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Proc-Type: 2001,MIC-CLEAR
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ACCESSION NUMBER: 0000895419-00-000012
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20000625
FILED AS OF DATE: 20000810
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CREE INC
CENTRAL INDEX KEY: 0000895419
STANDARD INDUSTRIAL CLASSIFICATION: [3674
] IRS NUMBER: 561572719
STATE OF INCORPORATION: NC
FISCAL YEAR END: 0627
</COMPANY-DATA>
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-21154
FILM NUMBER: 691814
</FILING-VALUES>
BUSINESS ADDRESS:
STREET 1: 4600 SILICON DR
CITY: DURHAM
STATE: NC
ZIP: 27703
BUSINESS PHONE: 9193615709
</BUSINESS-ADDRESS>
MAIL ADDRESS:
STREET 1: 4600 SILICON DR
STREET 2: STE 176
CITY: DURHAM
STATE: NC
ZIP: 27703
</MAIL-ADDRESS>
FORMER COMPANY:
FORMER CONFORMED NAME: CREE RESEARCH INC /NC/
DATE OF NAME CHANGE: 19940224
</FORMER-COMPANY>
</FILER>
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<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
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 25, 2000
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-21154 56-1572719
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction Identification Number)
of incorporation)
4600 Silicon Drive, Durham, North Carolina 27703
(Address of principal executive offices)
(919) 313-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0025 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of August 4, 2000 was approximately $3,368,572,950 (based on the
closing sale price of $102 per share).
The number of shares of the registrant's Common Stock, $0.0025 par value per
share, outstanding as of August 4, 2000 was 35,351,133.
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 31, 2000
are incorporated by reference into Part III.
<PAGE>
CREE, INC.
FORM 10-K
For the Fiscal Year Ended June 25, 2000
INDEX
Part I Page
Item 1. Business............................................................3
Item 2. Properties.........................................................20
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................20
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................21
Item 6. Selected Financial Data............................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........30
Item 8. Financial Statements and Supplementary Data........................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...............................53
Part III
Item 10. Directors and Executive Officers of the Registrant.................54
Item 11. Executive Compensation.............................................54
Item 12. Security Ownership of Certain Beneficial Owners and
Management.........................................................54
Item 13. Certain Relationships and Related Transactions.....................54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....55
SIGNATURES...................................................................57
<PAGE>
PART I
Item 1. Business
INTRODUCTION
- ------------
Cree, Inc., a North Carolina corporation, was established in 1987 to
commercialize silicon carbide, or SiC, semiconductor wafers and devices. Today,
we are the world leader in developing and manufacturing compound semiconductor
materials and electronic devices made from SiC. SiC-based devices offer
significant advantages over competing products made from silicon, gallium
arsenide, sapphire and other materials for certain electronic applications. We
use our compound semiconductor technology to make enabling products such as blue
and green light emitting diodes, or LEDs. We sell our LEDs to customers who
package them for use in applications such as backlighting for automotive
dashboards and automotive interior lighting, wireless handsets and other
consumer products. Other applications for our LEDs include indoor and outdoor
full color displays, such as video boards in indoor arenas and outdoor stadiums
or billboards and message signs. Our LEDs are also used in traffic signals,
indicator lights for consumer or industrial equipment and miniature white
lights. We have developed several generations of LED products, including high
performance LEDs with increased brightness over our previous diodes and small
chip products, which consume less power. Our SiC-based blue and green LEDs offer
benefits to our customers over competing products, including an industry
standard chip structure, improved resistance to electrostatic discharge, small
size and low unit price. We also manufacture SiC materials products, including
SiC wafers, that we sell for use in manufacturing and for research directed to
optoelectronics, microwave and power applications, and SiC crystals used in the
production of unique gemstones.
We have new product initiatives for RF and microwave transistors and recently
began shipping limited quantities of these devices. We believe that these
products may prove useful in a variety of applications, including power
amplifiers for wireless infrastructure, home-based multi-channel multi-point
subscriber units, digital broadcast applications and solid state radar. We also
have new product initiatives aimed at developing high power devices for power
conversion and switching uses and blue laser diodes for use in high-density
digital versatile disk, or DVD, players and other optical storage applications.
We are also developing LEDs with a higher luminous efficiency to expand our
existing family of devices. We believe if certain significant milestones are
achieved these LED chip products currently in development may enable our
customers to produce white lamps that could compete in the conventional lighting
market.
BACKGROUND
- ----------
Most semiconductor devices are fabricated on wafers made from silicon crystals.
Silicon evolved as the dominant semiconductor material because it is relatively
easy to grow into large, single crystals and is suitable for fabricating many
electronic devices. Alternative materials, such as gallium arsenide, or GaAs,
have emerged to enable the fabrication of new devices with characteristics that
could not be obtained using silicon, including certain RF, microwave, LED, laser
and other solid state devices. However, GaAs, silicon and other commercially
available semiconductor materials have certain physical and electronic
characteristics that limit their usefulness in certain applications. For
example, silicon and GaAs-based semiconductors have not demonstrated the ability
to fabricate short wavelength optoelectronic devices. In addition, the power
handling capabilities of silicon and GaAs-based microwave transistors can limit
the power and performance of microwave systems used in many
-3-
<PAGE>
commercial and military applications. SiC can deliver five times the power per
single device than silicon or GaAs based devices, therefore, SiC 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, jet engines and satellites.
Substantial research and development efforts have been undertaken to explore the
properties of other potential semiconductor materials. These efforts have
identified few candidate materials that are capable of being grown as low defect
single crystals, a requirement in the production of most semiconductors. SiC
also possesses physical and electronic properties that meaningfully increase
device performance over products fabricated from semiconductor materials in
general use. Of the few potential candidates, the properties of SiC make it an
excellent material for extending existing semiconductor device technology where
high power, high temperature or short wavelengths are important for performance.
SiC OVERVIEW
- ------------
SiC has many physical characteristics that make it difficult to produce. For
example, in a typical semiconductor manufacturing process, the semiconductor
material is grown in single crystal form and sliced into wafers. The wafers are
then polished and chemically etched, coated with thin crystalline films
containing controlled levels of impurities and fabricated into devices. Because
SiC can form many different atomic arrangements and must be grown at process
temperatures above 3,500 degrees Fahrenheit, it is difficult to grow large
single crystals that are homogeneous in structure. In addition, the high
temperatures required to grow SiC make the control of impurity levels in SiC
crystals and thin films difficult. "Micropipes," or small diameter holes, may
appear in the crystals during 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 also 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 from conventional silicon and GaAs-based semiconductor materials, resulting
in significant advantages if production hurdles can be overcome:
WIDE ENERGY BANDGAP. Bandgap is the amount of energy required to ionize an
electron from the valence band to the conduction band. SiC is classified as a
"wide bandgap" semiconductor material, meaning that more energy is required for
ionization. Electronic devices made from this material can operate more
efficiently and at much higher temperatures than devices made from other common
semiconductor materials.
HIGH BREAKDOWN ELECTRIC FIELD. The "breakdown electric field" is the amount of
voltage per unit distance that a material can withstand and still effectively
operate as a semiconductor device. SiC has a much higher breakdown electric
field than silicon or GaAs. This characteristic allows SiC devices to operate at
much higher voltage levels. Additionally, it allows SiC power devices to be
significantly smaller while carrying the same as or greater power levels than
comparable silicon and GaAs-based devices.
HIGH THERMAL CONDUCTIVITY. SiC is an excellent thermal conductor compared to
other commercially available semiconductor materials. This feature enables
SiC-based devices to operate at high power levels and still dissipate the excess
heat generated.
-4-
<PAGE>
HIGH SATURATED ELECTRON DRIFT VELOCITY. SiC has a "saturated electron drift
velocity" higher than that of silicon or GaAs. The saturated electron drift
velocity is the maximum speed at which electrons can travel through a material.
This characteristic, combined with a high breakdown electric field, allows the
fabrication of SiC-based microwave transistors that operate at significantly
higher power levels than current silicon and GaAs-based devices.
ROBUST MATERIAL. SiC has an extremely high melting point and is one of the
hardest known materials in the world. As a result, SiC can withstand much higher
electrical pulses and is much more radiation-resistant than silicon or GaAs. SiC
is also extremely resistant to chemical breakdown and can operate in harsh
environments.
GEMOLOGICAL APPEAL. In the gemstone industry, SiC is known as moissanite. Its
high refractive index and dispersion give it "diamond-like" sparkle or fire. In
addition, its hardness allows superior faceting and wear resistance compared to
many gemstone materials.
THE CREE SOLUTION
- -----------------
Some of the same physical characteristics that make SiC an excellent material
for certain semiconductor applications also make the material very difficult to
produce. Through our 13 years of development and manufacturing experience, we
have succeeded in overcoming many of the difficulties involved in processing SiC
for commercial use. We introduced our first product in October 1989 and believe
we are currently the leading volume producer of SiC wafers and SiC-based blue
and green LED products in the world. We believe that our proprietary process
techniques and the inherent attributes of SiC give our products significant
advantages over competing products for certain electronic and gemological
applications. These advantages include:
BLUE AND GREEN LIGHT EMISSION. We produce high efficiency blue and green LEDs
using gallium nitride, or GaN, a wide bandgap material, and other nitrides grown
on SiC substrates. Other manufacturers of nitride-based LEDs currently use
sapphire substrates. The conductive properties of SiC enable us to fabricate a
simpler, industry standard sized LED chip that is smaller than LEDs grown on
competing sapphire substrates. We believe the industry standard size of our chip
affords our customers more flexibility in gaining design wins and our smaller
chip size enables our product to be offered for a lower cost per chip in
comparison to sapphire-based products currently available. We are also
developing LEDs with higher luminous efficiency that may allow our products to
better compete with the brightness offered from sapphire-based products.
Sapphire-based products currently offer a higher brightness than our existing
LED products. We are also working to develop highly efficient near-ultraviolet
LED chips that may eventually be used by our customers to produce white lamps
that can compete with conventional lighting products for certain applications.
We have also demonstrated in the laboratory and are continuing development of
nitride-based blue laser diodes grown on SiC. The principal advantages of SiC
over other substrate materials for blue laser diodes are its high electrical and
thermal conductivity and its ability to be cleaved, providing an excellent
surface for laser light emission.
ENABLING SUBSTRATE PROPERTIES. The inherent attributes of SiC as a substrate
enable researchers to work on developing new optoelectronic, microwave and power
devices that offer significant advantages over competing products and which
could not be produced as effectively on other substrate materials. We
manufacture SiC wafers for both internal use and for sale to external
development programs to further new product development. We also sell some
wafers to Osram OS for the production of LED products. In October 1999, we
introduced a larger three-inch wafer to production for research purposes and
demonstrated a four-inch prototype wafer.
-5-
<PAGE>
GEMSTONE MATERIAL PROPERTIES. We manufacture SiC crystals that are used to
produce moissanite gemstones. The combination of SiC's optical properties (high
refractive index and dispersion) and robust material properties give these
gemstones both diamond-like sparkle or fire and hardness characteristics. We
continue to develop larger and higher quality SiC crystals for this application.
HIGH POWER RF AND MICROWAVE OPERATIONS. We have demonstrated SiC RF and
microwave transistors that can operate at much higher voltages than silicon or
GaAs because of SiC's high breakdown electric field, allowing much higher power
operation at high frequencies. We believe our higher power SiC devices will
enable the design and manufacture of SiC-based RF and microwave transmitters
with less circuit complexity and higher total output power. These same
advantages exist for microwave devices made using GaN on SiC substrates, which
can also operate at much higher frequencies than SiC-only devices. We recently
began shipping limited quantities of SiC RF devices that can be used in wireless
infrastructure applications such as cellular base station transmission systems.
We believe that SiC devices offer certain advantages for RF and microwave
applications in comparison to silicon and GaAs devices, including using fewer
devices for a similar range of frequency, superior linearity for digitally
modulated carrier applications which results in less distortion to the signal,
superior efficiency, and the ability to operate at higher temperatures. We are
continuing development of additional RF and microwave devices for use in
wireless infrastructure and other commercial and defense-related applications.
HIGH POWER, HIGH VOLTAGE OPERATION. We are developing SiC power diodes and
switches that are able to operate at higher power densities than currently used
semiconductor materials because of the much higher breakdown electric field of
SiC. In addition, we believe that our SiC power devices will be able to operate
with lower resistive losses and lower switching losses than those made with
silicon or GaAs.
PRODUCTS
- --------
All of our current products are based on our SiC technology. The following chart
illustrates our existing products and existing and potential applications of
these products by our customers and their end users:
PRODUCT EXISTING AND POTENTIAL USER APPLICATIONS
------- ----------------------------------------
Blue and green LEDs o Backlighting in applications such as automotive
dashboards and interior lighting, wireless hand-
sets and other lighting applications
o Large indoor full color displays, such as arena
video screens
o Large outdoor full color displays
o White light products to replace miniature incan-
descent bulbs, such as those used in automobile
map lights and other lighting applications
o Traffic signals
o Indicator lights used for consumer, office and
other equipment
Wafer Products o Manufacture of LEDs
o Research and development for new semiconductor
devices
-6-
<PAGE>
SiC crystals o Gemstones
RF transistors and o Power amplifier systems for wireless infra-
amplifiers structure, such as base stations, wireless local
loop and multi-channel, multi-point distribution
system base station and subscriber sites
o Digital broadcast systems
o Solid-state radar systems
o Military communications systems
BLUE AND GREEN LEDs
LEDs are solid-state chips used in miniature lamps in everyday applications such
as indicator lights on printers, computers and other equipment. LEDs generally
offer substantial advantages over small incandescent bulbs, including longer
life, lower maintenance cost and energy consumption, and smaller space
requirements. Groups of LEDs can make up single or multicolor electronic
displays. Since the introduction of our first blue SiC-only LED product in 1989,
we have developed several generations of LED products, including blue and green
LEDs using nitride materials on SiC substrates, a more robust conductive buffer
chip that is easier to build into lamps, higher brightness products and a small
size low power consumption diode. All of these products have a lower unit price
than competing products. We believe that LEDs made from SiC substrates offer
important benefits over those made from the sapphire substrates presently used
by our competitors, including:
o an industry standard vertical chip structure requiring a single wire bond
that permits faster LED assembly and reduced cost;
o a small chip size;
o improved resistance to electrostatic discharge, or ESD, which reduces the
cost, engineering effort and time to qualify LEDs at customer production
sites; and
o a lower-priced outdoor-capable product.
Presently, our LED chips are used for backlighting purposes in applications such
as automotive dashboards, interior automotive lighting, and liquid crystal
display or LCD, including wireless handsets and other consumer products. In
addition, they are used in office equipment indicator lighting, full color video
display technology, such as arena video boards, billboards and moving message
advertising and informational signs. Our standard brightness LED products,
offered in blue wavelengths only, are primarily used in indoor applications. In
September 1998, we introduced brighter, higher-priced blue and green LEDs that
offer a lower cost alternative to competing products made on sapphire
substrates. These products increased brightness up to 300% over our standard LED
products. These higher brightness parts are used by our customers to produce
packaged components marketed for backlighting applications requiring low power
consumption, such as LCDs for wireless handsets and consumer products, and in
traffic signals and outdoor full-color display applications where brightness is
critical.
We also offer a product line within our blue LED products that our customers use
in manufacturing solid-state LED components that emit white light. By passing
blue or near ultraviolet LED output through certain conversion materials such as
phosphors or polymers, blue light may be converted into white light. We
currently sell blue LED chips to customers who produce packaged components that
emit white light. Commercial products incorporating our chips for white light
conversion include backlighting applications for automobile dashboards and
instrumentation and LCD backlighting for
-7-
<PAGE>
wireless handsets. Other applications for white light LEDs include miniature
incandescent lighting, such as map lights, automobile trunk lights and small
flashlights.
In June 2000, we announced the introduction of a new smaller chip that is
available at standard and high brightness levels in blue and in high brightness
levels for green. This product costs less and uses 50% less power than our
larger sized chips. We are targeting this product to the low cost handset
market.
We are focusing current development efforts on further improving the brightness
of our high brightness LEDs. We believe that increased brightness is necessary
to effectively compete against LEDs fabricated on sapphire substrates, which are
presently brighter than our high brightness products, and may eventually lead to
products marketed for commercial lighting applications. LED products represented
63%, 49%, and 43% of our revenue for the fiscal years ended June 25, 2000, June
27, 1999, and June 28, 1998, respectively.
MATERIALS PRODUCTS
We manufacture SiC wafers for sale to corporate, government and university
programs that use SiC as the basis for research in optoelectronic, microwave and
high power devices. Each order may be sold as a bare wafer or customized by
adding epitaxial films, depending upon the nature of the customer's development
program. For the past several years, we have worked to improve the quality of
our wafers while increasing their size. In October 1999, we released a low-cost
two-inch wafer targeted as an alternative to sapphire substrates used by many
researchers in the optoelectronics field. In the same month, we introduced our
first three-inch wafer for sale to the research community.
Single crystalline SiC has characteristics that are similar to diamond,
including properties relating to hardness and brilliance. Through a proprietary
process, we manufacture SiC crystals in near colorless form for use in gemstone
applications. We sell SiC crystals directly to Charles & Colvard, or C&C, a
company founded to develop gemstone products from SiC crystals. C&C cuts and
facets the SiC crystals to fabricate diamond-like gemstones targeted at
customers who desire affordable high quality jewelry. In December 1999, C&C
announced lower sales revenue and higher inventory levels than anticipated as
well as the initiation of a new marketing campaign for its gemstone products. As
a result, we anticipate that sales to C&C will continue to decline as a
percentage of our business in fiscal 2001. Future demand also is dependent on
C&C's ability to cut, facet and effectively market its gemstone products. Wafer
and other material products represented 26%, 37% and 31% of our revenue for the
fiscal years ended June 25, 2000, June 27, 1999, and June 28, 1998,
respectively.
RF AND MICROWAVE TRANSISTORS
In June 1999, we announced the first of a planned line of SiC-based RF and
microwave transistor products. Samples of this product were shipped throughout
fiscal 2000. In June 2000, the first 10-watt transistor products were released
to production and became available to customers in limited quantities. These
products include a complete, self-biased broadband power amplifier covering 100
megahertz to 1 gigahertz as well as pre-matched transistors for broadband
wireless access bands up to 3.7 gigahertz. We believe that these products can be
used in a variety of power amplifier applications, including wireless
infrastructure, home-based subscriber units, cable TV and digital broadcast
applications. At this time we are shipping only limited quantities of these
products. Revenue growth from sales of these devices is dependent on the results
of customer evaluations of the first SiC RF products and whether the products
are designed into customer applications.
-8-
<PAGE>
PRODUCTS UNDER DEVELOPMENT
- --------------------------
The following chart illustrates the potential user applications for each area of
current product development:
PRODUCT CATEGORY POTENTIAL USER APPLICATIONS
---------------- ---------------------------
RF and microwave devices o Power amplifier systems for wireless
applications, such as base stations,
wireless local loop and multi-channel,
multi-point distribution system base
station and subscriber sites
o Amplifiers for CATV
o Digital broadcast systems
o Solid-state radar systems
Power devices o Industrial motor controls
o Electric vehicles
o High voltage power supplies
o Lighting ballasts
o Factory robotics
o Locomotive applications
o Solid-state power transmission
Blue and ultraviolet lasers o High density optical storage, such as
DVDs
LEDs with higher lumenous o Premium outdoor display signs
efficiency o Products for the conventional lighting
market
RF AND MICROWAVE DEVICES
We are currently developing SiC-based high power transistors that operate at
radio and microwave frequencies. We believe these devices will have applications
in wireless base stations, high power solid-state broadcast systems for
television and radio and radar search and detection equipment. These SiC-based
devices are targeted for frequencies from 30 megahertz to 4 gigahertz, including
third generation, or 3G transmitter site networks. We believe that future SiC
transistors in development, with higher output power per transistor than current
silicon and GaAs-based devices, will allow wireless systems to use fewer
transistors per base station, resulting in less complex circuitry, higher
linearity and lower cost. New higher power devices are targeted for introduction
in fiscal 2001 on a sample basis. We have also demonstrated 50 watts of
continuous wave power at 2 gigahertz in a complete amplifier from a single SiC
transistor.
We are also developing GaN-based microwave transistors on SiC substrates that
are targeted for higher frequency applications (10 to 30 gigahertz). We
previously reported the demonstration of GaN on SiC transistors that operated
with an output power of 40 watts at 10 gigahertz which we believe to be the
highest publicly reported pulsed power output for a single device at this
frequency. We also reported a record high power density of 9.8 watts per
millimeter, continuous wave, at 8.2 gigahertz on smaller GaN devices. This power
density is higher than that achieved with equivalent silicon or GaAs-based
devices. We do not anticipate that a commercial device capable of emitting power
at this level will be available in the near term.
-9-
<PAGE>
POWER DEVICES
We are developing prototype high power devices that have many potential uses.
Such devices could be employed in applications involving power conditioning as
well as power switching. SiC-based power devices have the potential to handle
significantly higher power densities than existing silicon-based devices and
operate at significantly higher temperatures and voltages with superior
switching capabilities, yielding power savings due to higher efficiency.
Potential applications include power drive components for electric vehicles,
lighting ballast components, industrial motor controls and power conditioning
for high voltage power transmission. In early fiscal 1999, we entered into a
three-year project with Kansai Electric Power Company, one of the largest power
companies in the world, for development of SiC-based devices for use in power
transmission networks. Under this program, we recently demonstrated a 12 kV high
efficiency SiC rectifier for use in electric power switching. We believe this
voltage level was higher than any previously reported for a single rectifier
device. We do not anticipate that a commercial device capable of switching power
at this voltage level will be available in the near term.
BLUE AND NEAR ULTRAVIOLET LASER DIODES
We continue to focus on the development of blue and near ultraviolet laser
diodes. SiC's inherent attributes, including its natural cleavability and high
thermal conductivity, make it an excellent substrate material for 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 demonstrated in the laboratory a short-lived
blue laser diode, fabricated from nitride materials deposited on SiC substrates,
which has a shorter wavelength than that of the red or infrared lasers used in
applications today. We believe that the shorter wavelength of blue light could
potentially result in storage capacity for optical disk drives that is
significantly greater than the capacity permitted by red light. Substantial
research and development work is needed for us to produce a short wavelength
laser suitable for consumer applications. In May 1999 we entered into a one-year
development agreement with Microvision, Inc., or Microvision, under which
Microvision provided $2.6 million in funding for us to conduct research in edge
emitting LEDs and laser diodes. In April 2000, the agreement was extended for an
additional two years with Microvision providing funding of $4.5 million and $5.5
million in the first and second years of the program, respectively.
LEDs WITH HIGHER LUMINOUS EFFICIENCY
In May 2000, we acquired Nitres, Inc., (now a wholly owned subsidiary known as
Cree Lighting Company, or Cree Lighting) with operations based in Goleta,
California. Cree Lighting is engaged in the development of new LED device and
manufacturing technology, with the goal of developing higher efficiency LED
technology necessary for LEDs to compete with incandescent and fluorescent
lighting technology for conventional lighting markets. In July 2000, Cree
Lighting demonstrated a near ultraviolet LED made using nitride materials on a
sapphire substrate with a power output of 17 mW and 28% external quantum
efficiency. This is the highest known external quantum efficiency publicly
reported for an LED in the UV-to-blue portion of the wavelength spectrum. Our
goal is to begin production of products using this new development in fiscal
2001.
GOVERNMENT CONTRACT FUNDING
- ---------------------------
We derive a portion of our revenue with funding from research contracts with the
U.S. Government. For the fiscal years ended June 25, 2000, June 27, 1999 and
June 28, 1998, government funding represented
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<PAGE>
11%, 14% and 21% 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. The contracts
generally provide that we may elect to obtain title to inventions made in the
course of research, with the government retaining a nonexclusive license to
practice such inventions for government purposes.
RESEARCH AND DEVELOPMENT
- ------------------------
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 yields by reducing variability in our processes.
We spent $20.0 million in fiscal 2000, $12.1 million in fiscal 1999 and $9.9
million in fiscal 1998 for direct expenditures relating to research and
development activities. Off-setting these expenditures were $12.7 million in
fiscal 2000, $9.0 million in fiscal 1999 and $9.7 million in fiscal 1998 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 $5.5 million in fiscal
2000, $4.5 million in fiscal 1999 and $ 3.5 million in fiscal 1998 towards our
product research and development activities.
SALES AND MARKETING
- -------------------
We actively market our wafer and optoelectronic products through targeted
mailings, telemarketing, select advertising and attendance at trade shows. We
generally use an executive sales approach, relying predominantly on the efforts
of senior management and a small direct sales staff for worldwide product sales.
We believe that this approach is preferable in view of our current customer base
and product mix, particularly since the production of lamp and display products
incorporating LED chips is concentrated among a relatively small number of
manufacturers. However, we depart from this approach for sales to certain Asian
countries. In Japan, we market our LED products and SiC wafers through our
distributors Sumitomo Corporation, or Sumitomo, and Shin-Etsu Handotai Co. Ltd.,
or Shin-Etsu. We also use sales representatives to market our LED products in
Hong Kong, China, Taiwan and South Korea. 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. We have engaged nine representatives for our RF products in the United
States. We have not yet engaged sales representatives or made other distribution
arrangements for our RF products outside the United States.
CUSTOMERS
- ---------
During fiscal 2000, revenues from three customers- Siemens AG, or Siemens,
Sumitomo and C&C each accounted for more than 10% of total revenue. For the year
ended June 27, 1999, and June 28, 1998, revenue from Siemens, C&C and the
Department of Defense each accounted for more than 10% of total revenue. For
financial information about foreign and domestic sales, please see Note 2,
"Summary of Significant Accounting Policies" to our consolidated financial
statements included in Item 8 of this report.
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BACKLOG
- -------
As of June 25, 2000, we had a firm backlog of approximately $76.5 million
consisting of approximately $55.1 million of product orders and $21.4 million
under research contracts signed with the U.S. Government, a portion which have
not yet been appropriated. This compares to a firm backlog level of $42.3
million as of June 27, 1999, which consisted of approximately $25.6 million of
product orders and approximately $16.7 million of research contracts signed with
the U.S. Government. We believe the entire backlog could be filled during fiscal
2001, with the exception of approximately $9.3 million in U.S. government funded
contracts.
MANUFACTURING
- -------------
Our products are manufactured in a six-part process, which includes: SiC crystal
growth, wafer slicing, polishing, epitaxial deposition, fabrication, and testing
and packaging. SiC crystals are grown using a proprietary high temperature
process designed to produce uniform crystals in a single crystalline form.
Crystals used for moissanite gemstones exit the manufacturing process at this
stage. Crystals used for other products are then sliced into wafers. The wafers
are polished and then processed using our epitaxial deposition processes, which
require that we grow thin layers of SiC, GaN or other material on the polished
wafer, depending on the nature of the device under production. SiC wafer
products may leave the manufacturing process either after polishing or epitaxy.
Following epitaxy, LED and RF chips are fabricated in a clean room environment.
The final steps include testing and packaging for shipment to the customer. In
manufacturing our products we depend substantially on our custom-manufactured
equipment and systems, some of which are manufactured internally and some of
which we acquire from third parties and customize ourselves.
SOURCES OF RAW MATERIALS
- ------------------------
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in our SiC products and LEDs, including certain key materials
and equipment used in our crystal growth, wafering, polishing, epitaxial
deposition, device fabrication and device test processes. We generally purchase
these limited source items pursuant to purchase orders and have no guaranteed
supply arrangements with our suppliers. In addition, the availability of these
materials, components and equipment to us is dependent in part on our ability to
provide our suppliers with accurate forecasts of our future requirements. We
endeavor to maintain ongoing communication with our suppliers to guard against
interruptions in supply and, to date, generally have been able to obtain
adequate supplies in a timely manner from our existing sources. However, any
interruption in the supply of these key materials, components or equipment could
have a significant adverse effect on our operations.
COMPETITION
- -----------
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and intense foreign competition. We
believe that we currently enjoy a favorable position in the existing markets for
SiC-based products and materials. However, we face actual and potential
competition from a number of established domestic and international compound
semiconductor companies. Many of these companies have greater engineering,
manufacturing, marketing and financial resources than we have.
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Our primary competition for blue and green LED products comes from Nichia
Chemical Industries, Ltd., or Nichia, Toyoda Gosei Co. Ltd. and Lumi Leds
Lighting, a joint venture between Agilent Technologies and Philips Lighting.
These companies currently market blue and green LED products that are brighter
than our high brightness blue and green LED devices. In addition, Uniroyal
Technologies, Inc., American Xtal Technology, Lucky Goldstar and other Asian
based companies have announced intentions to begin production of blue and green
LEDs, all on sapphire substrates. Some of our existing competitors have been
more successful than us in the market for outdoor display applications because
of the brightness demands of outdoor displays, as well as the decreased price
sensitivity of the outdoor display market. We believe our brighter blue and
green LEDs have enabled us to compete successfully in this market because our
LEDs often can be used in the same applications at a lower cost than competing
products. We are working on plans to improve the brightness of our LEDs to
enhance our ability to compete in this market. We believe that our approach to
manufacturing blue and green LEDs from SiC substrates offers a more
cost-effective design and process than competitors, who use a sapphire
substrate. Our smaller chip design, which is possible because we use a
conductive substrate, permits more devices to be fabricated on each wafer
processed, which lowers our cost per unit. In addition, our industry standard
vertical chip structure allows manufacturers to package the LED on the same
production line as other green, amber and red LEDs, eliminating the need for
special equipment necessary for chips made from sapphire substrates.
Furthermore, our SiC-based devices can withstand a higher level of ESD than
existing sapphire-based products and therefore are more suitable for
applications that require high ESD emission ratings, such as automotive
applications.
In addition to competitor using alternative LED technology, Osram OS is
currently producing LEDs using technology licensed from us in 1995. Shin-Etsu
has also licensed certain of our LED technology in 1996 but has not begun
production under this license. The market for SiC wafers also is becoming
competitive, as other companies in recent years have begun to offer SiC wafer
products or announced plans to do so.
PATENTS AND PROPRIETARY RIGHTS
- ------------------------------
We 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 25, 2000 we owned or held exclusive rights licensed under a total of 70
issued U.S. patents, subject in some cases to nonexclusive license rights held
by third parties. These patents expire between 2007 and 2018. Two of these
patents are jointly owned with a third party. In addition, we own or hold
exclusive license rights under corresponding patents and patent applications in
certain foreign countries.
Included in the patent licenses we hold is an exclusive license granted by North
Carolina State University, or N.C. State, to 10 U.S. patents, and to
corresponding foreign patents and applications, that relate to SiC materials and
device technology, including a process to grow single crystal SiC. The license,
granted pursuant to an agreement executed with N.C. State in 1987, is a
worldwide, fully paid, exclusive license to manufacture, use and sell products
and processes covered by the claims of patent applications filed by N.C. State
relating to the licensed inventions. Ten U.S. patents were subsequently issued
with respect to the applications, with expiration dates between 2007 and 2009.
Twelve of the foreign applications have been issued with expiration dates from
2006 to 2013. The U.S. government holds a non-exclusive license to practice the
inventions covered by the N.C. State license for government purposes. We have
also entered into other license agreements with N.C. State, and with the
licensing
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agencies of other universities, under which we have obtained rights to practice
inventions claimed in various patents and applications issued or pending in the
U.S. and other foreign countries.
For proprietary technology which is not patented or otherwise published, we seek
to protect the technology and related know-how and information as trade secrets
and to maintain it in confidence through appropriate non-disclosure agreements
with employees and others to whom the information is disclosed. There can be no
assurance that these agreements will provide meaningful protection against
unauthorized disclosure or use of our confidential information or that our
proprietary technology and know-how will not otherwise become known or
independently discovered by others. We also rely upon other intellectual
property rights such as copyright where appropriate.
