-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NVLTxloxP2TETYDQawg6AaGVPT953Vfb7W4qSHylCNbfJTSjVhA+yxozBufoPGsi PiBRIVeL3F3P3Ux0LBhAlw== 0000950168-96-001825.txt : 19961001 0000950168-96-001825.hdr.sgml : 19961001 ACCESSION NUMBER: 0000950168-96-001825 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREE RESEARCH INC /NC/ CENTRAL INDEX KEY: 0000895419 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 561572719 STATE OF INCORPORATION: NC FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21154 FILM NUMBER: 96637356 BUSINESS ADDRESS: STREET 1: 2810 MERIDIAN PKWY STE 176 CITY: DURHAM STATE: NC ZIP: 27713 BUSINESS PHONE: 9193615709 10-K405 1 CREE RESEARCH, INC. 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 Commission File No. 0-21154 CREE RESEARCH, INC. (Exact name of registrant as specified in its charter) North Carolina 56-1572719 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2810 Meridian Parkway, Suite 176, Durham, NC 27713 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (919) 361-5709 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.005 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The approximate aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant as of September 26, 1996 was $124,247,457 (based on the average bid and asked sales prices on that date of $12.69). Number of registrant's shares of Common Stock, par value $0.005 per share, outstanding as of September 26, 1996 was 12,300,858. Documents incorporated by reference: Portions of Proxy Statement accompanying the notice of the annual meeting of the shareholders of Cree Research, Inc. to be held on November 12, 1996(Part III). 1 INDEX Part I Page Item 1. Description of Business 3 Item 2. Description of Property 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements: Report of Independent Accountants 21 Consolidated Balance Sheets at June 30, 1996 and 1995 22 Consolidated Statements of Operations for the years ended June 30, 1996, 1995 and 1994 23 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 24 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1995 and 1994 26 Notes to Consolidated Financial Statements 27 Part III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37 Item 10. Directors and Executive Officers of the Registrant 37 Item 11. Executive Compensation 37 Item 12. Security Ownership of Certain Beneficial Owners and Management 37 Item 13. Certain Relationships and Related Transactions 37 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38 2 PART I Item 1. Business Cree Research, Inc. ("Cree" or the "Company") was incorporated in North Carolina in July, 1987. The Company develops, manufactures and markets electronic devices using silicon carbide ("SiC,") semiconductor technology. The Company believes that, for certain applications, SiC-based semiconductor devices offer significant advantages over products based on other semiconductor materials. The Company was founded to continue the research and development begun at North Carolina State University, to commercialize the production of SiC material, and to develop and market SiC-based semiconductor products. Cree has developed a proprietary process for the growth of SiC crystals and their fabrication into wafers and semiconductor devices. The first commercial application of this technology is a unique type of LED that takes advantage of SiC's ability to emit blue light. The Company's LED was introduced in October 1989. The Company believes that it is currently the primary commercial manufacturer of SiC wafers and SiC-based blue light emitting diode ("LED") products in the world although blue LEDs are produced by competitors using non-SiC materials. The Company markets its blue LED chip products principally to customers who incorporate them into packaged lamps for resale to original equipment manufacturers ("OEMs"). Cree began to ship volume quantities of the blue LED in fiscal 1991 and 1992. In 1995, Cree released an improved blue LED using gallium nitride on silicon carbide. The Company has since worked to ramp up its manufacturing capacity for this product. The Company also sells SiC wafer products to corporate, government, and university research laboratories. In addition, the Company is engaged in a variety of research programs related to the advancement of SiC process technology and the development of electronic devices that take advantage of SiC's unique physical and electronic properties. These research projects are primarily funded by federal government agencies and departments and corporate partners. In August 1994, the Company formed a North Carolina wholly-owned subsidiary, Real Color Displays, Inc. ("RCD"), for developing and marketing full color LED displays. RCD acquired the assets and assumed the liabilities of a Hong-Kong based company in this line of business. Vertical integration into the LED display market is a natural way for the Company to enhance its core position in LED chip production. Initially, the Company's strategy was to target the low-end full color moving message display market comprised of one and two-line message signs designed to display text messages and single graphics. These products are used in a variety of applications such as retail point of sale advertising, office information signs, casino displays, transportation signs and market information tickers. During fiscal 1996 RCD developed a new LED based product, the "Real Color Module(TM)". This product, introduced during the second half of fiscal 1996, has become the primary focus of RCD's business and is expected to account for the majority of RCD's sales during fiscal 1997. Cree Products Blue LEDs Cree introduced its blue LEDs to the marketplace in fiscal 1990 and has since developed several generations of blue LED products. Inexpensive, bright LEDs that produce red and green light have been available for many years. Bright blue LEDs have only recently been available from the Company at prices that begin to allow market penetration. Certain competitors offer bright blue LEDs but at selling prices higher than the Company's prices. Because the Company's blue LED is a solid-state device, it provides the same advantages over conventional incandescent lamps as do red and green LEDs. Moreover, with the availability of blue LEDs, the range of LED color possibilities, previously restricted to red, green, yellow, orange, and combinations of these colors, is virtually unlimited. Any color in the visible spectrum, including white light, may be created by using at least one LED for each primary 3 color (red, green, and blue) in a single lamp or in an array and varying the intensity of the color components until the desired color is obtained. There are two primary segments of the LED market that the Company's blue LED product is currently serving; the markets for displays and solid-state light components. The Company's blue LEDs are presently being used or designed into applications such as full-color flat-panel displays, automotive lighting and printer array bars. Blue LEDs combined with red and green LEDs allow the development of large-scale flat panel LED based displays. Such displays are currently being marketed in various formats by customers of the Company for indoor messaging and advertising applications. The majority of the market for LED-based display applications is in the Far East. The Company's principal customers who serve the display market are located in China, Taiwan and Japan. Cree also sells the LED product to European and domestic accounts. The Company supplies blue LEDs that OEMs use to manufacture solid-state light components. Single lamp red-green-blue indicators can be useful for consumer electronics, industrial instrumentation, automotive, and military electronics applications that require a full spectrum of colors. As the Company continues to move down the traditional LED price curve, the Company expects that more of these applications will become available for its LED product. During fiscal 1995 Cree developed a significantly higher performance blue LED. In the fourth quarter of fiscal 1995 the Company announced the release of its new LED chip known as the DH-85 and initial shipments began. The DH-85 combines the Company's SiC substrate and a compound known as gallium nitride ("GaN") to create a LED that produces a light output intensity approximately 30 times greater than the Company's older generation SiC chip. The higher intensity light output makes the chip viable for a broader range of applications and uses. Cree shipped increasing volumes of the DH-85 each quarter during fiscal 1996 but was not able to attain yields from manufacturing sufficient to provide a positive gross margin on this product. Cree's focus in manufacturing is to increase yields so that costs can be offset and a margin earned, ultimately allowing flexibility in pricing the product. If the Company were unable to do this, its earnings would be negatively impacted. Modules The Company's Real Color Displays division has developed a modular LED-based component that is sold to customers as a building block for customized video and graphic display systems. The RGB Module is a low profile full-color LED module for use in both large scale and small scale full-color LED display systems. The RGB module combines the three primary LED chips into surface mount pixels which are then assembled into very thin modules and can be combined to form any size display. The Company is in the process of applying for patents on the unique module design which combines the red, green and blue LED chips and the specialized drive circuitry which is required to drive each individual LED element with the speed necessary for video applications. Due to the extremely large and diverse market for LED display systems, the Company cannot effectively address all opportunities at the display system level and therefore the Company has chosen a strategy of supplying modules directly to well established LED display system suppliers. This approach is expected to dramatically shorten the sales cycle for full-color displays and maximize the efficiency of the Company's sales resources while minimizing the capital investments that would need to be made as a systems supplier. The Company believes that the RGB module gives it a unique advantage in the commercialization of full-color LED displays. 4 Moving Message Signs RCD has been manufacturing full color moving message sign products since its inception in August of 1994. The Company is able to produce 64 color moving message products at costs which are comparable to multi-three-color signs by utilizing the patented betagraphing technology which RCD acquired. The moving message sign products range in size from one to two lines of text with varying graphics capabilities. These products provide a low cost and effective way of displaying text messages which can be easily changed and updated. The possible sign applications for these displays range from lobby greetings to restaurant or bar promotions to informational signage in schools or factories. SiC Wafer Products The Company manufactures its SiC wafers, both for its own internal use and for sale to customers. The wafers are supplied to three market segments: corporate, government and university research and development programs. Typically, the Company's customers order wafers with epitaxial films and specify the film properties desired, which vary depending upon the nature of the devices the customer intends to research and develop. The application areas for these devices might include high frequency power, high power, high temperature optoelectronic, and radiation hard based uses. Wafer prices vary substantially, depending upon the customer's specifications. Product Development The Company is engaged in a wide number of research and development projects. Some projects have the goal of developing commercial products for the market in the near term. Other projects have longer term goals. There can be no assurance as to the successful development of commercial products or the timing thereof. The Company benefits from research and development efforts sponsored by both U.S. Government contracts and from internal corporate funding. Contracts are awarded to the Company to fund both short term and long term research projects. Contract revenues represent reimbursement by these various government entities for research and development costs and a portion of the Company's general and administrative expenses either on a cost plus or a cost share basis. Funding for projects with near term applications for the Company typically include a cost share component that the Company is responsible for absorbing as a cost of revenues. Projects that may not have readily available production applications or projects that relate to longer term development are normally awarded on a cost plus basis with built in margins of 7% to 10%. Contract revenues funded related expenditures of $5,721,000, $4,348,000 and $2,891,000 for the years ended June 30, 1996, 1995 and 1994, respectively. The Company has included $5,128,000, $3,599,000 and $2,426,000 of these expenditures for fiscal years 1996, 1995 and 1994, respectively, in cost of revenues. The remainder of these costs are classified as operating expenses under sales, general and administrative. Contract revenues reimbursed general and administrative expenses of $593,000, $749,000 and $465,000 for the fiscal years 1996, 1995 and 1994, respectively. The Company also contributed $1,565,000, $880,000 and $289,000 for the years ended June 30, 1996, 1995 and 1994, respectively, as a cost sharing component for the government contract revenues. The Company incurred research and development costs unabsorbed by contract revenues totaling $444,000, $473,000 and $712,000 for the fiscal years 1996, 1995 and 1994, respectively. Silicon Carbide Material The Company continually conducts research aimed at improving the quality of its SiC wafers and enhancing its SiC epitaxial process. In so doing, the Company believes it can lower manufacturing costs and permit the development of more complex SiC devices. The key factor impacting an eventual production timetable for more complex devices such as power 5 semiconductors is the SiC substrate and epitaxial technology, specifically material quality and wafer size. Reduction of defects below current levels is essential for demonstrating products such as large area power devices and achieving reasonable yields in production. Doping and epitaxial thickness uniformity are key yield factors. Yield is very important because device cost will be an important barrier to the introduction of advanced SiC products such as power and high temperature devices. Therefore, improvement of wafer and epitaxial quality is a high priority in the Company's research and development programs. Wafer size is also important not only for achieving lower costs but because most production fabrication facilities are scaled for at least two inch wafers. Therefore a larger