CREE INC
10-Q, 2000-11-03
SEMICONDUCTORS & RELATED DEVICES
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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 24, 2000

                         Commission file number: 0-21154


                                   CREE, INC.
             (Exact name of registrant as specified in its charter)


        North Carolina                                      56-1572719
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)


          4600 Silicon Drive
        Durham, North Carolina                                 27703
(Address of principal executive offices)                    (Zip Code)


                                 (919) 313-5300
              (Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. [ X] Yes [ ] No

The number of shares outstanding of the registrant's  Common Stock,  $0.0025 par
value per share, as of October 17, 2000 was 35,708,296.


















<PAGE>

                                   CREE, INC.
                                   FORM 10-Q

                    For the Quarter Ended September 24, 2000


                                      INDEX


                                                                        Page No.
                                                                        --------
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets at September 24, 2000
         (unaudited) and June 25, 2000                                      3

         Consolidated Statements of Income for the three months ended
         September 24, 2000 and September 26, 1999 (unaudited)              4

         Consolidated Statements of Cash Flows for the three months
         ended September 24, 2000 and September 26, 1999 (unaudited)        5

         Notes to Consolidated Financial Statements (unaudited)             6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                         12

Item 3.  Quantitative and Qualitative Disclosures of Market Risk           16

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                 17

Item 2.  Changes in Securities                                             17

Item 6.  Exhibits and Reports on Form 8-K                                  17

SIGNATURES                                                                 18

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                                   CREE, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

                                                September 24,          June 25,
                                                    2000                 2000
                                                -------------         ----------
                                                             (Unaudited)
ASSETS
Current assets:
       Cash and cash equivalents                  $  34,123           $ 103,843
       Short-term investments held to maturity      206,094             142,461
       Marketable securities                         16,215              15,842
       Accounts receivable, net                      19,992              12,406
       Interest receivable                            5,826               3,893
       Inventories                                   10,564               9,320
       Deferred income taxes                            139                  --
       Prepaid expenses and other current assets      3,741               1,254
                                                 -----------          ----------
              Total current assets                  296,694             289,019

       Property and equipment, net                  157,615             137,118
       Long-term investments held to maturity         9,936              41,965
       Deferred income taxes                         10,624              10,624
       Patent and license rights, net                 2,373               2,324
       Other assets                                  25,721               5,152
                                                 -----------          ----------
              Total assets                        $ 502,963           $ 486,202
                                                 ===========          ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
       Accounts payable, trade                    $  11,705           $  14,204
       Accrued salaries and wages                     4,429               3,133
       Other accrued expenses                        10,142               5,725
                                                 -----------          ----------
              Total current liabilities              26,276              23,062
Long term liabilities:
       Long term liability                              400                  --
                                                 -----------          ----------
              Total long term liabilities               400                  --

Shareholders' equity:
       Preferred stock, par value $0.01;                 --                  --
         3,000 shares authorized at September 24,
         2000 and June 25, 2000; none issued
         and outstanding
       Common stock, par value $0.0025;                  88                  88
         60,000 shares authorized at September 24,
         2000 and June 25, 2000; shares issued and
         outstanding 35,517 and 35,348 at September
         24, 2000 and June 25, 2000, respectively
       Additional paid-in-capital                   417,357             415,716
       Deferred compensation expense                 (1,604)             (1,755)
       Retained earnings                             60,811              48,156
       Accumulated other comprehensive                (365)                 935
         income (loss), net of tax
                                                 -----------          ----------
         Total shareholders' equity                 476,287             463,140
                                                 -----------          ----------
         Total liabilities and                    $ 502,963           $ 486,202
            shareholders' equity                 ===========          ==========

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       3
<PAGE>

                                   CREE, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                    (In thousands, except per share amounts)
                                   (Unaudited)

                                                    Three Months Ended
                                           -------------------------------------
                                            September 24,         September 26,
                                                2000                   1999
                                           ---------------       ---------------
Revenue:
    Product revenue, net                       $ 34,311              $ 18,248
    Contract revenue, net                         3,331                 2,613
                                           ---------------       ---------------
      Total revenue                              37,642                20,861

Cost of revenue:
    Product revenue, net                         14,489                 9,496
    Contract revenue, net                         2,587                 1,888
                                           ---------------       ---------------
      Total cost of revenue                      17,076                11,384

