<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 3, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CREE, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
NORTH CAROLINA 56-1572719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
4600 SILICON DRIVE
DURHAM, NORTH CAROLINA 27703
(919) 313-5300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CYNTHIA B. MERRELL
CHIEF FINANCIAL OFFICER AND TREASURER
CREE, INC.
4600 SILICON DRIVE
DURHAM, NORTH CAROLINA 27703
(919) 313-5300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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<S> <C>
GERALD F. ROACH, ESQ. PHILIP P. ROSSETTI, ESQ.
AMY J. MEYERS, ESQ. HALE AND DORR LLP
SMITH, ANDERSON, BLOUNT, 60 STATE STREET
DORSETT, MITCHELL & JERNIGAN, L.L.P. BOSTON, MASSACHUSETTS 02109
2500 FIRST UNION CAPITOL CENTER (617) 526-6000
RALEIGH, NORTH CAROLINA 27601
(919) 821-1220
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock $0.0025 par value per
share.................................. 2,990,000 $77.2188 $230,884,063 $60,953.39
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</TABLE>
(1) Includes 390,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee, based
upon the average of the high and low prices of the Common Stock on the
Nasdaq National Market on December 27, 1999 in accordance with Rule 457(c).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED JANUARY 3, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,600,000 SHARES
[CREE, INC. LOGO]
COMMON STOCK
$ PER SHARE
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Cree, Inc. is offering 2,600,000 shares of common stock with this prospectus.
This is a firm commitment underwriting.
The common stock is traded on the Nasdaq National Market under the symbol
"CREE." On December 30, 1999, the last reported sale price of the common stock
on the Nasdaq National Market was $84.875 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Price to the public................................. $ $
Underwriting discount...............................
Proceeds to Cree....................................
</TABLE>
Cree has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 390,000 additional
shares from Cree within 30 days following the date of this prospectus to cover
over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
BANC OF AMERICA SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP
MORGAN KEEGAN & COMPANY, INC.
The date of this Prospectus is , 2000
<PAGE> 3
Following the prospectus cover page are color photos of certain of Cree's
products:
o Blue and green LEDs
o Silicon carbide (SiC) wafers
o Gemstone crystals
o Microwave devices
o Utility substation
o Blue laser beam
In the center of the photo layout is the Cree logo over the title "Existing and
Planned Products"
Beside or beneath each photo is the following description:
o LEDs Cree has created high brightness blue and green LEDs through the
combination of SiC and nitride-based materials.
o SILICON CARBIDE WAFERS Cree is the leading worldwide supplier of SiC
wafers used by customers in research and development programs.
o GEMSTONE APPLICATIONS Cree manufactures near colorless SiC with
properties similar to diamond for use in unique gemstones.
o RADIO FREQUENCY "RF" AND MICROWAVE* Cree is developing devices for use
in RF and microwave applications, such as wireless infrastructure,
digital broadcast and radar applications.
o POWER SEMICONDUCTORS* Cree is developing power semiconductor devices
for applications such as power conditioning for motor controls and high
voltage power transmission.
o LASERS* Cree is developing blue laser diodes designed to increase
optical storage capability.
*Currently under development
2
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 6
Forward Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Price Range of Common Stock................................. 15
Capitalization.............................................. 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 28
Management.................................................. 41
Certain Transactions........................................ 43
Underwriting................................................ 45
Legal Matters............................................... 47
Experts..................................................... 47
Where You Can Find More Information......................... 47
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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As used in this prospectus, the terms "we," "us," "our" and "Cree" mean Cree,
Inc. and its subsidiaries (unless the context indicates a different meaning),
and the term "common stock" means our common stock, $0.0025 par value per share.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about , 2000, against payment in immediately available
funds.
3
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and accompanying notes that appear
elsewhere in this prospectus.
ABOUT CREE
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from silicon carbide, or SiC. We use our proprietary
compound semiconductor technology to make enabling products such as blue and
green light emitting diodes, or LEDs, SiC crystals used in the production of
unique gemstones, SiC wafers that are sold for use in manufacturing and for
research and development, and radio frequency, or RF, transistors for wireless
and broadcast applications. We have new product initiatives based on our
expertise in SiC, including microwave transistors for use in wireless
communications infrastructure and radar, blue laser diodes for optical storage
applications and high power devices for power conditioning and switching.
Our blue and green LEDs are sold to customers who package them for use in
applications such as backlighting for automotive dashboards and liquid crystal
displays, including wireless handsets and other consumer products. Other
applications include indoor and outdoor electronic displays, such as video
replay boards in indoor arenas and outdoor stadium signs, traffic signals and
miniature lighting. We have developed several generations of our LED products,
including high performance LEDs with increased brightness up to 300% over our
standard brightness products. Our SiC-based LEDs offer important benefits to our
customers, including an industry standard chip structure, small size, high
brightness and low unit price.
We believe that, for certain applications, SiC-based devices offer significant
advantages over other semiconductor materials such as silicon and gallium
arsenide. In particular, 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. For example, SiC
enables the manufacture of blue and green LEDs in an easier to use, industry
standard structure. SiC also permits a smaller LED chip size that we believe is
less expensive to produce than LEDs made using other materials. In addition,
researchers have demonstrated SiC-based microwave transistors that operate at
significantly higher power levels than existing silicon or gallium
arsenide-based devices. This characteristic should allow wireless systems to use
fewer transistors per base station with less complex circuitry, which should
result in a lower system cost.
Many of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material very difficult to
produce. Through our proprietary technology and over 12 years of development and
manufacturing experience, we have succeeded in overcoming many difficulties in
processing SiC for commercial use.
Our objective is to continue to develop SiC materials and device technology with
low unit costs. We are using our materials and process technology to develop new
microwave, power and laser diode products while continuing to enhance our LEDs,
SiC wafers and gemstone crystals. We are also using our SiC technology to begin
production of our RF products. We have increased the performance and reduced the
cost of our LED chips over the last several years by using different materials
to create brighter LEDs, decreasing chip size, increasing wafer diameter and
enhancing our manufacturing processes.
Effective January 1, 2000, we changed our name from "Cree Research, Inc." to
"Cree, Inc." Our principal executive offices are located at 4600 Silicon Drive,
Durham, North Carolina 27703. Our telephone number is (919) 313-5300.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Cree......................... 2,600,000 shares
Common stock to be outstanding after
the offering....................................... 32,099,499 shares
Use of proceeds...................................... For the expansion and acquisition of
facilities, the purchase of equipment,
research and development, working capital
and general corporate purposes.
Nasdaq National Market symbol........................ CREE
</TABLE>
The number of shares outstanding after the offering is based on 29,499,499
shares of common stock outstanding on September 26, 1999. This number excludes
4,072,633 shares of common stock reserved for issuance in connection with the
exercise of stock options and warrants outstanding on September 26, 1999, of
which 200,149 shares were issued between September 26, 1999 and December 26,
1999.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
The shares used in calculating earnings per share in the table below are
adjusted for our two-for-one stock split effective July 26, 1999. The as
adjusted balance sheet data in the table below give effect to the sale of
2,600,000 shares of common stock in this offering at an assumed public offering
price of $84.875 per share, and the application of the net proceeds from the
sale of the shares, after deducting the underwriting discount and our estimated
offering expenses.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
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JUNE 30, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1997 1998 1999 1998 1999
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<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue........................ $28,973 $42,531 $60,050 $12,279 $20,048
Gross profit......................... 9,878 14,552 28,130 5,657 9,414
Income from operations............... 3,112 8,145 16,582 3,364 6,455
Net income........................... $ 3,542 $ 6,275 $12,702 $ 2,366 $ 4,636
======= ======= ======= ======= =======
Earnings per share:
Basic.............................. $ 0.14 $ 0.24 $ 0.47 $ 0.09 $ 0.16
======= ======= ======= ======= =======
Diluted............................ $ 0.13 $ 0.23 $ 0.45 $ 0.09 $ 0.15
======= ======= ======= ======= =======
Shares used in per share calculation:
Basic.............................. 24,911 25,726 27,015 25,840 29,337
======= ======= ======= ======= =======
Diluted............................ 26,251 26,987 28,432 26,498 31,214
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<TABLE>
<CAPTION>
SEPTEMBER 26, 1999
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ACTUAL AS ADJUSTED
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 41,226 $250,869
Working capital............................................. 55,640 265,283
Total assets................................................ 149,105 358,748
Shareholders' equity........................................ 133,285 342,928
</TABLE>
5
<PAGE> 7
RISK FACTORS
You should carefully consider the following factors before deciding to invest in
the shares. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us, that we
currently deem immaterial or that are similar to those faced by other companies
in our industry or business in general may also impair our business operations.
If any of the following risks actually occurs, our business, financial condition
or results of future operations could be materially and adversely affected. In
that event, our stock price could decline, and you may lose all or part of your
investment. This prospectus also contains forward looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward looking statements as a result of numerous
factors, including the risks described below and elsewhere in this prospectus.
Please refer to "Forward Looking Statements" on page 13.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATE.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates and we may experience
significant fluctuations in our revenue and earnings in the future. Our
operating results will depend on many factors, including the following:
- - our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
- - our ability to produce enough usable product during each manufacturing step
(our "yield");
- - our ability to expand our production of SiC wafers and devices;
- - demand for our products;
- - demand for our customers' products;
- - competition; and
- - general industry and global economic conditions.
Our future operating results could be adversely affected by these or other
factors. Additionally, if our future operating results are below the
expectations of equity 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 and other consumer products, and they
insist that our products meet exact specifications for quality, performance and
reliability.
The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including the
following:
- - impurities in the materials used;
- - contamination of the manufacturing environment;
- - equipment failure, power outages or variations in the manufacturing process;
and
- - losses from human error.
Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected.
In the past, we have experienced difficulties in achieving acceptable yields on
both new and older products, and poor yields have adversely affected our
operating results. We may experience similar problems in the future and we
cannot predict when they may occur or their severity. Such problems could
significantly affect our future operating results.
6
<PAGE> 8
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDS, OUR
OPERATING RESULTS MAY SUFFER.
We have made and continue to make substantial investments in equipment and
facilities to manufacture high brightness blue and green LEDs. We have accepted
orders for these products in quantities that have sold out our existing and
planned increases in production capacity for the next few quarters. These
significant volumes also require improved production yields for the products to
meet customer demand. Successful production of these products is subject to a
number of risks, including the following:
- - our ability to consistently manufacture the products in volumes large enough
to cover our fixed costs and satisfy our customers' requirements; and
- - our ability to improve our yields and reduce the costs associated with the
manufacture of the products.
Our inability to produce adequate quantities of our high brightness blue and
green LEDs would have a material adverse effect on our business, results of
operations and financial condition. For example, our current contract with our
largest LED customer provides that the customer may recover liquidated damages,
or in some cases actual damages, if we materially default in meeting delivery
commitments.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The markets for our products are highly competitive. Our competitors offer blue
and green LEDs made from sapphire wafers that are brighter than the high
brightness LEDs we currently produce. In addition, some of our customers could
compete with us. For example, Osram Opto Semiconductors GMBH and Co. OHG, or
Osram OS, an indirect subsidiary of Siemens AG, and Shin-Etsu Handotai Co. Ltd.,
or Shin-Etsu, license some of our LED technology. Osram OS currently purchases
large volumes of our standard brightness blue LEDs but also manufactures some of
its volume requirements for these LEDs. Shin-Etsu may also seek to enter our LED
markets. The market for SiC wafers is likewise becoming competitive as other
firms have in recent years begun offering SiC wafer products or announced plans
to do so.
Also, other firms may develop new or enhanced products that are more effective
than any that we have developed or may develop. These firms may develop
technologies that enable the production of 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 or 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.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success depends 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 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 RF and
microwave devices, power devices, blue laser diodes and high temperature
devices. The successful development and
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introduction of these products depends on a number of factors, including the
following:
- - achievement of technology breakthroughs required to make commercially viable
devices;
- - the accuracy of our predictions of market requirements and evolving standards;
- - acceptance of our new product designs;
- - our ability to recruit qualified development personnel;
- - our timely completion of product designs and development;
- - our ability to develop repeatable processes to manufacture new products in
sufficient quantities for commercial sales; and
- - acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-effective 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 this trend to continue. For example,
for fiscal 1999 our top five customers accounted for 81% of our total revenue.
(These percentages consider sales to a distributor as sales to one customer).
Sales to Osram OS accounted for 37% of our total revenue in fiscal 1999. In
addition, sales to C3, Inc., or C3, accounted for 19% of our total revenue in
fiscal 1999. 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. Our customers use our products as components
in their products. If other aspects of our customers' products infringe a third
party's intellectual property rights, and our customers are then prohibited from
selling their products, our business could be adversely affected. If we lose a
large customer and fail to add new customers to replace lost revenue, our
operating results may not recover.
Under an exclusive supply agreement with an initial term extending to 2005, C3
must purchase from us each calendar quarter at least 50% (by dollar volume) of
its requirements for SiC materials for use in production of gemstones during the
quarter. In the fall of 1999, C3 announced lower sales revenue and higher
inventory levels than anticipated, as well as the launch of a new marketing
campaign. Recently, we agreed that C3 could reschedule approximately one-half of
its purchase commitments from the first half of calendar 2000 to the second half
of the year. We anticipate that sales to C3 will decrease in calendar 2000. We
may use excess capacity from C3-dedicated equipment for other applications, but
if we are not able to replace these revenues with sales from other areas of our
business, our financial results may be materially adversely affected.
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 assure you
that third parties will not attempt to assert infringement claims against us
with respect to our current or future products, including our core products. We
cannot predict the extent to which such assertions may require us 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. In
December 1999, one of our distributors in Japan was named in a lawsuit alleging
infringement of a Japanese patent and seeking an injunction that, if granted,
would preclude the distributor from selling certain of
8
<PAGE> 10
our standard brightness blue LED products in Japan. We have intervened in the
action to assist in the defense against the claim of infringement. Subject to
contractual limitations, we have an obligation to indemnify our distributor for
certain patent infringement claims. An adverse judgment against the distributor
would restrict our ability to sell certain products in Japan without obtaining a
license. Litigation to determine the validity of infringement 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 cannot predict the occurrence of future
intellectual property claims that may prevent us from selling products, result
in litigation or give rise to indemnification obligations or damage claims.
WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
CAPACITY.
In order to increase production, we must expand our existing facilities or
acquire new facilities, as well as purchase new manufacturing equipment. We are
beginning to construct 125,000 square feet of additional space at our
manufacturing facility and are in the process of purchasing another 120,000
square foot facility under construction on a 17.5-acre site near our existing
facility. Expansion activities such as these are subject to a number of risks,
including the following:
- - unforeseen environmental or engineering problems relating to existing or new
facilities;
- - unavailability or late delivery of the advanced, and often customized,
equipment used in the production of our products;
- - work stoppages and delays; and
- - delays in bringing production equipment on-line.
These and other risks may affect the ultimate cost and timing of our current
construction, as well as the acquisition of new facilities, which could
adversely affect our business, results of operations and financial condition.
For example, if we are not successful in meeting milestones associated with this
expansion, we could have difficulty making shipments of previously ordered
products; consequently, we could be in default under contracts with our
customers and/or subject to penalties.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.
We have experienced a period of significant growth that has strained our
management and other resources. We have grown from 188 employees on December 31,
1996 to 478 employees on December 26, 1999 and from revenues of $29.0 million
for the fiscal year ended June 30, 1997 to $60.1 million for the fiscal year
ended June 27, 1999. To manage our growth effectively, we must continue to:
- - implement and improve operational systems;
- - maintain adequate manufacturing facilities and equipment to meet customer
demand;
- - add experienced senior level managers; and
- - attract and retain qualified people with experience in engineering, design,
technical marketing and support.
We will spend substantial amounts of money in supporting our growth and may have
additional unexpected costs. Our systems, procedures or controls may not be
adequate to support our operations, and we may not be able to expand quickly
enough to exploit potential market opportunities. Our future operating results
will also depend on expanding sales and marketing, research and development, and
administrative support. If we cannot attract qualified people or manage growth
effectively, our business, operating results and financial condition could be
adversely affected.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.
Beginning in the second half of calendar 2000, we plan to begin shifting LED
production from
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two-inch wafers to three-inch wafers. We must first qualify our production
processes on systems designed to accommodate the larger wafer size, and some of
our existing production equipment must be refitted for the larger wafer size.
Delays in this process could have an adverse effect on our business. In
addition, in the past we have experienced lower yields for a period of time
following a transition to a larger wafer size until use of the larger wafer is
fully integrated in production and we begin to achieve production efficiency. We
anticipate that we will experience similar temporary yield reductions during the
transition to the use of three-inch wafers, and we have factored this into our
plan for production capacity. If this transition phase takes longer than we
expect or if we are unable to attain expected yield improvements, our operating
results may be adversely affected.
THE ONGOING OPERATION OF OUR MANUFACTURING FACILITY IS CRITICAL TO OUR BUSINESS.
Our principal manufacturing facility in Durham, North Carolina currently
includes a total of 214,000 square feet. The ongoing operation of this facility
is crucial to our strategy of expanding manufacturing capacity to meet demand
for our SiC products now and in the future.
We began commercial production of products from our present facility in August
1998. We expect that production from this facility will increase throughout the
remainder of fiscal 2000 and into fiscal 2001. Our inability to use all or a
significant portion of our facilities for prolonged periods of time for any
reason could have an adverse impact on our business. For example, a fire or
explosion caused by our use of combustible chemicals and high temperatures
during certain of our manufacturing processes would render some or all of our
facility inoperable for an indefinite period of time. Our manufacturing process
requires highly specialized customized equipment that is not easily replaced.
Consequently, damage to or destruction of any or all of our facility could
impair our ability to manufacture products for our customers.
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,
components 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 our 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.
OUR BUSINESS MAY SUFFER IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE
THEIR FUNDING FOR OUR RESEARCH AND DEVELOPMENT.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could be
adversely affected.
WE DEPEND HEAVILY ON KEY PERSONNEL.
Our success depends in part on keeping key technical and management personnel.
For example, some of the equipment used in the production of our products must
be modified before it is put to use and only a limited number of employees
possess the expertise needed to perform these modifications. Furthermore, the
number of individuals with experience in the production of SiC and related
products is limited, and our future success depends in part on retaining those
individuals who are already employees.
We must also continue to attract qualified personnel. The competition for
qualified personnel is intense, and the number of people with the experience
that we need is limited. We cannot be sure that we will be able to continue
10
<PAGE> 12
to attract and retain other skilled personnel in the future.
THERE ARE LIMITATIONS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY.
Our proprietary technology is critical to our business, and our business could
suffer if we are unable to sufficiently protect our intellectual property
rights. Our intellectual property position is based in part on patents owned by
us and on patents exclusively licensed to us by North Carolina State University,
also known as N.C. State.
We intend to continue to file patent applications in the future, where
appropriate, and to pursue such applications with U.S. and foreign patent
authorities, but we cannot be sure that any other patents will be issued on such
applications or that our patents will not be contested. In the past, one of the
important patents we license from N.C. State relating to SiC crystal growth was
subject to a reissue proceeding in the U.S.; however, the patent was
successfully reissued. Currently, a corresponding European patent is being
challenged, which means that we could lose patent protection in Europe for this
particular method. There is no assurance that other of our patents will not be
contested. Also, because issuance of a valid patent does not prevent other
companies from using alternative, non-infringing technology, we cannot be sure
that any of our patents (or patents issued to N.C. State or other parties and
licensed to us) will provide significant commercial protection.
