or that disputes
can be resolved without litigation. Litigation to determine the validity of
infringement, or claims alleged by third parties, could result in significant
expense to us and divert the efforts of our technical and management personnel,
whether or not the litigation is ultimately determined in our favor.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 62%, 74% and 79%
of our revenue in fiscal 1999, 1998 and 1997, respectively. 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 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 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
cost 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.
-18-
<PAGE>
Item 2. Properties
The Company operates its own facilities in Durham, North Carolina. Direct
control over SiC crystal growth, wafering, epitaxial deposition, device
fabrication and test operations allows the Company to shorten its product design
and production cycles and to protect its proprietary technology and processes.
In November 1997, the Company acquired its present manufacturing facility, a
30-acre industrial site in Durham, North Carolina, consisting of a 139,000
square foot production facility and 33,000 square feet of service and warehouse
buildings. Cree is currently constructing an addition to the main production
facility containing 42,000 square feet. The Company also recently purchased a
79-acre site close to its present facility for potential future expansion.
The Company currently leases space for some of its manufacturing facilities,
which occupy 21,900 square feet in Durham, North Carolina. This lease expires in
December 2001. In addition, the Company also leases approximately 13,200 square
feet in a separate building in Durham, North Carolina, that is expected to be
used for research and development projects. This lease expires in August 2000.
The Company also leases a small administrative office. This lease expires in
December 1999.
Item 3. Legal Proceedings
The Company is not a party to any material litigation and is not aware of any
pending or threatened litigation that could have a material adverse effect
either upon the Company's business, operating results or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock Market Information. The Company's common stock is traded in the
NASDAQ National Market and is quoted under the symbol "CREE". The following
table sets forth, for the quarters indicated, the high and low bid prices as
reported by NASDAQ. Quotations represent interdealer prices without an
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
FY 1999* FY 1998*
-------- --------
High Low High Low
---- --- ---- ---
First Quarter $ 8.750 $ 5.250 $10.250 $ 5.875
Second Quarter $23.500 $ 6.813 $14.750 $ 7.813
Third Quarter $26.625 $15.125 $9.813 $ 6.750
Fourth Quarter $36.688 $18.625 $8.813 $ 7.000
*As adjusted for the two-for-one split effective on July 26, 1999.
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<PAGE>
Holders and Dividends. There were approximately 387 holders of record of the
Company's common stock as of August 2, 1999.
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. There are no
contractual restrictions in place that currently materially limit, or are likely
in the future to materially limit, the Company from paying dividends on its
common stock, but applicable state law may limit the payment of dividends. The
present policy of the Company is to retain earnings, if any, to provide funds
for the operation and expansion of its business.
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 27, 1999, June 28, 1998 and June 30, 1997, and the
consolidated balance sheet data at June 27, 1999 and June 28, 1998 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the years ended June 30, 1996 and 1995 and the consolidated
balance sheet data at June 30, 1997, 1996 and 1995 are derived from audited
consolidated financial statements not included herein. All share amounts have
been restated to reflect the Company's two-for-one stock split effective July
26, 1999.
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
--------------------------------------------
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $53,464 $34,891 $ 19,823 $ 9,689 $ 5,989
Contract revenue, net 6,586 7,640 6,535 3,945 3,011
License fee income -- -- 2,615 1,423 --
--------------------------------------------
Total revenue 60,050 42,531 28,973 15,057 9,000
Income (loss) from continuing 12,702 6,275 3,542 243 (17)
operations
Net income per share, basic $0.47 $0.24 $0.14 $0.01 $0.00
Net income per share, dilutive $0.45 $0.23 $0.13 $0.01 $0.00
Weighted average shares 28,432 26,987 26,251 25,230 20,734
outstanding
Years Ended
--------------------------------------------
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $60,222 $27,603 $21,013 $18,596 $ 9,971
Total assets 144,217 72,724 50,137 43,796 20,924
Long-term obligations 4,650 10,804 1,638 -- --
Shareholders' equity $130,022 $54,865 $45,125 $40,672 $19,504
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins, and anticipated expense levels, as well as other statements, including
words such as "may," "will," "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Certain Business Risks and Uncertainties" in
Item 1 of this report, as well as other risks and uncertainties referenced in
this report.
OVERVIEW
- --------
We are the world leaders in developing and manufacturing semiconductor materials
and electronic devices made from SiC. We recognize product revenue at the time
of shipment or in accordance with the terms of the relevant contract. We
recognize the largest portion of our revenue from the sale of blue and green LED
products. We offer LEDs at two brightness levels- high brightness blue and green
products and standard blue products. Our LED devices are utilized by end users
for automotive backlighting, LCD backlighting (including wireless handsets),
indicator lamps, miniature white lighting, indoor sign and arena displays,
outdoor full color stadium displays, traffic signals and other lighting
applications. LED products represented 51% of our revenue in fiscal 1999 and 48%
in fiscal 1998.
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 fiscal 1999, C3 purchased equipment from us, which has more than doubled the
capacity for the production of crystals for C3. Sales of advanced materials made
from SiC represented 38% of our revenue in fiscal 1999 and approximately 34%
during fiscal 1998.
The balance of our revenue, 11% for fiscal 1999 and 18% for fiscal 1998 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 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 we expect funding to
exceed direct costs over the life of the contract. For contracts under which we
anticipate that direct costs will exceed amounts to be funded over the life of
the contract (i.e., certain cost-share arrangements), we report direct costs as
research and development expenses with related reimbursements recorded as an
offset to those expenses.
In June 1999, Cree announced the first of a family of RF and microwave
transistor products made from SiC and designed for use in a variety of power
amplification processes. A second phase of transistor products is expected to be
available in fiscal 2000. The Company expects that these products will be
marketed to a variety of amplifier producers, including wireless base stations
and digital broadcast applications. While distribution of samples will commence
in early fiscal 2000, during fiscal 2000 the Company believes that these
products will be sold in limited quantities as design cycles for the target
applications are generally several months. There can be no assurance that
customers will be able to
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<PAGE>
develop applications in the near future that will require commercial production
of the Company's RF products or that such products will be successful in the
market.
RESULTS OF OPERATIONS
- ---------------------
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
YEARS ENDED
-----------------------------------
June 27, June 28, June 30,
1999 1998 1997
-------- -------- --------
Revenue:
Product revenue, net...... 89.0% 82.0% 68.4%
Contract revenue, net..... 11.0 18.0 22.6
License fee income........ -- -- 9.0
-------- -------- --------
Total revenue.......... 100.0 100.0 100.0
Cost of Revenue:
Product revenue, net...... 44.9 51.1 46.2
Contract revenue, net..... 8.2 14.7 19.7
-------- -------- --------
Total cost of revenue.. 53.1 65.8 65.9
-------- -------- --------
Gross margin................. 46.9 34.2 34.1
Operating expenses:
Research and development.. 7.4 4.2 6.3
Sales, general and
administrative........... 10.1 9.6 14.9
Other expense............. 1.8 1.2 2.2
-------- -------- --------
Income from operations.... 27.6 19.2 10.7
Interest income, net......... 1.8 1.7 2.1
-------- -------- --------
Income before income taxes 29.4 20.9 12.8
Income tax expense........... 8.2 6.1 0.6
-------- -------- --------
Net income................ 21.2% 14.8% 12.2%
======== ======== ========
FISCAL YEARS ENDED JUNE 27, 1999 AND JUNE 28, 1998
Revenue
Revenue grew 41% from $42.5 million in fiscal 1998 to $60.1 million in fiscal
1999. This increase was attributable to higher product revenue, which rose 53%
from $34.9 million in fiscal 1998 to $53.5 million in fiscal 1999. This increase
in product revenue was a result of the 62% rise in sales of our LED products and
58% increase in materials revenue in fiscal 1999 compared to fiscal 1998,
respectively.
Growth in LED volume resulted from the introduction of the new high brightness
devices and improvements in the product design of and strong demand for the
standard brightness product. While we continue to improve our manufacturing
process and yields on our high brightness products, we must continue to
significantly increase our production output to meet the growing demands of our
customers. We believe that our LED products are particularly attractive to the
marketplace due to our low prices and
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<PAGE>
industry standard vertical structure. During fiscal 1999, LED volume grew 160%
while average sales prices declined 38%.
We expect that in order to increase market demand for all of our LED products,
we must continue to lower average sales prices, although pricing is anticipated
to be more stable in fiscal year 2000 than prior years. Historically, we have
been successful in matching lower sales prices with lower costs. During fiscal
2000, we plan to focus on reducing costs through higher production yields and
from greater volumes as fixed costs are spread over a greater number of units.
In September 1996, we entered into an agreement with Siemens where Siemens
agreed to purchase our blue LED chips. In December 1998, this agreement was
amended to provide for additional shipments of LED products through September
1999 and was assigned to an indirect subsidiary of Siemens, OSRAM Opto
Semiconductors GmbH & Co. ("Osram"), effective as of January 1, 1999. This
contract calls for declining prices based on an increase in the number of units
shipped. This pricing structure is common with customers in the semiconductor
industry and prior agreements with Siemens. Siemens (including its Osram
subsidiary) accounted for 37% of our revenue for fiscal 1999 and 40% in fiscal
1998. We are currently negotiating a new purchase agreement with Osram.
Our high brightness LED products, which were introduced during fiscal 1999,
continue to be ramped up to high volume production in our manufacturing
facility. During the fourth quarter of fiscal 1999, revenue from high brightness
products made up more than 25% of total LED revenue. We believe sales from these
products will surpass our standard brightness product during fiscal year 2000;
however, there can be no assurance that the product volume will increase or
yield improvements will be made to do so.
Revenue attributable to sales of SiC material was 58% higher in fiscal 1999 than
in the same period of fiscal 1998 due to a significant increase in sales to C3
for gemstone applications and strong demand for wafer products. During fiscal
1998, C3 was in initial stages of operation; therefore, unit sales were limited.
Revenue from sales of SiC wafers were higher in fiscal 1999 as compared to
fiscal 1998, due to quality improvements in wafers, along with the availability
of the larger two-inch wafer during fiscal 1999.
During fiscal 1999, sales from our displays business declined 96% from the prior
year period as we have chosen to discontinue this product line. Contract revenue
received from U.S. Government agencies also declined 14% during fiscal 1999
compared to fiscal 1998, as a significant contract that funded optoelectronic
research was exhausted in early fiscal 1999. We anticipate contract revenue to
increase slightly in fiscal 2000 as additional contract awards have been
received in late fiscal 1999.
Gross Profit
Gross margin climbed to 47% of revenue during fiscal 1999 as compared to 34%
during 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. During much of
fiscal 1998, 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 fiscal
1998; therefore, average die yields were significantly lower.
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<PAGE>
During fiscal 1999, margins realized on the high brightness products were lower
than those derived from our standard blue LED product, as the yield from the
manufacturing process was less than our standard product. Historically, we have
experienced lower margins with many new product introductions. While we continue
to make improvements to output and yield, the high brightness products may
continue to pressure margins in the short term if we are not able to meet our
yield objectives.
Average wafer costs for SiC material sales also declined 32% during fiscal 1999
over the comparative period due to more efficient processes and improved yield.
Research and Development
Research and development expenses increased 150% in fiscal 1999 to $4.4 million
from $1.8 million in fiscal 1998. Much of this increase was caused by
significantly higher costs for the initial development of the new high
brightness LED products. In May of 1999, the company signed a $2.6 million
agreement with MVIS for the development of edge-emitting LEDs and blue laser
diodes. As development costs are incurred under this contract, funding from MVIS
is offset against these expenses. During fiscal 1999, approximately $0.5 million
of funding from MVIS was offset against research and development expenses. The
remaining $2.1 million of funding is anticipated to be applied to research and
development expenses in fiscal 2000. We expect that including the offset of MVIS
funds in fiscal 2000, research and development expenses will remain relatively
stable compared to fiscal 1999 amounts.
Sales, General and Administrative
Sales, general and administrative expenses increased 47% in fiscal 1999 to $6.1
million from $4.1 million in the fiscal 1998 due primarily to the general growth
in our business. In addition, in fiscal 1998 two insurance events were recorded
that reduced expenses by $0.4 million. 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. Also as a result of our increased profitability
during fiscal 1999 over fiscal 1998, the profit sharing accrual (which was based
on 5% of operating income) has grown $0.4 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 Expense
Other expense increased 107% to $1.1 million during fiscal 1999 from $0.5
million in fiscal 1998. During 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. We also wrote-off other assets that had
no future value to the Company. These write-offs were slightly offset by income
recognized under our equipment build-out agreement with C3. In fiscal 1998 and
1999, we sold equipment manufactured by us to C3 at cost plus an overhead
allocation equivalent to that recognized on our government contracts. The
reimbursement by C3 of actual manufacturing costs was recorded as a reduction in
fixed assets, while the overhead allocation portion of the funds offset "Other
expense."