Because of rapid technological developments in the semiconductor industry, the
patent position of any semiconductor materials or device manufacturer, including
ours, is subject to uncertainties and may involve complex legal and factual
issues. Consequently, there can be no assurance that patents will be issued on
any of the pending applications owned or licensed to us or that claims allowed
in any patents issued or licensed to us will not be contested or invalidated. In
the past, the U.S. patent that we license from N.C. State relating to growth of
SiC was subject to a reissue proceeding; however, that patent was successfully
reissued. Currently, a corresponding European patent is being opposed, which
means that we could lose patent protection in Europe for this particular method
or that the scope of our patent protection may be reduced. There is likewise no
assurance that patent rights owned or exclusively licensed to us will provide
significant commercial protection since issuance of a patent does not prevent
other companies from using alternative, non-infringing technology. Further, we
earn a material amount of our revenues in overseas markets. While we hold and
have applied for patent protection for certain of our technologies in these
markets, there can be no assurance that we will obtain protection in all
commercially significant foreign markets or that our intellectual property
rights will provide adequate protection in all such markets.
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia in Tokyo District Court. As previously reported, the
complaint in this proceeding is directed to our standard brightness LED products
and alleges that these products infringe a Japanese patent owned by Nichia. The
suit seeks a permanent injunction against further distribution of the products
in Japan. We have intervened in the proceeding and filed a response denying the
allegations of infringement. In April 2000, Nichia commenced two additional
lawsuits against Sumitomo in Tokyo District Court in which it alleges that our
high brightness LED products infringe a second Japanese patent owned by Nichia.
The complaints in the new proceedings seek provisional and permanent injunctive
relief prohibiting Sumitomo from further sales of these products in Japan. We
have intervened in the new proceedings and have filed responses denying the
allegations of infringement. No monetary damages for infringement have been
sought in any of the lawsuits brought by Nichia against Sumitomo. Management
believes that the infringement claims are without merit and that the lawsuits
are motivated by competitive factors. We intend to vigorously defend our
products against these claims.
Frequent claims and litigation involving patents and intellectual property
rights are common in the semiconductor industry. Litigation may be necessary in
the future to enforce our intellectual property rights or to defend us against
claims of infringement, and such litigation can be protracted and costly and
divert the attention of key personnel. There can be no assurance that third
parties will not attempt to assert infringement claims against us with respect
to our current or future products. We have been notified from time to time of
assertions that our products or processes may be infringing patents or other
intellectual property rights of others. We have investigated such claims and
determined the assertions were without merit or taken steps to obtain a license
or avoid the infringement. However, we cannot
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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.
ENVIRONMENTAL REGULATION
- ------------------------
The Company is subject to a variety of governmental regulations pertaining to
chemical and waste discharges and other aspects of our manufacturing process.
For example, we are responsible for the management of the hazardous materials we
use and dispose of hazardous waste resulting from our manufacturing process. The
proper handling and disposal of such hazardous material and waste requires us to
comply with certain government regulations. We believe we are in full compliance
with such regulations, but any failure to comply, whether intentional or
inadvertent, could have an adverse effect on our business.
EMPLOYEES
- ---------
As of June 25, 2000, the Company (including its subsidiaries) employed 680
people, including 524 in manufacturing operations, 110 in research and
development, and 46 in sales and general administration. None of our employees
is represented by a labor union or subject to collective bargaining agreements.
We believe relations with our employees are strong.
CERTAIN BUSINESS RISKS AND UNCERTAINTIES
- ----------------------------------------
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATE.
Although we have had significant revenue and earnings growth in recent quarters,
we may not be able to sustain these growth rates and we may experience
significant fluctuations in our revenue and earnings in the future.
Our operating results will depend on many factors, including the following:
o our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
o whether we encounter low levels of usable product produced during each
manufacturing step (our "yield");
o our ability to expand our production of SiC wafers and devices;
o our ability to produce higher brightness products;
o demand for our products or our customers' products;
o competition; and
o general industry and global economic conditions.
Our future operating results could be adversely affected by these or other
factors. If our future operating results are below the expectations of stock
market analysts or our investors, our stock price may decline.
IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER.
Our SiC material products and our LED and RF device products are manufactured
using technologies that are highly complex. Our customers incorporate our
products into high volume applications such as
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automotive dashboards, wireless handsets, full color video displays and
gemstones, and they insist that our products meet exact specifications for
quality, performance and reliability.
The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including but
not limited to the following:
o impurities in the materials used;
o contamination of the manufacturing environment;
o equipment failure, power outages or variations in the manufacturing
process;
o losses from broken wafers or other human error; and
o defects in packaging.
Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected. For this reason, we are
constantly trying to improve our yields. In the past, we have experienced
difficulties in achieving acceptable yields on new products, which has adversely
affected our operating results. We may experience similar problems in the future
and we cannot predict when they may occur or their severity. These problems
could significantly affect our future operating results.
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 N.C. State and others. The licensed
patents include patents relating to our SiC crystal growth process. We intend to
continue to file patent applications in the future, where appropriate, and to
pursue such applications with U.S. and foreign patent authorities, but we cannot
be sure that patents will be issued on such applications or that our existing or
future patents will not be successfully contested. 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 with
confidentiality agreements with our employees and other parties. We cannot be
sure that these agreements will not be breached, that we would have adequate
remedies for any breach or that our trade secrets and proprietary know-how will
not otherwise become known or independently discovered by others.
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDs, OUR
OPERATING RESULTS MAY SUFFER.
We believe that higher volume production of high brightness blue and green LEDs
will be important to our future operating results. Achieving greater volumes
requires improved production yields for these products. Successful production of
these products is subject to a number of risks, including the following:
o our ability to consistently manufacture these products in volumes large
enough to cover our fixed costs and satisfy our customers' requirements;
and
o our ability to improve our yields and reduce the costs associated with
the manufacture of these products.
Our inability to produce adequate quantities of our high brightness blue and
green products would have a material adverse effect on our business, results of
operations and financial condition.
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OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
Our future success will depend on our ability to develop new SiC solutions for
existing and new markets. We must introduce new products in a timely and
cost-effective manner, and we must secure production orders from our customers.
The development of new SiC products is a highly complex process, and we have
historically experienced delays in completing the development and introduction
of new products. Products currently under development include high power RF and
microwave devices, power devices, blue laser diodes, high temperature devices
and higher brightness LED products. The successful development and introduction
of these products depends on a number of factors, including the following:
o achievement of technology breakthroughs required to make commercially
viable devices;
o the accuracy of our predictions of market requirements and evolving
standards;
o acceptance of our new product designs;
o the availability of qualified development personnel;
o our timely completion of product designs and development;
o our ability to develop repeatable processes to manufacture new products
in sufficient quantities for commercial sales;
o our customers' ability to develop applications incorporating our
products; and
o acceptance of our customers' products by the market.
If any of these or other factors become problematic, we may not be able to
develop and introduce these new products in a timely or cost-efficient manner.
WE DEPEND ON A FEW LARGE CUSTOMERS.
Historically, a substantial portion of our revenue has come from large purchases
by a small number of customers. We expect that trend to continue. For example,
for fiscal 2000 our top five customers accounted for 82% of our total revenue.
Accordingly, our future operating results depend on the success of our largest
customers and on our success in selling large quantities of our products to
them. The concentration of our revenues with a few large customers makes us
particularly dependent on factors affecting those customers. For example, if
demand for their products decreases, they may stop purchasing our products and
our operating results will suffer. If we lose a large customer and fail to add
new customers to replace lost revenue, our operating results may not recover.
WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.
In order to increase production at our new facility, we must add critical new
equipment, move existing equipment and complete the construction and upfit of
buildings. Expansion activities such as these are subject to a number of risks,
including unforeseen environmental or engineering problems relating to existing
or new facilities or unavailability or late delivery of the advanced, and often
customized, equipment used in the production of our products, and delays in
bringing production equipment on-line. These and other risks may affect the
construction of new facilities, which could adversely affect our business,
results of operations and financial condition.
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THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
The market for our products is highly competitive. Our competitors currently
sell blue and green LEDs made from sapphire wafers that are brighter than the
high brightness LEDs we currently produce. In addition, new firms have begun
offering or announced plans to offer blue and green LEDs. 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.
We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.
WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.
We have experienced a period of significant growth that has strained our
management and other resources. We have grown from 188 employees on December 31,
1996 to 680 employees on June 25, 2000 and from revenues of $44.0 million for
the fiscal year ended June 28, 1998 to $108.6 million for the fiscal year ended
June 25, 2000. To manage our growth effectively, we must continue to:
o implement and improve operation systems;
o maintain adequate manufacturing facilities and equipment to meet customer
demand;
o add experienced senior level managers; and
o attract and retain qualified people with experience in engineering,
design, 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.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.
Beginning in fiscal 2001, we plan to begin shifting LED production from two-inch
wafers to three-inch wafers. We must first qualify our production processes on
systems designed to accommodate the larger wafer size, and some of our existing
production equipment must be refitted for the larger wafer size. Delays in this
process could have an adverse effect on our business. In addition, in the past
we have experienced lower yields for a period of time following a transition to
a larger wafer size until use of the larger wafer is fully integrated in
production and we begin to achieve production efficiency. We anticipate that we
will experience similar temporary yield reductions during the transition to the
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.
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WE RELY ON A FEW KEY SUPPLIERS.
We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our SiC products, including key materials
and equipment used in critical stages of our manufacturing processes. We
generally purchase these limited source items with purchase orders, and we have
no guaranteed supply arrangements with such suppliers. If we were to lose such
key suppliers, our manufacturing efforts could be hampered significantly.
Although we believe our relationship with our suppliers is good, we cannot
assure you that we will continue to maintain good relationships with such
suppliers or that such suppliers will continue to exist.
IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.
In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could be
adversely affected.
OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Other companies may hold or obtain patents on inventions or may otherwise claim
proprietary rights to technology necessary to our business. We cannot assure you
that third parties will not attempt to assert infringement claims against us
with respect to our current or future products, including our core products. We
cannot predict the extent to which such assertions may require us to seek
licenses or, if required, whether such licenses will be offered or offered on
acceptable terms or that disputes can be resolved without litigation. Litigation
to determine the validity of infringement, or claims alleged by third parties,
could result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not the litigation is ultimately
determined in our favor. We cannot predict the occurrence of future intellectual
property claims that may prevent us from selling products, result in litigation
or give rise to indemnification obligations or damage claims.
IF AN ADVERSE JUDGEMENT IS ENTERED IN THE PENDING PATENT LITIGATION, OUR
BUSINESS MAY SUFFER.
Our distributor in Japan is currently a party to patent litigation in Japan,
brought by Nichia, in which Nichia claims that our LED products infringe two
Japanese patents it owns. The complaints in the proceedings seek injunctive
relief that would prohibit our distributor from further sales of our LED
products in Japan. A result adverse to the distributor in these cases would
impair our ability to sell both our standard brightness and high brightness LED
products in Japan. Subject to contractual limitations, we have an obligation to
indemnify our distributor for certain patent infringement claims.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.
Sales to customers located outside the U.S. accounted for about 69%, 59% and 58%
of our revenue in fiscal 2000, 1999 and 1998, respectively. We expect that
revenue from international sales will continue to be a significant part of our
total revenue. International sales are subject to a variety of risks, including
risks arising from currency fluctuations, the emergence of the Euro, trading
restrictions, tariffs, trade barriers and taxes. Also, U.S. Government or
military export restrictions could limit or prohibit sales to customers in
certain countries because of their uses in military or surveillance
applications. Because all
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of our foreign sales are denominated in U.S. dollars, our products become less
price competitive in countries with currencies that are low or are declining in
value against the U.S. dollar. Also, we cannot be sure that our international
customers will continue to place orders denominated in U.S. dollars. If they do
not, our reported revenue and earnings will be subject to foreign exchange
fluctuations.
Item 2. Properties
We operate our own facilities in Durham, North Carolina. Direct control over SiC
crystal growth, wafering, epitaxial deposition, device fabrication and test
operations allows us to shorten our product design and production cycles and to
protect our proprietary technology and processes. In November 1997, we acquired
our present manufacturing facility, a 30-acre industrial site in Durham, North
Carolina, consisting of a 139,000 square foot production facility and 33,000
square feet of service and warehouse buildings. In the second quarter of fiscal
2000, we completed a 42,000 square foot expansion of this facility. During the
third quarter of fiscal 2000, we purchased a 120,000 square foot shell building
on 17.5 acres of land near the existing production site that we plan to use for
administrative offices and as an employee services center. We are upfitting this
facility and have plans to begin using portions of it in the second quarter of
fiscal 2001. In addition, we are currently engaged in construction of a 250,000
square foot expansion of our main facility to provide added capacity for our LED
and materials production and future product lines. We are targeting primary
phases of this project to be finished in fiscal 2001, with the balance targeted
for completion in fiscal 2002.
We lease approximately 21,900 square feet in Durham, North Carolina for support
of our manufacturing and administrative activities. This lease expires in
December 2001. We also lease approximately 13,200 square feet in a separate
building in Durham, North Carolina that is used for RF production and microwave
research and development. This lease expires in August 2002. We lease a 3,000
square foot facility in Goleta, California for research and development
activities of Cree Lighting. This lease expires in April 2001. Finally we lease
facilities for two small administrative offices in West Lake Village, California
and Clearwater, Florida. The first lease is on a month to month renewal and the
other expires in December 2000.
Item 3. Legal Proceedings
In December 1999, one of our distributors in Japan, Sumitomo, was named in a
lawsuit filed by Nichia in Tokyo District Court. The complaint in this
proceeding is directed to our standard brightness LED products and alleges that
these products infringe a Japanese patent owned by Nichia. The suit seeks a
permanent injunction against further distribution of the products in Japan. We
have intervened in the proceeding and filed a response denying the allegations
of infringement. In April 2000, Nichia commenced two additional lawsuits against
Sumitomo in Tokyo District Court in which it alleges that our high brightness
LED products infringe a second Japanese patent owned by Nichia. The complaints
in the new proceedings seek provisional and permanent injunctive relief
prohibiting Sumitomo from further sales of these products in Japan. We have
intervened in the new proceedings and have filed responses denying the
allegations of infringement. No monetary damages for infringement have been
sought in any of the lawsuits brought by Nichia against Sumitomo. Management
believes that the infringement claims are without merit and that the lawsuits
are motivated by competitive factors. We intend to vigorously defend our
products against these claims.
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 2000.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock Market Information. The Company's common stock is traded in the
NASDAQ National Market and is quoted under the symbol "CREE". The following
table sets forth, for the quarters indicated, the high and low bid prices as
reported by NASDAQ. Quotations represent interdealer prices without an
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
FY 2000 FY 1999*
------- --------
High Low High Low
First Quarter $ 44.750 $23.500 $ 8.750 $ 5.250
Second Quarter 79.000 32.125 23.500 6.813
Third Quarter 202.000 66.625 26.625 15.125
Fourth Quarter 175.000 83.000 36.688 18.625
*As adjusted for the two-for-one split effective on July 26, 1999.
Holders and Dividends. There were approximately 530 holders of record of the
Company's common stock as of August 4, 2000.
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. There are no
contractual restrictions in place that currently materially limit, or are likely
in the future to materially limit, the Company from paying dividends on its
common stock, but applicable state law may limit the payment of dividends. The
present policy of the Company is to retain earnings, if any, to provide funds
for the operation and expansion of its business.
On May 1, 2000, the Company acquired all of the outstanding shares of Nitres,
Inc. from its shareholders in exchange for 1,847,746 shares of the Company's
common stock. The issuance of shares of the Company's common stock was exempt
from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended (the "Securities Act"), as a result of a fairness hearing conducted by
the Securities Administrator of the Office of the North Carolina Secretary of
State.
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below with respect to
the years ended June 25, 2000, June 27, 1999 and June 28, 1998, and the
consolidated balance sheet data at June 25, 2000 and June 27, 1999 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the years ended June 30, 1997 and 1996 and the consolidated
balance sheet data at June 28, 1998, and June 30, 1997 and 1996 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, Inc. effective May 1, 2000. This
transaction was accounted for under the pooling of interests method. All share
amounts have been restated to reflect the Company's two-for-one stock split
effective July 26, 1999.
-21-
<PAGE>
<TABLE>
Selected Consolidated Financial Data
(In thousands, except per share data)
<CAPTION>
Years Ended
--------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Product revenue, net $ 96,742 $ 53,424 $ 34,891 $ 19,823 $ 9,689
Contract revenue, net 11,820 8,977 9,071 7,025 3,960
License fee income -- -- -- 2,615 1,423
-------- ------- -------- -------- --------
Total revenue 108,562 62,401 43,962 29,463 15,072
Income from continuing operations $ 30,520 $ 12,448 $ 6,243 $ 3,650 $231
Net income per share, basic $0.93 $0.43 $0.23 $0.14 $0.01
Net income per share, dilutive $0.87 $0.41 $0.22 $0.13 $0.01
Weighted average shares outstanding-diluted 35,217 30,432 28,987 28,251 25,230
<CAPTION>
Years Ended
--------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $265,957 $ 59,889 $ 28,265 $ 21,121 $ 18,584
Total assets 486,202 145,933 74,379 50,568 43,811
Long-term obligations -- 4,650 11,046 1,638 --
Shareholders' equity 463,140 131,001 55,905 45,236 40,660
</TABLE>
-22-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in revenue, gross
margins, and anticipated expense levels, as well as other statements, including
words such as "may," "will," "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Certain Business Risks and Uncertainties" in
Item 1 of this report, as well as other risks and uncertainties referenced in
this report.
Overview
- --------
We are the world leader in developing and manufacturing semiconductor materials
and electronic devices made from SiC. We recognize product revenue at the time
of shipment or in accordance with the terms of the relevant contract. We
recognize the largest portion of our revenue from the sale of blue and green LED
products. We offer LEDs at two brightness levels- high brightness blue and green
products and standard blue products. Our LED devices are utilized by end users
for automotive backlighting, LCD backlighting (including wireless handsets),
indicator lamps, miniature white lighting, indoor sign and arena displays,
outdoor full color stadium displays, traffic signals and other lighting
applications. LED products represented 63% of our revenue in fiscal 2000 and 49%
in fiscal 1999.
We also derive revenue from the sale of materials products made from SiC that
are used primarily for research and development for new semiconductor
applications. We also sell SiC crystals to C&C, which incorporates them in
gemstone applications. Sales of SiC materials products and SiC crystals
represented 26% of our revenue in fiscal 2000 and approximately 37% during
fiscal 1999.
The balance of our revenue, 11% for fiscal 2000 and 14% for fiscal 1999 is
derived from government contract funding. Under various programs, U.S.
Government entities further the development of our technology by funding our
research and development efforts. All resulting technology remains our property
after the completion of the contract, subject to certain license rights retained
by the government. Contract revenue includes funding of direct research and
development costs and a portion of our general and administrative expenses and
other operating expenses for contracts under which we expect funding to exceed
direct costs over the life of the contract. For contracts under which we
anticipate that direct costs will exceed amounts to be funded over the life of
the contract (i.e., certain cost-share arrangements), we report direct costs as
research and development expenses with related reimbursements recorded as an
offset to those expenses.
We have new product initiatives for RF and microwave transistors and recently
began shipping limited quantities of our first RF devices. We believe that these
products can be used in a variety of applications, including power amplifiers
for wireless infrastructure, home-based subscriber units, digital broadcast
applications and solid state radar. We also have new product initiatives for
high power devices for power conversion and switching uses and blue laser diodes
for high-density digital versatile disk, or DVD, players and other optical
storage applications. We are also developing LEDs with a higher luminous
efficiency to expand our existing family of devices.
The following table shows our statement of operations data expressed as a
percentage of total revenue for the periods indicated:
-23-
<PAGE>
Years Ended
-----------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Revenue:
Product revenue, net................ 89.1% 85.7% 79.4%
Contract revenue, net............... 10.9 14.3 20.6
-------- -------- --------
Total revenue................... 100.0 100.0 100.0
Cost of Revenue:
Product revenue, net................ 40.0 43.2 49.4
Contract revenue, net............. 8.2 11.5 17.1
-------- -------- --------
Total cost of revenue........... 48.2 54.7 66.5
-------- -------- --------
Gross margin............................. 51.8 45.3 33.5
Operating expenses:
Research and development.......... 6.5 7.1 4.0
Sales, general and administrative 10.2 10.4 10.0
Other expense....................... 1.2 1.9 1.1
-------- -------- --------
Income from operations.............. 33.9 25.9 18.4
Other non-operating income............. 0.6 0.2 0.0
Interest income, net.................... 8.6 1.7 1.7
-------- -------- --------
Income before income taxes...... 43.1 27.8 20.1
Income tax expense....................... 15.0 7.8 5.9
-------- -------- --------
Net income.......................... 28.1% 20.0% 14.2%
======== ======== ========
Fiscal Years Ended June 25, 2000 and June 27, 1999
- --------------------------------------------------
Revenue
Revenue grew 74% to $108.6 million in fiscal 2000 from $62.4 million in fiscal
1999. This increase was attributable to higher product revenue, which rose 81%
to $96.7 million in fiscal 2000 from $53.4 million in fiscal 1999. This increase
in product revenue was a result of the 124% rise in sales of our LED products
and a 24% increase in SiC material revenue in fiscal 2000 compared to fiscal
1999, respectively.
Our high brightness LED products experienced the heaviest demand. While our LED
chip volume has grown 78% in fiscal 2000 over units shipped in fiscal 1999, our
average sales prices for LEDs have also increased 26% over the prior year. The
greater average sales price reflects a significant shift in mix to the higher
priced high brightness LED products. During fiscal 2000, the high brightness
products sold for an average sales price that was 125% higher than the standard
brightness product. For fiscal 2000, more than 70% of LED sales were
attributable to high brightness products. During fiscal 1999, less than 15% of
LED sales were from the high brightness devices. The average sales price for the
high brightness product line declined 12% in fiscal 2000 as compared to the
prior year. The increase in high brightness unit volume was due to the strong
demand from customers and the availability of additional capacity from our
factory as a result of our facility and equipment expansion and yield
improvements. Unit shipments of the high brightness product also increased due
to the introduction of small-sized chips
-24-
<PAGE>
during the fourth quarter of fiscal 2000. The small-sized high brightness chips
represented 8% of total LED volume for that quarter.
While we continue to improve our manufacturing process and yields on our high
brightness and standard brightness products, we must continue to significantly
increase our production output to meet the growing demands of our customers. We
believe that our LED products continue to be attractive to the marketplace due
to our low prices and industry standard vertical structure. We expect that in
order to increase market demand for all of our LED products, we must continue to
lower average sales prices, which is common in our industry. During fiscal 2001,
we believe that the average sales price for all LED products will decline based
on current and projected orders. However, we are targeting strong growth for our
LED revenue in fiscal 2001 to more than offset these lower prices with
significantly higher volume, stemming from strong customer demand and our
continued capacity expansion and yield improvements.
Revenue attributable to sales of SiC materials was 24% higher in fiscal 2000
than the same period in 1999 due to a significant increase in sales to C&C for
gemstone applications and demand for wafer products. In the second quarter of
fiscal 2000, C&C announced lower sales and higher inventory levels than
anticipated and we agreed to allow C&C to reschedule approximately one-half of
its purchase commitments from the first half of calendar 2000 to the second half
of the year. For fiscal 2001, we believe gemstone sales will comprise less than
5% of total revenue and strong demand from our LED business will more than
offset further reductions in gemstone sales. Demand for our wafer business
remains solid, and we are targeting increased revenue from these products in
fiscal 2001 due to higher demand for optoelectronic production and microwave and
power device research.
Contract revenue received from U.S. Government agencies increased 32% during
fiscal 2000 compared to fiscal 1999, due to increased revenue on a microwave
contract awarded in late fiscal 1999, and additional contract awards for Cree
Lighting during fiscal 2000. We are targeting contract revenue to increase
slightly in fiscal 2001 based on contracts awarded in late fiscal 2000.
Gross Profit
Gross profit increased 99% to $56.2 million in fiscal 2000 from $28.2 million in
fiscal 1999. This increase is due primarily to the rise in LED sales volume
discussed above and improved profitability. During fiscal 2000, the average
sales price of high brightness and standard brightness LED products declined 12%
and 21%, respectively, over the prior year. During the same comparative period,
the cost of these devices declined 45% and 28%, respectively. The lower costs
resulted from improved yields and greater throughput.
Profits on wafer and gemstone products have also improved during fiscal 2000 as
compared to fiscal 1999, due to higher quality materials being produced with
greater yields. As a result, average wafer costs for SiC material sales also
declined 34% during fiscal 2000 over the comparative period.
For fiscal 2001, we are targeting our average sales prices for LEDs to decline.
Historically, we have been successful in matching lower sales prices with lower
costs. During fiscal 2001, we plan to continue our focus on reducing costs
through higher production yields and from significantly greater volumes as fixed
costs are spread over a greater number of units.
-25-
<PAGE>
Research and Development
Research and development expenses increased 59% in fiscal 2000 to $7.1 million
from $4.4 million in fiscal 1999. Much of this increase was caused by greater
investments for research and development in RF and microwave and optoelectronics
programs. In May of 1999, we signed a $2.6 million agreement with Microvision,
Inc. or MVIS, for the development of edge-emitting LEDs and blue laser diodes.
In April 2000, we amended our contract with MVIS to extend the agreement for an
additional two-year period. Under the amended agreement, MVIS will fund an
additional $10.0 million. As development costs are incurred under the original
and amended contract, funding from MVIS is offset against these expenses. During
fiscal 2000, approximately $3.1 million of funding from MVIS was offset against
research and development expenses. During fiscal 1999, only $500,000 was applied
to research and development expenses. The remaining $9.0 million of funding is
expected to be applied to research and development expenses in fiscal 2001 and
fiscal 2002, with $4.5 million of funding expected to be applied each year. We
believe that including the offset of MVIS funds in fiscal 2001, research and
development expenses will continue to grow in future periods; however, we
believe that as a percentage of revenue, research and development costs will
remain constant.
Sales, General and Administrative
Sales, general and administrative expenses increased 71% in fiscal 2000 to $11.1
million from $6.5 million in fiscal 1999 due primarily to the general growth in
our business. In future periods, we believe that total sales, general and
administrative costs will continue to increase in connection with the growth of
our business; however, we believe that as a percentage of revenue they will
remain constant.
Other Expense
Other expense increased 11% to $1.3 million during fiscal 2000 from $1.2 million
in fiscal 1999 due to higher write-downs for fixed assets during the year.
Other Non-Operating Income
Other non-operating income increased 372% to $700,000 in fiscal 2000 from
$100,000 in fiscal 1999 due to greater income recognized from the sale of
investment securities. During fiscal 2000, a $4.1 million gain was recognized on
the sale of securities. This gain combined with one-time proceeds from an
insurance recovery of $400,000, more than offset a $3.8 million one-time charge
for expenses incurred with the acquisition of Nitres, Inc. In fiscal 1999,
$100,000 was recognized on the sale of securities.
Interest Income, net
Interest income, net has increased 788% to $9.4 million in fiscal 2000 from $1.1
million in fiscal 1999 due to higher average cash balances being available in
fiscal 2000 as a result of two public stock offerings completed in January 2000
and February 1999. Higher interest rates in fiscal 2000 also contributed to
increased interest income. In addition, in November 1997, we obtained a $10.0
million term loan from NationsBank to fund the acquisition and construction of
our manufacturing facility in Durham, North Carolina. The majority of the
interest incurred in the first half of fiscal 1999 was expensed and was shown as
an offset to "Interest income, net". This loan was repaid in the third quarter
of fiscal 1999; therefore, there was no interest expense associated with this
loan in fiscal 2000.
-26-
<PAGE>
Income Tax Expense
Income tax expense for fiscal 2000 was $16.3 million compared to $4.9 million in
fiscal 1999. This increase resulted from increased profitability during fiscal
2000 over fiscal 1999. Our effective tax rate during fiscal 2000 was 35%
compared to 28% in fiscal 1999 due to a reduction in the reserve for deferred
tax assets.
Fiscal Years Ended June 27, 1999 and June 28, 1998
- --------------------------------------------------
Revenue
Revenue grew 42% to $62.4 million in fiscal 1999 from $44.0 million in fiscal
1998. This increase was attributable to higher product revenue, which rose 53%
to $53.4 million in fiscal 1999 from $34.9 million in fiscal 1998. This increase
in product revenue was a result of the 62% rise in sales of our LED products and
58% increase in materials revenue in fiscal 1999 compared to fiscal 1998,
respectively.
Growth in LED volume resulted from the introduction of the new high brightness
devices and improvements in the product design of and strong demand for the
standard brightness product. During fiscal 1999, LED volume grew 160% while
average sales prices declined 38%.
Revenue attributable to sales of SiC material was 58% higher in fiscal 1999 than
in the same period of fiscal 1998 due to a significant increase in sales to C&C
for gemstone applications and strong demand for wafer products. During fiscal
1998, C&C was in the initial stages of operation; therefore, unit sales were
limited. Revenue from sales of SiC wafers were higher in fiscal 1999 as compared
to fiscal 1998, due to quality improvements in wafers, along with the
availability of the larger two-inch wafer during fiscal 1999.
During fiscal 1999, sales from our displays business declined 96% from the prior
year period as we had chosen to discontinue this product line. Contract revenue
received from U.S. Government agencies also declined 1% during fiscal 1999
compared to fiscal 1998, as a significant contract that funded optoelectronic
research was exhausted in early fiscal 1999.
Gross Profit
Gross margin climbed to 45% of revenue during fiscal 1999 as compared to 34%
during fiscal 1998. This increase is predominantly attributable to design and
manufacturing improvements that occurred in fiscal 1999 resulting in significant
reductions in cost. With the introduction of the new conductive buffer LED
technology in the fourth quarter of fiscal 1998, we were able to significantly
lower costs of production due to fewer manufacturing steps required with the new
chip structure and improved yield. During the first six months of fiscal 1998,
we introduced a smaller LED chip size and, in December 1997, we began to
fabricate devices on a larger two-inch wafer. During much of fiscal 1998, we
were still in the process of establishing these new manufacturing designs and
had not achieved production efficiency. In addition, the larger two-inch wafer
had not been in full production for much of fiscal 1998; therefore, average die
yields were significantly lower. During fiscal 1999, margins realized on the
high brightness products were lower than those derived from our standard blue
LED product, as the yield from the manufacturing process was less than our
standard product.
Average wafer costs for SiC material products sales also declined 32% during
fiscal 1999 over the comparative period due to more efficient processes and
improved yield.
-27-
<PAGE>
Research and Development
Research and development expenses increased 150% in fiscal 1999 to $4.4 million
from $1.8 million in fiscal 1998. Much of this increase was caused by
significantly higher costs for the initial development of the new high
brightness LED products. In May of 1999, the company signed a $2.6 million
agreement with MVIS for the development of edge-emitting LEDs and blue laser
diodes. As development costs were incurred under this contract, funding from
MVIS was offset against these expenses. During fiscal 1999, approximately
$500,000 of funding from MVIS was offset against research and development
expenses. The remaining $2.1 million of funding was applied to research and
development expenses in fiscal 2000.
Sales, General and Administrative
Sales, general and administrative expenses increased 48% in fiscal 1999 to $6.5
million from $4.4 million in fiscal 1998 due primarily to the general growth in
our business. In addition, in fiscal 1998 two insurance events were recorded
that reduced expenses by $400,000. As a result of the dismissal of a securities
class action lawsuit in November 1997, we were reimbursed $200,000 for costs
incurred in connection with the lawsuit. Most of these expenses were recorded in
fiscal 1997. In addition, we received a $200,000 reimbursement of medical
expenses due to a negotiated cost cap in a partially self-funded insured health
plan.