Gross profit                                     20,566                 9,477

Operating expenses:
    Research and development                      2,101                   931
    Sales, general and administrative             3,957                 2,056
    Other expense                                    --                   101
                                           ---------------       ---------------

      Income from operations                     14,508                 6,389

Other non-operating expense                          88                    --
Interest income, net                              4,783                   553
                                           ---------------       ---------------

      Income before income taxes                 19,203                 6,942

Income tax expense                                6,548                 2,388
                                           ---------------       ---------------
      Net income                                 12,655                 4,554
                                           ===============       ===============

Earnings per share:
      Basic                                      $ 0.36                $ 0.15
                                           ===============       ===============
      Diluted                                    $ 0.34                $ 0.14
                                           ===============       ===============

Shares used in per share calculation:
      Basic                                      35,406                31,185
                                           ===============       ===============
      Diluted                                    37,630                33,163
                                           ===============       ===============


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       4
<PAGE>

                                   CREE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (In thousands)
                                   (Unaudited)

                                                        Three Months Ended
                                                --------------------------------
                                                  September 24,   September 26,
                                                      2000              1999
                                                 --------------- ---------------
Operating activities:
    Net income                                      $  12,655        $  4,554
    Adjustments to reconcile net income to
      net cash provided by operating activities:
    Depreciation and amortization                       4,128           2,076
    Loss on disposal of property and equipment             --              43
    Amortization of patent rights                          15              32
    Purchase of marketable trading securities          (5,028)             --
    Proceeds from sale of marketable securities         5,837              --
    Gain on marketable trading securities              (1,182)             --
    Deferred income taxes                               1,479            (118)
    Tax benefits associated with stock options          4,500           2,520
    Amortization of deferred compensation                 151              68
    Changes in operating assets and liabilities:
      Accounts and interest receivable                 (9,519)         (1,083)
      Inventories                                      (1,244)            (74)
      Prepaid expenses and other assets                (2,626)            (11)
      Accounts payable, trade                          (2,499)         (1,484)
      Accrued expenses                                 (1,166)          1,593
                                                 --------------- ---------------
Net cash provided by operating activities               5,501           8,116
                                                 --------------- ---------------

Investing activities:
    Purchase of property and equipment                (24,626)         (9,773)
    Purchase of securities held to maturity           (50,613)             --
    Proceeds from securities held to maturity          19,010              --
    Purchase of patent rights                             (64)            (98)
    Increase in other long-term assets                (20,569)           (171)
                                                 --------------- ---------------
      Net cash used in investing activities           (76,862)        (10,042)
                                                 --------------- ---------------

Financing activities:
    Net repayments of long term debt                       --             (48)
    Net proceeds from issuance of common stock          1,641           1,072
                                                 --------------- ---------------
      Net cash provided by financing activities          1,641           1,024
                                                 --------------- ---------------

Net decrease in cash and cash equivalents           $ (69,720)       $   (902)
Cash and cash equivalents:
    Beginning of period                             $ 103,843        $ 42,545
                                                 --------------- ---------------
    End of period                                   $  34,123        $ 41,643
                                                 =============== ===============
Supplemental disclosure of cash flow information:
    Cash paid for income taxes                             --       $     63

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      5
<PAGE>

                                   CREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Basis of Presentation

The balance sheet as of September 24, 2000, the statements of operations for the
three month  periods ended  September  24, 2000 and September 26, 1999,  and the
statements  of cash flows for the three  months  ended  September  24,  2000 and
September  26, 1999 have been prepared by the Company and have not been audited.
In the opinion of management,  all  adjustments  necessary to present fairly the
financial position,  results of operations and cash flows at September 24, 2000,
and all periods  presented,  have been made.  The balance sheet at June 25, 2000
has been derived from the audited financial statements as of that date.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  It is suggested that these condensed  financial
statements  be read in  conjunction  with the  financial  statements  and  notes
thereto  included  in the  Company's  fiscal  2000 Form  10-K.  The  results  of
operations  for  the  period  ended  September  24,  2000  are  not  necessarily
indicative of the  operating  results that may be attained for the entire fiscal
year.