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<PAGE>
Interest Income, net
Interest income, net has increased 45% to $1.1 million in fiscal 1999 from $0.7
million in fiscal 1998 due to higher average cash balances being available in
fiscal 1999 as a result of a public stock offering completed in February 1999. A
portion of the proceeds received from the offering was used to repay all debt
that was outstanding; therefore during much of the third quarter and all of the
fourth quarter of fiscal 1999, there was no interest expense incurred. In
November 1997, we obtained a term loan from NationsBank to fund the acquisition
and construction of our manufacturing facility in Durham, North Carolina. Most
of that interest was capitalized during fiscal 1998.
Income Tax Expense
Income tax expense for fiscal 1999 was $4.9 million compared to $2.6 million in
fiscal 1998. This increase resulted from increased profitability during fiscal
1999 over fiscal 1998. Our effective tax rate during fiscal 1999 was 28%
compared to 29% in fiscal 1998.
FISCAL YEARS ENDED JUNE 28, 1998 AND JUNE 30, 1997
Revenue
Revenue increased 47% from $29.0 million in fiscal 1997 to $42.5 million in
fiscal 1998. A significant portion of the rise was attributable to the 132%
increase in LED volume sold pursuant to an amendment to the purchase agreement
with Siemens. This agreement and two subsequent amendments provided $6.8 million
in additional revenue in fiscal 1998 over fiscal 1997. This significant increase
in volume sold was offset by a 32% decline in our average sales price per LED
sold.
Wafer and other materials revenue increased 110% in fiscal 1998 over fiscal 1997
due to a 29% increase in wafer volume associated with greater interest in the
worldwide research community for SiC-based products, as well as revenues from
C3. C3 activity grew as a result of the execution in July 1997 of the new supply
agreement and development agreement. Revenues for the displays business
increased 37% in fiscal 1998 over fiscal 1997 due to increased interest among
customers for indoor video displays.
Contract revenue increased 17% to $7.6 million during fiscal 1998 as compared to
fiscal 1997, as a result of a change in the mix of funding from available
contracts. Contracts funded for fiscal 1997 included a higher amount of proceeds
recognized under two cost-share arrangements. For these arrangements, funds are
recorded as a reduction in research and development expense rather than as
contract revenue. As funds associated with these two programs were exhausted
during fiscal 1998, we shifted our resources to programs under a cost-plus or
catalog price arrangement, in which funding is recorded as contract revenue.
Therefore contract revenue was higher in fiscal 1998 than 1997.
Included in revenue for fiscal 1997 is a one-time license fee of $2.6 million.
This license fee was earned pursuant to a License and Technology Transfer
Agreement entered into in September 1996 with Shin-Etsu. Pursuant to this
agreement, we granted Shin-Etsu a license to use certain epitaxial and device
fabrication process technology for the manufacture of our blue LED product. We
did not record any license fee revenue during fiscal 1998.
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<PAGE>
Gross Profit
Our gross profit increased 47% to $14.6 million in fiscal 1998 over fiscal 1997.
Our gross margin was 34% for both fiscal 1998 and fiscal 1997. License fees,
which have no corresponding cost, were included in fiscal 1997 results. Without
license fee revenue, gross profit would have been $7.3 million or 28% of revenue
for fiscal 1997. The overall increase in gross profit in fiscal 1998 resulted
from higher revenue and lower LED and material costs per unit. The lower LED and
wafer costs were recognized due to higher throughput, which more effectively
utilized capacity and yield efficiencies. The greater throughput enabled us to
spread fixed cost investments over a larger volume of product. Greater yield in
LED applications resulted from a combination of a new smaller die size and a new
larger two-inch diameter wafer and in the fourth quarter of fiscal 1998, the
introduction of the conductive buffer technology. Yield was also higher for LED
and materials due to plant processing efficiency and a higher quality of wafer
materials used in these products.
The cost of contract revenue has increased in fiscal 1998 over fiscal 1997, due
to the change in the mix of funding from available contracts. Costs for fiscal
1997 included a higher amount of expenses recognized under two cost-share
arrangements. For these arrangements, costs are recorded as research and
development expenses rather than cost of contract revenue. When funding under
these two contracts was completed in the second quarter of fiscal 1998, all
resources were shifted to cost-plus and catalog priced contracts, where expenses
are recorded as a cost of contract revenue.
Research and Development
Research and development costs decreased by 3% to approximately $1.8 million in
fiscal 1998 from approximately $1.8 million in fiscal 1997 due to a reduction in
work performed under two cost-share contracts to further the blue laser
research. These cost-share contracts concluded during the first half of fiscal
1998. Additionally, research and development costs for fiscal 1997 included a
one-time write-off of $0.1 million for the closure of our Eastern European
Division, located in St. Petersburg, Russia.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased 4% to $4.1 million for
fiscal 1998 from $4.3 million in fiscal 1997 due to the receipt of two one-time
insurance payments. As a result of the dismissal in November 1997 of a
securities class action lawsuit filed in October 1996, we were reimbursed $0.2
million from our insurance carrier for costs incurred in defense of the suit. In
addition, as a result of a negotiated cost cap, we received a $0.2 million
reimbursement of medical expenses that were incurred under a partially
self-funded insured health plan. As a percentage of revenue, these costs have
decreased to 10% in fiscal 1998 from 15% in fiscal 1997.
Other Expense
In fiscal 1998, other expenses included a net loss recorded on the write-down of
leasehold improvements, the disposal of certain other fixed assets and a
write-off of $66,000 for the remaining value of goodwill associated with the
acquisition of the Real Color Displays subsidiary. In addition, we entered into
an agreement with C3 to sell equipment manufactured by us at cost plus a
reasonable overhead allocation. The overhead allocation was recorded as "Other
income;" however, the amount was more than offset by leasehold write-offs
associated with the move to our new facility and other asset disposals. Other
expense for fiscal 1997 was higher than that recorded in fiscal 1998 as large
fixed asset write-downs
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<PAGE>
were recorded as the result of a physical plant inventory. These write-downs
were greater than those recorded in fiscal 1998.
Interest Income, net
Interest income, net increased by $0.1 million in fiscal 1998 over fiscal 1997
due to higher investable cash balances available in fiscal 1998. Cash balances
were higher in fiscal 1998 as we generated approximately $12.1 million from
operations compared to approximately $6.1 million in fiscal 1997.
Income Tax Expense
Our effective income tax rate increased to 29% for fiscal 1998 from a 5%
effective rate during fiscal 1997. The lower rate for fiscal 1997 resulted from
the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. On February 17, 1999, we completed
our public stock offering and raised approximately $45.3 million, net of
offering expenses and the repayment of long-term debt. There were no selling
shareholders. The Company expects that the majority of these funds will continue
to be used to expand facilities and equipment capacity. The remainder will be
used for general corporate purposes, including working capital and potential
acquisitions of or investments in complementary businesses. The Company may also
issue additional shares of common stock for the acquisition of complementary
businesses or other significant assets. Although the Company from time to time
evaluates potential acquisitions of and investments in businesses and
anticipates continuing to make such evaluations, the Company has no present
commitments or agreements with respect to the acquisition or investment in
another business. As of June 27, 1999, we had working capital of approximately
$60.2 million, including $48.7 million in cash and cash equivalents and
marketable securities.
Operating activities generated $19.9 million in cash during fiscal 1999. This
was attributable primarily to net income of $12.7 million, other non-cash
expenses of $7.2 million, $3.5 million in deferred income tax benefits and $2.7
million for tax benefits associated with stock options. These amounts were
partly offset by an increase of $6.2 million in accounts receivable and a $1.4
million rise in inventory.
Most of the $45.3 million of cash used in investing activities in fiscal 1999
was related to expenditures associated with the construction of our new
manufacturing facility in Durham, North Carolina and increased manufacturing
capacity in the crystal growth, epitaxial, clean room and pack and test areas.
The Company also invested $4.5 million to acquire an investment in the common
stock of MVIS.
The $50.1 million of cash provided by financing activities in fiscal 1999
related primarily to the receipt of $61.4 million related to proceeds from the
public stock offering and the exercise of stock warrants and stock options from
the Company's employee stock option plan. This significant inflow of cash was
partly offset by the $10.0 million payoff of long term debt and a $3.2 million
repurchase of common stock. This stock was repurchased at an average price of
$6.84 per share. The stock warrants exercised were distributed in connection
with our September 1995 private placement and have an exercise price of $13.62.
As of June 27, 1999 warrants remained outstanding to purchase 258,000 shares;
these warrants will expire in September 2000.
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<PAGE>
We are currently engaged in construction activities related to a new packaging
area and the expansion of our crystal growth department. These additions, which
are expected to be completed by calendar year end, will allow us to consolidate
all LED and wafer manufacturing facilities to one site with improved
manufacturing capabilities. In order to grow existing products and provide
expanded facilities for our new microwave product line, we anticipate a second
phase of expansion to facilities and infrastructure to begin in fiscal 2000. We
anticipate total costs for these expenses to be between $15 and $20 million.
Estimates for equipment costs related to this expansion also total between $15
and $20 million. We plan to fund these capital projects with internally
generated cash plus cash on hand.
IMPACT OF THE YEAR 2000
State of Readiness
We have evaluated all of our internal software, embedded systems and products
against Year 2000 concerns and believe that our products and businesses will not
be substantially affected by the advent of the year 2000. We have completed a
Year 2000 compliance plan that included four phases: inventory, assessment,
remediation and testing. A detailed inventory of all computers and related
systems was completed and all critical upgrades were finished for all computers
that were non-Year 2000 compliant. All factory-dependent computers were also
tested and are now Year 2000 compliant. The only other remaining steps include a
network patch that impacts our utilities and the conversion of the electronic
mail system. We do not believe that these conversions are business critical.
Individual software installations are also being reviewed. These remaining areas
should be completed no later than September 1999.
Although we cannot control whether and how third parties will address the Year
2000 issue, we have now contacted critical vendors and suppliers and have been
informed that they have the ability to ensure smooth delivery of products
without disruptions caused by Year 2000 problems. Based on the responses of
these vendors to our survey, we believe that our vendors are either
substantially Year 2000 compliant or that any noncompliance will not have a
material effect on our operations. We have now received assurances from 95% of
these vendors. We anticipate that the remaining vendors also will be able to
ensure delivery of product; however, we do not expect that this assessment will
be complete until September 1999.
Costs
We do not believe that the costs associated with Year 2000 compliance have had a
material adverse effect on our business, results of operations or financial
condition. As of June 27, 1999, this project is substantially complete and we do
not anticipate that we will incur any material costs in winding up the project.
Year 2000 Risks
Although we believe that our planning efforts are adequate to address our Year
2000 concerns, there can be no assurance that we will not experience negative
consequences and material costs as a result of undetected errors or defects in
the technology used in our internal systems. Also, there is no assurance that
the systems of third parties on which we rely will be made compliant on a timely
basis. If realized, these risks could result in an adverse effect on our
business, results of operations and financial condition.
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<PAGE>
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 alternate 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. 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.
Contingencies
We have not yet developed a contingency plan to address what the Company should
do if we are unable to address the Year 2000 issue. We expect the contingency
plan to be in place after the inquiry of vendors and customers is completed.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures:
As of June 27, 1999, the Company maintains an investment in equity securities
that is treated for accounting purposes under SFAS 115 as "available for sale"
securities. This investment is carried at fair market value based upon quoted
market price of that investment as of June 27, 1999, with net unrealized gains
or losses excluded from earnings and reported as a separate component of
stockholder's equity. This investment, which consists of common stock of MVIS,
is subject to market risk of equity price changes. The common stock of MVIS is
publicly traded on the Nasdaq National Market. The Company acquired these shares
from MVIS in a private placement and has agreed not to sell the shares until at
least January 6, 2000; however, MVIS filed a registration statement in August
1999 covering the Company's sale of these shares. Since the Company is currently
restricted from trading these shares and management views this transaction as an
investment, the shares are accounted for as "available for sale" securities
under SFAS 115. The fair market value of this investment as of June 27, 1999,
using the closing sale price as of June 25, 1999, was $6.1 million, representing
268,600 shares.
During fiscal 1999, the Company repaid the term loan that was outstanding as of
June 28, 1998. The Company currently has no debt outstanding, therefore, Cree is
no longer subject to interest rate risk.