Other Expense
Other expense increased 135% to $1.2 million during fiscal 1999 from $500,000 in
fiscal 1998. During fiscal 1999, we realized impairments to leasehold costs as a
result of management's decision to move equipment from our leased facility to
our new manufacturing site. We also wrote-off other assets that had no future
value to us.
Other Non-Operating Income
Other non-operating income increased 100% to $100,000 in fiscal 1999 due to a
gain recorded for the sale of securities in that year. In fiscal 1998 there was
no "Other non-operating income".
Interest Income, net
Interest income, net has increased 40% to $1.1 million in fiscal 1999 from
$800,000 in fiscal 1998 due to higher average cash balances being available in
fiscal 1999 as a result of a public stock offering completed in February 1999. A
portion of the proceeds received from the offering was used to repay all debt
that was outstanding; therefore during much of the third quarter and all of the
fourth quarter of fiscal 1999, there was no interest expense incurred. In
November 1997, we obtained a term loan from NationsBank to fund the acquisition
and construction of our manufacturing facility in Durham, North Carolina. Most
of that interest was capitalized during fiscal 1998.
Income Tax Expense
Income tax expense for fiscal 1999 was $4.9 million compared to $2.6 million in
fiscal 1998. This increase resulted from increased profitability during fiscal
1999 over fiscal 1998. Our effective tax rate during fiscal 1999 was 28%
compared to 29% in fiscal 1998.
-28-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
We have funded our operations to date through sales of equity, bank borrowings
and revenue from product and contract sales. As of June 25, 2000, we had working
capital of $266.0 million, including $246.3 million in cash, cash equivalents
and short-term investments. Operating activities generated $63.0 million in
fiscal 2000 compared with $20.4 million generated during fiscal 1999. This
increase was primarily attributable to net income and other non-cash expenses of
$42.7 million, a $12.8 million increase in accounts payable and accrued
expenses, and a $27.3 million tax benefit associated with stock option
exercises. These amounts were partly offset by a $11.6 million increase in
deferred income taxes, and a $5.3 million rise in inventory.
Most of the $274.6 million of cash used in investing activities in fiscal 2000
was related to purchases of held to maturity investments. We also invested $12.5
million to acquire available for sale marketable securities. We invested $78.0
million in capital expenditures during fiscal 2000 compared to $41.4 million
during the same period of the prior fiscal year. The majority of the increase in
spending was due to new equipment additions to increase manufacturing capacity
in our crystal growth, epitaxy and package and test areas. Also we completed a
42,000 square foot facility expansion at our production site near Research
Triangle Park, North Carolina and began the construction of an additional
250,000 square foot facility expansion at the same site. In addition, we
acquired a 120,000 square foot shell building on 17.5 acres of land near our
present facility. We plan to use this facility for sales, general and
administrative, as well as for general employee service functions. The cost to
acquire this facility (not including the upfit costs for completing the shell
building) was $8.2 million.
The $272.9 million of cash provided by financing activities during fiscal 2000
related primarily to the receipt of $266.1 million in net proceeds from the
January 2000 stock offering and the exercise of stock options and stock
warrants. The stock warrants exercised were distributed in connection with our
September 1995 private placement and have an exercise price of $13.62. As of
June 25, 2000 warrants remained outstanding to purchase 231,000 shares; these
warrants will expire in September 2000.
We may also issue additional shares of common stock for the acquisition of
complementary businesses or other significant assets. From time to time we
evaluate potential acquisitions of and investments in complementary businesses
and anticipate continuing to make such evaluations.
We are currently engaged in construction activities relating to a 250,000 square
foot expansion of our main facility to provide added capacity for our LED and
materials and future product lines. We are targeting phases of this project to
be finished beginning in December 2000, with the balance targeted for completion
within 18 months. We anticipate total costs for these facilities to be between
$45.0 million and $50.0 million. Estimates for equipment costs relating to this
expansion and other additions total approximately $65.0 million. We plan to fund
this expansion with cash from operations and cash on hand.
-29-
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures:
- -------------------------
As of June 25, 2000, the Company maintains an investment in equity securities
that is treated for accounting purposes under SFAS 115 as "available for sale"
securities. This investment is carried at fair market value based upon quoted
market price of that investment as of June 25, 2000, with net unrealized gains
or losses excluded from earnings and reported as a separate component of
stockholder's equity. This investment, which consists of common stock of MVIS,
is subject to market risk of equity price changes. The common stock of MVIS is
publicly traded on the Nasdaq National Market. The Company acquired 268,600
shares from MVIS in a private placement in May 1999. In April 2000, the company
purchased 250,000 additional shares of common stock of MVIS. In June 2000,
162,600 shares from the initial investment were sold, leaving 356,000 shares
remaining. Management views this stock holding as an investment; therefore, the
shares are accounted for as "available for sale" securities under SFAS 115. The
fair market value of this investment as of June 25, 2000, using the closing sale
price as of June 23, 2000, was $15.8 million.
During the third quarter of fiscal 2000, the Company invested some of the
proceeds from its January 2000 public offering into high-grade corporate debt,
commercial paper, government securities and other investments at fixed interest
rates that vary by security. No other material changes in market risk were
identified during the most recent quarter.
During fiscal 1999, the Company repaid the term loan that was outstanding as of
June 28, 1998. The Company currently has no debt outstanding.
Qualitative Disclosures:
- ------------------------
The investment in MVIS common stock is subject to the market risk of equity
price changes. While the Company can not predict or manage the future market
price for such stock, management continues to evaluate its investment position
on an ongoing basis.
-30-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors...............................................32
Report of Independent Accountants............................................33
Consolidated Balance Sheets as of June 25, 2000 and June 27, 1999............34
Consolidated Statements of Operations for the years ended June 25, 2000,
June 27, 1999 and June 28, 1998..............................................35
Consolidated Statements of Cash Flow for the years ended June 25, 2000,
June 27, 1999 and June 28, 1998..............................................36
Consolidated Statements of Shareholders' Equity for the years ended
June 25, 2000, June 27, 1999 and June 28, 1998...............................37
Notes to Consolidated Financial Statements...................................38
-31-
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders of
Cree, Inc.
We have audited the accompanying consolidated balance sheets of Cree, Inc. and
subsidiaries as of June 25, 2000 and June 27, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements of Cree,
Inc. and subsidiaries as of and for the year ended June 28, 1998 were audited by
other auditors whose report dated July 22, 1998, except for the restatement of
the fiscal 1998 financial statements as a result of the business combination
described in the first three paragraphs of Note 2 for which the date is May 1,
2000, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cree,
Inc. and subsidiaries as of June 25, 2000 and June 27, 1999, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
July 21, 2000
-32-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Cree, Inc.
In our opinion, based on our audit and the report of other auditors, the
consolidated statements of income, of shareholders' equity, and of cash flow for
the year ended June 28, 1998 present fairly, in all material respects, the
results of operations and cash flows of Cree, Inc. and its subsidiaries for the
year ended June 28, 1998, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements give retroactive effect to the merger of Nitres, Inc. on May 1, 2000
in a transaction accounted for as a pooling of interest, as described in Note 2
to the consolidated financial statements. We did not audit the financial
statements of Nitres, Inc. which statements reflect total revenues of
$1,430,561, for the year ended June 28, 1998. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Nitres,
Inc., is based solely on the report of the other auditors. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of Cree, Inc. for any period subsequent to June 28, 1998.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 22, 1998, except for the restatement
of the fiscal 1998 financial statements as
a result of the business combination
described in the first three paragraphs
of Note 2 for which the date is May 1, 2000
-33-
<PAGE>
CREE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 25, June 27,
2000 1999
ASSETS --------- ---------
Current assets:
Cash and cash equivalents $103,843 $ 42,545
Short-term investments held to maturity 142,461 --
Marketable securities available for sale 15,842 6,145
Accounts receivable, net 12,406 16,099
Interest receivable 3,893 109
Inventories 9,320 3,986
Deferred income taxes -- 296
Prepaid expenses and other current assets 1,254 991
--------- ---------
Total current assets 289,019 70,171
Property and equipment, net 137,118 71,130
Long-term investments held to maturity 41,965 --
Deferred income taxes 10,624 2,879
Patent and license rights, net 2,324 1,742
Other assets 5,152 11
--------- ---------
Total assets $486,202 $145,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 14,204 $ 7,757
Current maturities of long term debt -- 478
Accrued salaries and wages 3,133 819
Other accrued expenses 5,725 1,228
--------- ---------
Total current liabilities 23,062 10,282
Long term liabilities:
Deferred income taxes -- 4,650
--------- ---------
Total long term liabilities -- 4,650
Shareholders' equity:
Preferred stock, par value $0.01; -- --
3,000 shares authorized at June 25,
2000 and June 27, 1999; none issued
and outstanding
Common stock, par value $0.0025; 60,000 88 77
shares authorized at June 25, 2000 and
June 27, 1999; 35,348 and 31,258 shares
issued and outstanding at June 25, 2000
and June 27, 1999, respectively
Additional paid-in-capital 415,716 113,268
Deferred compensation expense (1,755) (967)
Retained earnings 48,156 17,636
Accumulated other comprehensive income, 935 987
net of tax -------- --------
Total shareholders' equity 463,140 131,001
-------- --------
Total liabilities and shareholders' equity $486,202 $145,933
======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
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<PAGE>
CREE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended
-----------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Revenue:
Product revenue, net $ 96,742 $ 53,424 $ 34,891
Contract revenue, net 11,820 8,977 9,071
-------- -------- --------
Total revenue 108,562 62,401 43,962
Cost of revenue:
Product revenue, net 43,399 26,968 21,727
Contract revenue, net 8,963 7,195 7,496
-------- -------- --------
Total cost of revenue 52,362 34,163 29,223
-------- -------- --------
Gross profit 56,200 28,238 14,739
Operating expenses:
Research and development 7,054 4,443 1,774
Sales, general and administrative 11,091 6,472 4,383
Other expense 1,305 1,180 502
-------- -------- --------
Income from operations 36,750 16,143 8,080
Other non-operating income 656 139 --
Interest income, net 9,400 1,058 754
-------- -------- --------
Income before income taxes 46,806 17,340 8,834
Income tax expense 16,286 4,892 2,591
-------- -------- --------
Net income $30,520 $12,448 $6,243
======== ======== ========
Earnings per share:
Basic $0.93 $0.43 $0.23
======== ======== ========
Diluted $0.87 $0.41 $0.22
======== ======== ========
Shares used in per share calculation:
Basic 32,965 29,015 27,726
======== ======== ========
Diluted 35,217 30,432 28,987
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Year Ended
-----------------------------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------------------- ------------------- ------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 30,520 $ 12,448 $6,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,803 5,593 4,368
Loss on retirement of property and equipment 1,256 1,602 719
Loss on write off of patents -- 51 17
Amortization of patent rights 145 117 102
Amortization and write off of goodwill -- -- 86
Purchase of marketable trading securities (1,786) (233) (1,500)
Proceeds from sale of marketable trading securities 2,280 1,421 421
Loss (gain) on marketable trading securities (494) (141) 32
Loss (gain) on available for sale securities (3,567) -- --
Deferred income taxes (11,617) 628 382
Income tax benefits from stock option exercises 27,336 2,672 1,791
Amortization of deferred compensation 980 142 10
Changes in operating assets and liabilities:
Accounts and interest receivable (91) (5,753) (2,656)
Inventories (5,334) (1,443) 1,406
Prepaid expenses and other current assets (263) 414 (880)
Accounts payable, trade 6,447 2,049 1,141
Accrued expenses 6,356 799 350
-------------------- ------------------- ------------------
Net cash provided by operating activities 62,971 20,366 12,032
-------------------- ------------------- ------------------
Investing activities:
Purchase of available for sale securities (12,500) (4,500) --
Proceeds from sale of available for sale securities 6,291 -- --
Purchase of securities held to maturity (195,883) -- --
Proceeds from maturities of securities held to 11,457 -- --
maturity
Purchase of property and equipment (78,047) (41,439) (15,894)
Proceeds from sale of property and equipment -- 186 463
Purchase of patent rights (727) (379) (383)
Increase in other long term assets (5,141) -- --
-------------------- ------------------- ------------------
Net cash used in investing activities (274,550) (46,132) (15,814)
-------------------- ------------------- ------------------
Financing activities:
Net proceeds from issuance of long term debt -- 1,350 8,891
Net repayment of long term debt (47) (10,241) --
Net proceeds from issuance of common stock 272,924 61,470 3,736
Receipt of Section 16(b) common stock profits -- 594 --
Repurchase of common stock -- (3,213) (1,262)
-------------------- ------------------- ------------------
Net cash provided by financing activities 272,877 49,960 11,365
-------------------- ------------------- ------------------
Net increase in cash and cash equivalents 61,298 24,194 7,583
Cash and cash equivalents:
Beginning of year 42,545 18,351 10,768
-------------------- ------------------- ------------------
End of year $103,843 $42,545 $ 18,351
==================== =================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ 13 $ 282 $ 93
==================== =================== ==================
Cash paid for income taxes $ 272 $ 2,175 $ 336
==================== =================== ==================
Non-cash investing and financing activities:
Deferred compensation $ 1,768 $ 1,016 $ 98
==================== =================== ==================
Conversion of note payable to common stock $ 431 $ -- $ --
==================== =================== ==================
Equipment donated for common stock $ -- $ -- $ 150
==================== =================== ==================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-36-
<PAGE>
<TABLE>
<CAPTION>
CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 25, 2000, JUNE 27, 1999 AND JUNE 28, 1998
(In thousands)
Compre-
Common Additional Deferred hensive Total
Stock Paid-in Compen- Retained Income Shareholders'
Par Value Capital sation Earnings Equity
----------- ------------- ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 64 $46,234 $(5) $(1,055) $ -- $45,238
Common stock options exercised for
cash, 434 shares 1 1,693 1,694
Common stock warrants exercised for
cash, 662 shares 2 1,240 1,242
Employees granted stock, 52 shares 98 (98) --
Issuance of common stock for cash 1 949 950
and assets, 558 shares
Purchase of common stock for the
treasury, 164 shares (1,262) (1,262)
Retirement of 164 treasury shares (1,262) 1,262 --
Income tax benefits from stock
option exercises 1,791 1,791
Amortization of deferred 10 10
compensation
Net income 6,243 6,243
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 28, 1998 68 50,743 (93) 5,188 -- 55,906
Common stock options exercised for
cash, 418 shares 1 1,511 1,512
Common stock warrants exercised for
cash, 342 shares 4,656 4,656
Employees & directors granted
stock, 441 shares 1 1,015 (1,016) --
Issuance of common stock for cash,
3,010 shares 7 55,290 55,297
Purchase of common stock for the
treasury, 470 shares (3,213) (3,213)
Retirement of 470 treasury shares (3,213) 3,213 --
Receipt of Section 16(b) common
stock profits from a director 594 594
Income tax benefits from stock
option exercises 2,672 2,672
Amortization of deferred 142 142
compensation
Net income 12,448 12,448
Unrealized gain (loss) on
securities available for sale, net 987 987
of tax of $658
--------------
Comprehensive income 13,435
----------- ------------- ---------- ------------ ---------- --------------
Balance at June 27, 1999 77 113,268 (967) 17,636 987 131,001
Common stock options exercised for
cash, 927 shares 3 6,383 6,386
Common stock warrants exercised for
cash, 27 shares 367 367
Employees granted stock options,
137 shares 785 (785) --
Employees granted stock, 171 shares 983 (983) --
Common stock warrants granted, 16 31 31
shares
Loan converted to common stock, 169
shares 431 431
Issuance of common stock for cash,
3,289 shares 8 266,132 266,140
Income tax benefits from stock
option exercises 27,336 27,336
Amortization of deferred 980 980
compensation
Net income 30,520 30,520
Unrealized gain (loss) on
securities available for sale, net (52) (52)
of tax of $(27)
--------------
Comprehensive income 30,468
----------- ------------- ---------- ------------ ----------- --------------
Balance at June 25, 2000 $ 88 $415,716 $ (1,755) $ 48,156 $ 935 $463,140
=========== ============= ========== ============ =========== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-37-
<PAGE>
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cree, Inc., the "Company," or "Cree," a North Carolina corporation, develops,
manufactures, and markets silicon carbide-based semiconductor devices. Revenues
are primarily derived from the sale of blue and green light emitting diodes
("LED"), and silicon carbide ("SiC") based materials. The Company markets its
blue and green LED chip products principally to customers who incorporate them
into packaged lamps for resale to original equipment manufacturers. The Company
also sells SiC material products to corporate, government, and university
research laboratories. In addition, the Company is engaged in a variety of
research programs related to the advancement of SiC process technology and the
development of electronic devices that take advantage of SiC's unique physical
and electronic properties. The Company recovers the costs of a significant
portion of its research and development efforts from revenues on contracts with
agencies of the Federal government. This funding is recorded as contract
revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Business Combination
On May 1, 2000 the Company acquired Nitres, Inc. in a business combination
accounted for as a pooling of interests. Nitres, Inc., became a wholly owned
subsidiary (Cree Lighting Company) of the Company through the exchange of
1,847,746 shares of the Company's common stock for all of the outstanding stock
of Nitres, Inc. In addition, the Company assumed outstanding stock options and
warrants, which after adjustment for the exchange represented a total of 152,223
options and warrants to purchase shares of Cree's common stock. The accompanying
consolidated financial statements for fiscal 2000 are based on the assumption
that the companies were combined for the full year. All prior period
consolidated financial statements have been restated to include the results of
operations, financial position and cash flows of Nitres, Inc., as though Nitres,
Inc. had been a part of the Company for all periods presented.
Reconciliation of Previously Reported Operations - Selected Financial Data
The following table reflects the summarized results of operations of the
separate companies for the nine months ended March 26, 2000, the nearest
practical reporting period prior to the business combination on May 1, 2000. In
addition, a reconciliation of the amounts of net sales and net income previously
reported with restated amounts is included.
-38-
<PAGE>
(Unaudited)
Nine Months
ended (Year Ended (in 000s)
March 26, ---------------------
2000 June 27, June 28,
(in 000s) 1999 1998
----------- -------- --------
Net sales and other revenue:
As previously reported by Cree, Inc. $ 72,342 $ 60,050 $ 42,531
Nitres, Inc. 2,887 2,391 1,431
Elimination of intercompany transactions (27) (40) -
----------- -------- --------
As restated $ 75,202 $ 62,401 $ 43,962
=========== ======== ========
Net income (loss):
As previously reported by Cree, Inc. $ 19,575 $ 12,702 $ 6,275
Nitres, Inc. (392) (234) (32)
Elimination of intercompany transactions (20) (20) -
----------- -------- --------
As restated $ 19,163 $ 12,448 $ 6,243
=========== ======== =========
Elimination of Prior Intercompany Transactions
Prior to May 1, 2000, the Company and Nitres, in the normal course of business,
entered into certain transactions for the purchase and sale of merchandise.
These intercompany transactions have been eliminated in the accompanying
restated consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Cree, Inc., and
its wholly-owned subsidiaries, Cree Lighting Company ("Cree Lighting"), Real
Color Displays, Incorporated. ("RCD"), Cree Research FSC, Inc. ("FSC"), Cree
Funding LLC. ("Cree Funding") and Cree Technologies, Inc. ("Tech"). All material
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain 1999 and 1998 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 2000 presentation. These
reclassifications had no effect on previously reported net income or
shareholders' equity.
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the last Sunday in
the month of June. In fiscal 1998, the Company changed its fiscal year from the
twelve months ending June 30, to the annual period ending on the last Sunday in
the month of June.
Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at June 25, 2000 and June 27,
1999, and the reported amounts of revenues and expenses during the years ended
June 25, 2000, June 27, 1999 and June 28, 1998. Actual amounts could differ from
those estimates.
-39-
<PAGE>
Revenue Recognition
The Company recognizes product revenue at the time of shipment or in accordance
with the terms of the relevant contract. Revenue from government contracts is
recorded on the percentage-of-completion method as expenses per contract are
incurred.
Contract revenue represents reimbursement by various U.S. Government entities to
aid in the development of the Company's technology. The applicable contracts
generally provide that the Company may elect to retain ownership of inventions
made in performing the work, subject to a non-transferable, non-exclusive
license retained by the government to practice the inventions for government
purposes. Contract revenue includes funding of direct research and development
costs and a portion of the Company's general and administrative expenses and
other operating expenses for contracts under which funding is expected to exceed
direct costs over the life of the contract. The specific reimbursement
provisions of the contracts, including the portion of the Company's general and
administrative expenses and other operating expenses that are reimbursed, vary
by contract. Such reimbursements are recorded as contract revenue. For contracts
under which the Company anticipates that direct costs will exceed amounts to be
funded over the life of the contract (i.e., certain cost share arrangements),
the Company reports direct costs as research and development expenses with
related reimbursements recorded as an offset to those expenses.
In September 1996, the Company entered into a license and supply agreement with
Shin-Etsu Handotai Co. LTD. ("Shin-Etsu") and other parties to use certain LED
fabrication technology and has agreed to supply silicon carbide wafers required
to manufacture the licensed product. The license agreement provides for payment
of a license fee and royalties based on a percentage of sales of products made
using the licensed technology. The license fee was payable in installments which
totaled $2.7 million. As of June 25, 2000, all license fees had been received.
Substantially all of the Company's obligations to transfer the licensed
technology were performed during fiscal 1997 and the net present value of the
license fee payments and commission were recognized in that year.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term and long-term
investments, available for sale securities, accounts and interest receivable,
accounts payable, debt, and other liabilities approximate fair value at June 25,
2000 and June 27, 1999.
Investments
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities". This statement requires certain securities to be
classified into three categories:
(a) Securities Held-to-Maturity- Debt securities that the entity has
the positive intent and ability to hold to maturity are reported
at amortized cost.
-40-
<PAGE>
(b) Trading Securities- Debt and equity securities that are bought
and held principally for the purpose of selling in the near term
are reported at fair value, with unrealized gains and losses
included in earnings.
(c) Securities Available-for-Sale- Debt and equity securities not
classified as either securities held-to-maturity or trading
securities are reported at fair value with unrealized gains or
losses excluded from earnings and reported as a separate
component of shareholders' equity.
At June 25, 2000, and June 27, 1999, the Company held a short-term equity
investment in common stock of Microvision, Inc. ("MVIS"). The Company purchased
268,600 common shares in a private equity transaction in May 1999 at a price of
$16.75 per share, or $4.5 million. Pursuant to an agreement signed March 17,
2000, the Company committed to increase its equity position in MVIS by investing
an additional $12.5 million in MVIS common stock. This additional investment was
completed on April 13, 2000, when the Company purchased 250,000 shares at a
price of $50.00 per share. In June 2000, 162,600 MVIS shares were sold for $6.3
million, with a gain on sale recognized for $3.6 million. Management views these
transactions as investments, and the shares are accounted for as "available for
sale" securities under SFAS 115. Therefore unrealized gains or losses are
excluded from earnings and are recorded in other comprehensive income, net of
tax. For the years ended June 25, 2000, June 27, 1999 and June 28, 1998, the
Company recorded unrealized holding gains on this investment of $900,000 (net of
tax of $600,000), $1.0 million (net of tax of $700,000), and $0, respectively.
The fair market value of the MVIS investment as of June 25, 2000, using the
closing sale price as of June 23, 2000, was $15.8 million, representing 356,000
shares. The fair market value of this investment as of June 27, 1999 was $6.1
million.
As of June 25, 2000, the Company's short-term investments held to maturity
included $142.5 million consisting of $97.9 million in high-grade corporate
bonds, $15.0 million in government securities, and $29.6 million in a closed end
mutual fund investing in high grade corporate securities that mature within one
year. The Company purchased the investments with a portion of the proceeds from
its public stock offering in January 2000. The Company has the intent and
ability to hold these securities until maturity; therefore, they are accounted
for as "securities held-to-maturity" under SFAS 115. The securities are reported
on the balance sheet at amortized cost, as a short-term investment with unpaid
interest included in interest receivable.
As of June 25, 2000, the Company's long-term investments held to maturity
consisted of $42.0 million in high-grade corporate bond holdings that mature
after June 25, 2001. The Company purchased the corporate bonds with a portion of
the proceeds from the public stock offering in January 2000. The Company has the
intent and ability to hold these securities until maturity; therefore, they are
accounted for as "securities held-to-maturity" under SFAS 115. The securities
are reported on the balance sheet at amortized cost, as a long-term held to
maturity investment with unpaid interest included in interest receivable if
interest is due in less than 12 months, and as a long-term other asset if
interest is due in more than 12 months.
During fiscal 2000, the Company purchased and sold marketable trading securities
that resulted in the Company recording a realized gain on the sale of stock of
$500,000.
As of June 28, 1998, the Company's short-term investments consisted of common
stock holdings in Charles & Colvard, or C&C, the majority of which were bought
in November 1997. The Company also acquired additional shares of C&C in
September 1998 and acquired 24,601 shares directly from C&C pursuant to the
exercise of an option in January 1997. This investment was treated for
accounting
-41-
<PAGE>
purposes as a trading security, with net realized and unrealized gains and
losses included in net earnings. All common shares of C&C held by Cree were
subsequently sold during fiscal 1999. Realized gains on shares of C&C stock sold
during fiscal 1999 by the Company were $140,000. This amount was recorded as
other income. Approximately $32,000 of net loss was recorded to other income
(expense) in fiscal 1998 related to this investment.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method. Inventories consist of
the following:
Year Ended (in 000s)
-----------------------------------
June 25, June 27,
2000 1999
--------------- ----------------
Raw materials $2,415 $1,290
Work-in-progre 3,094 1,675
Finished goods 3,811 1,021
--------------- ----------------
$9,320 $3,986
=============== ================
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from three to
twenty years. Leasehold improvements are amortized over the life of the related
lease. Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. The cost and related accumulated
depreciation of the assets are removed from the accounts upon disposition and
any resulting gain or loss is reflected in operations. During the years ended
June 25, 2000, June 27, 1999 and June 28, 1998, the Company recorded $1.3
million, $1.6 million and $700,000, respectively, as losses on retirement of
property and equipment reflected in other operating expense on the consolidated
statements of income.
The Company has entered into two agreements with C&C to sell crystal growth
equipment manufactured by the Company to C&C at cost plus a reasonable overhead
allocation. As a result of these transactions, the Company has recognized
$227,000, $473,000 and $332,000, in fiscal 2000, fiscal 1999 and fiscal 1998,
respectively, as "other operating income" for the overhead allocation portion of
the sales price. These equipment agreements were completed in October 1999. In
May 2000, the Company agreed to purchase all of the crystal growth equipment
previously sold to C&C for a purchase price of $5.0 million, which was less than
the Company's direct cost to manufacture the equipment.
In November 1997, the Company purchased real property consisting of
approximately thirty acres of land with a production facility of approximately
139,000 square feet and a total of approximately 33,000 square feet of service
and warehouse buildings. This property is located in Durham, North Carolina, in
the vicinity of the Research Triangle Park. The purchase price for the land and
buildings was $3.0 million. The Company has now moved the majority of its
employees and production to this facility.
In the second quarter of fiscal 2000, the Company completed a 42,000 square foot
facility expansion at its production site near Research Triangle Park, North
Carolina. In the third quarter of fiscal 2000, the
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<PAGE>
Company purchased a 120,000 square foot facility on 17.5 acres of land adjacent
to the existing production site. The Company plans to use this facility for
sales, general and administrative and research and development personnel, as
well as for general employee services functions. The cost to acquire this
facility (not including the upfit costs for completing the shell building) was
$8.1 million. In addition, the Company is currently engaged in construction
activities relating to a 250,000 square foot expansion of its facility.
Impairment of Long-Lived Assets
The Company assesses the realizability of the carrying value of its investment
in long-lived assets whenever events or changes in circumstances indicate that
an impairment may have occurred in accordance with the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for
Impairment of Long Lived Assets and Assets to be Disposed of". As of June 25,
2000, the Company has not recorded an impairment in the carrying value of its
long-lived assets.
Depreciation
The Company has changed its depreciation policy to reflect lower useful lives on
new manufacturing equipment. The useful life has been reduced from 9 years to 5
years for all manufacturing equipment purchased since the beginning of fiscal
year 2000. In management's estimate, this new policy was necessary due to the
changes in estimated useful lives of new equipment caused by technology changes
anticipated with the future development of larger diameter wafers. Management
estimates that the change in policy reduced the Company's fiscal 2000 net income
by $889,000 or $0.03 per share.
Patent and License Rights
Patent rights reflect costs incurred to enhance and maintain the Company's
intellectual property position. License rights reflect costs incurred to use the
intellectual property of others. Both are amortized on a straight-line basis.
During fiscal 1997, the Company changed its previous estimate of the useful life
of patents from 17 years, beginning at the date of patent issue, to 20 years
from the date of patent application. This change was made to conform to a
legislative amendment made to the U.S. patent laws, which became effective in
June 1995. This change in estimate had no material impact on net income or
earnings per share, since the average period of time between patent application
and issue is generally about three years. Amortization expense was $148,000,
$117,000, and $102,000 for the years ended June 25, 2000, June 27, 1999, and
June 28, 1998, respectively. Total accumulated amortization for patents and
license rights was approximately $813,000 and $669,000 at June 25, 2000 and June
27, 1999, respectively.
Goodwill
Goodwill represented the amount by which the costs to acquire the net assets of
the Real Color Displays subsidiary exceeded their related fair value at
acquisition. Based on a review of undiscounted cash flows of the subsidiary
anticipated over the remaining amortization period, the Company determined that
goodwill had been impaired. As a result, the Company wrote off the remaining
$66,000 carrying value of such goodwill in the second quarter of fiscal 1998. As
required by generally accepted accounting principles, this charge was included
in the results of operations.
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<PAGE>
Research and Development
The U.S. Government provides funding through research contracts for several of
the Company's current research and development efforts. The contract funding may
be based on either a cost-plus or a cost-share arrangement. The amount of
funding under each contract is determined based on cost estimates that include
direct costs, plus an allocation for research and development, general and
administrative and the cost of capital expenses. Cost-plus funding is determined
based on actual costs plus a set percentage margin. For the cost-share
contracts, the actual costs are divided between the U.S. government and the
Company based on the terms of the contract. The government's cost share is then
paid to the Company. Activities performed under these arrangements include
research regarding silicon carbide and gallium nitride materials. The contracts
typically require the submission of a written report that documents the results
of such research.
The revenue and expense classification for contract activities is based on the
nature of the contract. For contracts where the Company anticipates that funding
will exceed direct costs over the life of the contract, funding is reported as
contract revenue and all direct costs are reported as costs of contract revenue.
For contracts under which the Company anticipates that direct costs will exceed
amounts to be funded over the life of the contract, costs are reported as
research and development expenses and related funding as an offset of those
expenses. The following table details information about contracts for which
direct expenses exceed funding by period as included in research and development
expenses:
Year ended (in 000s)
---------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Net research and development costs $ 538 $ -- $ 276
Government funding 868 -- 601
-------- -------- --------
Total direct costs incurred $ 1,406 $ -- $ 877
======== ======== =========
Interest Capitalization
No interest was capitalized in the fiscal year ended June 25, 2000. During the
fiscal years ended June 27, 1999, and June 28, 1998, the Company capitalized
interest on funds used to construct property, plant and equipment in connection
with its newly acquired facilities. Interest capitalized for fiscal years 1999
and 1998 was $128,000, and $128,000, respectively.
Credit Risk, Major Customers and Major Suppliers
Financial instruments, which may subject the Company to a concentration of
credit risk, consist principally of marketable securities, cash equivalents and
accounts receivable. Marketable securities consist primarily of high-grade
corporate debt, commercial paper, government securities and other investments at
interest rates that vary by security. The Company's cash equivalents consist
primarily of money market funds. Certain bank deposits may at times be in excess
of the FDIC insurance limit.
The Company sells its products to manufacturers and researchers worldwide and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses, in the aggregate, have generally been within
management's expectations. The Company presently derives primarily all of its
contract revenues from contracts with the U.S. Department of Defense.