In addition to patent protection, we also rely on trade secrets, technical
know-how and other unpatented proprietary information relating to our product
development and manufacturing activities. We try to protect this information
through the use of 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.
We may initiate litigation in the future to enforce our intellectual property
rights. Litigation can be protracted, costly and distracting to key personnel.
We cannot assure you that we will prevail in any litigation we initiate and, if
we are not successful, the scope of our rights to important intellectual
property could be diminished or eliminated.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 79% of our
revenue in fiscal 1997, about 74% of our revenue in fiscal 1998, and about 62%
of our revenue in fiscal 1999.
We expect that revenue from international sales will continue to be a
significant part of our total revenue. International sales are subject to a
variety of risks, including risks arising from currency fluctuations, trends in
use of the Euro, trading restrictions, tariffs, trade barriers and taxes. Also,
export laws restrict sales of some of our products to customers in certain
countries because of national security or other concerns.
Because all of our foreign sales are denominated in U.S. dollars, our products
become less price competitive in countries with currencies that are low or are
declining in value against the U.S. dollar. Also, we cannot be sure that our
international customers will continue to place orders denominated in U.S.
dollars. If they do not, our reported revenue and earnings will be subject to
foreign exchange fluctuations.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION.
We are subject to a variety of government regulations pertaining to chemical and
waste discharges and other aspects of our manufacturing process. For example, we
are responsible for the management of the hazardous materials we use and
disposal of hazardous waste resulting from our manufacturing process. The proper
handling and disposal of such hazardous material and waste requires us to comply
with certain government
11
<PAGE> 13
regulations. We believe we are in full compliance with such regulations as of
the date of this prospectus, but any failure, whether intentional or
inadvertent, to comply with such regulations could have an adverse effect on our
business. In addition, these regulations may affect our ability to expand or
change our manufacturing facility.
THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT AN INVESTMENT IN OUR STOCK.
The market price of our common stock has been and may continue to be subject to
wide fluctuations. Factors affecting our stock price may include:
- - variations in operating results from quarter to quarter;
- - changes in earning estimates by analysts;
- - market conditions in the industry; and
- - general economic conditions.
Our stock price has fluctuated widely. For example, between November 1997 and
January 1998 the price of our common stock dropped from approximately $14.75 to
$6.75 per share. Between August 1998 and December 26, 1999, the price of our
common stock rose from approximately $5.25 to $79.00 per share. Consequently,
the current market price of our common stock may not be indicative of future
market prices, and you may not be able to sustain or increase the value of your
investment in our common stock.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES.
Even though the date is now past January 1, 2000, and we have not experienced
any immediate adverse impact from the transition to the Year 2000, we cannot
provide assurance that our suppliers and customers have not been affected in a
manner that is not yet apparent. In addition, certain computer programs which
were date sensitive to the Year 2000 may not have been programmed to process the
Year 2000 as a leap year, and any negative consequential effects remain unknown.
As a result, we will continue to monitor our Year 2000 compliance and the Year
2000 compliance of our suppliers and customers.
12
<PAGE> 14
FORWARD LOOKING STATEMENTS
Information set forth in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contains various "forward looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. These statements
represent our judgment concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
positions to differ materially. Forward looking statements are typically
identified by the use of terms such as "may," "will," "expect," "anticipate,"
"estimate" and similar words, although some forward looking statements are
expressed differently. Our actual results could differ materially from those
contained in the forward looking statements due to a number of factors,
including fluctuations in our operating results, production yields in our
manufacturing processes, whether we can produce sufficient quantities of high
brightness blue and green LEDs to meet demand, our dependence on a few
customers, whether we can manage our growth effectively, assertion of
intellectual property rights by others and adverse economic conditions. These
and other factors that could cause actual results to differ materially from such
forward looking statements are set forth under the caption "Risk Factors" and
elsewhere in this prospectus.
13
<PAGE> 15
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 2,600,000 shares of
common stock we are offering will be approximately $209.6 million. If the
underwriters fully exercise the over-allotment option, the net proceeds will be
approximately $241.2 million. For the purpose of estimating net proceeds, we are
assuming that the public offering price will be $84.875 per share. "Net
proceeds" is what we expect to receive after paying the underwriting discount
and other estimated expenses of this offering.
We expect to use the net proceeds as follows:
- - approximately $50 million to $60 million will be used to fund the expansion
and acquisition of facilities, as well as to purchase equipment; and
- - the balance will be used for general corporate purposes, including working
capital, research and development, and potential acquisitions of or
investments in complementary businesses.
We reserve the right to vary the use of proceeds among the categories listed
above because our ability to use the proceeds in the approximate amounts listed
is dependent on a number of factors, including the unexpected costs of equipment
and other capital expenditures, the progress of new product research and
development and the continued success of our products. Pending such uses, we
intend to invest the net proceeds from this offering in investment grade,
interest-bearing securities.
From time to time we evaluate potential opportunities for acquisitions of and
investments in complementary businesses, but we cannot assure you that we will
complete any particular acquisition or investment. We have no present commitment
or agreement with respect to a material acquisition of or investment in another
business.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and do not
anticipate that we 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, us from paying dividends on our common stock.
Our present policy is to retain earnings, if any, to provide funds for the
operation and expansion of our business.
14
<PAGE> 16
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the Nasdaq National Market under the symbol
CREE on February 8, 1993. The following table sets forth the high and low sales
prices for our common stock for the periods indicated as reported on the Nasdaq
National Market and as adjusted for the two-for-one stock split effective July
26, 1999.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1998:
First Quarter............................................. $ 10.250 $ 5.875
Second Quarter............................................ 14.750 7.813
Third Quarter............................................. 9.813 6.750
Fourth Quarter............................................ 8.813 7.000
FISCAL 1999:
First Quarter............................................. $ 8.750 $ 5.250
Second Quarter............................................ 23.500 6.813
Third Quarter............................................. 26.625 15.125
Fourth Quarter............................................ 36.688 18.625
FISCAL 2000:
First Quarter............................................. $ 44.750 $ 23.500
Second Quarter............................................ 79.000 32.125
Third Quarter (through December 30, 1999)................. 88.500 74.375
</TABLE>
On December 30, 1999, the last reported sale price on the Nasdaq National Market
for our common stock was $84.875 per share. On December 30, 1999, there were
approximately 436 holders of record of our common stock.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization as of September 26, 1999 on an
actual and as adjusted basis to reflect the sale of 2,600,000 shares of common
stock that we are offering with this prospectus, at an assumed offering price of
$84.875 per share, after deducting the underwriting discount and our estimated
offering expenses and applying the net proceeds. The total number of shares of
our common stock outstanding as of September 26, 1999, as adjusted for this
offering in the table below, excludes 4,072,633 shares of common stock reserved
for issuance in connection with the exercise of stock options and warrants
outstanding at September 26, 1999, of which 200,149 shares were issued between
September 26, 1999 and December 26, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 26, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 41,226 $250,869
======== ========
Shareholders' equity:
Preferred stock, $0.01 par value; 3,000 shares authorized;
none issued and outstanding............................ $ -- $ --
Common stock, $0.0025 par value; 60,000 shares authorized;
29,500 shares issued and outstanding actual; 32,100
shares issued and outstanding as adjusted.............. 74 80
Additional paid-in capital................................ 112,180 321,817
Retained earnings........................................... 21,031 21,031
-------- --------
Total shareholders' equity.................................. 133,285 342,928
-------- --------
Total capitalization........................................ $133,285 $342,928
======== ========
</TABLE>
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the statement of income data for the years ended June 30, 1997, June
28, 1998 and June 27, 1999 and balance sheet data as of June 28, 1998 and June
27, 1999 from the audited financial statements included in this prospectus. The
financial statements for the periods ended June 30, 1997 and June 28, 1998 were
audited by PricewaterhouseCoopers LLP, independent accountants. The financial
statements for the year ended June 27, 1999 were audited by Ernst & Young LLP,
independent auditors. We derived the statement of income data for the years
ended June 30, 1995 and 1996 and the balance sheet data as of June 30, 1995,
1996 and 1997 from audited financial statements that are not included in this
prospectus. We derived the statement of income data for the three months ended
September 27, 1998 and September 26, 1999 and balance sheet data at September
26, 1999 from the unaudited financial statements included in this prospectus. We
believe that the unaudited historical financial statements contain all
adjustments needed to present fairly the information included in those
statements, and that the adjustments made consist of normal recurring
adjustments. Historical results are not necessarily indicative of results of
operations to be expected in the future, and the results for the three months
ended September 26, 1999 are not necessarily indicative of results to be
expected for the entire year. The shares used in calculating earnings per share
in the table below are adjusted for our two-for-one stock split effective July
26, 1999. You should read this information in conjunction with our financial
statements and other financial data included elsewhere in this prospectus or
incorporated by reference from our reports filed with the Securities and
Exchange Commission and the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
---------------------------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 28, JUNE 27, SEPT. 27, SEPT. 26,
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Product revenue, net.................... $ 5,989 $ 9,689 $19,823 $34,891 $53,464 $10,720 $18,257
Contract revenue, net................... 3,011 3,945 6,535 7,640 6,586 1,559 1,791
License fee income...................... -- 1,423 2,615 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total revenue......................... 9,000 15,057 28,973 42,531 60,050 12,279 20,048
Cost of revenue:
Product revenue, net.................... 4,244 8,411 13,388 21,727 26,977 5,415 9,498
Contract revenue, net................... 1,773 3,078 5,707 6,252 4,943 1,207 1,136
------- ------- ------- ------- ------- ------- -------
Total cost of revenue................. 6,017 11,489 19,095 27,979 31,920 6,622 10,634
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 2,983 3,568 9,878 14,552 28,130 5,657 9,414
Operating expenses:
Research and development................ 1,194 1,286 1,826 1,774 4,443 806 931
Sales, general and administrative....... 2,268 2,917 4,301 4,131 6,064 1,218 1,927
Other (income) expense.................... (1) (11) 639 502 1,041 269 101
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. (478) (624) 3,112 8,145 16,582 3,364 6,455
Interest income, net...................... 461 867 607 730 1,060 115 569
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes....... (17) 243 3,719 8,875 17,642 3,479 7,024
Income tax expense........................ -- -- 177 2,600 4,940 1,113 2,388
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ (17) $ 243 $ 3,542 $ 6,275 $12,702 $ 2,366 $ 4,636
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic................................... $ 0.00 $ 0.01 $ 0.14 $ 0.24 $ 0.47 $ 0.09 $ 0.16
======= ======= ======= ======= ======= ======= =======
Diluted................................. $ 0.00 $ 0.01 $ 0.13 $ 0.23 $ 0.45 $ 0.09 $ 0.15
======= ======= ======= ======= ======= ======= =======
Shares used in per share calculation:
Basic................................... 20,734 23,652 24,911 25,726 27,015 25,840 29,337
======= ======= ======= ======= ======= ======= =======
Diluted................................. 20,734 25,230 26,251 26,987 28,432 26,498 31,214
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- JUNE 28, JUNE 27, SEPT. 26,
1995 1996 1997 1998 1999 1999
------- ------- ------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 3,748 $10,162 $10,448 $17,680 $ 42,506 $ 41,226
Working capital.................................. 9,970 18,596 21,013 27,603 60,222 55,640
Total assets..................................... 20,924 43,796 50,137 72,724 144,217 149,105
Shareholders' equity............................. 19,504 40,672 45,125 54,865 130,022 133,285
</TABLE>
17
<PAGE> 19
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," "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 "Risk Factors" as well as other risks and
uncertainties referenced in this prospectus.
OVERVIEW
We are the world leader 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 derive
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 brightness blue products. Our LED devices are utilized by end users
for automotive dashboard backlighting, liquid crystal display, or LCD,
backlighting, including wireless handsets and other consumer products, indicator
lamps, miniature white lights, 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.
During the first quarter of fiscal 2000, revenues derived from sales of high
brightness LEDs were greater than 50% of the total LED sales mix. Historically,
we have experienced low margins with many new product introductions, including
the high brightness products. We have continued to make improvements to output
and yield since the high brightness products were introduced in fiscal 1999.
During the first quarter of fiscal 2000, improved yields for the high brightness
LED products contributed to a 16% reduction in unit costs from the fourth
quarter of fiscal 1999. During the remainder of fiscal 2000, we plan to focus on
reducing unit costs through higher production yields and increased volumes as
fixed costs are spread over a greater number of units.
We derive revenue from the sale of SiC wafers that are used for device
production and research and development. In addition, we sell SiC crystals to
C3, which uses them in gemstone applications. Sales of advanced materials made
from SiC represented 38% of our revenue in fiscal 1999 and approximately 34%
during fiscal 1998. During late fiscal 1998, fiscal 1999 and early fiscal 2000,
C3 purchased crystal growth equipment we constructed but retain to use in
manufacturing material for C3; this equipment has more than doubled our capacity
allocated to the production of crystals for C3. In the fall of 1999, C3
announced lower sales revenue and higher inventory levels than anticipated as
well as launched a new marketing campaign for its gemstone products. Recently,
we agreed that C3 could reschedule approximately one-half of its purchase
commitments from the first half of calendar 2000 to the second half of the year.
We anticipate that overall sales to C3 will decrease in calendar 2000 and we may
use manufacturing capacity that becomes available due to a reduction in sales to
C3 for our other product applications.
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 support the development of our technology by supplementing
our research and development funding. We retain ownership of patent rights on
technology developed under such contracts, subject to certain license rights
retained by the
18
<PAGE> 20
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, we announced the introduction of the first of a family of RF and
microwave transistor products made from SiC. These products are designed for use
in a variety of power amplification applications. A second phase of transistor
products is expected to be available in fiscal 2000. We expect that these
products will be marketed to a variety of amplifier producers for a number of
uses, including wireless base station and digital broadcast applications. While
distribution of these products on a sample basis commenced in early fiscal 2000,
we believe that these products will be sold in limited quantities as evaluation
kits during fiscal 2000 since design cycles for the target applications
generally exceed six months. There can be no assurance that customers will
develop applications requiring commercially significant volumes of our RF
products or that such products will be successful in the market.
In September 1996, we entered into an agreement with Siemens under which Siemens
agreed to purchase a fixed quantity of our blue LED chips. In December 1998,
this agreement was amended to provide for additional shipments of LED products
through September 1999. This contract was assigned to Osram OS, an indirect
subsidiary of Siemens, effective January 1, 1999. Siemens (including its Osram
OS subsidiary) accounted for 37% of our revenue for fiscal 1999 and 40% in
fiscal 1998.
In August 1999, we entered into a new purchase agreement with Osram OS pursuant
to which Osram OS agreed to purchase, and we are obligated to ship, stipulated
quantities of both standard brightness and high brightness LED chips, as well as
SiC wafers, through September 2000. This contract gives Osram OS limited rights
to defer shipments. It also provides for recovery of liquidated damages, and
actual damages in some instances, if we materially default in meeting shipment
schedules. The contract provides for higher unit prices early in the contract
term, with unit price reductions becoming available as the cumulative volume of
products shipped increases.
We are also a party to certain license agreements related to our technology for
the manufacture of LEDs under which we have received one-time license fees. The
license fee revenue was recognized in the year our obligation to transfer the
licensed technology was fulfilled.
RECENT DEVELOPMENTS
On January 3, 2000, we announced preliminary unaudited results for the quarter
ended December 26, 1999. For the quarter, our revenue increased 70% to $23.9
million from $14.0 million for the quarter ended December 27, 1998. Operating
income for the quarter ended December 26, 1999 was $8.2 million compared to $3.7
million for the quarter ended December 27, 1998. Net income for the quarter
ended December 26, 1999 was $5.8 million compared to $2.9 million for the
quarter ended December 27, 1998. Earnings per diluted share for the quarter
ended December 26, 1999 were $0.18 compared to $0.10 for the quarter ended
December 27, 1998.
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table shows our statement of income data expressed as a percentage
of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
------------------------------ ---------------------
JUNE 30, JUNE 28, JUNE 27, SEPT. 27, SEPT. 26,
1997 1998 1999 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net......................... 68.4% 82.0% 89.0% 87.3% 91.1%
Contract revenue, net........................ 22.6 18.0 11.0 12.7 8.9
License fee income........................... 9.0 -- -- -- --
----- ----- ----- ----- -----
Total revenue............................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue, net 46.2 51.1 44.9 44.1 47.4
Contract revenue, net........................ 19.7 14.7 8.3 9.8 5.6
----- ----- ----- ----- -----
Total cost of revenue..................... 65.9 65.8 53.2 53.9 53.0
----- ----- ----- ----- -----
Gross margin................................... 34.1 34.2 46.8 46.1 47.0
Operating expenses:
Research and development..................... 6.3 4.2 7.4 6.6 4.6
Sales, general and administrative............ 14.9 9.6 10.1 9.9 9.6
Other expense................................ 2.2 1.2 1.7 2.2 0.4
----- ----- ----- ----- -----
Income from operations.................... 10.7 19.2 27.6 27.4 32.2
Interest income, net........................... 2.1 1.7 1.8 0.9 2.8
----- ----- ----- ----- -----
Income before income taxes................ 12.8 20.9 29.4 28.3 35.0
Income tax expense 0.6 6.1 8.2 9.0 11.9
----- ----- ----- ----- -----
Net income................................ 12.2% 14.8% 21.2% 19.3% 23.1%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
Revenue. For the quarter ended September 26, 1999, we reported revenue of $20.0
million reflecting a 63% increase over the first quarter of fiscal 1999. First
quarter product revenue of $18.3 million, which includes sales of LEDs and
materials, increased 70% over the first quarter of fiscal 1999. Higher product
revenue was primarily the result of LED revenue growth of 92% in the first
quarter of fiscal 2000 as compared to the same period in the prior year. Much of
this growth was attributed to a 121% increase in LED volumes over the comparable
period with a substantially higher mix of high brightness blue and green LED
products. During the first quarter of fiscal 2000, revenue from high brightness
chips surpassed revenues from our standard brightness products although unit
volumes of the standard brightness product were higher. Average LED sales prices
paid by customers declined 15% in the first quarter of fiscal 2000 compared with
the first quarter of fiscal 1999. During the remaining quarters of fiscal 2000,
average sales prices for standard brightness and high brightness LED products
are expected to remain stable or decline slightly at a reduced pace from
reductions experienced in previous years. We believe that increased volumes will
offset any decline in average LED sales prices during the remaining quarters of
fiscal 2000.
LED shipments also increased as a result of the new Osram OS contract which
calls for a 44% increase in chip shipments over the previous agreement and
extends the Osram OS purchase commitment through the first quarter of fiscal
2001. While we believe that Osram OS will continue
20
<PAGE> 22
to be our largest customer during fiscal 2000, we expect that the percentage of
our revenue attributable to Osram OS will decline as shipments increase to other
customers. However, there can be no assurance that revenue from new or existing
customers will reduce the concentration of our total revenues derived from the
Osram OS contract.