Qualitative Disclosures:
The investment in MVIS common stock is subject to the market risk of equity
price changes. While the Company can not predict or manage the future market
price for such stock, management continues to evaluate its investment position
on an ongoing basis.
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<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors..............................................31
Report of Independent Accountants...........................................32
Consolidated Balance Sheets as of June 27, 1999 and June 28, 1998...........33
Consolidated Statements of Operations for the years ended June 27, 1999,
June 28, 1998 and June 30, 1997.............................................34
Consolidated Statements of Cash Flow for the years ended June 27, 1999,
June 28, 1998 and June 30, 1997.............................................35
Consolidated Statements of Shareholders' Equity for the years ended
June 27, 1999, June 28, 1998 and June 30, 1997..............................36
Notes to Consolidated Financial Statements..................................37
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Cree Research, Inc.
We have audited the accompanying consolidated balance sheet of Cree Research,
Inc. and subsidiaries as of June 27, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of Cree
Research, Inc. and subsidiaries as of and for the two year period ended June 28,
1998 were audited by other auditors whose report dated July 22, 1998 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cree
Research, Inc. and subsidiaries as of June 27, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
accordance with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
July 23, 1999
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Cree Research, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows present fairly, in all material respects, the financial position of Cree
Research, Inc. and subsidiaries at June 28, 1998, and the results of their
operations and their cash flows for the years ended June 28, 1998 and June 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998
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<PAGE>
CREE RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 27, June 28,
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 42,506 $ 17,680
Marketable securities 6,145 657
Accounts receivable, net 16,285 10,479
Inventories 3,977 2,543
Deferred income taxes 296 1,952
Prepaid expenses and other current assets 558 1,347
--------- ---------
Total current assets 69,767 34,658
Property and equipment, net 69,884 36,476
Patent and license rights, net 1,731 1,525
Deferred income taxes 2,827 --
Other assets 8 65
--------- ---------
Total assets $144,217 $ 72,724
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 7,487 $ 5,595
Current maturities of long term debt -- 17
Accrued salaries and wages 819 391
Other accrued expenses 1,239 1,052
--------- ---------
Total current liabilities 9,545 7,055
Long term liabilities:
Long term debt -- 8,650
Deferred income taxes 4,650 2,154
--------- ---------
Total long term liabilities 4,650 10,804
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares -- --
authorized at June 27, 1999 and 2,750 shares
authorized at June 28, 1998; none issued and
outstanding
Common stock, par value $0.0025; 60,000 shares 73 65
authorized at June 27, 1999 and 29,000 shares
authorized at June 28, 1998; shares issued and
outstanding 29,258 and 25,978 at June 27, 1999
and June 28, 1998, respectively
Additional paid-in-capital 111,136 49,676
Retained earnings 18,813 5,124
--------- ---------
Total shareholders' equity 130,022 54,865
--------- ---------
Total liabilities and shareholders' equity $144,217 $ 72,724
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
June 27, June 28, June 30,
1999 1998 1997
--------- -------- --------
Revenue:
Product revenue, net $ 53,464 $34,891 $19,823
Contract revenue, net 6,586 7,640 6,535
License fee income -- -- 2,615
--------- -------- --------
Total revenue 60,050 42,531 28,973
Cost of revenue:
Product revenue, net 26,977 21,727 13,388
Contract revenue, net 4,943 6,252 5,707
--------- -------- --------
Total cost of revenue 31,920 27,979 19,095
Gross profit 28,130 14,552 9,878
Operating expenses:
Research and development 4,443 1,774 1,826
Sales, general and administrative 6,064 4,131 4,301
Other expense 1,041 502 639
--------- -------- --------
Income from operations 16,582 8,145 3,112
Interest income, net 1,060 730 607
--------- -------- --------
Income before income taxes 17,642 8,875 3,719
Income tax expense 4,940 2,600 177
--------- -------- --------
Net income $12,702 $ 6,275 $ 3,542
========= ======== ========
Other comprehensive income, net of tax
Unrealized holding gains 987 -- --
========= ======== ========
Comprehensive income $13,689 $ 6,275 $ 3,542
========= ======== ========
Earnings per share:
Basic $0.47 $0.24 $0.14
========= ======== ========
Diluted $0.45 $0.23 $0.13
========= ======== ========
Shares used in per share calculation:
Basic 27,015 25,726 24,911
========= ======== ========
Diluted 28,432 26,987 26,251
========= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)
June 27, June 28, June 30,
1999 1998 1997
-------- -------- --------
Operating activities:
Net income $ 12,702 $ 6,275 $ 3,542
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 5,382 4,217 3,356
Loss on disposal of property and
equipment 1,602 719 631
Loss on write off of patents 51 17 141
Amortization of patent rights 117 102 108
Amortization and write off of goodwill -- 86 41
Purchase of marketable trading
securities (233) (1,500) --
Proceeds from sale of marketable
trading securities 1,421 421 --
Loss (gain) on marketable trading
securities (141) 32 --
Deferred income taxes 3,494 394 (192)
Income tax benefits from stock
option exercises 2,672 1,791 96
Changes in operating assets and liabilities:
Accounts receivable (6,196) (2,398) (891)
Inventories (1,434) 1,406 (723)
Prepaid expenses and other assets (1,981) (882) (262)
Accounts payable, trade 1,892 1,092 (226)
Accrued expenses 598 320 476
-------- -------- --------
Net cash provided by operating activities 19,946 12,092 6,097
-------- -------- --------
Investing activities:
Maturity of investment securities -- -- 1,787
Purchase of available for sale
security (4,500) -- --
Purchase of property and equipment (40,578) (15,287) (8,115)
Proceeds from sale of property and
equipment 186 463 13
Purchase of patent rights (374) (377) (310)
-------- -------- --------
Net cash used in investing
activities (45,266) (15,201) (6,625)
-------- -------- --------
Financing activities:
Net proceeds from issuance of long
term debt 1,350 8,667 --
Net repayment of long term debt (10,000) -- --
Net proceeds from issuance of common
stock 61,415 2,936 926
Receipt of Section 16(b) common
stock profits 594 -- --
Repurchase of common stock (3,213) (1,262) (112)
-------- -------- --------
Net cash provided by financing
activities 50,146 10,341 814
-------- -------- --------
Net increase in cash and cash equivalents $ 24,826 $ 7,232 $ 286
Cash and cash equivalents:
Beginning of year $ 17,680 $ 10,448 $10,162
-------- -------- --------
End of year $ 42,506 $ 17,680 $10,448
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of
amounts capitalized $ 257 $ 74 $ --
-------- -------- --------
Cash paid for income taxes $ 2,175 $ 336 $ 300
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
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CREE RESEARCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDING JUNE 27, 1999, JUNE 28, 1998 AND JUNE 30, 1997
(In Thousands)
Total
Common Additional Share-
Stock Paid-in Retained Treasury holders'
Par Value Capital Earnings Stock Equity
--------- ---------- --------- --------- --------
Balance at June 30, 1996 $ 61 $45,342 $(4,693) $ (38) $ 40,672
Common stock options
exercised for cash, 104
shares................... 160 160
Common stock warrants
exercised for cash, 406
shares................... 1 766 767
Purchase of common stock
for the treasury, 20 shares (112) (112)
Retirement of 40 treasury
shares................... (150) 150 --
Income tax benefits from
stock option exercises... 96 96
Net income............... 3,542 3,542
--------- ---------- --------- --------- --------
Balance at June 30, 1997 62 46,214 (1,151) -- 45,125
Common stock options
exercised for cash, 434
shares................... 1 1,693 1,694
Common stock warrants
exercised for cash, 662
shares.................. 2 1,240 1,242
Purchase of common stock
for the treasury, 164 shares (1,262) (1,262)
Retirement of 164 treasury
shares.................. (1,262) 1,262 --
Income tax benefits from
stock option exercises... 1,791 1,791
Net income............... 6,275 6,275
--------- ---------- --------- --------- --------
Balance at June 28, 1998 65 49,676 5,124 -- 54,865
Common stock options
exercised for cash, 418
shares.................. 1 1,511 1,512
Common stock warrants
exercised for cash, 342
shares.................. 4,656 4,656
Issuance of common stock
for cash 2,990 shares... 7 55,240 55,247
Purchase of common stock
for the treasury, 2,990
shares................. (3,213) (3,213)
Retirement of 470 treasury
shares................. (3,213) 3,213 --
Receipt of Section 16(b)
common stock profits from a
director............... 594 594
Income tax benefits from
stock option exercises.... 2,672 2,672
Other comprehensive income,
net of tax............... 987 987
Net income............... 12,702 12,702
--------- ---------- --------- --------- --------
Balance at June 27, 1999 $ 73 $111,136 $ 18,813 $ -- $130,022
========= ========== ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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CREE RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree Research, Inc., the "Company," or "Cree," a North Carolina corporation,
develops, manufactures, and markets silicon carbide-based semiconductor devices.
Revenues are primarily derived from the sale of blue light emitting diodes, and
silicon carbide based materials. The Company markets its blue LED chip products
principally to customers who incorporate them into packaged lamps for resale to
original equipment manufacturers. The Company also sells SiC material products
to corporate, government, and university research laboratories. In addition, the
Company is engaged in a variety of research programs related to the advancement
of SiC process technology and the development of electronic devices that take
advantage of SiC's unique physical and electronic properties. The Company
recovers the costs of a significant portion of its research and development
efforts from revenues on these contracts with agencies of the Federal
government. This funding is recorded as contract revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Cree Research,
Inc., and its wholly-owned subsidiaries, Real Color Displays, Inc. ("RCD"), Cree
Research FSC, Inc. ("FSC"), and Cree Technologies, Inc. ("Tech"). All material
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. 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.
Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at June 27, 1999 and June 28,
1998, and the reported amounts of revenues and expenses during the years ended
June 27, 1999, June 28, 1998 and June 30, 1997. Actual amounts could differ from
those estimates.
Revenue Recognition
The Company recognizes product revenue at the time of shipment or in accordance
with the terms of the relevant contract. Revenue from government contracts is
recorded on the percentage-of-completion method as expenses per contract are
incurred. License fee income is recognized when the transfer of licensed
technology is completed.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the furthering of the development of the Company's technology by
supplementing the Company's research and
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development efforts. The applicable contracts generally provide that the Company
may elect to retain ownership of inventions made in performing the work, subject
to a non-transferable, non-exclusive license retained by the government to
practice the inventions for government purposes. Contract revenue includes
funding of direct research and development costs and a portion of the Company's
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. The specific reimbursement provisions of the contracts, including the
portion of the Company's general and administrative expenses and other operating
expenses that are reimbursed, vary by contract. Such reimbursements are recorded
as contract revenue. For contracts under which the Company anticipates that
direct costs will exceed amounts to be funded over the life of the contract
(i.e., certain cost share arrangements), the Company reports direct costs as
research and development expenses with related reimbursements recorded as an
offset to those expenses.
In September 1996, the Company entered into a license and supply agreement with
Shin-Etsu Handotai Co. LTD. ("Shin-Etsu") and other parties to use certain LED
fabrication technology and has agreed to supply silicon carbide wafers required
to manufacture the licensed product. The license agreement provides for payment
of a license fee and royalties based on a percentage of sales of products made
using the licensed technology. The license fee was payable in installments which
totaled $2,700,000. As of June 27, 1999, all license fees have been received.
Substantially all of the Company's obligations to transfer the licensed
technology were performed during fiscal 1997 and the net present value of the
license fee payments and commission were recognized.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
Marketable Securities
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:
(a) Securities Held-to-Maturity- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in
earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading
securities are reported at fair value with unrealized gains or losses
excluded from earnings and reported as a separate component of
shareholders' equity.
As of June 27, 1999, the Company's short-term investments consisted of common
stock holdings of Microvision, Inc. ("MVIS"). The Company purchased 268,600
common shares in a private equity transaction in May 1999 at a price of $16.75
per share. In August 1999, MVIS filed a registration statement for the Company's
sale of these shares; however, Cree has agreed not to sell the shares until at
least January 6, 2000. Since the Company is currently restricted from trading
these shares and management views this transaction as an investment, the shares
are accounted for as "available for sale"
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securities under SFAS 115. Therefore unrealized gains or losses are excluded
from earnings and reported as a separate component of shareholders' equity.
As of June 28, 1998, the Company's short-term investments consisted of common
stock holdings in C3, Inc ("C3"), the majority of which were bought in November
1997. The Company also acquired additional shares of C3 in September 1998 and
acquired 24,601 shares directly from C3 pursuant to the exercise of an option in
January 1997. This investment was treated for accounting purposes as a trading
security, with net realized and unrealized gains and losses included in net
earnings. All common shares of C3 held by Cree were subsequently sold during
fiscal 1999. Realized gains on shares of C3 stock sold during fiscal 1999 by the
Company were $140,000. This amount was recorded as other income. Approximately
$32,000 of net loss was recorded to other income (expense) in fiscal 1998
related to this investment.