Approximately 19% and 10%, respectively, of the Company's accounts receivable
balance at June 25, 2000 and June 27, 1999 was
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<PAGE>
due from the Department of Defense. The Company had amounts due from Siemens
A.G. (or its indirect subsidiary, Osram) totaling 19% and 35%, of accounts
receivable balances at June 25, 2000 and June 27, 1999, respectively. In
addition, the Company had amounts due from Sumitomo Corporation totaling 22% of
accounts receivable balances at June 25, 2000.
In May 2000, the Company agreed to purchase $5 million of manufacturing
equipment from C&C. As consideration for this equipment the Company offset
existing accounts receivable from C&C and future product shipments up to the $5
million purchase price. As a result, no accounts receivable balances were due
from C&C at June 25, 2000. At June 27, 1999, the Company had amounts due from
C&C totaling 17% of accounts receivable balances.
The Company has derived its product and contract revenue from sales in the
United States, the Far East, and Europe as follows:
Year ended
------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
United States 31% 41% 42%
Far East 64% 48% 39%
Europe 5% 11% 19%
One customer accounted for 26%, 35%, and 40% of revenue for fiscal 2000, 1999,
and 1998, respectively. Another customer accounted for 15%, 18%, and 10% of
revenue for fiscal 2000, 1999, and 1998, respectively. A third customer
accounted for 25%, 7%, and 8% of revenue fiscal 2000, 1999, and 1998,
respectively. The Department of Defense accounted for 90%, 96%, and 94% of
contract revenues during fiscal 2000, 1999, and 1998, respectively.
The Company depends on single or limited source suppliers for a number of raw
materials and components used in its SiC wafer products and LEDs. Any
interruption in the supply of these key materials or components could have a
significant adverse effect on the Company's operations.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of
common stock shares outstanding. Diluted earnings per common share is computed
using the weighted average number of common stock shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock.
Accounting for Stock Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", no compensation is recorded for stock options or
other stock-based awards that are granted to employees with an exercise price
equal to or above the common stock price on the grant date.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation." This
Statement establishes fair value as the measurement basis for equity instruments
issued in exchange for goods or services and stock-based compensation plans.
Fair value may be measured using quoted market prices, option-pricing models or
other reasonable estimation methods. SFAS 123 permits the Company to choose
between adoption of
-45-
<PAGE>
the fair value based method or disclosing pro forma net income information. The
Statement is effective for transactions entered into after December 31, 1995.
The Company will continue to account for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, as amended, and will provide
the pro forma disclosures required by SFAS 123.
3. ACCOUNTS RECEIVABLE, NET
The following is a summary of the components of accounts receivable:
Year Ended (in 000s)
-----------------------
June 25, June 27,
2000 1999
-------- --------
Billed trade receivables $ 10,262 $ 14,645
Unbilled contract receivables 2,394 1,629
-------- --------
12,656 16,274
Allowance for doubtful accounts (250) (175)
-------- --------
Total accounts receivable, net $ 12,406 $ 16,099
======== ========
The following table summarizes the changes in the Company's allowance for
doubtful accounts for the years ended June 25, 2000, June 27, 1999, and June 28,
1998:
Year Ended (in 000s)
------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Balance at beginning of year $ 175 $ 151 $ 216
Charges to cost and expenses 75 24 50
Deductions (write-offs to reserve) -- -- (115)
-------- -------- ---------
Balance at end of year $ 250 $ 175 $ 151
======== ======== =========
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
Year ended (in 000s)
-------------------------------
June 25, June 27,
2000 1999
-------- --------
Office equipment and furnishings $ 2,765 $ 1,948
Land & Buildings 41,087 21,031
Machinery and equipment 77,856 47,804
Leasehold improvements 1,461 1,549
-------- --------
123,169 72,332
Accumulated depreciation (22,633) (13,670)
-------- --------
100,536 58,662
Construction in progress 36,582 12,468
-------- --------
Net Property & Equipment $137,118 $71,130
======== ========
Depreciation and amortization of property and equipment totaled $10.8 million,
$5.6 million, and $4.4 million for the years ended June 25, 2000, June 27, 1999,
and June 28, 1998, respectively.
-46-
<PAGE>
5. SHAREHOLDERS' EQUITY
On January 20, 2000, the Company completed a public offering of 3,289,000 shares
of its common stock at a price to the public of $85.125 per share. The Company
received net aggregate proceeds of approximately $266.1 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds are being used primarily for manufacturing facility expansion and
purchase of additional equipment, the acquisition of an additional facility,
research and development, and general corporate purposes.
At June 27, 1999, the Articles of Incorporation of the Company authorized the
Company to issue up to 30,000,000 shares of common stock, with a par value of
$0.005 per share, and 3,000,000 shares of preferred stock, with a par value of
$0.01 per share. The preferred stock may be issued in one or more classes or
series with the number of shares, designation, relative rights, preferences, and
limitations of each class or series to be determined by resolution of the Board
of Directors. The Articles of Incorporation were amended, effective at the close
of business on July 26, 1999, to effect a two-for-one split of the common stock.
As a result, as of the effective date of the amendment, the Articles of
Incorporation authorize the Company to issue up to 60,000,000 shares of common
stock, with a par value of $0.0025 per share. The amendment did not change the
number of authorized shares or other provisions relating to the preferred stock.
On July 30, 1999, the Company issued to each holder of record of common stock a
certificate evidencing the additional shares of common stock resulting from the
stock split. All references in this document to common stock and per common
share data have been adjusted to reflect the common stock split.
On February 17, 1999, the Company completed a public offering selling 2,990,000
shares of its common stock at a price of $19.69 per share. The Company received
net aggregate proceeds of approximately $55.2 million after deducting
underwriter discounts and estimated offering costs. A portion of the net
proceeds, $10 million, was used to repay debt to a commercial bank. The majority
of the funds are being used for plant expansion and the balance for general
corporate purposes, including working capital and potential acquisition of or
investments in complementary businesses.
At June 25, 2000, the Company had reserved a total of 5,486,472 shares of its
common stock for future issuance as follows.
Number of shares
----------------
For exercise of outstanding warrants to purchase
common stock 246,680
For exercise of outstanding common stock options 4,089,527
For future common stock option awards 872,904
For possible future issuance to employees under the
Employee Stock Purchase Plan 277,361
----------------
Total reserved 5,486,472
================
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<PAGE>
6. STOCK OPTIONS AND STOCK WARRANTS
As permitted by SFAS 123, "Accounting For Stock-Based Compensation", the Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and amendments in
accounting for its employee stock option plans. The Company has recorded
deferred compensation expense of $1.8 million, $1.0 million, and $100,000, for
the difference between the grant price and the deemed fair value of stock and
stock options granted for the years ended June 25, 2000, June 27, 1999, and June
28, 1998, respectively. Of this deferred compensation amount, $980,000,
$142,000, and $10,000 was amortized for the years ended June 25, 2000, June 27,
1999, and June 28, 1998, respectively.
As of June 25, 2000, the Company's Amended and Restated Equity Compensation Plan
(the "Plan") has authorized the grant of options for up to 6,880,000 shares of
the Company's common stock. All options granted have 10 year terms and vest and
become fully exercisable within 5 years. The Company had granted 192,000 options
with a 10 year term for shares of the Company's common stock under the Stock
Option Plan for Non-Employee Directors. This plan was terminated in November
1997 and all 192,000 options granted under this plan are now fully vested. At
June 25, 2000, there were also outstanding options to purchase 136,543 shares of
the Company's common stock pursuant to option agreements assumed in the
acquisition of Nitres, Inc. The Company's current stock plans provide for grants
of options with exercise prices equal to or exceeding fair market value on the
date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with weighted average risk free rates of interest of 6.24%
and 5.3%, for the years ended June 25, 2000 and June 27, 1999, respectively. The
volatility factor of the expected market price of the Company's common stock is
0.882 and the weighted-average expected life of the options was 7 years for
executives and directors and 5 years for other employees.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<PAGE>
Year ended (in 000's, except per share data)
--------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
------- -------- --------
Net income, as reported $30,520 $ 12,448 $ 6,243
Earnings per share, as reported:
Basic $0.93 $0.43 $0.23
Diluted $0.87 $0.41 $0.22
Pro forma net income, as adjusted 21,507 8,714 4,373
for SFAS 123
Pro forma earnings per share,
as adjusted for SFAS 123:
Basic $0.65 $0.30 $ 0.16
Diluted $0.61 $0.29 $ 0.15
The following table details the number of stock options outstanding and their
related exercise prices and weighted-average remaining contractual lives as of
June 25, 2000:
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<PAGE>
Weighted-Average
Remaining
Exercise Price Number of Options Contractual Life
-------------- ----------------- -----------------
$ 0.01 136,543 9 years
$ 1.56 16,000 4 years
$ 1.81 91,161 3 years
$ 1.88 9,668 1 year
$ 2.00 42,350 4 years
$ 2.19 12,000 4 years
$ 3.41 8,000 3 years
$ 3.69 12,000 4 years
$ 4.69 30,530 7 years
$ 5.13 13,200 7 years
$ 5.60 15,950 6 years
$ 6.49 544,250 7 years
$ 7.13 39,150 8 years
$ 7.19 124,210 6 years
$ 7.63 969,800 8 years
$ 7.88 72,000 6 years
$ 8.19 37,630 8 years
$ 8.38 8,000 8 years
$ 8.88 28,990 8 years
$ 9.38 54,300 7 years
$ 9.69 20,000 8 years
$12.32 90,000 8 years
$20.50 115,200 9 years
$22.60 125,745 9 years
$22.63 66,450 9 years
$33.56 208,500 9 years
$34.31 12,000 9 years
$37.75 468,000 9 years
$83.94 576,900 10 years
$104.94 141,000 10 years
-----------------
4,089,527
=================
<TABLE>
<CAPTION>
Total Stock Option Activity - Year ended
-------------------------------------------------------------------------
June 25, 2000 June 27, 1999 June 28, 1998
Number of Weighted Number of Weighted Number of Weighted
Options Average Options Average Options Average
(in 000s) Price (in 000s) Price (in 000s) Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 3,613 $ 8.14 2,410 $ 5.10 1,854 $ 2.38
Granted 1,753 51.45 1,712 10.85 1,084 6.99
Exercised (1,075) 5.13 (418) 3.63 (434) 3.90
Forfeited (201) 16.14 (91) 7.08 (94) 4.34
--------- -------- --------- -------- --------- --------
Outstanding -
end of year 4,090 $27.09 3,613 $ 8.14 2,410 $ 5.10
========= ======== ========= ======== ========= ========
Exercisable at
end of year 1,353 $ 5.98 1,478 $ 5.39 1,198 $ 4.20
========= ======== ========= ======== ========= ========
</TABLE>
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<PAGE>
In connection with the Company's September 1995 private placement, the Company
issued 600,000 warrants, which have an exercise price of $13.62, which
represents fair value on the date of grant, and expire September 2000. Warrants
to purchase 27,000 and 342,000 shares of common stock were exercised during the
fiscal years ended June 25, 2000 and June 27, 1999, respectively. Warrants to
purchase 231,000 shares remain outstanding under this private placement as of
June 25, 2000. As of June 25, 2000, there were also outstanding warrants to
purchase 15,680 shares of the Company's common stock, at an exercise price of
$2.55 per share, which expire February 2007. These warrants were originally
issued by Nitres, Inc. in February 2000 and were assumed by the Company in its
acquisition of Nitres, Inc. in May 2000.
7. LEASE COMMITMENTS
The Company currently leases five facilities. These facilities are comprised of
both office and manufacturing space. The first facility has a remaining lease
period of approximately one and one half years. The lease term for the second
facility began in September 1995 and a renewal option was exercised in September
1999. At June 25, 2000, the second facility lease has a remaining lease period
of approximately two years with an option to renew for an additional two years.
The leases for the third and fourth facilities expire in December 2000 and April
2001, respectively. The lease term on the fifth facility runs from month to
month. All of the remaining lease agreements provide for rental adjustments for
increases in property taxes, the consumer price index and general property
maintenance.
Rent expense associated with these and other expired leases totaled $420,000,
$478,000, and $562,000 for the years ended June 25, 2000, June 27, 1999, and
June 28, 1998, respectively. Future minimum rentals as of June 25, 2000 under
these leases are as follows:
Minimum Rental
Amount
Fiscal Years Ended (in 000s)
------------------ --------------
June 24, 2001 $383
June 30, 2002 207
June 30, 2003 12
--------------
Total $602
==============
8. LONG-TERM DEBT
In December 1998, Cree Lighting (previously Nitres, Inc.) received a $431,000
bridge loan from a group of investors to finance its working capital needs. The
bridge loan was made to Cree Lighting subject to conversion rights that would
cause conversion to shares of the Company's common stock in the event of a
financing or one year passing. At June 27, 1999, the investor bridge loan was
still outstanding. In February 2000, the $431,000 bridge loan was converted to
168,750 shares of the Company's common stock. In September 1997, Cree Lighting
purchased equipment on credit and issued a note to the equipment manufacturer
for $382,000. Payments on the note were made in quarterly installments beginning
in January 1998. At June 27, 1999, obligations under the equipment note were
approximately $48,000. The balance on the note was repaid in September 1999.
In November 1997, the Company entered into a term loan with a commercial bank
for up to $10.0 million to finance the purchase and upfit of the new main
facility in Durham, North Carolina. Approximately $3.0 million was disbursed
under the loan to finance the initial purchase of the facility with the
remaining proceeds disbursed on a monthly basis based on actual expenditures
incurred. The loan, which was collateralized by the purchased property and
subsequent upfits, accrued interest at a
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<PAGE>
fixed rate of 8% and carried customary covenants, including the maintenance of a
minimum tangible net worth and other requirements. On February 17, 1999, the
entire $10.0 million indebtedness was repaid with proceeds received from the
public stock offering. Interest expense was $13,000, $282,000, and $93,000 for
the years ended June 25, 2000, June 27, 1999, and June 28, 1998, respectively.
9. INCOME TAXES
The Company accounts for its income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The actual income tax expense for the years ended June 25, 2000, June 27, 1999,
and June 28, 1998 differed from the amounts computed by applying the U.S.
federal tax rate of 35% in fiscal 2000 and fiscal 1999, and 34% in fiscal 1998,
to pretax earnings as a result of the following:
Year Ending (in 000s)
----------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Federal income tax provision at
statutory rate $ 16,382 $ 6,174 $ 3,018
State tax provision 1,517 211 166
Increase (decrease) in income
tax expense resulting from:
Foreign sales corporation (1,682) (510) (214)
Decrease in valuation allowance -- (290) (358)
Research and development (258) (251) --
State tax credits -- (394) --
Non-deductible transaction costs 327 -- --
Other -- (48) (21)
-------- -------- --------
Income tax expense $ 16,286 $ 4,892 $ 2,591
======== ======= ========
The following are the components of the provision for income taxes for the years
ended June 25, 2000, June 27, 1999, and June 28, 1998:
Year Ending (in 000s)
------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Current:
Federal $ 856 $ 2,553 $ 699
Foreign Tax Withholding -- -- 50
State 200 300 269
-------- -------- --------
1,056 2,853 1,018
Deferred:
Federal 15,111 2,299 1,573
State 119 (260) --
-------- -------- --------
15,230 2,039 1,573
Net Provision $16,286 $ 4,892 $ 2,591
======== ======== ========
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<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
Year Ending (in 000s)
----------------------
June 25, June 27,
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards $11,641 $ 97
Research tax credits 785 420
Compensation 268 105
Inventory 202 126
Bad debt 93 65
Alternative minimum tax 1,690 1,513
Foreign tax credit 0 270
Other 526 527
-------- --------
Total gross deferred tax assets 15,205 3,123
Less valuation allowance -- --
-------- --------
Total net deferred tax assets 15,205 3,123
Deferred tax liabilities:
Marketable equity securities 658 658
Property and equipment depreciation 6,060 3,992
-------- --------
Gross deferred tax liabilities 6,718 4,650
-------- --------
Net deferred tax assets (liability) $ 8,487 $(1,527)
======= ========
As of June 25, 2000, the Company has net operating loss carryforwards for
federal purposes of $25 million and $38 million for state purposes. The net
operating losses have been generated from the tax benefits associated with stock
options, which have been accounted for as an addition to paid-in capital. The
state net economic loss carryforward will expire beginning in 2004 and federal
operating loss carryforwards will expire beginning in 2020.
10. EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") on
November 2, 1999. The Purchase Plan provides employees of the Company, and its
majority-owned subsidiaries, with an opportunity to purchase common stock
through payroll deductions. The purchase price is set at 85% of the lower of the
fair market value of common stock at the beginning of the participation period
or on a purchase date. Contributions are limited to 15% of an employee's
compensation. The participation periods have a 12 month duration, with new
participation periods beginning in November and May of each year. Each
participation period has two purchase dates, one in October and the other in
April. The first participation period began on November 2, 1999 and the first
purchase date was April 30, 2000. The Board of Directors has reserved 300,000
shares of common stock for issuance under the Purchase Plan. As of June 25,
2000, 22,639 shares of common stock had been purchased under the Purchase Plan.
11. RETIREMENT PLAN
The Company maintains an employee benefit plan (the "Plan") pursuant to Section
401(k) of the Internal Revenue Code. Under the Plan, there is no fixed dollar
amount of retirement benefits, and actual
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<PAGE>
benefits received by employees will depend on the amount of each employee's
account balance at the time of retirement. All employees are eligible to
participate under the Plan on the first day of a new fiscal quarter after date
of hire. The Pension Benefit Guaranty Corporation does not insure the Plan. The
Company may, at its discretion, make contributions to the Plan. However, the
Company did not make any contributions to the Plan during the years ended June
25, 2000, June 27, 1999, and June 28, 1998.
12. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share", as of December 28, 1997. SFAS No. 128 required the
Company to change its method of computing, presenting and disclosing earnings
per share information. All prior period data presented has been restated to
conform to the provisions of SFAS No. 128.
The following computation reconciles the differences between the basic and
diluted presentations:
Year ended (in 000's, except per share data)
--------------------------------------------
June 25, June 27, June 28,
2000 1999 1998
-------- -------- --------
Basic:
Net income $ 30,520 $ 12,448 $ 6,243
======== ======== ========
Weighted average common shares 32,965 29,015 27,726
======== ======== ========
Basic earnings per share $0.93 $ 0.43 $ 0.23
======== ======== ========
Diluted:
Net income $ 30,520 $ 12,448 $ 6,243
======== ======== ========
Weighted average common shares
-basic 32,965 29,015 27,726
Dilutive effect of stock options
& warrants 2,252 1,417 1,261
-------- -------- --------
Weighted average common shares
-diluted 35,217 30,432 28,987
======== ======== ========
Diluted earnings per share $0.87 $ 0.41 $ 0.22
======== ======== ========
Potential common shares that would have the effect of increasing diluted
earnings per share are considered to be antidilutive. In accordance with SFAS
No. 128, these shares were not included in calculating diluted earnings per
share. As of June 25, 2000 and June 27, 1999, there were no potential shares
considered to be antidilutive. For the year ended June 28, 1998, there were
225,000 shares that were not included in calculating diluted earnings per share
because their effect was antidilutive.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issues Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information called for in items 10 through 13 is incorporated by reference
from the Company's definitive proxy statement relating to its annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 2000.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial statements and financial statement schedule - the
financial statements and reports of independent auditors are filed as part
of this report (see index to Consolidated Financial Statements at Part II
Item 8 on page 30 of this Form 10-K). The financial statement schedules are
not included herein as they are either not applicable or are included as
part of the consolidated financial statements.
(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws, as amended (1)
4.1 Specimen Common Stock Certificate (1)
10.1 Equity Compensation Plan, as amended and restated
August 24, 1999 (2) *
10.2 Stock Option Plan for Non-Employee Directors (terminated
as to future grants pursuant to Board action dated
September 1, 1997) (3) *
10.3 Management Incentive Compensation Program - Fiscal Year
2000 Plan (1) *
10.4 License Agreement between the Company and North Carolina
State University dated December 3, 1987 (4)
10.5 Amendment to License Agreement between the Company and
North Carolina State University dated September 11, 1989 (4)
10.6 Development, License and Supply Agreement between the
Company and Siemens A.G. dated October 24, 1995 (5)
10.7 Purchase Agreement between the Company and Siemens A.G.
dated September 6, 1996 (6)
10.8 First Amendment to Purchase Agreement between the Company
and Siemens A.G. dated April 22, 1997 (7)
10.9 Second Amendment to Purchase Agreement between the Company
and Siemens A.G. dated December 9, 1997 (8)
10.10 Third Amendment to Purchase Agreement between the Company
and Siemens A.G.dated September 8, 1998 (9)
10.11 Fourth Amendment to Purchase Agreement between the Company
and Siemens A.G. dated December 16, 1998 (10)
10.12 Transformation Agreement with Siemens A.G. and OSRAM Opto
Semiconductors GmbH & Co. OHG effective January 1, 1999 (11)
10.13 Purchase Agreement between the Company and Osram Opto Semi-
conductors GmbH & Co. dated August 30, 1999 (2)
10.14 Merger Agreement dated as of April 10, 2000 among Cree,
Inc., Crystal Acquisition, Inc., Nitres, Inc. and share-
holders of Nitres, Inc. listed on signature pages thereto
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
23.2 Consent of Independent Accountants
27.1 Financial Data Schedule (for SEC use only)
99.1 Report of Independent Auditors
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<PAGE>
(1) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 333-94013, and
declared effective by the Securities and Exchange Commission on January 13,
2000.
(2) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on November 4, 1999.
(3) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-8, Registration No. 33-98958, and
effective with the Securities and Exchange Commission on November 3, 1995.
(4) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form SB-2, Registration No. 33-55998, and
declared effective by the Securities and Exchange Commission on February 8,
1993.
(5) Incorporated by reference herein. Filed as an exhibit to the Company's
Registration Statement filed on Form S-3, Registration No. 33-98728, and
declared effective by the Securities and Exchange Commission on December
27, 1995. Confidential treatment of portions of this exhibit was granted by
the Securities and Exchange Commission pursuant to Rule 24b-2 by order
dated December 29, 1995.
(6) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on September 30, 1996. Confidential treatment of portions of
this exhibit was granted by the Securities and Exchange Commission pursuant
to Rule 24b-2 by order dated November 21, 1996.
(7) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on May 2, 1997. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated June 26, 1997.
(8) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 12, 1998.
(9) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on October 30, 1998. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated November 23, 1998.
(10) Incorporated by reference herein. Filed as an exhibit to the Company's
Quarterly Report filed on Form 10-Q with the Securities and Exchange
Commission on January 28, 1999. Confidential treatment of portions of this
exhibit was granted by the Securities and Exchange Commission pursuant to
Rule 24b-2 by order dated February 24, 1999.
(11) Incorporated by reference herein. Filed as an exhibit to the Company's
Annual Report filed on Form 10-K with the Securities and Exchange
Commission on August 12, 1999.
* Compensatory Plan
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Company
during the three months ended June 25, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CREE, INC.
Date: August 10, 2000
By: /s/ F. Neal Hunter
--------------------------------
F. Neal Hunter
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ F. Neal Hunter Chairman of the Board and August 10, 2000
- ---------------------------- Chief Executive Officer
F. Neal Hunter
/s/ Cynthia B. Merrell Chief Financial Officer August 10, 2000
- ----------------------------
Cynthia B. Merrell
/s/ Calvin H. Carter, Jr. Director August 10, 2000
- ----------------------------
Calvin H. Carter, Jr., Ph.D.
/s/ James E. Dykes Director August 10, 2000
- ----------------------------
James E. Dykes
/s/ Michael W. Haley Director August 10, 2000
- ----------------------------
Michael W. Haley
/s/ John W. Palmour Director August 10, 2000
- ----------------------------
John W. Palmour, Ph.D
/s/ Walter L. Robb Director August 10, 2000
- ----------------------------
Walter L. Robb, Ph.D.
Director August 10, 2000
- ----------------------------
Dolph W. von Arx
-57-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>NITRES MERGER AGREEMENT
<TEXT>
EXHIBIT 10.14
- -------------------------------------------------------------------------------
MERGER AGREEMENT
DATED AS OF APRIL 10, 2000
BY AND AMONG
CREE, INC.,
CRYSTAL ACQUISITION, INC.
NITRES, INC.
AND
THOSE SHAREHOLDERS OF NITRES, INC.
LISTED ON THE SIGNATURE PAGES HERETO
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - THE MERGER .........................................................................1
1.1 The Merger ..............................................................................1
1.2 Exchange Procedures .....................................................................4
1.3 Parties' Intent .........................................................................5
1.4 Issuances into Escrow ...................................................................5
1.5 Closing .................................................................................6
1.6 Transaction Documents ...................................................................6
1.7 Dissenters'Rights .......................................................................6
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS ......6
2.1 Ownership of Stock ......................................................................7
2.2 Existence and Good Standing .............................................................7
2.3 Capital Stock ...........................................................................7
2.4 Power and Authority .....................................................................7
2.5 Subsidiaries and Investments ............................................................8
2.6 Financial Statements; No Material Changes ...............................................8
2.7 Books and Records .......................................................................9
2.8 Title to Properties; Encumbrances ......................................................10
2.9 Tangible Assets ........................................................................10
2.10 Real Property .........................................................................10
2.11 Leases ................................................................................10
2.12 Contracts .............................................................................10
2.13 Government Contracts ..................................................................11
2.14 No Conflicts; Restrictive Documents; Consents .........................................14
2.15 Litigation ............................................................................14
2.16 Taxes .................................................................................14
2.17 Independent Contractor Status .........................................................15
2.18 Liabilities; Indebtedness .............................................................15
2.19 Insurance .............................................................................16
2.20 Intellectual Property .................................................................16
2.21 Licenses ..............................................................................18
2.22 Compliance with Laws ..................................................................19
2.23 Accounts Receivable ...................................................................19
2.24 Employee Relations ....................................................................19
2.25 Employee Benefit Plans ................................................................19
2.26 Environmental Matters .................................................................20
2.27 Interests in Clients, Suppliers, Etc ..................................................22
2.28 Bank Accounts, Powers of Attorney .....................................................22
2.29 No Changes Since Balance Sheet Date ...................................................22
2.30 Disclosure ............................................................................22
2.31 Broker's or Finder's Fees .............................................................23
2.32 Copies of Documents ...................................................................23
2.33 Matters Affecting Employees ...........................................................23
2.34 Pooling ...............................................................................23
2.35 Affiliate Letters .....................................................................23
2.36 Investment ............................................................................23
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND MERGER SUB ..................24
3.1 Existence and Good Standing ............................................................24
3.2 Capital Stock ..........................................................................24
3.3 Purchaser Shares .......................................................................24
3.4 Power and Authority ....................................................................25
3.5 No Conflicts; Restrictive Documents; Consents ..........................................25
3.6 SEC Reports ............................................................................25
3.7 Broker's or Finder's Fees ..............................................................26
3.8 Litigation .............................................................................26
3.9 No Prior Activities ....................................................................26
ARTICLE IV - CONDUCT OF BUSINESS; EXCLUSIVE DEALING; REVIEW ...................................26
4.1 Conduct of Business of the Company .....................................................26
4.2 Exclusive Dealing; Voting ..............................................................27
4.3 Review of the Company ..................................................................28
4.4 Best Efforts ...........................................................................28
ARTICLE V - CONDITIONS TO THE PURCHASER'S AND MERGER SUB'S OBLIGATIONS ........................28
5.1 Truth of Representations and Warranties ................................................29
5.2 Good Standing and Other Certificates ...................................................29
5.3 Performance of Agreements ..............................................................29
5.4 No Litigation ..........................................................................29
5.5 Pooling Letter .........................................................................29
5.6 Affiliate Letters ......................................................................29
5.7 Pooling Opinion ........................................................................29
5.8 Opinion of the Company's Counsel .......................................................30
5.9 No Material Adverse Change .............................................................30
5.10 Governmental and Other Approvals and Consents .........................................30
5.11 State Securities Permit ...............................................................30
5.12 Employment and Consulting Agreements ..................................................30
5.13 Certain Agreements ....................................................................30
5.14 Escrow Agreement ......................................................................30
5.15 Shareholder Approval ..................................................................31
5.16 Dissenters ............................................................................31
5.17 Plan of Merger ........................................................................31
5.18 Terms of Option Agreements and Restricted Shares ......................................31
5.19 Tax Matters ...........................................................................31
5.20 Resignations ..........................................................................31
5.21 Intra-Company Debt ...................................................................31
5.22 Current Employees .....................................................................31
5.23 Release of Security Interests .........................................................32
5.24 Holders of Unexercised Options ........................................................32
5.25 Restricted Shares .....................................................................32
ARTICLE VI - CONDITIONS TO THE COMPANY'S OBLIGATIONS ..........................................32
6.1 Truth of Representations and Warranties ................................................32
6.2 Good Standing and Other Certificates ...................................................32
6.3 Performance of Agreements ..............................................................33
6.4 Opinion of Purchaser's Counsel .........................................................33
6.5 State Securities Permit ................................................................33
6.6 Governmental and Other Approvals and Consents ..........................................33
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
6.7 Shareholder Approval ...................................................................33
6.8 Plan of Merger .........................................................................34
6.9 Tax Opinion ............................................................................34
6.10 Bank Loan .............................................................................34
ARTICLE VII - CERTAIN COVENANTS AND AGREEMENTS OF THE PARTIES .................................34
7.1 Non-Competition; Non-Interference ......................................................34
7.2 Fairness Hearing Application ...........................................................36
7.3 Pooling Restrictions and Related Matters ...............................................36
7.4 Compliance with Employment and Consulting Agreements ...................................37
7.5 Supplemental Disclosure ................................................................37
7.6 Employees; Continued Operations ........................................................37
7.7 Form S-8 ...............................................................................38
7.8 Listing of Additional Shares ...........................................................38
7.9 401(k) Plan ............................................................................38
7.10 Dissenters ............................................................................38
7.11 Shareholder Meeting; Shareholder Approval; Information Statement ......................38
7.12 Director and Officer Indemnification ..................................................39
ARTICLE VIII - SURVIVAL OF REPRESENTATIONS; INDEMNITY; SET-OFF ................................39
8.1 Survival of Representations ............................................................39
8.2 Indemnification ........................................................................39
ARTICLE IX - TERMINATION ......................................................................41
9.1 Termination ............................................................................41
ARTICLE X - MISCELLANEOUS .....................................................................42
10.1 Definitions of Certain Terms ..........................................................42
10.2 Expenses ..............................................................................44
10.3 Remedies Not Exclusive ................................................................44
10.4 Governing Law .........................................................................44
10.5 Further Assurances ....................................................................44
10.6 Captions ..............................................................................44
10.7 Publicity .............................................................................44
10.8 Notices ...............................................................................44
10.9 Recovery of Litigation Costs ..........................................................46
10.10 Parties in Interest ..................................................................46
10.11 Counterparts .........................................................................46
10.12 Entire Agreement .....................................................................46
10.13 Construction of Certain Disclosures ..................................................47
10.14 Amendments ...........................................................................47
10.15 Severability .........................................................................47
10.16 Third Party Beneficiaries ............................................................47
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Schedules
<S> <C>
Schedule 2.1 Shareholders
Schedule 2.3 Company Capitalization
Schedule 2.5 Subsidiaries and Investments
Schedule 2.6 Financial Statements; Backlog
Schedule 2.8 Encumbrances
Schedule 2.9 Tangible Assets
Schedule 2.11 Leases
Schedule 2.12 Contracts
Schedule 2.13 Government Contracts
Schedule 2.14 Restrictive Documents and Consents
Schedule 2.16 Taxes
Schedule 2.17 Company Contractors
Schedule 2.18 Indebtedness
Schedule 2.19 Insurance
Schedule 2.20(b) Registered Proprietary Assets
Schedule 2.20(c) Other Proprietary Assets
Schedule 2.20(d) Licensed Proprietary Assets
Schedule 2.20(e) Encumbrances on Proprietary Assets
Schedule 2.20(f) Joint Development of Proprietary Assets
Schedule 2.20(g) Employees or Consultants Not Subject to Confidentiality Agreement
Schedule 2.20(i) Infringement
Schedule 2.20(j) Licenses or Other Limitations on Proprietary Assets
Schedule 2.20(k) Certain Technology Matters
Schedule 2.21 Licenses
Schedule 2.24 Employees
Schedule 2.25 Employee Benefit Plans
Schedule 2.26(b) Environmental Matters
Schedule 2.26(g) Storage Tanks
Schedule 2.27 Interests in Clients, Suppliers, etc.