Revenue attributable to sales of SiC materials was 46% higher in the first
quarter of fiscal 2000 than in the same period of fiscal 1999. The increased
revenue was due to significant contributions made by our gemstone products and
improvements in throughput and yield in wafer production. Gemstone product sales
during the period benefited from the added capacity provided under the C3 supply
agreement; however, as a result of rescheduling purchase commitments from C3, we
anticipate that revenue from sales of gemstone products to C3 will be lower in
calendar 2000. Wafer volume has also increased. We believe this increase is due
in large part to our continued success in offering wafer products with lower
defect densities, which enable customers to conduct advanced research for
microwave and power applications. Contract revenue received from U.S. Government
agencies increased 15% during the first quarter of fiscal 2000 as compared to
the same quarter in the prior year due to additional contract awards received in
late fiscal 1999 and in the first quarter of fiscal 2000.
Gross Profit. Our gross margin was 47% for the quarter ended September 26, 1999
as compared to 46% for the same period in the prior year. Our sustained
profitability stems from higher throughput and manufacturing yield on LED and
materials products, thereby lowering our cost per unit and successfully matching
or offsetting lower sales prices. We have also been successful in increasing LED
revenue by lowering prices and raising the volume of high brightness products
produced. For the remainder of fiscal 2000, we plan to continue the strategy of
seeking to lower LED costs and anticipate that the greatest cost saving benefits
will be derived from greater volume and higher yields on our high brightness
products. During the second half of calendar 2000, we plan to begin a migration
of LED production from two-inch wafers to three-inch wafers in order to increase
efficiency and lower cost. As is typical with previous transitions to larger
size wafers, we may experience lower yields for a period of time until the
production process is normalized. We believe that continued yield improvement on
our two-inch process will substantially offset lower yields that we may
experience with our migration to the three-inch process, although we cannot
assure you of such results. Lower costs also have been achieved on wafer
products due to improved efficiency. Margins from gemstone products have also
improved due to higher yields.
Research and Development. Research and development expenses for the quarter
ended September 26, 1999 increased 16% over the comparable prior year period.
This was due to increases in internal research and development efforts not
included in the scope of government contract funding as well as unreimbursed
development costs under our contract with Microvision, Inc. In May 1999, we
signed an agreement with Microvision under which Microvision is providing $2.6
million for the development of edge-emitting LEDs and blue laser diodes. As
development costs are incurred under this program, funding from Microvision is
offset against these expenses. During the quarter ended September 26, 1999,
spending under our development program with Microvision was higher than funding
received.
Sales, General and Administrative. Sales, general and administrative expenses
for the quarter ended September 26, 1999 increased by 58% over the same period
in the prior year due to increased costs to support the growth of our business.
As a percentage of revenue, sales, general and administrative costs remained at
10% of revenue in the first quarter. We expect this percentage to remain
comparable for the remainder of fiscal 2000.
Other Expense. During the first quarter of fiscal 2000, we continued to perform
under an agreement with C3 to sell equipment we manufacture to C3 at cost plus a
comparable overhead allocation to those incurred from government contracts. The
overhead allocation was recorded as "other operating
21
<PAGE> 23
income;" however, the amount was more than offset by unrelated asset writeoffs
for the first quarters of fiscal 2000 and of fiscal 1999.
Interest Income, Net. Net interest income increased by $454,000 in the first
quarter of fiscal 2000 over the first quarter of fiscal 1999. This was due
primarily to the investment of cash proceeds from our common stock offering in
February 1999. In addition, a portion of the proceeds from the offering were
used to repay a $10.0 million loan balance in the third quarter of fiscal 1999;
therefore, no interest expense was incurred in the first quarter of fiscal 2000.
Interest expense incurred with the loan was capitalized as a part of the
construction improvements made to our facility in fiscal 1999. When
manufacturing operations were moved to the new site in the first quarter of
fiscal 1999, portions of the interest associated with the completed work were
expensed. For the first quarter of 1999 total interest incurred was $196,000
with only $84,000 being eligible for capitalization, and therefore $112,000 was
expensed.
Income Tax Expense. Income tax expense for the first quarter of fiscal 2000 was
approximately $2.4 million compared to $1.1 million in the first quarter of
fiscal 1999. This increase resulted from increased profitability during the
first quarter of fiscal 2000 over the same period of fiscal 1999.
FISCAL YEARS ENDED JUNE 27, 1999, JUNE 28, 1998 AND JUNE 30, 1997
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.
Growth in LED volume resulted from the introduction of new high brightness
devices and improvements in the product design of and strong demand for our
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 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 in 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.
We are continuing to ramp up production volume for our high brightness LED
products, which were introduced during fiscal 1999. During the fourth quarter of
fiscal 1999, revenue from high brightness products made up more than 25% of our
total LED revenue. We believe revenues from these products will surpass revenues
from our standard brightness product during fiscal 2000; however, there can be
no assurance that the product volumes will increase or that we will achieve the
required yield improvements.
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 larger two-inch wafers during fiscal 1999.
22
<PAGE> 24
During fiscal 1999, sales from our displays business declined 96% from the prior
year period as we chose to discontinue that 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 we received additional contract awards in
late fiscal 1999.
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 our 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 by the
worldwide research community in 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 and
development agreements. Revenues for our 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 used in the manufacture of our standard
brightness blue LED product. We did not record any license fee revenue during
fiscal 1998.
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 in fiscal 1999 resulting
in significant reductions in cost. With the introduction of our 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 larger two-inch wafers. 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. During fiscal
1999, margins realized on high brightness products were lower than those derived
from our standard brightness blue LED product, as the yield from the
manufacturing process was less than our standard brightness product.
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.
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
23
<PAGE> 25
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 products. 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 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 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
our new high brightness LED products. During fiscal 1999, approximately $500,000
of funding provided under our contract with Microvision 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 Microvision funds in fiscal 2000,
research and development expenses will remain relatively stable compared to
fiscal 1999 amounts.
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 our 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 approximately $100,000 for the closure of our Eastern
European Division, located in St. Petersburg, Russia.
Sales, General and Administrative Expenses. 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
approximately $400,000. As a result of the dismissal of a securities class
action lawsuit in November 1997, we were reimbursed approximately $200,000 for
costs incurred in connection with the lawsuit. Most of these expenses were
recorded in fiscal 1997. In addition, we received approximately $200,000 in
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) grew approximately $400,000. 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.
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
approximately $200,000 from our insurance carrier for costs incurred in defense
of the suit. In addition, as a result of a negotiated cost cap, we received an
approximate $200,000 reimbursement of medical expenses that were incurred under
a partially self-funded insured health
24
<PAGE> 26
plan. As a percentage of revenue, these costs have decreased to 10% in fiscal
1998 from 15% in fiscal 1997.
Other Expense. Other expense increased 107% to $1.1 million during fiscal 1999
from approximately $500,000 in fiscal 1998. During fiscal 1999, we realized
impairments to leasehold costs as a result of our 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 us. 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 overhead allocation was recorded as "Other income," however, the amount was
more than offset by the other write-offs.
In fiscal 1998, other expense included a net loss recorded on the write-down of
leasehold improvements associated with a leased facility in Durham, North
Carolina and disposal of certain other fixed assets and a write-off of $66,000
for the remaining value of goodwill associated with the acquisition of our 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 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 45% to $1.1 million in
fiscal 1999 from $700,000 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.
Interest income, net increased by approximately $100,000 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 $12.1 million from
operations compared to $6.1 million in fiscal 1997.
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.
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.
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<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables are our unaudited quarterly results of operations in dollar
amounts and as a percentage of revenue for the periods indicated. We have
prepared this information on a basis consistent with our audited financial
statements and included all adjustments that we consider necessary for a fair
presentation of the information for the periods presented. Amounts used in
calculating earnings per share reflect the two-for-one stock split effective
July 26, 1999. Results of operations for any fiscal quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 28, MARCH 29, JUNE 28, SEPT. 27, DEC. 27, MARCH 28, JUNE 27, SEPT. 26,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net................ $8,164 $8,929 $ 9,593 $10,720 $12,805 $14,084 $15,855 $18,257
Contract revenue, net............... 1,942 1,742 1,955 1,559 1,233 1,951 1,843 1,791
------ ------ ------- ------- ------- ------- ------- -------
Total revenue..................... 10,106 10,671 11,548 12,279 14,038 16,035 17,698 20,048
Cost of revenue:
Product revenue, net................ 4,946 5,510 5,852 5,415 6,377 6,794 8,391 9,498
Contract revenue, net............... 1,600 1,430 1,573 1,207 1,045 1,503 1,188 1,136
------ ------ ------- ------- ------- ------- ------- -------
Total cost of revenue............. 6,546 6,940 7,425 6,622 7,422 8,297 9,579 10,634
------ ------ ------- ------- ------- ------- ------- -------
Gross profit.......................... 3,560 3,731 4,123 5,657 6,616 7,738 8,119 9,414
Operating expenses:
Research and development............ 527 367 487 806 1,121 1,515 1,001 931
Sales, general and administrative... 850 1,041 1,105 1,218 1,450 1,568 1,828 1,927
Other expense....................... 390 31 79 269 298 311 163 101
------ ------ ------- ------- ------- ------- ------- -------
Income from operations............ 1,793 2,292 2,452 3,364 3,747 4,344 5,127 6,455
Interest income, net.................. 169 180 217 115 20 347 578 569
------ ------ ------- ------- ------- ------- ------- -------
Income before income taxes........ 1,962 2,472 2,669 3,479 3,767 4,691 5,705 7,024
Income tax expense.................... 490 717 790 1,113 916 1,314 1,597 2,388
------ ------ ------- ------- ------- ------- ------- -------
Net income.......................... $1,472 $1,755 $ 1,879 $ 2,366 $ 2,851 $ 3,377 $ 4,108 $ 4,636
====== ====== ======= ======= ======= ======= ======= =======
Earnings per share:
Basic............................... $ 0.06 $ 0.07 $ 0.07 $ 0.09 $ 0.11 $ 0.13 $ 0.15 $ 0.16
====== ====== ======= ======= ======= ======= ======= =======
Diluted............................. $ 0.05 $ 0.07 $ 0.07 $ 0.09 $ 0.10 $ 0.12 $ 0.14 $ 0.15
====== ====== ======= ======= ======= ======= ======= =======
Shares used in per share calculation:
Basic............................... 25,578 26,056 26,052 25,840 25,664 27,266 27,015 29,337
Diluted............................. 27,272 27,002 26,858 26,498 27,668 29,770 28,432 31,214
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 28, MARCH 29, JUNE 28, SEPT. 27, DEC. 27, MARCH 28, JUNE 27, SEPT. 26,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net................ 80.8% 83.7% 83.1% 87.3% 91.2% 87.8% 89.6% 91.1%
Contract revenue, net............... 19.2 16.3 16.9 12.7 8.8 12.2 10.4 8.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenue..................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue, net................ 48.9 51.6 50.7 44.1 45.4 42.4 47.4 47.4
Contract revenue, net............... 15.8 13.4 13.6 9.8 7.4 9.3 6.7 5.6
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenue............. 64.7 65.0 64.3 53.9 52.8 51.7 54.1 53.0
----- ----- ----- ----- ----- ----- ----- -----
Gross margin.......................... 35.3 35.0 35.7 46.1 47.2 48.3 45.9 47.0
Operating expenses:
Research and development............ 5.2 3.4 4.2 6.6 8.0 9.4 5.7 4.6
Sales, general and administrative... 8.4 9.8 9.5 9.9 10.3 9.9 10.3 9.6
Other expense....................... 3.9 0.3 0.8 2.2 2.1 1.9 0.9 0.6
----- ----- ----- ----- ----- ----- ----- -----
Income from operations............ 17.8 21.5 21.2 27.4 26.8 27.1 29.0 32.2
Interest income, net.................. 1.7 1.7 1.9 0.9 0.1 2.2 3.2 2.8
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes........ 19.5 23.2 23.1 28.3 26.9 29.3 32.2 35.0
Income tax expense.................... 4.8 6.7 6.9 9.1 6.5 8.2 9.0 11.9
----- ----- ----- ----- ----- ----- ----- -----
Net income........................ 14.7% 16.5% 16.2% 19.2% 20.4% 21.1% 23.2% 23.1%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
26
<PAGE> 28
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 26, 1999, we had
working capital of $55.6 million, including $41.2 million in cash and cash
equivalents. Operating activities generated $7.5 million for the first quarter
of fiscal 2000 compared with $1.2 million generated during the comparative
period in fiscal 1999. The increase was primarily attributable to higher
profitability and was supplemented by timing differences and the net increase in
accounts payable and accrued expenses.
We invested $9.8 million in capital expenditures during the first three months
of fiscal 2000 compared to $4.1 million during the same period in the prior
fiscal year. The majority of the increase in spending was due to new equipment
additions to increase manufacturing capacity in our crystal growth and epitaxy
areas. We also continue to expand facilities at our production site near
Research Triangle Park, North Carolina.
We are currently engaged in construction activities relating to expansion of our
epitaxial and clean room fabrication facilities. We intend to expand our
facility for RF and microwave test and packaging areas in calendar 2000. We
believe these additions will allow us to dramatically increase capacity at our
facility for LED, RF and microwave products. We anticipate total costs for these
expenses to be between $20.0 million and $25.0 million. Estimates for equipment
costs relating to this expansion total between $20.0 million and $25.0 million.
We also recently committed to purchase a 120,000 square foot facility under
construction on 17.5 acres of land near our present facility. We plan to use
this facility for sales, general and administrative and research and development
personnel, as well as for general employee services functions. The cost to
acquire this facility (not including the upfit costs for completing the shell
building) is $8.1 million. We plan to fund all of these expansion activities
with the net proceeds of this offering.
Although from time to time we evaluate potential acquisitions of and investments
in complementary businesses and anticipate continuing to make such evaluations,
we have no present commitments or agreements with respect to the potential
acquisition of or investment in another business.
Cash provided by financing activities during fiscal 2000 reflected the receipt
of $1.0 million in proceeds from the exercise of stock options from our employee
stock option plan.
At September 27, 1998, we had a loan outstanding for $10.0 million from a
commercial bank to finance portions of the upfit of the production facility. The
final draw to this loan was made during the first quarter of fiscal 1999 for
$1.3 million. The loan was subsequently paid off in the third quarter of fiscal
1999. We also committed $3.2 million during the first quarter of fiscal 1999 to
repurchase common stock.
We anticipate that internally generated cash plus the proceeds of this offering
will be sufficient to fund our capital requirements for the next 12 months.
IMPACT OF THE YEAR 2000
Even though the date is now past January 1, 2000 and we have not experienced any
immediate adverse impact from the transition to the Year 2000, we cannot provide
assurance that our suppliers and customers have not been affected in a manner
that is not yet apparent. In addition, certain computer programs which were date
sensitive to the Year 2000 may not process the Year 2000 as a leap year, and any
negative consequential effects remain unknown. As a result, we will continue to
monitor our Year 2000 compliance and the Year 2000 compliance of our suppliers
and customers.
27
<PAGE> 29
BUSINESS
OVERVIEW
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC. Using our proprietary compound
semiconductor technology, we produce LEDs for use in automotive and LCD
backlighting, indicator lamps, full color LED displays and other lighting
applications. We also manufacture SiC crystals used in the production of unique
gemstone products and SiC wafers sold for the manufacture of LEDs and for
research directed to optoelectronics, microwave and power applications.
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. We have new product initiatives
based on SiC, including RF and microwave devices for wireless infrastructure,
such as base stations, multi-channel, multi-point distribution service and
wireless local loop networks, and for radar. We also have new product
initiatives for larger and higher quality crystals for moissanite gemstones,
blue laser diodes for optical storage applications and power devices for power
conversion or switching uses. We recently introduced the first RF transistor
available using SiC technology with initial samples. This product is designed
for use in wireless and broadcast applications.
BACKGROUND
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 most
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 solid state
devices. However, GaAs, silicon and other commercially available 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.
SIC OVERVIEW
SiC has many physical characteristics that make it 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 thin crystalline films
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
28
<PAGE> 30
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 their 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 if
production hurdles can be overcome:
- - Wide Energy Bandgap. Bandgap is the amount of energy required to ionize 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 or 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 or GaAs-based devices.
- - Robust Material. SiC has an extremely high melting point and is one of the
hardest known materials in the world. As a result, SiC can withstand much
higher electrical pulses and is much more radiation-resistant than silicon or
GaAs. SiC is also extremely resistant to chemical breakdown and can operate in
harsh environments.
- - 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.
29
<PAGE> 31
OUR SOLUTION
Through our proprietary technology and over 12 years of development and
manufacturing experience, we have succeeded in overcoming the difficulties
involved in processing SiC for commercial use. We introduced our first product
in October 1989 and currently are the leading manufacturer of SiC wafers and
SiC-based blue and green LED products in the world. We believe that our
proprietary process techniques and the inherent attributes of SiC give our
products significant advantages over competing products for certain electronic
and gemological applications. These advantages include:
- - Blue and Green Light Emission. We produce high efficiency blue and green LEDs
using gallium nitride, or GaN, a wide bandgap material, and other nitrides
grown on SiC substrates. Other manufacturers of nitride-based LEDs use
sapphire substrates. The conductive properties of SiC enable us to fabricate a
simpler, smaller LED chip as compared to competing LEDs grown on sapphire
substrates. We have also demonstrated and are 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. We
manufacture SiC wafers for both internal use and for sale to external
development programs to further new product development. We recently
introduced a larger three-inch wafer to production for research purposes and
demonstrated a four-inch prototype wafer. These larger substrates with lower
defect densities should drive further device development and strengthen SiC's
economic advantages in certain applications.
- - Gemstone Material Properties. We manufacture 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. We continue to develop larger and higher quality SiC crystals
for this application.
- - High Power RF and Microwave Operations. We have 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 enable the
fabrication of SiC-based RF and microwave 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. We recently introduced on a
sample basis the first in a planned line of RF and microwave devices designed
for use in wireless infrastructure and broadcast applications, and we expect
to begin shipping evaluation units in the third quarter of fiscal 2000. We are
continuing development of additional RF and microwave devices for use in
wireless infrastructure, radar systems and other commercial and
defense-related applications.
- - High Power, High Voltage Operation. We are 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, we believe that our SiC power devices will be able
to operate with lower resistive losses and lower switching losses than those
made with silicon or GaAs.
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<PAGE> 32
STRATEGY
Our strategy is to continue to develop SiC materials and device technology for
use in enabling products and systems. We believe that by supplying our customers
with enabling component technology, they are able to develop and deliver new
systems that provide enhanced performance capabilities. Our strategy
incorporates the following key elements:
- - Grow Revenues Through Multiple Product Lines. We focus our technology on six
primary product lines -- LEDs, SiC wafers, gemstone crystals, RF and microwave
devices, power devices and laser diodes. We generate our current product
revenues primarily through the sale of blue and green LEDs, SiC wafers and
gemstone crystals and have recently released test samples of our first RF
product. We plan to continue leveraging our enabling materials technology to
develop microwave, power and laser products while continuing to develop new
and improved products to enhance growth in the markets for LEDs, SiC wafers,
gemstone crystals and RF products.