As of June 28, 1998, the Company's president had promised to indemnify the
Company for losses up to $300,000, plus the lesser of $100,000 or the net
difference between the per share selling price and $9.375 per share for all
shares of C3 common stock sold by Cree. As a result, at June 28, 1998, the
Company had recorded a $390,000 receivable from the president based upon this
agreement for the net realized and unrealized losses on this investment. Since
Cree sold its shares of C3 for a net gain, the indemnity has been terminated
with no payments becoming due.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method. Inventories consist of
the following:
June 27, June 28,
1999 1998
in (000)s in (000)s
--------- ---------
Raw materials $ 1,290 $ 999
Work-in-progress 1,675 752
Finished goods 1,012 792
--------- ---------
$ 3,977 $2,543
========= =========
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three to
twenty years. Leasehold improvements are amortized over the life of the related
lease. Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and related accumulated
depreciation of the assets are removed from the accounts upon disposition and
any resulting gain or loss is reflected in operations.
The Company has entered into two agreements with C3 to sell crystal growth
equipment manufactured by the Company to C3 at cost plus a reasonable overhead
allocation. As a result of these transactions, the Company has recognized an
overhead allocation of $473,000 and $332,000, in fiscal 1999 and fiscal 1998,
respectively, as "other operating income".
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In November 1997, the Company purchased real property consisting of
approximately thirty acres of land with a production facility of approximately
139,000 square feet and a total of approximately 33,000 square feet of service
and warehouse buildings. This property is located in Durham, North Carolina, in
the vicinity of the Research Triangle Park. The purchase price for the land and
buildings was $3,000,000. The Company has now moved the majority of its
employees and production to this facility.
The Company assesses the realizability of the carrying value of its investment
in property and equipment whenever events or changes in circumstance indicate
that an impairment may have occurred in accordance with the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for Impairment of Long Lived Assets and Assets to be Disposed of".
As of June 27, 1999, the Company has not recorded any impairment in the carrying
value of its property and equipment.
Patent and License Rights
Patent rights reflect costs incurred to enhance and maintain the Company's
intellectual property position. License rights reflect costs incurred to use the
intellectual property of others. Both are amortized on a straight-line basis.
During fiscal 1997, the Company changed its previous estimate of the useful life
of patents from 17 years, beginning at the date of patent issue, to 20 years
from the date of patent application. This change was made to conform to a
legislative amendment made to the U.S. patent laws, which became effective in
June 1995. This change in estimate had no material impact to net income or
earnings per share, since the average period of time between patent application
and issue is generally about three years. Amortization expense was $117,000,
$102,000 and $108,000 for the years ended June 27, 1999, June 28, 1998 and June
30, 1997, respectively. Total accumulated amortization for patents was
approximately $669,000 and $560,000 at June 27, 1999 and June 28, 1998,
respectively.
Goodwill
Goodwill represented the amount by which the costs to acquire the net assets of
the Real Color Displays subsidiary exceeded their related fair value at
acquisition. Based on a review of undiscounted cash flows of the subsidiary
anticipated over the remaining amortization period, the Company determined that
goodwill had been impaired. As a result, the Company wrote off the remaining
$66,000 carrying value of such goodwill in the second quarter of fiscal 1998. As
required by generally accepted accounting principles, this charge was included
in the results of operations.
Research and Development Policy
The Company contracts with the U.S. government for many of its current research
and development efforts. By entering into these contracts, the Company has most
of its research and product development costs funded by the U.S. government. The
contract funding may be based on a cost-plus or a cost-share arrangement.
Pursuant to each contract, the amount of funding is determined based on cost
estimates that include direct costs, plus an allocation for research and
development, general and administrative and the cost of capital expenses.
Cost-plus funding is determined based on actual costs plus a set percentage
margin. For the 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 funded to the Company. The contracts typically
require the submission of a written report that documents the results of such
research.
Funding on contracts under which the Company anticipates that funding will
exceed direct costs over the life of the contract is recorded as contract
revenue and related costs are reported as a cost of revenue.
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For contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, direct costs are shown 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 reflected in the statements of
operations:
Year ended (in 000s)
June 27, June 28, June 30,
1999 1998 1997
-------- -------- --------
Net research and development costs $ -- $ 276 $ 671
Government funding -- 601 2,186
-------- -------- --------
Total direct costs incurred $ -- $ 877 $ 2,857
======== ======== ========
As of June 28, 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.
Interest Capitalization
During the fiscal years ended June 27, 1999 and June 28, 1998, the Company
capitalized interest on funds used to construct property, plant and equipment in
connection with the newly acquired facility. Interest capitalized for the fiscal
1999 and 1998 was $128,000 and $128,000, respectively.
Credit Risk, Major Customers and Major Suppliers
Financial instruments, which may subject the Company to a concentration of
credit risk, consist principally of cash equivalents and accounts receivable.
The Company's cash equivalents consist of commercial paper. Certain bank
deposits may at times be in excess of the FDIC insurance limit.
The Company sells its products to manufacturers and researchers worldwide and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses, in the aggregate, have generally been within
management's expectations. The Company presently derives primarily all of its
contract revenues from contracts with the U.S. Department of Defense.
Approximately 10% and 18%, respectively, of the Company's accounts receivable
balance at June 27, 1999 and June 28, 1998 was due from the Department of
Defense. In addition, the Company had amounts due from Siemens A.G. (or its
indirect subsidiary, Osram) totaling 35% and 37%, of accounts receivable
balances at June 27, 1999 and June 28, 1998, respectively. At June 27, 1999 and
June 28, 1998, the Company had amounts due from C3 totaling 17% and 23%,
respectively, of accounts receivable balances.
The Company has derived its product revenue from sales primarily in the United
States, the Far East, and Europe as follows:
Year Ended
1999 1998 1997
---- ---- ----
United States....... 38% 26% 21%
Far East............ 50% 49% 33%
Europe.............. 11% 24% 44%
Other............... 1% 1% 2%
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One customer accounted for 37%, 40% and 31% of revenue for fiscal 1999, 1998 and
1997, respectively. Another customer accounted for 19%, 11% and 2% of revenue
for fiscal 1999, 1998 and 1997, respectively. The Department of Defense
accounted for 100%, 93% and 99% of contract revenues during fiscal 1999, 1998,
and 1997, respectively.
The Company depends on single or limited source suppliers for a number of raw
materials and components used in its SiC wafer products and LEDs. Any
interruption in the supply of these key materials or components could have a
significant adverse effect on the Company's operations.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of
common stock shares outstanding. Diluted earnings per common share is computed
using the weighted average number of common stock shares outstanding adjusted
for the incremental shares attributed to outstanding options to purchase common
stock.
Accounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, no compensation is recorded for stock options or
other stock-based awards that are granted to employees with an exercise price
equal to or above the common stock price on the grant date.
In October, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 ("FAS 123"), "Accounting for Stock Based Compensation." This
Statement establishes fair value as the measurement basis for equity instruments
issued in exchange for goods or services and stock-based compensation plans.
Fair value may be measured using quoted market prices, option-pricing models or
other reasonable estimation methods. FAS 123 permits the Company to choose
between adoption of the fair value based method or disclosing pro forma net
income information. The Statement is effective for transactions entered into
after December 31, 1995. The Company will continue to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25, as
amended, and provide only the pro forma disclosures required by FAS 123.
3. ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
June 27, 1999 June 28, 1998
(in 000s) (in 000s)
------------- -------------
Trade receivables $ 14,685 $ 8,971
Other short term receivables 1,775 1,659
------------- --------------
16,460 10,630
Allowance for doubtful accounts (175) (151)
------------- --------------
Total accounts receivable $ 16,285 $ 10,479
============= ==============
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The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 27, 1999, June 28, 1998 and June 30,
1997:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Balance at beginning of year $ 151 $ 216 $ 50
Charges to cost and expenses 24 50 190
Deductions (write-offs to reserve) -- (115) (24)
--------- --------- ---------
Balance at end of year $ 175 $ 151 $ 216
========= ========= =========
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
June 27, June 28,
1999 1998
(in 000s) (in 000s)
--------- ---------
Office equipment and furnishings $ 1,948 $ 1,372
Land & Buildings 21,031 3,501
Machinery and equipment 46,199 28,136
Leasehold improvements 1,549 4,697
--------- ---------
70,727 37,706
Accumulated depreciation (13,311) (10,304)
--------- ---------
57,416 27,402
Construction in progress 12,468 9,074
--------- ---------
Net Property & Equipment $69,884 $36,476
========= =========
Depreciation and amortization of property and equipment totaled $5,382,000,
$4,217,000 and $3,356,000 for the years ended June 27, 1999, June 28, 1998 and
June 30, 1997, respectively.
5. SHAREHOLDERS' EQUITY
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30,000,000 shares of common stock, with a par value of
$0.005 per share, and 3,000,000 shares of preferred stock, with a par value of
$0.01 per share. The preferred stock may be issued in one or more classes or
series with the number of shares, designation, relative rights, preferences, and
limitations of each class or series to be determined by resolution of the Board
of Directors. The Articles of Incorporation were amended, effective at the close
of business on July 26, 1999, to effect a two-for-one split of the common stock.
As a result, as of the effective date of the amendment, the Articles of
Incorporation authorize the Company to issue up to 60,000,000 shares of common
stock, with a par value of $0.0025 per share. The amendment did not change the
number of authorized shares or other provisions relating to the preferred stock.
All share numbers have been restated to give effect to the stock split.
On February 17, 1999, the Company completed a public offering selling 2,990,000
shares of its common stock at a price of $19.69 per share. The Company received
net aggregate proceeds of approximately $55.2 million after deducting
underwriter discounts and estimated offering costs. A portion of the net
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proceeds, $10 million, was used to repay debt to a commercial bank. The majority
of the funds are being used for plant expansion and the balance for general
corporate purposes, including working capital and potential acquisition of or
investments in complementary businesses.
6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by FAS 123, "Accounting For Stock-Based Compensation", the Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and amendments in
accounting for its employee stock option plans.
The Company's Amended and Restated Equity Compensation Plan has authorized the
grant of options for up to 5,400,000 shares of the Company's common stock. All
options granted have 10 year terms and vest and become fully exercisable within
5 years. The Company had granted 192,000 options with a 10 year term for shares
of the Company's common stock under the Stock Option Plan for Non-Employee
Directors. This plan was terminated in November 1997 and all 192,000 options
granted under this plan are now fully vested. The Company's current stock plans
provide for grants of options with exercise prices equal to or exceeding fair
market value on the date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with weighted average risk free rates of interest of 5.3%
and 5.6%, for the years ended June 27, 1999 and June 28, 1998, respectively. The
volatility factor of the expected market price of the Company's common stock is
1.174 and the weighted-average expected life of the options was 7 years for
executives and directors and 5 years for other employees.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Net income, as reported $ 12,702 $ 6,275 $3,542
Pro forma net income, as adjusted 8,968 4,405 1,418
for FAS 123
Pro forma earnings per share:
Basic $ 0.33 $ 0.17 $ 0.05
Diluted $ 0.32 $ 0.16 $ 0.05
The following table details the number of stock options outstanding and their
related exercise prices as of June 27, 1999:
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Number of Options Outstanding as of June 27, 1999
Weighted-Average
Exercise Price Number of Options Contractual Life
-------------- ----------------- ----------------
$ 0.21 2,866 1 year
$ 1.56 16,000 5 years
$ 1.81 322,584 4 years
$ 1.88 10,668 1 year
$ 2.00 87,200 5 years
$ 2.19 12,000 5 years
$ 3.41 8,000 4 years
$ 3.69 12,000 5 years
$ 4.69 38,800 8 years
$ 5.13 21,400 8 years
$ 5.60 26,900 7 years
$ 6.49 752,200 8 years
$ 7.13 46,000 9 years
$ 7.19 330,950 6 years
$ 7.63 1,189,800 9 years
$ 7.88 96,000 7 years
$ 8.19 38,400 9 years
$ 8.38 10,000 9 years
$ 8.88 33,600 9 years
$ 9.38 71,800 8 years
$ 9.69 20,000 9 years
$12.32 114,000 9 years
$20.50 134,400 10 years
$22.60 139,600 10 years
$22.63 78,000 10 years
-----------------
3,613,168
Total Option Activity
-------------------------------------------------------------
June 27, 1999 June 28, 1998 June 30, 1997
Weighted Weighted Weighted
Options Average Options Average Options Average
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- -------- --------- --------
Outstanding -
beginning of year 2,410 $ 5.10 1,854 $ 2.38 1,264 $ 2.20
Granted 1,712 $10.85 1,084 $ 6.99 762 $ 6.78
Exercised (418) $ 3.63 (434) $ 3.90 (104) $ 1.54
Forfeited (91) $ 7.08 (94) $ 4.34 (68) $ 4.03
--------- --------- ---------
Outstanding -
end of year 3,613 $ 8.14 2,410 $ 5.10 1,854 $ 2.38
Exerciseable at
end of year 1,478 $ 5.39 1,198 $ 4.20 1,404 $ 3.72
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In connection with the Company's September 1995 private placement, the Company
issued 600,000 warrants, which have an exercise price of $13.62, which
represents fair value on the date of grant, and expire September 2000. Warrants
to purchase 342,000 shares of common stock were exercised during the fiscal year
ended June 27, 1999. Warrants to purchase 258,000 shares remain outstanding as
of June 27, 1999 and represent the only warrants outstanding.
