Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification Number)
4600 Silicon Drive, Durham, North Carolina 27703
(Address of principal executive offices)
(919) 313-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00125 par value
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates of the
registrant as of August 1, 2002 was approximately $1,019,706,031 (based on the
closing sale price of $14.49 per share).
The number of shares of the registrant's Common Stock, $0.00125 par value per
share, outstanding as of August 1, 2002 was 72,728,948.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held October 29, 2002
are incorporated by reference into Part III.
CREE, INC.
FORM 10-K
For the Fiscal Year Ended June 30, 2002
INDEX
Part I Page
----
Item 1. Business ............................................................................. 3
Item 2. Properties ........................................................................... 26
Item 3. Legal Proceedings .................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders .................................. 30
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................................................. 30
Item 6. Selected Financial Data .............................................................. 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................. 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................... 46
Item 8. Financial Statements and Supplementary Data .......................................... 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ................................................. 74
Part III
Item 10. Directors and Executive Officers of the Registrant ................................... 74
Item 11. Executive Compensation ............................................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................................................... 74
Item 13. Certain Relationships and Related Transactions ....................................... 74
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................... 75
SIGNATURES ......................................................................................... 77
-2-
PART I
Item 1. Business
INTRODUCTION
Cree, Inc., a North Carolina corporation, was established in 1987 to
commercialize semiconductor wafers and devices made from silicon carbide, or
SiC. Today, we are the world-leader in developing and manufacturing compound
semiconductor materials and electronic devices made from SiC and a leading
developer and manufacturer of optoelectronic and electronic devices made from
gallium nitride, or GaN, and related materials. We also produce RF power
transistor components and modules for wireless infrastructure applications using
silicon-based bipolar and laterally diffused metal oxide semiconductor, or
LDMOS, process technologies. We operate our business in two segments, the Cree
segment, which consists of our SiC-based products and research contracts, and
the Cree Microwave segment, which consists of RF transistors and RF transistor
modules based on a silicon platform.
SiC and GaN-based devices offer technical advantages over competitive products
made from silicon, gallium arsenide, or GaAs, sapphire and other materials for
certain electronic applications. We use our wide bandgap compound semiconductor
technology to make enabling products such as near ultra-violet (products with
wavelengths between 380 and 410 nanometers), or UV, blue and green light
emitting diodes, or LEDs. We sell our LEDs to customers who package them for use
in applications such as wireless handsets, backlighting for automotive
dashboards and other consumer products. Other applications for our LEDs include
indoor and outdoor full color displays, such as video boards in arenas and
stadiums, billboards and message signs. Our LEDs are also used in traffic
signals, indicator lights for consumer or industrial equipment and miniature
white lights used for illumination applications. We have developed several
generations of LED products, including our MegaBright(TM) and XBright(TM) LEDs
released during fiscal 2002. Based on our own measurements, we believe that our
XBright(TM) product family includes the highest brightness (which is defined as
the optical power output from a chip at 20 milliamps of drive current) UV, blue
and green LEDs commercially available. All of our SiC-based GaN UV, blue and
green LEDs offer benefits to our customers over competing products, which
include a vertical chip structure, improved resistance to electrostatic
discharge and small size. We also manufacture SiC material products, including
SiC wafers, which we sell for use in manufacturing LEDs and power devices and
for research directed to optoelectronics (which includes LEDs and laser diodes),
microwave and power devices, and bulk SiC material, which we sell for use in
gemstone applications. The remainder of our Cree segment revenue is derived from
sales of laser diodes and power diodes, and sales from industrial contracts and
government contracts for research work performed for the U.S. Government.
Our entry into the wireless infrastructure market as a component supplier
occurred with our acquisition in December 2000 of the UltraRF business of
Spectrian Corporation, or Spectrian. We renamed the UltraRF business Cree
Microwave during fiscal 2002. Cree Microwave operates its own wafer fabrication
facility that utilizes silicon substrates to create bipolar and LDMOS devices to
produce high-power, high performance radio frequency, or RF, power
semiconductors for use in wireless infrastructure equipment.
We have new product initiatives aimed at developing LEDs with higher luminous
efficiency to expand our existing family of optoelectronic devices. We believe
that if certain significant milestones are achieved, the LED chips currently in
development may enable our customers to produce white lamps designed to compete
in the lighting market. Some of our customers are already offering early
illumination products using our devices. We also have new product initiatives
for RF and microwave transistors using
-3-
SiC and GaN technology. We believe that these products may be useful in a
variety of applications, including power amplifiers for next generation wireless
infrastructure and solid state radar. In addition, we are developing and
sampling high power rectifiers for power conversion and switching uses, which we
believe will allow for more efficient use of energy in certain applications over
alternative silicon-based semiconductor solutions. We are working on the
development of a high-powered UV laser diode for use in next generation
high-density digital versatile disk, or DVD, and other optical storage
applications. At Cree Microwave, we are developing higher performance LDMOS
devices for next generation power amplifiers for base station infrastructure
applications.
BACKGROUND
Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon is the dominant semiconductor material because the technology has
evolved to the point where it can be grown into large, high quality single
crystals that are suitable for fabricating many 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 semiconductor devices. However, GaAs,
silicon and other commercially available semiconductor materials have physical
and electronic characteristics that limit their usefulness in certain
applications. For example, conventional silicon and GaAs-based semiconductors
have not demonstrated the ability to enable short wavelength (UV, blue or green)
LED or laser 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 certain commercial and military applications. With the
possibility of allowing higher power densities, SiC and GaN-based wireless
systems may use fewer transistors per base station with less complex circuitry,
which may result in a lower system cost. Furthermore, few silicon or GaAs
devices can operate effectively at temperatures above 400(degrees) Fahrenheit.
This is a significant limitation for applications such as advanced electronic
systems for high power electric motors and high frequency RF devices.
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. The
properties of SiC and GaN make them excellent materials for extending existing
semiconductor device technology where high power, high temperature or UV, blue
and green wavelengths are important for performance.
SiC AND GaN OVERVIEW
Wide bandgap semiconductors are an emerging class of semiconductors that enable
a variety of capabilities for solid state devices. Two of the most common wide
bandgap semiconductors are SiC and GaN. SiC is most commonly targeted for power
devices and RF devices, while GaN is generally targeted for optoelectronic
applications, as well as higher frequency microwave power devices. SiC makes an
excellent substrate for growing layers of GaN due to its material properties.
For GaN optoelectronic devices, conductive SiC substrates allow the fabrication
of vertical devices (a single contact on top and bottom), as opposed to the use
of insulating sapphire substrates where devices need both diode contacts placed
on the top of the die. This allows GaN-on-SiC LEDs to be smaller in size than
the two top contact devices made on sapphire. For high power GaN RF devices, the
high thermal conductivity of SiC allows for very efficient heat dissipation.
This is important for the high power densities generated in these devices.
SiC has many physical characteristics that make it difficult to produce. For
example, in a typical semiconductor manufacturing process, the semiconductor
material is grown as a single crystal and sliced
-4-
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) Fahrenheit to achieve our
desired crystal structure, it is difficult to grow large single crystals that
have a homogeneous 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.
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.
The characteristics discussed below distinguish SiC and GaN 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 and GaN are
classified as wide bandgap semiconductor materials, meaning that more energy is
required for ionization. Electronic devices made from these materials can
operate more efficiently and at much higher temperatures than devices made from
other common semiconductor materials. The wider energy bandgap also enables the
generation of shorter wavelength (UV, blue and green) light in optoelectronic
devices.
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 and GaN have much higher breakdown
electric fields than silicon or GaAs. This characteristic allows wide bandgap
devices to operate at much higher voltage levels. Additionally, it allows SiC
power devices to be significantly smaller while carrying the same or greater
power levels than comparable silicon and GaAs-based devices. This same advantage
holds true for SiC and GaN RF power devices.
HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This enables a SiC-based
device to operate at high power levels and still dissipate the excess heat
generated. It also enables efficient heat dissipation when used as a substrate
for GaN-based devices such as RF transistors.
HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC and GaN have "saturated electron
drift velocities" 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 and GaN-based microwave transistors that operate
at RF frequencies with significantly higher power density levels than current
silicon and GaAs-based devices.
ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. As a result, SiC can withstand much higher
electrical pulses and is more radiation-resistant than silicon or GaAs. SiC and
GaN are also extremely resistant to chemical breakdown and can operate in harsh
environments.
THE CREE SOLUTION
Some of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material a technical
challenge to produce. Through our 15 years of development and manufacturing
experience, we have succeeded in overcoming many of the difficulties involved in
processing SiC substrates for commercial use. We believe that our proprietary
process
-5-
techniques and the inherent attributes of both SiC and GaN give our products
significant advantages over competing products for certain electronic
applications. These advantages include:
UV, BLUE AND GREEN LIGHT EMISSION. We produce high efficiency UV, blue and green
LEDs using GaN and other nitrides grown on SiC substrates. Most other
manufacturers of nitride-based LEDs currently use sapphire substrates, other
than Osram Opto Semiconductors GmbH, a subsidiary of Osram GmbH, or Osram, which
has licensed the ability to manufacture SiC-based devices and buys SiC wafers
for use in their manufacturing process, from us. The conductive properties of
SiC enable us to fabricate a single top contact LED chip that is smaller than
the "two top contact" products made by competitors who use sapphire substrates.
Our chips made with SiC substrates can be packaged the same way as red, green
and amber LED chips made from other materials that are widely used in the LED
industry. We believe that the single top contact design of our chip affords our
customers flexibility for certain package types. We are also continuing
development of nitride-based UV laser diodes grown on SiC. The principal
advantages of SiC over sapphire substrate materials for UV laser diodes are the
high thermal conductivity attributes of the material and the ability for the
material to be easily 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. The majority of our
current production is on two-inch diameter (50 millimeter) material. We also
have released three-inch diameter (75 millimeter) wafers and demonstrated a
four-inch diameter (100 millimeter) prototype wafer.