- - Expand Capacity and Infrastructure. In order to meet anticipated demand for
our existing products and to develop and fabricate new products, we have more
than doubled our manufacturing capacity over the last year and are preparing
to support additional growth over the next several years as needed. In
November 1997, we acquired our present manufacturing facility in Durham, North
Carolina, a 30-acre site with 172,000 square feet of manufacturing, warehouse
and office space. We recently completed a 42,000 square foot expansion of this
facility and intend to further expand this facility by an additional 125,000
square feet to increase capacity. We also intend to purchase new equipment. In
addition we are in the process of purchasing a 120,000 square foot facility
under construction on a 17.5-acre site near our current facility.
- - Enhance Competitive Value of SiC Products Through Technological Advances. We
believe that we can make existing and future products more competitive than
alternative non-SiC products through continued technological advances. In
pursuing this strategy, we have increased the performance and reduced the cost
of our LED chips over the last several years by using different materials to
increase brightness, decreasing die size, increasing wafer diameter and
developing a conductive buffer epitaxial and fabrication process. These
improvements have resulted in LED chip products which provide a low cost
solution for numerous high volume applications. We are continuing SiC
development activities to provide improvements in die cost, crystal quality
and device performance. In the second half of calendar 2000, we plan to begin
the integration of three-inch wafers into our LED production process. We
believe this larger wafer size will enable further reductions in LED costs as
we begin to achieve higher yields than are possible with two-inch wafers.
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<PAGE> 33
PRODUCTS
All of our products are an outgrowth of our core SiC technology. We continually
pursue technical improvements to our existing products in order to lower cost
and improve quality. The following chart illustrates our existing products and
user applications:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
PRODUCT USER APPLICATIONS
- ---------------------------------------------------------------------------------------------------------
Blue and green LEDs - Backlighting in applications such as
automotive dashboards and LCDs, including
wireless handsets and other lighting
applications
- Large indoor full color displays, such as
arena video screens
- Large outdoor full color displays
- White light products to replace miniature
incandescent bulbs, such as those used in
automobile map lights and other lighting
applications
- Traffic signals
- ---------------------------------------------------------------------------------------------------------
Wafer products - Manufacture of LEDs
- Research and development for new
semiconductor applications
- ---------------------------------------------------------------------------------------------------------
SiC crystals - Gemstones
- ---------------------------------------------------------------------------------------------------------
RF transistors (first product available on a - Communications and other wireless
test sample basis) applications
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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 our blue LED product in 1989, blue LEDs
could not be produced in volumes necessary for commercialization. Since then, we
have 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 blue LEDs,
together with red and green, has enabled the development of full color LED lamps
and video displays.
We believe that LEDs made from SiC substrates offer important benefits over
those made from competing substrates, including:
- - an industry standard vertical chip structure requiring a single wire bond that
permits faster LED assembly and reduced cost;
- - a small chip size compatible with industry trends towards package
miniaturization;
- - high resistance to electrostatic discharge, or ESD, which reduces the cost,
engineering effort and time to qualify LEDs at customer production sites; and
- - a lower-priced outdoor-capable product.
Presently, our blue LED chips are used for backlighting purposes in applications
such as automotive dashboards and LCD displays, including wireless handsets and
other consumer products. In addition, they are used in office equipment
indicator lighting, full color video display technology, such as arena
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<PAGE> 34
video replay boards, moving message advertising and informational signs. Our
standard brightness blue LED products are primarily used in indoor applications.
In September 1998, we introduced brighter blue and green LEDs that offer a lower
cost alternative to competing sapphire products. These products, which increase
brightness up to 300% over our standard LED products, are used in backlighting
applications requiring low power consumption, such as LCDs for wireless handsets
and consumer products, and in traffic signals and outdoor full-color display
applications where brightness is critical.
We also offer a product line within our 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. We currently sell blue LEDs to customers who produce
the white light conversion LED. Commercial products incorporating our chips for
white light conversion include 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.
We are focusing current development efforts on further improving the brightness
of our high brightness LEDs. We believe that increased brightness will further
enhance our ability to compete against LEDs fabricated from sapphire substrates,
which are presently brighter than our high brightness products.
Wafer Products
We manufacture SiC wafers for sale to corporate, government and university
programs that use SiC 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, we have worked to improve the quality of
our wafers while increasing their size. In October 1999, we released a low-cost
two-inch wafer targeted as an alternative to sapphire substrates used by many
researchers in the optoelectronics field. In the same month, we introduced our
first three-inch wafer for sale to the research community. We also sell our
wafers to Osram OS for the manufacture of standard brightness LED products under
a license from us.
SiC Crystals for Gemstone Applications
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, we manufacture SiC crystals in near colorless form for use in gemstone
applications. We sell SiC crystals to C3, a company which was founded to develop
gemstone products from SiC crystals. C3 cuts and polishes the SiC crystals to
fabricate diamond-like gemstones targeted at customers who desire affordable
high quality jewelry. Over the past 18 months, we significantly expanded crystal
growth capacity for C3, funded by C3, to meet increased volume requirements
anticipated by C3. More recently, however, C3 announced lower sales revenue and
higher inventory levels than anticipated as well as the initiation of a new
marketing campaign for its gemstone products. We anticipate that sales to C3
will decrease in calendar 2000. Consequently, we may use manufacturing capacity
that becomes available due to a reduction in sales to C3 for other product
applications. Future demand also is dependent on C3's ability to cut, facet and
effectively market its gemstone products.
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<PAGE> 35
RF and Microwave Transistors
In June 1999, we announced the first of a planned line of SiC-based RF and
microwave transistor products. Initial samples of this product were shipped
during the first quarter of fiscal 2000. Evaluation kits are expected to be
available for shipment on a test sample basis in the third quarter of fiscal
2000. A second phase of transistor products is scheduled for release to
production in calendar 2000, although it is possible that we could experience
delays in development or production that would prevent us from meeting this
schedule. We believe that these products can be used in a variety of power
amplifier applications, including wireless infrastructure and digital broadcast
applications. We believe that future SiC transistors in development, with higher
output power per transistor than current silicon and GaAs-based devices, will
allow wireless systems to use fewer transistors per base station, resulting in
less complex circuitry, higher linearity and lower cost. While distribution of
initial samples for the first product has begun, we believe that sales will be
limited to samples and evaluation kits during fiscal 2000, as we continue to
refine the product and respond to our customers' design requests. We anticipate
that each transistor product subsequently released will go through a similar
process. There can be no assurance that our customers will be able to develop
applications in the near future that will require commercial production of our
RF products or that such products will be successful in the market.
PRODUCTS UNDER DEVELOPMENT
We believe that the inherent physical characteristics of SiC make it an
excellent material for many new semiconductor applications. We are dedicated to
creating new applications using SiC and have 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
- ---------------------------------------------------------------------------------------------------------
High power RF and microwave devices - Power amplifier systems for wireless
applications, such as personal communications
service base stations
- Power amplifier systems for third generation,
or 3G, wireless local loop and multi-channel,
multi-point distribution service transmitter
sites
- Digital broadcast systems
- Solid-state radar systems
- ---------------------------------------------------------------------------------------------------------
Power devices - Industrial motor controls
- Electric vehicles
- High voltage power supplies
- Lighting ballasts
- Factory robotics
- Locomotive applications
- Solid-state power transmission
- ---------------------------------------------------------------------------------------------------------
Blue and ultraviolet lasers - High density optical storage, such as CDs and
DVDs
- ---------------------------------------------------------------------------------------------------------
High temperature devices - Automotive and aerospace electronics
- ---------------------------------------------------------------------------------------------------------
</TABLE>
High Power RF and Microwave Devices
We are currently developing SiC-based high power transistors that operate at
radio and microwave frequencies. We believe these devices will have applications
in wireless base stations, high power solid-state broadcast systems for
television and radio and radar search and detection equipment.
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<PAGE> 36
In June 1999, we introduced our first RF transistor product on a test sample
basis. We continue to develop other SiC-based RF and microwave transistor
devices expected for prototype distribution during fiscal 2000. All of these
products are designed to amplify power in several applications. These SiC
devices are expected to be used for frequencies from 400 megahertz to 10
gigahertz, including 3G transmitter site networks.
We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). During
fiscal 1999, we reported the demonstration of GaN on SiC transistors that
operated with an output power of 10.0 watts at 9.0 gigahertz. We also previously
reported a record high power density of 6.9 watts per millimeter at 10 gigahertz
on smaller GaN devices. This power density is higher than that achieved with
equivalent silicon or GaAs-based devices. We do not anticipate that a commercial
device capable of emitting power at this level will be available in the near
term.
Power Devices
We are 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, we 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
We continue 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 substrate 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. We have demonstrated a blue laser diode, fabricated from GaN and related
materials deposited on SiC substrates, which has a shorter wavelength than that
of the red or infrared lasers used today. We believe that the shorter wavelength
of blue light could potentially result in storage capacity for optical disk
drives that is significantly greater 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. We believe that we were the first
U.S.-based company to demonstrate 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. In the
second half of fiscal 1999, we entered into a one-year development agreement
with Microvision by which Microvision provides $2.6 million in funding for us to
conduct research in edge-emitting LEDs and laser diodes. Microvision has the
right to extend the agreement for a second year by making an additional payment
of $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, we are currently
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<PAGE> 37
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. We are 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. Although we have developed prototype devices,
additional development work is needed to achieve commercial viability.
RESEARCH AND DEVELOPMENT
We believe that our ability to maintain our position as the world's leading
supplier of SiC material and SiC-based semiconductor products, and to expand the
markets for such products, will depend in large part on our ability to enhance
existing products and to continue developing new products incorporating the
latest improvements in SiC technology. Accordingly, we are committed to
investing significant resources in research and development.
We continually conduct research aimed at improving the quality of our crystals
and wafers and enhancing our epitaxial film deposition (wafer coating) process.
We believe that these research and development efforts will benefit all of our
products. We believe we can increase the diameter of our wafers while lowering
manufacturing costs and permitting the development of more complex devices. The
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 cost. In moving to larger
wafer sizes, we are focusing on how to stabilize the process to repeatedly grow
larger diameter crystals with minimal defects. The two-inch wafer size, which we
introduced in fiscal 1998, is considered a minimum standard for many niche
fabrication facilities. We recently introduced a three-inch wafer for sale to
the research community and demonstrated a four-inch wafer, which we believe is
the largest single crystal SiC wafer ever exhibited.
We spent $9.7 million in fiscal 1997, $8.6 million in fiscal 1998 and $9.4
million in fiscal 1999 for direct expenditures relating to research and
development activities. Offsetting these expenditures were $8.7 million in
fiscal 1997, $8.2 million in fiscal 1998 and $6.6 million in fiscal 1999, 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. Customers contributed $66,000 in
fiscal 1997, $3.5 million in fiscal 1998 and $4.5 million in fiscal 1999 towards
our product research and development activities.
SALES AND MARKETING
We actively market our products through targeted mailings, telemarketing, select
advertising and attendance at trade shows. We generally use an executive sales
approach, relying predominantly on the efforts of senior management and a small
direct sales staff for worldwide product sales. We believe that this approach is
preferable in view of our 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, we
depart from this approach for sales to certain Asian countries. In Japan, we
market our LED products and SiC wafers through our distributors Sumitomo
Corporation and Shin-Etsu. We also use sales representatives to market our LED
products in Hong Kong, China, Taiwan and Korea. We sell SiC crystal materials
for use in gemstone applications directly to C3 under an exclusive supply
agreement. We plan to use both direct sales and sales representatives to market
any new RF products.
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<PAGE> 38
MANUFACTURING AND FACILITIES
We operate our own facilities in Durham, North Carolina. Direct control over SiC
crystal growth, wafering, epitaxial deposition, device fabrication and test
operations allows us to shorten our product design and production cycles and to
protect our proprietary technology and processes. In November 1997, we acquired
our 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. We recently completed a facility
expansion of 42,000 square feet and in December 1999 began construction of an
additional 125,000 square feet expected to be completed in calendar 2000. In
1999, we also purchased a 79-acre site and have contracted to purchase a 120,000
square foot facility under construction on a 17.5-acre site. Both of these sites
are near our current manufacturing facility.
We currently lease approximately 21,900 square feet in Durham, North Carolina
for some of our manufacturing and research and development activities. This
lease expires in December 2001. We also lease approximately 13,200 square feet
in a separate building in Durham, North Carolina which is used for RF production
and microwave research and development. This lease expires in August 2002.
Our products are manufactured in a six-part process which includes: SiC crystal
growth, wafer slicing, polishing, epitaxial deposition, fabrication, and testing
and packaging. 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 our 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 RF chips are fabricated
in a clean room environment. The final steps include testing and packaging for
shipment to the customer. In manufacturing our products we depend substantially
on our custom-manufactured equipment and systems, some of which are manufactured
internally and some of which we acquire from third parties and customize
ourselves.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in our SiC products and LEDs, including certain key materials
and equipment used in our crystal growth, wafering, polishing, epitaxial
deposition, device fabrication and device test processes. We generally purchase
these limited source items pursuant to purchase orders and have no guaranteed
supply arrangements with our suppliers. In addition, the availability of these
materials, components and equipment to us is dependent in part on our ability to
provide our suppliers with accurate forecasts of our future requirements. We
endeavor to maintain ongoing communication with our suppliers to guard against
interruptions in supply and, to date, generally have been able to obtain
adequate supplies in a timely manner from our existing sources. However, any
interruption in the supply of these key materials, components or equipment could
have a significant adverse effect on our operations.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. We
believe that we currently enjoy a favorable position in the existing markets for
SiC-based products and materials primarily as a result of our proprietary
SiC-based technology. However, we face 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 we have.
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<PAGE> 39
Our primary competition for the blue and green LED products comes from Nichia
Chemical Industries, Ltd., Toyoda Gosei Co. Ltd. and LumiLeds Lighting, a joint
venture between Agilent Technologies and Philips Lighting, which currently
market blue and green LED products that are brighter than our high brightness
blue and green LED devices. In addition, Uniroyal Technologies, Inc. has
announced its intention to begin production of blue and green LEDs in January
2000. Existing competitors historically have 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. We believe our brighter blue and green LEDs have enabled us to compete
successfully in this market because our LEDs can be used in the same
applications at a lower cost than competing products. At the same time, we
continue development to improve the brightness of our LEDs to enhance our
ability to compete in this market.
We believe that our approach to manufacturing blue and green LEDs from SiC
substrates offers a more cost-effective design and process than our competitors,
who use a sapphire substrate. Our smaller chip design, which is compatible with
industry trends toward 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, our 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, our SiC-based
devices can withstand a higher level of ESD than existing sapphire-based
products and therefore are more suitable for applications that require high ESD
emission ratings, such as automotive applications.
We believe that other companies, including certain of our customers, may seek to
enter the blue and green LED market in the future. For example, Osram OS and
Shin-Etsu have licensed some of our LED technology, which may facilitate their
entry into our LED markets. We believe that Osram OS is currently producing LEDs
using technology licensed from us. The market for SiC wafers also is becoming
competitive, as other companies in recent years have begun to offer SiC wafer
products or announced plans to do so.
PATENTS AND PROPRIETARY RIGHTS
We are a leader in the development of SiC materials and devices made using SiC.
We seek to protect our 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. We have also from time to time acquired,
through license grants or assignments, rights to patents on inventions
originally developed by others.
At December 30, 1999, we owned or exclusively licensed, subject in some cases to
previous licenses held by third parties, a total of 59 issued U.S. patents.
These patents expire between 2007 and 2017. We also own two U.S. patents jointly
with a third party. We also own or hold exclusive licenses to corresponding
patents and patent applications in certain foreign countries we consider
significant or potentially significant markets.
The license rights above include an exclusive license from 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 us and N.C.
State in 1987. This license gave us a worldwide, fully paid, exclusive license
to manufacture, use and sell products and processes covered by 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
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<PAGE> 40
non-exclusive license to practice the inventions covered by the N.C. State
license for government purposes. We have also entered into other license
agreements with N.C. State, and with the licensing agencies of other
universities, under which we have 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, we seek
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 our confidential information or that our
proprietary technology and know-how will not otherwise become known or
independently discovered by others. We also rely 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
ours, 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 us or that claims allowed
in any patents issued or licensed to us will not be contested or invalidated. In
the past, the U.S. patent that we license 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 we could lose patent protection in Europe for this particular method.
There is likewise no assurance that patent rights owned or exclusively licensed
to us will provide significant commercial protection since issuance of a patent
does not prevent other companies from using alternative, non-infringing
technology. Further, we earn a material amount of our revenues in overseas
markets. While we hold and have applied for patent protection for certain of our
technologies in these markets, there can be no assurance that we will obtain
protection in all commercially significant foreign markets or that our
intellectual property rights will provide adequate protection in all such
markets.
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia Corporation seeking an injunction that, if granted,
would preclude Sumitomo from selling our standard brightness blue LED product in
Japan. The suit, filed in Tokyo District Court, alleges infringement of a patent
issued to Nichia in Japan. We believe that the infringement allegation is
without merit and that the lawsuit is motivated by competitive factors. We have
intervened in the action and are assisting Sumitomo in defending the suit.
Subject to contractual limitations, we have an obligation to indemnify Sumitomo
for certain patent infringement claims.
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 our intellectual property rights or to defend us 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 us with respect
to our current or future products, including core products. We have been
notified from time to time of assertions that our 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 us to seek a license under the rights asserted
or whether a license would be granted. Likewise, we cannot predict the
occurrence of future assertions that may prevent us from selling products,
result in litigation or require us to pay damage awards.
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<PAGE> 41
EMPLOYEES
As of December 26, 1999, we employed 478 people, including 363 in manufacturing
operations, 77 in research and development, and 38 in sales and general
administration. None of our employees is represented by a labor union or subject
to collective bargaining agreements. We believe relations with our employees are
strong.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and Directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
F. Neal Hunter(1)....................... 37 Chairman of the Board of Directors and
Chief Executive Officer
Charles M. Swoboda...................... 32 President and Chief Operating Officer
Calvin H. Carter, Jr., Ph.D.(2)......... 44 Director, Executive Vice President, and
Director of Materials Technology
Cynthia B. Merrell...................... 39 Chief Financial Officer and Treasurer
John W. Palmour, Ph.D................... 39 Director and Director of Advanced
Devices
James E. Dykes(1)(2)(3)................. 62 Director
Michael W. Haley(2)(3).................. 61 Director
Walter L. Robb, Ph.D.(3)................ 71 Director
Dolph W. von Arx(1)(2)(3)............... 65 Director
</TABLE>
- -------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Hunter, one of our co-founders, has served as our Chairman of the Board of
Directors since 1995, as our Chief Executive Officer since 1994 and as a
Director since our inception in 1987. Mr. Hunter also served as President from
1994 until January 1999. Prior to his election as President and Chief Executive
Officer in 1994, Mr. Hunter served as General Manager with responsibility for
the management of our optoelectronic products and as our Secretary and
Treasurer. He received his B.S. degree in mechanical engineering from N.C.
State.
Mr. Swoboda became President in January 1999 and has served as our Chief
Operating Officer since June 1997. Prior to becoming President, Mr. Swoboda also
held the title of Vice President since June 1997. Mr. Swoboda joined us in 1993
and served as our Operations Manager from July 1996 to June 1997, as Wafer Fab
Manager from April 1996 to July 1996, as General Manager of our subsidiary, Real
Color Displays, Inc., from August 1994 to April 1996 and as LED Product Manager
from July 1993 to August 1994. Prior to 1993, he was employed by Hewlett-Packard
Company, an electronics company. Mr. Swoboda received a B.S. degree in
electrical engineering from Marquette.