7. LEASE COMMITMENTS
The Company currently leases three facilities. These facilities are comprised of
both office and manufacturing space. The first facility has a remaining lease
period of approximately two and one half years. The lease term for the second
facility began in September 1995. This facility has a remaining lease period of
approximately one-year with two options to renew for a total of four additional
years. The lease for the third facility expires in December 1999. All of these
agreements provide for rental adjustments for increases in property taxes, the
consumer price index and general property maintenance.
Rent expense associated with these and other expired leases totaled $430,000,
$522,000 and $549,000 for the years ended June 27, 1999, June 28, 1998, and June
30, 1997, respectively. Future minimum rentals as of June 27, 1999 under these
leases are as follows:
Minimum Rental
Fiscal Years Ended Amount
(in 000s)
------------------ --------------
June 25, 2000 $ 312
June 24, 2001 247
June 30, 2002 119
-----
Total $ 678
=====
8. LONG-TERM DEBT
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10,000,000 to finance the purchase and upfit of the new main facility
in Durham, North Carolina. Approximately $2,950,000 was disbursed under the loan
to finance the initial purchase of the facility with the remaining proceeds
disbursed on a monthly basis based on actual expenditures incurred. The loan,
which was collateralized by the purchased property and subsequent upfits,
accrued interest at a fixed rate of 8% and carried customary covenants,
including the maintenance of a minimum tangible net worth and other
requirements. On February 17, 1999, the entire $10,000,000 indebtedness was
repaid with proceeds received from the public stock offering. At June 28, 1998,
short term and long term borrowings associated with this loan were $17,000 and
$8,650,000, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of FAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the 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
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settled. Under FAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The actual income tax expense for the years ended June 29, 1999, June 28, 1998,
and June 30, 1997 differed from the amounts computed by applying the U.S.
federal tax rate of 35% in fiscal 1999, and 34% in fiscal 1998 and 1997, to
pretax earnings as a result of the following:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Federal income tax provision at $ 6,174 $ 3,018 $ 1,265
statutory rate
State tax provision 211 166 193
Increase (decrease) in income tax
expense resulting from:
Foreign sales corporation (510) (214) --
Decrease in valuation allowance (290) (358) (1,279)
Research and development (251) -- --
State tax credits (394) -- --
Other -- (12) (2)
--------- --------- ---------
Income tax expense $ 4,940 $ 2,600 $ 177
========= ========= =========
The following are the components of the provision for income taxes for the years
ended June 27, 1999, June 28, 1998 and June 30, 1997:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Current:
Federal $ 2,553 $ 699 $ 54
Foreign Tax Withholding -- 50 220
State 300 269 95
--------- --------- ---------
2,853 1,018 369
Deferred:
Federal 2,347 1,582 (442)
State (260) -- 250
--------- --------- ---------
2,087 1,582 (192)
Net Provision $ 4,940 $ 2,600 $ 177
========== ========= =========
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<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
June 27, 1999 June 28, 1998
(in 000s) (in 000s)
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 97 $ 1,304
Research tax credits 420 169
Compensation 105 62
Inventory 126 120
Bad debt 65 56
Alternative minimum tax 1,513 261
Foreign tax credit 270 270
Other 527 --
------------- -------------
Total gross deferred tax assets 3,123 2,242
Less valuation allowance -- (290)
------------- -------------
Total net deferred tax assets 3,123 1,952
Deferred tax liabilities:
Marketable equity securities 658 --
Property and equipment depreciation 3,992 2,154
------------- -------------
Gross deferred tax liabilities 4,650 2,154
------------- -------------
Net deferred tax liability $ (1,527) $ (202)
============= =============
The net change in the total valuation allowance for the years ended June 27,
1999 and June 28, 1998 was $290,000. The primary reason for the reduction in the
valuation allowance in 1999 and 1998 was the greater likelihood of the
utilization of future tax benefits from net operating loss ("NOL")
carryforwards. Realization of deferred tax assets associated with the NOL
carryforwards is dependent upon the Company generating sufficient taxable income
prior to their expiration. Management believes that there is a risk that certain
of the state NOL carryforwards may expire unused and, accordingly, has
established a valuation allowance against them. 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.
As of June 27, 1999, the Company has net operating loss carryforwards for
federal purposes of $75,000 and $1,400,000 for state purposes. The carryforward
expiration period is 2011 to 2019 for federal tax purposes and from 2000 to 2004
for state purposes.
10. RETIREMENT PLAN
The Company maintains an employee benefit plan (the "Plan") pursuant to Section
401(k) of the Internal Revenue Code. Under the Plan, there is no fixed dollar
amount of retirement benefits, and actual benefits received by employees will
depend on the amount of each employee's account balance at the time of
retirement. All employees are eligible to participate under the Plan on the
first day of a new fiscal quarter after date of hire. The Pension Benefit
Guaranty Corporation does not insure the Plan. The
-48-
<PAGE>
Company may, at its discretion, make contributions to the Plan. However, the
Company did not make any contributions to the Plan during the years ended June
27, 1999, June 28, 1998 or June 30, 1997.
11. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share", as of December 28, 1997. SFAS No. 128
required the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data presented
has been restated to conform to the provisions of SFAS No. 128.
The following computation reconciles the differences between the basic and
diluted presentations:
June 27, June 28, June 30,
1999 1998 1997
(in 000s) (in 000s) (in 000s)
--------- --------- ---------
Basic:
Net income $ 12,702 $ 6,275 $ 3,542
========= ========= =========
Weighted average common shares 27,015 25,726 24,911
========= ========= =========
Basic income per common share $ 0.47 $ 0.24 $ 0.14
========= ========= =========
Diluted:
Net income $ 12,702 $ 6,275 $ 3,542
========= ========= =========
Weighted average common
shares-basic 27,105 25,726 24,911
Dilutive effect of stock options
& warrants 1,417 1,261 1,340
--------- --------- ---------
Weighted average common
shares-diluted 28,432 26,987 26,251
========= ========= =========
Diluted income per common share $ 0.45 $ 0.23 $ 0.13
========= ========= =========
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. As of
June 27, 1999, there were no potential shares considered to be antidilutive. For
the years ended June 28, 1998 and June 30, 1997, there were 225,000 and 574,000
shares, respectively, that were not included in calculating diluted income per
share because their effect was antidilutive.
12. 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 non-owner changes in equity that are excluded
from net income. For fiscal 1999, the Company reports accumulated gains on
available-for-sale investment securities that are accumulated in shareholders'
equity as an item of other comprehensive income. At the time of the sale, any
previously recognized gains or losses that were accumulated in shareholders'
equity would be reversed in comprehensive income and then recognized as an
element of net income. For the year ended June 28, 1998, the Company had no
items of other comprehensive income.
-49-
<PAGE>
In fiscal 1999, the Company adopted Statement of Financial 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 require 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 as the Company
only operates in a single segment.
In June 1998, The Financial Accounting Standards Board issues 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.
13. SUBSEQUENT EVENT
On July 13, 1999 the Company filed a Form 8-K announcing a two-for-one split of
its common stock. The stock split was effected by an amendment to the Company's
Articles of Incorporation that became effective at the close of business on July
26, 1999. With the effectiveness of the amendment, each issued and unissued
authorized share of common stock, $0.005 par value per share, was automatically
split into two whole shares of common stock, $0.0025 par value per share. On
July 30, 1999, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the common stock split.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information called for in items 10 through 13 is incorporated by reference
from the Company's definitive proxy statement relating to its annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 1999.
-50-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial statements and financial statement schedule - the
financial statements and reports of independent auditors are filed as part of
this report (see index to Consolidated Financial Statements at Part II Item 8 on
page 30 of this Form 10-K). The financial statement schedules are not included
herein as they are either not applicable or are included as part of the
consolidated financial statements.
(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------
3.1 Articles of Incorporation, as amended July 26, 1999
3.2 Bylaws, as amended May 28, 1999
4.1 Specimen Common Stock Certificate adopted July 21, 1999
10.1 Amended and Restated Equity Compensation Plan, as amended June 28,
1999*
10.2 Stock Option Plan for Non-Employee Directors (terminated as to
future grants pursuant to Board action dated September 1, 1997) (1)*
10.3 License Agreement between the Company and North Carolina State
University dated December 3, 1987 (2)
10.4 Amendment to License Agreement between the Company and North
Carolina State University dated September 11, 1989 (2)
10.5 Development, License and Supply Agreement between the Company and
Siemens A.G. dated October 24, 1995 (3)
10.6 Purchase Agreement between the Company and Siemens A.G. dated
September 6, 1996 (4)
10.7 First Amendment to Purchase Agreement between the Company and
Siemens A.G. dated April 22, 1997 (5)
10.8 Second Amendment to Purchase Agreement between the Company and
Siemens A.G. dated December 9, 1997 (6)
10.9 Third Amendment to Purchase Agreement between the Company and
Siemens A.G. dated September 8, 1998 (7)
10.10 Fourth Amendment to Purchase Agreement between the Company and
Siemens A.G. dated December 16, 1998 (8)
10.11 Transformation Agreement with Siemens A.G. and OSRAM Opto
Semiconductors GmbH & Co. OHG effective January 1, 1999
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of Registrant (9)
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
-51-
<PAGE>
(1) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-8, Registration No. 33-98958, and
effective with the Securities and Exchange Commission on November 3, 1995.
(2) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form SB-2, Registration No. 33-55998, and
declared effective by the Securities and Exchange Commission on February 8,
1993.
(3) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 33-98728, and
declared effective by the Securities and Exchange Commission on December
27, 1995. Confidential treatment of portions of this exhibit was granted by
the Securities and Exchange Commission pursuant to Rule 24b-2 by order
dated December 29, 1995.
(4) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on September 30, 1996. Confidential treatment of portions of
this exhibit was granted by the Securities and Exchange Commission pursuant
to Rule 24b-2 by order dated November 21, 1996.
(5) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on May 2, 1997. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated June 26, 1997.
(6) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 12, 1998.
(7) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on October 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated November 23, 1998.
(8) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 28, 1999. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 24, 1999.
(9) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on August 19, 1998.
* Compensatory Plan
-52-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CREE RESEARCH, INC.
Date: August 11, 1999
By: /s/ F. Neal Hunter
---------------------------------------
F. Neal Hunter
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ F. Neal Hunter Chairman of the Board August 11, 1999
- ----------------------------
F. Neal Hunter
/s/ Cynthia B. Merrell Chief Financial Officer August 11, 1999
- ----------------------------
Cynthia B. Merrell
/s/ Calvin H. Carter, Jr. Director August 11, 1999
- ----------------------------
Calvin H. Carter, Jr., Ph.D.
/s/ James E. Dykes
- ---------------------------- Director August 11, 1999
James E. Dykes
/s/ Michael W. Haley Director August 11, 1999
- ----------------------------
Michael W. Haley
/s/ John W. Palmour Director August 11, 1999
- ----------------------------
John W. Palmour, Ph.D
/s/ Walter L. Robb
- ---------------------------- Director August 11, 1999
Walter L. Robb, Ph.D.
/s/ Dolph W. von Arx Director August 11, 1999
- ----------------------------
Dolph W. von Arx
-53-
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
CREE RESEARCH, INC.
ARTICLE I
The name of the Corporation is Cree Research, Inc.
ARTICLE II
The period of duration of the Corporation shall be perpetual.
ARTICLE III
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under Chapter 55
of the General Statutes of North Carolina.