Accounting Policies

Business Combination

On May 1, 2000 the  Company  acquired  Nitres,  Inc.  in a business  combination
accounted for as a pooling of  interests.  Nitres,  Inc.,  became a wholly owned
subsidiary  (Cree  Lighting  Company)  of the Company  through  the  exchange of
1,847,746 shares of the Company's common stock for all of the outstanding  stock
of Nitres,  Inc. In addition,  the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 152,223
options and warrants to purchase shares of Cree's common stock. All prior period
consolidated  financial  statements have been restated to include the results of
operations, financial position and cash flows of Nitres, Inc., as though Nitres,
Inc. had been a part of the Company for all periods presented.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of Cree, Inc., and
its wholly-owned  subsidiaries,  Cree Lighting Company ("Cree  Lighting"),  Cree
Research FSC, Inc.,  Cree Funding LLC, Cree Employee  Services  Corporation  and

                                       6
<PAGE>

Cree Technologies, Inc. All material intercompany accounts and transactions have
been eliminated in consolidation.

Reclassifications

Certain 2000 amounts in the accompanying  consolidated financial statements have
been reclassified to conform to the 2001 presentation.  These  reclassifications
had no effect on previously reported net income or shareholders' equity.

Fiscal Year

The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June.  Accordingly,  all  quarterly  reporting  reflects  a 13 week
period in fiscal 2001 and fiscal 2000. The Company's current fiscal year extends
from June 26, 2000 through June 24, 2001.

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.

Fair Value of Financial Instruments

The carrying  amounts of cash and cash  equivalents,  short-term  and  long-term
investments,  available for sale securities,  accounts and interest  receivable,
accounts  payable,  debt,  and  other  liabilities  approximate  fair  value  at
September 24, 2000 and June 25, 2000.

Investments

Investments  are  accounted  for  in  accordance  with  Statement  of  Financial
Accounting  Standards No. 115 (SFAS 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.

                                       7
<PAGE>

As of September 24, 2000, the Company's short-term  investments held to maturity
included  $206.1 million  consisting of $156.5  million in high-grade  corporate
bonds, $20.0 million in government securities, and $29.6 million in a closed end
mutual fund investing in high grade corporate  securities that mature within one
year. The Company  purchased the investments with a portion of the proceeds from
its public  stock  offering  in January  2000.  The  Company  has the intent and
ability to hold these securities until maturity;  therefore,  they are accounted
for as "securities held-to-maturity" under SFAS 115. The securities are reported
on the balance sheet at amortized  cost, as a short-term  investment with unpaid
interest included in interest receivable.

As of September 24, 2000, the Company's  long-term  investments held to maturity
consisted of $9.9 million in  high-grade  corporate  bond  holdings  that mature
after  September 24, 2001.  The Company  purchased  the  corporate  bonds with a
portion of the proceeds  from the public  stock  offering in January  2000.  The
Company  has the intent and  ability to hold these  securities  until  maturity;
therefore,  they are accounted for as "securities  held-to-maturity"  under SFAS
115. The  securities  are reported on the balance sheet at amortized  cost, as a
long-term held to maturity  investment with unpaid interest included in interest
receivable if interest is due in less than 12 months,  and as a long-term  other
asset if interest is due in more than 12 months.

At September 24, 2000,  and  September  26, 1999,  the Company held a short-term
equity  investment in common stock 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,  or $4.5  million.  Pursuant to an  agreement  signed
March 17, 2000, the Company committed to increase its equity position in MVIS by
investing an  additional  $12.5 million in MVIS common  stock.  This  additional
investment was completed on April 13, 2000, when the Company  purchased  250,000
shares at a price of $50.00 per share.  In June 2000,  162,600  MVIS shares were
sold for $6.3 million,  with a gain on sale  recognized  for $3.6  million.  The
Company has also purchased other securities for investment purposes.  Management
views these  transactions  as  investments,  and the shares are accounted for as
"available for sale"  securities under SFAS 115.  Therefore  unrealized gains or
losses are  excluded  from  earnings  and are  recorded  in other  comprehensive
income, net of tax.

During  the first  quarter  of  fiscal  2001,  the  Company  purchased  and sold
marketable  trading securities that resulted in the Company recording a realized
gain on the sale of stock of $1.2 million.