HIGH POWER RF AND MICROWAVE OPERATION. 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. Similar advantages exist for microwave devices
made using GaN on SiC substrates, which can also operate at much higher
frequencies than SiC-only devices. In fiscal 2000 we first began shipping sample
quantities of SiC RF devices which have potential applications in wireless
infrastructure systems. We have continued development efforts directed to
improving the performance and reliability of our SiC RF devices which has
increased their attractiveness to wireless system manufacturers. As the
performance of silicon-based LDMOS products continued to improve, we determined
that near term wireless infrastructure power transistors were likely to be
manufactured with silicon-based products rather than our SiC-based devices. As a
result, we acquired the business now comprising Cree Microwave in December 2000
to participate in the RF power transistor market in the near term. We believe
our SiC transistors will likely be more desirable for broadband amplifiers that
can cover the entire DCS/PCS/UMTS frequency band of 1.8-2.2 gigahertz, or GHz.
Additional applications include wide bandwidth military radio and test and
instrumentation equipment. In addition, we continue to develop GaN-based devices
for high frequency wireless infrastructure and other commercial and defense
related applications. We are also pursuing the development of monolithic
microwave integrated circuit, or "MMIC", power amplifiers in both SiC and GaN
for a variety of military applications.
HIGH POWER, HIGH VOLTAGE OPERATION. We are producing small quantities of a
product family of SiC Schottky diodes that have a greater breakdown voltage than
Schottky diodes made from other semiconductor materials currently available. We
believe our Schottky diodes offer inherent system benefits beyond these
competitive products because of the significant reduction of reverse recovery
current at similar breakdown voltages. We believe that our SiC power diodes
operate with significantly lower switching losses than those made with silicon
or GaAs, for the same breakdown voltage. In
-6-
addition, we believe that our SiC power transistors under development operate
with lower resistive losses and lower switching losses than those made with
silicon or GaAs.
PRODUCTS
We operate our business in two segments, the Cree segment, which consists of our
SiC and GaN-based products, and the Cree Microwave segment, which consists of
silicon-based RF power transistor components and modules.
THE CREE SEGMENT:
UV, BLUE AND GREEN LEDs
LEDs are solid-state electronic components used in miniature packages in
everyday applications such as indicator lights on televisions, radios, 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 full-color electronic displays. In 1989 we introduced the first
commercially viable blue LED made using a SiC only design. Subsequently, we have
developed and released several generations of LED products, including UV, blue
and green LEDs made from GaN and related materials on SiC substrates. With the
initial release of our XBright(TM) LEDs in fiscal 2002, we believe we have
introduced the brightest commercially available UV, blue and green product
family of LEDs. Our customers are currently in the qualification stages of
packaging XBright(TM) chips and some have encountered challenges in qualifying
their packaging process. We target a ramp-up to commercial production levels
during the first half of fiscal 2003.
We will continue to work to improve the brightness of our UV, blue and green
chips to achieve higher performance than currently available. Over the next five
to ten years or perhaps longer, we believe these yet to be developed products
could be used to produce white lamps to compete with conventional lighting
products for certain applications. We believe that LEDs made using SiC
substrates offer important benefits over competitive devices using sapphire
substrates including:
- an industry standard vertical chip structure requiring a single wire
bond that permits more efficient LED assembly;
- a smaller area chip size; and
- higher performance in terms of brightness.
Presently, our LED chips are used for backlighting purposes in applications such
as wireless handsets and automotive dashboard lighting. They are also used in
white light products designed for specialty indoor illumination and for the
illumination of outdoor buildings and structures and in landscape lighting. In
addition, they are used in consumer products and office equipment as indicator
lighting, in full color video displays, such as arena replay screens, billboards
and moving message advertising and informational signs and as the green light in
traffic signals. Our standard brightness LED products, offered in blue
wavelengths only, are primarily used in indoor applications, automotive designs
or as indicator lights. Some customers manufacture solid-state LED components
that emit white light using our blue LEDs. Customers are also working to develop
white light components using our UV LEDs. By passing blue or UV LED light
through certain conversion materials such as phosphors, or by using blue in
combination with LEDs of other appropriate colors, white light emission can be
obtained from lamps made with blue or UV LEDs. We currently sell blue LED chips
to customers who produce packaged components that emit white light. Current
commercial applications of white LEDs using Cree's blue
-7-
LEDs include backlighting applications for automobile dashboards and
instrumentation, backlighting for wireless handsets and early general
illumination applications. During fiscal 2002, we received our QS 9000
registration, which signifies that our quality systems met a set of requirements
established by international auto manufacturers.
We believe that our products are well positioned to take advantage of recent
trends in the wireless handset market. Although the global market for wireless
handsets may be flat to declining due to a slow global economy, we believe our
share of this market could increase as a result of changes in backlighting
applications. Handset manufacturers recently have begun to use blue or white
backlighting in new models, rather than traditional yellow-green backlighting
that has been common during the last several years. We believe that our chips
meet the blue and or white lighting characteristics that the market is now
demanding. In addition, we believe that the development of full color displays
for mobile handsets will increase demand for white LEDs in order to maximize the
effectiveness of the full color display.
We are focusing current development efforts on further improving the efficiency
as well as lowering our cost to manufacture our LEDs and improving other
performance characteristics of the devices for certain markets, such as thinner
chips and lower forward voltages. Responding to a market trend towards devices
with a lower forward voltage, we undertook major development initiatives during
fiscal year 2002 as we trailed sapphire-based LEDs in this important area for
new high-volume cell phone applications. The current "two top contact"
sapphire-based devices have certain advantages compared to our single top
contact design in terms of lower forward voltage and thinner chips. We believe
that increased brightness will continue to be necessary to develop new
applications and market opportunities for LEDs, and may eventually lead to
products marketed for commercial lighting applications. LED products represented
58%, 65% and 63% of our revenue for the fiscal years ended June 30, 2002, June
24, 2001 and June 25, 2000, respectively.
MATERIALS PRODUCTS
We manufacture SiC wafers for sale to corporate customers that use the wafers in
manufacturing products for optoelectronic and power device applications.
Corporate, government and university programs also buy wafers for research and
development directed to optoelectronic, microwave and high power devices. Our
SiC wafer products may be sold as a bare wafer or customized by adding epitaxial
films of SiC or GaN materials, depending upon the nature of the customer's
needs. Since the company's inception in 1987, we have worked continuously to
improve the quality of our SiC wafers while also increasing wafer diameter. In
October 1999, we introduced our first three-inch wafer and we have recently
expanded our product line of three-inch wafers, which are better suited for the
manufacture of power devices. We currently sell wafers to Osram and Infineon
Technologies AG, or Infineon, for the production of LED and power products,
respectively.
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to color, hardness and brilliance. We manufacture
SiC crystals in near colorless form for use in gemstone applications. We sell
SiC in bulk crystal form to Charles & Colvard, or C&C; a company founded to
produce and market gemstone products made from SiC crystals. C&C cuts and facets
the SiC crystals to fabricate gemstones targeted at customers who desire
alternative colorless, affordable, high-quality jewelry. Sales of gemstone
crystals have re-emerged as a stronger product line in the second half of fiscal
2002, due to heavier demand from C&C. Future demand for this product is
dependent on C&C's ability to cut, facet and effectively market its gemstone
products. Our SiC wafer products are marketed through executive sales while
materials used for gemstone applications are exclusively sold to C&C. Wafer and
other material products represented 13%, 14% and 26% of our revenue for the
fiscal years ended June 30, 2002, June 24, 2001 and June 25, 2000, respectively.
-8-
POWER DEVICES
In fiscal 2002, we announced the commercial release of the first products in our
planned line of SiC-based power devices. Our initial products are 600-volt
Schottky diodes offered in limited quantities at 1, 4, 6 and 10 amp ratings.
During the first quarter of fiscal 2003, we have released a 20 amp device. We
are marketing these products to manufacturers of power conditioning and power
switching equipment as potential replacements for silicon-based power devices in
certain applications. SiC-based power devices have the potential to handle
significantly higher power densities than existing silicon-based devices and can
operate at significantly higher voltages with superior switching capabilities,
yielding power savings due to higher efficiency. Potential applications include
power factor correction and switch mode power supplies typically used in
telecommunications and computer servers, and heavy industrial uses. Other
applications include industrial motor controls, high frequency power supplies
and medical applications.
Revenue growth from these devices is dependent on the results of customer
evaluations of the Schottky diode device and whether the products are designed
into customer applications. We believe that revenue growth will be slow
initially because our technology is not a "drop in" replacement and is currently
much more expensive than silicon devices. In addition, with the slowdown of the
global economy, we believe many companies have reduced their research and
development budgets, which has impacted our growth. Finally, our Schottky
devices are a new technology, and it will take time to penetrate existing
markets. Power devices represented less than 1% of revenue for the fiscal years
ended June 30, 2002, June 24, 2001 and June 25, 2000.
RF AND MICROWAVE TRANSISTORS
During fiscal year 2002, we offered a new 10-watt transistor product made from
SiC to customers in prototype quantities. We believe that these products can be
used in a variety of power amplifier applications, including wireless
infrastructure, home-based subscriber units, digital broadcast and military
broadband radio applications. Revenue growth from sales of these devices is
dependent on the results of customer evaluations of SiC RF products, further
improvements in device performance, further expansion of our SiC RF product
family, and whether the products are designed into customer applications.