Schedule 2.28 Bank Accounts, Powers of Attorney
Schedule 2.29 No Material Changes
Schedule 2.35 Rule 145 Affiliates
Schedule 4.1 Conduct of Business
Schedule 5.13 Certain Agreements
Schedule 5.22(a) Employees
Schedule 5.22(b) Other Employees
Schedule 7.6 Post-Closing Conduct of Business
Schedule 8.2 Indemnification Matters
</TABLE>
Exhibits
Exhibit A - Plan of Merger
Exhibit B - Escrow Agreement
Exhibit C-1, C-2 and C-3 - Nondisclosure and Confidentiality Agreement
Exhibit D - Affiliate Letter
Exhibit E - Opinion of Company's Counsel
Exhibit F - Consulting Agreement
Exhibit G-1, G-2, G-3, G-4 - Employment Agreements
Exhibit H - Opinion of Purchaser's Counsel
iv
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT (this "Agreement") is made and dated as of April 10, 2000,
by and among CREE, INC., a North Carolina corporation (the "Purchaser"), CRYSTAL
ACQUISITION, INC., a North Carolina corporation and wholly-owned subsidiary of
the Purchaser ("Merger Sub"), NITRES, INC., a California corporation (the
"Company"), and those shareholders of the Company as listed on the signature
page to this Agreement (the "Principal Shareholders"). Capitalized terms used in
this Agreement and not otherwise defined are defined in Section 10.1 below.
Except as otherwise specifically stated, references in this Agreement to
schedules and exhibits are references to the documents attached as schedules and
exhibits to this Agreement, all of which form a part hereof.
WITNESSETH:
WHEREAS, the parties to this Agreement desire for Merger Sub and the
Company to engage in, and the boards of directors of the Purchaser, Merger Sub
and the Company have approved, the merger of Merger Sub with and into the
Company (the "Merger") upon the terms and subject to the conditions set forth in
this Agreement and in the related Plan and Agreement of Merger attached as
Exhibit A (the "Plan of Merger");
WHEREAS, the Principal Shareholders are the owners of at least 95% of all
issued and outstanding shares of capital stock of the Company and the owners of
at least a majority of the issued and outstanding shares of each class of
capital stock of the Company, as set forth adjacent to their respective names on
Schedule 2.1; and
WHEREAS, the parties intend and desire for the Merger to constitute a
"pooling of interests" for the Purchaser's accounting purposes and a
reorganization within the meaning of Section 368(a) of the Code for United
States federal income tax purposes;
NOW, THEREFORE, in consideration of the premises, covenants and agreements
set forth in this Agreement and of other good and valuable consideration, the
receipt and legal sufficiency of which they hereby acknowledge, and intending to
be legally bound, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger
(a) Upon the performance of all covenants and obligations and the
fulfillment of all conditions to the obligations of the parties contained
herein (other than such covenants, obligations and conditions as shall have
been waived in accordance with the terms hereof), and in accordance with
the North Carolina Business Corporation Act, as amended (the "NCBCA"), and
the California Corporations Code, as amended (the "California Code"), at
the Effective Time (as defined in subsection (b) below), Merger Sub shall
be merged with and into the Company in accordance with the Plan of Merger;
the separate existence of Merger Sub shall cease; and the Company shall be
the surviving corporation (sometimes referred to herein as the "Surviving
Corporation") and shall continue its corporate existence under the laws of
the State of California. The name of the Surviving Corporation shall be
"Cree Lighting Company."
<PAGE>
(b) The Merger shall be effected by the filing of articles of merger
with the Secretary of State of North Carolina in accordance with the
provisions of Article 11 of the NCBCA and the filing of the Plan of Merger
with the Secretary of State of California in accordance with the provisions
of Section 1103 of the California Code. The Merger shall become effective
at the time set forth in such articles of merger and Plan of Merger, which
shall be filed contemporaneously with the closing conducted pursuant to
Section 1.5 below (the "Closing"). The time and date when the Merger shall
become effective is referred to in this Agreement as the "Effective Time."
(c) At the Effective Time, by virtue of the Merger and without any
action on the part of the holders of shares of common stock, $.001 par
value per share, or preferred stock, $.001 par value per share, of the
Company ("Company Common Stock" and "Company Preferred Stock",
respectively, and collectively the "Company Stock"), and subject to the
withholding into escrow described in Section 1.4 below:
(i) Each issued and outstanding share of Company Common Stock
(other than treasury shares and Dissenting Shares (as defined below))
shall be converted into the right to receive shares of Common Stock of
the Purchaser ("Purchaser Common Stock") such that each holder of
shares of Company Common Stock shall be entitled to receive the number
of shares of Purchaser Common Stock (less any fractional share, which
shall be eliminated) determined by multiplying (A) the number of
shares of Company Common Stock set forth opposite his or her name on
Schedule 2.1 by (B) the Exchange Ratio (as defined below);
(ii) Each issued and outstanding share of Company Preferred Stock
(other than treasury shares and Dissenting Shares) shall be converted
into the right to receive the number of shares of Purchaser Common
Stock equal to the sum of (A) the number of shares obtained by
multiplying the number of shares of Company Preferred Stock set forth
opposite his or her name on Schedule 2.1 by the Preference Exchange
Ratio (as defined below), plus (B) the number of shares of Purchaser
Common Stock that the holder of such shares would have received had
the Company Preferred Stock been converted into Company Common Stock
immediately prior to the Effective Time (less any fractional share,
which shall be eliminated).
(iii) Each outstanding option to purchase shares of Company
Common Stock (a "Stock Option") under the Company 1999 Stock
Option/Stock Issuance Plan (the "Company Plan"), whether vested or
unvested shall be assumed by Purchaser. Accordingly, each Stock Option
shall be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such Stock Option immediately
prior to the Effective Time (including without limitation any
repurchase rights), the number of shares of Purchaser Common Stock
determined by multiplying the number of shares of Company Common Stock
that were purchasable immediately prior to the Effective Time upon the
exercise of such Stock Option by the Exchange Ratio (less any
fractional share, which shall be eliminated) at a price per share
(rounded up to the nearest whole cent) equal to (A) the exercise price
per share of Company Common Stock immediately prior to the Effective
Time under such Stock Option divided by (B) the Exchange Ratio;
provided, however, that in the case of any Stock Option to which
Section 422 of the Code applies ("incentive stock options"), the
option price, the number of shares purchasable pursuant to such
option, and the terms and conditions of exercise of such option shall
be determined in order to comply with Section 424(a) of the Code. As
soon as practicable after the Effective Time, the Purchaser shall
deliver to each
2
<PAGE>
holder of Stock Options a notice confirming the foregoing assumption
and setting forth such holder's rights pursuant thereto, including the
number of shares of Purchaser Common Stock purchasable under the
assumed Stock Option and the corresponding exercise price thereunder;
(iv) Each share of Company Common Stock (a) acquired by a
Shareholder on the exercise of Stock Options granted by the Company
under the Company Plan or (b) otherwise issued by the Company to a
Shareholder, which in each case is subject to repurchase rights
(collectively, the "Repurchase Rights"), including without limitation
Company Common Stock issued pursuant to the Company Plan or pursuant
to certain Common Stock Issuance Agreements or certain Common Stock
Purchase Agreements between the Company and certain Shareholders
(collectively, the "Restricted Shares") shall be converted into the
right to receive shares of Purchaser Common Stock as described in
Section 1.1(c)(i) above and the Repurchase Rights and any agreement or
instrument evidencing the Repurchase Rights shall be deemed assigned
by the Company to Purchaser and shall be deemed assumed by the
Purchaser, thereby giving the Purchaser all the rights that the
Company would have had under the terms of the Repurchase Rights
including the right to repurchase the shares upon the happening of
certain events. As soon as practicable after the Effective Time, the
Purchaser shall deliver to each holder of Restricted Shares a notice
confirming the foregoing assignment and assumption and setting forth
such holder's rights pursuant thereto;
(v) Each outstanding warrant to purchase shares of Company
Preferred Stock (a "Warrant") shall be deemed to constitute a warrant
to acquire, on the same terms and conditions as were applicable under
such Warrant immediately prior to the Effective Time, the number of
shares of Purchaser Common Stock that would have been received by the
holder thereof had the warrant been exercised to purchase Company
Preferred Stock immediately prior to the Effective Time (less any
fractional share, which shall be eliminated) at a price per share
(rounded up to the nearest whole cent) equal to (A) the exercise price
per share of Company Preferred Stock immediately prior to the
Effective Time under such Warrant multiplied by a fraction the
numerator of which shall be the number of shares of Company Preferred
Stock for which the Warrant is exercisable and the denominator of
which shall be the number of shares of Purchaser Common Stock for
which the Warrant is exercisable after the Effective Time. As soon as
practicable after the Effective Time, the Purchaser shall deliver to
each holder of a Warrant a notice confirming the foregoing and setting
forth such holder's rights pursuant thereto, including the number of
shares of Purchaser Common Stock purchasable under the Warrant and the
corresponding exercise price thereunder; and
(vi) Each share of Company Stock that is owned by the Company, if
any, shall automatically be cancelled and retired and shall cease to
exist, and no Purchaser Common Stock shall be delivered in exchange
therefor.
(d) For purposes of this Article I:
(i) "Average Share Price" shall mean the average of the closing
price of Purchaser Common Stock over the 30-day period ending three
(3) days prior to the Closing, taking into account any stock splits,
stock dividends or similar recapitalization.
(ii) "Company Capitalization" shall mean the Company's
fully-diluted capitalization immediately prior to the Effective Time
(treating all then-outstanding Stock Acquisition Rights for securities
of the Company as fully exercised or converted into shares of
3
<PAGE>
Company Common Stock), comprised of 2,362,194 shares of Company Stock
on the date hereof, as set forth on Schedule 2.3.
(iii) "Exchange Ratio" shall mean the number (rounded to five
decimal places) determined by dividing (A) 2,000,000 (the total number
of Purchaser shares) less the Preference Shares by (B) the Company
Capitalization. In the event that between the date of this Agreement
and the Closing Date, the Purchaser shall change the number of shares
of Purchaser Common Stock that are issued and outstanding as a result
of any stock split, stock dividend or similar recapitalization, the
figures and calculations used to determine the Exchange Ratio each
shall be proportionately adjusted correspondingly. Subject to the
foregoing sentence, the Purchaser shall have no obligation to issue in
excess of 2,000,000 shares of Purchaser Common Stock pursuant to this
Agreement.
(iv) "Preference Exchange Ratio" shall mean $1.48 divided by the
Average Share Price.
(v) "Preference Shares" shall mean that number of shares of
Purchaser Common Stock equal to the sum of (A) the total number of
shares of Company Preferred Stock outstanding immediately prior to the
Effective Time and (B) the total number of shares of Company Preferred
Stock that would have been outstanding had all of the Warrants been
exercised immediately prior to the Effective Time, multiplied by the
Preference Exchange Ratio.
(e) Capital Stock of Merger Sub. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of shares of
common stock, $.01 par value per share, of Merger Sub ("Merger Sub Common
Stock"), each share of Merger Sub Common Stock issued and outstanding
immediately prior to the Effective Date shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of
common stock, par value $.001 per share of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.
1.2 Exchange Procedures.
(a) Purchaser hereby designates its transfer agent to act as the
Exchange Agent hereunder (the "Exchange Agent"). Promptly after the
Effective Time, Purchaser shall make available to the Exchange Agent for
exchange in accordance with this Article I, through such reasonable
procedures as the Purchaser and the Exchange Agent may adopt, certificates
evidencing the shares of Purchaser Common Stock issuable pursuant to
Section 1.1(c)(i) and (ii) above in exchange for the shares of Company
Stock outstanding immediately prior to the Effective Time less the number
of shares of Purchaser Common Stock to be deposited into the Escrow Fund
(defined below) pursuant to Section 1.4 below. Upon surrender of a stock
certificate representing shares of Company Stock (a "Certificate") for
cancellation to the Exchange Agent in accordance with the Purchaser's and
Exchange Agent's procedures, the holder of such Certificate shall be
entitled to receive in exchange therefor (A) the number of shares
represented by the surrendered Certificate, multiplied by (B) the
applicable number of shares pursuant to Section 1.1(c). The Certificate so
surrendered shall forthwith be cancelled. Until surrendered as contemplated
by this Section 1.2(a), each Certificate shall be deemed from and after the
Effective Time to represent only the right to receive upon such surrender
the merger consideration described above for each share represented by the
Certificate. In no
4
<PAGE>
event shall the holder of any such surrendered Certificate be entitled
to receive interest on any merger consideration to be received in
connection with the Merger. Neither the Exchange Agent nor the Purchaser
shall be liable to a holder of Company Stock for any merger consideration
paid to a public official pursuant to any applicable abandoned property,
escheat or similar law. Any payments under this Section 1.2 shall be
subject to applicable tax withholding requirements.
(b) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the
Purchaser or its transfer agent, the posting by such person of a bond or
other indemnification, in such reasonable and customary amount as the
Purchaser or its transfer agent may direct, as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Certificate
the merger consideration described above.
1.3 Parties' Intent. The parties to this Agreement intend for the
transactions contemplated by this Agreement to qualify for "pooling of
interests" treatment for the Purchaser's accounting purposes and as a
reorganization within the meaning of Section 368(a) of the Code for United
States federal income tax purposes.
1.4 Issuances into Escrow.
(a) When making the issuances required by Section 1.1 above, and
notwithstanding any provision in this Agreement to the contrary, the
Purchaser shall withhold from the shareholders of the Company (the
"Shareholders") (on a pro rata basis according to their respective
interests therein) and deliver to the Escrow Agent (as defined in the
Escrow Agreement referred to below) ten percent (10%) of the aggregate
number of shares of Purchaser Common Stock issuable pursuant to Section
1.1(c)(i) and (ii) above (the "Escrow Fund"), to be held and distributed by
the Escrow Agent pursuant to the terms of this Agreement and the Escrow
Agreement attached as Exhibit B (the "Escrow Agreement"). All such shares
shall be issued in the name of the Escrow Agent, as escrow agent under the
Escrow Agreement.
(b) Fred A. Blum shall, by virtue of the Merger and as of the
Effective Time, be irrevocably appointed attorney-in-fact and authorized to
act for and on behalf of any or all of the Shareholders (with full power of
substitution in the premises) with respect to all matters arising in
connection with the Escrow Agreement, including without limitation the
power and authority on behalf of each Shareholder to do or take any one or
more of the actions enumerated in Section 1.4 thereof (the above-named
representative, or any subsequent representative appointed under the Escrow
Agreement, the "Representative"). Such appointment may be changed as
provided in the Escrow Agreement. Each of the Purchaser and Merger Sub
shall be entitled to rely on such appointment and treat the Representative
as the duly appointed attorney-in-fact of each Shareholder for all such
purposes. Each Shareholder by receiving merger consideration acknowledges
and agrees that such appointment is irrevocable and coupled with an
interest.
(c) The Representative shall not be liable for any act done or omitted
hereunder as Representative while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice
of counsel shall be conclusive evidence of such good faith. Each
Shareholder shall jointly and severally indemnify the
5
<PAGE>
Representative and hold him harmless against any loss, liability or expense
incurred without gross negligence or bad faith on the part of the
Representative and arising out of or in connection with the acceptance or
administration of his duties hereunder.
1.5 Closing. Consummation of the Merger and the other transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. on the second
business day after all of the conditions set forth in Article V and Article VI
shall have been satisfied or waived, or at such other time and date as the
Purchaser and the Company shall designate in writing (such specified or other
time and date, the "Closing Date").
1.6 Transaction Documents. As used in this Agreement, the term "Transaction
Documents" shall mean, collectively, this Agreement, the Escrow Agreement, the
Employment and Consulting Agreements (as defined in Section 5.12), and all
agreements, instruments, certificates and other documents executed or delivered
in accordance with the terms of this Agreement or any Transaction Document.
1.7 Dissenters' Rights. Any shares of Company Stock which immediately prior
to the Effective Time are held by shareholders who have properly exercised and
perfected, and have not withdrawn or otherwise forfeited, dissenters' or
appraisal rights in accordance with California Code Section 1300 et seq.
("Dissenting Shares") shall not be converted into the right to receive shares of
Purchaser Common Stock at the Effective Time as provided in Sections 1.1(c)(i)
or (ii) above; rather, the holders of Dissenting Shares shall be entitled to
receive consideration determined pursuant to California Code Section 1300 et
seq.; provided, however, that if any such holder shall have failed to perfect or
shall withdraw or lose such holder's dissenter's rights, such holder's shares of
Company Stock thereupon shall be deemed to have been converted into the right to
receive shares of Purchaser Common Stock as provided in Sections 1.1(c)(i) or
(ii) above (subject to the withholding into escrow described in Section 1.4
above), and such shares shall no longer be Dissenting Shares. Company agrees
that, except with the prior written consent of Purchaser, or as required under
the California Code, the Company will not voluntarily make any payment with
respect to, or settle or offer to settle, any purchase demand by a holder of
Dissenting Shares. Each holder of Dissenting Shares who becomes entitled to
payment for such shares pursuant to California Code Section 1300 et seq. shall
receive payment therefor from the Surviving Corporation from funds provided by
Purchaser (but only after the amount of the payment required therefor shall have
been agreed upon or finally determined pursuant to the California Code).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company (and not any Principal Shareholders) represents and warrants to
the Purchaser and Merger Sub and agrees as set forth in this Article II, except
that each Principal Shareholder (and not the Company) represents and warrants
severally, and not jointly and severally, to the Purchaser and Merger Sub and
agrees as set forth in Sections 2.1(b), 2.4(b), and 2.36 as follows:
6
<PAGE>
2.1 Ownership of Stock.
(a) Each Shareholder is the record owner of the number of shares of
Company Stock listed opposite his or her name in Schedule 2.1, which are,
to the Company's knowledge, free and clear of all Encumbrances.
(b) Each Principal Shareholder is the lawful owner of the number of
shares of the Company Stock listed opposite of his or her name in Schedule
2.1, free and clear of all Encumbrances.
2.2 Existence and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has the power to own its properties and to carry on its
business as now being conducted. The Company is not required to be qualified to
do business in any other jurisdictions under applicable Law.
2.3 Capital Stock. The Company has an authorized capitalization consisting
of the number and types of shares of capital stock set forth in Schedule 2.3,
with the par value per share stated therein. The Company has issued and
outstanding the number and types of shares of capital stock set forth in
Schedule 2.3; no other shares of capital stock are issued or outstanding; and
there are no outstanding Stock Acquisition Rights for securities of the Company,
other than as contemplated by this Agreement or set forth in Schedule 2.3. In
the case of Stock Options and Restricted Shares, Schedule 2.3 sets forth the
number of vested shares as of the date of this Agreement. Set forth on Schedule
2.3 are the following for each holder of capital stock and Stock Options of the
Company: (i) in the case of capital stock, whether such stock constitutes or has
constituted Restricted Shares at any time; (ii) in the case of Restricted Shares
or Stock Options, the date of issuance or grant, the vesting commencement date,
the date of exercise or purchase, and a brief description of the vesting
provisions. Except as set forth on Schedule 2.3, the Merger will not cause the
acceleration of vesting of any Stock Options or any Restricted Shares or the
termination or lapse of any Repurchase Rights. All of the issued and outstanding
shares of capital stock of the Company have been duly authorized and validly
issued, are fully paid and non-assessable, were issued in accordance with the
registration or qualification provisions of the Securities Act and any relevant
state securities laws or pursuant to valid exemptions therefrom, and none of
such shares have been issued in violation of the preemptive rights, rights of
first refusal or other similar rights of any Shareholder. With respect to each
Person that received at any time Restricted Shares, the Company delivered to
such Person at or prior to the time of receipt by such Person of such Restricted
Shares a memorandum or other instrument accurately describing the consequences
of the failure by such Person to file timely an election under Section 83(b) of
the Code. The requisite shareholders of the Company have executed and delivered
to the Company proper instruments such that the acceleration of the vesting (or
lapse of certain repurchase rights) under the Stock Options and Restricted
Shares do not constitute excess parachute payments under Section 280G of the
Code.
2.4 Power and Authority.
(a) The Company has all requisite power and authority to enter into
and deliver this Agreement and the other Transaction Documents to which it
is a party, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The Company's
execution, delivery and performance of this Agreement
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and the other Transaction Documents and the Company's consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all corporate action required by applicable Law or the
Company's Organizational Documents, other than shareholder approval as
contemplated by this Agreement. This Agreement and the other Transaction
Documents to which the Company is a party constitute the valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as enforcement may be
limited by general equitable principles (whether raised in a proceeding at
law or in equity), or by applicable bankruptcy, insolvency, moratorium or
similar laws of general application relating to or affecting creditors'
rights (including without limitation, the effect of statutory or other laws
regarding fraudulent conveyances or transfers and preferential transfers).
As of the Closing Date, the Company shall have complied with the
requirements of the California Code relating to dissenters' rights
applicable to the Merger or the other transactions contemplated hereby.
(b) Each Principal Shareholder has the full legal right, power and
authority to enter into and deliver this Agreement and the other
Transaction Documents to which such Principal Shareholder is a party,
perform such Principal Shareholder's obligations hereunder and thereunder
and consummate the transactions contemplated hereby and thereby. Each
Principal Shareholder's execution, delivery and performance of this
Agreement and the other Transaction Documents and such Principal
Shareholder's consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all action required of
such Principal Shareholder by applicable Law and, if applicable, its
Organizational Documents. This Agreement and the other Transaction
Documents to which each Principal Shareholder is a party constitute the
valid and legally binding obligations of such Principal Shareholder,
enforceable against such Principal Shareholder in accordance with their
respective terms, except as enforcement may be limited by general equitable
principles (whether raised in a proceeding at law or in equity), or by
applicable bankruptcy, insolvency, moratorium or similar laws of general
application relating to or affecting creditors' rights (including without
limitation, the effect of statutory or other laws regarding fraudulent
conveyances or transfers and preferential transfers).
2.5 Subsidiaries and Investments. Except as set forth in Schedule 2.5, the
Company does not own, directly or indirectly, any capital stock or other equity
or ownership or proprietary interest in any Person and is not a party to any
joint venture or partnership Contract.
2.6 Financial Statements; No Material Changes.
(a) The Company has furnished the Purchaser with true and complete
copies of the unaudited balance sheet of the Company as of December 31,
1999 (the "Balance Sheet") and the related statement of income for the year
then ended (collectively, the "Annual Financial Statements"). The Company
also has furnished the Purchaser with true and complete copies of the
unaudited balance sheet and statement of income for the Company for the
one-month period ending January 31, 2000 and the one-month period ending
February 29, 2000, each of which was prepared on a basis consistent with
the corresponding Annual Financial Statements; further, on or before the
tenth day of each calendar month after the date of this Agreement, the
Company will use its best efforts to provide the Purchaser with an
unaudited balance sheet and statement of income for the Company for each
such calendar month, each of which will be prepared on a basis consistent
with the corresponding Annual Financial Statements (the "Interim Financial
Statements," and together with the Annual Financial Statements, the
"Financial Statements"). The Financials Statements have been
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prepared in accordance with generally accepted accounting principles (GAAP)
consistently applied throughout the periods indicated (except that the
Financial Statements do not contain footnotes), and are correct, complete,
and consistent with the Company's books and records (which are correct and
complete), except that the Interim Financial Statements are subject to
normal, recurring adjustments (which will not be material, individually or
in the aggregate). The balance sheets furnished pursuant to this Section
2.6 fairly present the financial condition of the Company at the respective
dates thereof, and reflect all claims against and debts and liabilities of
the Company, fixed or contingent, as at the respective dates thereof
(including the Company management's reasonable estimate in accordance with
GAAP of any unliquidated liability required by GAAP to be reflected
thereon); and the related statements of income, shareholders' equity and
cash flows fairly present the results of the operations of the Company and
the changes in financial position for the periods indicated. There are no
transactions between the Company and any Shareholder (or any affiliate
thereof) which are not reflected in the Financial Statements or on Schedule
2.6 or Schedule 2.12.
(b) Since December 31, 1999 (the "Balance Sheet Date"), there has been
no event, fact, condition, circumstance or other development which has had
or may have, individually or in the aggregate, a Material Adverse Effect on
the Company, whether as a result of any Casualty, termination or impairment
of any material Contract or business relationship, the enactment of any new
Law, or otherwise; nor is the Company aware of any such event, fact,
condition, circumstance or other development which is reasonably likely to
occur in the foreseeable future.
(c) Schedule 2.6 sets forth a true and correct report describing the
Company's backlog (calculated based on fee payments anticipated to be
received under letters of intent and legally binding written agreements for
the provision of services to third parties) ("Backlog"). The Backlog as of
February 29, 2000 was at least $4,430,000, of which at least $646,000 is
attributable to the fiscal year ending December 31, 2000.
(d) Without limiting the foregoing, and for purposes of the
Purchaser's evaluation whether the Purchaser is required to file a
notification under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (together with all rules and regulations promulgated
thereunder, the "HSR Act"), (i) the Company is not "engaged in
manufacturing" (as defined in the HSR Act); (ii) the total assets of the
Company and any Person controlled by the Company, taken together and
calculated on the basis required by the HSR Act, are less than $10 million;
(iii) the annual net sales of the Company and any person controlled by the
Company, taken together and calculated on the basis required by the HSR
Act, are less than $100 million; and (iv) the Company does not have an
"ultimate parent entity" (as defined in the HSR Act).
2.7 Books and Records. The minute books of the Company, as previously made
available to the Purchaser and its representatives, contain accurate records of
all meetings of and action taken by the shareholders and board of directors
(including committees thereof) of the Company. The Company has none of its
records, systems, controls, data or information recorded, stored, maintained,
operated or otherwise wholly or partly dependent upon or held by any means
(including any electronic, mechanical or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
are not under the exclusive ownership and direct control of the Company.
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2.8 Title to Properties; Encumbrances. Except as set forth in Schedule 2.8
and except for properties and assets reflected in the Balance Sheet or acquired
since the Balance Sheet Date which in each case have been sold or otherwise
disposed of in the ordinary course of business, the Company has good, valid and
marketable title to (a) all of its properties and assets (real and personal,
tangible and intangible), including without limitation all of the properties and
assets reflected in the Balance Sheet, and (b) all of the properties and assets
purchased by the Company since the Balance Sheet Date; in each case subject to
no Encumbrance, except for Permitted Encumbrances.
2.9 Tangible Assets. Schedule 2.9 contains an accurate and complete list of
all tangible assets of the Company, whether owned or leased (as so indicated),
having a value (individually or in the aggregate with other like items) in
excess of $25,000, and not including any materials or similar items having a
useful life of less than one year. The tangible assets listed in Schedule 2.9
are in a state of good maintenance and repair, are adequate and suitable for the
purposes for which they are currently being used, and constitute all of the
tangible assets (having such value) used in or necessary to conduct the
Company's business as currently conducted.
2.10 Real Property. Except as described in Section 2.11 as to leased real
property, the Company does not currently own, and has not at any time owned, in
whole or in part, any interest (direct or indirect) in any real property.
2.11 Leases. Schedule 2.11 contains an accurate and complete list and
summary of the terms of each lease to which the Company is a party (as lessee or
lessor). Each lease set forth in Schedule 2.11 (or required to be set forth in
Schedule 2.11) is in full force and effect; all rents and additional rents due
to date on each such lease have been paid; in each case, the lessee has been in
peaceable possession since the commencement of the original term of such lease
and is not in default thereunder, and no waiver, indulgence or postponement of
the lessee's obligations thereunder has been granted by the lessor; and there
exists no event of default or event, occurrence, condition or act (including the
transactions contemplated by this Agreement) which, with the giving of notice,
the lapse of time or the happening of any further event or condition, would
become a default under such lease. To the Company's knowledge, all of the
covenants to be performed by any other party under any such lease have been
fully performed. The property leased by the Company is in a state of good
maintenance and repair and is adequate and suitable for the purposes for which
it is presently being used.
2.12 Contracts. Except as set forth in Schedule 2.12, the Company neither
has nor is bound by (a) any Contract relating to the performance by the Company
of services for or on behalf of any person or entity requiring the Company to
provide more than $25,000 in such services, or is not terminable by the Company
without penalty within 30 days, (b) any Contract relating to the engagement as
an independent contractor or employment of any person by the Company, or any
bonus, deferred compensation, pension, profit sharing, stock option, employee
stock award or purchase, retirement or other employee benefit plan, (c) any
Contract which contains restrictions with respect to the payment of dividends or
other distributions by the Company, (d) any Contract relating to capital
expenditures exceeding $25,000 individually or in the aggregate, and not
terminable by the Company without penalty within 30 days, (e) any loan or
advance to, or investment in, any Person or any Contract relating to the making
of any such loan, advance or investment, (f) any guarantee or other contingent
liability in respect of any indebtedness or obligation of any Person (other than
the endorsement of negotiable instruments for collection in the ordinary course
of business), (g) any management service,
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consulting or any other similar type Contract, (h) any Contract limiting the
freedom of the Company to engage in any line of business in any geographic area,
or to compete with any Person, (i) any other Contract which involves $25,000 or
more that is not immediately terminable by the Company without penalty, or (j)
any Contract which might reasonably be expected to have a potential adverse
impact on the business or operations of the Company. Each Contract set forth in
Schedule 2.12 (or required to be set forth in Schedule 2.12) is in full force
and effect and constitutes a valid and legally binding obligation of each party
thereto, enforceable thereagainst in accordance with its terms; and there exists
no, and the Company has not received any notice or other communication asserting
the actual or alleged existence of any, default or event of default or event,
occurrence, condition or act (including the consummation of the transactions
contemplated by this Agreement) which, with the giving of notice, the lapse of
time or the occurrence of any other event or condition would become a default or
event of default thereunder. The Company has not violated any of the terms or
conditions of any Contract which would at any time since the Company's inception
have been required to be set forth in a schedule listing the types of agreements
and instruments set forth in Schedule 2.12 in any material respect. The Company
is in good relations with each other party thereto, and all of the covenants to
be performed by any other party thereto have been fully performed. The Company
is in good relations with and has not experienced, and does not anticipate, any
dispute with any supplier, vendor, contractor, or customer with which the
Company has conducted business during the one year period ending with the date
of this Agreement.
2.13 Government Contracts.
(a) Capitalized terms used in this Section 2.13 which are not
otherwise defined in this Agreement shall have the respective meanings set
forth below:
"Affiliate" means with respect to a specified person, any subsidiary,
joint venture or partnership controlled by the specified person and any
predecessors to the foregoing which had a Government Contract (during the
period when the predecessor was under the control of the specified person)
which remains subject to possible government audit.
"Bid" means any bid, proposal or quotation made by the Company, or by
a contractor team or joint venture in which the Company is participating,
that, if accepted, would lead to a Government Prime Contract or a
Government Subcontract.
"Government Contract" means any Government Prime Contract, Government
Subcontract, Bid or Teaming Agreement.
"Government Prime Contract" means any prime contract, basic ordering
agreement, letter contract, purchase order, delivery order, change,
arrangement or other commitment of any kind, on which final payment has not
been made, between the Company and either the U.S. Government or a State
Government.