Inventories

Inventories  are  stated at the lower of cost or  market,  with cost  determined
under  the  first-in,  first-out  (FIFO)  method.  Inventories  consist  of  the
following:

                                       8
<PAGE>

                                              September 24,           June 25,
                                                  2000                  2000
                                             ---------------        ------------
                                                         (in thousands)
        Raw materials                          $  2,339               $ 2,415
        Work-in-process                           3,396                 3,094
        Finished goods                            4,829                 3,811
                                             ---------------        ------------
        Total Inventories                      $ 10,564               $ 9,320
                                             ===============        ============

Research and Development

The U.S.  Government  provides funding through research contracts for several of
the Company's current research and development efforts. The contract funding may
be based on  either a  cost-plus  or a  cost-share  arrangement.  The  amount of
funding under each contract is determined  based on cost  estimates that include
direct  costs,  plus an  allocation  for research and  development,  general and
administrative and 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
paid to the  Company.  Activities  performed  under these  arrangements  include
research regarding silicon carbide and gallium nitride materials.  The contracts
typically  require the submission of a written report that documents the results
of such research.

The revenue and expense  classification for contract  activities is based on the
nature of the contract. For contracts where the Company anticipates that funding
will exceed direct costs over the life of the  contract,  funding is reported as
contract revenue and all direct costs are reported as costs of contract revenue.
For contracts under which the Company  anticipates that direct costs will exceed
amounts  to be  funded  over the life of the  contract,  costs are  reported  as
research  and  development  expenses  and related  funding as an offset of those
expenses.  The following  table details  information  about  contracts for which
direct expenses exceed funding by period as included in research and development
expenses:

                                                      Three months ended
                                              ----------------------------------

                                               September 24,      September 26,
                                                   2000                1999
                                              ---------------     --------------
                                                         (in thousands)
Net research and development costs                $ 136               $  40
Government funding                                  347                  67
                                              ---------------     --------------
Total direct costs incurred                       $ 483               $ 107
                                              ===============     ==============


                                       9
<PAGE>

Significant Sales Contract

In July 2000, the Company entered into a new Purchase  Agreement with Osram Opto
Semiconductors GmbH & Co. ("Osram"),  pursuant to which Osram agreed to purchase
and the Company is  obligated to ship  certain  quantities  of both the standard
brightness and the high  brightness LED chips and silicon carbide wafers through
September 2001.

The  agreement  calls for certain  quantities  of standard  brightness  and high
brightness  LED chips to be  delivered  by month.  In the event the  Company  is
unable to ship at least 85% of the cumulative  quantity due to have been shipped
each month,  Osram is entitled to liquidated  damages of one percent per week of
the purchase price of the delayed  product,  subject to a maximum of ten percent
of the purchase price. If product shipments are delayed six weeks or more due to
circumstances within the Company's control,  then in lieu of liquidated damages,
Osram may claim damages actually resulting from the delay up to forty percent of
the purchase price of delayed products.

The contract also gives Osram limited rights to defer shipments. For products to
be shipped in more than 24 weeks after initial  notice,  Osram can defer 30% and
25% of standard brightness and high brightness LEDs, respectively.  For products
to be shipped in more than 12 weeks, but less than 24 weeks, Osram may defer 10%
of scheduled  quantities for both standard  brightness and high brightness LEDs.
In each case,  Osram is  required to accept all  products  within 90 days of the
original shipment date. In all other cases, Osram may reschedule  shipments only
with the Company's mutual written agreement.

Additionally,  the Purchase  Agreement provides for higher per unit prices early
in the contract with reductions in unit prices being available as the cumulative
volume shipped  increases.  The higher prices were  negotiated by the Company to
offset higher per unit costs expected earlier in the contract.

Income Taxes

The Company has  established an estimated tax provision  based upon an effective
rate of 34%. The estimated  effective rate was based upon  projections of income
for the fiscal year and the Company's ability to utilize remaining net operating
loss carryforwards and other tax credits. However, the actual effective rate may
vary depending upon actual pre-tax book income for the year or other factors.

Earnings Per Share

The  Company  presents  earnings  per  share in  accordance  with  Statement  of
Financial  Accounting  Standards (SFAS) No. 128, "Earnings Per Share".  SFAS No.
128  required  the  Company to change its method of  computing,  presenting  and
disclosing earnings per share information.