THE CREE MICROWAVE SEGMENT:
RF AND MICROWAVE TRANSISTORS
We believe that silicon bipolar and LDMOS technology is complementary to our SiC
and GaN-based microwave devices. Cree Microwave produces bipolar and LDMOS
devices made from silicon. These products enable us to provide an array of power
amplifier semiconductor devices designed to meet a broad spectrum of the
wireless infrastructure markets now and in the future. Cree Microwave offers
products for use in a range of systems. These systems include Advanced Mobile
Phone Services, or AMPS, Time Division Multiple Access, or TDMA, Code Division
Multiple Access, or CDMA, Global System for Mobile Communications, or GSM,
Universal Mobile Telephone Service, or UMTS and Enhanced Data Rates for GSM
Evolution, or EDGE systems. Cree Microwave is one of only a few major
manufacturers of LDMOS RF devices.
The market for cellular communications services has grown substantially during
the past decade due to decreasing prices for wireless handsets, increasing
competition among service providers and a greater availability of high quality
services. In recent quarters, the cellular communications market has been
-9-
declining due to the global economic slowdown, which has caused carriers to
reduce infrastructure spending. However, we believe that significant long-term
market opportunities exist.
A typical wireless communication system comprises a geographic region containing
a number of cells, each of which contains a base station. The cells are
networked to form a service provider's coverage area. Each base station houses
the equipment that sends telephone calls to and from the switching office of the
local wire line telephone company and transmits and receives calls to the
wireless users within the cell. Base stations may be configured as single
carrier or multi-carrier designs.
Digital systems, which convert voice transmission into bits of electronic
information, enable data transmission among other things. The four dominant
digital transmission modulation formats for cellular networks include GSM, TDMA,
CDMA and EDGE systems and operate in frequency ranges from 900 megahertz, or
MHz, to 2400 MHz. These systems have a call capacity of three to eight times
that of analog networks. The implementation of these digital networks has
resulted in increased demand for network infrastructure equipment. Cree
Microwave is able to produce both bipolar and LDMOS products that are used in
the manufacture of power amplifiers for both analog and digital base stations.
Cree Microwave produces the semiconductor content of a power amplifier, which is
used in a base station to boost the power of a signal so that it can reach a
wireless phone or other device within a designated geography.
During fiscal 2002, we developed an amplifier module that incorporates our
LDMOS-based transistors and is designed to simplify the design and assembly of
power amplifiers using the LDMOS products. We believe that this module product
can deliver a lower system cost to our customer due to less costly packaging, a
smaller design and relative ease of manufacture for our customer.
RF products represented 16% and 11% of our revenue for the fiscal years ended
June 30, 2002 and June 24, 2001, respectively. The Cree Microwave business
segment was acquired from Spectrian in December 2000. The majority of sales from
this segment were to Spectrian during fiscal 2002 and 2001. The loss of or a
decline in sales to this customer would have a material adverse effect on this
segment.
PRODUCTS UNDER DEVELOPMENT
THE CREE SEGMENT:
LEDs WITH HIGHER OUTPUT POWER
Cree Lighting, based in Goleta, California, is engaged in the development of new
LED device technology, with the goal of developing higher efficiency LEDs to
compete with incandescent and fluorescent lighting technology for conventional
lighting markets. During fiscal 2002, we more than doubled the typical
brightness of our LED products with the introduction of our XBright(TM) and
MegaBright(TM) products. In order to compete with incandescent and fluorescent
lighting technology for conventional lighting markets, the brightness of our
products will need to increase significantly over the brightness of our products
available today. We do not anticipate that our products can achieve the
necessary level of brightness in a cost competitive product over the next few
years; however, we believe we can achieve a greater level of brightness to
enable interim illumination applications, such as miniature incandescent
lighting replacements. One such interim step during fiscal 2002 was the
introduction of our XBright(TM) 900 Power Chip LED. At 900 x 900 microns nominal
gross die size, the XBright(TM) Power Chip is significantly larger than industry
standard (300 x 300 microns) LEDs and is the first large area version of our
XBright(TM) chip technology. These chips deliver more than 10 times the light
output at a higher current than our standard XBright(TM) chips and we believe
these high-power LEDs could help
-10-
enable a new range of lighting applications. These chips will require our
customers to develop new packages to support these higher-powered chips. The
targeted application for these devices is the solid state illumination market.
BLUE AND UV LASER DIODES
We continue to focus on the development of blue and UV laser diodes. SiC has
inherent attributes, including its natural cleavability and high thermal
conductivity that make it an excellent substrate material for the development of
such short wavelength laser diodes. The storage capacity of optical disk drives
can be increased significantly by utilizing a laser diode capable of emitting
shorter wavelength light. We have shipped sample UV laser diodes, fabricated
from nitride materials deposited on SiC substrates, which have a shorter
wavelength than that of the red or infrared lasers used in applications today.
We believe that the shorter wavelength of UV light could potentially result in
storage capacity for optical disk drives that is significantly greater than the
capacity permitted by red light. We also believe that UV laser technology may be
used in miniature optical devices for compact sized electronics, such as digital
cameras. We have demonstrated a prototype UV laser with 3 milliwatts of power
and a projected lifetime of 10,000 hours. We believe that this laser meets the
current power requirement of a "read" laser; however, additional development is
required to commercialize this product. We continue to work on developing a
"read/write" UV laser, which will require approximately 30 milliwatts of
continuous wave, or CW, power, and we are targeting our first product to be
released for customer sampling during fiscal 2003. A consortium of DVD
manufacturers is currently creating standards for blue and UV laser devices
named the Blu-Ray Disc format. Once these standards are completed, we believe
that the demand for diodes that meet the standards may increase.
POWER DEVICES
We are developing additional prototype high power devices that we believe have
many potential uses. Such devices could be employed in applications involving
power conditioning as well as power switching. We intend to release higher
voltage Schottky products within the next fiscal year, targeted for motor
control and snubber applications. In fiscal 1999, we entered into a three-year
project with Kansai Electric Power Company, one of the largest power companies
in the world, for the development of SiC-based devices for use in power
transmission networks. This project was completed during fiscal 2002. During
this project we demonstrated record results with a 6 kV MOSFET
(metal-oxide-semiconductor field effect transistor) and a 5.5 kV junction field
effect transistor that had on-resistances that were 1/25th and 1/65th lower,
respectively, of the theoretical limit for an equivalent silicon device.
Additionally, high voltage SiC PIN diodes were demonstrated with blocking
voltages up to 19 kV, a 50% increase over our previous record and almost double
what is commercially available in silicon. We continue to work on higher power
devices such as Schottky and PIN diodes as well as power switches. However, we
are not planning to release PIN diodes or power switches suitable for power
transmission in the near term.
RF AND MICROWAVE DEVICES
We are currently developing additional SiC-based transistors that operate at
radio and microwave frequencies. We believe these devices will have applications
in future generation wireless base stations, solid-state broadcast systems, wide
bandwidth military radio, and radar search and detection equipment. These
SiC-based devices are targeted for frequencies from 30 MHz to 4 GHz. We believe
that future SiC transistors in development, with higher power density than
current silicon and GaAs-based devices, may allow wireless systems to operate
across a wider band and use fewer transistors per base station, resulting in
less complex circuitry, higher linearity, better efficiency and lower cost.
-11-
We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher gain and/or higher frequency applications including
cellular base stations and solid-state radar systems. In December 2001, we
reported CW performance for GaN of 108 watts at 2 GHz, which we believe to be
the highest publicly reported CW power output for a single device at this
frequency. This demonstrates its potential for infrastructure applications. We
developed GaN MMICs that demonstrated 24 watts of power at 16 GHz. This power
level is higher than that achieved with equivalent 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.
THE CREE MICROWAVE SEGMENT:
RF AND MICROWAVE DEVICES
We continue to enhance the capabilities of our silicon-based LDMOS products and
are working towards the release of next generation devices that we believe will
allow for more linearity and increased power and be comparable to the best in
class products of our competitors. We are targeting these products to be
available in fiscal 2003. We are also continuing to develop additional module
devices to meet advanced needs of our customers. The module configuration allows
us to produce more of the circuit for the power transistor and the product is
more competitively priced than our regular LDMOS devices because the module
configuration features a lower cost package compared with the traditional
ceramic package used for discrete devices. We are targeting these products to be
produced in commercial volumes in fiscal 2003. Additionally we are working with
certain customers on advanced modulation products.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS OF CUSTOMERS AND
ASSETS
For financial information about business segments, please see Note 2, "Summary
of Significant Accounting Policies and Other Matters" to our consolidated
financial statements included in Item 8 of this report. For financial
information about the geographical areas of customers, please see Note 2,
"Summary of Significant Accounting Policies and Other Matters" to our
consolidated financial statements included in Item 8 of this report. All of our
long-lived assets are currently maintained in the United States.
GOVERNMENT CONTRACT FUNDING
We derive a portion of our revenue from funding from research contracts with the
U.S. Government. For the fiscal years ended June 30, 2002, June 24, 2001 and
June 25, 2000, government funding represented 12%, 10% and 11% of total revenue,
respectively. These contracts typically cover work performed over several months
up to three years. These contracts may be modified or terminated at the
convenience of the government. Therefore, these programs may be subject to
government budgetary fluctuations. The contracts generally provide that we may
elect to retain title to inventions made in the course of research, with the
government obtaining a nonexclusive license to practice such inventions for
government purposes.
RESEARCH AND DEVELOPMENT
We invest significant resources in research and development aimed at improving
our semiconductor materials and developing new device and production technology.
Our core SiC materials research is directed to improving the quality and
diameter of our SiC substrates. We are also working to improve the quality of
the SiC and nitride epitaxial materials we grow to produce devices and to
improve device
-12-
yields by reducing variability in our processes. These efforts are in addition
to on-going projects focused on brighter LEDs, higher power, higher linearity RF
and microwave devices, UV laser devices and higher power diodes and switches
discussed above.