"Government Subcontract" means any subcontract, basic ordering
agreement, letter subcontract, purchase order, delivery order, change,
arrangement or other commitment of any kind, on which final payment has not
been made, between the Company and any prime contractor to either the U.S.
Government or a State Government or any subcontractor with respect to a
Government Prime Contract.
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"State Government" means any state, territory or possession of the
United States or any department or agency of any of the above with
statewide jurisdiction and responsibility.
"Teaming Agreement" has the same meaning as the term, "Contractor team
arrangement," as defined in Federal Acquisition Regulation ("FAR") 9.601.
"U.S. Government" means the United States Government or any
department, agency or instrumentality thereof.
(b) A list of each and every Government Contract to which the Company
or any of its subsidiaries is a party is set forth in Schedule 2.13
attached hereto. Except as set forth in Schedule 2.13:
(i) To the best of the Company's knowledge and except for normal
disallowances and exceptions raised in past or future DCAA or DCMC
audits that would not be material in amount (or exceed the Company's
reserves therefor), the Company has fully complied with all terms and
conditions of such Government Contract, including all clauses,
provisions and requirements incorporated expressly by reference or by
operation of law therein;
(ii) The Company has fully complied with all requirements of any
statute, rule, regulation, order or agreement pertaining to such
Government Contract;
(iii) All representations and certifications executed,
acknowledged or set forth by the Company in or pertaining to such
Government Contract were current, accurate and complete as of their
effective date, and the Company has fully complied with all such
representations and certifications;
(iv) Neither the U.S. Government, any State Government nor any
prime contractor, subcontractor or other person has notified the
Company in writing or orally, that the Company has breached or
violated any Government Contract, statute, rule, regulation,
certification, representation, clause, provision, requirement or
implied duty;
(v) No termination for convenience, termination for default, cure
notice, show cause notice, or notice of breach of contract has been
issued under or in connection with any Government Contract;
(vi) No cost incurred by the Company under or in connection with
any Government Contract has been questioned or disallowed in writing;
(vii) No money due to the Company under or in connection with any
Government Contract has been (or has attempted to be) withheld or set
off;
(viii) All amounts previously charged or at present carried as
chargeable by the Company to any Government Contract with an agency or
instrumentality of the U.S. Government or any State Government have
been or will be reasonable, allowable and allocable to each such
Government Contract, net of any applicable reserves established by the
Company;
(ix) No notice has been given of a cost accounting standard
non-compliance under or in connection with any Government Contract;
and
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(x) The Company's business as currently conducted is in all
respects adequate and suitable for the performance of existing
Government Contracts.
(c) Investigations and Audits. Except as set forth in Schedule 2.13:
(i) None of the Company, the Company's Affiliates nor any of the
Company's directors, officers, employees, agents or consultants is (or
for the last five (5) years has been) under administrative, civil or
criminal investigation, indictment or information, audit or internal
investigation with respect to any alleged irregularity, misstatement
or omission arising under or relating to any Government Contract;
(ii) Neither the Company nor any of the Company's Affiliates has
made a voluntary disclosure to the U.S. Government or any State
Government with respect to any alleged irregularity, misstatement or
omission arising under or relating to a Government Contract;
(iii) The Company has no knowledge of any irregularity,
misstatement or omission arising under or relating to any Government
Contract that has led or could lead, either before or after the
Closing Date, to any of the consequences set forth in (i) and (ii)
above or any other damage, penalty assessment, recoupment of payment
or disallowance of cost in excess of the reserves therefor established
by the Company; and
(iv) The Company has no reason to believe that any employee,
agent, consultant, representative or Affiliate of the Company is in
receipt or possession of any competitor or government proprietary or
procurement sensitive information under circumstances where there is
reason to believe that such receipt or possession is unlawful or
unauthorized.
(d) Financing Arrangements and Claims Except as set forth in Schedule
2.13, there exist:
(i) No receivables financing arrangements with respect to
performance of any Government Contract;
(ii) No notice of any outstanding claims against the Company,
either by the U.S. Government, any State Government or by any prime
contractor, subcontractor, vendor or other third party, arising under
or relating to any Government Contract, which has been received by the
Company;
(iii) No facts that are known by the Company upon which such a
claim may be based in the future arising under or relating to any
Government Contract;
(iv) No disputes between the Company and the U.S. Government, any
State Government or any prime contractor, subcontractor or vendor
arising under or relating to any Government Contract; and
(v) No facts that are known by the Company over which such a
dispute may arise in the future.
The Company has no interest in any pending or potential claim against the
U.S. Government, any State Government or any prime contractor,
subcontractor or vendor arising under or relating to any Government
Contract.
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(e) No Suspension or Debarment. Neither the Company, nor to the
Company's knowledge, any of its directors, officers of employees, nor any
of the Company's Affiliates is (or for the last five (5) years has been)
suspended or debarred from doing business with the U.S. Government or any
State Government, or has been declared nonresponsible or ineligible for
U.S. Government or State Government contracting. The Company knows of no
circumstances that would warrant the institution of suspension or debarment
proceedings or the finding of nonresponsibility or ineligibility on the
part of the Company in the future.
2.14 No Conflicts; Restrictive Documents; Consents . Except as set forth in
Schedule 2.14, the Company is not subject to, or a party to, any Organizational
Document, Law (including without limitation the Worker Adjustment and Retraining
Notification Act, as amended) or Contract, or any other restriction of any kind
or character, which adversely affects the business practices, operations or
condition of the Company or any of its assets or property, or which would be
violated by or conflict with, prevent or impair (whether by acceleration of any
liability, creation of any Encumbrance or otherwise) or require any declaration,
filing, registration, notice, approval or consent to, with or of any Person in
connection with, the consummation of the transactions contemplated by this
Agreement or any other Transaction Document, compliance by the Company with the
terms, conditions and provisions hereof or thereof, or the present or continued
operation of the Company's business after the date hereof or the Closing Date on
substantially the same basis as heretofore operated, or which would restrict the
ability of the Company to acquire any property or conduct business in any area.
2.15 Litigation. There is no action, suit, proceeding at law or in equity,
arbitration or administrative or other proceeding or investigation by or before
any governmental or other instrumentality or agency pending or, to the Company's
knowledge, threatened against or affecting the Company, or any of its properties
or rights which could affect the right or ability of the Company to carry on its
business as now conducted, or which could affect the condition, whether
financial or otherwise, or properties of the Company; and the Company is not
aware of any basis for any such action, proceeding or investigation. Neither the
Company nor any of its affiliates is subject to any judgment, order or decree
entered in any lawsuit or proceeding which may affect any of the Company's
operations or business practices, or the ability of the Company to acquire any
property or conduct business in any area.
2.16 Taxes. The Company has filed or caused to be filed, within the times
and manners prescribed by law, all federal, state, local and foreign tax
returns, elections and tax reports which are required to be filed by, or with
respect to, the Company. True and complete copies of all such returns have been
made available to the Purchaser. Except as set forth on Schedule 2.16, (i) such
returns and reports reflect accurately all liability for taxes of the Company
for the periods covered thereby, (ii) all federal, state, local and foreign
income, profits, franchise, sales, use, occupancy, excise and other taxes and
assessments (including interest and penalties) payable by or due from the
Company have been fully paid or adequately disclosed and fully provided for in
the books and financial statements of the Company, and (iii) no examination of
any tax return of the Company is currently in progress, and no basis for any
assessment exists. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any tax return of the Company.
2.17 Independent Contractor Status. Schedule 2.17 sets forth a complete
list of the Persons engaged by the Company at any time to render consulting or
similar services to the Company on an independent contractor basis
(collectively, the "Company Contractors"). The
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Company has previously made available to the Purchaser true and complete copies
of each and every agreement between the Company and any Company Contractor.
Except as set forth on Schedule 2.17, each Company Contractor is and at all
times has been an independent contractor to, and not an employee of, the Company
for purposes of all applicable federal and state income tax withholding
requirements and otherwise.
2.18 Liabilities; Indebtedness.
(a) Except as set forth on Schedule 2.18, there are no liabilities,
obligations or indebtedness of or claims against the Company, whether known
or unknown, due or not yet due, asserted or unasserted (whether or not
probable of assertion), actual or potential, choate or inchoate, fixed,
contingent, or otherwise, arising from or in connection with, or based upon
acts, omissions, events, things, facts, conditions, matters or occurrences
existing, occurring or taking place on or before the Closing Date, whether
or not discovered, known, asserted, expected or contemplated by any party
or third party, or in any way choate on the Closing Date; and the Purchaser
shall not suffer or be subject to any Losses (as defined in Section 8.2(a)
below) arising from the foregoing, whether such Losses occur before or
after the Closing Date, except: (i) those liabilities set forth in the
Balance Sheet, (ii) liabilities that are not greater than $25,000 in the
aggregate, and (iii) liabilities actually incurred (not including
contingent liabilities (other than as permitted by Section 2.29) or acts or
omissions which may give rise to future liabilities) subsequent to the
Balance Sheet Date and incurred prior to the Effective Time in the ordinary
course of the Company's business and consistent with past practice;
provided that, without limitation, any other act or omission which may give
rise to liability in the future, including without limitation, any of the
following or any act or omission which results in any of the following, are
specifically deemed not to be in the ordinary course of business: (A) any
action, suit, proceeding at law or in equity, arbitration or other
proceeding or investigation by or before a governmental or other body, (B)
violation of Law, breach of contract, tort, violation of the rights of
others, acts or omissions causing injury to person or property, (C)
illegal, unlawful or criminal act or activity; or (D) any act in bad faith.
(b) Without limiting subsection (a) above, the Company has no
liabilities of any kind or character incurred in connection with or arising
from or in connection with the merger of Widegap Technology, LLC with and
into the Company, that are not reflected on the Balance Sheet or set forth
on Schedule 2.18.
(c) Schedule 2.18 is a complete and correct listing of all (i)
indebtedness for money borrowed by the Company, (ii) guarantees by or of
the Company, (iii) letters of credit and other credit enhancements extended
to the Company, and (iv) all capital lease obligations (all obligations
described by (i) through (iv) being referred to herein as "Indebtedness").
No default or event of default, or event or condition which with the giving
of notice, the lapse of time, a determination of materiality, the
satisfaction of any other condition or any combination of the foregoing
would constitute such a default or event of default exists with respect to
any such Indebtedness. As of the date of this Agreement, the sum of the
Indebtedness of the Company does not exceed $200,000 in principal amount
plus accrued interest at non-default rates.
2.19 Insurance. Set forth in Schedule 2.19 is a complete list of insurance
policies which the Company maintains with respect to its business, properties
and employees, together with a description of each claim made thereon in excess
of $25,000. All such policies are in full force and effect and are free from any
right of termination on the part of the applicable insurance carriers. Except as
set forth on Schedule 2.19, such policies, with respect to their
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amounts and types of coverage, are adequate to insure fully against risks to
which the Company and its property and assets are normally exposed in the
operation of its business, including professional liability, and do not require
the payment of any unusual premium, surcharge, or other increase above market
insurance rates as a result of the nature of the Company's business or the
manner in which such business has been conducted, including but not limited to
past loss or claim experience or risks of operations pertinent to insurability.
There are no outstanding unpaid premiums except in the ordinary course of
business, and the Company has not received any notice of cancellation or
non-renewal of any such policy. The Company is not aware of any extraordinary
risks, situations, occurrences or other matters which have been disclosed, or
should have been disclosed, to insurance carriers or brokers in connection with
any applications for insurance. There has never been any material adverse change
in the relationship of the Company with its insurers or in the premiums payable
pursuant to such policies. There exists no event of default or event,
occurrence, condition or act (including the transactions contemplated by this
Agreement) which, with the giving of notice, the lapse of time or the happening
of any further event or condition would become a default or occasion a material
premium increase (other than an increase anticipated as a result of the growth
and change in nature of the business) under any such policy or give rise to, and
the Company has no anticipation of, any termination or cancellation thereof or
premium increase therefor. Except as set forth on Schedule 2.19, the Company has
been covered by one or more policies of insurance of the types described in
Schedule 2.19 continuously since the commencement of its operations for all
services provided by the Company at any time.
2.20 Intellectual Property.
(a) As used in this Section 2.20, "Proprietary Asset" means any: (a)
patent, patent application, trademark (whether registered or unregistered),
trademark application, trade name, fictitious business name, service mark
(whether registered or unregistered), service mark application, copyright
(whether registered or unregistered), copyright application, maskwork,
maskwork application, trade secret, know-how, customer list, computer
software, source code, algorithm, invention, design, blueprint, engineering
drawing, proprietary product, technology, proprietary right or other
intellectual property right or intangible asset; or (b) right to use or
exploit any of the foregoing.
(b) Schedule 2.20(b) sets forth, with respect to each Proprietary
Asset owned by the Company that is registered with any Governmental
Authority or for which an application has been filed with any Governmental
Authority, (i) a brief description of such Proprietary Asset, and (ii) the
names of the jurisdictions covered by the applicable registration or
application.
(c) Schedule 2.20(c) identifies and provides a brief description of
all other Proprietary Assets owned by the Company that are material to the
business of the Company.
(d) Schedule 2.20(d) identifies and provides a brief description of
each Proprietary Asset that is licensed or otherwise made available to the
Company by any Person (other than commercially available business and
accounting software licensed to the Company under software licenses
generally available to the public), and identifies the Contract under which
such Proprietary Asset is being licensed or otherwise made available to the
Company.
(e) Except as set forth on Schedule 2.20(e), the Company has good and
valid title to all of the Proprietary Assets identified or required to be
identified in Schedules
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2.20(b) and 2.20(c) (the "Company Proprietary Assets"), free and clear of
all Encumbrances other than Permitted Encumbrances. The Company has a valid
right to use, license and otherwise exploit all Proprietary Assets
identified in Schedule 2.20(d).
(f) Except as set forth in Schedule 2.20(f), the Company has not
developed jointly with any other Person any Proprietary Asset that is
material to the business of the Company with respect to which such other
Person has any rights. Except as set forth in Schedule 2.20(f), there is no
Contract pursuant to which any Person has any right (whether or not
currently exercisable) to use, license or otherwise exploit any Company
Proprietary Asset.
(g) The Company has taken reasonable measures and precautions to
protect and maintain the confidentiality, secrecy and value of all Company
Proprietary Assets (except Proprietary Assets whose value would be
unimpaired by disclosure). Without limiting the generality of the
foregoing, except as set forth in Schedule 2.20(g), (i) all current and
former employees of the Company who are or were involved in, or who have
contributed to, the creation or development of any Company Proprietary
Asset have executed and delivered to the Company an agreement (containing
no exceptions to or exclusions from the scope of its coverage) that is
substantially identical to the form of agreement attached hereto as Exhibit
C-1, C-2 or C-3 (as applicable), and (ii) all current and former
consultants and independent contractors to the Company who are or were
involved in, or who have contributed to, the creation or development of any
Company Proprietary Asset have executed and delivered to the Company an
agreement (containing no exceptions to or exclusions from the scope of its
coverage) that is substantially identical to the form of agreement attached
hereto as Exhibit C-1, C-2 or C-3 (as applicable). No current or former
employee, officer, director, stockholder, consultant or independent
contractor has any right, claim or interest in or with respect to any
Company Proprietary Asset. Each such agreement entered into by a present
employee, consultant or independent contractor of the Company is in full
force and effect and constitutes a valid and legally binding obligation of
each party thereto, enforceable thereagainst in accordance with its terms.
(h) With respect to the pending patent applications of the Company
listed in Schedule 2.20(b) (the "Patent Applications"):
(i) all prior art and other information material to the
patentability of the claims in the Patent Applications of which the
inventors are aware has been duly disclosed to the U.S. Patent and
Trademark Office;
(ii) the Company and the inventors did not sell or offer to sell
devices covered by any claims of any of the Patent Applications, or
manufactured using any process claimed in any of the Patent
Applications, or disclose the claimed invention to any third party
other than patent counsel for the Company, prior to the filing date of
such application;
(iii) each of the Patent Applications discloses the best mode of
operation of the claimed device or process as contemplated by the
named inventors at the time of filing such application;
(iv) the Persons named as inventors in each Patent Application
are the inventors of the invention described in such application; and
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(v) each inventor named in each Patent Application has executed a
binding assignment of his or her rights to such application in favor
of the Company, and each such assignment has been duly recorded in the
U.S. Patent and Trademark Office.
(i) Except as set forth in Schedule 2.20(i), insofar as the Company
has knowledge of the matters referred to:
(i) none of the Company Proprietary Assets, and no Proprietary
Asset that is currently being developed by the Company (either by
itself or with any other Person), infringes, misappropriates or makes
any unauthorized use of any Proprietary Asset owned or used by any
other Person;
(ii) none of the devices that have been designed, created,
developed, assembled or manufactured by the Company, nor any apparatus
or processes used by the Company in the manufacture or assembly
thereof, infringes, misappropriates or makes any unauthorized use of
any Proprietary Asset owned or used by any other Person, and none of
such devices, apparatus or processes, has at any time infringed,
misappropriated or made any unauthorized use of, and the Company has
received no notice or other communication (in writing or otherwise) of
any actual, alleged, possible or potential infringement,
misappropriation or unauthorized use of, any Proprietary Asset owned
or used by any other Person; and
(iii) to the knowledge of the Company, no Person is infringing,
misappropriating or making any unauthorized use of, any Company
Proprietary Asset.
(j) The Company Proprietary Assets constitute all of the Proprietary
Assets necessary to enable the Company to conduct its business in the
manner in which such business has been and is being conducted. Except as
set forth in Schedule 2.20(j), the Company has not (i) licensed any of the
Company Proprietary Assets to any Person or (ii) entered into any covenant
not to compete or Contract limiting its ability to exploit fully any
Company Proprietary Assets or to transact business in any market or
geographical area or with any Person.
(k) The Company further represents and warrants to the Purchaser and
Merger Sub as set forth on Schedule 2.20(k).
2.21 Licenses. Schedule 2.21 attached hereto contains an accurate and
complete list of all material licenses, franchises, permits, rights and other
authorizations (collectively, "Licenses") used, or anticipated to be used, in
the operation of the business of the Company or otherwise held by the Company.
The Company owns or otherwise lawfully uses each License necessary or required
by applicable law to conduct its business as conducted as of the date of this
Agreement, free and clear of all Encumbrances. All of the Licenses are in full
force and effect, not subject to any current default or right of cancellation,
termination or revocation.
2.22 Compliance with Laws. The Company is, and at all times has been, in
compliance with all applicable Laws in all material respects. There exists no
event, occurrence, condition or act which, with the giving of notice, the lapse
of time or the occurrence of any further event or condition would constitute a
violation of any applicable Law by the Company in any material respects. Neither
the Company nor any of its affiliates, nor any Person acting for or on behalf of
any thereof, has at any time made or participated in any bribe, kickback or
illegal payment.
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2.23 Accounts Receivable. Without duplication of the representations and
warranties set forth in Section 2.13, each of the Company's accounts receivable
arises from a bona fide transaction occurring in the ordinary course of business
and to the knowledge of the Company will be collectible net of reserves shown on
the Balance Sheet or taken in the ordinary course of business since the Balance
Sheet Date and there is no contest, claim or right of set-off contained in any
oral or written agreement with any account debtor relating to the amount or
validity of any account receivable. There has been no material adverse change
since the Balance Sheet Date in the amount of accounts receivable or other debts
due the Company or the allowances with respect thereto, or accounts payable of
the Company, from that reflected in the Balance Sheet.
2.24 Employee Relations. Schedule 2.24 contains an accurate list of all of
the Company's employees, showing for each his or her position, date of
employment, 1999 compensation, and current annualized salary. The Company is in
substantial compliance with all Laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and has not
and is not engaged in any unfair labor practice. No unfair labor practice
complaint against the Company is pending before the National Labor Relations
Board or any other governmental authority. There is no labor strike, dispute,
slowdown or stoppage actually pending or, to the Company's knowledge, threatened
against or involving the Company. No representation question exists respecting
the employees of the Company. No grievance which might have an adverse effect
upon the Company or the conduct of its business exists, no arbitration
proceeding arising out of or under any collective bargaining agreement is
pending, and no claim therefor has been asserted. No collective bargaining
agreement is currently being negotiated by the Company. The Company has not
experienced any labor difficulty during the last three years. No current
employee has expressed or communicated to the Company any current grievance or
any intent to leave or contemplation of leaving the Company's employ. To the
Company's knowledge, there has not been and there will not be any adverse change
in relations with employees of the Company as a result of any announcement or
the consummation of the transactions contemplated by this Agreement.
2.25 Employee Benefit Plans.
(a) Set forth in Schedule 2.25 is an accurate and complete list of all
employee benefit plans of any variety whatsoever (the "Employee Benefit
Plans"), including without limitation any within the meaning of Section
3(3) of ERISA (whether or not any such Employee Benefit Plans are otherwise
exempt from the provisions of ERISA), as well as any bonus, stock option,
stock purchase, severance or incentive plan, arrangement or agreement,
established, maintained or contributed to by or with respect to the Company
at any time. The Company has provided the Purchaser with true and complete
copies of all documents governing or relating to each such Employee Benefit
Plan along with, to the extent applicable, the summary plan description,
IRS Form 5500 and IRS determination letter ("Determination Letter").
(b) Each Employee Benefit Plan has been administered in all respects
in accordance with its terms and is in compliance in all respects with the
applicable provisions, if any, of ERISA and the Code. All reports, returns
and similar documents with respect to the Employee Benefit Plans required
to be filed with any government agency or distributed to any Employee
Benefit Plan participant have been duly and timely filed or distributed.
There are no investigations by any government agency, and no termination
proceedings or other claims, suits
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or proceedings against or involving any Employee Benefit Plan or asserting
any rights or claims to benefits under any Employee Benefit Plan that could
give rise to any liability to the Company or such Employee Benefit Plan.
Except as set forth on Schedule 2.25, all of the Employee Benefit Plans
that are intended to be qualified under Section 401(a) of the Code have
received a Determination Letter and such plans and the trusts related
thereto are exempt from federal income taxes; no such Determination Letter
has been revoked and revocation has not been threatened; and no such
Employee Benefit Plan has been amended since the date of its most recent
Determination Letter or application therefor in any respect that would
adversely affect its qualification or increase its cost. No Employee
Benefit Plans have been terminated, except for such amendments made by the
sponsor of the prototype document for which the deadline for filing an
application for a Determination Letter has not yet expired. There have not
been any "reportable events" (as defined in Section 4043 of ERISA and the
regulations thereunder) with respect thereto; and no Employee Benefit Plan
has an "accumulated funding deficiency" within the meaning of Section
412(a) of the Code or any unfunded liability of any kind.
2.26 Environmental Matters.
(a) For purposes of this Section 2.26, "Hazardous Substance" means any
of the following: (i) a "hazardous substance" as defined in 42 U.S.C.
Section 9601(14), as amended from time to time, and all rules, regulations
and orders promulgated thereunder as in effect from time to time, (ii) a
"hazardous waste," as defined in 42 U.S.C. Section 6903(5), as amended from
time to time, and all rules, regulations and orders promulgated thereunder
as in effect from time to time, (iii) if not included in (i) or (ii) above,
"hazardous waste constituents" as defined in 40 C.F.R. Section 260.10,
including, without limitation, those listed in Appendix VII and VIII of
Subpart D of 40 C.F.R. Section 261, as amended from time to time, and all
rules, regulations and orders promulgated thereunder as in effect from time
to time, (iv) "source," "special nuclear" or "by-product material," as
defined in 42 U.S.C. Sections 3011, et seq., as amended from time to time,
and all rules, regulations and orders promulgated thereunder as in effect
from time to time, and (v) any other waste, substance or material, the
generation, transportation, treatment, storage, release, or disposal of
which is regulated under or by applicable Laws, including without
limitation petroleum and petroleum products, asbestos and
asbestos-containing materials, and low-level radioactive substances and
wastes.
(b) Except as set forth in Schedule 2.26(b), the Company and its
leased real property set forth in Schedule 2.11 (the "Leased Real
Property") are in compliance, and since the Company's acquisition of an
interest in its Leased Real Property have been in compliance, in all
material respects, and, to the knowledge of the Company, prior to such
acquisition were in compliance, in all material respects with all
applicable Laws relating to Hazardous Substances. Without limiting the
foregoing, (i) the operations of the Company do not violate, and since
commencement of operations of the Company have not violated, in any
material respect, any Law relating to the generation, storage, processing,
utilization, labeling, transportation, treatment, disposal, release,
discharge, emission or other disposition of Hazardous Substances, and (ii)
the Company or, to the knowledge of the Company, any current or former
owner, occupant or operator of any property at any time owned, leased or
operated by the Company, has not ever utilized any such property or any
portion thereof in material violation of any Law relating to the
generation, storage, processing, utilization, labeling, transportation,
disposal, treatment, emission, release, discharge, or other disposition of
Hazardous Substances. Schedule 2.26(b) hereto contains: (i) a true list and
description of all environmental audits and assessments in the possession
of, or available to, the Company relating to the Leased Real Property, and
(ii) any property at any time owned, leased or
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operated by the Company, including, with respect to any such assessment,
removal, remediation, closure or other type of such operation, the date of
commencement; the date of completion or closure or anticipated date of
completion or closure; and the estimated cost of any such operation.
(c) The Company has not and does not utilize, store, dispose of,
treat, generate, process, transport, release or own any Hazardous Substance
in material violation of any applicable Law.
(d) The Company has, in a timely manner, obtained all licenses,
permits, consents and approvals from any foreign, federal, state, local or
other governmental, administrative or regulatory authority, body, agency,
court, tribunal or similar entity ("Governmental Authority") and filed all
reports required to be filed under or pursuant to any applicable Law
related to any Hazardous Substance.
(e) The Company has not received any notice of any writ, injunction,
claim, decree, order or judgment outstanding or of any action instituted or
threatened under or pursuant to, or of any violation of, any environmental
Law applicable to any operations or property of the Company or any
predecessors thereof, including, without limitation, any notice from any
Governmental Authority or other Person advising the Company that it is or
is potentially responsible for response costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. Section
9601 et seq.) (together with the regulations promulgated thereunder,
"CERCLA"), or any other Law with respect to a release or threatened release
of any Hazardous Substances.
(f) Except as set forth on Schedule 2.26(b), the Company has not
received any notice of any violation of any environmental, zoning, worker
safety or land use Law, including, without limitation, under CERCLA, the
Resource Conservation and Recovery Act, as amended (42 U.S.C. Section 6901,
et seq.), the Oil Pollution Act of 1990 (33 U.S.C. 2701, et seq.), the
Emergency Planning and Community Right-to-Know Act, as amended (42 U.S.C.
Section 11001, et seq.), the Clean Water Act, as amended (33 U.S.C. Section
3121, et seq.), the Clean Air Act, as amended (42 U.S.C. Section 7401, et
seq.), the Toxic Substances Control Act, as amended (15 U.S.C. Section
2601, et seq.), Occupational Safety and Health Act, as amended (29 U.S.C.
Section 651, et seq.), together with the regulations promulgated under each
respective law, and any state or local similar laws and regulations and any
so-called local, state or federal "superfund" or "superlien" law.
(g) Except as set forth on Schedule 2.26(g), to the Company's
knowledge, there are not now and never have been any under- or aboveground
storage tanks located on any Leased Real Property or any other property at
any time owned, leased or operated by the Company or any of its
predecessors or subsidiaries.
2.27 Interests in Clients, Suppliers, Etc. Except as described in Schedule
2.27, neither the Company, nor, to the knowledge of the Company, any Shareholder
possesses, directly or indirectly, any financial or other interest in any Person
which is a client, supplier, customer, lessor, lessee, or competitor or
potential competitor of the Company (other than ownership of a minority interest
in a publicly traded entity).
2.28 Bank Accounts, Powers of Attorney. Set forth in Schedule 2.28 is an
accurate and complete list showing (a) the name and address of each bank in
which the Company has
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an account or safe deposit box, the number of any such account or any such box
and the names of all persons authorized to draw thereon or to have access
thereto, and (b) the names of all persons, if any, holding powers of attorney
(including without limitation with respect to tax matters) from the Company and
a summary statement of the terms thereof.
2.29 No Changes Since Balance Sheet Date.
(a) Except as set forth on Schedule 2.29, since the Balance Sheet
Date, the Company has not (i) incurred any liability or obligation of any
nature (whether accrued, absolute, contingent, known or unknown or
otherwise) except in the ordinary course of business or in an amount less
than $25,000 in the aggregate (ii) permitted any of its assets to be
subjected to any Encumbrance (other than Permitted Encumbrances), (iii)
sold, transferred or otherwise disposed of any assets except in the
ordinary course of business or for an amount less than $25,000 in the
aggregate, (iv) made any capital expenditure or commitment therefor except
in the ordinary course of business or in an amount less than $25,000 in the
aggregate, (v) declared or paid any dividend or made any other
distribution, or redeemed, purchased or otherwise acquired any its
securities or Stock Acquisition Rights therefor, (vi) made any bonus or
profit sharing distribution or payment of any kind, (vii) increased its
indebtedness for borrowed money, except current borrowings from banks in
the ordinary course of business or in an amount less than $25,000 in the
aggregate, or made any loan to any Person; (viii) written off as
uncollectible any notes or accounts receivable except write-offs in the
ordinary course of business charged to applicable reserves, none of which
individually or in the aggregate exceeds $25,000, (ix) granted any increase
in the rate of wages, salaries, bonuses or other remuneration of any
executive employee or other employees, (x) cancelled or waived any claims
or rights, (xi) made any change in any method of accounting or auditing
practice, (xii) otherwise conducted its business or entered into any
transaction, except in the usual and ordinary manner and in the ordinary
course of business, or (xiii) agreed, whether or not in writing, to do any
of the foregoing.
(b) As of the date hereof, the aggregate amount outstanding under the
Bank Loan is $200,000 in principal amount plus accrued interest at
non-default rates.
2.30 Disclosure. None of this Agreement, the Financial Statements, or any
schedule, exhibit or certificate attached hereto or delivered in accordance with
the terms hereof or any document or statement in writing which has been supplied
by or on behalf of the Company in connection with the transactions contemplated
by this Agreement, contains any untrue statement of a material fact or omits any
statement of a material fact necessary in order to make the statements contained
herein or therein not misleading. All information concerning the Company which
is material to the transactions contemplated hereby has been provided to the
Purchaser, including without limitation any and all appraisals, valuations,
estimates or other projections concerning the Company or its securities, except
that the Company has not provided to Purchaser certain information regarding its
Proprietary Assets, the effect of providing which would have, in the Company's
reasonable opinion, an adverse effect on the Company's business should the
transactions contemplated hereby not be consummated. There is no fact known to
the Company which materially adversely affects the business, prospects,
valuation or financial condition of the Company or its properties or assets
which has not been set forth in this Agreement, the Financial Statements, or any
schedule, exhibit or certificate attached hereto or delivered in accordance with
the terms hereof.
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2.31 Broker's or Finder's Fees. No agent, broker, person or firm acting on
behalf of the Company or any Shareholder is, or will be, entitled to any
commission or broker's or finder's fees from any of the parties hereto, or from
any person or entity controlling, controlled by or under common control with any
of the parties hereto, in connection with any of the transactions contemplated
by this Agreement.
2.32 Copies of Documents. The Company has caused to be made available for
inspection and copying by the Purchaser and its advisers true, complete and
correct copies of all documents referred to in this Article II or in any
schedule attached to this Agreement, other than certain documents related to the
Company's Proprietary Assets as described in Section 2.30.
2.33 Matters Affecting Employees. To the knowledge of the Company, no
employee of the Company is subject to any Contract or Law which adversely
affects or which might adversely affect such employee's ability to act as an
employee of the Purchaser or the Surviving Corporation following consummation of
the transactions contemplated by this Agreement.