wafer will accelerate the process of bringing advanced SiC products to market. The Company continues work on a $5.8 million contract awarded by the Defense Advanced Research Projects Agency ("DARPA") to fund this research and development. The contract runs through May 1998. Cree is working with Motorola, General Electric and Honeywell on three separate projects under the contract that will address power and high temperature device applications for the technology. Cree also believes that it has the opportunity to sell a significantly increased volume of its SiC wafers at premium prices to its customers if it can develop a process for consistently producing material with very low defect levels. While the Company has produced such low-defect material from time to time, a reliable consistent process has yet to be demonstrated. The speed with which the Company can improve its material will directly impact Cree's ability to grow the market for advanced semiconductors based on SiC. Low Cost Super-Bright Blue LEDs In fiscal 1995 Cree developed a blue LED, the DH-85, that is much brighter than its prior generation blue LED. The brighter chip was developed by depositing a thin layer of gallium nitride (GaN) on a SiC substrate as opposed to a SiC thin film on SiC substrate. The GaN thin film significantly enhanced the efficiency of the light output from the LED. Cree increased production of the DH-85 each quarter during fiscal 1996 but not to the point that revenues could offset the additional investment made in equipment, facilities and personnel to manufacture the product. The Company currently relies on three "epitaxy" systems to produce the DH-85 and conduct research and development runs to improve the manufacturing process and to advance its blue laser program. From time to time the Company has experienced unplanned downtime with these systems and unpredictable yields. This has kept costs high. Cree's goal is to stabilize the process and achieve increasing and predictable yields from this critical part of the manufacturing cycle. Under a recently signed contract to supply Siemens A.G. with blue LEDs, the Company will be adding at least one additional epitaxy system to meet production requirements. Cree is also attempting to redesign the epitaxial layers or thin films to reduce manufacturing complexity and costs and to improve the performance of the LED. The Company's goal is to be a high volume supplier of super-bright blue LED chips. The Company believes that to achieve this goal it must offer the product at prices below its current average selling prices. Accordingly, Cree must reduce its costs of production. Management believes that its current strategy of apportioning its epitaxy systems between research and development and production is a viable approach to achieving this goal. By allocating appropriate research and development capacity, the Company is attempting to improve and stabilize the epitaxy process to achieve appropriate yields. If the Company does not achieve appropriate increases in yields, then costs would fail to decline at the planned rate, the market for the product would probably fail to develop at otherwise expected rates and the Company's ability to generate a positive gross margin and net profits would be jeopardized. High-Power Radio Frequency and Microwave Transistors The Company is working with corporate partners to develop high-power radio frequency and microwave transistors. Such devices could eventually have important applications in cellular phone base stations, high-power solid-state broadcast systems for television and radio, satellite communications, radar search and detection equipment and electronic counter measure systems. 6 During fiscal 1995, the Company reported the development of SiC transistors that operate at frequencies up to 32 gigahertz ("GHz"). In addition, Motorola completed power measurements on the devices and has determined that the transistors operate at 2.8 watts per millimeter at 1.8 GHz. This power density is two to three times higher than that normally achieved with equivalent silicon or gallium arsenide devices. Although prototype devices have been developed, additional development work is needed to achieve commercial viability. Because of the development costs involved, the Company has applied for significant additional funding from a government agency for this project. Blue and Ultraviolet ("UV") Laser Diodes The storage capacity of optical disk drives can be increased significantly by utilizing a laser diode capable of emitting short wavelength light. The Company believes that a laser diode fabricated from gallium nitride and related materials deposited on SiC substrates could be capable of emitting short wavelength light in the blue or ultraviolet spectrum, potentially increasing the storage capability of optical disk drives by a factor of three to four. This increased storage capability could lead to advances in CD-ROM data storage and audio and video compact disc applications. The government's interest in the blue laser diode is for the next generation of high density optical recording and playback systems as well as lightweight countermeasure and covert communication systems for the military. In April, 1995 the Company began work on a two year $4.0 million contract from DARPA to develop a blue laser diode. The Company also entered into a joint development agreement with Philips Laboratories-Briarcliff ("Philips") to develop this technology. Cree, Philips and another contractor are providing another $4.0 million bringing total funding for this program to approximately $8.0 million. Additional funds were allocated to the development of the blue laser diode in June of 1996 when DARPA awarded another $4.3 million to be spent over a three year period. As part of the contract Cree and Philips will provide approximately one million dollars. The deliverable specified in the latest DARPA contract is for Cree to demonstrate a blue laser diode within a certain range of wavelengths and power outputs with a greater than 1,000 hour life. Commercial lasers typically have a specification for 10,000 hours of useful life. Both Cree and Philips will cross-license certain technology useful to the development of a blue laser diode and will share manufacturing rights at the end of the contract. High-Temperature Devices The Company has developed prototype SiC-based transistors and rectifiers that operate at very high temperatures. These high-temperature semiconductors have potential applications in the aerospace and automotive industries. For example, Cree has been working with a customer that is developing a sensor based on a SiC semiconductor that could be used to measure engine performance via insertion directly into the cylinder of an automobile engine. The application aims to optimize fuel economy by adjusting engine performance during operation. In addition, these devices could find use in applications such as down hole drilling equipment, space-based power systems and electronic vehicles. Although prototype devices have been developed for some of the applications mentioned, additional development work is needed to achieve commercial viability. High-Power Semiconductors The Company is working on the development of prototype high power devices that, if successfully developed, could have many significant uses. Such devices could be very important in applications involving power conditioning and regulation. Potential application areas include variable speed drives for heating, ventilation and air conditioning systems, lighting ballasts, industrial motor controls, uninterruptable power supplies and power drive components for electric vehicles. Cree continues to make progress in improving the quality of its SiC material, improving processes for fabricating devices and improving device designs. However, the Company can provide no assurance that further work will result in improvements in processes, material quality and end products that are necessary to introduce such products to market. 7 Nonvolatile Random Access Memories ("NVRAMs") Cree is investigating the possible development of SiC-based NVRAM products. SiC-based NVRAMs may be able to retain an electrical charge for an extended period without being refreshed. The Company believes that SiC-based NVRAMs could be capable of "write" speeds many times faster than silicon-based nonvolatile memory devices. The Company is presently working on a $4.8 million contract which ends in October, 1997 to advance work in this area. The contract is monitored by the Office of Naval Research ("ONR"). Potential consumer applications include portable electronic products where device power consumption and speed are important. Defense applications include electronic circuits in satellites where power consumption is a major concern. This program is in a very preliminary stage and there can be no assurance that a commercially viable product will ever be developed. Strategic Alliances The Company believes that the formation of strategic alliances with other companies is a viable strategy for more quickly developing its technology, bringing certain products to market and defraying investment in resources. For example, the Company has teamed with Philips to develop a blue laser diode. Since Philips was a pioneer in compact disc laser technology Cree realized that Philips was well positioned to benefit from the development of the next generation of laser diodes. Likewise Cree and Siemens signed a joint agreement in October, 1995 to embark on the development of a "true" green LED. Siemens is a major manufacturer of LEDs for their captive systems business. Siemens committed to a $1.5 million license fee, a third of which has been collected, to license certain epitaxial and fabrication technology from Cree as a basis for the development of green LEDs. The contract is for a three year period and contemplates Cree supplying a portion of Siemens' requirements for blue LEDs. However specific amounts are not committed and must be agreed on periodically. In a separate supply agreement signed by Cree and Siemens in September 1996, Cree has committed to sell over $5 million worth of LEDs to Siemens through fiscal 1997. The Company will continue to evaluate similar opportunities from time to time as a way to more quickly realize value for its proprietary technology. Sales and Distribution The Company markets its blue LED chips domestically and in a number of foreign countries. Because the production of lamp and display products incorporating LED chips is concentrated among a relatively small number of manufacturers, the Company uses an executive sales approach combined with manufacturers representatives, and distributors to market its LED chips. In Japan the Company markets its LED products and SiC wafers through its distributors Sumitomo Corporation and Shin-Etsu Handotai Co., Ltd. (the "Japanese Distributors"). The sales to Sumitomo occur under a three year distribution agreement signed in June 1995. The Company markets its SiC wafer products throughout the rest of the world via a small direct sales staff. RCD currently distributes the majority of its LED-based modules directly to original equipment manufacturers (OEMs). The OEMs in turn manufacture, sell and generally install modular based display systems at their customer's site. RCD also maintains a sales representative in Korea who receives a commission in connection with units the representative sells. The majority of moving message signs are sold via a network of international distributors in Central and South America, Australia, the Pacific Rim and Canada. RCD also employs a direct sales program and uses a dealer network to market a portion of its products. Competition The semiconductor industry is intensely competitive and is characterized by rapid technological change, price erosion, and heightened foreign competition. The Company 8 believes that it currently enjoys a favorable position in the existing and potential emerging markets for SiC-based products and materials primarily as a result of its proprietary SiC-based technology. However, the Company faces potential competition from a number of established domestic and international semiconductor companies, each of which is conducting SiC-related research and development. All of these companies have vastly greater engineering, manufacturing, marketing, and financial capabilities than the Company. The Company also is aware that several smaller companies, including Advanced Technology Materials, Incorporated are devoting resources toward the development and marketing of SiC wafers and devices. The Company also faces growing competition from companies working with other wide bandgap semiconductor materials such as GaN. Nichia Chemicals ("Nichia") and Toyoda Gosei, companies in Japan, previously announced the development of a GaN-based pn junction blue LED lamp that is brighter than the Company's recently released SiC:GaN super bright blue LED product. The sale price for Cree's new super bright LED is lower than the product offered by Nichia. However, there can be no assurance that Nichia will not achieve economies of scale in its production process that will result in lower pricing. Price and intensity are the two primary drivers that determine the timing and extent of market development. Cree developed its new product by growing GaN on SiC substrates for the subsequent fabrication of super bright blue LEDs. Although more expensive than sapphire (Al2O3), which is used by Nichia as a substrate for GaN thin film growth, SiC has several potential advantages. The lattice mismatch between 6H-SiC and GaN is approximately 3.5% versus 15% for Al2O3 and GaN. A closer lattice match could result in GaN films grown on SiC having a lower defect density than films grown on Al2O3. More importantly, unlike Al2O3, SiC is a conductive substrate. This means that industry standard vertical devices with a top and bottom contact can be fabricated with GaN grown on SiC, whereas GaN grown on Al2O3 (an insulator) are being fabricated as horizontal devices with both contacts on top. Because both contacts must be placed on top of the device, a horizontal structure typically requires a larger chip size than a vertical structure (Figure 1). AN ILLUSTRATION APPEARS IN THIS SPACE DESCRIBING THE DIFFERENCES BETWEEN THE LED DEVICE MANUFACTURED BY CREE AND THAT MANUFACTURED BY NICHIA. Figure 1. Additionally, a smaller chip size can provide an important cost advantage. Cree's vertical chip can be as small as 0.01 inches on a side yielding an area of .0001 square inch, or 44% of the competitive chip. Competitive chips are 0.015 inches on a side yielding an area of .000225 per square inch. Thus, SiC substrates can be 2.25 times the cost of sapphire and still be competitive on a price per chip basis assuming all other processing costs are the same. Furthermore, because all red and green chips are vertical devices, Cree's vertical structure facilitates rapid acceptance in existing LED component assembly operations. The Company has an issued patent related to GaN LEDs fabricated on SiC substrates entitled "High Efficiency Light Emitting Diodes From Bipolar Gallium Nitride", U.S. patent #5,210,051. 