We spent $51.2 million in fiscal 2002, $38.4 million in fiscal 2001 and $20.0
million in fiscal 2000 for direct expenditures relating to research and
development activities. Off-setting these expenditures were $19.5 million in
fiscal 2002, $19.0 million in fiscal 2001 and $12.7 million in fiscal 2000 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 $9.0 million
in fiscal 2002, $11.9 million in fiscal 2001 and $5.5 million in fiscal 2000
towards our product research and development activities.
SALES AND MARKETING
We actively market our LED, wafer and power products through targeted
promotions, telemarketing, select advertising and attendance at trade shows. We
have a small direct sales force and senior management actively works with
customers around the world. 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 LED packaging manufacturers. Additionally, the sales
team has been expanded in fiscal 2002 to include sales offices in Hong Kong and
Japan.
In June 2002, we opened an office in Tokyo, Japan, through our subsidiary Cree
Japan, Inc., to bring our technology and engineering support closer to the
Japanese customer base. In connection with the opening of our new office,
Sumitomo Corporation, or Sumitomo, was named as our strategic partner to
distribute our products in Japan. Sumitomo has exclusive distribution rights in
Japan for our nitride LED chip products and SiC wafer products for a minimum of
three years. Our personnel in Japan will work with and support the sales
activities of the Sumitomo team dedicated to our product line.
We also use sales representatives to market our LED products in Hong Kong,
China, Taiwan and South Korea. However, as a result of the introduction of many
new products during fiscal 2002, we perceived the need for more frequent
interaction with our customers. As a result, we opened a Southeast Asian sales
office in Kowloon, Hong Kong, through our subsidiary Cree Asia-Pacific, Inc., to
facilitate business transactions and act as the liaison between our Asia Pacific
customers and our U.S. corporate office. Territorial responsibilities for the
Cree-Asia Pacific sales office include Hong Kong, China, Taiwan and Malaysia. In
addition, the Hong Kong sales office oversees the day-to-day administration of
our sales agents in Hong Kong and Taiwan as well as assisting our direct
customers in the region.
We sell SiC crystal materials for use in gemstone applications directly to C&C
under an exclusive supply agreement. We are using both direct sales and sales
representative arrangements to market RF products for Cree Microwave, including
a new distributor agreement signed with Arrow Manufacturing in fiscal 2002.
CUSTOMERS
During fiscal 2002, revenues from four customers, Osram, Spectrian, Sumitomo
(which represents sales to several Japanese customers) and the U.S. Government,
each accounted for more than 10% of total revenue. During fiscal 2002, we signed
new supply agreements with Osram and Sumitomo, which extend into fiscal 2003.
Spectrian is a customer of the Cree Microwave segment. During fiscal 2001,
-13-
revenues from three customers, Osram, Sumitomo and Spectrian, each accounted for
more than 10% of total revenue. For the year ended June 25, 2000, revenue from
Osram, Sumitomo, C&C and the U.S. Government each accounted for more than 10% of
total revenue. For financial information about foreign and domestic sales,
please see Note 2, "Summary of Significant Accounting Policies and Other
Matters" to our consolidated financial statements included in Item 8 of this
report.
BACKLOG
As of June 30, 2002, we had a backlog believed to be firm of approximately
$138.7 million consisting of approximately $86.9 million of product orders and
$51.8 million under research contracts signed with the U.S. Government, for
which a portion of the contracted funds have not yet been appropriated. This
compares to a firm backlog as of June 24, 2001, of approximately $86.5 million
consisting of approximately $69.9 million of product orders and $16.6 million
under research contracts signed with the U.S. Government, a portion which had
not yet been funded through appropriations. Backlog could be adversely affected
if the U.S. Government exercises its rights to terminate the government
contracts or does not appropriate and allocate all of the funding contemplated
by the contracts. We believe the entire backlog could be filled during fiscal
2003, with the exception of approximately $9.7 million of product orders and
$23.9 million in U.S. Government funded contracts. The reported backlog amounts
include $16.2 million ordered from Spectrian under their supply agreement. If we
are not able to produce LDMOS 8 products that meet qualification specifications,
this amount of revenue may be reduced or may not be realized at all.
MANUFACTURING
Our SiC products are manufactured in a seven-part process, which include: SiC
crystal growth, wafer slicing, polishing, epitaxial deposition, fabrication,
testing and packaging. SiC crystals are grown using a high temperature process
designed to produce uniform crystals in a single crystalline form. Crystals used
for 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 epitaxial deposition processes, which require that we grow
thin layers of SiC, GaN or other materials 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,
power and RF chips are fabricated in a clean room environment. The final step
includes testing and sawing prior to shipment to the customer. Power chips are
then forwarded to a third party where they are assembled into industry standard
packages and returned to us prior to shipment to our customers. SiC RF
transistors are currently packaged and tested in our Durham, North Carolina
facility. However, we believe that this process will be transferred to the Cree
Microwave facility in Sunnyvale, California during fiscal 2003. 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.
Cree Microwave produces both silicon LDMOS and silicon bipolar junction
transistor, or BJT, structures at its wafer fabrication facility in Sunnyvale,
California. Both product families use silicon wafers that are acquired from
third parties and the devices are fabricated in a clean room environment. The
clean room steps employ multiple stages of photolithography, diffusion, thin
film metal deposition and both wet and dry etch process in the manufacturing
cycle. Finished wafers are electrically tested and may be shipped to customers
at this point. Transistor die from wafers, which continue in the manufacturing
process, are assembled into thermally conductive packages or modules and tested
prior to shipment to customers.
-14-
SOURCES OF RAW MATERIALS
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in our products, including certain key materials and
equipment used in our crystal growth, wafering, polishing, epitaxial deposition,
device fabrication and device assembly processes. We generally purchase these
limited source items pursuant to purchase orders and have limited 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 substantial foreign competition.
We believe that our Cree segment currently enjoys a favorable position in the
existing markets for SiC-based products and materials. We also believe that our
Cree Microwave segment can become competitive in the market for silicon-based
LDMOS devices if it succeeds in qualifying its most recently introduced LDMOS
devices for volume production. 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.
Our primary competition for our optoelectronic products comes from companies
that manufacture and or sell nitride based LED chips. We consider Nichia
Corporation, or Nichia, Toyoda Gosei Co. Ltd., or Toyoda, and Lumileds Lighting
LLC, a joint venture between Agilent Technologies and Philips Lighting to be our
primary competitors. These companies currently market LED products made using
nitride materials on sapphire substrates, and Nichia markets short wavelength
nitride-based laser diodes. In addition, American Xtal Technology, Epistar,
Arima, UEC and other Asian based companies in recent years have begun production
of UV, blue and green LEDs, all on sapphire substrates. We attempt to closely
monitor the progress of Taiwanese competitors. We believe that these new
competitors have had some success in securing new business over the last few
quarters and could potentially become significant competitors in the future.
Historically, some of our existing competitors have been more successful in the
market for outdoor display applications because, prior to the release of our
MegaBright(TM) and XBright(TM) products, some sapphire devices were brighter
than our LEDs. We believe our new MegaBright(TM) and XBright(TM) devices will
enable us to compete successfully in this market.
We believe our approach to manufacturing UV; blue and green LEDs using SiC
substrates enables us to offer a cost-effective chip design. Our customers'
desired product attributes for nitride based LEDs are generally price and the
brightness of the devices for the intended applications. At times other factors
such as size or forward voltage of the device are also competitive factors.
Osram, which licensed certain LED technology from us in 1995, is currently
producing LEDs using nitride materials on SiC substrates. Shin-Etsu Handotai Co.
Ltd. also licensed certain LED technology from us in 1996 but never began
commercial production under this license.
The market for SiC wafers also is becoming more competitive, as other companies
in recent years have begun to offer SiC wafer products or announced plans to do
so, including Sterling Semiconductors, II-VI, Sixon and other small
manufacturers. To our knowledge, none of these competitors are currently
-15-
offering SiC wafers for use in device production, as their materials are
generally not considered to have production level quality. Our power devices,
which are currently available in limited quantities, compete with similar
devices offered by Infineon.
The markets served by Cree Microwave's LDMOS and bipolar products are
competitive. Motorola Incorporated, or Motorola, Infineon, which recently
acquired LDMOS capabilities from Telefonaktiebolaget LM Ericsson, and Royal
Philips Electronic NV, or Phillips, currently manufacture competing products.
Currently, we believe Motorola dominates the marketplace with over 80% market
share due to superior performance and pricing. Cree Microwave is targeting to
release a new line of improved LDMOS products during the first quarter of fiscal
2003 that is intended to be comparable with the performance of Motorola parts at
a competitive price.
PATENTS AND PROPRIETARY RIGHTS
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 June 30, 2002, we owned or held exclusive
rights licensed under a total of 133 issued U.S. patents, subject in some cases
to nonexclusive license rights held by third parties. These patents expire
between 2007 and 2020. Two of these patents are jointly owned with a third
party. Twenty-six of these patents relate primarily to our Cree Microwave
segment. In addition, we own or hold exclusive license rights under
corresponding patents and patent applications in various foreign countries.
Among the patent licenses we hold are exclusive licenses granted by North
Carolina State University, or NCSU, to U.S. and corresponding foreign patents
and patent applications that relate to SiC materials and device technology and
to GaN growth technology. These licenses include rights under patents and patent
applications relating to processes for growing single crystal SiC and low defect
GaN materials. The licenses are worldwide, exclusive licenses to manufacture,
use and sell products and processes covered by the claims of patents issued on
applications filed by NCSU relating to the licensed inventions. The U.S.