ARTICLE IV
The aggregate number of shares of capital stock which the Corporation shall have
authority to issue is 63,000,000 shares divided into two classes consisting of
60,000,000 shares of Common Stock with a par value of $ 0.0025 per share and
3,000,000 shares of Preferred Stock with a par value of $0.01 per share. The
Board of Directors is authorized from time to time to establish one or more
series of Preferred Stock and to determine the preferences, limitations and
relative rights of the Preferred Stock before issuance of any shares of that
class and of any series of Preferred Stock before issuance of shares of that
series.
ARTICLE V
The number of directors of the Corporation may be fixed by the bylaws.
ARTICLE VI
There shall be no preemptive rights with respect to the shares of the
capital stock of the Corporation.
ARTICLE VII
No director of the Corporation shall have personal liability arising out
of an action whether by or in the right of the Corporation or otherwise for
monetary damages for breach of his or her duty as a director; provided, however,
that the foregoing shall not limit or eliminate the personal liability of a
director with respect to (i) acts or omissions not made in good faith that such
director at the time of such breach knew or believed were in conflict with the
best interests of the Corporation, (ii) any liability under Section 55-8-33 of
the North Carolina General Statutes or any successor provision, (iii) any
transaction from which such director derived an improper personal benefit or
(iv) acts or omissions occurring prior to the date of the effectiveness of this
Article. As used in this Article, the term "improper personal benefit" does not
include a director's compensation or other incidental benefit for or on account
of his or
<PAGE>
her service as a director, officer, employee, independent contractor, attorney
or consultant of the Corporation.
Furthermore, notwithstanding the foregoing provision, in the event that
Section 55-2-02 or any other provision of the North Carolina General Statutes is
amended or enacted to permit further limitation or elimination of the personal
liability of a director, the personal liability of the Corporation's directors
shall be limited or eliminated to the fullest extent permitted by the applicable
law.
This Article shall not affect a charter or bylaw provision or contract or
resolution of the Corporation indemnifying or agreeing to indemnify a director
against personal liability. Any repeal or modification of this Article shall not
adversely affect any limitation hereunder on the personal liability of a
director with respect to acts or omissions occurring prior to such repeal or
modification.
ARTICLE VIII
The name and address of the incorporator is Fred D. Hutchison, Suite 450,
2626 Glenwood Avenue, Raleigh, North Carolina 27608.
EXHIBIT 3.2
BYLAWS
OF
CREE RESEARCH, INC.
(as amended through May 28, 1999)
ARTICLE I
OFFICES
1. Principal Office. The principal office of the Corporation shall be
located in Durham County, North Carolina or such other place as is designated by
the Board of Directors.
2. Registered Office. The registered office of the Corporation required by
law to be maintained in the State of North Carolina may be, but need not be,
identical with the principal office.
3. Other Offices. The Corporation may have offices at such other places,
either within or without the State of North Carolina, as the Board of Directors
may from time to time determine or as the affairs of the Corporation may
require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
1. Place of Meetings. All meetings of shareholders shall be held at the
principal office of the Corporation or at such other place, either within or
without the State of North Carolina, as shall be designated in the notice of the
meeting or agreed upon by a majority of the shareholders entitled to vote
thereat.
2. Annual Meeting. The annual meeting of the shareholders shall be held at
the principal office of the Corporation at ten o'clock (10:00) a.m., on the
first Tuesday in October of each year if not a legal holiday, and if such, the
next secular day following, for the purpose of electing Directors of the
Corporation and for the transaction of such other business as may be properly
brought before the meeting close.
3. Substitute Annual Meeting. If the annual meeting shall not be held on
the day designated by these Bylaws, a substitute annual meeting may be called in
accordance with the provisions of paragraph 4 of this Article II. A meeting so
called shall be designated and treated for all purposes as the annual meeting.
4. Special Meetings. Special meetings of the shareholders may be called at
any time by the Board of Directors of the Corporation or by the Chairman.
5. Notice of Meetings.
(a) Written or printed notice stating the time and place of the meeting
shall be delivered not less than ten (10) nor more than fifty (50) days before
the date thereof, either personally or by mail, by or
<PAGE>
at the direction of the President, the Secretary, or other person calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder at his address as it appears on the
record of shareholders of the Corporation, with postage thereon prepaid.
(b) In the case of an annual or substitute annual meeting, the notice of
meeting need not specifically state the business to be transacted thereat unless
it is a matter, other than election of Directors, on which the vote of the
shareholders is expressly required by the provisions of the North Carolina
Business Corporation Act. In the case of a special meeting, the notice of
meeting shall specifically state the purpose or purposes for which the meeting
is called.
(c) When a meeting is adjourned for thirty (30) days or more, notice of
the adjourned meeting shall be given as in the case of an original meeting. When
a meeting is adjourned for less than thirty (30) days in any one adjournment, it
is not necessary to give any notice of the time and place of the adjourned
meeting or of the business to be transacted thereat other than by announcement
at the meeting at which the adjournment is taken.
6. Voting Lists. At least ten (10) days before each meeting of shareholders
the Secretary of the Corporation shall prepare an alphabetical list of the
shareholders entitled to vote at such meeting or any adjournment thereof, with
the address of and number of shares held by each, which list shall be kept on
file at the registered office of the Corporation for a period of ten (10) days
prior to such meeting, and shall be subject to inspection by any shareholder at
any time during the usual business hours. This list shall also be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the whole time of the meeting.
7. Quorum.
(a) Unless otherwise provided by law, the holders of a majority of the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. In the absence of a quorum at the opening
of any meeting of shareholders, such meeting may be adjourned from time to time
by the vote of a majority of the shares voting on the motion to adjourn, but no
other business may be transacted until and unless a quorum is present. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the original meeting.
(b) The shareholders at a meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
sufficient shareholders to leave less than a quorum.
8. Voting of Shares
(a) Each outstanding share having voting rights shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders.
(b) Except in the election of Directors, the vote of a majority of the
shares voted on any matter at a meeting of shareholders, duly held and at which
a quorum is present, shall be the act of the shareholders on that matter, unless
the vote by a greater number is required by law or by the charter or Bylaws of
the Corporation.
<PAGE>
(c) Voting on all matters except the election of Directors shall be by
voice vote or by a show of hands unless the holders of one-tenth of the shares
represented at the meeting shall, prior to the voting on any matter, demand a
ballot vote on that particular matter.
9. Proxies. Shares may be voted either in person or by one or more agents
authorized by a written proxy executed by the shareholder or by his duly
authorized attorney-in-fact. A proxy is not valid after the expiration of eleven
(11) months from the date of its execution, unless the person executing it
specifies therein the length of time for which it is to continue in force, or
limits its use to a particular meeting, but no proxy, whether or not designated
as irrevocable, shall be valid after ten (10) years from the date of its
execution, unless renewed or extended at any time before its expiration for not
more than ten (10) years from the date of such renewal or extension.
10. Notice of Shareholder Business and Nominations.
(a) Annual Meetings of Shareholders.
(i) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the shareholders
may be made at an annual meeting of shareholders: (a) pursuant to the notice of
meeting pursuant to Article II, Section 5 of these Bylaws; (b) by or at the
direction of the Board of Directors; or (c) by any shareholder of the
Corporation who was a shareholder of record at the time of giving of notice
provided for in this Bylaw (Article II, Section 10), who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this Bylaw.
(ii) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (c) of paragraph (a)(i) of
this Bylaw, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for shareholder action. To be timely, a shareholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th calendar day nor
earlier than the close of business on the 90th calendar day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is more than 30 calendar days
before or more than 60 calendar days after such anniversary date, notice by the
shareholder to be timely must be so delivered not earlier than the close of
business on the 90th calendar day prior to such annual meeting and not later
than the close of business on the later of the 60th calendar day prior to such
annual meeting or the 10th calendar day following the calendar day on which
public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a shareholder's
notice as described above. Such shareholder's notice shall set forth: (a) as to
each person whom the shareholder proposes to nominate for election or reelection
as a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule
14a-11 thereunder (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the shareholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
the name and address of such shareholder, as they appear on the Corporation's
books,
<PAGE>
and of such beneficial owner and the class and number of shares of the
Corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.
(b) Special Meetings of Shareholders.
(i) Only such business shall be conducted at a special meeting of
shareholders as shall have been brought before the meeting pursuant to the
notice of meeting under Article II, Section 5 of these Bylaws. If directors are
to be elected at a special meeting of shareholders pursuant to the notice of
meeting, nominations of persons for election to the Board of Directors at such
meeting may be made (a) by or at the direction of the Board of Directors, or (b)
by any shareholder of the Corporation who is a shareholder of record at the time
of giving of notice provided for in this Bylaw, who shall be entitled to vote at
the meeting and who complies with the notice procedures set forth in this Bylaw.
(ii) In the event a special meeting of shareholders is called for the
purpose of electing one or more directors to the Board of Directors, any
shareholder may, pursuant to clause (b) above, nominate a person or persons (as
the case may be) for election to such position(s) as specified in the notice of
meeting, if the shareholder shall have delivered notice containing the
information specified in paragraph (a)(ii) of this Bylaw to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th calendar day prior to such special meeting and not later
than the close of business on the later of the 60th calendar day prior to such
special meeting or the 10th calendar day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a shareholder's notice as described
above.
(c) General.
(i) Only such persons who are nominated in accordance with the procedures
set forth in this Bylaw shall be eligible to serve as directors and only such
business shall be conducted at a meeting of shareholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Bylaw. Except as otherwise provided by law, the Articles of Incorporation or
these Bylaws, the Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Bylaw and, if any proposed nomination or business
is not in compliance with this Bylaw, to declare that such defective proposal or
nomination shall be disregarded.
(ii) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported a national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Bylaw, a shareholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of
shareholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
11. Informal Action by Shareholders. Any action which is required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if a consent in writing, setting forth the
<PAGE>
action so taken, shall be signed by all of the persons who would be entitled to
vote upon such action at a meeting, and filed with the Secretary of the
Corporation to be kept in the Corporate Minute Book, whether done before or
after the action so taken. Such consent shall have the same force and effect as
a unanimous vote of shareholders.
ARTICLE III
DIRECTORS
1. General Powers. The business and affairs of the Corporation shall be
managed by the Board of Directors or by such committees as the Board may
establish pursuant to these Bylaws.
2. Number, Term and Qualification. The number of Directors of the
Corporation shall be not less than three (3), the exact number of which shall be
determined from time to time by resolution of the shareholders. Each Director
shall hold office until his death, resignation, retirement, removal,
disqualification, or his successor is elected and qualifies. Directors need not
be residents of the State of North Carolina or shareholders of the Corporation.
3. Election of Directors. Except as provided in paragraph 6 of this Article
III, the Directors shall be elected at the annual meeting of shareholders; and
those persons who receive the highest number of votes shall be deemed to have
been elected. If any shareholder so demands, election of Directors shall be by
ballot.
4. Cumulative Voting. At each election for Directors, every shareholder
entitled to vote at such election shall have the right to vote, in person or by
proxy, the number of shares standing of record in his name for as many persons
as there are Directors to be elected and for whose election he has a right to
vote, or to cumulate his vote by giving one candidate as many votes as the
number of such Directors multiplied by the number of his shares shall equal, or
by distributing such votes on the same principle among any number of such
candidates. This right of cumulative voting shall not be exercised unless some
shareholder or proxy holder announces in open meeting, before the voting for
Directors starts, his intention so to vote cumulatively; and if such
announcement is made, the chair shall declare that all shares entitled to vote
have the right to vote cumulatively and shall announce the number of shares
present in person and by proxy and shall thereupon grant a recess of not less
than one hour nor more than four hours, as he shall determine, or of such other
period of time as is unanimously then agreed upon.
5. Removal. Directors may be removed from office with or without cause by a
vote of shareholders holding a majority of the outstanding shares entitled to
vote at an election of Directors; provided, however, unless the entire Board is
removed, an individual Director may not be removed if the number of shares
voting against the removal would be sufficient to elect a Director if such
shares were voted cumulatively at an annual election. If any Directors are so
removed, new Directors may be elected at the same meeting.
6. Vacancies. A vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the authorized number of Directors approved by
the shareholders in accordance with these Bylaws, may be filled by a majority of
the remaining Directors, though less than a quorum, or by the sole remaining
Director. The shareholders may elect a Director at any time to fill any vacancy
not filled by the Directors.
<PAGE>
7. Chairman. There may be a Chairman of the Board of Directors elected by
the Directors from their number at any meeting of the Board. The Chairman shall
serve as an officer of the Corporation as provided in Article V and shall
preside at all meetings of the shareholders and of the Board of Directors and
perform such other duties as may be directed by the Board of Directors.