9 In addition to Nichia, other LED companies are believed to be funding development programs in the area of GaN, including, but not limited to: Toshiba, Hewlett Packard, Siemens and Rohm. The ability of the Company to compete successfully in existing and future markets for its products will depend on elements both within and outside its control. These elements include, but are not limited to, success in designing and manufacturing new products that implement its proprietary SiC-based technology, improvements of existing products, improvements in its SiC-based process technology, increasing production capability of SiC:GaN products including access to capital, protection of its products by effective utilization of intellectual property laws, improvements in product quality, performance and reliability, ease of use, price, diversity of product line, efficiency of production, the rate at which customers incorporate the Company's components into their products, product introductions by the Company's competitors, and general domestic and international economic conditions. Significant changes in domestic or international economic or trade conditions could potentially impact the Company's ability to meet targeted sales goals. Sources and Availability of Raw Materials 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, including certain key materials and equipment used in its crystal growth, wafering, polishing, epitaxial deposition, device fabrication, and device test processes. The Company generally purchases these single or limited source materials and components pursuant to purchase orders and has no guaranteed supply arrangements with such suppliers. In addition, the availability of these materials and components to the Company is dependent, in part, on the Company's ability to provide its suppliers with accurate forecasts of its future requirements. Production of many materials used in semiconductor manufacturing is limited to one or a few manufacturing facilities worldwide. Disruption of production at one or more of these facilities represents a risk for the entire semiconductor industry. However, smaller companies, such as Cree, may be at greater risk than larger companies if supplies of any materials become scarce as suppliers may favor their larger customers in allocating their products. Any interruption in the supply of these key materials or components could have a significant adverse effect on the Company's operations. Customers For the year ended June 30, 1996, two customers accounted for 32% of product revenues. For the same period, contract revenues consisted entirely of U.S. Government contracts, 97% from the Department of Defense. For the year ended June 30, 1995, two customers accounted for 24% of product revenues. For the same period, contract revenues consisted entirely of U.S. government contracts, 95% from the Department of Defense. For the year ended June 30, 1994, three customers accounted for 53% of product revenues. For the same period, contract revenues consisted entirely of U.S. government contracts, 76% from the Department of Defense and 20% from the Department of Commerce. Backlog As of June 30, 1996, the Company had a firm backlog of approximately $15.5 million consisting of approximately $2.1 million of product orders and $13.4 million of executed research contracts. This compares to a firm backlog level of $14.1 million as of June 30, 1995, which consisted of approximately $500,000 of product orders and approximately $13.6 million of executed research contracts. The Company considers orders for products shippable within six months of the backlog date and fully executed research contract awards as of the backlog date as firm backlog. Contractual termination dates on some research contracts, included in the backlogs at both June 30, 1996 and 1995, extend beyond the end of the succeeding fiscal years, respectively. Approximately $10.9 million of the June 30, 1996 backlog relates to cost sharing arrangements under four separate agreements with the U.S. Department of Defense. The total costs to be shared by the Company under these four contracts is $2.6 million through July 1999. Patents and Proprietary Rights The Company licenses ten U.S. patents from North Carolina State University ("NCSU"), and holds twenty-five additional domestic patents of its own or owned jointly. Cree also has license to eight foreign patents issued on the NCSU technology and twelve foreign patents issued on Cree applications. In addition Cree has seventeen patent applications of its own and two joint applications with other entities pending in the United States. The Company also has fifty-seven foreign patent applications pending. In addition to its patent rights, the Company relies upon certain proprietary know-how and trade secrets in its manufacturing process and has entered into non-disclosure agreements to protect its proprietary technology with both employees and parties outside of the Company. 10 The Company earns a material amount of its revenues in overseas markets. While the Company has applied for patent protection for certain of its technologies and products in some of these markets, there can be no assurance that such markets will be subject to the Company's intellectual property rights. The NCSU License. In December 1987, the Company entered into a license agreement with NCSU pursuant to which the Company was granted a worldwide, fully paid, exclusive license to manufacture, use, and sell products and processes covered by the claims of ten U.S. patent applications filed by NCSU relating to SiC materials and SiC-based semiconductor devices, some of which also have been filed in foreign countries. Ten patents were subsequently issued with respect to eight of those applications, with expiration dates between 2007 and 2009. Eight of the foreign filings have been issued with expiration dates from 2006 through 2011. Under the terms of the license, the U.S. Office of Naval Research has retained an interest in the licensed technology for certain military applications. In exchange for the granting of the license, the Company issued 135,196 shares of its Common Stock to NCSU. Cree's Patents. Since its inception, the Company has been granted twenty-five U.S. patents of its own or jointly owned. These patents expire between 2008 and 2014. The Company has filed a number of these patent applications in foreign countries, twelve of which have been issued. In addition, the Company has in the past entered into, and intends to continue to seek, joint research and development programs to develop new SiC-based devices. These efforts have resulted in the filing of several joint patent applications. The Company filed a joint patent application with Purdue University pertaining to certain nonvolatile memory devices, and the Company has exclusive, worldwide rights to the resulting patent, now that it is issued. The Company has filed two joint patent applications with General Electric Corporation ("GE"), one of which has issued, and one joint patent application with NCSU. The NCSU patent has now been issued as two separate patents (process and product) and Cree has secured a worldwide, fully paid exclusive license to its use. Although the Company has not received any claims that its products infringe on the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products or that such assertion may not require the Company to enter into royalty arrangements, prevent the Company from selling products, or result in protracted or costly litigation. Because of rapid technological developments in the semiconductor industry and the broad and rapidly developing patent and mask-work coverage, the patent position of any semiconductor device manufacturer, including that of the Company, is subject to uncertainties and may involve complex legal and factual issues. Consequently, although the Company holds certain patents, is licensed under other patents, and is currently pursuing additional patent applications, there can be no assurance that patents will be issued from any pending applications or that claims allowed by any existing or future patents issued or licensed to the Company will not be challenged, invalidated, or circumvented, or that any rights granted thereunder will provide adequate protection to the Company. Moreover, the Company may be required to participate in interference proceedings to determine the priority of inventions, which could result in substantial costs to the Company. Employees At June 30, 1996, the Company had approximately 176 employees, 156 in the United States and 20 in Russia, all of whom are designated as full-time, with the exception of 4 which are temporary. None of the Company's employees are represented by a labor union or covered by a collective bargaining agreement. The Company has experienced no work stoppages and believes that its employee relations are good. Executive Officers All but one of the Company's executive officers also serve on the Company's Board of Directors. Biographies of the executive officers are incorporated by reference under the 11 heading "Election of Directors" in the Company's Proxy Statement to be filed with respect to the Annual Meeting to be held November 12, 1996. Risk Factors Ownership of the Company's common stock is subject to a number of risks, including the following: Since the Company's inception, the Company has derived approximately half of its revenues from sales of products and the other half from funded research contracts. Over the same period, the Company estimates that approximately a third of its product sales have been made to customers for commercial applications with the balance being sold for evaluation purposes. Although the Company believes that, over the last six months, a majority of its blue LED chips have been sold for incorporation into end-user commercial products, a number of customers are still evaluating the blue LED, and on-going sales of significant volumes of products to these customers cannot be assured. There can also be no assurance that competitors will not introduce products that are competitive with or superior to the Company's blue LED. The Company periodically has experienced lower than anticipated production yields. Production yield problems in the future could have an adverse effect on the Company's operations. The Company manufacturers several key components used in its crystal growth and expitaxial deposition processes and also depends, substantially, on its custom-manufactured processing equipment and systems. Should the Company experience protracted problems in the production of its key components or the operation of its proprietary manufacturing systems, its ability to deliver its products could be materially impacted. The Company is also dependent on single or limited source suppliers for a number of raw materials and components used in its SiC wafer products and LED's. An interruption in the supply of these items could cause the Company's manufacturing efforts to be hampered significantly and result in customer dissatisfaction. The Company relies on a small number of customers for the majority of its sales, and the loss of any one of these customers could have a material adverse effect on the business and prospects of the Company. The Company has and is expected to continue to have a substantial percentage of its sales from foreign companies, primarily in Japan, Korea, Taiwan, China and Europe. There can be no assurance that the Company's current intellectual property position will be enforceable in foreign countries to the extent it is enforceable in the United States. In addition, the Company's international sales may be subject to government controls and other risks, including export licenses, federal restrictions on the export of technology, changes in demand resulting from currency fluctuations, political instability, trade restrictions, changes in tariffs, and difficulties managing international operations and collecting accounts receivable. The patents and other proprietary rights of the Company may not prevent the competitors of the Company from developing noninfringing technology and products that are more attractive to customers than the technology and products of the Company. The technology and products of the Company could be determined to infringe the patents or other proprietary rights of others. To remain competitive, the Company must continue to invest substantial resources in research and development. The Company's prospects for long-term success is substantially dependent on its ability to continue increasing the performance of its blue LED product. The ability of the Company to compete effectively depends upon its ability to attract and retain highly-skilled engineering, scientific, manufacturing, marketing and managerial personnel. The Company has expanded its operations rapidly and operating results will be adversely affected if net sales do not increase sufficiently to compensate for the increase in operating expenses caused by this expansion. Over the last several years, the Company has been awarded a number of contracts from agencies of the United States government for purposes of developing SiC material and SiC-based semiconductor devices. Government policy is constantly changing, however, and there can be no assurance that the Company will enter into any additional government contracts or, if such contracts are entered into, that they will be profitable or produce contract revenues. In addition, there can be no assurance that after any such contracts are entered into, changing 12 government regulations will not significantly alter the benefits of such contracts or arrangements that can be expected to inure to the Company. Cutbacks in or reallocations of federal spending, including changes which could be proposed or implemented in the future, could have a material, adverse impact on the Company's results of operations, as well as its ability to implement its research and development programs. The Company is subject to a variety of government regulations pertaining to discharges and other aspects of its manufacturing process. The Company believes that it is currently in full compliance with such regulations, however, any failure, whether intentional or inadvertent, to comply with such regulations could have an adverse effect on the Company's business. The market price of the Company's securities has been very volatile as a result of many factors, some of which are outside the control of the Company, including, but not limited to, quarterly variations in financial results, announcements by the Company, its competitors, customers, potential customers or government agencies and predictions by industry analysts, as well as general economic conditions. Sales by the Company's existing