Dr. Carter, one of our co-founders, has served as a Director and Vice President
since our inception. He currently holds the positions of Executive Vice
President and Director of Materials Technology. As Director of Materials
Technology, Dr. Carter is responsible for our development of advanced materials
growth technology, including the growth of silicon carbide material for
semiconductor and other applications. He previously served as Vice President,
New Product Development from 1995 to 1997 and as Director of Technology from
1987 to 1995. Dr. Carter holds B.S., M.S. and Ph.D. degrees in materials science
and engineering from N.C. State.
41
<PAGE> 43
Ms. Merrell was named Chief Financial Officer and Treasurer effective July 1998
after serving as our Interim Chief Financial Officer and Assistant Treasurer
since January 1998. Ms. Merrell joined us in 1996, initially serving as our
Controller. From January 1992 to November 1996 she was employed as the
controller of Kaset International, a subsidiary of The Times Mirror Company
which is engaged in providing training, consulting and project management
services in the field of customer relations. Ms. Merrell's prior financial
experience includes service in various capacities with Tropicana Products, Inc.
and the accounting firm of Arthur Andersen & Co. She received a B.S. degree in
accounting from the University of Florida and is licensed as a Certified Public
Accountant in Florida.
Dr. Palmour, one of our co-founders, currently serves as Director of Advanced
Devices and, in that capacity, is responsible for our development of advanced
silicon carbide devices such as microwave transistors and power devices. Dr.
Palmour has served as a Director since October 1995 and previously served on the
Board of Directors from October 1992 to April 1993. He has been an employee
since 1988. Dr. Palmour received his B.S. and Ph.D. degrees from N.C. State in
the fields of materials science and engineering.
Mr. Dykes became a Director in January 1992. He served as Executive Vice
President of Thomas Group, Inc., a publicly held management consulting group,
from July 1997 through June 1998 and from 1994 to 1997 served as President and
Chief Executive Officer of Intellon Corp., a privately held start-up company in
the home automation industry. From January 1989 until his retirement in December
1992, Mr. Dykes served as President and Chief Executive Officer of Signetics
Company, a subsidiary of North American Philips Corporation. Mr. Dykes received
a B.S. degree in electrical engineering from the University of Florida. He is
currently a director of EXAR Corporation, Thomas Group, Inc. and Theseus Logic,
Inc.
Mr. Haley became a Director in April 1989. He serves as Chairman and Chief
Executive Officer of Triton Management Company based in Greensboro, North
Carolina, which previously owned and operated 60 restaurants and has been
engaged principally in investment and property management since the sale of the
restaurants in 1993 and 1996. Mr. Haley graduated from the University of North
Carolina-Chapel Hill, where he received a bachelor's degree in business
administration.
Dr. Robb became a Director in April 1993. He is currently the President of
Vantage Management, Inc., a consulting and investment firm in Schenectady, New
York. From 1986 through 1992, Dr. Robb served as a Senior Vice President for
Corporate Research and Development for General Electric Company, a diversified
technology company. From 1951 to 1986, he held various other positions with
General Electric Company. Dr. Robb received a B.S. degree from Pennsylvania
State University and M.S. and Ph.D. degrees from the University of Illinois. All
of Dr. Robb's degrees were awarded in chemical engineering. He is currently a
Director of Celgene Corporation, Neopath, Inc. and Mechanical Technology
Incorporated.
Mr. von Arx became a Director in October 1991. He served as the Non-Executive
Chairman of Morrison Restaurants Inc. from January 1996 to July 1998 and is the
former Chairman, President and Chief Executive Officer of Planters LifeSavers
Company, an affiliate of RJR Nabisco, Inc., where he served in such capacities
for four years prior to his retirement in 1991. Mr. von Arx is a graduate of
Washington University, where he received a bachelor's degree. He is currently a
Director of Ruby Tuesday, Inc., International Multifoods Corporation, MacKenzie
Investment Management, Inc. and BMC Fund, Inc.
42
<PAGE> 44
CERTAIN TRANSACTIONS
SUPPLY AND RELATED AGREEMENTS WITH C3, INC.
We are a party to certain agreements with C3. Mr. Hunter, our Chairman and Chief
Executive Officer, is a brother of Jeff N. Hunter, who serves as Chairman of the
Board and Chief Executive Officer of C3, and of C. Eric Hunter, a founder of C3.
According to C3's proxy statement dated April 7, 1999, at March 1, 1999 Jeff N.
Hunter beneficially owned 4.3% of the outstanding shares of common stock of C3.
According to a Schedule 13G report filed with the Commission January 20, 1999,
at January 18, 1999 C. Eric Hunter beneficially owned 9.4% of the outstanding
shares of common stock of C3. General Electric Pension Trust, which beneficially
owns approximately 8.7% of our outstanding shares, at March 1, 1999 was the
beneficial owner of 8.3% of the outstanding shares of C3 common stock, according
to the C3 Proxy Statement. At August 13, 1999, five of our directors (Messrs.
Carter, Dykes, Palmour, Robb and von Arx) also held C3 shares, representing in
the aggregate approximately 1.5% of the shares outstanding, with the largest
individual holding representing less than one percent. Neither we nor any other
directors or executive officers besides the five listed above presently hold
shares of C3 stock.
We supply SiC to C3 pursuant to a supply agreement originally entered into in
1995 and amended and restated in June 1997. The agreement, with an initial term
extending to 2005, provides that we will supply SiC to C3 on an exclusive basis
for use in the fabrication of gemstones and that C3 will purchase from us each
quarter at least 50% (by dollar volume) of its requirements for SiC material.
Recently, we agreed that C3 could reschedule approximately one-half of its
purchase commitments from the first half of calendar 2000 to the second half of
the year. In related development agreements executed in 1997 and 1998, and
amended and restated in July 1998, we have undertaken to develop improved
processes for manufacturing large volume, colorless SiC material for sale to C3.
In addition, we and C3 are parties to an agreement executed in February 1996
under which we supply certain electronic devices to C3 for use in gemstone
testing equipment. During the fiscal year ended June 27, 1999, C3 purchased
approximately $11.4 million in products and services from us under these
agreements. Under an agreement entered in December 1999, C3 has committed to
purchase a minimum fixed quantity of SiC materials from us until December 2000.
We and C3 also executed agreements in May 1998 and May 1999 under which C3
agreed to purchase equipment to be constructed by us and retained by us for use
in manufacturing material for sale to C3. The purchase price of the equipment is
equal to our labor and material costs incurred in construction, plus a
reasonable allocation of overhead, subject to a maximum price of $3.4 million
and $2.8 million under the 1998 and 1999 agreements, respectively. Construction
under the 1998 agreement was begun during fiscal 1998 and completed in fiscal
1999. C3 paid us $3.4 million during fiscal 1999 as the purchase price of this
equipment, which was equal to our construction costs plus an overhead allocation
of $603,000 (determined using the same methods as followed by us in our cost
accounting for government contracts). Construction under the 1999 agreement was
begun during the 1999 fiscal year and was completed in fiscal 2000. We charged
C3 approximately $1.3 million (which included an overhead allocation of
$202,000) for costs incurred under this agreement during fiscal 1999 and $1.4
million through the first quarter of fiscal 2000. Under the terms applicable to
these purchases, C3 is obligated to transfer title to the equipment to us once
it is fully depreciated.
EMPLOYMENT AGREEMENT WITH C. ERIC HUNTER
In May 1999, we entered into an employment agreement with C. Eric Hunter, a
brother of our Chairman and Chief Executive Officer. Mr. Hunter served as our
President and Chief Executive Officer from 1987 until 1994 and served as
Chairman of our Board of Directors from 1987 until 1995.
43
<PAGE> 45
He was engaged as a consultant to us from 1995 until expiration of the
consulting agreement in June 1998. Mr. Hunter has developed and filed patent
applications on several inventions relating to wide bandgap materials that are
of interest to us. In view of our interest in these inventions and Mr. Hunter's
knowledge and expertise in wide bandgap materials generally, we entered into
negotiations to acquire his rights in the inventions and to obtain his
assistance on technical matters on a part-time basis.
Pursuant to the May 1999 agreement, we employed Mr. Hunter at a salary of
$15,000 per year as Senior Technology Advisor with responsibilities that include
conceiving and evaluating ideas and inventions relating to wide bandgap
materials. In the agreement, Mr. Hunter assigned to us rights to seven pending
U.S. patent applications and one issued U.S. patent on inventions relating to
wide bandgap materials, subject to previously granted license rights. Two
additional U.S. patents have subsequently issued on the acquired applications.
In consideration of the assignment and other benefits under the agreement, we
granted Mr. Hunter, on May 11, 1999, an option to purchase 134,400 shares of
common stock at an exercise price equal to the closing market price on the grant
date (adjusted for stock splits). The option vests over seven years in equal
annual increments, subject to continued employment at the applicable vesting
date. The employment agreement obligates Mr. Hunter not to engage in certain
competitive activities during the ten-year term of the agreement and for three
years thereafter. Neither party may terminate the agreement except for cause (as
defined in the agreement) and except that Mr. Hunter may resign after seven
years.
44
<PAGE> 46
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., Prudential Securities Incorporated, Banc of
America Securities LLC, SoundView Technology Group, Inc. and Morgan Keegan &
Company, Inc. are acting as representatives of the underwriters. The
underwriting agreement provides for the purchase of a specific number of shares
of common stock by each of the underwriters. The underwriters' obligations are
several, which means that each underwriter is required to purchase a specified
number of shares, but is not responsible for the commitment of any other
underwriter to purchase shares. Subject to the terms and conditions of the
underwriting agreement, each underwriter has severally agreed to purchase the
number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
CIBC World Markets Corp.....................................
Prudential Securities Incorporated..........................
Banc of America Securities LLC..............................
SoundView Technology Group, Inc.............................
Morgan Keegan & Company, Inc................................
---------
Total............................................. 2,600,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$ per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 390,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the public offering price that
appears on the cover page of this prospectus, less the underwriting discount. If
this option is exercised in full, the total price to public will be $253.8
million, and the total proceeds to us will be $241.7 million. The underwriters
have severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares proportionate
to the underwriter's initial amount reflected in the foregoing table.
45
<PAGE> 47
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us:
<TABLE>
<CAPTION>
TOTAL
--------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- ------------------- ---------------------
<S> <C> <C>
$ $ $
</TABLE>
We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $550,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
We, as well as our executive officers and Directors, have agreed to a 90-day
"lock up" with respect to approximately 3,290,142 shares of common stock and
certain other of our securities that they beneficially own, including securities
that are convertible into shares of common stock and securities that are
exchangeable or exercisable for shares of common stock. This means that, subject
to certain exceptions, for a period of 90 days following the date of this
prospectus, we and such persons may not offer, sell, pledge or otherwise dispose
of these securities without the prior written consent of CIBC World Markets
Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- - Stabilizing transactions -- The representatives may make bids or purchases for
the purposes of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
- - Over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created in
connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option.
- - Penalty bids -- If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim a
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
- - Passive market making -- Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject to
certain limitations, until the time, if ever, at which a stabilizing bid is
made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
46
<PAGE> 48
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon for
us by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500 First
Union Capitol Center, Raleigh, North Carolina 27601. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts 02109.
EXPERTS
The consolidated balance sheet as of June 27, 1999 and the consolidated
statements of income, cash flow and shareholders' equity for the year ended June
27, 1999 included in this prospectus have been included herein and incorporated
by reference to the Annual Report on Form 10-K for the year ended June 27, 1999
in reliance on the report of Ernst & Young LLP, independent auditors, given on
the authority of that firm as experts in accounting and auditing.
The consolidated balance sheet as of June 28, 1998 and the consolidated
statements of income, cash flow and shareholders' equity for the years ended
June 30, 1997 and June 28, 1998 included in this prospectus have been included
herein and incorporated by reference to the Annual Report on Form 10-K for the
year ended June 27, 1999 in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the Securities and
Exchange Commission in connection with this offering. In addition, we file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy the
registration statement and any other documents filed by us at the Securities and
Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Room. Our
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at "http://www.sec.gov".
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any of our contracts or other documents, the
reference may not be complete and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
The Securities and Exchange Commission allows us to "incorporate by reference"
into this prospectus the information we file with it, which means that we can
disclose important information to you by referring you to those documents.
Information incorporated by reference is part of this prospectus. Later
information filed with the Securities and Exchange Commission will update and
supersede this information.
We incorporate by reference the documents listed below (File No. 34-21154) and
any future filings made with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
this offering is completed:
- - Annual Report on Form 10-K for the fiscal year ended June 27, 1999.
- - Quarterly Report on Form 10-Q for the quarter ended September 26, 1999.
47
<PAGE> 49
- - Current Report on Form 8-K dated July 13, 1999.
- - The description of our common stock contained in our registration statement on
Form 8-A filed with the Commission under Section 12 of the Securities Exchange
Act of 1934.
You may request a copy of these filings, at no cost, by contacting us at:
Cree, Inc.
4600 Silicon Drive
Durham, North Carolina 27703
Attention: Investor Relations Manager
Telephone: (919) 313-5300
48
<PAGE> 50
CREE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interim Financial Statements -- Unaudited
Consolidated Balance Sheets as of June 27, 1999 (audited)
and September 26, 1999................................. F-2
Consolidated Statements of Income for the three months
ended September 27, 1998 and September 26, 1999........ F-3
Consolidated Statements of Cash Flow for the three months
ended September 27, 1998 and September 26, 1999........ F-4
Consolidated Statements of Shareholders' Equity for the
year ended June 27, 1999 (audited) and for the three
months ended September 26, 1999........................ F-5
Notes to Consolidated Financial Statements................ F-6
Annual Financial Statements
Report of Independent Auditors............................ F-11
Report of Independent Accountants......................... F-12
Consolidated Balance Sheets as of June 28, 1998 and June
27, 1999............................................... F-13
Consolidated Statements of Income for the years ended June
30, 1997, June 28, 1998 and June 27, 1999.............. F-14
Consolidated Statements of Cash Flow for the years ended
June 30, 1997, June 28, 1998 and June 27, 1999......... F-15
Consolidated Statement of Shareholders' Equity for the
years ended June 30, 1997, June 28, 1998 and June 27,
1999................................................... F-16
Notes to Consolidated Financial Statements................ F-17
</TABLE>
F-1
<PAGE> 51
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 26,
1999 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,506 $ 41,226
Marketable securities..................................... 6,145 3,727
Accounts receivable, net.................................. 16,285 16,900
Inventories............................................... 3,977 4,060
Deferred income tax....................................... 296 296
Prepaid expenses and other current assets................. 558 571
-------- --------
Total current assets................................... 69,767 66,780
Property and equipment, net............................... 69,884 77,575
Patent and license rights, net............................ 1,731 1,798
Deferred income tax....................................... 2,827 2,827
Other assets.............................................. 8 125
-------- --------
Total assets........................................... $144,217 $149,105
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................... $ 7,487 $ 5,406
Accrued salaries and wages................................ 819 2,043
Other accrued expenses.................................... 1,239 3,691
-------- --------
Total current liabilities.............................. 9,545 11,140
Long term liabilities:
Long term liability....................................... -- 30
Deferred income tax....................................... 4,650 4,650
-------- --------
Total long term liabilities............................ 4,650 4,680
Shareholders' equity:
Preferred stock, par value $0.01; 3,000 shares authorized
at June 27, 1999 and September 26, 1999; none issued
and outstanding........................................ -- --
Common stock, par value $0.0025; 60,000 shares authorized
at June 27, 1999 and September 26, 1999; shares issued
and outstanding 29,258 and 29,500 at June 27, 1999 and
September 26, 1999, respectively....................... 73 74
Additional paid-in-capital................................ 111,136 112,180
Retained earnings......................................... 18,813 21,031
-------- --------
Total shareholders' equity............................. 130,022 133,285
-------- --------
Total liabilities and shareholders' equity........ $144,217 $149,105
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 52
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Product revenue, net...................................... $10,720 $18,257
Contract revenue, net..................................... 1,559 1,791
------- -------
Total revenue.......................................... 12,279 20,048
Cost of revenue:
Product revenue, net...................................... 5,415 9,498
Contract revenue, net..................................... 1,207 1,136
------- -------
Total cost of revenue.................................. 6,622 10,634
Gross profit................................................ 5,657 9,414
Operating expenses:
Research and development.................................. 806 931
Sales, general and administrative......................... 1,218 1,927
Other expense............................................. 269 101
------- -------
Income from operations................................. 3,364 6,455
Interest income, net........................................ 115 569
------- -------
Income before income taxes............................. 3,479 7,024
Income tax expense.......................................... 1,113 2,388
------- -------
Net income............................................. $ 2,366 $ 4,636
======= =======
Other comprehensive income, net of tax:
Unrealized holding loss................................ -- (2,418)
------- -------
Comprehensive income........................................ $ 2,366 $ 2,218
======= =======
Earnings per share:
Basic..................................................... $ 0.09 $ 0.16
======= =======
Diluted................................................... $ 0.09 $ 0.15
======= =======
Shares used in per share calculation:
Basic..................................................... 25,840 29,337
======= =======
Diluted................................................... 26,498 31,214
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 53
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income................................................ $ 2,366 $ 4,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,140 2,009
Loss on disposal of property and equipment............. 511 43
Amortization of patent rights.......................... 28 32
Purchase of marketable trading securities.............. (234) --
Loss on marketable trading securities.................. 67 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,217) (615)
Inventories.......................................... (706) (83)
Prepaid expenses and other assets.................... 595 (130)
Accounts payable, trade.............................. (2,452) (2,081)
Accrued expenses..................................... 1,119 3,707
------- -------
Net cash provided by operating activities......... 1,217 7,518
------- -------
Investing activities:
Purchase of property and equipment........................ (4,006) (9,744)
Proceeds from sale of property and equipment.............. 10 --
Purchase of patent rights................................. (91) (99)
------- -------
Net cash used in investing activities............. (4,087) (9,843)
------- -------
Financing activities:
Net proceeds from issuance of long-term debt.............. 1,281 --
Net proceeds from issuance of common stock................ 159 1,045
Repurchase of common stock................................ (3,214) --
------- -------
Net cash (used in) provided by financing
activities.................................... (1,774) 1,045
------- -------
Net decrease in cash and cash equivalents................... (4,644) (1,280)
Cash and cash equivalents:
Beginning of period....................................... 17,680 42,506
------- -------
End of period............................................. $13,036 $41,226
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ 112 $ --
======= =======
Cash paid for income taxes................................ $ 164 $ 63
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 54
CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 27, 1999 AND THE THREE MONTHS ENDED SEPTEMBER 26, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL TOTAL
PAR PAID-IN RETAINED TREASURY SHAREHOLDERS'
VALUE CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
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 treasury,
470 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 (audited)...... 73 111,136 18,813 -- 130,022
Common stock options exercised for cash,
242 shares............................ 1 1,044 -- -- 1,045
Other comprehensive loss, net of tax.... -- -- (2,418) -- (2,418)
Net income.............................. -- -- 4,636 -- 4,636
--- -------- ------- ------- --------
Balance at September 26, 1999
(unaudited)........................... $74 $112,180 $21,031 $ -- $133,285
=== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 55
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The balance sheet as of September 26, 1999, the statements of operations for the
three month periods ended September 27, 1998 and September 26, 1999, and the
statements of cash flows for the three months ended September 27, 1998 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 26, 1999,
and all periods presented, have been made. The balance sheet at June 27, 1999
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 1999 Form 10-K. The results of
operations for the period ended September 26, 1999 are not necessarily
indicative of the operating results that may be attained for the entire fiscal
year.
ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. Accordingly, all quarterly reporting reflects a 13 week
period in fiscal 2000 and fiscal 1999. The Company's current fiscal year extends
from June 28, 1999 through June 25, 2000.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This statement requires certain securities
to be classified into three categories:
(a) Securities Held-to-Maturity-Debt securities that the entity has
the positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities-Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are reported
at fair value, with unrealized gains and losses included in earnings.
(c) Securities Available-for-Sale-Debt and equity securities not
classified as either securities held-to-maturity or trading securities are
reported at fair value with unrealized gains and losses excluded from
earnings and reported in retained earnings.
As of September 26, 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
F-6
<PAGE> 56
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
"available for sale" securities under SFAS 115. Therefore unrealized gains or
losses are excluded from earnings and are recorded directly in retained
earnings.
As of September 27, 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. Recognized gains on shares of C3 stock recorded to the statement of
income during fiscal 1999 by the Company were $140,000. This amount was recorded
as other income.
Long Term Debt
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $3.0 million 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. As of September 27, 1998 the entire $10.0 million loan was
outstanding, including a current portion of $69,000 and a long term amount of
$9.9 million. On February 17, 1999, the entire $10.0 million indebtedness was
repaid with proceeds received from a public stock offering.
During the three months ended September 27, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with the facility. Interest capitalized for the three months ended September 27,
1998, was $84,000.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out ("FIFO") method. Inventories consist of the
following:
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 26,
1999 1999
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $1,290 $1,352
Work-in-progress........................................... 1,675 1,193
Finished goods............................................. 1,012 1,515
------ ------
Total inventory.......................................... $3,977 $4,060
====== ======
</TABLE>
Research and Development Accounting Policy
The U.S. Government provides funding for several of the Company's current
research and development efforts. The contract funding may be based on 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
F-7
<PAGE> 57
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1998 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Net research and development costs..................... $-- $ 40
Government funding..................................... -- 67
-- ----
Total direct costs incurred.......................... $-- $107
=== ====
</TABLE>
Significant Sales Contract
In September 1996, the Company entered into a Purchase Agreement with Siemens AG
("Siemens"), pursuant to which Siemens agreed to purchase LED chips made with
the Company's gallium nitride-on-silicon carbide technology. In April 1997,
December 1997 and September 1998, contract amendments were executed that
provided for enhanced product specifications requested by Siemens and larger
volume requirements, respectively. In December 1998, the Purchase Agreement was
amended to provide for additional shipments of LED products through September
1999. The Purchase Agreement was subsequently assigned to an indirect subsidiary
of Siemens, OSRAM Opto Semiconductors GMBH & Co. OHG ("Osram"), effective as of
January 1, 1999.
In August 1999, the Company entered into a new Purchase Agreement with Osram,
pursuant to which Osram agreed to purchase and the Company is obligated to ship
stipulated quantities of both the standard brightness and the high brightness
LED chips and silicon carbide wafers through September 2000.
The agreement calls for certain quantities of standard brightness and high
brightness LED chips to be delivered by month. In the event the Company
materially defaults in delivering shipments, Osram may recover 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.
F-8
<PAGE> 58
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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
20% 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.
Also, additional quantities of high brightness LEDs stipulated in the contract
may be deferred to the next quarter with 60 days notice at the election of
Osram. In all cases, Osram would be required to accept all products within 90
days of the original shipment date. 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.
Depreciation
The Company has changed its depreciation policy to reflect lower useful lives on
new manufacturing equipment. The useful life has been reduced from nine years to
five years for all manufacturing equipment purchased since the beginning of
fiscal year 2000. In management's estimate, this new policy was necessary due to
the changes in estimated useful lives of new equipment caused by technology
changes anticipated with the future development of larger diameter wafers. Based
on information available at this time, management estimates that the change in
policy may reduce the Company's fiscal 2000 net income by approximately $660,000
or $0.02 per share, but actual results may vary.
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, "Earnings Per Share" ("SFAS 128"). 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.
F-9
<PAGE> 59
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following computation reconciles the difference between the basic and
diluted presentations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 27, SEPTEMBER 26,
1998* 1999
--------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income....................................... $ 2,366 $ 4,636
Weighted average common shares................... 25,840 29,337
------- -------
Basic earnings per common share.................. $ 0.09 $ 0.16
======= =======
Net income....................................... $ 2,366 $ 4,636
Diluted weighted average common shares:
Common shares outstanding........................ 25,840 29,337
Dilutive effect of stock options and warrants.... 658 1,877
------- -------
Total diluted weighted average common shares..... 26,498 31,214
------- -------
Diluted earnings per common share................ $ 0.09 $ 0.15
======= =======
</TABLE>
- -------------------------
* Weighted average shares and per share amounts have been adjusted for the
two-for-one stock split effective July 26, 1999.
Potential common shares that would have the effect of increasing diluted
earnings per share are considered to be antidilutive. In accordance with SFAS
No. 128, these shares were not included in calculating diluted earnings per
share. Accordingly, 476,000 and 1.0 million shares for the three months ended
September 26, 1999 and September 27, 1998, respectively, were not included in
calculating diluted earnings per share because their effect was antidilutive.
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.
F-10
<PAGE> 60
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
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 each of the two years in the
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 fiscal year then ended,
in accordance with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
July 23, 1999
F-11
<PAGE> 61
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. We have not audited the consolidated financial statements of Cree
Research, Inc. for any period subsequent to June 28, 1998.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998, except as to Note 13 to the consolidated financial statements
for which the date is July 13, 1999
F-12
<PAGE> 62
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,680 $ 42,506
Marketable securities..................................... 657 6,145
Accounts receivable, net.................................. 10,479 16,285
Inventories............................................... 2,543 3,977
Deferred income tax....................................... 1,952 296
Prepaid expenses and other current assets................. 1,347 558
-------- --------
Total current assets................................... 34,658 69,767
Property and equipment, net............................... 36,476 69,884
Patent and license rights, net............................ 1,525 1,731
Deferred income tax....................................... -- 2,827
Other assets.............................................. 65 8
-------- --------
Total assets........................................... $ 72,724 $144,217
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................... $ 5,595 $ 7,487
Current maturities of long term debt...................... 17 --
Accrued salaries and wages................................ 391 819
Other accrued expenses.................................... 1,052 1,239
-------- --------
Total current liabilities.............................. 7,055 9,545
Long term liabilities:
Long term debt............................................ 8,650 --
Deferred income tax....................................... 2,154 4,650
-------- --------
Total long term liabilities............................ 10,804 4,650
Shareholders' equity:
Preferred stock, par value $0.01; 2,750 shares authorized
at June 28, 1998 and 3,000 shares authorized at June
27, 1999; none issued and outstanding.................. -- --
Common stock, par value $0.0025; 29,000 shares authorized
at June 28, 1998 and 60,000 shares authorized at June
27, 1999; shares issued and outstanding 25,978 and
29,258 at June 28, 1998 and June 27, 1999,
respectively........................................... 65 73
Additional paid-in-capital................................ 49,676 111,136
Retained earnings......................................... 5,124 18,813
-------- --------
Total shareholders' equity............................. 54,865 130,022
-------- --------
Total liabilities and shareholders' equity............. $ 72,724 $144,217
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE> 63
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Product revenue, net.................................... $19,823 $34,891 $53,464
Contract revenue, net................................... 6,535 7,640 6,586
License fee income...................................... 2,615 -- --
------- ------- -------
Total revenue........................................ 28,973 42,531 60,050
Cost of revenue:
Product revenue, net.................................... 13,388 21,727 26,977
Contract revenue, net................................... 5,707 6,252 4,943
------- ------- -------
Total cost of revenue................................ 19,095 27,979 31,920
Gross profit.............................................. 9,878 14,552 28,130
Operating expenses:
Research and development................................ 1,826 1,774 4,443
Sales, general and administrative....................... 4,301 4,131 6,064
Other expense........................................... 639 502 1,041
------- ------- -------
Income from operations............................... 3,112 8,145 16,582
Interest income, net...................................... 607 730 1,060
------- ------- -------
Income before income taxes........................... 3,719 8,875 17,642
Income tax expense........................................ 177 2,600 4,940
------- ------- -------
Net income........................................... $ 3,542 $ 6,275 $12,702
======= ======= =======
Other comprehensive income, net of tax;
Unrealized holding gains............................. -- -- 987
------- ------- -------
Comprehensive income...................................... $ 3,542 $ 6,275 $13,689
======= ======= =======
Earnings per share:
Basic................................................... $ 0.14 $ 0.24 $ 0.47
======= ======= =======
Diluted................................................. $ 0.13 $ 0.23 $ 0.45
======= ======= =======
Shares used in per share calculation:
Basic................................................... 24,911 25,726 27,015
======= ======= =======
Diluted................................................. 26,251 26,987 28,432
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE> 64
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 3,542 $ 6,275 $ 12,702
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,356 4,217 5,382
Loss on disposal of property and equipment............. 631 719 1,602
Loss on write off of patents........................... 141 17 51
Amortization of patent rights.......................... 108 102 117
Amortization and write off of goodwill................. 41 86 --
Purchase of marketable trading securities.............. -- (1,500) (233)
Proceeds from sale of marketable trading securities.... -- 421 1,421
Loss (gain) on marketable trading securities........... -- 32 (141)
Deferred income taxes.................................. (192) 394 3,494
Income tax benefits from stock option exercises........ 96 1,791 2,672
Changes in operating assets and liabilities:
Accounts receivable.................................. (891) (2,398) (6,196)
Inventories.......................................... (723) 1,406 (1,434)
Prepaid expenses and other assets.................... (262) (882) (1,981)
Accounts payable, trade.............................. (226) 1,092 1,892
Accrued expenses..................................... 476 320 598
------- -------- --------
Net cash provided by operating activities......... 6,097 12,092 19,946
------- -------- --------
Investing activities:
Maturity of investment securities......................... 1,787 -- --
Purchase of available for sale security................... -- -- (4,500)
Purchase of property and equipment........................ (8,115) (15,287) (40,578)
Proceeds from sale of property and equipment.............. 13 463 186
Purchase of patent rights................................. (310) (377) (374)
------- -------- --------
Net cash used in investing activities............. (6,625) (15,201) (45,266)
------- -------- --------
Financing activities:
Net proceeds from issuance of long-term debt.............. -- 8,667 1,350
Net repayment of long-term debt........................... -- -- (10,000)
Net proceeds from issuance of common stock................ 926 2,936 61,415
Receipt of Section 16(b) common stock profits............. -- -- 594
Repurchase of common stock................................ (112) (1,262) (3,213)
------- -------- --------
Net cash provided by financing activities......... 814 10,341 50,146
------- -------- --------
Net increase in cash and cash equivalents................... 286 7,232 24,826
Cash and cash equivalents:
Beginning of year......................................... 10,162 10,448 17,680
------- -------- --------
End of year............................................... $10,448 $ 17,680 $ 42,506
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ -- $ 74 $ 257
======= ======== ========
Cash paid for income taxes................................ $ 300 $ 336 $ 2,175
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
<PAGE> 65
CREE, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDING JUNE 30, 1997, JUNE 28, 1998 AND JUNE 27, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL TOTAL
PAR PAID-IN RETAINED TREASURY SHAREHOLDERS'
VALUE CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
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, 470 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
=== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE> 66
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree, 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 and green light emitting diodes and
silicon carbide-based materials. The Company markets its 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. These research
projects are primarily funded by U.S. Government agencies and departments. The
Company recovers the costs of a majority of its research and development efforts
from revenues on these contracts with agencies of the U.S. Government.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, 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 28, 1998 and June 27,
1999, and the reported amounts of revenues and expenses during the years ended
June 30, 1997, June 28, 1998 and June 27, 1999. 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 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,
F-17
<PAGE> 67
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $2.7 million. 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 in that fiscal year.
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, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This statement requires certain securities
to be classified into three categories:
(a) Securities Held-to-Maturity: Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at
amortized cost.
(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 in retained earnings.
The Company's short-term investments are comprised of equity securities that are
classified as securities available for sale, which are reported at fair value
based upon quoted market prices as of June 27, 1999 with unrealized gains or
losses excluded from earnings and reported only in retained earnings.
As of June 28, 1998, short-term investments consisted of common stock holdings
in C3, Inc. ("C3"), a portion of which we purchased in November 1997. The
Company also acquired additional shares of
F-18
<PAGE> 68
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 sold during fiscal 1999. Recognized gains on shares of C3 stock recorded to
the statement of income 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 27, 1999, 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" securities under SFAS 115. Therefore unrealized gains or
losses are excluded from earnings and are recorded directly to retained
earnings.
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:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 999 $1,290
Work-in-progress............................................ 752 1,675
Finished goods.............................................. 792 1,012
------ ------
$2,543 $3,977
====== ======
</TABLE>
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
20 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 the
overhead allocation of $473,000 and $332,000, in fiscal 1999 and fiscal 1998
respectively, as "Other operating income."
In November 1997, the Company purchased real property consisting of
approximately 30 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
F-19
<PAGE> 69
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Carolina, in the vicinity of the Research Triangle Park. The purchase price for
the land and buildings was $3.0 million. The Company 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."
For the fiscal year ended 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 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 $108,000, $102,000 and $117,000 for the
years ended June 30, 1997, June 28, 1998 and June 27, 1999, respectively. Total
accumulated amortization for patents was approximately $560,000 and $669,000 at
June 28, 1998 and June 27, 1999, 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 either 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. Activities performed
under both of 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.
F-20
<PAGE> 70
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 contract revenue. 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
income:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net research and development costs......................... $ 671 $276 $--
Government funding......................................... 2,186 601 --
------ ---- ---
Total direct costs incurred................................ $2,857 $877 $--
====== ==== ===
</TABLE>
Interest Capitalization
During the fiscal years ended June 28, 1998 and June 27, 1999, the Company
capitalized interest on funds used to construct property, plant and equipment in
connection with the newly acquired facility. Interest capitalized for fiscal
1998 and 1999 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 18% and 10%, respectively, of the Company's accounts receivable
balance at June 28, 1998 and June 27, 1999 was due from the Department of
Defense. In addition, the Company had amounts due from Siemens AG (or its
indirect subsidiary, Osram) totaling 37% and 35%, of accounts receivable
balances at June 28, 1998 and June 27, 1999, respectively. At June 28, 1998 and
June 27, 1999, the Company had amounts due from C3 totaling 23% and 17%,
respectively.
F-21
<PAGE> 71
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has derived its product revenue from sales primarily in the United
States, the Far East, and Europe as follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States...................................... 21% 26% 38%
Far East........................................... 33% 49% 50%
Europe............................................. 44% 24% 11%
Other.............................................. 2% 1% 1%
</TABLE>
One customer accounted for 31%, 40% and 37% of revenue for fiscal 1997, 1998 and
1999, respectively. Another customer accounted for 2%, 11% and 19% of revenue
for fiscal 1997, 1998 and 1999, respectively. The Department of Defense
accounted for 99%, 93% and 100% of contract revenues during fiscal 1997, 1998
and 1999, 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
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of 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, "Accounting for Stock Based Compensation" ("FAS 123"). 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.
F-22
<PAGE> 72
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------
JUNE 28, JUNE 27,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trade receivables......................................... $ 8,971 $14,685
Other short-term receivables.............................. 1,659 1,775
------- -------
10,630 16,460
Allowance for doubtful accounts........................... (151) (175)
------- -------
Total accounts receivable................................. $10,479 $16,285
======= =======
</TABLE>
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 30, 1997, June 28, 1998 and June 27,
1999:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................... $ 50 $216 $151
Charges to cost and expenses............................... 190 50 24
Deductions (write-offs to reserve)......................... (24) (115) --
---- ---- ----
Balance at end of year..................................... $216 $151 $175
==== ==== ====
</TABLE>
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------
JUNE 28, JUNE 27,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Office equipment and furnishings............................ $ 1,372 $ 1,948
Land and buildings.......................................... 3,501 21,031
Machinery and equipment..................................... 28,136 46,199
Construction in progress.................................... 9,074 12,468
Leasehold improvements...................................... 4,697 1,549
-------- --------
46,780 83,195
Accumulated depreciation.................................... (10,304) (13,311)
-------- --------
Net property and equipment.................................. $ 36,476 $ 69,884
======== ========
</TABLE>
Depreciation and amortization of property and equipment totaled $3.4 million,
$4.2 million and $5.4 million for the years ended June 30, 1997, June 28, 1998
and June 27, 1999, respectively.
F-23
<PAGE> 73
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30.0 million shares of common stock, with a par value of
$0.005 per share, and 3.0 million 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 60.0 million 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 3.0
million 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
underwriting discounts and offering costs. A portion of the net proceeds, $10.0
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 5.4 million shares of the Company's common stock. All
options granted have ten year terms and vest and become fully exercisable within
five years. The Company had granted 192,000 options with a ten 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 5.6%
and 5.3%, for the years ended June 28, 1998 and June 27, 1999, respectively. The
volatility factor of the expected market price of the Company's common stock is
0.748 for fiscal 1997 and 1998 and 1.174 for fiscal 1999, and the
weighted-average expected life of the options was seven years for executives and
directors and five years for other employees for fiscal 1997, 1998 and 1999.