2.34 Pooling. The pooling letter referred to in Section 5.6 will be true
and accurate as of the date of its execution and delivery by the Company and as
of the Closing Date.
2.35 Affiliate Letters. Set forth on Schedule 2.35 is a list of each
"affiliate" of the Company (within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act, or applicable SEC accounting
releases with respect to pooling of interests accounting treatment) (a "Rule 145
Affiliate") as of the date of this Agreement. Each such Rule 145 Affiliate has
executed and delivered to the Purchaser and the Purchaser's accountants a
letter, dated and as of the date of this Agreement, in form and substance
satisfactory to the Purchaser and its accountants in the form attached as
Exhibit D.
2.36 Investment. Each Principal Shareholder represents and warrants that
such Principal Shareholder (i) is acquiring Purchaser Common Stock for such
Principal Shareholder's own account for investment and not with a view to, or
for resale in connection with, any distribution of Purchaser Common Stock within
the meaning of the Securities Act and does not intend to resell, assign or
otherwise dispose of all or any part of the Purchaser Common Stock being
acquired; (ii) understands that such Principal Shareholder may be required to
bear the economic risk of an investment in the Purchaser beyond the time that
such Principal Shareholder desires to liquidate such investment; (iii) is able
to bear the economic risk of investment in Purchaser Common Stock and has no
need for liquidity with respect to the Purchaser Common Stock; (iv) has received
all information that such Principal Shareholder considers necessary or advisable
to make a decision concerning an investment in Purchaser Common Stock and has
had adequate opportunity to ask questions and receive answers concerning the
terms and conditions of the Merger and to obtain any additional information
which the Company or Purchaser possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy of the information
provided by the Company or Purchaser; (v) has sought such accounting, legal and
tax advice as such Principal Shareholder has considered necessary to make an
informed investment decision; (vi) such Principal Shareholder acknowledges that
the Purchaser is a reporting company under Section 12 of Exchange Act; and such
Principal Shareholder has had an opportunity to review the Purchaser's various
filings previously made pursuant to the Exchange Act which are publicly
available.
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The subject matter covered by any section, subsection or provision of this
Article II shall not be exclusive as to such subject matter to the extent
covered by another section, subsection or provision of this Article II, and the
specificity of any representation or warranty or other provision or part thereof
shall not affect or limit the generality of any other representation or warranty
or other provision or part thereof. The Company has used its best efforts to
identify correctly on each disclosure Schedule (including by cross-reference)
each item of disclosure applicable to such Schedule, but the failure to so
cross-reference shall not cause a representation to be untrue if the relevant
item is clearly disclosed on another Schedule and the applicability of such item
to another Schedule is clearly recognizable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND MERGER SUB
The Purchaser and Merger Sub jointly and severally represent and warrant to
the Company and agree as follows:
3.1 Existence and Good Standing. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
North Carolina. Merger Sub is a corporation duly organized, validly existing and
in good standing under the laws of the State of North Carolina.
3.2 Capital Stock. Merger Sub has an authorized capitalization consisting
of 100,000 shares of common stock, $.01 par value per share, of which 1,000
shares are issued and outstanding and are held by the Purchaser. All such
outstanding shares have been duly authorized and validly issued and are fully
paid and nonassessable.
3.3 Purchaser Shares. The shares of Purchaser Common Stock to be issued to
the Shareholders pursuant to Section 1.1 above have been duly authorized and,
when issued and delivered in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable. The shares of Purchaser Common
Stock to be issued upon the exercise of those Stock Options under the Company
Plan which are to be assumed by the Purchaser pursuant to Section 1.1(c)(iii)
have been duly authorized, and when issued will be validly issued, fully paid
and non-assessable. The shares of Purchaser Common Stock to be issued upon the
exercise of the Warrants which shall constitute warrants to acquire shares of
Purchaser Common Stock pursuant to Section 1.1(c)(v) have been duly authorized,
and when issued will be validly issued and fully paid and non-assessable.
3.4 Power and Authority.
(a) The Purchaser has all requisite power and authority to enter into
and deliver this Agreement and the other Transaction Documents to which it
is a party, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The
Purchaser's execution, delivery and performance of this Agreement and the
other Transaction Documents and the Purchaser's consummation of the
transactions contemplated hereby and thereby will have been duly and
validly authorized by all corporate action required of the Purchaser by
applicable Law or its Organizational Documents. This Agreement and the
other Transaction Documents to which the Purchaser is a party constitute
the valid and legally binding obligations of the Purchaser, enforceable
against the Purchaser in
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accordance with their respective terms, except as enforcement may be
limited by general equitable principles (whether raised in a proceeding at
law or in equity), or by applicable bankruptcy, insolvency, moratorium or
similar laws of general application relating to or affecting creditors'
rights (including without limitation, the effect of statutory or other laws
regarding fraudulent conveyances or transfers and preferential transfers).
(b) Merger Sub has all requisite power and authority to enter into and
deliver this Agreement and the other Transaction Documents to which it is a
party, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. Merger Sub's
execution, delivery and performance of this Agreement and the other
Transaction Documents and Merger Sub's consummation of the transactions
contemplated hereby and thereby will have been duly and validly authorized
by all corporate action required of Merger Sub by applicable Law or its
Organizational Documents. This Agreement and the other Transaction
Documents to which Merger Sub is a party constitute the valid and legally
binding obligations of Merger Sub, enforceable against Merger Sub in
accordance with their respective terms, except as enforcement may be
limited by general equitable principles (whether raised in a proceeding at
law or in equity), or by applicable bankruptcy, insolvency, moratorium or
similar laws of general application relating to or affecting creditors'
rights (including without limitation, the effect of statutory or other laws
regarding fraudulent conveyances or transfers and preferential transfers).
3.5 No Conflicts; Restrictive Documents; Consents. Neither the Purchaser
nor Merger Sub is subject to, or a party to, any Organizational Document, Law or
Contract, or any other restriction of any kind or character, which would be
violated by or conflict with, prevent or impair (whether by acceleration of any
liability, creation of any Encumbrance or otherwise) or require any declaration,
filing, registration, notice, approval or consent to, with or of any Person in
connection with, the consummation of the transactions contemplated by this
Agreement or any other Transaction Document, or compliance by the Purchaser or
Merger Sub with the terms, conditions and provisions hereof or thereof.
3.6 SEC Reports. Since January 1, 1999, the Purchaser has filed with the
United States Securities and Exchange Commission (the "SEC") all forms,
financial statements, documents and reports (collectively, "SEC Reports")
required to be filed by the Purchaser pursuant to the Exchange Act. Such SEC
Reports were prepared in all material respects in accordance with the Exchange
Act and, when filed, did not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
3.7 Broker's or Finder's Fees. Other than CIBC World Markets Corp., no
agent, broker, person or firm acting on behalf of the Purchaser or Merger Sub
is, or will be, entitled to any commission or broker's or finder's fees from any
of the parties hereto, or from any person or entity controlling, controlled by
or under common control with any of the parties hereto, in connection with any
of the transactions contemplated herein.
3.8 Litigation. There is no action, suit, proceeding at law or in equity,
arbitration or administrative or other proceeding or investigation by or before
any governmental or other instrumentality or agency pending or, to the
Purchaser's knowledge, threatened against or affecting the Purchaser or Merger
Sub, or any of their respective properties or rights, which, if adversely
determined, would have a material adverse effect on the ability of the Purchaser
or Merger Sub to consummate the transactions contemplated by this Agreement or
to perform
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their respective obligations hereunder. Neither the Purchaser nor Merger Sub is
subject to any judgment, order or decree entered in any lawsuit or proceeding
which may have a material adverse effect on the ability of the Purchaser or
Merger Sub to consummate the transactions contemplated by this Agreement or to
perform their respective obligations hereunder.
3.9 No Prior Activities. Merger Sub was formed solely for the purpose of
engaging in the transactions contemplated hereby, has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
ARTICLE IV
CONDUCT OF BUSINESS; EXCLUSIVE DEALING; REVIEW
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement to the Closing Date, the Company shall conduct its operations
only according to its ordinary and usual course of business and preserve intact
its business organization, keep available the services of its officers and
employees, maintain satisfactory relationships with licensors, suppliers,
distributors, clients and others having business relationships with the Company,
and perform in all material respects all of the Company's obligations under all
Contracts to which the Company is a party or by which it or any of its assets or
properties are bound. Without limiting the foregoing, prior to the Closing Date,
except as may be first approved in writing by the Purchaser, set forth in
Schedule 4.1 or otherwise permitted or required by this Agreement, the Company
shall not: (a) amend or modify the Company's Organizational Documents, (b) amend
or modify the compensation payable or to become payable by the Company to each
officer, employee or agent of the Company, (c) make any bonus, pension,
retirement or insurance payment or arrangement to or with any such persons
except those that may have already been accrued, (d) enter into any Contract,
except Contracts in the ordinary course of business having a value of less than
$25,000, (e) make any change affecting any bank, safe deposit or power of
attorney arrangements of the Company, (f) issue or sell, or issue any securities
of the Company or any Stock Acquisition Rights for, or subdivide or otherwise
change in any respect, any securities of the Company, (g) merge, combine or
consolidate with another entity, or acquire or purchase an equity interest in or
a substantial portion of the assets of another entity, (h) modify or amend or
waive any benefit of any non-competition agreement to which the Company or any
of its subsidiaries is a party, (i) permit any insurance policy naming the
Company or any of its subsidiaries as a beneficiary or loss payee to be
cancelled or terminated unless replaced at termination with similar policies,
(j) incur Indebtedness except under the Company's line of credit with Silicon
Valley Bank (the "Bank Loan") in the ordinary course of business consistent with
past practices in an aggregate amount not in excess of $300,000 including
principal and interest, or (k) take any of the actions referred to in Section
2.29 hereof. The Company shall not take or fail to take any action which would
cause the representations and warranties contained in Article II of this
Agreement to be or become untrue or incorrect. During the period from the date
of this Agreement to the Closing Date, the Company shall confer at Purchaser's
request on a regular and frequent basis with one or more designated
representatives of the Purchaser to report operational matters and to report the
general status of ongoing operations. The Company shall notify the Purchaser of
any unexpected emergency or other change in the normal course of the Company's
business or in the operation of its properties and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), adjudicatory proceedings, budget meetings or
submissions involving any property of the Company, and keep the Purchaser fully
informed of such events and permit its representatives prompt access to all
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materials prepared in connection therewith. Notwithstanding Section 4.1(f)
above, with the prior written consent of the Purchaser, the Company may grant
options, from the date of this Agreement to the Closing Date, exercisable to
purchase shares of Company Common Stock to employees employed by the Company,
but which shall in any event be on comparable terms as existing Stock Options
and consistent with past practices. Upon obtaining the Purchaser's written
consent, such options shall be deemed to be Stock Options for purposes of
Section 1.1(c)(iii) and shall be deemed listed in Schedule 2.3.
4.2 Exclusive Dealing; Voting.
(a) During the period from the date of this Agreement to the Closing
Date, the Company (and its officers, directors, employees, affiliates,
agents and representatives) and the Principal Shareholders shall refrain
from taking any action directly or indirectly to encourage, solicit,
initiate or engage in discussions or negotiations with, or provide any
information to, any person or entity other than the Purchaser concerning
any proposal for, or consummate, the sale of the capital stock in or
substantially all of the assets of, or other business combination
involving, the Company. The Company shall notify the Purchaser immediately
if any proposal concerning any such proposed transaction involving the
Company or any significant assets of the Company (any such proposal being
referred to herein as an "Acquisition Proposal") or any request for
confidential information regarding the Company is received, and shall
provide to the Purchaser such information regarding any such Acquisition
Proposal or request as the Purchaser shall request.
(b) At any meeting of the Shareholders called for the purpose of
voting on the Merger (or any written consent solicited in lieu of a
meeting), each Principal Shareholder agrees to vote his, her or its shares
in favor of the Merger and against any competing Acquisition Proposal, or
any other proposal that would result in a breach of any representation,
warranty, covenant or agreement of the Company hereunder.
4.3 Review of the Company. The Purchaser may, prior to the Closing Date,
directly and through its representatives, review the properties, books and
records of the Company and its financial and legal conditions as and to the
extent they deem necessary or advisable to familiarize themselves with such
properties and other matters; such review, and any information known to the
Purchaser, shall not, however, affect the binding nature of representations and
warranties made by the Company or the Principal Shareholders hereunder or the
remedies of the Purchaser for breaches of those representations and warranties.
With respect to Intellectual Property, notwithstanding anything to the contrary
in this paragraph, Purchaser's access to the Intellectual Property shall be
limited to review of summary documents regarding patents and trade secrets and
engineering documents that show the capability and performance of Company
technology, all as the Company may reasonably determine to provide to Purchaser.
In furtherance of the foregoing, and notwithstanding anything to the contrary in
this paragraph, Purchaser's access to the Company's facilities, equipment,
technical data, books, records and employees may be limited in the Company's
reasonable discretion. The Company shall permit the Purchaser and its
representatives to have, after the date of this Agreement, full access to the
premises, personnel, accountants and all books and records of the Company and
cause the officers of the Company to furnish the Purchaser with such financial
and operating data and other information with respect to the business and
properties of the Company as the Purchaser from time to time reasonably shall
request. In the event of termination of this Agreement without consummation of
the transactions contemplated hereby, the Purchaser shall keep confidential any
information obtained from the Company concerning
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the Company's properties, operations and business (unless readily ascertainable
from public or published information or trade sources) until the or becomes so
ascertainable and, at the request of the Company, shall return to the Company
all copies of any schedules, statements, documents or other written information
obtained in connection therewith. In the event that Purchaser in the course of
its investigation obtains actual knowledge of a matter and if Purchaser
recognizes that such matter constitutes a material breach of a representation or
warranty of the Company, Purchaser shall promptly notify the Company of such
breach. Within ten (10) days after the date of this Agreement, the Company shall
deliver to the Purchaser a complete and accurate list, certified by the
President of the Company, of each Person that at any time received Restricted
Shares which timely filed an election under Section 83(b) of the Code with
respect to such Restricted Shares, together with copies of such elections, and
any other related documents reasonably requested by and satisfactory to the
Purchaser.
4.4 Best Efforts. Each of the Company, the Principal Shareholders, the
Purchaser and Merger Sub shall use his, her or its respective best efforts in
good faith to satisfy the various conditions to Closing and consummate the
Merger as soon as practicable after the date hereof in accordance with
applicable laws.
ARTICLE V
CONDITIONS TO THE PURCHASER'S AND MERGER SUB'S OBLIGATIONS
The Purchaser's and Merger Sub's obligations to engage in the Merger are
conditioned upon satisfaction, on or prior to the Closing Date, of each of the
following conditions:
5.1 Truth of Representations and Warranties. The representations and
warranties of the Company and the Principal Shareholders contained in this
Agreement or in any schedule attached hereto that are qualified by reference to
materiality shall be true and correct, and the representations and warranties
that are not so qualified shall be true and correct in all material respects, on
and as of the Closing Date with the same effect as though such representations
and warranties had been made on and as of such date, and the Company shall have
delivered to the Purchaser a certificate, dated the Closing Date, to such effect
as to the Company.
5.2 Good Standing and Other Certificates. The Company shall have delivered
to the Purchaser (a) a copy of the Company's Articles of Incorporation,
including all amendments thereto, certified by the Secretary of State of
California as of the Closing Date or any of the five preceding business days,
(b) a certificate from the Secretary of State of California and the California
Franchise Tax Board to the effect that the Company is in good standing in
California, (c) a copy of the bylaws of the Company, certified by the Secretary
of the Company as being true and correct and in effect on the Closing Date, and
(d) a copy of resolutions, certified as of the Closing Date by the Secretary of
the Company, adopted by the Board of Directors and Shareholders of the Company
and authorizing the execution and delivery by the Company of this Agreement and
the other Transaction Documents to which the Company is a party, the performance
by the Company of its obligations hereunder and thereunder and the consummation
by the Company of the transactions contemplated hereby and thereby.
5.3 Performance of Agreements. All of the agreements of the Company and the
Shareholders to be performed on or before the Closing Date pursuant to the terms
of this Agreement shall have been duly performed in all material respects, and
the Company shall
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have delivered to the Purchaser a certificate, dated the Closing Date, to such
effect as to the Company.
5.4 No Litigation. No action or proceedings shall have been instituted or
threatened before a court or other government body or by any public authority,
and no claim shall have been asserted or threatened to be asserted, to restrain
or prohibit any of the transactions contemplated hereby, and the Company shall
have delivered to the Purchaser a certificate, dated the Closing Date, to such
effect.
5.5 Pooling Letter. The Company shall have executed and delivered to the
Purchaser and the Purchaser's accountants a representations letter, in form and
substance satisfactory to the Purchaser and its accountants, relating to
"pooling of interests" accounting.
5.6 Affiliate Letters. Each Rule 145 Affiliate shall have executed and
delivered to the Purchaser and the Purchaser's accountants a letter, in form and
substance satisfactory to the Purchaser and its accountants in the form attached
as Exhibit D.
5.7 Pooling Opinion. The Purchaser shall have received a letter, dated the
Closing Date, from Ernst & Young LLP, accountants for the Purchaser, in form and
substance satisfactory to the Purchaser, regarding the appropriateness of
pooling of interests accounting for the transactions contemplated by this
Agreement.
5.8 Opinion of the Company's Counsel. The Company shall have furnished the
Purchaser with an opinion, dated and as of the Closing Date, of Riordan &
McKinzie, a professional corporation, counsel to the Company, in the form
attached as Exhibit E.
5.9 No Material Adverse Change. Since the date of this Agreement, no event,
fact, change, condition, circumstance or other development shall have occurred
that has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company, and the Company shall have
delivered to the Purchaser a certificate, dated the Closing Date, to such
effect.
5.10 Governmental and Other Approvals and Consents. All governmental and
other consents and approvals, if any, necessary to permit the consummation of
the transactions contemplated by this Agreement, the absence of which would have
a Material Adverse Effect on the Company, shall have been received.
5.11 State Securities Permit. Purchaser shall have received all necessary
states securities permits or other authorizations or confirmations as to the
availability of an exemption from registration of the Purchaser Common Stock
under the North Carolina Securities Act and Section 3(a)(10) of the Securities
Act, and no proceedings shall be pending, or to the knowledge of Purchaser,
threatened in writing by any securities administration to suspend the
effectiveness of such exemption for the issuance of the Purchaser Common Stock
in the Merger. Without limiting the foregoing, the North Carolina Secretary of
State or her delegate (the "Administrator") shall have issued an Order approving
the fairness of the terms and conditions of the Agreement and the issuance of
the Purchaser Common Stock in connection therewith after a hearing conducted in
accordance with Section 78A-30 of the General Statutes of North Carolina.
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5.12 Employment and Consulting Agreements. The person identified in the
Consulting Agreement in the form of Exhibit F attached hereto shall have
executed and delivered to the Purchaser such Consulting Agreement and each of
the persons identified in the Employment Agreements in the form of Exhibit G-1,
G-2, G-3 and G-4, respectively, attached hereto shall have executed and
delivered to the Purchaser such Employment Agreements (all such persons each
being referred to as a "Key Person", and such agreements being referred to
collectively as the "Employment and Consulting Agreements").
5.13 Certain Agreements. Each Shareholder and holder of Stock Options as
listed on Schedule 5.13 shall have either signed the Merger Agreement or
executed and delivered an agreement having terms identical to Section 7.1 of
this Agreement.
5.14 Escrow Agreement. The Shareholders and the Escrow Agent (as defined in
the Escrow Agreement) shall have executed and delivered to the Purchaser an
escrow agreement in the form of Exhibit B, with such modifications thereto as
are reasonably requested by the Escrow Agent prior to execution thereof (the
"Escrow Agreement," as defined in Section 1.4 above).
5.15 Shareholder Approval. The Merger, this Agreement and the Plan of
Merger shall have been approved by the vote required of the Shareholders of the
Company by applicable Law and the Company's Organizational Documents, and the
Company shall have delivered to the Purchaser a certificate, dated the Closing
Date, to such effect.
5.16 Dissenters. As of the Effective Time, the holders of not more than 5%
of the Company Stock (calculated on a fully-diluted basis) shall have demanded
or otherwise purported to exercise their respective dissenter's rights, if any,
pursuant to the California Code with respect to any shares of Company Stock.
5.17 Plan of Merger. The Company shall have executed and delivered the Plan
of Merger to the Purchaser.
5.18 Terms of Option Agreements and Restricted Shares. Each agreement
evidencing a Stock Option outstanding under the Company Plan and each agreement
evidencing a Repurchase Right regarding a Restricted Share shall provide for and
permit the assumption of each such Stock Option and the assignment and
assumption of each such Repurchase Right by the Purchaser as contemplated by
Section 1.1 above; no agreement or other action of the holder of any such Stock
Option or Restricted Share shall be necessary to effect the same (or the Company
shall have delivered to the Purchaser proof that each such agreement has been
made or action taken); and the Company shall have delivered to the Purchaser a
certificate, dated the Closing Date, to such effect.
5.19 Tax Matters. The Purchaser shall have received assurances reasonably
satisfactory to it that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code.
5.20 Resignations. The Purchaser shall have received a written resignation,
satisfactory in form and substance to the Purchaser, from each officer and
director of the Company requested by the Purchaser to resign on or prior to the
Closing Date.
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5.21 Intra-Company Debt. All indebtedness, other than travel and similar
advances outstanding in the ordinary course of business, of the employees of the
Company to the Company, shall have been repaid in full.
5.22 Current Employees.
(a) All of the employees listed in Schedule 5.22(a) hereto shall
continue to be employees of the Company, and none shall have expressed or
communicated to the Company any grievance or any intent to leave or
contemplation of leaving the Company's employ.
(b) At least ninety percent (90%) of the employees listed in Schedule
5.22(b) hereto shall continue to be employees of the Company, and such
ninety percent (90%) of such employees shall not have expressed or
communicated to the Company any grievance or intent to leave or
contemplation of leaving the Company's employ.
5.23 Release of Security Interests. The guarantors of the Bank Loan shall
have executed and delivered to the Purchaser a release of the related security
interests in form and substance reasonably satisfactory to the Purchaser, upon
payment of the Bank Loan in accordance with Section 6.10.
5.24 Holders of Unexercised Options. Each holder of outstanding,
unexercised Stock Options shall have executed and delivered to the Company an
instrument in the form agreed to by the Purchaser and the Company on the date of
this Agreement regarding the tax treatment of such Stock Options.
5.25 Restricted Shares. The Company shall have delivered to the Purchaser
(i) evidence reasonably satisfactory to the Purchaser that each Person that at
any time received Restricted Shares timely filed an election under Section 83(b)
of the Code with respect to such Restricted Shares or (ii) an instrument
executed and delivered by each such Person with respect to the consequences of
the failure by such Person to file timely such election, including, in form and
substance reasonably satisfactory to the Purchaser a release of the Company and
addressing payment of any tax obligations and such other matters required by
Purchaser.
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The Company's obligations to engage in the Merger are conditioned upon
satisfaction, on or prior to the Closing Date, of each of the following
conditions:
6.1 Truth of Representations and Warranties. The representations and
warranties of the Purchaser and Merger Sub contained in this Agreement that are
qualified by reference to materiality shall be true and correct, and the
representations and warranties that are not so qualified shall be true and
correct in all material respects, on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date, and the Purchaser shall have delivered to the Company a certificate,
dated the Closing Date, to such effect.
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6.2 Good Standing and Other Certificates.
(a) Purchaser. The Purchaser shall have delivered to the Company (i) a
copy of the Purchaser's Articles of Incorporation, including all amendments
thereto, certified by the Secretary of State of North Carolina as of the
Closing Date or any of the five preceding business days, (ii) a certificate
from the Secretary of State of North Carolina to the effect that the
Purchaser exists in North Carolina and listing all charter documents of the
Purchaser on file as of the Closing Date or any of the five preceding
business days, (iii) a copy of the bylaws of the Purchaser, certified by an
officer of the Purchaser as being true and correct and in effect on the
Closing Date, and (iv) a copy of resolutions, certified as of the Closing
Date by an officer of the Purchaser, adopted by the Board of Directors of
the Purchaser and authorizing the execution and delivery by the Purchaser
of this Agreement and the other Transaction Documents to which the
Purchaser is a party, the performance by the Purchaser of its obligations
hereunder and thereunder and the consummation by the Purchaser of the
transactions contemplated hereby and thereby.
(b) Merger Sub. Merger Sub shall have delivered to the Company (i) a
copy of Merger Sub's Articles of Incorporation, including all amendments
thereto, certified by the Secretary of State of North Carolina as of the
Closing Date or any of the five preceding business days, (ii) a certificate
from the Secretary of State of North Carolina to the effect that Merger Sub
exists in North Carolina and listing all charter documents of Merger Sub on
file as of the Closing Date or any of the five preceding business days,
(iii) a copy of the bylaws of Merger Sub, certified by an officer of Merger
Sub as being true and correct and in effect on the Closing Date, and (iv) a
copy of resolutions, certified as of the Closing Date by an officer of
Merger Sub, adopted by the Board of Directors and shareholder of Merger Sub
and authorizing the execution and delivery by Merger Sub of this Agreement
and the other Transaction Documents to which Merger Sub is a party, the
performance by Merger Sub of its obligations hereunder and thereunder and
the consummation by Merger Sub of the transactions contemplated hereby and
thereby.
6.3 Performance of Agreements. All of the agreements of the Purchaser and
Merger Sub to be performed on or before the Closing Date pursuant to the terms
hereof shall have been duly performed in all material respects, and the
Purchaser shall have delivered to the Company a certificate, dated the Closing
Date, to such effect.
6.4 Opinion of Purchaser's Counsel. The Purchaser shall have furnished the
Principal Shareholders with an opinion, dated and as of the Closing Date, of
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., in the form
attached as Exhibit H.
6.5 State Securities Permit. Purchaser shall have received all necessary
states securities permits or other authorizations or confirmations as to the
availability of an exemption from registration of the Purchaser Common Stock
under the North Carolina Securities Act and Section 3(a)(10) of the Securities
Act, and no proceedings shall be pending, or to the knowledge of Purchaser,
threatened in writing by any securities administration to suspend the
effectiveness of such exemption for the issuance of the Purchaser Common Stock
in the Merger. Without limiting the foregoing, the Administrator shall have
issued an Order approving the fairness of the terms and conditions of the
Agreement and the issuance of the Purchaser Common Stock in connection therewith
after a hearing conducted in accordance with Section 78A-30 of the General
Statutes of North Carolina.
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6.6 Governmental and Other Approvals and Consents. All governmental and
other consents and approvals concerning the Purchaser or Merger Sub, if any,
necessary to permit the consummation of the transactions contemplated by this
Agreement shall have been received, and all applicable waiting periods (and any
extensions thereof) under the HSR Act shall have expired or otherwise been
terminated satisfactorily to the Company.
6.7 Shareholder Approval. The holders of a majority of the Company's
outstanding voting shares, and the holders of a majority of the shares of Series
A Preferred Stock, voting as a separate class, shall have approved the Merger in
accordance with the California Code.
6.8 Plan of Merger. The Purchaser and Merger Sub shall have executed and
delivered the Plan of Merger to the Company.
6.9 Tax Opinion. The Company shall have received a written opinion of the
Company's legal counsel, Riordan & McKinzie, dated as of the Closing Date, to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, and such opinion shall not have been withdrawn.
In rendering such opinion, counsel shall be entitled to rely upon, among other
things, reasonable assumptions and representations by the parties; provided,
however, that if Riordan & McKinzie does not render such opinion, this condition
shall nonetheless be satisfied if Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, LLP, or other counsel reasonably satisfactory to the Company, renders
such opinion in form and substance reasonably satisfactory to the Company.
6.10 Bank Loan. Purchaser shall pay the Bank Loan at Closing (subject to
Section 4.1), and deliver, or caused to be delivered, to the Company evidence of
such payment.
ARTICLE VII
CERTAIN COVENANTS AND AGREEMENTS OF THE PARTIES
7.1 Non-Competition; Non-Interference. Each Principal Shareholder listed on
Schedule 5.13 agrees, in partial consideration for the performance by the
Purchaser and Merger Sub of the transactions contemplated by this Agreement and
in recognition of the fact that such transactions reflect the acquisition for
value by the Purchaser and Merger Sub of the Company and its rights, assets and
liabilities, that such Principal Shareholder shall not:
(a) from the Closing Date until the second (2nd) anniversary of the
Closing Date, directly or indirectly, as an officer, director, shareholder,
partner, associate, owner, employee, consultant, or otherwise, become or be
interested in or associated with, work for and/or assist (including without
limitation participating in academic or other research for the direct
benefit of, or pursuant to an arrangement under which rights in the
products of such research are held by) any other corporation, firm or
business engaged in the same or a competitive business with the Company's
or the Purchaser's business, as conducted as of the date of this Agreement
or at any time prior to the expiration of the second anniversary of the
Closing Date, including, without limitation, any Competing Activities
(defined below), in a capacity connected with such entities' competitive
activities in any county of any state of the United States, any of the
United States or any other nation in which the Company or the Purchaser has
an office or does business (directly or indirectly) or in any geographical
area in which the Company or the Purchaser is engaged in, soliciting or
doing business. For purposes of this subsection (a), direct or indirect
ownership of not more than one percent (1%) of the
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issued and outstanding stock of a corporation, the shares of which are
regularly traded on a national securities exchange or in the
over-the-counter market, shall not be deemed to be a violation of the
preceding sentence. For purposes of this subsection (a), "Competing
Activities" shall mean the development, manufacture, marketing,
distribution or sale of, or research directed to, Group III nitride
materials or devices fabricated on or from such materials;
(b) from the Closing Date until the second (2nd) anniversary of the
Closing Date, directly or indirectly, solicit, interfere with the Company's
or the Purchaser's relationships with, or entice away from the Company or
the Purchaser any customer, supplier, person, firm or corporation who or
which has, at any time during the eighteen (18) months immediately
preceding the date of this Agreement or at any time during which such
Shareholder was an employee of or consultant to the Purchaser, done
business with the Company or the Purchaser, or offer employment to or
procure employment for any person who has at any time during the eighteen
(18) months immediately preceding the date of this Agreement or at any time
during which such Shareholder was an employee of or consultant to the
Purchaser been employed or engaged by the Company or the Purchaser;
(c) use for any purpose or knowingly divulge, directly or indirectly,
to any entity or person, any material information concerning the Company or
the Purchaser's device designs, device structures, package design,
epitaxial equipment and processes and other "know-how", processes, methods,
research, development or marketing techniques, programs, standard operating
procedures and practices, materials or plans, customer or vendor list or
any other of the Company's or the Purchaser's trade secrets, confidential
information, price lists or pricing policies, except information which is
(i) in the public domain or (ii) becomes public knowledge through no fault
of such Principal Shareholder or (iii) is required to be disclosed by court
order or other government process or the disclosure of which is necessary
to enable such Principal Shareholder to comply with applicable law. In the
event that such Principal Shareholder shall be required to make disclosure
pursuant to the provisions of clause (iii) of the preceding sentence, such
Principal Shareholder promptly shall notify the Surviving Corporation and
the Purchaser and take, at the expense of the Surviving Corporation or the
Purchaser, all reasonably necessary steps requested by the Surviving
Corporation or the Purchaser to defend against the enforcement of such
court order or other government process, and permit the Surviving
Corporation and the Purchaser to participate with counsel of its choice in
any proceeding relating to the enforcement thereof; or
(d) take or engage in any form or manner, directly or indirectly, any
action which directly or indirectly is materially detrimental to the
goodwill, name, business relationships and prospects, or operation of the
Company or the Purchaser or is otherwise intended to be adverse to the
Company or the Purchaser.