stockholders, trading by short sellers and other market factors may adversely affect the market price of the Companies securities. Any or all of these risks could have a material adverse affect on the market price of the securities of the Company. The Company's quarterly operating results have varied significantly as a result of a number of factors, including the timing and market acceptance of new product introductions by the Company, the timing of significant orders from and shipments to customers, non-recurring license fee income, and general domestic and international economic conditions. The Company's operating results may fluctuate in the future as a result of these and other factors, including the Company's success in developing, introducing , and shipping new products; its product mix; and the level of competition that it experiences. Item 2. Description of Property The Company leases its manufacturing, marketing and primary research and development facilities, which occupy 26,000 square feet in a facility in Durham, North Carolina. The lease expires on December 31, 2001. The Company has a renewal option to extend the term of the lease through December 31, 2006. The Company's subsidiary Real Color Displays, Inc., leases approximately 3,000 square feet of office and warehouse space in Morrisville, North Carolina. RCD conducts principally all of its business from this facility. The lease expires early in calendar 1997 but the Company may, at its option, exercise three additional one year rental terms. Cree completed construction of leasehold improvements to outfit a newly leased 13,000 square foot facility in Durham in September, 1995. The lease term is five years with an option for two additional lease terms of two years each. In addition to the North Carolina facilities, the Company makes use of certain laboratory space in the Ioffe Technical Institute in St. Petersburg, Russia to house the research and development program of its wholly-owned subsidiary, Cree Research Eastern European Division ("Cree-EED"). The Company recently signed a supply contract with Siemens A.G. to supply blue LEDs. To meet production requirements, the Company is evaluating whether to lease additional space. At this time no additional leases have been signed. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 13 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 System and is quoted under the symbol "CREE". The following table sets forth, for the quarters indicated, the high and low sale prices as reported by NASDAQ and as adjusted for the two-for-one stock split effective August 14, 1995. Quotations represent interdealer prices without an adjustment for retail markups, markdowns or commissions and may not represent actual transactions. FY 1996 FY 1995 High Low High Low First Quarter $31-1/2 $14-1/8 $6 $3-3/4 Second Quarter $26-1/2 $12-1/2 $5-1/8 $3-1/2 Third Quarter $19 $11 $4-1/8 $2-13/16 Fourth Quarter $21-1/2 $13-3/4 $14-1/2 $3-5/8 Holders and Dividends. There were approximately 379 holders of record of the Company's Common Stock as of September 12, 1996. 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 would limit the Company from paying dividends on its common stock, but applicable state law may limit the payment of dividends. The present policy of the Company is to retain earnings, if any, to provide funds for the operation and expansion of its business. Item 6. Selected Financial Data The consolidated statement of operations data set forth below with respect to the years ended June 30, 1996, 1995 and 1994 and the consolidated balance sheet data at June 30, 1996 and 1995 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, 1993 and 1992 and the consolidated balance sheet data at June 30, 1994, 1993 and 1992 are derived from audited consolidated financial statements not included herein. 14 Selected Financial Data (all data in thousands, except per share data)
Years Ended June 30, 1996 1995 1994 1993 1992 Statement of Operations Data: Product revenue, net $9,689 $5,989 $3,534 $3,859 $1,428 Contract revenues 5,863 5,160 3,956 2,463 1,528 License fee income 1,423 - - - - Total Revenues 16,975 11,149 7,490 6,322 2,956 Net income (loss) 243 (17) (431) 594 (978) Net income (loss) per share 0.02 0.00 (0.04) 0.07 (0.31) Weighted average shares outstanding 12,614,964 10,367,290 10,336,646 8,602,326 3,169,148
Years Ended June 30, 1996 1995 1994 1993 1992 Balance Sheet Data: Working capital $18,596 $9,971 $11,006 $15,852 $2,429 Total assets 43,796 20,924 20,018 20,309 5,736 Long-term obligations - - 14 23 476 Shareholder's equity 40,672 19,504 19,334 19,669 4,415
oThe Company has not declared a dividend on common stock since its inception oThe years ended June 30, 1996 and 1995 include the Company's wholly owned subsidiary, Real Color Displays, Inc. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Identifying Important Factors That Could Cause the Company's Actual Results to Differ From Those Projected in Forward Looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this document are advised that this document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company and its business. This document also identifies important factors which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include the Company's ability to increase production capacity and yield, price competition, the actions of competitors, infringement of intellectual property rights and licenses of the Company or others, the effects of government regulation, both foreign and domestic, availability of U.S. government funded research contracts, possible delays in the introduction of new products, customer acceptance of products or services and other factors, which are described herein. 15 The cautionary statements made pursuant to the Private Litigation Securities Reform Act of 1995 above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of such Act. Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated by the forward looking statements. Results of Operations On August 1, 1995, the Board of Directors approved a proposed resolution for a two-to-one stock split. The final resolution, effective August 14, 1995, split each share of Cree's common stock into two whole shares of common stock and the par value of the common stock accordingly decreased by one-half to $0.005 per share. All share values reported throughout this document reflect post split share data. Results of operations include the operations of the Company's wholly-owned subsidiary, Real Color Displays, Inc. ("RCD") from the date of RCD's purchase of the net assets of Color Cells International, Ltd. on August 5, 1994. Details regarding the purchase were previously reported on the Company's Form 8-K filed on August 22, 1994. The following table sets forth, for the periods indicated, items in the Consolidated Statements of Operations as a percentage of total revenues and the increase (decrease) by each item as a percentage of the amount for the previous period:
Percentage of Period to Period Total Revenues Change 1996 1995 1994 Years Ended June 30, Compared to 1996 1995 1994 1995 1994 1993 Product revenue, net 57% 54% 47% 62% 69% (8)% Contract revenues 35 46 53 14 30 61 License fee income 8 0 0 100 0 0 Total revenue 100 100 100 52 49 18 Cost of revenue 84 80 79 60 50 37 Gross margin 16 20 21 21 44 (12) Research and development 3 4 10 (6) (34) 59 Sales, general and administrative 17 20 23 28 30 58 Income (loss) from operations (4) (4) (12) (31) 46 * Other income (expense) 5 4 6 88 2 164 Net income (loss) 1 0 (6) * 96 8
* Not Meaningful Throughout this subtitle all references to "the current year"or to "fiscal 1996" refer to the year ended June 30, 1996 and all references to "the prior year","previous year " or to "fiscal 1995" refer to the year ended June 30, 1995. All references to "fiscal 1994" refer to the year ended June 30, 1994. The Company's fiscal 1996 revenues of $16,975,000 represent a 52% increase over the prior year. Fiscal 1995 revenue, $11,149,000, represents a 49% increase over the year ended June 30, 1994. Included in current year revenue is a one time license fee of $1,423,000. In 16 addition to the licensing of certain technology, the agreement allows for the joint development and manufacture of light emitting diodes ("LEDs") using Cree's proprietary epitaxial and fabrication technology. The license fee agreement provided an initial cash payment of $500,000 upon confirmation of the agreement, with additional $500,000 payments due October 1996 and October 1997. All obligations under the license agreement were fulfilled by the Company as of December 31, 1995. The net present value of the license fee was recognized at the time technology transfer was completed. Product revenue is comprised of LED sales, wafer products, Real Color Module(TM) and RCD's display sales. Total product revenue grew at a consistent rate in the current and prior year. Product revenue for the current year was $9,689,000 compared to $5,988,000 in the prior year, a 62% increase. Fiscal 1995 product revenue represents a 69% increase over fiscal 1994 product revenue of $3,534,000. A significant component of the current year growth was attributable to optoelectronic device sales, namely the super-bright blue LED. LED sales increased 279% over the prior year to $3,518,000. Growth in LED sales during fiscal 1996 was limited by production problems. LED sales declined 30% in fiscal 1995 as compared to fiscal 1994. This was primarily attributable to customer anticipation of the super-bright blue LED product release. Wafer products or material sales grew 27% to $4,314,000 in the current year as compared to a growth rate of 53% in the prior year. Current year growth was adversely affected as the Company addressed capacity constraints. The Company expects continued growth in this product line as the Company optimizes additional capacity installed during the current year. The growth in revenue from wafer sales in the prior year over that of 1994 was primarily attributable to increasing SiC device development activities at major electronic component and system manufacturers. Revenues for RCD displays and the Real Color Module(TM) increased 11% in the current year to $1,857,000. Display sales were initiated in the first quarter of fiscal 1995 when Real Color Displays was formed. Module sales were introduced late in the second quarter of fiscal 1996. Growth in both of these areas has been restrained to some extent by the availability of blue LEDs. More recently sufficient LED supply has been made available and the Company is actively developing a customer base for its display products. Congruent with the Company's goal, contract revenues, although growing from year to year, is representing a smaller percentage of total revenue, 35% in fiscal 1996, 46% in fiscal 1995, and 53% in fiscal 1994. Contract revenues increased by 14% to $5,863,000 in the current year compared to a 30% increase in the previous year. Growth has been mitigated due to a shift in capacity to production of the super-bright LED chip. The Company expects contract billings to increase based on investments in capacity made during the current year and as the Company seeks to improve manufacturing yields. Two contracts accounted for 59% of the revenue in the current year. These contracts relate to the development of a blue laser diode and improving the Company's silicon carbide ("SiC") wafer technology. These contracts expire March, 1997 and May, 1998, respectively. In the prior year, two contracts contributed more than 60% of contract revenues. One is for the development of a memory chip based on SiC and will expire in October, 1996. The other is aimed at LED product development. At June 30, 1996, the contract revenues backlog was $13,369,000 and extends through July, 1999. The Company's gross margin decreased to 16% of sales, as compared to 20% for fiscal years 1995 and 1994. The current period gross margin would have reflected a gross margin decline down to 8% of sales as compared to the prior period without the benefit of the license fee income, an income source for which there were no material costs of revenue. The decreased margin is due to low manufacturing yields, specifically related to acceptable LED wafers produced in the Company's epitaxy process for the new LED product. Although the Company increased super-bright blue LED chip throughput for fiscal 1996, the number of chips produced did not offset the increase in manufacturing costs resulting from a significant investment in additional capacity. Additional production reforms are necessary for the Company to offer beneficial pricing to its customers. Additional capacity and continued improvements in the manufacturing process are planned and could provide stronger margins, if successful. The Company's failure to meet these objectives could result in high costs for the LED product and unsatisfactory margins. 