                                       10
<PAGE>

The  following  computation  reconciles  the  differences  between the basic and
diluted presentations:

                                                      Three months ended
                                              ----------------------------------
                                               September 24,      September 26,
                                                   2000                1999
                                              ---------------     --------------
                                                         (in thousands,
                                                     except per share data)
  Basic:
  Net income                                      $ 12,655            $ 4,554
                                              ===============     ==============
  Weighted average common shares                    35,406             31,185
                                              ===============     ==============
  Basic income per common share                     $ 0.36             $ 0.15
                                              ===============     ==============

  Diluted:
  Net income                                      $ 12,655            $ 4,554
                                              ===============     ==============
  Weighted average common shares-basic              35,406             31,185
  Dilutive effect of stock options
    and warrants                                     2,224              1,978
                                              ---------------     --------------
  Weighted average common shares-diluted            37,630             33,163
                                              ===============     ==============
  Diluted income per common share                   $ 0.34             $ 0.14
                                              ===============     ==============


Potential common shares that would have the effect of increasing  diluted income
per share are considered to be  antidilutive.  In accordance  with SFAS No. 128,
these  shares  were not  included  in  calculating  diluted  income  per  share.
Accordingly, 765,000 and 476,000 shares for the three months ended September 24,
2000 and  September  26, 1999,  respectively,  were not included in  calculating
diluted income per share for the periods presented.

New Accounting Pronouncements

In June 1998, The Financial  Accounting Standards Board issued Statement No. 133
"Accounting  for Derivative  Instruments and Hedging  Activities"  ("SFAS 133"),
which is required to be adopted in years  beginning  after June 15,  1999.  SFAS
133, as amended by SFAS 137 and SFAS 138, is effective  for all fiscal  quarters
of fiscal years  beginning  after June 15, 2000.  In the first quarter of fiscal
2001,  the Company  adopted SFAS 133.  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.

                                       11
<PAGE>

Item 2.  Management's  Discussion and Analysis of Financial Condition and
         Results of Operations

Information set forth in this Form 10-Q, including  Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations,  contains  various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and  Section 21E of the  Securities  Act of 1934.  These  statements
represent the Company's judgment  concerning the future and are subject to risks
and  uncertainties  that could cause the Company's actual operating  results and
financial position to differ materially.  Such forward-looking statements can be
identified  by the use of  forward-looking  terminology  such as "may,"  "will,"
"anticipate,"  "believe,"  "plan,"  "estimate,"  "expect,"  and  "intend" or the
negative  thereof or other  variations  thereof or comparable  terminology.  The
Company cautions that any such forward-looking  statements are further qualified
by important  factors that could cause the Company's actual operating results to
differ materially from those in the  forward-looking  statements.  These factors
include,  but  are  not  limited  to,  fluctuations  in our  operating  results,
production yields in our manufacturing processes, whether we can produce greater
quantities  of high  brightness  blue and green LEDs,  our  dependence  on a few
customers,  whether new customers will emerge, whether we can develop, introduce
and create market demand for new products,  whether we can ramp up manufacturing
production  of new  products  to meet  demand,  whether we can manage our growth
effectively,  assertion  of  intellectual  property  rights by  others,  adverse
economic conditions,  and insufficient  capital resources.  See Exhibit 99.1 for
additional factors that could cause the Company's actual results to differ.


Overview

Cree,  Inc. is the world leader in developing  and  manufacturing  semiconductor
materials and electronic devices made from silicon carbide ("SiC"). We recognize
product  revenue at the time of shipment or in accordance  with the terms of the
relevant contract. We derive the largest portion of our revenue from the sale of
blue and green light emitting diode ("LED") products. The Company offers LEDs at
two brightness  levels -- high  brightness  blue and green products and standard
blue  products.  Our LED  devices  are  utilized  by end  users  for  automotive
dashboard  lighting,  liquid crystal  display  ("LCD")  backlighting,  including
wireless handsets and other consumer products,  indicator lamps, miniature white
lights,  indoor signs and arena displays,  outdoor full color displays,  traffic
signals and other lighting applications.

The demand for high brightness products continued to be strong through the first
quarter.  During the first  quarter of fiscal 2001,  revenues  derived from high
brightness  LED sales  were  greater  than 80% of the total LED sales  mix.  The
increase in demand for high  brightness  products was due to strong  demand from
customers. Unit shipments of the small-sized high brightness chips, designed for

                                       12
<PAGE>

handset applications, more than doubled during the first quarter and represented
more than 15% of total LED volume in the first quarter of fiscal 2001.