It is the desire and intent of the parties to this Agreement that the
provisions of this Section 7.1 shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. If any particular provisions or portion of this
Section 7.1 shall be adjudicated to be invalid or unenforceable, this Section
shall be deemed amended to delete therefrom such provision or portion
adjudicated to be invalid or unenforceable, such amendment to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.
The parties recognize that the performance of the obligations under this
Section 7.1 by each of the Principal Shareholders is special, unique and
extraordinary in character, and
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that in the event of the breach by any such Shareholder of the terms and
conditions of this Section 7.1 to be performed, the Purchaser shall be entitled,
if it so elects, to institute and prosecute proceedings in any court of
competent jurisdiction, either in law or in equity, to obtain damages for any
breach of this Section 7.1, to enforce the specific performance thereof by such
Shareholder or to enjoin such Shareholder from performing services for any such
other person, firm or corporation.
For purposes of this Section 7.1 only, the term "Purchaser" shall include
the Purchaser and all affiliates of the Purchaser, including the Surviving
Corporation, and the term "Company" shall include the Company and all affiliates
of the Company.
7.2 Fairness Hearing Application. Each of the parties to this Agreement
shall, and shall cause their Affiliates to, use all reasonable efforts to cause
the issuance of the Purchaser Common Stock to be exempt from registration under
applicable federal and state securities Laws by filing as soon as practicable an
application with the Secretary of State of the State of North Carolina pursuant
to N.C. Gen. Stat. Section 78A-30 requesting a hearing upon the terms and
conditions of the Merger to be held as soon as practicable after the filing of
such application and taking all actions necessary or appropriate to comply with
the requirements set forth therein. The Company and the Shareholders shall
furnish to Purchaser the information to be included in such application. None of
the parties to this Agreement shall make at such hearing, or include in any
information supplied with such application or distributed at such hearing, any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
7.3 Pooling Restrictions and Related Matters.
(a) Pooling of Interests Accounting. Neither the Company nor any
Shareholder shall take, or fail to take, any action which would disqualify
the transactions contemplated by this Agreement from pooling of interests
accounting treatment by the Purchaser or to be treated as a reorganization
within the meaning of Section 368(a) of the Code. Without limiting the
foregoing, no Shareholder shall sell, transfer, pledge, or otherwise
dispose of such Shareholder's interests in or reduce such Shareholder's
risk relative to any of the shares of Purchaser Common Stock to be issued
to such Shareholder pursuant to Section 1.1 above commencing as required by
pooling of interests accounting and continuing until the Purchaser shall
have published financial results covering at least 30 days of combined
operations of the Purchaser and the Surviving Corporation after
consummation of the Merger.
(b) Stop Transfer Order. The Purchaser shall not be bound by any
attempted transfer, sale or other disposition in violation of any of the
restrictions set forth in this Section 7.3, and the Purchaser shall be
entitled to deliver to the Purchaser's transfer agent an appropriate stop
transfer order in connection therewith, pursuant to which such transfer
agent shall refrain from registering any such attempted transfer, sale or
disposition.
(c) Certificate Legends. The certificates representing any shares of
the Purchaser's Common Stock issued to a Rule 145 Affiliate set forth on
Schedule 2.35 pursuant to Section 1.1 above shall bear legends in
substantially the following form:
"The shares represented by this certificate were issued pursuant to a
business combination accounted for as a "pooling of interests" and may
not be sold, nor may the
35
<PAGE>
owner thereof reduce his risks relative thereto in any way, until such
time as Cree, Inc. ("Cree") has published financial results covering at
least 30 days of combined operations after the effective date of the
exchange through which the business combination was effected. In
addition, the shares represented by this certificate may not be sold,
transferred or otherwise disposed of except or unless (1) covered by an
effective registration statement under the Securities Act of 1933, as
amended, or an exemption therefrom, or (2) in accordance with Rule 145
(in the case of shares issued to an individual who is not an affiliate
of Cree).
The certificates issued representing any shares of Purchaser Common
Stock to a person who is not a Rule 145 Affiliate shall not bear any
restrictive legend so long as the exemption under Section 3(a)(10) of
the Securities Act with respect to the issuance of the Purchaser Common
Stock is available at the Effective Time.
7.4 Compliance with Employment and Consulting Agreements. Each of the Key
Persons shall comply in all respects with any of the Employment and Consulting
Agreements to which he is a party.
7.5 Supplemental Disclosure. Subject to Section 4.3, each party shall give
prompt notice to the other of (i) the occurrence, or non-occurrence, of any
event the occurrence, or nonoccurrence, of which would be likely to cause (x)
any representation or warranty contained in this Agreement to be untrue or
inaccurate or (y) any covenant, condition or agreement contained in this
Agreement not to be complied with or satisfied and (ii) any failure of the other
party to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 7.5 shall not have any effect for the
purpose of determining the satisfaction of the conditions set forth in Article V
of this Agreement or otherwise limit or affect the remedies available hereunder
to any party.
7.6 Employees; Continued Operations.
(a) Prior to the Closing, the Company shall use its reasonable efforts
to ensure that each person who is an officer or employee of the Company,
and each person who is a consultant of the Company, shall, after the
Closing, remain an employee or consultant, as the case may be, of the
Company, until such person's employment or consulting arrangement expires
or is terminated in accordance with its terms. Nothing herein shall be
deemed or construed to give rise to a right of employment. As of the
Closing, the Purchaser will make available to employees who continue in the
employ, or become employed by, the Company, terms and conditions of
employment, including employee benefit plans, that, taken as a whole, are
comparable to the terms and conditions of employment, including employee
benefit plans, provided to employees of the Company as of the date hereof
and which are no less favorable than such employees' current employment
terms; provided, however, that the terms and conditions of such employee
benefit plans may be varied or eliminated at any time subsequent to the
first anniversary of the Closing Date in a manner determined by the
Compensation Committee of the Purchaser. Each such employee or consultant
shall receive credit for his or her service with the Company for all
purposes under such employee benefit plans.
(b) It is the present intent of the parties that, as of and after the
Closing, the Purchaser will conduct the business of the Company as
described in Schedule 7.6.
36
<PAGE>
(c) The provisions of this Section 7.6 represent the present intent of
the Purchaser, and the Purchaser will exercise good faith efforts to comply
with the provisions of this Section 7.6. Notwithstanding anything to the
contrary contained herein, it is understood that the Purchaser retains
discretion to manage its business in the best interests of its
shareholders, and that good faith modifications of or variances from these
provisions in the exercise of such discretion are appropriate and
permitted.
7.7 Form S-8. Promptly after the Effective Date, Purchaser shall use its
reasonable best efforts to file a Registration Statement on Form S-8 (or any
successor form) under the Securities Act, covering the shares of Purchaser
Common Stock issuable pursuant to outstanding Stock Options under the Company
Plan assumed by Purchaser pursuant to Section 1.1(c)(iii). As soon as
practicable after the date hereof and prior to the Closing, the Company will use
its reasonable best efforts to cause all holders of assumed Stock Options to
agree in writing not to exercise their options until Purchaser has filed a
registration statement on Form S-8 in accordance with this section. The Company
shall cooperate with and assist Purchaser in the preparation of such
registration statement.
7.8 Listing of Additional Shares. Promptly following the date hereof,
Purchaser shall use its reasonable best efforts to file with the Nasdaq National
Market, to the extent required, a Notification Form for Listing of Additional
Shares with respect to the shares of Purchaser Common Stock issuable upon
conversion of the Company Stock as a result of the Merger and upon exercise of
Stock Options and Warrants to acquire Company Stock assumed by Purchaser as a
result of the Merger.
7.9 401(k) Plan. Prior to Closing, the Company's Board of Directors shall
take all necessary and appropriate actions to approve the termination of the
Company's 401(k) plan so that, after the Closing, Purchaser may complete such
termination and provide for (i) a rollover of the assets of such plan to
Purchaser's 401(k) plan or (ii) the distribution of the assets of such plan in a
lump sum form to the plan's participants, as may be directed by such
participants.
7.10 Dissenters. During the period from the date of this Agreement to the
Closing Date, the Company (and its officers, directors, employees, affiliates,
agents and representatives) shall comply with all provisions of the California
Code relating to dissenters' rights applicable to the Merger and other
transactions contemplated hereby.
7.11 Shareholder Meeting; Shareholder Approval; Information Statement.
(a) The Company shall, subject to and in accordance with applicable
Law and the Company's Organizational Documents, duly call, give notice of,
convene and hold a meeting of the holders of Company Common Stock and
Company Preferred Stock, voting as a separate class, as promptly as
practicable after the date of this Agreement, for the purpose of
considering and voting to approve and adopt this Agreement, the Plan of
Merger and the transactions contemplated hereby and thereby. The
shareholder vote required for the adoption and approval of this Agreement,
the Plan of Merger and the transactions contemplated hereby and thereby,
shall be the vote required by the California Code and the Company's
Organizational Documents. The Board of Directors of the Company shall
recommend to the Shareholders that they vote in favor of the approval and
adoption of this Agreement, the Plan of Merger and the transactions
contemplated hereby and thereby and take all action reasonably necessary to
solicit and obtain such approval.
37
<PAGE>
(b) In connection with such shareholder meeting, as soon as
practicable after the date of this Agreement, the Company shall prepare an
information statement (the "Information Statement") for distribution to its
Shareholders. The Information Statement shall be subject to review by the
Purchaser. The Company will cooperate with the Purchaser so as to
coordinate the distribution on a timely basis of the Information Statement
with any materials related to the fairness hearing referred to in Section
7.2.
7.12 Director and Officer Indemnification. Purchaser agrees that all rights
to indemnification now existing in favor of any director or officer of the
Surviving Corporation, as provided in its Articles of Incorporation or bylaws,
for acts or omissions occurring at or prior to the Effective Time, shall
continue in full force and effect and that Purchaser shall not cause or allow
the Surviving Corporation to modify such rights to indemnification.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNITY; SET-OFF
8.1 Survival of Representations. The respective representations and
warranties of the Company, the Shareholders, the Purchaser and Merger Sub
contained in this Agreement or in any schedule attached hereto shall survive the
consummation of the Merger and the other transactions contemplated hereby and
shall remain in full force and effect notwithstanding any investigation or
examination of, or knowledge with respect to, the subject matter thereof by or
on behalf of the Company, the Shareholders, Merger Sub or the Purchaser, as the
case may be, until the first anniversary of the Closing Date (the period ending
on such date is referred to as the "Representations Period"), except that (i)
the representation and warranty in Section 2.20(i)(i) and (ii) shall expire at
and as of the Effective Time, and (ii) such representations and warranties
(including Section 2.20(i)(i) and (ii)) shall survive indefinitely in the event
of fraud or intentional misrepresentation with respect thereto. No claim for
indemnification pursuant to Section 8.2(a) or (f) based on an alleged breach of
any such representation or warranty may be brought after the expiration of the
Representations Period, except that claims made in good faith in writing and
setting forth in reasonable detail the claim prior to such expiration, including
without limitation claims made with respect to actions anticipated in good
faith, regardless of whether any action or demand has in fact been commenced,
shall be deemed to have been brought prior to the end of the Representations
Period (it being understood, without limitation, that any and all Losses arising
after the expiration of the Representations Period shall be recoverable upon
notice properly given prior to the expiration of the Representations Period in
accordance with this Section 8.1).
8.2 Indemnification.
(a) Subject to the limitations set forth in this Article VIII, the
Shareholders shall indemnify, defend and hold harmless the Purchaser,
Merger Sub and their Affiliates (including the Company after the Merger),
and all of their respective officers, directors, employees (other than the
Key Persons), agents and shareholders (other than the Shareholders) (each,
an "Indemnitee") to the fullest extent permitted in law or equity, from and
against any and all losses, claims, actions, damages, liabilities, costs
and expenses (including reasonable attorneys' fees and expenses) net of
actual tax benefits, and net of actual cash insurance recoveries or
recoveries from indemnities of third parties (collectively, "Losses")
relating to or arising from or in connection with (i) any
misrepresentation, breach or violation of, or default in any of the
representations, warranties, covenants, or agreements given or made by
38
<PAGE>
the Company or any Shareholder in or pursuant to this Agreement or any of
the other Transaction Documents or in any other agreement or officer's
certificate delivered to the Purchaser or Merger Sub in connection with
this Agreement, (ii) the enforcement by the Purchaser of its rights
pursuant to this Section 8.2, including any litigation, proceeding or
investigation relating thereto, and (iii) any matter described in Schedule
8.2. The Purchaser shall have no obligation to seek an insurance recovery
or third party indemnification and if the Purchaser does so and obtains a
recovery, the Purchaser's indemnity claim shall not be offset to the extent
of the Purchaser's expenses in obtaining such recovery and an amount equal
to anticipated premium increases for the following three (3) years.
(b) Except with respect to any misrepresentation or non-fulfillment of
the representations and warranties in Section 2.1 above, any breach of any
post-Closing covenant, or any Losses resulting from or arising out of fraud
or other intentional or knowing misconduct or misrepresentation, as to
which (in each case) the Shareholders shall be liable to the Indemnities
without limitation, notwithstanding the foregoing provisions of Section
8.2(a), (i) recovery from the Escrow Fund shall be the sole monetary
recourse of any Indemnitee for claims under Section 8.2(a), and (ii) the
Indemnitees shall not be entitled to indemnification under Section 8.2(a)
above for any amount unless and until the aggregate of all amounts for
which the Indemnitees would otherwise be entitled to be indemnified exceeds
$500,000 (in the aggregate), all amounts in excess of which the Indemnitees
shall be indemnified for as provided in this Section 8.2; provided,
however, that any amounts arising under Schedule 8.2 shall be immediately
subject to a claim of indemnity hereunder and shall not be subject to the
$500,000 threshold set forth in this Section 8.2(b)(ii). Solely for
purposes of determining whether the aggregate of all amounts for which the
Indemnitees would otherwise be entitled to be indemnified exceeds $500,000,
the amount of each indemnifiable claim and the aggregate amount of all
indemnifiable claims shall not be limited by the definition of "material"
in Section 10.1(i) below, or the use of the term "material" or its related
forms in any representations or warranties. Accordingly, indemnifiable
claims may consist of Losses (whether or not arising from a breach of an
individual representation, warranty, covenant or indemnity) that
individually or in the aggregate do not constitute material amounts,
provided such amounts in the aggregate exceed $500,000. In no event shall
the indemnification of Purchaser by the Shareholders be deemed to include
indemnification against potential third party claims described in Section
2.20(i)(i) and (ii); provided, however, that for any such claims resulting
from or arising out of the Company's or the Shareholders' fraud or other
intentional or knowing misrepresentation, the Shareholders shall be jointly
and severally liable to the Indemnitees without limitation.
(c) The obligations of the Shareholders under this Section 8.2 shall
be secured pursuant to the Escrow Agreement.
(d) As of and after the Closing, the Surviving Corporation shall have
no liability under this Agreement, and no Shareholder shall threaten or
bring any claim or action whatsoever against the Surviving Corporation for
contribution to any amounts payable under this Section 8.2 by such
Shareholder.
(e) The obligations to indemnify, defend and hold harmless pursuant to
this Section 8.2 shall survive the consummation of the transactions
contemplated by this Agreement.
39
<PAGE>
(f) After the Closing, subject to Section 8.1, Purchaser shall
indemnify and hold harmless the Shareholders from and against any Losses
relating to, arising from or in connection with (i) any misrepresentation,
breach or violation of or default in any of the representations,
warranties, covenants or agreements given or made by Purchaser or Merger
Sub in this Agreement and (ii) the enforcement of the Shareholder's rights
under this Section 8.2(f). Except in the case of fraud or other intentional
or knowing misconduct or misrepresentation, the maximum aggregate recourse
by the Company and the Shareholders (collectively) on account of breaches
of this Agreement by the Purchaser or Merger Sub shall not exceed the
amount determined by multiplying ten percent (10%) by the aggregate value
(calculated with reference to the closing prices on the Closing Date) of
the Purchaser Common Stock issued in the Merger at the Effective Time, and
no claim shall be made unless the aggregate losses of the Shareholders
exceeds $500,000, and only to the extent of such excess. No claim for
indemnification pursuant to this Section 8.2(f) may be brought after the
expiration of the Representations Period, except that claims made in good
faith in writing and setting forth in reasonable detail the claim prior to
such expiration, including without limitation claims made with respect to
actions anticipated in good faith, regardless of whether any action or
demand has in fact been commenced, shall be deemed to have been brought
prior to the end of the Representations Period. No claim for indemnity
shall be made without the consent of the Shareholder Representative, who
shall have the power to settle or otherwise resolve any claim on behalf of
the Shareholders. In no event shall the Purchaser be obligated to indemnify
the Shareholders for the reasonable fees and expenses of more than one
counsel for all Shareholders (and local counsel, if appropriate).
ARTICLE IX
TERMINATION
9.1 Termination.
(a) The parties hereto shall be entitled to terminate this Agreement
as follows, provided that no such termination shall limit or terminate any
liability of one party to another for any breach hereof, and provided
further that the provisions of Sections 7.1(c) (confidentiality), 8.2
(indemnification) and 10.7 (publicity) shall survive any such termination:
(i) the parties hereto may terminate this Agreement by mutual
written consent at any time;
(ii) the Purchaser may terminate this Agreement by written notice
to the Company on or prior to the Closing Date if the Company or any
Shareholder shall have breached in any material respect any
representation, warranty, covenant or agreement contained in this
Agreement and failed to cure the same within ten (10) days after
written notice thereof from the Purchaser;
(iii) the Company may terminate this Agreement by written notice
to the Purchaser on or prior to the Closing Date if the Purchaser
shall have breached in any material respect any representation,
warranty, covenant or agreement contained in this Agreement and failed
to cure the same within ten (10) days after written notice thereof
from the Company;
40
<PAGE>
(iv) the Purchaser or the Company may terminate this Agreement by
written notice to the other if the consummation of the Merger shall
not have occurred on or before May 31, 2000 (provided, that if the
Secretary of State of North Carolina shall not have issued a permit
with respect to the fairness of the Merger to the Shareholders of the
Company prior to such date, the date shall be extended to June 30,
2000; provided, however, that the right to terminate this Agreement
pursuant to this subsection (iv) shall not be available to a party
whose (or whose affiliate's) action or failure to act shall have been
a principal cause of or resulted in the failure of the Merger to occur
on or before such date; and
(v) the Purchaser or the Company may terminate this Agreement by
written notice to the other parties hereto on or prior to the Closing
Date if any court or other governmental instrumentality of competent
jurisdiction shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement which order or injunction
shall not have been lifted within ten (10) days of issuance thereof.
(b) Notwithstanding approval of this Agreement and the Plan of Merger
by the shareholders of Merger Sub and the Company, the parties hereto agree
that termination of this Agreement shall constitute mutual termination and
abandonment of the Plan of Merger and that, upon any such termination,
neither Merger Sub nor the Company shall have any further rights or
obligations under or arising out of the Plan of Merger; provided that in
the event of termination under clauses 9.1(a)(ii) or (iii), no party shall
be relieved of liability for its breach of this Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Definitions of Certain Terms. As used in this Agreement, the following
capitalized terms shall have the respective meanings set forth below:
(a) "Casualty" shall mean any fire, explosion, accident, casualty,
labor trouble, flood, drought, riot, storm, condemnation or act of God or
other public force.
(b) "Code" shall mean the United States Internal Revenue Code of 1986
and all rules and regulations promulgated thereunder from time to time, in
each case as amended.
(c) "Contract" shall mean any contract, agreement, indenture,
instrument or other binding commitment or arrangement of any kind.
(d) "Encumbrance" shall mean any lien, encumbrance, security interest,
mortgage, pledge, lease, option, easement, servitude, covenant, condition,
restriction under any Contract, or other charge, restriction or claim of
any kind.
(e) "ERISA" shall mean the Federal Employee Retirement Income Security
Act of 1974 and all rules and regulations promulgated thereunder from time
to time, in each case as amended.
41
<PAGE>
(f) "Exchange Act" shall mean the federal Securities Exchange Act of
1934 and all rules and regulations promulgated thereunder from time to
time, in each case as amended.
(g) "HSR Act" shall mean the Federal Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and all rules and regulations promulgated
thereunder from time to time, in each case as amended.
(h) "Law" shall mean any national, federal, state, local or foreign
law, rule, regulation, statute, ordinance, order, judgment, decree, permit,
franchise, license or other governmental restriction or requirement of any
kind.
(i) "Material Adverse Effect" shall mean any material adverse effect
on the business, financial condition, results of operations, or prospects
of the affected party, including without limitation any effect which
prevents or impairs materially such party's performance of its obligations
under, or the consummation of, this Agreement. When the term "material" is
used with reference to the Company, a matter shall be deemed "material" if
the matter involves or affects (i) in the case of Section 5.9, an amount or
amounts in excess of $500,000 individually or in the aggregate and (ii) in
all other cases, an amount in excess of $25,000 individually or in the
aggregate with other like matters.
(j) "Organizational Document" shall mean any certificate or articles
of incorporation, bylaw, board of directors' or shareholders' resolution,
or other corporate document or action comparable to any of the foregoing
currently in effect.
(k) "Permitted Encumbrance" shall mean such of the following as to
which no enforcement, collection, execution, levy or foreclosure proceeding
shall have been commenced (except as otherwise provided below): (i) liens
reflected in the Balance Sheet; (ii) liens consisting of zoning or planning
restrictions, easements, permits and other restrictions or limitations on
the use of real property or irregularities in title thereto which do not
detract from the value of, or impair the use of, such property by the
Company in the operation of its business; (iii) liens for current taxes,
assessments or governmental charges or levies on property not yet due and
delinquent or that are being contested in good faith; (iv) statutory
Encumbrances, such as materialmen's, mechanics', carriers', workmens' and
repairmens' liens and other similar liens arising in the ordinary course of
business for amounts that are not yet due and delinquent or that are being
contested in good faith; (v) pledges or deposits to secure obligations
under workers' compensation laws or similar legislation; and (vi)
Encumbrances related to bank credit facilities, capital lease obligations,
obligations for borrowed money and purchase money mortgages and conditional
sales contracts entered into in the ordinary course of business which will
be retired at Closing.
(l) "Person" shall mean any individual, partnership, joint venture,
corporation, trust, limited liability company, unincorporated organization,
government (or subdivision thereof) or other entity.
(m) "Securities Act" shall mean the United States Securities Act of
1933 and all rules and regulations promulgated thereunder from time to
time, in each case as amended.
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<PAGE>
(n) "Stock Acquisition Right" shall mean any option, warrant, right
(preemptive or otherwise), call, commitment, conversion right, right of
exchange, plan or other agreement of any character providing for the
purchase, issuance or sale of any securities.
10.2 Expenses. Each party hereto shall pay all of its own expenses relating
to the transactions contemplated by this Agreement, including without limitation
the fees and expenses of its respective counsel.
10.3 Remedies Not Exclusive. Except as specifically provided in Section
8.2, nothing in this Agreement shall limit or restrict in any manner any other
rights or remedies any party hereto may have against any other party hereto at
law, in equity or otherwise, including without limitation any such rights
pursuant to the Escrow Agreement or any of the Employment and Consulting
Agreements.
10.4 Governing Law. The interpretation and construction of this Agreement,
and all matters relating hereto, shall be governed by the laws of the State of
North Carolina, without regard to the choice of law principles thereof. The
parties acknowledge and agree that this Agreement is being executed and
delivered in North Carolina.
10.5 Further Assurances. In addition to the actions, documents and
instruments specifically required by this Agreement or any other Transaction
Document to be taken or delivered on or before the Closing Date or from time to
time thereafter, each of the parties to this Agreement shall, before and after
the Closing Date, without further consideration, take such other actions and
execute and deliver such other documents and instruments as another party hereto
reasonably may request in order to effect and perfect the transactions
contemplated by this Agreement and the other Transaction Documents.
10.6 Captions. The Article and Section captions used in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
10.7 Publicity. Except as otherwise required by applicable law, no party
and no affiliate of any party shall issue any press release or make any other
public statement relating to, connected with or arising out of this Agreement or
the matters contained herein without the other parties' prior written approval
of the contents and the manner of presentation and publication thereof.
10.8 Notices. Notice or other communications required or permitted
hereunder shall be sufficiently given if delivered in person or sent by telecopy
or by registered or certified mail or by recognized overnight courier, postage
prepaid, addressed as follows:
If to the Purchaser or Merger Sub, to:
Cree, Inc.
4600 Silicon Drive
Durham, North Carolina 27703
Attention: Adam H. Broome, General Counsel and Secretary
43
<PAGE>
with a copy to its counsel,
Smith, Anderson, Blount, Dorsett, Mitchell &
Jernigan, L.L.P.
2500 First Union Capitol Center
Raleigh, North Carolina 27601
Attention: Gerald F. Roach, Esq.
If to the Company or any Shareholder, to:
Nitres, Inc.
5655 Lindero Canyon Road
Suite 404
Westlake Village, California 91362
Attention: Fred A. Blum
with a copy to its counsel:
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, California 90071
Attention: Thomas A. Waldman, Esq.
or to such other address or number as shall be furnished in writing by any such
party in such manner, and such notice or communication shall be deemed to have
been given as of the date so delivered, sent by telecopier or mailed.
10.9 Recovery of Litigation Costs. If any legal action or arbitration or
other proceeding is brought for the enforcement of this Agreement, or based on
an alleged dispute, breach, default or misrepresentation in connection with any
of the provisions of the Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to which
it or they may be entitled.
10.10 Parties in Interest. This Agreement may not be transferred, assigned,
pledged or hypothecated by any party hereto without the other parties' prior
written consent. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors and permitted assigns.
10.11 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument. This
Agreement may be executed and delivered by facsimile or telecopy and any
signature delivered by such means shall be deemed an original.
10.12 Entire Agreement. This Agreement, including the other documents
referred to herein which form a part hereof, contains the entire understanding
of the parties hereto with respect to the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter, other than the
Confidentiality Agreement between the parties dated February 8, 2000, as
44
<PAGE>
amended. All exhibits and schedules referred to in this Agreement are intended
to be and hereby are specifically made a part of this Agreement.
10.13 Construction of Certain Disclosures. The representations and
warranties set forth in Articles II and III above, respectively, are cumulative.
The subject matter covered by any section of either such article shall not be
exclusive as to such subject matter to the extent covered by another section of
such article, and the specificity of any representation or warranty shall not
affect or limit the generality of any other representation or warranty made or
given by the same party.
10.14 Amendments. This Agreement may be waived, amended, supplemented or
modified only by a written agreement executed by each of the parties hereto.
10.15 Severability. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
10.16 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person or entity other than the parties hereto.
[signatures appear on next page]
45
<PAGE>
[signature page to Merger Agreement]
IN WITNESS WHEREOF, the Purchaser, Merger Sub, the Company and the
Principal Shareholders have caused their respective names to be hereunto
subscribed individually or by their respective officers thereunto duly
authorized, as the case may be, all as of the day and year first above written.
CREE, INC.
By: /s/ F. Neal Hunter
-------------------------------------
F. Neal Hunter
Chairman and Chief Executive Officer
CRYSTAL ACQUISITION, INC.
By: /s/ Charles M. Swoboda
-------------------------------------
Charles M. Swoboda
President
NITRES, INC.
By: /s/ Fred A. Blum
-------------------------------------
Fred A. Blum
President and Chief Executive Officer
[signatures continue on next page]
<PAGE>
[signature page to Merger Agreement]
PRINCIPAL SHAREHOLDERS
[signature lines to follow]
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11.1
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TEXT>
EXHIBIT 11.1
Statement Regarding Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------
June 25, June 27, June 28, June 30, June 30,
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Basic:
Weighted average common 32,965,000 29,015,000 27,726,000 26,911,000 23,652,000
shares outstanding
Net income 30,520,000 12,448,000 6,243,000 3,650,000 231,000
Net income per common share $0.93 $0.43 $0.23 $0.14 $0.01
Diluted:
Weighted average common 32,965,000 29,015,000 27,726,000 26,911,000 23,652,000
shares outstanding
Dilutive effect of stock options 2,252,000 1,417,000 1,261,000 1,340,000 1,578,000
and warrants
Total shares 35,217,000 30,432,000 28,987,000 28,251,000 25,230,000
Net income 30,520,000 12,448,000 6,243,000 3,650,000 231,000
Net income per common share $0.87 $0.41 $0.22 $0.13 $0.01
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>SUBSIDIARIES OF REGISTRANT
<TEXT>
EXHIBIT 21.1
Subsidiaries of Registrant
Cree Lighting Company
Cree Funding, LLC
Cree Technologies, Inc.
Cree Research FSC, Inc.
Real Color Displays, Incorporated
(Articles of Dissolution filed with the
North Carolina Secretary of State on June 23, 2000)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements of
Cree, Inc. on Form S-8 (Nos. 33-92477, 33-92479, 33-98956 and 33-98958) and on
Form S-3 (No. 33-98728) of (i) our report dated July 21, 2000, with respect to
the consolidated financial statements of Cree, Inc. and subsidiaries, and (ii)
our report dated March 26, 2000, except for Note 8, as to which the date is
April 10, 2000, with respect to the financial statements of Nitres, Inc.
included in the Annual Report (Form 10-K) of Cree, Inc. for the year ended June
25, 2000.
/s/ Ernst & Young LLP
Raleigh, North Carolina
August 8, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>CONSENT OF INDEPENDENT ACCOUNTANTS
<TEXT>
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-98956, 33-98958, 333-92477 and 333-92479) and
Form S-3 (No. 33-98728) of Cree, Inc. of our report dated July 22, 1998, except
for the restatement of the fiscal 1998 financial statements as a result of the
business combination described in the first three paragraphs of Note 2 for which
the date is May 1, 2000, relating to the financial statements of Cree, Inc.,
which appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
August 8, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000895419
<NAME> CREE, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> JUN-25-2000 JUN-27-1999 JUN-28-1998
<PERIOD-START> JUN-28-1999 JUN-29-1998 JUL-01-1997
<PERIOD-END> JUN-25-2000 JUN-27-1999 JUN-28-1998
<EXCHANGE-RATE> 1 1 1
<CASH> 103,843 42,545 18,351
<SECURITIES> 158,303 6,145 657
<RECEIVABLES> 16,549 16,383 10,941
<ALLOWANCES> 250 175 151
<INVENTORY> 9,320 3,986 2,543
<CURRENT-ASSETS> 289,019 70,171 35,695
<PP&E> 159,751 84,800 47,524
<DEPRECIATION> 22,633 13,670 10,452
<TOTAL-ASSETS> 486,202 145,933 74,380
<CURRENT-LIABILITIES> 23,062 10,282 7,429
<BONDS> 0 0 0
<PREFERRED-MANDATORY> 0 0 0
<PREFERRED> 0 0 0
<COMMON> 414,049 112,378 50,718
<OTHER-SE> 49,091 18,623 5,188
<TOTAL-LIABILITY-AND-EQUITY> 486,202 145,933 74,380
<SALES> 108,562 62,401 43,962
<TOTAL-REVENUES> 108,562 62,401 43,962
<CGS> 52,362 34,163 29,223
<TOTAL-COSTS> 70,507 45,078 35,380
<OTHER-EXPENSES> 1,305 1,180 502
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (9,400) (1,058) (754)
<INCOME-PRETAX> 46,806 17,340 8,834
<INCOME-TAX> 16,286 4,892 2,591
<INCOME-CONTINUING> 30,520 12,448 6,243
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 30,520 12,448 6,243
<EPS-BASIC> 0.93 0.43 0.23
<EPS-DILUTED> 0.87 0.41 0.22
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>REPORT OF INDEPENDENT AUDITORS
<TEXT>
EXHIBIT 99.1
Report of Independent Auditors
Board of Directors
Nitres, Inc.
We have audited the accompanying balance sheets of Nitres, Inc. as of June 30,
1999 and 1998 and the related statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended June
30, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nitres, Inc. as of June 30,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
March 26, 2000, except for Note 8,
as to which the date is
April 10, 2000
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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