17 The Company benefits from research and development efforts sponsored by both U.S. Government contracts and from internal corporate funding. Contracts are awarded to the Company to fund both short term and long term research projects. Contract revenues represent reimbursement by these various government entities for research and development costs and a portion of the Company's general and administrative expenses either on a cost plus or a cost share basis. Funding for projects with near term applications for the Company typically include a cost share component that the Company is responsible for absorbing as a cost of revenues. Projects that may not have readily available production applications or projects that relate to longer term development are normally awarded on a cost plus basis with built in margins of 7% to 10%. Contract revenues funded related expenditures of $5,721,000, $4,348,000 and $2,891,000 for the years ended June 30, 1996, 1995 and 1994, respectively. These expenditures are included primarily as a cost of revenues, $5,128,000, $3,599,000 and $2,426,000 for fiscal years 1996, 1995 and 1994, respectively. The remaining portion of these costs are classified as operating expenses under sales, general and administrative. Contract revenues reimbursed general and administrative expenses of $593,000, $749,000 and $465,000 for the fiscal years 1996, 1995 and 1994, respectively. The Company also contributed $1,565,000, $880,000 and $289,000 for the years ended June 30, 1996, 1995 and 1994, respectively, as a cost sharing component for the government contract revenues. The Company incurred research and development costs unabsorbed by contract revenues totaling $444,000, $473,000 and $712,000 for the fiscal years 1996, 1995 and 1994, respectively. Sales, general and administrative expenses increased by 28% to $2,906,000 for the current year and by 30% to $2,267,000 for the prior year. The current period increase is primarily attributable to sales efforts to promote the Real Color Module(TM), increased sales travel and promotions, corporate communication costs, public company expenses and professional fees such as legal and accounting. All periods reported reflect the impact of overall organization growth. The increase in the prior year is primarily attributable to the aquisition of RCD in August of 1994. Interest income increased 85% to $872,000 in the current year. The increase is attributable to significantly increased cash balances available for investment as a result of the Company's private equity placement at the end of the first quarter of the current year. Liquidity and Capital Resources The Company's cash and current investments (securities having maturities of less than one year) balance was $11,949,000 at June 30, 1996, $5,838,000 at June 30, 1995 and $8,883,000 at June 30, 1994. The Company's operations utilized $1,636,000, $562,000 and $269,000 during the years then ended. For all years reported, funds utilized in operations were mainly used to fund increasing receivables and increasing inventory balances. The Company has historically experienced a higher days sales outstanding than the general industry. For the years ended June 30, 1996, 1995 and 1994 the Company's days sales outstanding was 107, 94, and 88 days, respectively. The high days sales outstanding is primarily due to the timing of the production and sales cycles which have generally resulted in a significant portion of product revenue being recognized and invoiced in the extreme later part of each quarter. Additionally, the Company has historically invoiced government contract revenues in the period following the period in which the revenue was recognized. The increase in the current year's days sales outstanding is primarily attributable to the long term receivable associated with the license fee income. The Company invested $14,740,000, $3,486,000 and $1,615,000 in fiscal 1996, 1995 and 1994, respectively, on equipment and leasehold improvements. A significant part of the equipment purchased in 1996 and 1995 related to the production of super-bright blue LEDs. The balance of the equipment purchased provides an increase in capacity for material production and processing. Early in fiscal 1996, the Company brought on line a new facility dedicated to device fabrication and testing. The new facility significantly increased production capability directly benefiting LED production. In the latter half of fiscal 1996, the Company 18 focused its capital spending at increasing crystal growth production and wafer processing capacity. As of June 30, 1996, the Company had received or installed but not paid for $831,000 in equipment and leasehold improvements and had open purchase orders for an additional $914,000. Subsequent to June 30, 1996, the Company accepted a significant customer order that will require additional capital investments. More specifically, the Company expects to add additional manufacturing equipment in most process areas and to add additional space. Management expects to spend approximately $4 to $5 million to add the capacity required by this contract. The Company expects to finance those expenditures with approximately $4 million in term debt. Financing activities provided the Company $20,924,000 during fiscal 1996. The majority of the funding was provided by the Company's September 28, 1995, private placement which netted the Company approximately $17.5 million. The remainder of the funding was provided by warrant and option exercises. The Company's wholly-owned subsidiary, Real Color Displays, Inc. has access to a revolving line of credit for borrowing availability of $600,000. The line was renewed for a one year period in September, 1995. The revolver accrues interest at the banks prime lending rate and carries customary covenants, namely the maintenance of a minimum tangible net worth and cash and investment balances. The revolver primarily supports the issuance of letters of credit by RCD. As of June 30, 1996 there were no outstanding borrowings under this facility. The Company intends to fund its operations from internally generated funds and from the proceeds from the planned term debt facility during fiscal 1997. However, the Company is always evaluating competitive conditions in the industry and as a part of its ongoing strategy may seek additional funding sources as market conditions permit. 19 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements
Page Report of Independent Accountants 21 Consolidated Balance Sheets at June 30, 1996 and 1995 22 Consolidated Statements of Operations for the years ended June 30, 1996, 1995 and 1994 23 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 24 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1995 and 1994 26 Notes to Consolidated Financial Statements 27 Financial Statement Schedule - ---------------------------- Report of Independent Accountants of Supplemental Schedule 41 Schedule II - Valuation and qualifying accounts 42
20 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders Cree Research, Inc. We have audited the accompanying consolidated balance sheets of Cree Research, Inc. and subsidiary as of June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cree Research, Inc. and subsidiary as of June 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Raleigh, North Carolina August 29, 1996 21 ITEM 8 - Financial Statements Consolidated Balance Sheets CREE RESEARCH, INC. CONSOLIDATED BALANCE SHEETS
June 30, June 30, 1996 1995 -------------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 10,161,706 $ 3,748,422 Short-term investments, held to maturity 1,787,271 2,089,278 Accounts receivable, net 6,393,394 3,599,722 Inventories 3,226,484 1,677,092 Deferred costs on research contracts - 81,006 Prepaid expenses and other current assets 150,990 195,697 -------------------- ------------------ Total current assets 21,719,845 11,391,217 Long-term investments, held to maturity - 1,821,911 Long-term accounts receivable 464,253 - Property and equipment, net 20,218,101 6,455,584 Patent and license rights, net 1,204,738 1,020,475 Other assets 61,714 65,915 Goodwill, net 127,692 169,026 -------------------- ------------------ Total assets $ 43,796,343 $20,924,128 -------------------- ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 2,657,054 $ 1,111,562 Accrued expenses 467,201 309,008 -------------------- ------------------ Total current liabilities 3,124,255 1,420,570 Commitments and contingencies Shareholders' equity: Common stock, $0.005 par value; 14,500,000 shares authorized; shares issued and outstanding 12,277,418 and 10,410,726, net of treasury shares, at June 30, 1996 and 1995 61,437 52,104 Additional paid-in capital 45,342,063 24,427,446 Accumulated deficit (4,693,599) (4,936,454) -------------------- ------------------ 40,709,901 19,543,096 Less: Unearned compensation - (1,725) 10,000 shares of common stock in treasury, at cost (37,813) (37,813) -------------------- ------------------ Total shareholders' equity 40,672,088 19,503,558 -------------------- ------------------ Total liabilities and shareholders' equity $ 43,796,343 $20,924,128 ==================== ==================
The accompanying notes are an integral part of the consolidated financial statements. 22 Consolidated Statements of Operations CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, -------------------------------------------------------------- 1996 1995 1994 ------------------- ------------------ ----------------- Revenues: Product revenue, net $ 9,688,833 $ 5,988,465 $ 3,534,113 Contract research and grants 5,862,962 5,160,258 3,955,971 License fee income 1,423,160 - - ------------------- ------------------ ----------------- Total revenue 16,974,955 11,148,723 7,490,084 Cost of revenues 14,249,031 8,886,687 5,923,186 Gross margin 2,725,924 2,262,036 1,566,898 Operating expenses: Research and development 444,009 473,201 712,084 Sales, general and administrative 2,905,535 2,266,800 1,739,600 ------------------- ------------------ ----------------- Loss from operations (623,620) (477,965) (884,786) Other income (expense): Interest income 871,953 471,992 458,819 Interest expense (5,478) (11,101) (2,327) Other - - (2,589) ------------------- ------------------ ----------------- Net income (loss) $ 242,855 $ (17,074) $ (430,883) =================== ================== ================= Net income (loss) per share $ 0.02 $ (0.00) $ (0.04) =================== ================== ================= Weighted average shares outstanding 12,614,964 10,367,290 10,336,646 =================== ================== =================
The accompanying notes are an integral part of the consolidated financial statements. 23 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, ----------------------------------------------- 1996 1995 1994 ---------------- -------------- -------------- Operating activities: Net income (loss) $ 242,855 $ (17,074) $ (430,883) Adjustments to reconcile net income (loss) to net cash used in operating activities: Net gain on disposal of fixed asset (8,126) -- -- Provision for uncollectible accounts 203,057 20,081 21,514 Depreciation and amortization 1,764,796 1,381,866 905,399 Amortization of patent rights 125,651 87,608 50,125 Amortization of goodwill 41,334 37,649 -- Non-cash compensation expense related to stock options 1,725 3,444 24,063 Changes in assets and liabilities: Accounts receivable (3,460,982) (1,470,704) (707,045) Inventories (1,549,392) (1,027,627) 20,965 Deferred costs on research contracts 81,006 (81,006) -- Prepaid expenses and other assets 48,908 226,882 (97,668) Accounts payable, trade 714,496 190,887 (115,094) Accrued expenses 158,193 86,396 59,569 ------------ ------------ ------------ Net cash used in operating activities (1,636,479) (561,598) (269,055) Investing activities: Purchases of investment securities -- (2,203,878) (13,469,406) Maturities of investment securities 2,123,918 5,495,884 11,216,079 Purchases of property and equipment (14,740,102) (3,485,780) (1,615,460) Proceeds from sale of property and equipment 51,911 -- -- Payment of equipment deposits -- (71,240) (237,875) Payment for acquisition of subsidiary -- (214,523) -- Purchases of patent rights (309,914) (273,076) (217,537) ------------ ------------ ------------ Net cash used in investing activities (12,874,187) (752,613) (4,324,199) Financing activities: Proceeds from issuance of note payable -- 415,622 -- Principal payments on notes and capital leases -- (438,662) (8,474) Net proceeds from issuance of common stock 20,923,950 199,583 44,871 Repurchase of common stock -- -- (37,813) Receipt of Section 16(b) common stock profits -- -- 64,100 Payment of legal fees related to receipt of section 16(b) common stock profits -- (16,000) -- ------------ ------------ ------------ Net cash provided by financing activities 20,923,950 160,543 62,684 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalants 6,413,284 (1,153,668) (4,530,570) Cash and cash equivalents: Beginning of the year 3,748,422 4,902,090 9,432,660 ------------ ------------ ------------ End of the year $ 10,161,706 $ 3,748,422 $ 4,902,090 ============ ============ ============
24 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, ------------------------------------------------- 1996 1995 1994 --------------- -------------- -------------- Supplemental disclosure of cash flow information: Cash paid for interest $ 5,478 $ 10,940 $ 2,327 =============== ============== ============== Cash paid for income taxes $ - $ - $ 10,000 =============== ============== ============== Supplemental schedule of non-cash investing and financing activities: Accounts payable recorded for purchases of equipment $ 830,996 $ 329,646 $ 109,213 =============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 25 CREE RESEARCH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 1996, 1995 AND 1994
COMMON STOCK ADDITIONAL TOTAL PAR PAID-IN ACCUMULATED UNEARNED TREASURY SHAREHOLDERS' VALUE CAPITAL DEFICIT COMPENSATION STOCK EQUITY -------------- --------------- --------------------------------------------- --------------- Balance at June 30, 1993 $ 51,617 $ 24,140,479 $ (4,488,497) $ (34,332) $ - $ 19,669,267 Common stock options exercised for cash, 33,966 shares 170 34,701 34,871 Common stock warrants exercised for cash, 2,666 shares 13 9,987 10,000 Expired stock options (5,100) 5,100 - Purchase of common stock for the treasury, 10,000 shares (37,813) (37,813) Compensation expense for common stock options 24,063 24,063 Receipt of Section 16(b) common stock profits from an officer of the Company 64,100 64,100 Net Loss (430,883) (430,883) -------------- --------------- ------------------------------ ------------- --------------- Balance at June 30, 1994 51,800 24,244,167 (4,919,380) (5,169) (37,813) 19,333,605 Common stock options exercised for cash, 22,806 shares 114 15,229 15,343 Common stock warrants exercised for cash, 37,866 shares 190 184,050 184,240 Compensation expense for common stock options 3,444 3,444 Payment of legal fees related to receipt of Section 16(b) common stock profits (16,000) (16,000) Net Loss (17,074) (17,074) -------------- --------------- ------------------------------ ------------- --------------- Balance at June 30, 1995 52,104 24,427,446 (4,936,454) (1,725) (37,813) 19,503,558 Common stock options exercised for cash, 121,783 shares 609 412,520 413,129 Common stock warrants exercised for cash, 665,442 shares 3,327 2,916,257 2,919,584 Compensation expense for common stock options 1,725 1,725 Proceeds from sale of 1,079,467 shares of common stock and 300,000 common stock warrants, net of issuance costs 5,397 17,585,840 17,591,237 of $624,769 Net Income 242,855 242,855 -------------- --------------- ------------------------------ ------------- --------------- Balance at June 30, 1996 $ 61,437 $ 45,342,063 $ (4,693,599) $ - $ (37,813) $ 40,672,088 ============== =============== ============================== ============= ===============