Government holds a non-exclusive license to practice certain of the inventions
for government purposes. The licenses relating to the growth of bulk single
crystal SiC and to other SiC materials and device technology are fully-paid,
while the licenses relating to growth of low defect GaN materials require us to
pay NCSU royalties on sales of products made using the licensed processes.
The patents we have licensed from NCSU relating to bulk SiC growth expire
beginning in 2007, and we may face increased competition in the market for SiC
materials as these patents expire. In addition, in the event our licenses to the
U.S. patents owned by NCSU relating to SiC growth were to be terminated under
the terms of our license agreement, we could potentially be enjoined from
practicing the patented process. In that event the business of our entire Cree
segment could be disrupted since the segment is critically dependent on our
ability to manufacture bulk single crystal SiC material. Similarly, if our
license to the patents relating to growth of low defect GaN materials were to be
terminated, it could have a material adverse effect on our ability to produce
GaN-based laser diodes or other products manufactured using the patented
process.
We have also entered into license agreements with the licensing agencies of
other universities, and with other companies, under which we have obtained
exclusive or non-exclusive rights to practice inventions claimed in various
patents and applications issued or pending in the U.S. and other foreign
countries. We do not believe the financial obligations under these agreements,
or the loss of the licensed rights under any of these agreements, would have a
material adverse effect on our business, financial condition or
-16-
results of operation. One of these license agreements includes license rights
granted to our Cree Lighting subsidiary by the Trustees of Boston University, or
Boston University, under certain U.S. patents and corresponding foreign patents
and patent applications which relate to the manufacture of certain GaN-based
structures on sapphire and other substrates. The license agreement with Boston
University grants Cree Lighting an exclusive, worldwide royalty-bearing license
under these patents and patent applications, subject to royalty payments and
other obligations under the license agreement. As described in Item 3 "Legal
Proceedings", at page 27, at June 30, 2002, Cree Lighting and Boston University
are parties to pending litigation in which they have alleged that Nichia and its
subsidiary, Nichia America Corporation, are infringing one of the licensed
patents. Termination of the license to this patent would end Cree Lighting's
right to assert the patent against future infringements.
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 trademarks and copyright where appropriate. We have
registered "Cree" and the Cree logo as a trademark for certain products in the
U.S. We have also applied for registration of several trademarks for our
products in the U.S. and other countries.
Because of rapid technological developments in the semiconductor industry, the
intellectual property position of any semiconductor materials or device
manufacturer, including Cree is subject to uncertainties and may involve complex
legal and factual issues. 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. 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.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. As of June 30, 2002, we were
parties to complex intellectual property litigation in the United States and
Japan with one of our competitors in the LED business, as described in Item 3
"Legal Proceedings", at page 27. We may become parties to other litigation in
the future to enforce our intellectual property rights or to defend against
claims of infringement. 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. We from time to time receive correspondence
asserting that our products or processes are or may be infringing patents or
other intellectual property rights of others. Our practice is to investigate
such claims to determine whether the assertions have merit and, if so, we take
appropriate steps to seek to obtain a license or to avoid the infringement.
However, we cannot predict whether past or future assertions of infringement may
result in litigation or the extent to which such assertions may require us to
seek a license under the rights asserted or whether a license would be available
or available on acceptable terms. Likewise, we cannot predict the occurrence of
future assertions of infringement that may prevent us from selling products,
result in litigation or require us to pay damage awards.
-17-
ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state and local provisions
enacted or adopted regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. These include statutory
and regulatory provisions under which we are responsible for the management of
hazardous materials we use and the disposition of hazardous wastes resulting
from our manufacturing processes. Failure to comply with such provisions,
whether intentional or inadvertent, could result in fines and other liabilities
to the government or third parties, injunctions requiring us to suspend or
curtail operations or other remedies, and could have a material adverse effect
on our business.
EMPLOYEES
As of June 30, 2002, we employed 893 people, including 678 in manufacturing
operations, 146 in research and development, and 69 in sales and general
administration. None of our employees are represented by a labor union or
subject to collective bargaining agreements.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
Described below are various risks and uncertainties that may affect our
business. These risks and uncertainties 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 affect our business. If any of the
risks described below actually occurs, our business, financial condition or
results of future operations could be materially and adversely affected.
Our operating results and margins may fluctuate significantly.
Although we experienced significant revenue and earnings growth in past years,
we may not be able to sustain such growth or maintain our margins, and we may
experience significant fluctuations in our revenue, earnings and margins in the
future. For example, historically, the prices of our LEDs have declined based on
market trends. We have attempted to maintain our margins by constantly
developing improved or new products, which command higher prices or lower the
cost of LEDs. If we are unable to do so, our margins will decline. Our operating
results and margins may vary significantly in the future due to many factors,
including the following:
- our ability to develop, manufacture and deliver products in a timely
and cost-effective manner;
- variations in the amount of usable product produced during
manufacturing (our "yield");
- our ability to improve yields and reduce costs in order to allow lower
product pricing without margin reductions;
- our ability to ramp up production for our new LED products;
- our ability to produce higher brightness and more efficient LED
products that satisfy customer design requirements;
- our ability to develop new products that have specifications which
meet the evolving needs of our customers, including smaller and
thinner chips with lower forward voltage;
- our ability to complete customer product qualifications for our LDMOS
8 products and ramp up production of those products;
- changes in demand for our products and our customers' products;
- changes in competitive landscape such as high volume and low pricing
from Asian competitors;
-18-
- declining average sales prices for our products;
- changes in the mix of products we sell;
- changes in manufacturing capacity and variations in the utilization of
that capacity; and
- damage to our manufacturing facility resulting from fire, flood, or
otherwise as we only have one site for SiC production.
These or other factors could adversely affect our future operating results and
margins. If our future operating results or margins are below the expectations
of stock market analysts or our investors, our stock price may decline.
If we experience poor production yields, our margins could decline and our
operating results may suffer.
Our SiC material products and our LED, power and RF device products are
manufactured using technologies that are highly complex. We manufacture our SiC
wafer products from bulk SiC crystals, and we use these SiC wafers to
manufacture our LED products and our SiC-based RF and power semiconductors. Our
Cree Microwave subsidiary manufactures its RF semiconductors on silicon wafers
purchased from others. During our manufacturing process, each wafer is processed
to contain numerous "die," which are the individual semiconductor devices, and
the RF power devices are further processed by incorporating them into a package
for sale as a packaged component. The number of usable crystals, wafers, die and
packaged components that result from our production processes can fluctuate as a
result of many factors, including but not limited to the following:
- impurities in the materials used;
- contamination of the manufacturing environment;
- equipment failure, power outages or variations in the manufacturing
process;
- losses from broken wafers or human errors; and
- defects in packaging.
We refer to the proportion of usable product produced at each manufacturing step
relative to the gross number that could be constructed from the materials used
as our manufacturing "yield." Since many of our manufacturing costs are fixed,
if our yields decrease, our margins could decline and our operating results
would be adversely affected. In the past, we have experienced difficulties in
achieving acceptable yields on new products, which has adversely affected our
operating results. We may experience similar problems in the future and we
cannot predict when they may occur or their severity. In some instances, we may
offer products for future delivery at prices based on planned yield
improvements. Reduced yields or failure to achieve planned yield improvements
could significantly affect our future margins and operating results.
Our business and our ability to produce our products may be impaired by claims
we infringe intellectual property of others.
Vigorous protection and pursuit of intellectual property rights characterize the
semiconductor industry. These traits have resulted in significant and often
protracted and expensive litigation. Litigation to determine the validity of
patents or claims by third parties of infringement of patents or other
intellectual property rights could result in significant expense and divert the
efforts of our technical personnel and management, even if the litigation
results in a determination favorable to us. In the event of an adverse result in
such litigation, we could be required to:
-19-
- pay substantial damages;
- indemnify our customers;
- stop the manufacture, use and sale of products found to be infringing;
- discontinue the use of processes found to be infringing;
- expend significant resources to develop non-infringing products and
processes; and/or
- obtain a license to use third party technology.
Where we consider it necessary or desirable, we may seek licenses under patents
or other intellectual property rights. However, we cannot be certain that
licenses will be available or that we would find the terms of licenses offered
acceptable or commercially reasonable. Failure to obtain a necessary license
could cause us to incur substantial liabilities and costs and to suspend the
manufacture of products. In addition, if adverse results in litigation made it
necessary for us to seek a license or to develop non-infringing products or
processes, there is no assurance we would be successful in developing such
products or processes or in negotiating licenses upon reasonable terms or at
all. Our results of operations, financial condition and business could be harmed
if such problems were not resolved in a timely manner.
Our distributor in Japan is presently a party to patent litigation in Japan
brought by Nichia, in which the plaintiff claims that certain of our LED
products infringe Japanese patents it owns. The complaints in the proceedings
seek injunctive relief that would prohibit our distributor from further sales of
these products in Japan. The district court ruled in our favor in both lawsuits,
but Nichia has appealed these rulings. An adverse result in either of these
cases would impair our ability to sell the particular LED products at issue in
Japan and could cause customers not to purchase other LED products from us in
Japan and elsewhere. Subject to contractual limitations, we have an obligation
to defend and indemnify our distributor for patent infringement claims.
We have also initiated patent infringement litigation in the United States
District Court for the Eastern District of North Carolina against Nichia and one
of its subsidiaries, asserting patent infringement with respect to certain
Nichia nitride-based semiconductor products, including laser diode products.
Nichia has responded with counterclaims alleging, among other things, patent
infringement claims against us based on four U.S. patents directed to nitride
semiconductor technology. In addition, Nichia alleges trade secret
misappropriation and related claims against Cree Lighting and a former Nichia
researcher who is now employed by Cree Lighting on a part-time basis and Cree.