F-24
<PAGE> 74
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income, as reported............................ $3,542 $6,275 $12,702
====== ====== =======
Pro forma net income, as adjusted for FAS 123...... $1,418 $4,405 $ 8,968
====== ====== =======
Pro forma earnings per share:
Basic............................................ $ 0.05 $ 0.17 $ 0.33
====== ====== =======
Diluted.......................................... $ 0.05 $ 0.16 $ 0.32
====== ====== =======
</TABLE>
The following table details the number of stock options outstanding and their
related exercise prices as of June 27, 1999:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS OUTSTANDING AS OF JUNE 27, 1999
- -----------------------------------------------------
NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICE OPTIONS CONTRACTUAL LIFE
- -------------- ----------------- ----------------
<S> <C> <C>
$ 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
=========
</TABLE>
F-25
<PAGE> 75
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL OPTION ACTIVITY
------------------------------------------------------------
JUNE 30, 1997 JUNE 28, 1998 JUNE 27, 1999
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 1,264 $2.20 1,854 $2.38 2,410 $ 5.10
Granted......................... 762 $6.78 1,084 $6.99 1,712 $10.85
Exercised....................... (104) $1.54 (434) $3.90 (418) $ 3.63
Forfeited....................... (68) $4.03 (94) $4.34 (91) $ 7.08
----- ----- -----
Outstanding at end of year...... 1,854 $2.38 2,410 $5.10 3,613 $ 8.14
Exerciseable at end of year..... 1,404 $3.72 1,198 $4.20 1,478 $ 5.39
</TABLE>
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 $549,000,
$522,000 and $430,000 for the years ended June 30, 1997, June 28, 1998, and June
27, 1999, respectively. Future minimum rentals as of June 27, 1999 under these
leases are as follows:
<TABLE>
<CAPTION>
MINIMUM RENTAL
FISCAL YEARS ENDED AMOUNT
------------------ --------------
(IN THOUSANDS)
<S> <C>
June 25, 2000......................... $312
June 24, 2001......................... 247
June 30, 2002......................... 119
----
Total....................... $678
====
</TABLE>
8. LONG-TERM DEBT
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $3.0 million was disbursed
under the loan to finance the initial purchase of the facility
F-26
<PAGE> 76
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $10.0 million
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 $8.7 million, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). 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
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 30, 1997, June 28, 1998
and June 27, 1999 differed from the amounts computed by applying the U.S.
federal tax rate of 34% in fiscal 1997 and 1998 and 35% in fiscal 1999, to
pretax earnings as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision at statutory rate............. $ 1,265 $3,018 $6,174
State tax provision........................................ 193 166 211
Decrease in income tax expense resulting from:
Foreign sales corporation................................ -- (214) (510)
Decrease in valuation allowance.......................... (1,279) (358) (290)
Research and development................................. -- -- (251)
State tax credits........................................ -- -- (394)
Other.................................................... (2) (12) --
------- ------ ------
Income tax expense......................................... $ 177 $2,600 $4,940
======= ====== ======
</TABLE>
F-27
<PAGE> 77
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the components of the provision for income taxes for the years
ended June 30, 1997, June 28, 1998 and June 27, 1999:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ 54 $ 699 $2,553
Foreign tax withholding.................................. 220 50 --
State.................................................... 95 269 300
----- ------ ------
369 1,018 2,853
Deferred:
Federal.................................................. (442) 1,582 2,347
State.................................................... 250 -- (260)
----- ------ ------
(192) 1,582 2,087
----- ------ ------
Net provision.............................................. $ 177 $2,600 $4,940
===== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------
JUNE 28, JUNE 27,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $1,304 $ 97
Research tax credits...................................... 169 420
Compensation.............................................. 62 105
Inventory................................................. 120 126
Bad debt.................................................. 56 65
Alternative minimum tax................................... 261 1,513
Foreign tax credit........................................ 270 270
Other..................................................... -- 527
------ ------
Total gross deferred tax assets............................. 2,242 3,123
Less valuation allowance.................................... (290) --
------ ------
Total net deferred tax assets............................... 1,952 3,123
Deferred tax liabilities:
Marketable equity securities.............................. -- 658
Property and equipment depreciation....................... 2,154 3,992
------ ------
Gross deferred tax liabilities.............................. 2,154 4,650
------ ------
Net deferred tax liability.................................. $ 202 $1,527
====== ======
</TABLE>
F-28
<PAGE> 78
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net change in the total valuation allowance for the years ended June 28,
1998 and June 27, 1999 was $358,000 and $290,000, respectively. The primary
reason for the reduction in the valuation allowance in 1998 and 1999 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. 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 NOL carryforwards for federal purposes of
$75,000 and $1.4 million 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 Plan is not insured by
the Pension Benefit Guaranty Corporation.
The 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
30, 1997, June 28, 1998 or June 27, 1999.
11. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards, "Earnings
Per Share" ("SFAS No. 128"), 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.
F-29
<PAGE> 79
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following computation reconciles the differences between the basic and
diluted presentations:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
JUNE 30, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic:
Net income...................................... $ 3,542 $ 6,275 $12,702
======= ======= =======
Weighted average common shares.................. 24,911 25,726 27,015
======= ======= =======
Basic income per common share................... $ 0.14 $ 0.24 $ 0.47
======= ======= =======
Diluted:
Net income...................................... $ 3,542 $ 6,275 $12,702
======= ======= =======
Weighted average shares:
Common shares outstanding....................... 24,911 25,726 27,015
Dilutive effect of stock options and warrants... 1,340 1,261 1,417
------- ------- -------
Total shares and common share equivalents....... 26,251 26,987 28,432
======= ======= =======
Diluted income per common share................. $ 0.13 $ 0.23 $ 0.45
======= ======= =======
</TABLE>
Potential common shares that would have the effect of increasing diluted income
per share are considered to be antidilutive. In accordance with SFAS No. 128,
these shares were not included in calculating diluted income per share. For the
years ended June 30, 1997 and June 28, 1998, there were 574,000 and 225,000
shares, respectively, that were not included in calculating diluted income per
share because their effect was antidilutive. As of June 27, 1999, there were no
potential shares considered to be 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 years ended June 30, 1997 and June 28, 1998, the
Company had no items of other comprehensive income.
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 requires those companies to report selected
segment information in interim financial statements to shareholders. SFAS 131
also establishes standards for related disclosures about products and services,
geographic
F-30
<PAGE> 80
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 2000. 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.
F-31
<PAGE> 81
- --------------------------------------------------------------------------------
[Cree, Inc. Logo]
CREE, INC.
2,600,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
________ , 2000
CIBC WORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
BANC OF AMERICA
SECURITIES LLC
SOUNDVIEW TECHNOLOGY GROUP
MORGAN KEEGAN &
COMPANY, INC.
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses of the Company payable in connection
with the issuance and distribution of the common stock being registered hereby,
excluding underwriting discounts and commissions. All expenses of the offering
will be borne by the Company. All amounts shown are estimates except the SEC
registration fee, the NASD filing fee, and the NASDAQ fee:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 60,953
NASD Filing Fee............................................. 23,588
NASDAQ Fee.................................................. 17,500
Printing and Engraving Expenses............................. 100,000
Legal Fees and Expenses..................................... 150,000
Accounting Fees............................................. 150,000
Blue Sky Expenses........................................... 5,000
Transfer Agent and Registrar Fees and Expenses.............. 5,000
Miscellaneous Expenses...................................... 37,959
--------
Total............................................. $550,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the North Carolina Business Corporation Act
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was, is,
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (1) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (2) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
II-1
<PAGE> 83
In addition to, and separate and apart from the indemnification described above
under the statutory scheme, Section 55-8-57 of the North Carolina Business
Corporation Act permits a corporation to indemnify or agree to indemnify any of
its directors, officers, employees or agents against liability and expenses
(including attorney's fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interest of the corporation. The
Company's bylaws provide for indemnification to the fullest extent permitted
under the North Carolina Business Corporation Act, provided, however, that the
Company will indemnify any person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Board of Directors of the Company. Accordingly, the Company may indemnify
its directors, officers and employees in accordance with either the statutory or
the non-statutory standard.
Sections 55-8-52 and 55-8-56 of the North Carolina Business Corporation Act
require a corporation, unless its articles of incorporation provide otherwise,
to indemnify a director or officer who has been wholly successful, on the merits
or otherwise, in the defense of any proceeding to which such director or officer
was a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.
Finally, Section 55-8-57 of the North Carolina Business Corporation Act provides
that a corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or not
the corporation is otherwise authorized by the North Carolina Business
Corporation Act to indemnify such party. The Company's directors and officers
are currently covered under directors' and officers' insurance policies
maintained by the Company.
As permitted by North Carolina law, Article VII of the Company's Articles of
Incorporation limits the personal liability of directors for monetary damages
for breaches of duty as a director provided that such limitation will not apply
to (i) acts or omissions not made in good faith that the director at the time of
the breach knew or believed were in conflict with the best interest of the
Company, (ii) any liability for unlawful distributions under Section 55-8-33 of
the North Carolina Business Corporation Act, (iii) any transaction from which
the director derived an improper personal benefit, or (iv) acts or omissions
occurring prior to the date the provision became effective.
Section 7 of the Underwriting Agreement filed as Exhibit 1.01 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
ITEM 16. EXHIBITS
The following documents (unless indicated) are filed herewith and made a part of
this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
1.01* -- Form of Underwriting Agreement
4.01 -- Specimen Common Stock Certificate
4.02 -- Restated Articles of Incorporation, as amended
</TABLE>
II-2
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
4.03 -- Bylaws, as amended
5.01 -- Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
23.01 -- Consent of PricewaterhouseCoopers LLP
23.02 -- Consent of Ernst & Young LLP
23.03 -- Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
24.01 -- Powers of Attorney (see page II-5)
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of the expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
3. The undersigned Registrant hereby undertakes that: (a) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (b) for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Durham, State of North Carolina, on January 3, 2000.
CREE, INC.
By: /s/ F. NEAL HUNTER
---------------------------------------
F. Neal Hunter
Chairman and Chief Executive
Officer
II-4
<PAGE> 86
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints F. Neal Hunter and Cynthia B. Merrell and each of them,
each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this registration statement, to
sign any related abbreviated registration statement filed pursuant to Rule
462(b) of the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons on January 3, 2000 in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ F. NEAL HUNTER Chairman and Chief Executive Officer
- ---------------------------------------------------
F. Neal Hunter
/s/ CYNTHIA B. MERRELL Chief Financial Officer and Treasurer
- --------------------------------------------------- (Chief Accounting and Financial
Cynthia B. Merrell Officer)
/s/ CALVIN H. CARTER, JR. Director
- ---------------------------------------------------
Calvin H. Carter, Jr., Ph.D.
/s/ JAMES E. DYKES Director
- ---------------------------------------------------
James E. Dykes
/s/ MICHAEL W. HALEY Director
- ---------------------------------------------------
Michael W. Haley
/s/ JOHN W. PALMOUR Director
- ---------------------------------------------------
John W. Palmour, Ph.D.
/s/ WALTER L. ROBB Director
- ---------------------------------------------------
Walter L. Robb, Ph.D.
/s/ DOLPH W. VON ARX Director
- ---------------------------------------------------
Dolph W. Von Arx
</TABLE>
II-5
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
1.01* -- Form of Underwriting Agreement
4.01 -- Specimen Common Stock Certificate
4.02 -- Restated Articles of Incorporation, as amended
4.03 -- Bylaws, as amended
5.01 -- Opinion of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
23.01 -- Consent of PricewaterhouseCoopers LLP
23.02 -- Consent of Ernst & Young LLP
23.03 -- Consent of Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P. (included in Exhibit 5.01 hereto)
24.01 -- Powers of Attorney (see page II-5)
</TABLE>
- -------------------------
* To be filed by amendment.
II-6
<PAGE> 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, 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> 2
CREE, 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:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the (Cust) (Minor)
entities under Uniform Gifts to
JT TEN - as joint tenants with Minors Act
right of survivorship
and not as tenants in (State)
common
</TABLE>
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.
<PAGE> 1
EXHIBIT 4.02
RESTATED 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 33,000,000 shares divided into two classes consisting of
(a) 30,000,000 shares of Common Stock with a par value of $ 0.005 per share;
and (b) 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> 2
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.
<PAGE> 3
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CREE RESEARCH, INC.
Pursuant to Section 55-10-06 of the General Statutes of North Carolina,
the undersigned corporation hereby submits the following Articles of Amendment
for the purpose of amending its Articles of Incorporation:
1. The name of the corporation is Cree Research, Inc.
2. The text of Article IV of the Articles of Incorporation is amended to read
in its entirety as follows:
"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."
3. No exchange, reclassification or cancellation of issued shares will be
effected by the amendment except as follows:
(a) Upon the effectiveness of these Articles of Amendment, each issued and
unissued authorized share of Common Stock, $0.005 par value per share,
shall automatically be changed into two whole shares of Common Stock,
$0.0025 par value per share.
(b) The corporation will issue, on July 30, 1999, to each person who is a
record holder of Common Stock upon the effectiveness of these Articles
of Amendment, a certificate evidencing the additional shares of Common
Stock owned by such holder as a result of the amendment.
(c) Each Common Stock certificate properly issued by the corporation prior
to the effectiveness of these Articles of Amendment which remains
outstanding at the time these Articles become effective shall, upon
and after such effectiveness, and without any requirement for action
by the holder thereof, be deemed a certificate evidencing a number of
shares of Common Stock, $0.0025 par value per share, equal to the
number of shares stated on the face of such certificate, without
regard to any par value amount stated on such certificate.
<PAGE> 4
4. The amendment was duly adopted on July 12, 1999 by the board of directors
of the corporation in accordance with Section 55-10-02(4) of the North
Carolina General Statutes. No shareholder approval is required for adoption
of these Articles of Amendment since the corporation had only shares of
Common Stock outstanding and the amendment merely changes each issued and
unissued authorized share of the outstanding class into a greater number of
whole shares.
5. These Articles of Amendment shall be effective as of 5:00 p.m., Eastern
Daylight Time, on July 26, 1999.
Signed this the 14th day of July, 1999.
CREE RESEARCH, INC.
By: /s/ Adam H. Broome
----------------------------------
Adam H. Broome, Secretary
-2-
<PAGE> 5
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CREE RESEARCH, INC.
Pursuant to Section 55-10-06 of the General Statutes of North Carolina,
the undersigned corporation hereby submits the following Articles of Amendment
for the purpose of amending its Articles of Incorporation:
1. The name of the corporation is Cree Research, Inc.
2. The text of Article I of the Articles of Incorporation is amended to read
in its entirety as follows:
"The name of the corporation is Cree, Inc."
3. No exchange, reclassification or cancellation of issued shares will be
effected by the amendment.
4. The date of adoption of the amendment was November 2, 1999.
4. The amendment was approved by shareholder action as required by Chapter 55
of the North Carolina General Statutes.
5. These Articles of Amendment shall be effective on January 1, 2000.
Signed this the 7th day of December, 1999.
CREE RESEARCH, INC.
By: /s/ Adam H. Broome
-------------------------------------
Adam H. Broome, Secretary
<PAGE> 1
EXHIBIT 4.03
BYLAWS OF
CREE RESEARCH, INC.
(AS AMENDED THROUGH NOVEMBER 1, 1999)
ARTICLE I
DEFINITIONS
In these bylaws, unless otherwise provided, the following terms shall
have the following meanings:
(1) "Act" shall mean the North Carolina Business Corporation
Act as codified in Chapter 55 of the North Carolina General Statutes effective
July 1, 1990, and as amended from time to time;
(2) "Articles of Incorporation" shall mean the Corporation's
articles of incorporation, including amended and restated articles of
incorporation and articles of merger;
(3) "Corporation" shall mean Cree Research, Inc.;
(4) "Distribution" shall mean a direct or indirect transfer of
money or other property (except the Corporation's own shares) or incurrence of
indebtedness by the Corporation to or for the benefit of its shareholders in
respect of any of its shares. A distribution may be in the form of a declaration
or payment of a dividend, a purchase, redemption, or other acquisition of
shares, a distribution of indebtedness, or otherwise;
(5) "Emergency" shall mean a catastrophic event which prevents
a quorum of the board of directors from being readily assembled;
(6) "Shares" shall mean the units into which the proprietary
interests in the Corporation are divided; and
(7) "Voting group" shall mean all shares of one or more
classes or series that under the Articles of Incorporation or the Act are
entitled to vote and be counted together collectively on a matter at a meeting
of shareholders. All shares entitled by the Articles of Incorporation or the Act
to vote generally on a matter are for that purpose a single voting group.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE: The principal office of the Corporation
shall be located at 4600 Silicon Drive, Durham County, Durham, North Carolina
27703, or at such other place as may be determined from time to time by the
directors.
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SECTION 2. REGISTERED OFFICE: The registered office of the Corporation
shall be maintained in the State of North Carolina, and may be, but not need be,
identical with the principal office.
SECTION 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 III
MEETINGS OF SHAREHOLDERS
SECTION 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 as may be agreed upon by a majority of the shareholders
entitled to vote at the meeting.
SECTION 2. ANNUAL MEETING: The annual meeting of shareholders for the
election of directors and the transaction of other business shall be held
annually in any month on any day (except Saturday, Sunday or a legal holiday) as
fixed by the board of directors.
SECTION 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 by the board of directors, the chairman or the president. A meeting so
called shall be designated and treated for all purposes as the annual meeting.
SECTION 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.
SECTION 5. NOTICE OF MEETING: Written or printed notice stating the
time and place of the meeting shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of any shareholders' meeting, either
personally, or by telephone, telegraph, teletype, mail, private carrier,
facsimile transmission, or other form of wire or wireless communication by or at
the direction of the chairman of the board, 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 the shareholders of the Corporation, with postage
thereon prepaid.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called. In
the case of an annual or substitute annual meeting, the notice of meeting need
not specifically state the business to be transacted unless such a statement is
required by the Act.
When an annual or special meeting is adjourned to a different date,
time, and place, it is not necessary to give any notice of the adjourned meeting
other than by announcement at the meeting at which the adjournment is taken;
provided, however, that if a new record date for the
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adjourned meeting is or must be set, notice of the adjourned meeting must be
given to persons who are shareholders as of the new record date.
The record date for determining the shareholders entitled to notice of
and to vote at an annual or special meeting shall be fixed as provided in
Section 3 of Article VIII.
SECTION 6. WAIVER OF NOTICE: A shareholder may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 7. SHAREHOLDER LIST: Commencing two (2) business days after
notice of a meeting of shareholders is given and continuing through such
meeting, the secretary of the Corporation shall maintain at the principal office
of the Corporation an alphabetical list of the shareholders entitled to vote at
such meeting, arranged by voting group, with the address of and number of shares
held by each. This list shall be subject to inspection by any shareholder or his
agent or attorney at any time during usual business hours and may be copied at
the shareholder's expense. This list shall be made available at the meeting and
any shareholder, or his representative, may inspect the list at any time during
the meeting or any adjournment thereof.
SECTION 8. QUORUM: A majority of the votes entitled to be cast on a
matter by any voting group, represented in person or by proxy, shall constitute
a quorum of that voting group for action on that matter. The shareholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by a majority of
the votes voting on the motion to adjourn; and at any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the original meeting.
SECTION 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 may take the form of a telegram,
telex, facsimile or other form of wire or wireless communication which appears
to have been transmitted by a shareholder. A proxy is effective when received by
the secretary or other officer or agent authorized to tabulate votes. 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.
SECTION 10. VOTING OF SHARES: Except as otherwise provided in the
Articles of Incorporation and the Act, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders.
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Except for the election of directors, which is governed by the
provisions of Section 3 of Article IV, if a quorum is present, action on a
matter by a voting group is approved if the votes cast within the voting group
favoring the action exceed the votes cast against the action, unless the vote of
a greater number is required by the Act, the Articles of Incorporation, or these
bylaws.
Shares of the Corporation are not entitled to vote if: (i) they are
owned, directly or indirectly, by the Corporation, unless they are held by it in
a fiduciary capacity; (ii) they are owned, directly or indirectly, by a second
corporation in which the Corporation owns a majority of the shares entitled to
vote for directors of the second corporation; or (iii) they are redeemable
shares and (x) notice of redemption has been given and (y) a sum sufficient to
redeem the shares has been deposited with a bank, trust company, or other
financial institution under an irrevocable obligation to pay the holders the
redemption price upon surrender of the shares.
SECTION 11. INFORMAL ACTION BY SHAREHOLDERS: Any action which may be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all of the
persons who would be entitled to vote upon such action at a meeting and is
delivered to the Corporation to be included in the minutes or to be kept as part
of the corporate records. Such consent shall have the same force and effect as a
unanimous vote of shareholders.