The accompanying notes are an integral part of the consolidated financial statements. 26 CREE RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Cree Research, Inc. (the "Company"), incorporated in the State of North Carolina on July 14, 1987, develops, manufactures, and markets silicon carbide-based semiconductor devices. Revenues are primarily derived from the sale of blue light emitting diodes (LEDs), silicon carbide (SiC) wafers and full-color LED based electronic displays and modules. The Company markets its blue LED chip products principally to customers who incorporate them into packaged lamps for resale to original equipment manufacturers. The Company also sells SiC wafer products to corporate, government, and university research laboratories. In addition, the Company is engaged in a variety of research programs related to the advancement of SiC process technology and the development of electronic devices that take advantage of SiC's unique physical and electronic properties. These research projects are primarily funded by federal government agencies and departments. The Company recovers the costs of a majority of its research and development efforts from revenues on these contracts with agencies of the Federal government. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Cree Research, Inc. and Real Color Displays, Inc. (RCD). All material intercompany accounts and transactions have been eliminated. 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 disclosure of contingent assets and liabilities at June 30, 1996 and 1995, and the reported amounts of revenues and expenses during each of the three years in the period ended June 30, 1996. Actual results could differ from those estimates. Advertising Costs Effective July 1, 1995, the Company adopted the provisions of SOP 93-7, "Reporting on Advertising Costs." The Company has elected to expense all advertising costs as incurred or the first time advertising takes place, with the exception of direct response advertising, which is capitalized and amortized over the period of its expected future benefit. At June 30, 1996, the Company did not have any amounts capitalized as direct response advertising. The Company incurred total advertising expenditures of approximately $151,000, $147,000 and $121,000 during the years ended June 30, 1996, 1995, and 1994, respectively. The adoption of the provisions of SOP 93-7 did not result in a change in accounting policy or have an effect on net income. Fair Values of Financial Instruments Effective July 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The Company estimates the fair values of its investments based on market quotations and the fair values of its cash equivalents based on interest rates available on similar instruments. At June 30, 1996, the market values of the Company's investments and cash equivalents approximated their respective carrying values. Revenue Recognition The Company recognizes revenue from product sales at the time of shipment for product sales. Revenues from contract revenues represent reimbursement by various U.S. Government entities of research and development costs and a portion of the Company's general and administrative expenses and other operating expenses on either a cost plus or cost share basis. 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. 27 The contracts are awarded to the Company in order to aid in the furthering of the development of the Company's technology by supplementing the Company's research and development efforts. Any resulting technology obtained by the Company through these research and development efforts remains the property of the Company after the completion of the contract. The Company recognizes the contract research and grants funding related to these contracts as the related expenses are incurred in accordance with the terms of the contract. The Company entered into its first agreement to license its technology in October 1995. The agreement also provides for the joint development and manufacture of LEDs using Cree's technology. The license portion of the agreement provided an initial cash payment of $500,000 upon confirmation of the agreement, with additional $500,000 payments due in October 1996 and October 1997. All obligations under the license agreement with respect to fees paid to the Company have been fulfilled by the Company as of December 31, 1995. The net present value of the entire license fee was recognized at the time the technology transfer was completed. Cash and Cash Equivalents Cash and cash equivalents are highly liquid investments with original maturities of three months or less when purchased. Inventories Inventories are stated at the lower of cost or market, with cost determined under the first-in, first-out (FIFO) method. Inventories consist of the following at June 30: 1996 1995 --------------- ---------------- Raw materials $ 1,308,766 $ 713,824 Work-in-progress 947,785 635,763 Finished goods 969,933 327,505 --------------- ---------------- $ 3,226,484 $ 1,677,092 =============== ================ 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 five to nine years. Leasehold improvements are amortized over the shorter of the life of the related lease or their estimated useful lives. 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 profit or loss is reflected in operations. During the first quarter of fiscal 1996, the Company changed its previous estimate on the useful lives of some of its manufacturing equipment from five to nine years. The change in estimate was based on the Company's experience with similar fixed assets. The net adjustment increased net income approximately $280,000 or $0.02 per share for the year. 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 over 17 years. Total accumulated amortization was approximately $424,000 and $298,000 at June 30, 1996 and 1995, respectively. 28 Goodwill Goodwill represents the amount by which the costs of acquired net assets exceed their related fair value and is being amortized on a straightline basis over a life of five years. The carrying value of goodwill will be reviewed if the facts and circumstances suggests that it is impaired. If this review indicates that goodwill will not be recoverable as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company will adjust the carrying value of goodwill in accordance with FAS No. 121 "Accounting for Impairment of Long Lived Assets." Accumulated amortization related to goodwill was approximately $79,000 and $38,000 at June 30, 1996 and 1995, respectively. Research and Development Cost Policy The Company benefits from research and development efforts sponsored by both government agencies and from internal corporate funding. Contracts are awarded to the Company to fund both short term and long term research projects. Contract revenues represent reimbursement by these various U.S. Government entities of research and development costs and a portion of the Company's general and administrative expenses either on a cost plus or a cost share basis. The Company incurred research and development costs unabsorbed by revenues totaling $444,000, $473,000 and $712,000 for fiscal years 1996, 1995, and 1994, respectively. Contract revenues funded Company expenditures of $5,721,000, $4,348,000 and $2,891,000 for the years ended June 30, 1996, 1995 and 1994, respectively. The Company has included $5,128,000, $3,599,000 and $2,426,000 of these expenditures for fiscal years 1996, 1995 and 1994, respectively, in cost of revenues. The remainder of these costs are classified as operating expenses under sales, general and administrative. Contract revenues reimbursed general and administrative expenses of $593,000, $749,000 and $465,000 for the fiscal years 1996, 1995 and 1994, respectively. Also included in the cost of revenues are Company incurred costs of $1,565,000, $880,000, and $289,000 as a cost sharing component of the government contract research grants, during the same periods, respectively. Credit Risk, Major Customers and Major Suppliers Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash equivalents, investments and accounts receivable. The Company's investments consist of U.S. Treasury notes, commercial paper and corporate bonds. Certain bank deposits may at times be in excess of the FDIC insurance limit. On July 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("FAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities." All of the Company's short- and long-term investments are classified as securities held-to-maturity and are reported at amortized cost. The Company has the positive intent and ability to hold these investments to maturity. The adoption of FAS No. 115 had no material effect on the Company's financial statements. Investments consist of the following at June 30: 1996 1995 U.S. Treasury obligations $ 1,000,000 $ 2,988,567 Corporate debt 922,622 787,271 --------------- ---------------- $ 1,787,271 $ 3,911,189 =============== ================ 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 30% and 56%, respectively, of the Company's 29 accounts receivable at June 30, 1996 and 1995 was due from the Department of Defense. In addition, the Company had receivables from one customer totaling 23% of accounts receivable at June 30, 1996. Slightly more than half of that amount relates to license fee income earned in the second quarter of fiscal year 1996 but due to be paid through October 1997. The remainder relates to product sales. The Company has derived its product revenue from sales primarily in the United States, the Far East, and Europe as follows: Year Ended 1996 1995 1994 United States 31% 50% 39% Far East 27% 14% 24% Europe 38% 31% 37% Rest of World 4% 5% - Two customers accounted for 32% of product revenue in fiscal 1996 as compared to two customers accounting for 24% in fiscal year 1995. Three customers accounted for 53% of product revenue in fiscal 1994. One customer accounted for 97%, 95% and 76% of contract revenues during fiscal 1996, 1995, and 1994, respectively. In addition, a second customer accounted for 20% of contract revenues during fiscal 1994. 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. Shareholders' Equity Stock Split On August 14, 1995, the Company effected a stock split, splitting each share of common stock into two whole shares of common stock and the par value of the common stock accordingly decreased by one-half to $0.005 per share. All share values reported throughout this document reflect post split data. Per Share Data Net income (loss) per common share is computed using the weighted average number of common stock shares and common stock equivalents outstanding during each quarterly period. Dividends The payment of dividends is limited by the laws of the State of North Carolina. Long Lived Assets In March 1995, the Financial Accounting Standards Board issued Satement of Financial Accounting Standards No. 121 ("FAS 121"),"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which became effective for fiscal years beginning after December 15, 1995. FAS 121 establishes standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company adopted FAS 121 effective July 1, 1995. The financial statement impact of adopting FAS 121 was not material. 30 Accounting for Stock Based Compensation In October, 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 ("FAS 123"), "Accounting for Stock Based Compensation." This Statement establishes fair value as the measurement basis for equity instruments issued in exchange for goods or services and stock-based compensation plans. Fair value may be measured using quoted market prices, option-pricing models or other reasonable estimation methods. FAS 123 permits the Company to choose between adoption of the fair value based method or disclosing pro forma net income information. The Statement is effective for transactions entered into after December 31, 1995 and the disclosure requirements are effective for fiscal years beginning after December 15, 1995. The Company will continue to account for stock-based compensation in accordance with Accounting Principals Board Opinion No. 25 and provide only the pro forma disclosures required by FAS 123. Hence, the adoption of the Statement is not expected to have a material impact on the Company's net income or financial position. Reclassification Reclassifications of certain amounts have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. These reclassifications had no effect on shareholders equity, the results of operations or per share data previously reported. 3. ACCOUNTS RECEIVABLE The following is a summary of accounts receivables as of June 30: 1996 1995 --------------- -------------- Trade receivables................. $ 5,863,796 $ 3,584,408 Other receivables................. 1,043,651 37,658 --------------- -------------- 6,907,447 3,622,066 Allowance for doubtful accounts... 49,800 22,344 --------------- -------------- $ 6,857,647 $ 3,599,722 =============== ============== 4. PROPERTY AND EQUIPMENT The following is a summary of property and equipment as of June 30: 1996 1995 --------------- --------------- Office equipment and furnishings.... $ 848,042 $ 565,557 Machinery and equipment............. 19,955,391 9,429,138 Construction in progress............ 1,199,080 588,104 Leasehold improvements.............. 5,371,713 1,464,078 ---------------- ---------------- 27,374,226 12,046,877 Accumulated depreciation............ 7,156,125 5,591,293 ---------------- ---------------- $ 20,218,101 $ 6,455,584 ================ ================ 5. SHAREHOLDERS' EQUITY The Board of Directors is authorized to issue, at its discretion, Class A preferred stock and Class B preferred stock in one or more series with the number of shares, designation, relative rights, preferences, and limitations to be determined by resolution of the Board of Directors. 31 6. STOCK OPTIONS AND STOCK WARRANTS The Company maintains a non-qualified stock option plan for its officers and employees. Upon issuance of stock options under the plan, unearned compensation equivalent to the difference, if any, between the fair market value and the exercise prices of the options at the measurement date is charged to shareholders' equity and subsequently amortized over the stock option vesting period. Options granted to date become exercisable on various dates through April 2000 and expire at various dates through April 2005. The following table details the number of stock options outstanding and their related exercise prices. Number of Options Outstanding Option Price 1996 1995 < $0.01 4,666 8,534 0.42 36,846 40,370 2.82 7,094 7,094 3.13 20,000 20,000 3.63 263,798 319,888 3.75 14,397 19,444 4.00 53,400 58,500 4.38 -- 2,000 6.82 9,420 17,400 7.38 6,000 6,000 7.50 30,000 30,000 In addition to the options detailed above, the following table includes 186,000 options, exercisable at prices ranging from $3.63 to $12.13 per share granted to current or former outside directors of the Company and consultants.
1996 1995 1994 ----------------- ------------------ --------------- Authorized 1,240,000 840,000 800,000 Granted (net, cumulative) 885,132 885,132 662,632 Exercised during year (at prices from <$0.01 to $4.00) 121,783 22,808 33,966 Exercised (cumulative) 192,823 71,040 48,232 Exercisable at year end 487,062 307,508 183,132 Expired and Forfeited 15,826 21,420 15,282 Expired and Forfeited (cumulative) 60,688 44,862 23,442 Outstanding at year end 631,621 769,230 614,400 Available for future grants 415,556 (270) 160,810)