We have  continued to make  improvements  to output and yield.  During the first
quarter of fiscal 2001, margins for high brightness LED products were strong due
to improvements in yield.  During the remainder of fiscal 2001, we plan to focus
on reducing costs through higher production yields and from significantly higher
volumes as fixed costs are spread over a greater number of units.

We derive additional  revenue from the sale of advanced  materials made from SiC
that are used  primarily  for research  and  development  for new  semiconductor
applications. We also sell SiC crystals to Charles & Colvard ("C&C"), for use in
gemstone applications. The balance of our revenue is derived from government and
customer  research contract funding.  Under various  programs,  U.S.  Government
entities  further the  development of our technology by funding our research and
development efforts.

Results of Operations

Three Months Ended September 24, 2000 and September 26, 1999

Revenue.  For the quarter ended September 24, 2000, the Company reported revenue
of $37.6  million  reflecting an 80% increase in sales over the first quarter of
fiscal 2000.  First quarter  product  revenue of $34.3  million,  which includes
sales of light emitting  diodes  ("LEDs") and materials,  increased 88% over the
first quarter of fiscal 2000. Higher product revenue was primarily the result of
LED  revenue  growth of 146% in the first  quarter of fiscal 2001 as compared to
the same period in the prior year.  Much of this growth was attributed to a 120%
increase in LED volumes over the comparable  period with a substantially  higher
mix of high  brightness  blue and  green  LED  products.  The  increase  in high
brightness  unit  volume  was  due to  strong  demand  from  customers  and  the
availability of additional capacity from our factory as a result of our facility
and equipment expansion and yield improvements. Average LED sales prices paid by
customers increased 12% in the first quarter of fiscal 2001 compared to the same
quarter  in the prior  year due to the shift in sales mix to the  higher  priced
high brightness LED products. During the first quarter of fiscal 2001, more than
80% of LED sales were  attributed  to the high  brightness  product.  During the
comparable  period in fiscal 2000, less than 34% of LED sales were from the high
brightness  devices.  The average  sales price for the high  brightness  product
declined 5% and 2% in the first  quarter of fiscal 2001 and 2000,  respectively,
over the prior sequential quarter.

We expect that in order to increase  market  demand for all of our LED products,
we must continue to lower average sales prices, which is common to our industry.
However,  we are  targeting  strong growth for our LED revenue in fiscal 2001 to
more than offset these lower prices with significantly  higher volume,  stemming
from strong  customer  demand and our  continued  capacity  expansion  and yield
improvements.  We also plan to introduce a new ultra bright LED product targeted

                                       13
<PAGE>

for the  second  half of  fiscal  2001 that is  expected  to offer two times the
brightness  of our high  brightness  devices.  We believe  this new product will
drive  a  portion  of  the  demand,  however;  if we  are  unable  to  meet  the
manufacturing ramp up of this product in the appropriate timeframe,  revenue may
be lower than anticipated.

Wafer  sales grew 53% in the first  quarter of fiscal  2001 over the prior year.
Much of this growth was  attributed  to a 121% increase in wafer volume over the
comparable  period due to strong  demand for silicon  carbide  materials  by the
corporate and research  communities.  Overall,  silicon  carbide based  material
sales  declined by 2% in the first  quarter of fiscal 2001  compared to the same
period of fiscal  2000.  The  decrease  in  revenue  was  attributable  to lower
gemstone  sales.  During  fiscal  2000,  C&C  announced  lower  sales and higher
inventory levels than anticipated. The Company agreed to allow C&C to reduce its
purchase  commitments  for calendar  2000.  While C&C remains  optimistic  about
future  business,  we are  targeting no revenue from  gemstone  materials in the
second half of fiscal 2001.  We believe that strong demand from our LED business
will more than offset the reduction in gemstone sales. Contract revenue received
from U.S.  Government  agencies increased 27% during the first quarter of fiscal
2001 as compared to the same quarter in the prior year. The  additional  revenue
was anticipated as additional  contract awards were received in late fiscal 2000
and in the first quarter of fiscal 2001.