The court has directed that the claims against Cree Lighting be transferred to
the United States District Court for the Central District of California. The
court has orally granted our motion for summary judgment in which we requested
dismissal of Nichia's trade secret and related claims against Cree. An adverse
result under Nichia's patent infringement counterclaims, which remain in the
case, may impair our ability to sell our LED and laser diode products and could
include a substantial damage award against us.
We also have been named as a defendant to a counterclaim of Nichia in a lawsuit
pending in the U.S. District Court for the Eastern District of Pennsylvania. The
complaint in the underlying action, which was brought by Rohm Co., Ltd., or Rohm
against Nichia Corporation and Nichia America Corporation, alleges that Nichia
is infringing certain U.S. patents owned by Rohm. Nichia's counterclaim alleges
that Rohm and we violated antitrust laws by conspiring to exclude Nichia from
the U.S. market for high brightness LEDs. The counterclaim seeks actual and
treble damages, attorneys' fees and court costs. We have moved to dismiss the
counterclaim for lack of personal jurisdiction.
-20-
Our Cree Lighting subsidiary has also initiated litigation, now pending in the
United States District Court for the Eastern District of North Carolina against
Nichia and one of its subsidiaries asserting patent infringement with respect to
gallium nitride-based semiconductor technology useful in manufacturing certain
LEDs and laser diode devices. The lawsuit seeks damages and an injunction
against infringement.
We believe the claims asserted against our products in the Japanese cases and
the claims asserted against us in the U.S. cases are without merit, and we
intend to vigorously defend against the charges. However, we cannot be certain
that we will be successful, and litigation may require us to spend a substantial
amount of time and money and could distract management from our day-to-day
operations. Litigation costs to date in these cases have been substantial, and
variability in these costs could adversely affect our financial results. If any
of these cases were decided against us, the result would have a material adverse
effect on our operations and financial condition.
There are limitations on our ability to protect our intellectual property.
Our intellectual property position is based in part on patents owned by us and
patents exclusively licensed to us by NCSU, Boston University and others. The
licensed patents include patents relating to the SiC crystal growth process that
is central to our SiC materials and device business. 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. However, we cannot be
sure that patents will be issued on such applications or that our existing or
future patents will not be successfully contested by third parties. Also, since
issuance of a valid patent does not prevent other companies from using
alternative, non-infringing technology, we cannot be sure that any of our
patents (or patents issued to others and licensed to us) will provide
significant commercial protection.
In addition to patent protection, we also rely on trade secrets and other
non-patented proprietary information relating to our product development and
manufacturing activities. We try to protect this information through appropriate
efforts to maintain its secrecy, including requiring employees and third parties
to sign confidentiality agreements. We cannot be sure that these efforts will be
successful or that the confidentiality agreements will not be breached. We also
can not be sure that we would have adequate remedies for any breach of such
agreements or other misappropriation of our trade secrets, or that our trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
Where necessary, we may initiate litigation to enforce our patent or other
intellectual property rights, but there is no assurance that we will be
successful in any such litigation. Moreover, litigation may require us to spend
a substantial amount of time and money and could distract management from our
day-to-day operations.
If we are unable to produce adequate quantities of our MegaBright(TM) and
XBright(TM) LED products and improve our yields, our operating results may
suffer.
We believe that achieving higher volume production and lower production costs
for our MegaBright(TM) and XBright(TM) LED products will be important to our
future operating results. We must reduce costs of these products to avoid margin
reductions from the lower selling prices we may offer due to our competitive
environment and/or to satisfy prior contractual commitments. Achieving greater
volumes and lower costs requires improved production yields for these products.
We recently redesigned our XBright(TM) LED product to address certain
difficulties in packaging the devices identified by some customers following the
introduction of the product, and we are planning to manufacture the redesigned
products in
-21-
volume. We may encounter manufacturing difficulties as we ramp up our capacity
to make these products. Our failure to produce adequate quantities and improve
the yields of these products could have a material adverse effect on our
business, results of operations and financial condition. In addition, our
customers may encounter difficulties with their manufacturing processes using
our XBright(TM) devices, which could increase product returns and impact
customer demand, each of which would have a material adverse effect on our
business, results of operations and financial condition.
Our operating results are substantially dependent on the development of new
products based on our core SiC technology.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner, and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development and introduction
of new products. Products currently under development include larger high
quality substrates and epitaxy, high power RF and microwave devices, power
devices, blue laser diodes and higher brightness LED products. The successful
development and introduction of these products depends on a number of factors,
including the following:
- achievement of technology breakthroughs required to make commercially
viable devices;
- the accuracy of our predictions of market requirements and evolving
standards;
- acceptance of our new product designs;
- the availability of qualified development personnel;
- our timely completion of product designs and development;
- our ability to develop repeatable processes to manufacture new
products in sufficient quantities for commercial sales;
- our customers' ability to develop applications incorporating our
products; and
- acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.
We face risks of reduced revenue under our contract with Spectrian if we cannot
complete product qualification on a timely basis or ramp up production of our
LDMOS 8 products.
Revenues of our Cree Microwave segment are dependent on our amended Supply
Agreement with Spectrian. If we are unable to complete the full product
qualification process and ramp up production of our recently released LDMOS 8
products adequately, Spectrian may reduce the amount it purchases during the
applicable quarter under the agreement, subject to the satisfaction of certain
conditions. Consequently, our results of operations could be adversely affected
by further delays in qualifying our LDMOS 8 products. In addition, if we are
unable to supply other products that meet or exceed the specifications of
certain competitive parts designated by Spectrian, Spectrian may purchase those
products from other vendors. In that case, the purchased quantities will be
deducted from the minimum quantities required to be purchased from us under the
Supply Agreement. The resulting reduction in revenue could have an adverse
effect on our results of operations.
-22-
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. For example, for fiscal 2002 our top five
customers (excluding government contracts and including Sumitomo, which
represents several Japanese customers) accounted for 64% of our total revenue.
Accordingly, our future operating results depend on the success of our largest
customers and on our success in selling large quantities of our products to
them. The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may limit or stop purchasing our
products and our operating results will suffer. If we lose a large customer and
fail to add new customers to replace lost revenue, our operating results may not
recover.
When customers provide only limited advance notice of firm orders, our business
and results of operations may be adversely affected by changes in customer
demand.
We sell to our largest LED customer based on a rolling forecast of which only a
limited period reflects firm orders. Any change in this customer's demand or
forecast could have a material adverse impact on our business as the timing and
quantities of our production may not match demand or our overall demand may
decline. For example, we may be left with additional inventory on hand or we may
not have sufficient capacity to satisfy all of our contractual commitments,
which could have adverse consequences under our existing contracts.
Recently, we have experienced a trend towards smaller customers gaining design
wins from our larger customers for finished products incorporating our LEDs.
While in the short term, this trend may lead to increased sales to smaller
customers and an increase in the portion of our revenue that they represent, the
long term effects of this trend are uncertain. In addition, smaller customers
typically do not commit up front to purchase a specified volume over a long
period of time, which reduces our ability to predict and maintain a steady
stream of orders and revenue as sales to smaller customers increase as a
percentage of revenue.
The markets in which we operate are highly competitive.
The markets for our LED, laser and RF and microwave power semiconductor products
are highly competitive. New firms have begun offering UV, blue and green LEDs.
In the RF power semiconductor field, the products manufactured by Cree Microwave
compete with products offered by substantially larger competitors which have
dominated the market to date based on product quality and pricing. The market
for SiC wafers is also becoming competitive as other firms have in recent years
begun offering SiC wafer products or announced plans to do so. We also expect
significant competition for products we are currently developing, such as those
for use in microwave communications and power switching.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Or
competitors could invent disruptive technology that may make our products
obsolete. Any of these developments could have an adverse effect on our
business, results of operations and financial condition.
We face significant challenges managing our growth.
We have experienced a period of significant growth that has challenged our
management and other resources. We have grown from 248 employees on June 28,
1998 to 893 employees on June 30, 2002 and from revenues of $44.0 million for
the fiscal year ended June 28, 1998 to $155.4 million for the fiscal year ended
June 30, 2002. To manage our growth effectively, we must continue to:
-23-
- implement and improve operating systems, which are effective and
efficient;
- maintain adequate manufacturing facilities and equipment to meet
customer demand;
- improve the skills and capabilities of our current management team;
- add experienced senior level managers; and
- attract and retain qualified people with experience in engineering,
design and technical marketing 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.
Performance of our investments in other companies could negatively affect our
financial condition.
From time to time, we have made investments in public and private companies that
engage in complementary businesses. Should the value of these investments
decline, the related write-down in value could have a material adverse effect on
our financial condition as reflected in our balance sheets. In addition, if the
decline in value is determined to be "other than temporary", the related
write-down could have a material adverse effect on our reported net income. For
example, in the fourth quarter of fiscal 2002 we recorded a non-operating charge
of $30.1 million (pre-tax) relating to the declines in the value of equity
investments determined to be "other than temporary" as a result of continued
depressed market conditions. Each of these investments is subject to the risks
inherent in the business of the company in which we have invested and to trends
affecting the equity markets as a whole. Our private company investments are
subject to additional risks relating to the limitations on transferability of
our interests due to the lack of a public market and to other transfer
restrictions. Our public company investments are subject to market risks and
also can be subject to contractual limitations on transferability. As a result,
we may not be able to reduce the size of our positions or liquidate our
investments when we deem appropriate to limit our downside risk.
Our operating results could be adversely affected if we encounter difficulty
transitioning production to a larger wafer size.
We are in the process of gradually shifting production of some products from
two-inch wafers, to two and one quarter and 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 two and one quarter and 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.
We rely on a few key suppliers.