8. Compensation. The Board of Directors may compensate Directors for their
services as such and may provide for the payment of all expenses incurred by
Directors in attending regular and special meetings of the Board.
9. Executive and Other Committees.
(a) The Board of Directors, by resolution adopted by a majority of the
number of Directors then in office, may designate from among its members an
Executive Committee and one or more other committees, each consisting of two or
more directors, and each of which, to the extent provided in the resolution,
shall have and may exercise all of the authority of the Board of Directors,
except no such committee shall have authority as to the following matters:
(i) The dissolution, merger or consolidation of the Corporation;
or the sale, lease or exchange of all or substantially all of the property of
the Corporation.
(ii) The designation of any such committee or the filling of
vacancies in the Board of Directors or on any such committee.
(iii) The fixing of compensation of the Directors for serving on the
Board or on any such committee.
(iv) The amendment or repeal of the Bylaws or adoption of new
Bylaws.
(v) The amendment or repeal of any resolution of the Board which by
its terms shall not be so amendable or repealable.
(b) Any such committee, or any member thereof, may be discharged or
removed by action of the majority of the Board of Directors. Any resolutions
adopted or other action taken by any such committee within the scope of the
authority delegated to it by the Board of Directors shall be deemed for all
purposes to be adopted or taken by the Board of Directors.
ARTICLE IV
MEETINGS OF DIRECTORS
1. Regular Meetings. A regular meeting of the Board of Directors shall be
held immediately after, and at the same place as, the annual meeting of
shareholders. In addition, the Board of Directors may provide, by resolution,
the time and place, either within or without the State of North Carolina, for
the holding of additional regular meetings.
2. Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, if one has been duly
elected, the President or any two Directors. Such meetings may be held either
within or without the State of North Carolina.
<PAGE>
3. Notice of Meetings.
(a) The Secretary shall give notice, at least two days before the meeting,
by any usual means of communication of any regular meeting of the Board of
Directors.
(b) The person or persons calling a special meeting of the Board of
Directors shall, at least two days before the meeting, give notice thereof by
any usual means of communication. Such notice or waiver of notice shall specify
the business to be transacted at, or the purpose of, the meeting that is called.
Notice of an adjourned meeting need not be given if the time and place are fixed
at the meeting adjourning and if the period of adjournment does not exceed ten
(10) days in any one adjournment.
(c) Attendance by a Director at a meeting shall constitute a waiver of
notice of such meeting, except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
4. Quorum. A majority of the Directors in office shall constitute a quorum
for the transaction of business at any meeting of the Board of Directors.
5. Manner of Acting.
(a) Except as otherwise provided in Paragraph 5, the act of a majority of
the Directors then in office shall be the act of the Board of Directors, unless
a greater number is required by law, the charter of the Corporation, or a Bylaw
adopted by the shareholders.
(b) The vote of a majority of the number of Directors then in office shall
be required to adopt a resolution constituting an Executive Committee or other
committee of the Board. The vote of a majority of the Directors then holding
office shall be required to adopt, amend or repeal a Bylaw, or to adopt a
resolution dissolving the Corporation without action by the shareholders, in
circumstances authorized by law. Vacancies in the Board of Directors may be
filled as provided in paragraph 6 of Article III of these Bylaws.
6. Informal Action by Directors. Action taken by the Directors or members
of a committee of the Board of Directors without a meeting is nevertheless Board
or committee action if written consent to the action in question is signed by
all of the Directors or members of the committee, as the case may be, and filed
with the minutes of the proceedings of the Board or committee, whether done
before or after the action so taken.
7. Attendance by Telephone. Any one or more Directors or members of a
committee may participate in a meeting of the Board or committee by means of a
conference telephone or similar communications device which allows all persons
participating in the meeting to hear each other, and such participation in the
meeting shall be deemed presence in person at such meeting.
ARTICLE V
OFFICERS
1. Officers. The officers of the Corporation shall consist of a Chairman, a
President, a Secretary, a Treasurer and such other officers (including, without
limitation, one or more Executive Vice
<PAGE>
Presidents, Vice Presidents, Assistant Secretaries and Assistant Treasurers) as
may from time to time be appointed in accordance with these Bylaws. The Chairman
shall be chosen from among the directors.
2. Appointment and Term. The Chairman, the President and any Executive Vice
Presidents shall be appointed by the Board of Directors. Other officers may be
appointed either by the Board of Directors or by the Chairman. The Board of
Directors may appoint officers at any regular meeting or at any special meeting
called for such purpose. Each officer shall hold office until his death,
resignation, retirement, removal or disqualification, or until his successor is
appointed and qualifies.
3. Removal. Any officer or other agent appointed by the Board of Directors
may be removed by the Board, with or without cause, and any officer or other
agent appointed by the Chairman may be removed either by the Board or by the
Chairman, with or without cause. Such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
4. Chairman. The Chairman shall be the chief executive officer of the
Corporation. Subject to the direction of the Board of Directors, he shall have
general executive charge, management and control of the properties, business and
operations of the Corporation with all such powers as may be reasonably incident
to such responsibilities. He may sign certificates for shares of capital stock
of the Corporation and may agree upon and execute leases, contracts, evidences
of indebtedness and other obligations in the name of the Corporation, and any
deeds, mortgages, bonds or other instruments which may be lawfully executed on
behalf of the Corporation, except where required by law to be otherwise signed
or executed and except where the signing and execution thereof shall be
delegated by the Board of Directors to some other officer or agent. He shall
have such other powers and duties as from time to time may be assigned to him by
the Board of Directors.
5. President. The President shall be the chief operating officer of the
Corporation. Subject to the direction of the Chairman, he shall supervise the
day-to-day operation of the Corporation, shall act in a general executive
capacity and shall assist the Chairman in the administration and operation of
the Corporation's business and general supervision of its policies and affairs.
Unless the Board of Directors otherwise determines, the President shall have the
authority to sign certificates for shares of capital stock of the Corporation
and may agree upon and execute leases, contracts, evidences of indebtedness and
other obligations in the name of the Corporation, and any deeds, mortgages,
bonds or other instruments which may be lawfully executed on behalf of the
Corporation, except where required by law to be otherwise signed or executed and
except where the signing and execution thereof shall be delegated by the Board
of Directors to some other officer or agent. Unless the Board of Directors
otherwise determines, the President shall, in the absence of or because of the
inability to act of the Chairman, perform all duties of the Chairman and preside
at all meetings of shareholders and (should he be a director) of the Board of
Directors. He shall have such other powers and duties as from time to time may
be assigned to him by the Board of Directors or the Chairman.
6. Executive Vice Presidents. The Executive Vice Presidents, in the order
of their appointment unless otherwise determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of that office. In addition, they shall perform such other
duties and have such other powers as the Board of Directors or the Chairman
shall prescribe.
7. Vice Presidents. The Vice Presidents shall perform such duties and have
such powers as the Board of Directors or the Chairman or President shall
prescribe.
<PAGE>
8. Secretary. The Secretary shall keep accurate records of the acts and
proceedings of all meetings of shareholders, directors and committees. He shall
give all notices required by law and by these Bylaws. He shall have general
charge of the corporate books and records and of the corporate seal, and he
shall affix the corporate seal to any lawfully executed instrument requiring it.
He shall have general charge of the stock transfer books of the Corporation and
shall keep, at the registered or principal office of the Corporation or at the
offices of any transfer agent designated by the Corporation, a record of
shareholders showing the name and address of each shareholder and the number and
class of the shares held by each. He shall sign such instruments as may require
his signature, and, in general, attest the signature or certify the incumbency
or signature of any other officer of the Corporation and shall perform all
duties incident to the office of Secretary and such other duties as may be
assigned from time to time by the Board of Directors or the Chairman.
9. Treasurer. The Treasurer shall have custody of all funds and securities
belonging to the Corporation and shall receive, deposit or disburse the same
under the direction of the Chairman. The Treasurer shall keep full and accurate
accounts of the finances of the Corporation in books especially provided for
that purpose, which may be consolidated or combined statements of the
Corporation and one or more of its subsidiaries as appropriate, that include a
balance sheet as of the end of the fiscal year, an income statement for that
year, and a statement of cash flows for the year unless that information appears
elsewhere in the financial statements. If financial statements are prepared for
the Corporation on the basis of generally accepted accounting principles, the
annual financial statements must also be prepared on that basis. The Treasurer
shall, in general, perform all duties incident to such office and such other
duties as may be assigned from time to time by the Board of Directors or the
Chairman.
10. Assistant Secretaries and Treasurers. The Assistant Secretaries and
Assistant Treasurers shall, in the absence or disability of the Secretary or the
Treasurer, perform the respective duties and exercise the respective powers of
those offices, and they shall, in general, perform such other duties as shall be
assigned to them by the Board of Directors or Chairman, or by the Secretary or
the Treasurer, respectively.
11. Bonds. The Board of Directors, by resolution, may require any or all
officers, agents and employees of the Corporation to give bond to the
Corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of Directors.
12. Action With Respect to Securities of Other Corporations. Unless
otherwise directed by the Board of Directors, the Chairman shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of security holders of or with respect to any action of security
holders of any other corporation in which this Corporation may hold securities
and otherwise to exercise any and all rights and powers which this Corporation
may possess by reason of its ownership of securities in such other corporation.
ARTICLE VI
CONTRACTS, LOANS AND DEPOSITS
1. Contracts. The Board of Directors may authorize any officer or officers,
or agent or agents, to enter into any contract or execute and deliver any
instrument on behalf of the Corporation, and such authority may be general or
confined to specific instances.
<PAGE>
2. Loans. No loans shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
3. Checks and Drafts. All checks, drafts or other orders for the payment of
money issued in the name of the Corporation shall be signed by such officer or
officers, or agent or agents, of the Corporation and in such manner as shall
from time to time be determined by resolution of the Board of Directors.
4. Deposits. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such depository
or depositories as the Board of Directors shall direct.
ARTICLE VII
CERTIFICATES FOR SHARES AND OTHER TRANSFER
1. Certificates for Shares. Certificates representing shares of the
Corporation shall be issued, in such form as the Board of Directors shall
determine, to every shareholder for the fully paid shares owned by him. These
certificates shall be signed by the President or any Vice President or a person
who has been designated as the chief executive officer of the Corporation and by
the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer and sealed
with the seal of the Corporation or a facsimile thereof. The signatures of any
such officers upon a certificate may be facsimiles or may be engraved or printed
or omitted if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. In case any officer who has signed or whose facsimile or other
signature has been placed upon such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the date of its issue. They
shall be consecutively numbered or otherwise identified; and the name and
address of the persons to whom they are issued, with the number of shares and
date of issue, shall be entered on the stock transfer books of the Corporation.
2. Transfer of Shares. Transfer of shares shall be made on the stock
transfer books of the Corporation only upon surrender of the certificates for
the shares sought to be transferred by the record holder thereof or by his duly
authorized agent, transferee or legal representative. All certificates
surrendered for transfer shall be canceled before new certificates for the
transferred shares shall be issued.
3. Closing Transfer Books and Fixing Record Date.
(a) For the purpose of determining shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not to
exceed, in any case, fifty (50) days. If the stock transfer books shall be
closed for he purpose of determining shareholders entitled to notice of or to
vote at a meeting of shareholders, such books shall be closed for at least ten
(10) full days immediately preceding the date of such meeting.
(b) In lieu of closing the stock transfer books, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more
<PAGE>
than sixty (60) days and, in case of a meeting of shareholders, not less than
ten (10) full days immediately preceding the date on which the particular
action, requiring such determination of shareholders, is to be taken.
(c) If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or of shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be, shall be the record date for such determination of
shareholders.
(d) When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this Section 3, such determination
shall apply to any adjournment thereof regardless of its length except where the
determination has been made through the closing of the stock transfer books and
the stated period of closing has expired.
4. Lost Certificates. The Board of Directors may authorize the issuance of
a new share certificate in place of a certificate claimed to have been lost or
destroyed, upon receipt of an affidavit of such fact from the person claiming
the loss or destruction. When authorizing such issuance of a new certificate,
the Board may require the claimant to give the Corporation a bond in such sum as
it may direct to indemnify the Corporation against loss from any claim with
respect to the certificate claimed to have been lost or destroyed; or the Board
may, by resolution reciting that the circumstances justify such action,
authorize the issuance of the new certificate without requiring such a bond.