Gross Profit.  Gross profit increased 117% to $20.6 million in the first quarter
of fiscal 2001.  Compared to the prior year, gross margins increased to 55% from
45% of  revenue  due to the  successful  execution  of cost  reduction  programs
combined  with  rising  average  sales  prices  for LEDs due to the shift in mix
toward higher  priced high  brightness  products  during this  timeframe.  Lower
product costs stem from higher  throughput  and  manufacturing  yield on LED and
materials products,  thereby lowering the cost per unit. In recent quarters,  we
have  continued  to be  successful  in reducing  LED costs at a faster rate than
average sales prices.  For the remainder of fiscal 2001, we plan to continue the
strategy  of  reducing   costs  through  higher   production   yields  and  from
significantly greater volumes as fixed costs are spread over a greater number of
units.

Research and Development. Research and development expenses for the three months
ending  September 24, 2000,  increased 126% to $2.1 million from $0.9 million in
the comparable prior year period. This was due to increases in internal research
and development  efforts for RF and microwave and optoelectronics  programs.  We
believe that research and development  expenses will continue to grow during the
remainder of fiscal 2001 due to increased  funding  necessary to release  future
products;  however,  as a percentage of revenue,  these expenses are targeted to
remain relatively even.

Sales, General and Administrative.  Sales,  general and administrative  expenses
for the three month period  ended  September  24, 2000  increased by 92% to $4.0
from $2.1  million  in the same  period in the prior year due  primarily  to the
general growth in our business and additional legal expenses.  For the remainder
of fiscal 2001, we believe that total sales,  general and  administrative  costs

                                       14
<PAGE>

will  continue  to  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  declined  100% to $0 in the first  quarter from
$101,000  in the  same  period  of the  prior  year as the  Company  took  asset
write-offs during the first quarter of fiscal 2000.

Other Non-Operating  Expense.  Other non-operating  expenses for the three-month
period  ended  September  24, 2000 was $88,000  compared to $0 in the prior year
period, due to additional costs associated with the acquisition of Nitres, Inc.

Interest Income, Net. Net interest income increased $4.2 million to $4.8 million
in the first  quarter of fiscal 2001  compared to $0.6 million in the prior year
period.  This was due to higher  average cash  balances  being  available in the
first quarter of fiscal 2001 as a result of the public stock offering  completed
in January 2000.  Higher interest rates in the first quarter of fiscal 2001 also
increased interest income.

Income Tax Expense.  Income tax expense for the first quarter of fiscal 2001 was
$6.5 million  compared to $2.4 million in the first quarter of fiscal 2000. This
increase  resulted  from  increased  profitability  during the first  quarter of
fiscal 2001 over the same period of fiscal 2000.  Our tax provision rate was 34%
for both periods.

Liquidity and Capital Resources

We have funded our operations to date through sales of equity,  bank  borrowings
and revenue from product and contract  sales.  As of September  24, 2000, we had
working  capital  of  $270.4  million,  including  cash,  cash  equivalents  and
short-term  investments of $240.2  million.  Net cash provided by operations was
$5.5  million for the three  months ended  September  24, 2000  compared to $8.1
million that was generated  during the  comparative  period in fiscal 2000.  The
decrease was primarily attributable to the timing of payments made and received.
Accounts and interest  receivable  and other prepaid  expenses  increased  $12.1
million  due to  increased  product  shipments  combined  with  higher  interest
receivable  related to higher yielding  securities  balances and other timing in
the collection of invoices.  Additional  timing  differences led to decreases of
$3.7 million in accounts payable and accrued expense balances.

Most of the $76.9  million used in investing  activities in the first quarter of
fiscal 2001 was related to the purchase of held to maturity investments. We also
invested $24.6 million in capital expenditures during the first quarter compared
to $9.8 million during the same period of the prior fiscal year. The majority of
spending  for capital  expenditures  was due to new  equipment  additions in our
epitaxy,  crystal  growth,  clean room, and package and test areas.  The Company
also continues construction on the 125,000 square foot facility expansion at the
existing  site that is scheduled  to be completed by December  2000 and equipped
during  the next few  quarters.  The  investment  in  long-term  assets of $20.6
million  represents the  investments in Xemod,  Inc. and other  companies.  Cash

                                       15
<PAGE>

provided by financing  activities  during  fiscal 2001 related to the receipt of
$1.6 million in proceeds  from the exercise of stock  options from the Company's
employee stock option plan and the exercise of outstanding stock warrants.