SECTION 12. CORPORATION'S ACCEPTANCE OF VOTES: If the name signed on a
vote, consent, waiver, or proxy appointment corresponds to the name of a
shareholder, the Corporation is entitled to accept the vote, consent, waiver, or
proxy appointment and to give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, or proxy appointment
does not correspond to the name of its shareholder, the Corporation is
nevertheless entitled to accept the vote, consent, waiver, or proxy appointment
and to give it effect as the act of the shareholder if: (i) the shareholder is
an entity and the name signed purports to be that of an officer or agent of the
entity; (ii) the name signed purports to be that of an administrator, executor,
guardian, or conservator representing the shareholder and, if the Corporation
requests, evidence of fiduciary status acceptable to the Corporation has been
presented with respect to the vote, consent, waiver, or proxy appointment; (iii)
the name signed purports to be that of a receiver or trustee in bankruptcy of
the shareholder and, if the Corporation requests, evidence of its status
acceptable to the Corporation has been presented with respect to the vote,
consent, waiver, or proxy appointment; (iv) the name signed purports to be that
of a beneficial owner or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the signatory's
authority to sign for the shareholder has been presented with respect to the
vote, consent, waiver, or proxy appointment; or (v) two or more persons are the
shareholder as co-tenants or fiduciaries and the name signed purports to be the
name of at least one of the co-owners and the person signing appears to be
acting on behalf of all the co-owners.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the secretary or other officer or agent authorized to tabulate
votes has a reasonable basis for doubt about the validity of the signature on it
or about the signatory's authority to sign for the shareholder.
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SECTION 13. 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 III, 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 III, Section 13), 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 thirty (30) calendar days before or more than sixty (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, 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 III, Section 5 of these bylaws. If directors are
to be elected at a special meeting of
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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)(i) 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 or 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 in 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.
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ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS: All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, its board of directors.
SECTION 2. NUMBER, TERM AND QUALIFICATIONS: The number constituting the
board of directors 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 until his successor is elected and qualified. Directors
need not be residents of the State of North Carolina or shareholders of the
Corporation.
SECTION 3. ELECTION OF DIRECTORS: Except as provided in Section 6 of
this Article, 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, the election of
directors shall be by ballot.
SECTION 4. NO CUMULATIVE VOTING: Unless otherwise required by the Act,
the shareholders of the Corporation shall have no right to cumulate their votes
for the election of directors.
SECTION 5. REMOVAL: Any director 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. If a director is elected by
a voting group of shareholders, only members of that voting group may
participate in the vote to remove him. A director may not be removed by the
shareholders at a meeting unless the notice of the meeting specifies such
removal as one of its purposes. If any directors are removed, new directors may
be elected at the same meeting.
SECTION 6. VACANCIES: Any vacancy occurring in the board of directors,
including, without limitation, a vacancy resulting from an increase in the
authorized number of directors or from the failure by the shareholders to elect
the full authorized number of directors, may be filled by the majority of the
remaining directors. If the directors remaining in office constitute fewer than
a quorum of the board, such vacancy may be filled by the affirmative vote of a
majority of the remaining directors or by the sole remaining director. If the
vacant office was held by a director elected by a voting group of shareholders,
the remaining director or directors elected by that voting group are entitled to
fill the vacancy. The shareholders may elect a director at any time, subject to
the provisions of Section 13 of Article III, to fill a vacancy not filled by the
directors. If the vacant office was held by a director elected by a voting group
of shareholders, the holders of shares of that voting group may fill the vacancy
not filled by the directors elected by such voting group. The term of a director
elected to fill a vacancy shall expire at the next shareholders' meeting at
which directors are elected.
SECTION 7. CHAIRMAN OF THE BOARD: 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 VI. The chairman shall preside at all meetings of the board of directors
and perform such other duties as may be directed by the board.
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SECTION 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.
SECTION 9. COMMITTEES: The board of directors may create an executive
committee and other committees of the board, each of which shall have at least
two (2) members, all of whom shall be directors. The creation of a committee and
the appointment of members to it must be approved by a majority of all the
directors in office when the action is taken. Each committee may, as specified
by the board of directors, exercise some or all of the authority of the board
except that a committee may not: (i) authorize distributions; (ii) approve or
propose to shareholders action that the Act requires be approved by
shareholders; (iii) fill vacancies on the board of directors or on any of its
committees; (iv) amend the Articles of Incorporation pursuant to Section
55-10-02 of the Act or its successor; (v) adopt, amend, or repeal bylaws; (vi)
approve a plan of merger not requiring shareholder approval; (vii) authorize or
approve a reacquisition of shares, except according to a formula or method
prescribed by the board of directors; or (viii) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences, and limitations of a class or series of
shares, except that the board of directors may authorize a committee to do so
within limits specifically prescribed by the board of directors. 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. The provisions of Article V, which govern meetings of
the board of directors, shall likewise apply to meetings of any committee of the
board.
ARTICLE V
MEETINGS OF DIRECTORS
SECTION 1. REGULAR MEETINGS: Regular meetings of the board of directors
shall be held at such time and place, within or without the State of North
Carolina, as the board of directors shall fix by resolution.
SECTION 2. SPECIAL MEETINGS: Special meetings of the board of directors
may be called by or at the request of the chairman of the board, president or
any two directors. Such meetings may be held either within or without the State
of North Carolina, as fixed by the person or persons calling the meeting.
SECTION 3. NOTICE OF MEETINGS: Regular meetings of the board of
directors may be held without notice. The person or persons calling a special
meeting of the board of directors shall, at least two (2) days before the
meeting, give notice of the meeting by any usual means of communication,
including by telephone, telegraph, teletype, mail, private carrier, facsimile
transmission, or other form of wire or wireless communication. Such notice shall
specify the purpose for which the meeting is called and may be oral.
SECTION 4. WAIVER OF NOTICE: Any director may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the director, and filed with the minutes or corporate records;
provided, however, that a director's attendance at or
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participation in a meeting waives any required notice to him unless the director
at the beginning of the meeting (or promptly upon his arrival) objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
SECTION 5. 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.
SECTION 6. MANNER OF ACTING: The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is required by law, the Articles of
Incorporation or these bylaws.
SECTION 7. PRESUMPTION OF ASSENT: A director of the Corporation who is
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding it or transacting business at the meeting; (ii) his
dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he files written notice of his dissent or abstention with the
presiding officer of the meeting before its adjournment or with the Corporation
immediately after adjournment of the meeting. This right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
SECTION 8. PARTICIPATION IN MEETINGS: Any or all of the directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. ACTION WITHOUT MEETING: Action which may be taken at a board
of directors meeting or at a committee of the board of directors meeting may be
taken without a meeting if the action is taken by all members of the board or
committee and is evidenced by one or more written consents signed by each
director or committee member before or after such action, which describes the
action taken and is included in the minutes or filed with the corporate records.
Such action is effective when the last director or committee member signs the
consent, unless the consent specifies a different effective date.
ARTICLE VI
OFFICERS
SECTION 1. OFFICERS OF THE CORPORATION: The officers of the Corporation
shall consist of a chairman, a president, secretary, treasurer, and such vice
presidents, assistant secretaries, assistant treasurers, and other officers as
may be appointed from time to time in accordance with these bylaws. The chairman
shall be chosen from among the directors. Any two or more offices may be held by
the same person, but no officer may act in more than one capacity where action
of two or more officers is required.
SECTION 2. APPOINTMENT AND TERM: The chairman, the president and any
executive vice presidents shall be appointed by the board of directors. The
other officers of the Corporation may be appointed by the board of directors or
the chairman. A duly appointed officer may appoint
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one or more officers or assistant officers if authorized by the board of
directors. 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, disqualification or until his
successor is appointed and qualifies. The appointment of an officer does not
itself create contract rights for either the officer or the Corporation.
SECTION 3. COMPENSATION OF OFFICERS: The compensation of officers of
the Corporation shall be fixed by the board of directors. No officer shall
receive compensation for serving the Corporation in any other capacity unless
such additional compensation be authorized by the board of directors.
SECTION 4. RESIGNATION AND REMOVAL: An officer may resign at any time
by communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the Corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer. Any officer or agent
appointed by the board of directors may be removed by the board at any time,
with or without cause, and any officer or agent appointed by the chairman or by
any other officer, pursuant to authority granted by the board, 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.
SECTION 5. BONDS: The board of directors may by resolution require any
officer, agent, or employee of the Corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. 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.
SECTION 7. 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
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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.
SECTION 8. 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.
SECTION 9. 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.
SECTION 10. 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.
SECTION 11. 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.
SECTION 12. 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.
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SECTION 13. 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 VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS: The board of directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
SECTION 2. LOANS: No loans shall be contracted on behalf of the
Corporation and no evidences 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.
SECTION 3. CHECKS AND DRAFTS: All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers or agents of the Corporation and in such manner as shall from time to
time be determined by resolution of the board of directors.
SECTION 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 depositories as the board of directors shall direct.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES: Shares may, but need not, be
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
Corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the shareholder this information in writing
and without charge. These certificates shall be signed, either manually or in
facsimile, by the president, any vice president or any person who has been
designated the chairman of the Corporation, and the secretary or any assistant
secretary, the treasurer or any assistant treasurer. In case any officer who has
signed or whose facsimile or other signature has been placed upon such
certificate shall
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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.
SECTION 2. TRANSFER OF SHARES: Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares. All certificates
surrendered for transfer shall be cancelled before new certificates for the
transferred shares shall be issued.
SECTION 3. FIXING RECORD DATE: For the purpose of determining
shareholders entitled to receive notice of a meeting of shareholders, to demand
a special meeting, to vote, to take any other action, or to receive payment, or
for any other purpose, the board of directors may fix in advance a date as the
record date for any such determination of shareholders, such record date in any
case to be not more than sixty (60) days, and, in case of a meeting of
shareholders, not less than ten (10) days, before the date on which the
particular action requiring such determination of shareholders is to be taken.
When a determination of shareholders entitled to notice of or to vote
at any meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment of such meeting unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 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 the issuance of a new
certificate, the board of directors 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 of directors may, by resolution reciting that
the circumstances justify such action, authorize the issuance of the new
certificate without requiring such a bond.
SECTION 5. REACQUIRED SHARES: The Corporation may acquire its own
shares and shares so acquired constitute authorized but unissued shares.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. DISTRIBUTIONS: The board of directors may from time to time
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the Articles of Incorporation.
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SECTION 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 which shall have such other
characteristics as the board of directors may determine.
SECTION 3. RECORDS AND REPORTS: All of the Corporation's records shall
be maintained in written form or in another form capable of conversion into
written form within a reasonable time.
The Corporation shall keep as permanent records minutes of all meetings
of its incorporators, shareholders, and board of directors, a record of all
actions taken by the shareholders or board of directors without a meeting, and a
record of all actions taken by a committee of the board of directors in place of
the board of directors.
The Corporation shall keep a copy of the following records at its
principal office: (i) the Articles of Incorporation and all amendments to them
currently in effect; (ii) these bylaws and all amendments to them currently in
effect; (iii) resolutions adopted by its board of directors creating one or more
classes or series of shares and fixing their relative rights, preferences, and
limitations (if shares issued pursuant to those resolutions are outstanding);
(iv) the minutes of all meetings of shareholders and records of all actions
taken by shareholders without a meeting during the past three years; (v) all
written communications to shareholders generally within the past three years;
(vi) the annual financial statements described below, prepared during the past
three years; (vii) a list of the names and business addresses of its current
directors and officers; and (viii) its most recent annual report delivered to
the North Carolina Secretary of Revenue (or Secretary of State, if applicable).
The Corporation shall prepare and make available to its shareholders
annual financial statements for the Corporation and its subsidiaries that: (i)
includes 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; and (ii) is
accompanied by either (x) a report of a public accountant on the annual
financial statements, or (y) a statement by the treasurer stating his reasonable
belief whether the annual financial statements were prepared on the basis of
generally accepted accounting principles (and, if not, describing the basis of
preparation) and describing any respects in which the statements were not
prepared on a basis of accounting consistent with the statements prepared for
the preceding year. These annual financial statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the close of each fiscal year of the Corporation. On written request from a
shareholder who was not mailed the annual financial statements, the Corporation
shall mail to him the latest such statements.
The Corporation shall also prepare and file with the North Carolina
Secretary of Revenue (or North Carolina Secretary of State, if applicable) an
annual report in such form as required by Section 55-16-22 of the Act, or its
successor.
SECTION 4. INDEMNIFICATION: Any person who at any time serves or has
served as a director or officer of the Corporation, or at the request of the
Corporation is or was serving as an officer, director, agent, partner, trustee,
administrator, or employee for any other foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be indemnified by the Corporation to the fullest extent from time to time
permitted by law in the event he is made, or is threatened to be made, a party
to any threatened, pending or completed civil, criminal, administrative,
investigative or arbitrative action, suit or proceeding and
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<PAGE> 15
any appeal therein (and any inquiry or investigation that could lead to such
action, suit or proceeding), whether or not brought by or on behalf of the
Corporation, seeking to hold him liable by reason of the fact that he is or was
acting in such capacity; provided, however, that the Corporation shall not
indemnify any such person against liability or expenses he may incur on account
of his activities which were, at the time taken, known or believed by him to be
clearly in conflict with the best interests of the Corporation. In addition, the
board may provide such indemnification for the employees and agents of the
Corporation as it deems appropriate.
The rights of those receiving indemnification hereunder shall, to the
fullest extent from time to time permitted by law, cover (i) reasonable
expenses, including without limitation all attorneys' fees actually and
necessarily incurred by him in connection with any such action, suit or
proceeding, (ii) all reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan), penalty, or settlement for which he may have become
liable in such action, suit or proceeding; and (iii) all reasonable expenses
incurred in enforcing the indemnification rights provided herein.
Expenses incurred by anyone entitled to receive indemnification under
this section in defending a proceeding may be paid by the Corporation in advance
of the final disposition of such proceeding as authorized by the board of
directors in the specific case or as authorized or required under any provisions
in the bylaws or by any applicable resolution or contract upon receipt of an
undertaking by or on behalf of the director to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation against such expenses.
The board of directors of the Corporation shall take all such action as
may be necessary and appropriate to authorize the Corporation to pay the
indemnification required by this bylaw, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him.
Any person who at any time serves or has served in any 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. Any repeal or modification of these
indemnification provisions shall not affect any rights or obligations existing
at the time of such repeal or modification. The rights provided for herein 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.
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.
The rights granted herein shall not be limited by the provisions
contained in Section 55-8-51 of the Act (or its successor).
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SECTION 5. FISCAL YEAR: The fiscal year of the Corporation shall be
fixed by the board of directors.
SECTION 6. AMENDMENTS:
(a) The board of directors may amend or repeal these bylaws,
except to the extent otherwise provided in the Articles of Incorporation, a
bylaw adopted by the shareholders, or the Act, and except that a bylaw adopted,
amended or repealed by the shareholders may be readopted, amended or repealed by
the board of directors if the Articles of Incorporation, the Act or a bylaw
adopted by the shareholders authorizes the board of directors to adopt, amend,
or repeal that particular bylaw or the bylaws generally.
(b) 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.
(c) The Corporation's shareholders may adopt, amend, alter,
change, or repeal any of these bylaws consistent with the provisions of Section
10 of Article III.
SECTION 7. EMERGENCIES: In anticipation of or during an emergency, the
board of directors may: (i) modify lines of succession to accommodate the
incapacity of any director, officer, employee, or agent; and (ii) relocate the
principal office or designate alternative principal or regional offices, or
authorize the officers to do so.
During an emergency: (i) notice of a meeting of the board of directors
need be given only to those directors whom it is practicable to reach and may be
given in any practicable manner, including by publication and radio; and (ii)
one or more officers present at a meeting of the board of directors may be
deemed to be directors for the meeting, in order of rank and within the same
rank in order of seniority, as necessary to achieve a quorum.
SECTION 8. SEVERABILITY: Should any provision of these bylaws become
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
SECTION 9. WAIVER OF NOTICE: Whenever any notice is required to be
given to any shareholder or director under the provisions of the Act or under
the provisions of the Articles of Incorporation 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.
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SECTION 10. TIME PERIODS: In applying any provision of these bylaws
which requires an act to be done or not done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded and the day of the event shall be included.
ATTESTED:
/s/ Adam H. Broome Date: November 1, 1999
- ------------------------------------- ---------------------------
Secretary
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EXHIBIT 5.01
SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, L.L.P.
LAWYERS
OFFICES MAILING ADDRESS
2500 First Union Capitol Center P.O. Box 2611
Raleigh, North Carolina 27601 Raleigh, North Carolina
27602-2611
TELEPHONE (919) 821-1220
FACSIMILE (919) 821-6800
January 3, 2000
Cree, Inc.
4600 Silicon Drive
Durham, North Carolina 27703
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel for Cree, Inc. (the "Company") in connection with the
issuance and sale by the Company of up to 2,990,000 shares of the Company's
Common Stock (including up to 390,000 shares subject to the underwriters'
over-allotment option), $0.0025 par value per share. These shares are described
in the Company's Registration Statement on Form S-3 filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), on January 3, 2000, with which this opinion is filed as an
exhibit (the "Registration Statement").
We have examined the Amended and Restated Articles of Incorporation, as
amended, and Amended and Restated Bylaws of the Company, the minutes of the
meetings of the Board of Directors of the Company relating to the authorization
and issuance of securities and such other documents, records, and matters of law
as we have deemed necessary for purposes of this opinion. In our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents as originals, the conformity to originals of all documents submitted
to us as certified copies or photocopies, and the authenticity of the originals
of such latter documents. In rendering the opinion set forth below, we also have
relied upon a certificate of an officer of the Company whom we believe is
responsible.
Based upon the foregoing and the additional qualifications set forth
below, it is our opinion that the 2,990,000 shares of Common Stock of the
Company which are being registered pursuant to the Registration Statement will,
when issued and delivered against payment therefor as contemplated by the
Registration Statement, be validly issued, fully paid and nonassessable.
<PAGE> 2
The opinion expressed herein does not extend to compliance with state
and federal securities laws relating to the sale of these securities.
We hereby consent to the reference to our firm in the Registration
Statement under the heading "Legal Matters" and to the filing of this opinion as
an exhibit to the Registration Statement. Such consent shall not be deemed to be
an admission that this firm is within the category of persons whose consent is
required under Section 7 of the Act or the regulations promulgated pursuant to
the Act.
This opinion is limited to the laws of the State of North Carolina, and
no opinion is expressed as to the laws of any other jurisdiction.
Our opinion is as of the date hereof, and we do not undertake to advise
you of matters that might come to our attention subsequent to the date hereof
which may affect our legal opinion expressed herein.
Sincerely yours,
/s/ SMITH, ANDERSON, BLOUNT, DORSETT,
MITCHELL & JERNIGAN, L.L.P.
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in this registration
statement on Form S-3 of our report dated July 22, 1998, on our audits of the
financial statements of Cree Research, Inc. and subsidiaries, which is included
herein and appears in Cree Research, Inc.'s Annual Report on Form 10-K for
the year ended June 27, 1999. We also consent to the references to our firm
under the captions "Selected Consolidated Financial Data" and "Experts."
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
December 30, 1999
<PAGE> 1
EXHIBIT 23.02
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
July 23, 1999, in the Registration Statement (Form S-3 No. 333-0000) and related
Prospectus of Cree Research, Inc., for the registration of 2,990,000 shares of
its common stock.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
December 30, 1999