-24-
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our products, including key materials and
equipment used in critical stages of our manufacturing processes. We generally
purchase these limited source items with purchase orders, and we have no
guaranteed supply arrangements with such suppliers. If we were to lose such key
suppliers, our manufacturing operations could be interrupted or hampered
significantly.
If government agencies or other customers discontinue or curtail their funding
for our research and development programs our business may suffer.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. Government contracts are
subject to the risk that the government agency may not appropriate and allocate
all funding contemplated by the contract. In addition, our government contracts
generally permit the contracting authority to terminate the contracts for the
convenience of the government, and the full value of the contracts would not be
realized if they are prematurely terminated. If government and customer funding
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.
If our products fail to perform or meet customer requirements, we could incur
significant additional costs.
The manufacture of our products involves highly complex processes. Our customers
specify quality, performance and reliability standards that we must meet. If our
products do not meet these standards, we may be required to replace or rework
the products. In some cases our products may contain undetected defects or flaws
that only become evident after shipment. We have experienced product quality,
performance or reliability problems from time to time. Defects or failures may
occur in the future. If failures or defects occur, we could:
- lose revenue;
- incur increased costs, such as warranty expense and costs associated
with customer support;
- experience delays, cancellations or rescheduling of orders for our
products;
- experience increased product returns;
- write-down existing inventory; or
- experience product returns.
We are subject to risks from international sales.
Sales to customers located outside the U.S. accounted for about 65%, 69% and 69%
of our revenue in fiscal 2002, 2001 and 2000, respectively. We expect that
revenue from international sales will continue to be a significant part of our
total revenue. International sales are subject to a variety of risks, including
risks arising from currency fluctuations, trading restrictions, tariffs, trade
barriers and taxes. Also, U.S. Government export controls could restrict or
prohibit the exportation of products with defense applications. Because all of
our foreign sales are denominated in U.S. dollars, our products become less
price competitive in countries with currencies that are low or are declining in
value against the U.S. dollar. Also, if we experience substantial changes in the
U.S. dollar currency exchange as compared to the Japanese yen, our sales
opportunities may be reduced as our primary competitors may offer more favorable
pricing. 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.
-25-
If we fail to integrate acquisitions successfully, our business will be harmed.
We completed two strategic acquisitions during calendar year 2000. We will
continue to evaluate strategic opportunities available to us, and we may pursue
other product, technology or business acquisitions. Such acquisitions can
present many types of risks, including the following:
- we may fail to successfully integrate the operations and personnel of
newly acquired companies with our existing business;
- we may experience difficulties integrating our financial and operating
systems;
- our ongoing business may be disrupted or receive insufficient
management attention;
- we may not cost-effectively and rapidly incorporate acquired
technology;
- we may not be able to recognize cost savings or other financial
benefits we anticipated;
- acquired businesses may fail to meet our performance expectations;
- we may lose key employees of acquired businesses;
- we may not be able to retain the existing customers of newly acquired
operations;
- our corporate culture may clash with that of the acquired businesses;
and
- we may incur undiscovered liabilities associated with acquired
businesses that are not covered by indemnification we may obtain from
the seller.
We may not successfully address these risks or other problems that arise from
our recent or future acquisitions. In addition, in connection with future
acquisitions, we may issue equity securities that could dilute the percentage
ownership of our existing shareholders, we may incur debt and we may be required
to amortize expenses related to intangible assets that may negatively affect our
results or operations.
We depend on design trends in mobile phones to drive a large percentage of LED
demand.
Our results of operations could be adversely affected by reduced customer demand
for LED products for use in wireless handsets. We derive a significant portion
of our LED product revenue from sales to customers who use our LED products in
wireless handsets, and customer demand is dependent upon trends in the wireless
market. We believe the growth for the global market for wireless handsets has
slowed and may be declining. As a result, our ability to maintain or increase
our LED product revenue depends on the number of models into which customers
design our products. Also, design cycles in the handset industry are short, and
demand is volatile, which makes production planning difficult to forecast.
Item 2. Properties
We own our facilities in Durham, North Carolina where the business for our Cree
segment is conducted. In November 1997, we acquired our present manufacturing
facility, a 30-acre industrial site in Durham, North Carolina, which originally
consisted of a 139,000 square foot production building and 33,000 square feet of
service and warehouse buildings. In fiscal 2000 and fiscal 2002, we completed
two expansions that increased the size of these facilities by 42,000 square feet
and 147,000 square feet, respectively. During fiscal 1999 we purchased
approximately 80 acres of undeveloped land near our production facilities for
potential expansion purposes. We have installed a small electrical substation on
this site for use in transmitting power to our production facilities but have
not otherwise developed the
-26-
land. During fiscal 2000, we purchased a 120,000 square foot building on 17.5
acres of land near our existing production site. We subsequently upfitted
approximately two-thirds of the building for use as meeting rooms and
administrative offices and as an employee services center.
We lease a separate building in Durham, North Carolina that was recently used by
our Cree segment for production of SiC-based RF and microwave devices and
related research and development. We have relocated these operations to our main
production site and no longer use the space. This lease expires in September
2002 and will not be renewed.
We lease through our Cree Japan subsidiary, a sales and marketing office in
Tokyo, Japan that is used to support our Japan distributor's sales of Cree
segment products. This three-year lease agreement expires in June 2005. We also
contract, through our Cree Asia-Pacific subsidiary, office space in Kowloon,
Hong Kong that is used in our Cree segment to provide sales and marketing
support in Southeast Asia. The agreement for use of this space expires in
February 2003 unless renewed by the parties.
The Cree Microwave facility is approximately 49,600 square feet of
administrative and manufacturing space located in Sunnyvale, California. We
sublease the premises from Spectrian through our Cree Microwave subsidiary,
which entered into the sublease agreement with Spectrian in December 2000 in
connection with our acquisition of the Cree Microwave business. Spectrian leased
the facility from its landlord in November 1996 for a 15-year term under lease
terms that included three options to extend the lease for up to an additional
fifteen years. Under the sublease between Cree Microwave and Spectrian, if
Spectrian exercises its option to extend the term of its master lease with its
landlord, Cree Microwave may also exercise an option to extend the sublease. We
have guaranteed the obligations of our subsidiary under the sublease.
Cree Lighting leases two facilities in Goleta, California for our Cree segment.
One facility, which covers 35,840 square feet, has a five-year lease that was
signed in August 2000 with an option to extend the lease for another five-year
period. This facility is used for research and development and administration.
Cree has guaranteed the obligations of its subsidiary under this lease. Cree
Lighting has sub-leased 10,217 square feet of this facility to a third party.
This two-year sub-lease agreement was entered into in October 2000 and was
terminated in July 2002. A new two-year sub-lease for 10,217 square feet with a
new tenant was entered into in July 2002 and will expire in July 2004. Cree
Lighting also leases an additional facility on a month to month basis that is
used for research and development. We have given notice to terminate this lease
in August 2002.
Item 3. Legal Proceedings
Foreign Legal Proceedings
Nichia Corporation v. Sumitomo Corporation: In December 1999, one of our
distributors, Sumitomo, was named in a lawsuit filed by Nichia in Japan in the
Tokyo District Court. The complaint in the proceeding was directed to our
standard brightness LED products and alleged that these products infringe a
Japanese patent owned by Nichia, Japanese Patent No. 2,918,139. The suit sought
a permanent injunction against further distribution of the products in Japan. We
intervened in the proceeding and filed a response denying the allegations of
infringement. In May 2001 the Tokyo District Court ruled in favor of Cree and
Sumitomo, finding no infringement, and dismissed the complaint. Nichia has
appealed the ruling to the Tokyo High Court.
In April 2000, Nichia commenced two additional lawsuits against Sumitomo in
Tokyo District Court in which it alleged that our high brightness LED products
infringe a second Japanese patent owned by
-27-
Nichia, Japanese Patent No. 2,778,405. The suits sought preliminary and
permanent injunctions against further distribution of the products in Japan. We
intervened in the proceeding and filed responses denying the allegations of
infringement. In October 2001, following an adverse ruling in a separate case on
the validity of the patent, Nichia dismissed the complaint seeking a preliminary
injunction, leaving the complaint for a permanent injunction pending. In
December 2001 the Tokyo District Court ruled in favor of Cree and Sumitomo in
the remaining lawsuit, finding no infringement, and dismissed the complaint.
Nichia has appealed the ruling to the Tokyo High Court.
Rohm Co., Ltd. v Nichia Corporation: In July 2001, Rohm Co., Ltd., or Rohm,
filed a complaint against Nichia in the Tokyo District Court. Rohm seeks a
ruling that sales of its products that incorporate our standard brightness LED
products do not infringe the patent that was the subject of Nichia's December
1999 lawsuit, Japanese Patent No. 2,918,139. We intervened in this proceeding in
December 2001 to assist in showing that our standard brightness LED products do
not infringe the patent. The case remains pending before the district court.
Domestic Legal Proceedings
North Carolina State University and Cree, Inc. v. Nichia Corporation and others:
On September 22, 2000, NCSU and Cree commenced a patent infringement lawsuit
against Nichia and its subsidiary, Nichia America Corporation, or Nichia
America, in the U.S. District Court for the Eastern District of North Carolina.
The complaint seeks enforcement of a patent, U.S. Patent No. 6,051,849, relating
to GaN-based semiconductors manufactured using lateral epitaxial overgrowth
technology, which permits the growth of high quality GaN-based materials useful
in manufacturing certain laser diodes and other devices. The patent was issued
to NCSU in April 2000 and is licensed to Cree on an exclusive basis under an
agreement executed in June 1999.