We may also  issue  additional  shares of common  stock for the  acquisition  of
complementary  businesses  or other  significant  assets.  From  time to time we
evaluate potential  acquisitions of and investments in complementary  businesses
and anticipate continuing to make such evaluations.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Quantitative Disclosures

As of September 24, 2000, the Company maintains investments in equity securities
that are treated for accounting  purposes under SFAS 115 as "available for sale"
securities.  These  investments are carried at fair market value based on quoted
market prices of the  investments as of September 24, 2000,  with net unrealized
gains or losses  excluded from earnings and reported as a separate  component of
stockholder's  equity.  These  investments  are subject to market risk of equity
price changes. Management views these stock holdings as investments;  therefore,
the shares are accounted for as "available for sale"  securities under SFAS 115.
The fair market value of these  investments as of September 24, 2000,  using the
closing sale price as of September 22, 2000 was $16.2 million.

During the first  quarter  of fiscal  2001,  the  Company  invested  some of the
proceeds from its January 2000 public  offering into other  investments at fixed
interest rates that vary by security.  No other material  changes in market risk
were identified during the most recent quarter.

Qualitative Disclosures

Investments  in the common  stock of other public  companies  are 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.

                                       16
<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

On September 22, 2000 the Company filed a patent  infringement  lawsuit  against
Nichia Corporation and Nichia America  Corporation in the United States District
Court for the Eastern District of North Carolina.  The lawsuit seeks enforcement
of a patent relating to gallium nitride-based semiconductor devices manufactured
using lateral epitaxial overgrowth (LEO) technology, which permits the growth of
high quality gallium  nitride-based  materials useful in  manufacturing  certain
laser diodes and other  devices.  The patent was issued to North  Carolina State
University  in April 2000 and is  licensed  to Cree under a June 1999  agreement
pursuant  to  which  Cree  obtained  rights  to a  number  of  LEO  and  related
techniques.  In its complaint, Cree alleges that Nichia is infringing the patent
by, among other things,  importing,  selling and offering for sale in the United
States certain gallium  nitride-based laser diodes covered by one or more claims
of the patent. The lawsuit seeks damages and an injunction against infringement.
North Carolina State University is a co-plaintiff in the action.

Item 2. Changes in Securities

During the three months ended  September  24, 2000,  the Company  issued  54,696
shares of its common  stock to the  holders  of  outstanding  warrants  upon the
exercise of such warrants in reliance on the exemption  provided by section 4(2)
of the  Securities  Act of 1933 as a private  placement.  The exercise price for
47,000  warrants was $13.62.  The exercise  price for 7,696  warrants was $2.55;
however,  these warrants were exercised on a net basis, and the Company received
no cash upon the issuance of the shares.

Item 6.  Exhibits and Reports on Form 8-K

         (a) Exhibits:

             10.1    Purchase Agreement between the Company and Osram Opto Semi-
                     conductors Gmbh & Co. dated July 27, 2000. (1)

             27.1    Financial Data Schedule

             27.2    Restated Financial Data Schedule

             99.1    Certain Business Risks and Uncertainties

         (b) Reports on Form 8-K:

             No reports on Form 8-K were filed by the Company during the quarter
             ended September 24, 2000.

        ---------------------
         (1) Confidential  treatment  of  portions  of  this  document has  been
             requested  pursuant to Rule 24b-2  of the  Securities and  Exchange
             Commission.

                                       17
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements  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.

Date:  November 1, 2000
                                       CREE, INC.


                                       /s/ Cynthia B. Merrell
                                       ----------------------------------------
                                       Cynthia B. Merrell,
                                       Chief Financial Officer and Treasurer
                                       (Authorized Officer and Chief Financial
                                       and Accounting Officer)










































                                       18
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.

10.1    Purchase Agreement between the Company and Osram Opto Semi-
        conductors Gmbh & Co. dated July 27, 2000. (1)

27.1    Financial Data Schedule

27.2    Restated Financial Data Schedule

99.1    Risk Factors

        ---------------------
         (1) Confidential  treatment  of  portions  of  this  document  has been
             requested  pursuant to Rule 24b-2  of the  Securities and  Exchange
             Commission.




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