During fiscal year 1992, the Company issued stock warrants to purchasers of Class B non-voting preferred stock, Series C. The warrants entitle the holders to purchase 607,320 shares of common stock at $3.75 per share. In September 1992, the Company issued stock warrants to additional purchasers of Class B non-voting preferred stock, Series C. The warrants entitle the holders to purchase 363,644 shares of common stock at $4.13 per share. Warrants to purchase 425,642, 2,666 and 2,666 shares of common stock were exercised during the years ended June 30, 1996, 1995 and 1994, respectively. The remaining 539,990 warrants are fully exercisable and expire on February 8, 1998. 32 Commensurate with an initial public offering of common stock in February 1993 the Company granted the lead underwriter warrants to purchase 280,000 shares of the Company's common stock at $4.95 per share. During the years ended June 30, 1996 and 1995, 239,800 and 35,200 of these warrants were exercised, respectively. The remaining 5,000 warrants are exercisable and will expire on February 8, 1998, if not sooner exercised. In connection with the Company's September 1995 private placement, the Company issued an additional 300,000 warrants, which have an exercise price of $27.23 and expire September 2000. As of June 30, 1996, none of these warrants had been exercised. 7. COMMITMENTS The Company currently leases three facilities under four separate lease agreements. These facilities are comprised of both office and manufacturing space. The first facility has a remaining lease period of approximately five years, with an option to renew for an additional five years. Also associated with this facility is a sublease agreement entered into on January 4, 1996 to acquire an adjacent 2,000 square feet. The sublease expires on October 24, 1998. The second facility relates to the Company's subsidiary, RCD. The lease for that facility has an initial term of two years with three one year renewal options. At June 30, 1996, approximately seven months remain on the original term. The lease term for the third facility began in September 1995. The lease has an initial term of five years with two options of two years each. Each lease and sublease agreement provide for rental adjustments for increases in property taxes, the consumer price index and general property maintenance. Rent expense associated with these leases totaled $388,000, $257,000 and $240,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Future minimum rentals as of June 30, 1996 under these leases for each of the next five fiscal years are as follows: June 30, 1997 $ 403,000 1998 396,000 1999 390,000 2000 390,000 2001 341,000 thereafter 195,000 ------- Total $ 2,115,000 ========= 8. INCOME TAXES The Company accounts for its income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes." Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company had no provision for income tax for the years ended June 30, 1996, 1995 and 1994, due to the reversal in 1996 of valuation allowances recorded in prior years and the establishment of valuation allowances in 1995 and 1994. Reconciliations of expected income tax at the statutory federal rate with actual income tax expense for the years ended June 30, 1996, 1995 and 1994 are as follows: 33 1996 1995 1994 ---------- ---------- ------------- Expected income tax provision (benefit) at statutory rate (34%).......................... $ 82,569 $ (5,805) $ (146,500) State tax provision (benefit).... 36,585 (105,831) -- Increase (decrease) in income tax expense resulting from: Increase (decrease) in valuation allowance........ (105,762) 129,112 144,600 Other........................ (13,392) (17,476) 1,900 ----------- ----------- ------------- Income tax expense............... $ -- $ -- $ -- ============ =========== ============= At June 30, 1996, the Company had deferred tax liabilities of $1,012,000, deferred tax assets of $3,676,000 and a valuation allowance of $2,664,000. The principal temporary differences included above are deferred asset items consisting of net operating loss carryforwards of $3,290,000, research tax credits of $157,000, compensation of $55,000, inventory of $53,000 and a deferred liability item consisting of depreciation of $1,012,000. The net change in the valuation allowance is composed of an $106,000 decrease, reflected in the provision for taxes, and an increase of $765,000 to offset the net operating loss carryforwards generated by stock options exercised. The benefit of the $765,000 valuation allowance will be credited to additional paid-in capital when realized. At June 30, 1995, the Company had deferred tax liabilities of $379,000, deferred tax assets of $2,384,000 and a valuation allowance of $2,005,000. The principal temporary differences included above are deferred asset items consisting of net operating loss carryforwards of $2,087,000, research tax credits of $157,000, compensation of $65,000, and a deferred liability item nsisting of depreciation of $379,000. The Company has net operating loss carryforwards for federal purposes of $8,885,000 and for state purposes of $5,299,000. The carryforward expiration period is from 2004 to 2011 for federal tax purposes and from 1997 to 2001 for state purposes. The amount and timing of the utilization of the Company's net operating loss carryforwards are limited under Section 382 of the Internal Revenue Code. 9. RELATED PARTY TRANSACTIONS Sumitomo Corporation ("Sumitomo") owns 159,996 shares of common stock or 1.3% of outstanding shares as of June 30, 1996, 1995 and 1994. During 1996, 1995, and 1994, sales to Sumitomo totaled $1,572,000, $616,000 and $52,000. These sales were at margins consistent with those achieved in connection with sales of similar products to the Company's other customers. At June 30, 1996, 1995 and 1994, accounts receivable includes $515,000, $326,000 and $36,000, respectively, related to these product revenues. During the year ended June 30, 1994 the Company was engaged in an LED development project with a company whose chief executive was a principal stockholder of Cree. During that year Cree recorded $57,000 in development fees related to this project. 10. ACQUISITION In August 1994, the Company formed a North Carolina wholly-owned subsidiary, RCD, to develop and market full color LED displays. Subsequently, RCD acquired the net assets of Color Cells International, Ltd., a Hong-Kong based company in this line of business, for cash consideration of $214,523 and assumption of $151,932 of liabilities. The terms of the acquisition call for an "Earn-Out Payment" based on calculated net profits, payable half in cash and half in Cree common stock. Earn-Out Payments are subject to certain limitations concerning the timing (calculation based on certain eligible shipments through September 1997) and amount (maximum payments of $1.8 million) of any such payments. To date, no amounts have been earned or paid under this agreement. 34 The above acquisition was accounted for as a purchase transaction and accordingly, the various assets acquired and liabilities assumed, have been recorded at their respective fair market value as of the date of acquisition, with the excess of the purchase price of $206,675 being recorded as goodwill. This goodwill is being amortized over a five year period. The Company intends to record amounts paid, if any, under the earn out provisions described above as additional purchase consideration in the period the amount is determinable. The results of operations of the acquired business have been included in the consolidated statements of operations since the purchase date. 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 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 after completing six months of service. The Plan is not insured by the Pension Benefit Guaranty Corporation. The Company may, at its discretion, make contributions to the Plan. However, the Company did not make any contributions to the Plan during the years ended June 30, 1996, 1995 or 1994. -35- 12. LINE OF CREDIT The Company's wholly-owned subsidiary, Real Color Displays, Inc. has access to a revolving line of credit for borrowing availability of $600,000. The line was renewed for a one year period in September 1995. The revolver accrues interest at the banks prime lending rate and carries customary covenants, namely the maintenance of a minimum tangible net worth and cash and investment balances. The revolver primarily supports the issuance of letters of credit by RCD. As of June 30, 1996 there were no outstanding borrowings under this facility. 36 PART III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 to Cree Research, Inc.'s definitive proxy statement relating to its annual meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the end of fiscal 1996. 37 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, financial statements schedule, and report of independent accountants are filed as part of this report (see index to Consolidated Financial Statements at Part II Item 8 on page 20 of this Form 10-K). (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 to date(1) 3.2 Bylaws, as amended to date(1) 10.1 Employee Stock Option Plan adopted by the Company on August 2, 1989(1) 10.2 Amendment to the Employee Stock Option Plan by resolution dated December 17, 1992(1) 10.12 Employment Agreement with Alan J. Robertson dated December 11, 1992(1) 10.19 Lease Agreements for Meridian Parkway facility dated February 10, 1988, as amended from time to time through August 25, 1992(1) 10.20 Amendments to Lease Agreements for the Meridian Parkway facility dated April 12, 1993 and June 15, 1993(2) 10.24 License Agreement between the Company and North Carolina State University dated December 3, 1987(1) 10.25 Amendment to License Agreement between the Company and North Carolina State University dated September 11, 1989(1) 10.27 Memorandum Agreement among the Company, Sumitomo Corporation of America and Shin-Etsu Handotai Co., Ltd. dated April 16, 1990(1) 10.28 Manufacturing Agreement between the Company and Marquette Electronics, Inc. dated September 18, 1992(1) 10.29 Research Agreement and Option to License between the Company and North Carolina State University dated September 13, 1989(1) 10.30 Agreement between General Instrument Corporation and the Company dated June 24, 1988(1) 10.31 Letter Agreement with General Instrument Corporation dated February 21, 1992, superseding agreement dated June 24, 1988(1) 10.33 Contract between the Company and Office of Naval Research, Contract No. N00014-92-C-0083(1) 38 10.36 Summary Plan Description for the Cree Research, Inc. 401(k) Savings Plan(1) 10.37 Contract between the Company and the Defense Advanced Research Projects Agency dated May 8, 1992, Contract No. N00014-92-C- 0100(1) 10.39 Contract between the Company and the Office of Naval Research, Contract No. N00014-93-0071(2) 10.41 Contract between the Company and NASA Lewis Research Center Contract No. NAS3-26927(2) 10.42 Amendment to Contract No. NAS3-26927 between the Company and NASA Lewis Research Center(2) 10.43 Agreement between the Company and Motorola, Inc. dated September 17, 1992(2) 10.44 Contract between the Company and the Department of the Air Force, I.D. No. F33615-93-C-1294(3) 10.45 Contract between the Company and the U.S. Air Force dated August 9, 1994, I.D. No. F33615-94-C-2500(4) 10.46 Contract between the Company and the U.S. Office of Naval Research dated September 30, 1994, I.D. No. N00014-94-C-0293(4) 10.47 Contract between the Company and the U.S. Office of Naval Research dated October 28, 1994, I.D. No N00014-95-C-0038(4) 10.48 Contract between the Company and the U.S. Advanced Research Projects Agency dated March 15, 1995, I.D. No. MDA972-95-C-0016(4) 10.49 Contract between the Company and U.S. Air Force dated May 25, 1995, I.D. No. F33615-95-C-5426(4) 10.50 Contract between the Company and Siemens A.G. dated October 24, 1995(5) 10.51 Contract between the Company and Purdue University, Agreement No. 530-1360-03, subgrant under the U.S. Office of Naval Research, grant No. N00014-95-1-1302 10.52 Contract between the Company and the U.S. Air Force dated July 2, 1996, I.D. No, F19628-96-C-0066 10.53 Contract between the Company and Siemens A.G. dated September 11, 1996 (6) 11.00 Computation of Per Share Earnings 21.00 Subsidiaries of Registrant (4) 23.00 Consent of Independent Accountants 27.00 Financial Data Schedule (for SEC use only) 39 (1) Incorporated by reference herein. Filed as an exhibit to the Company's Registration Statement filed on Form SB-2 and declared effective by the Securities and Exchange Commission on February 8, 1993 and bearing Registration #33-55998. (2) Incorporated by reference herein. Filed as an exhibit to the Company's annual report filed on Form 10-KSB with the Securities and Exchange Commission on August 1, 1993. (3) Incorporated by reference herein. Filed as an exhibit to the Company's annual report filed on Form 10-KSB with the Securities and Exchange Commission on August 2, 1994. (4) Incorporated by reference herein. Filed as an exhibit to the Company's annual report filed on Form 10-KSB with the Securities and Exchange Commission on August 10, 1995. (5) Incorporated by reference herein. Filed as an exhibit to the Company's Registration Statement filed on Form S-3 (No. 33-98728) 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 24 b-2 by order dated December 29, 1995. (6) Confidential treatment of portions of this Exhibit is being requested pursuant to Rule 24 b-2. (b) Reports on Form 8-K filed during the last quarter of the period covered by this report. None. 40 REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE Board of Directors and Shareholders Cree Research, Inc. In connection with our audits of the consolidated financial statements of Cree Research, Inc. and subsidiary as of June 30, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, which financial statements are included in this Form 10-K, we have also audited the financial statement schedule listed in Item 14(a) herein. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Raleigh, North Carolina August 29, 1996 -41- SCHEDULE II CREE RESEARCH, INC. VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands) Allowance for Doubtful Accounts Balance at Charged to Deductions Years Beginning Costs and (Write-Offs Balance at End Ended June 30, of Period Expenses Charged to Reserve) of Period _______________________________________________________________________________ 1996 $22 $203 $(175) $50 1995 $27 $ 20 $ (25) $22 1994 $42 $ 22 $ (37) $27 _______________________________________________________________________________ 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CREE RESEARCH, INC. By: s/ F. Neal Hunter F. Neal Hunter Date: September 30, 1996 President and 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 September 30, 1996 ______________________________ F. Neal Hunter s/ Alan J. Robertson Chief Financial Officer September 30, 1996 ______________________________ Alan J. Robertson s/ Calvin H. Carter, Jr., Ph.D. Director September 30, 1996 _______________________________ Calvin H. Carter, Jr., Ph.D. s/ James E. Dykes Director September 30, 1996 ______________________________ James E. Dykes s/ Michael W. Haley Director September 30, 1996 ______________________________ Michael W. Haley s/ Walter L. Robb, Ph.D. Director September 30, 1996 ______________________________ Walter L. Robb, Ph.D. s/ Dolph W. von Arx Director September 30, 1996 ______________________________ Dolph W. von Arx s/ John W. Palmour, Ph.D. Director September 30, 1996 ______________________________ John W. Palmour, Ph.D.