In their answer to the complaint, Nichia and Nichia America denied infringement
and asserted a counterclaim seeking a declaratory judgment that the subject
patent is invalid and not infringed. Nichia further alleged in its counterclaim
that we are infringing four of its U.S. patents relating to nitride
semiconductor technology, U.S. Patent Nos. 5,306,662; 5,578,839; 5,747,832; and
5,767,581. Nichia also asserted misappropriation of trade secrets and related
claims against Cree and a former Nichia researcher now employed by one of our
subsidiaries, Cree Lighting, on a part-time basis. In addition, as subsequently
amended, Nichia's counterclaim named Cree Lighting as a counterclaim defendant
on trade secret and related claims and asserted claims under the Computer Fraud
and Abuse Act against the Cree Lighting employee.
We have replied to the patent infringement claims of Nichia's amended
counterclaim, denying any infringement and asserting a claim seeking a
declaratory judgement that the four Nichia patents at issue are invalid,
unenforceable and not infringed. The Cree Lighting employee and we have also
replied to the trade secret and related claims in the amended counterclaim,
denying any liability. We included with our reply a claim for damages in which
we have alleged that Nichia's actions in bringing the counterclaim for patent
infringement were not taken for any legitimate purpose and constitute unfair
competition in violation of North Carolina law.
In response to Nichia's amended counterclaim, the Cree Lighting employee named
as a counterclaim co-defendant also moved to dismiss the claims against him
under the Computer Fraud and Abuse Act. The court granted the motion in April
2002 and dismissed the claims, finding that Nichia had failed to state
claims upon which relief could be granted. Cree Lighting also moved to dismiss,
or in the alternative to transfer, Nichia's claims against it for lack of proper
venue. In March 2002 the court found that it lacked
-28-
venue over the claims Nichia had asserted against Cree Lighting and directed
that the claims be transferred to the U.S. District Court for the Central
District of California.
In December 2000 Nichia America filed a motion for summary judgement seeking
dismissal of the patent infringement claims Cree and NCSU have asserted. In
support of the motion Nichia argued that the relevant claims of the patent, U.S.
Patent No. 6,051,849, which relate to certain lateral epitaxial overgrowth
technology, were invalid as a matter of law on grounds of indefiniteness. The
North Carolina district court denied the motion April 2002, and the claims NCSU
and we asserted under this patent remain pending.
In January 2002, Cree and the Cree Lighting employee named as a counterclaim
co-defendant moved for summary judgment dismissing Nichia's trade secret
misappropriation and related claims. The motion sought dismissal on the ground
that Nichia had failed to specify any trade secrets that would support the
claims. At a hearing in July 2002, the North Carolina district court orally
informed counsel that the court was granting the motion. Although a written
order confirming the ruling has not yet been entered, we understand that the
trade secret misappropriated claims against Cree and the Cree Lighting employee,
and at least some of the related non-patent claims, have been or will be
dismissed upon entry of a written order confirming the court's oral ruling.
Also in January 2002, Nichia moved to strike certain of our defenses to its
patent infringement claims and to preclude us from obtaining or using any
evidence concerning those defenses. Nichia alleged in support of the motion that
the defenses were based upon information improperly disclosed by the Cree
Lighting employee and counterclaim co-defendant. Nichia filed an amended motion
to strike in May 2002 in which it sought the same relief. At a hearing in July
2002, the court advised counsel orally that the motion to strike was denied. As
a result our patent infringement defenses Nichia challenged remain available to
us to prove in future proceedings in the case.
Although there can be no assurances of success, we believe the counterclaims
asserted in the North Carolina case are without merit and we intend to defend
against them vigorously.
Trustees of Boston University and Cree Lighting Company v. Nichia Corporation
and others: On May 3, 2001, Boston University and Cree Lighting commenced a
patent infringement lawsuit against Nichia and Nichia America in the U.S.
District Court for the Northern District of California. The defendants moved to
transfer the case to the U.S. District Court for the Eastern District of North
Carolina, and the case was transferred to the North Carolina district court in
October 2001.
In their complaint Boston University and Cree Lighting allege that Nichia and
Nichia America infringe a patent, U.S. Patent No. 5,686,738, relating to
GaN-based semiconductor technology useful in manufacturing certain LED and other
semiconductor devices. The patent was issued to Boston University in 1997 and is
licensed to Cree Lighting under a March 2001 agreement. In the complaint, Cree
Lighting and Boston University allege that the defendants are infringing the
patent by, among other things, importing, selling and offering for sale in the
United States certain GaN-based light emitting devices covered by one or more
claims of the patent. The complaint seeks damages and an injunction against
infringement.
Rohm Co. Ltd, v. Nichia Corporation and others: In November 2001, we were served
with pleadings in which Cree was named as a defendant to a counterclaim of
Nichia and Nichia America in a lawsuit pending in the U.S. District Court for
the Eastern District of Pennsylvania. The complaint in the underlying action,
which was brought by Rohm against Nichia and Nichia America, alleges that Nichia
is infringing certain U.S. patents owned by Rohm. Nichia's counterclaim, as
amended in December 2001,
-29-
names both Rohm and us as counterclaim defendants and alleges that we violated
antitrust laws by conspiring with Rohm to exclude Nichia from the U.S. market
for high brightness LEDs. The counterclaim seeks actual and treble damages,
attorneys' fees and court costs. We have moved to dismiss the counterclaim for
lack of personal jurisdiction. Rohm has separately moved to dismiss certain
counts of the counterclaims, including those asserted against us, for failure to
state a claim on which relief can be granted. Both motions remain pending.
Although there can be no assurances of success, we believe the claims asserted
in the Pennsylvania case are without merit and we intend to defend against them
vigorously.
Other Litigation: We are also a party to certain other pending litigation
arising in the normal course of business. While we cannot predict the final
outcome of such litigation with certainty, we believe, based on consultation
with legal counsel, that the outcome of such other matters would not materially
affect our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters
Common Stock Market Information. Our common stock is traded in the Nasdaq
National Market and is quoted under the symbol "CREE". The following table sets
forth, for the quarters indicated the high and low sales prices as reported by
Nasdaq. Quotations represent interdealer prices without an adjustment for retail
markups, markdowns or commissions and may not represent actual transactions.
FY 2002 FY 2001*
------- --------
High Low High Low
---- --- ---- ---
First Quarter $ 27.500 $ 14.090 $ 81.719 $ 42.375
Second Quarter 29.730 13.761 64.125 27.750
Third Quarter 33.320 12.400 40.500 14.870
Fourth Quarter 14.340 10.350 36.650 12.210
*As adjusted for the two-for-one split effective on December 1, 2000.
Holders and Dividends. There were approximately 718 holders of record of our
common stock as of August 1, 2002.
We have never 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, but applicable
-30-
state law may limit the payment of dividends. Our present policy is to retain
earnings, if any, to provide funds for the operation and expansion of our
business. There were no sales of unregistered securities during fiscal 2002.
Equity Compensation Plan information will be provided under Item 12.
-31-
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 30, 2002, June 24, 2001 and June 25, 2000 and the
consolidated balance sheet data at June 30, 2002 and June 24, 2001 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the years ended June 27, 1999 and June 28, 1998 and the
consolidated balance sheet data at June 25, 2000, June 27, 1999 and June 28,
1998 are derived from audited consolidated financial statements not included
herein. All consolidated statement of operations and consolidated balance sheet
data shown below are adjusted to reflect the acquisition of Nitres, now known as
Cree Lighting, effective May 1, 2000. This transaction was accounted for under
the "pooling of interests" method. We acquired the business comprising the Cree
Microwave segment in December 2000. This transaction was accounted for under the
purchase method. All share amounts have been restated to reflect our two-for-one
stock splits effective July 26, 1999 and December 1, 2000.
Selected Consolidated Financial Data
(In thousands, except per share data)
Years Ended
----------------------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Statement of Operations Data:
Product revenue, net $ 136,230 $159,533 $ 96,742 $ 53,424 $ 34,891
Contract revenue, net 19,204 17,694 11,820 8,977 9,071
------- ------- ------- ------ ------
Total revenue 155,434 177,227 108,562 62,401 43,962
Net (loss) income ($101,723) $ 27,843 $ 30,520 $ 12,448 $ 6,243
Net (loss) income per share, basic ($ 1.40) $ 0.39 $ 0.46 $ 0.21 $ 0.11
Net (loss) income per share, diluted ($ 1.40) $ 0.37 $ 0.43 $ 0.20 $ 0.11
Weighted average shares outstanding:
Basic 72,718 72,243 65,930 58,030 55,452
Diluted 72,718 75,735 70,434 60,864 57,974
As of
----------------------------------------------------------------------
June 30, June 24, June 25, June 27, June 28,
2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
Balance Sheet Data:
Working capital $151,851 $244,178 $265,957 $ 59,889 $28,265
Total assets 504,195 615,123 486,202 145,933 74,379
Long-term obligations -- -- -- 4,650 11,046
Shareholders' equity 482,104 589,097 463,142 131,003 55,905
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins, and anticipated expense levels, as well as other statements, including
words such as "may," "will," "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business, economic
and other risks and uncertainties, both known and unknown, and our actual
results of operations may differ materially from those contained in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Certain
Business Risks and Uncertainties" in Item 1 of this report, as well as other
risks and uncertainties referenced in this report.
Business Overview
We are the world leaders in developing and manufacturing compound semiconductor
materials and electronic devices made from SiC and a leading developer and
manufacturer of optoelectronic and electronic devices made from GaN and related
materials on SiC substrates. We derive the largest portion of our revenue from
the sale of near ultra-violet, or UV, blue and green light emitting diodes or
LEDs. We currently offer LEDs at three brightness levels:
- XBright(TM)UV, blue and green products;
- mid-brightness UV, blue and green products, which include
MegaBr