ARTICLE VIII
INDEMNIFICATION AND REIMBURSEMENT
OF DIRECTORS AND OFFICERS
1. Expenses and Liabilities: The Corporation shall have the power to
indemnify any present or former director, officer, employee or agent of the
Corporation, or any person who has served or is serving in such capacity at the
request of the Corporation in any other corporation, partnership, joint venture,
trust or other enterprise or as a trustee or administrator under an employee
benefit plan, with respect to any liability or litigation expenses, including
reasonable attorneys' fees, incurred by any such person to the extent and upon
the terms and conditions provided by law. Therefore, to the extent and upon the
terms and conditions provided by law, the Corporation shall so indemnify any and
all of its officers and directors against liability and litigation expenses,
including reasonable attorneys' fees, arising out of their status as such or
their activities in any of the foregoing capacities (excluding, however,
liability or litigation expenses which any of the foregoing may incur on account
of his or her activities which were, at the time taken, known or believed by him
or her to be clearly in conflict with the best interest of the Corporation).
Such officers and directors shall be entitled to recover from the Corporation,
and the Corporation shall pay, all reasonable costs, expenses, and attorneys'
fees in connection with the enforcement of rights to indemnification granted
herein. Any person who at any time after the adoption of this bylaw serves or
has served in either of the aforesaid capacities for or on behalf of the
Corporation shall be deemed to be doing or to have done so in reliance upon and
as consideration for the right of indemnification provided herein. Such right
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of any other rights to which such person may be entitled
apart from the provisions of this bylaw.
<PAGE>
The right of indemnification hereinabove provided for shall not be
exclusive of any rights to which any such director, officer, employee or agent
may otherwise be entitled under any bylaw, agreement, vote of the Board of
Directors or shareholders or otherwise with respect to any liability or
litigation expenses arising out of his activities in such capacity.
2. Advance Payment of Expenses. Expenses incurred by a director, officer,
employee or agent in defending a civil or criminal action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding, as authorized by the Board of Directors in the
specific case, upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he or she is entitled to be indemnified by the Corporation
against such expenses. Notwithstanding the above, the Corporation shall, upon
receipt of an undertaking by or on behalf of the director or officer involved to
repay the expenses described in the first paragraph of this Article VIII unless
it shall ultimately be determined that he or she is entitled to be indemnified
by the Corporation against such expenses, pay such expenses incurred by such
director or officer in defending a civil or criminal action, suit or proceeding
in advance of the final disposition of such action, suit or proceeding.
3. Insurance. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise or as a trustee or administrator under
an employee benefit plan against any liability asserted against him and incurred
by him in such capacity, or arising out of his status as such, whether or not
the Corporation or other such enterprise would have the power to indemnify him
against such liability.
ARTICLE IX
GENERAL PROVISIONS
1. Dividends. The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and by its charter.
2. Seal. The corporate seal of the Corporation shall consist of two
concentric circles between which is the name of the Corporation and in the
center of which is inscribed "1987", and such seal, as impressed on the margin
hereof, is hereby adopted as the corporate seal of the Corporation.
3. Waiver of Notice. Whenever any notice is required to be given to any
shareholder or Director under the provisions of the North Carolina Business
Corporation Act or under the provisions of the charter or Bylaws of the
Corporation, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be equivalent to the giving of such notice.
4. Fiscal Year. The fiscal year of the Corporation shall be determined by
the Board of Directors.
5. Form of Records. Any records maintained by the Corporation in the
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs, or any other information storage
<PAGE>
device; provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
6. Amendments. Except as otherwise provided herein, these Bylaws may be
amended or repealed and new Bylaws may be adopted by the affirmative vote of a
majority of the Directors then holding office at any regular or special meeting
of the Board of Directors or by affirmative vote of shareholders entitled to
exercise a majority of voting power of the Corporation.
The Board of Directors shall have no power to adopt a Bylaw:
(1) Changing the statutory requirement for a quorum of Directors or action
by Directors or changing the statutory requirement for a quorum of shareholders
or action by shareholders;
(2) Providing for the management of the Corporation otherwise than by the
Board of Directors or the committees thereof;
(3) Increasing or decreasing the number of Directors; or
(4) Classifying and staggering the election of Directors.
No Bylaw adopted or amended by the shareholders may be altered or repealed
by the Board of Directors.
EXHIBIT 4.1
NUMBER SHARES
[CREE LOGO]
CR
INCORPORATED UNDER THE LAWS OF THE STATE OF SEE REVERSE FOR
NORTH CAROLINA CERTAIN
DEFINITIONS
COMMON STOCK CUSIP 225447 10 1
THIS CERTIFIES THAT
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
CREE RESEARCH, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Adam H. Broome [CREE CORPORATE SEAL] /s/ Charles M. Swoboda
Secretary President
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NEW YORK)
TRANSFER AGENT AND REGISTRAR
- --------------------------- AUTHORIZED SIGNATURE
<PAGE>
CREE RESEARCH, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE DIFFERENT CLASSES AND SERIES OF CAPITAL
STOCK. THE CORPORATION WILL FURNISH ANY SHAREHOLDER UPON REQUEST, IN WRITING AND
WITHOUT CHARGE, A STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES
AND LIMITATIONS APPLICABLE TO EACH CLASS OF CAPITAL STOCK OF THE CORPORATION AND
OF THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH
SERIES AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR
FUTURE SERIES.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the (Cust) (Minor)
entirties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act
right of survivorship
and not as tenants in (State)
common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITIES OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------- shares of
the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated
X-------------------------------------
X-------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACT OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed: -----------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR
INSTITUTION SUCH AS A SECURITIES
BROKER/DEALER, COMMERCIAL BANK,
TRUST COMPANY, SAVINGS ASSOCIATION
OR A CREDIT UNION PARTICIPATING IN
A MEDALLION PROGRAM PURSUANT TO
RULE 17Ad-15 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
EXHIBIT 10.1
CREE RESEARCH, INC.
AMENDED AND RESTATED
EQUITY COMPENSATION PLAN
(formerly the Cree Research, Inc.
Employee Stock Option Plan)
(As amended June 28, 1999)
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"), and was subsequently
amended or amended and restated September 17, 1996, September 1, 1997,
December 7, 1998, March 31, 1999 and June 28, 1999.
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
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
<PAGE>
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 Mar-
ket 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.
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.
<PAGE>
2.23 "Stock" means shares of the Common Stock of Cree Research, Inc., par value
$.0025 per share, as may be adjusted pursuant to the provisions of Section
3.10.
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
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.
<PAGE>
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 Five Million Four Hundred Eighty Thousand (5,480,000) 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. (*As adjusted for stock split effective July 26, 1999.)
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
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
<PAGE>
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 share-
holders 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
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
<PAGE>
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 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;
<PAGE>
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.
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:
<PAGE>
(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).
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:
<PAGE>
(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.
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.
<PAGE>
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
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:
<PAGE>
(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,
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, exchange-
able securities, phantom stock and Stock awards or options valued by ref-
erence 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.
<PAGE>
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.
(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.
<PAGE>
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.
(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
<PAGE>
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.
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.
<PAGE>
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;
(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.
<PAGE>
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
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.
<PAGE>
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 10.11
March 30, 1999
TRANSFORMATION AGREEMENT
between
Siemens AG HL
a company incorporated under the laws of the Federal Republic of Germany, whose
registered office is at Wittelsbacherplatz 2, 80312 Munich
- - hereinafter referred to as SIEMENS
and
CREE Research, Inc.
a company incorporated under the laws of North Carolina, whose registered office
is at 4600 Silicon Drive, Durham, NC 27703.
- - hereinafter referred to as CREE
and
OSRAM Opto Semiconductors GmbH & Co. OHG
a company incorporated under the laws of the Federal Republic of Germany, whose
registered office is at Wernerwerkstrasse 2, 83049 Regensburg,
- - hereinafter referred to as OSRAM OS
Whereas -
the parties hereto except OSRAM OS have entered into a Development, License and
Supply Agreement dated October 25, 1995, and a Purchase Agreement dated
September 6, 1996 and amendments thereto (hereinafter referred to collectively
as the "Agreements").
which are in full force and effect, unconditional and unterminated as of
today.
SIEMENS as party to the Agreements, now intends to transfer its position as
party to the Agreements to its subsidiary, OSRAM OS.
OSRAM OS wishes to take over SIEMENS' position and become party instead and
place of SIEMENS.
<PAGE>
Now it is hereby agreed as follows:
With effect as of January 1st, 1999 the Agreements shall be modified as follows:
Siemens Aktiengesellschaft, a company incorporated in the Federal Republic
of Germany and having its registered address at Wittelsbacherplatz 2,
Postfach 10 12 12, D 80312 Muenchen, the Federal
Republic of Germany,
in each case shall be substituted by:
OSRAM Opto Semiconductors GmbH & Co. OHG, Wernerwerkstrasse 2, 93049
Regensburg, the Federal Republic of Germany, "OSRAM OS".
Consequentially, each reference in the wording of the Agreements to
"Siemens" or "Siemens HL" shall be deemed to read "OSRAM OS" instead.
Nothing herein shall be construed to release SIEMENS from its obligations
under the Agreements, including but not limited to its obligations with
respect to confidential information of CREE, and SIEMENS shall in all
events remain responsible for performance of the Agreements by OSRAM OS.
Correspondence of technical, commercial or sales-related content necessary
in the course of performing this agreement shall pass directly between
Siemens HL OS and the competent departments at OSRAM OS, Wernerwerkstrasse
2, 93049 Regensburg.
Apart from the above changes, the Agreements shall remain unaltered in full
force and effect.
OSRAM OS agrees to be bound by and comply with the Restricted Use Agreement
(RUA) dated October 1, 1994 between Siemens and Cree with respect to all SiC
material supplied by Cree.
Durham, dated this March 30, 1999
..../s/..............................
CREE Research, Inc.
Regensburg, dated this ...30.3.., 1999 Regensburg, dated this ....30.3..,
1999
..../s/.............................. ..../s/................................
SIEMENS AG HL OSRAM Opto Semiconductors
GmbH & Co. OHG
EXHIBIT 11.1
CREE RESEARCH, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Year Ended Year Ended Year Ended Year Ended Year Ended
June 27, June 28, June 30, June 30, June 30,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Basic:
Weighted average
common shares
outstanding 27,015,000 25,726,000 24,911,000 23,652,000 20,734,000
Net income (loss) 12,702,000 6,275,000 3,542,000 243,000 (17,000)
---------- ---------- ---------- ---------- ----------
Net income (loss)
per common share $ 0.47 $ 0.24 $ 0.14 $ 0.01 $ (0.00)
========== ========== ========== ========== ==========
Diluted:
Weighted average
common shares
outstanding 27,015,000 25,726,000 24,911,000 23,652,000 20,734,000
Dilutive effect of
stock options and
warrants 1,417,000 1,261,000 1,340,000 1,578,000 ---
---------- ---------- ---------- ---------- ----------
Total shares 28,432,000 26,987,000 26,251,000 25,230,000 20,734,000
---------- ---------- ---------- ---------- ----------
Net income (loss) 12,702,000 6,275,000 3,542,000 243,000 (17,000)
---------- ---------- ---------- ---------- ----------
Net income (loss)
per common share $ 0.45 $ 0.23 0.13 $ 0.01 $ (0.00)
========== ========== ========== ========== ==========
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of Cree Research, Inc. on Forms S-8 (No. 33-98956 and No. 33-98958) and Form
S-3 (No. 33-98728) of our report dated July 23, 1999 with respect to the
consolidated financial statements of Cree Research, Inc. and subsidiaries
included in this Annual Report on Form 10-K for the year ended June 27, 1999.
Ernst & Young LLP
Raleigh, North Carolina
August 11, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-98728) and Forms S-8 (No. 33-98956 and No.
33-98958) of Cree Research, Inc. and subsidiaries of our report dated July
22, 1998 relating to the financial statements which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
August 11, 1999
<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> 12-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> JUN-27-1999
<EXCHANGE-RATE> 1
<CASH> 42,506
<SECURITIES> 6,145
<RECEIVABLES> 16,460
<ALLOWANCES> 175
<INVENTORY> 3,977
<CURRENT-ASSETS> 69,767
<PP&E> 83,195
<DEPRECIATION> 13,311
<TOTAL-ASSETS> 144,217
<CURRENT-LIABILITIES> 9,545
<BONDS> 0
0
0
<COMMON> 111,209
<OTHER-SE> 18,813
<TOTAL-LIABILITY-AND-EQUITY> 144,217
<SALES> 60,050
<TOTAL-REVENUES> 60,050
<CGS> 31,920
<TOTAL-COSTS> 43,468
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> (1,060)
<INCOME-PRETAX> 17,642
<INCOME-TAX> 4,940
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