43 EX-10 2 EXHIBIT 10.51 PURDUE UNIVERSITY WEST LAFAYETTE, IN 47907 AMENDMENT NO. 01 AGREEMENT NO. 530-1360-03 SUBGRANT UNDER OFFICE OF NAVAL RESEARCH GRANT NO. N00014-95-1-1302 This is an amendment to Agreement No. 530-1360-03, which carries an effective date of September 29, 1995, between Purdue University and Cree Research, Inc. Purdue University and Cree Research, Inc. to amend Agreement No. 530-1360-03. This amendment will increase the subcontract by $212,487. Total Obligated Funds under Agreement No. 530-1360-03 Changed to $421,462 Section B Period of Performance is replaced with: The work under this Subgrant shall be performed during the period September 29, 1995 through October 31, 1996. Section D Consideration is replaced with: In full consideration of the Grantee's performance hereunder, the University shall reimburse the Grantee an amount not to exceed a total of $421.462. Except as provided herein, all terms and conditions remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 01. CREE RESEARCH, INC PURDUE UNIVERSITY By: Calvin H. Carter, Jr. /s/ By: Douglas W. Sabel /s/ ------------------- --------------------- Douglas W. Sabel Associate Contract Administrator Typed Name: Calvin H. Carter, Jr. Vice President Date: 6-12-96 Date: 5-8-96 PURDUE UNIVERSITY WEST LAFAYETTE, INDIANA 47907 AGREEMENT NO. 530-1360-03 SUBCONTRACT UNDER OFFICE OF NAVAL RESEARCH GRANT NO. N00014-95-1-1302 Type of Contract: Cost Reimbursement Effective Date: September 29, 1995 Subcontractor: Cree Research, Inc. 2810 Meridian Parkway, Suite 176 Durham, NC 27713 Project: "Manufacturable Power Switching Devices" Obligated Funds: $208,975 The Subcontractor agrees to furnish and deliver all supplies to Purdue University (hereafter referred to as University) and to perform all services set forth in the attached Schedule for the consideration stated therein. The rights and obligations of the parties to this Agreement shall be subject to and governed by the Schedule and General Provisions. Mail Invoices To: Purdue University Office of Contract & Grant Business Affairs 1063 Hovde Hall, Room 339 West Lafayette, IN 47907-1063 ATTN: Kathleen Poindexter CREE RESEARCH, INC. PURDUE UNIVERSITY BY: Calvin H. Carter, Jr. /s/ BY: Larry E. Pherson /s/ Vice President Larry E. Pherson, Director Office of Contract and Grant Business Affairs DATE: 1-30-96 DATE: 11-28-95 Subcontract Schedule Section A - Statement of Work The Subcontractor shall perform the research entitled: "Manufacturable Power Switching Devices", in accordance with the Subcontractor's Statement of Work, which incorporated into this agreement as Attachment A. Section B - Period of Performance: The work under this Agreement shall be performed during the period September 29, 1995 throuh April 30, 1996. Section C - Deliverable Items: Deliverables under this Subcontract, namelv, fabrications of prototype and full size devices, shall be in accordance with the Statement of Work (Attachment A, Page 4). Section D - Allowable Cost and Payment: For the performance of this Agreement, the Universitv shall pay the Subcontractor the cost thereof determined to be allowable in accordance with the provisions of Subpart 31.2 of the Federal Acquisition Regulations, Defense FAR Supplement Part 231. The Agreement budget summarizes the category of costs and is incorporated herein as Attachment B. The Subcontractor may submit invoices to the University not more frequently than monthly. Said invoice should state the period for which reimbursement is being requested and should itemize the costs by budget category per the budget summary. In the event that any payments to the Subcontractor under this Agreement are subsequently disallowed by the Government as items of cost of this Agreement, the Subcontractor shall repay the University on demand the amount of any such disallowed items or, at the discretion of the University, the University may deduct such amounts from subsequent payments to be made to the Subcontractor hereunder, without prejudice, however, to the Subcontractor's right thereafter to establish the allowability of any such item of cost under the Agreement. Section E - Pre-Contract Costs In accordance with FAR 31.205-32, all costs which have been incurred by the Subcontractor up to ninety (90) days prior to the effective date of this Agreement, where their incurrence is necessary to comply with the proposed schedule, will be considered allowable costs. However, these costs will be allowable only to the extent that they would have been allowable if incurred after the start date of the project under this Agreement, and only to a maximum of $208,975 through the date of the Subcontract award. Any pre-contract costs are made at the Subcontractor's own risk. Should these pre-contract costs be disallowed for any reason, such costs incurred shall be the sole responsibility of the Subcontractor and will not be used as the basis of a claim against or construed as an obligation of the University or the Government. Section F - Consideration: This Subcontract is incrementally and contingent upon the availability of funds. No liability on the part of the University or the Government beyond the obligated funds in this Subcontract exists unless and until funds are made available to the Subcontractor through written amendment to the Subcontract. In full consideration of the Subcontractor's performance described hereunder, the University shall reimburse the Subcontractor an amount not to exceed $208,975. Section G - Publication: All publications must cite the source of support (i.e., Office of Naval Research funds through the University and shall indicate that the findings, opinions and recommendations expressed therein are those of the author and not necessarily those of Purdue University or the Government. A copy of all proposed publications shall be submitted to the University's Principal Investigator. The Subcontractor may not use the mm of the University or the Office of Naval Research in news releases or advertising or in other publications directed to the general public without the written approval of the University. Section H - Audit: Notwithstanding any other conditions of this Agreement, the books and records of the Subcontractor hereunder will be n" available upon request, at the Subcontractor's regular place of business, for audit by the Federal Government. Additionally, the books and records must be retained for a period of three (3) years following final payment. Section I - Principal Investigator: The University's Principal Investigator is Dr. James A. Cooper, Jr. Dr. Cooper is not authorized to change any element of this Agreement. All changes shall be consummated by formal written amendment. The Subcontractor's Principal Investigator is Dr. John W. Palmour, who is responsible for the conduct of the work contemplated by the Subcontractor. Should Dr. Palmour become unavailable, the Subcontractor shall propose a substitute investigator for approval by the University Section J - Indemnity: The Subcontractor and its employees engaged in performance under this Agreement shall at all times be deemed to be performing as independent contractors and not as agents or employees of the University, and the negligent acts and omissions of such employees shall be deemed to be those of the Subcontractor. The Subcontractor shall indemnify and hold harmless the University and its employees from and against any and all losses, claims, demands, judgments, costs and expenses of every nature and kind arising out of or incidental to or in any way resulting from negligent acts and omissions of the Subcontractor or the Subcontractor's employees while acting within the scope of their employment- Section K - Order of Precedence: In the event of any inconsistencies in this Agreement, unless otherwise provided herein, shall be resolved by giving precedence in the following order: 1. The Schedule (Section A through Section K) 2. General Provisions (Section L) Section L - General Provisions: This Agreement will be administered in accordance with the terms and conditions, as applicable to the Subcontractor, set forth in Attachment C. Section M - Alterations in this Contract: The terms "Contracting Officer" and "Government" as used throughout this Agreement shall for the purpose of this Agreement mean "Purdue University", with the exception of Clauses 14 and 15 of the General Provisions, Attachment C. In these cases, the clauses shall retain their original language and meaning. Section N - Communication: PURDUE UNIVERSITY Technical Matters: Contractual Matters: Dr. James A. Cooper, Jr. Kathleen Poindexter Department of Electrical Assistant Project Administrator and Computer Engineering OCGBA 1285 Electrical Engineering Bldg. 1063 Hovde Hall Purdue University Purdue University West Lafayette, IN 47907-1285 West Lafayette, IN 47907-1063 Phone: (317) 494-3514 Phone: (317) 494-1078 Fax: (317) 494-1360 CREE RESEARCH, INC. Technical Matters: Contractual Matters: Dr. John W. Palmour Mr. Calvin H. Carter, Jr. PI-Senior Scientist Vice President, New Product Development Cree Research, Inc. Cree Research, Inc. 2810 Meredian Pkwy. 2810 Meredian Pkwy. Durham, NC 27713 Durham, NC 27713 Phone: (919) 361-5709 Phone: (919) 361-5709 Fax: (919) 361-4630 Fax: (919) 361-4630 ATTACHMENT A A Proposal to the PURDUE RESEARCH FOUNDATION 1021 HOVDE HALL West Layfayette. IN 47907- 1021 entitled MANUFACTURABLE POWER SWITCHING DEVICES Base Project Price: $857,988 Price of Option: $589.898 Period of Performance Base Program: September 30, 1995 to September 29, 1998 Option Program: September 30, 1998 to September 29, 2000 Submitted by Cree Research, Inc. 2810 Meridian Parkway, Suite 176 Durham, North Carolina 27713 John W. Palmour /s/ Calvin H. Carter, Jr. /s/ Dr. John W. Palmour Dr. Calvin H. Carter, Jr. PI-Senior Scientist Vice President "This data shall not he disclosed outside the Government and Shall not be duplicated, used or disclosed--in whole or in part.-for any purpose other than to evaluate the proposal; provided that if a contract is awarded to this offerer as a result of or in connection with the submission of this data. the government shall have 'he right to duplicate, use or disclose the data to the extent provided by the contract. This restriction does not limit the government's right to use information contained in the data if it is obtained from another source without restriction. The data subject to this restriction is contained on all pages of the technical proposal." Summary Silicon carbide has been projected to have tremendous potential for high voltage solid-state power devices with very high voltage and current ratings because of its electrical and physical properties. The rapid development of the technology for producing high quality single crystal SiC wafers and thin films presents the opportunity to fabricate solid-state devices with power-temperature capability far greater than devices currently available. This capability is ideally suited to the application of power conditioning on new more-electric or all-electric defense systems, turbine engine actuators, and space-based power systems. These applications require switches and amplifiers capable of large currents with relatively low voltage drops. The potential for improved performance is indicated by the SiC material characteristics. For example, the breakdown characteristics of a semiconductor are very important in determining the safe operating area (SOA) of a power device fabricated from that material. The measured electric breakdown field for SiC is in the range of 2-4x10 to the 6th power V/cm depending on the doping range, (reference 1) and is about 8-10 times higher than that of Si. This indicates that devices fabricated from SiC should be capable of supporting large DC and AC voltages. This permits the devices to amplify and switch large power levels. The requirement that a power device must be able to dissipate a significant amount of power indicates that the thermal characteristics of the semiconductor are also of fundamental importance. The thermal conductivity of SiC is 4.9 W/(degree)'C-cm at 27(degrees)'C which is greater than that of any metal.(reference 2) The high value of thermal conductivity for SiC allows dissipated energy to be readily extracted from the device. This. in turn. allows a corresponding increase in power to be applied to the device for a given allowed junction temperature. An additional advantage offered by SiC is the allowed magnitude of channel temperature. Devices fabricated from SiC have been operated at temperatures in the range of 400-650(degrees)'C, whereas Si devices can be operated to only about 175(degrees)C without severe degradation in the device characteristics. Thus. not only would a SiC power device have better thermal characteristics than a Si device, it would also have a higher rated junction temperature. The high temperature capability of SiC power devices provides two distinct and powerful advantages for use in defense applications. The first advantage is that it allows electric control in aggressive environments, such as turbine engines, that were previously problematic or even impossible. Secondly, a large amount of power can be pulsed through the device without exceeding the rated junction temperature. A high operating temperature also allows much smaller heat sinks to be used for these devices. Of the numerous SiC polytypes, 4H-SiC shows the best potential for high power and high frequency operation because the electron mobility in 4H-SiC is almost double that of 6H-SiC, with measured mobilities as high as 1050 cm (to the 2nd power) fV-sec. Moreover. 6H-SiC exhibits a high degree of mobility anisotropy, having a mobility in the (000 1) direction that is 1/5th that in the basal plane, (reference 3) yielding a lOx advantage for 4H-SiC over 6H-SiC for vertical power devices. The wider bandgap of 4H-SiC (3.26 eV) should also allow even higher reliability and lower leakage currents at high temperature. Therefore, a strong emphasis has been placed on developing 4H-SiC at Cree for both the high power and high frequency applications. Cree Research has recently demonstrated high quality 30 mm diameter 4H-SiC substrates and has also developed and characterized the epitaxial growth of 4H-SiC on these substrates. Likewise, Cree has been developing SiC power devices and has now demonstrated several types of device structures fabricated in 4H-SiC. High voltage rectifiers (reference 4) and power switches such as power MOSFETs and thyristors have shown desirable characteristics, (reference 5) further confirming the potential of this material. The vertical power MOSFETs and thyristors have been demonstrated at both room temperature and high temperatures. All of these devices had relatively small active areas in order to avoid micropipe defects (about 100 cm(to the negative 2nd power)), but show promise for much larger power devices as the material quality is improved. The voltage drop resulting from the on-state resistance is one of the most important parameters of a power switch, as it determines the amount of dissipated energy due to Joule heating. The much higher breakdown electric field of SiC should also allow SiC power devices to have much thinner drift regions than a Si device with an equivalent voltage rating. Since the majority of the on-resistance in a unipolar device, such as a power MOSFET, is due to the resistance of the drain-drift region. the ability of SiC to have about one eighth of the drain-drift region thickness is very significant. In fact. a SiC power MOSFET theoretically should have a much lower specific R than an equivalent Si device. despite the lower electron mobility of SiC. Two authors have published figure of merit studies that predict the superiority of SiC over Si for power applications based on this comparison.(references 6 and 7) The latter of these has predicted that high voltage SiC unipolar devices can have a specific on-resistance that is 1/200th that of an equivalent Si device! One advantage of the unipolar switching. devices such as MOFSETS, JFETS, or Static Induction Transistors (SITs), is that the voltage drop can be kept very low (less than 2 V) because there is no pn junction built-in potential to overcome. However, the major disadvantage of these devices is that their current densities are relatively low because there is no minority carrier current. Typical high voltage (greater than 600 V) Si power MOSFET current densities are in the range of 30-50 A/cm (to the 2nd power). The SiC power MOFSETs discussed above were typically in the range of 100-200 A/cm (to the 2nd power). Cree will develop improved 4H-SiC MOSFETs as part of this program. Although bipolar power devices such as thvristors, insulated gate bipolar transistors (IGBTs), and MOS-controlled thyristors (MCTS) must have a voltage drop higher than the built-in voltage of a diode, the current densities above this voltage can be much higher than for unipolar devices because of their minority carrier current. Typical Si IGBT current ratings are in the range of 200-300 A/cm (to the 2nd power) and Si thyristors are generally above 1000 A/cm (to the 2nd power). Cree's SiC thyristor current densicv was I 000 A/cm (to the 2nd power) with a voltage drop of 4.0 V. Therefore, if the combination of high voltage and high current is desired. bipolar devices are typically required. In particular. Si IGBTs and MCTs are beginning to dominate the market in this arena. Because of the relatively small wafer size and the higher cost of SiC material. the issue of obtaining very high current densities will become even more important. A higher current density device will translate into a much smaller., higher yield, less expensive device. It is anticipated by Cree that a high voltage bipolar SiC device will have 10 times higher current density than a unipolar device and that the price will be less than one tenth that of an equivalently rated unipolar device. As naval systems move closer to more-electric or all-electric motor controls and power distribution, in which very high voltage - high current devices are typically desired, then the choice of which material and type of device becomes critical. It is now generally accepted that SiC devices theoretically have tremendous potential over Si devices not only because of their high temperature / high reliability characteristics, but because of their potential to have much smaller, more efficient parts, which can in turn make them very cost competitive. For high current applications it is also apparent that a bipolar device would be the most cost efficient for the reasons discussed above. The final question is which type of bipolar switching device would be the optimal device for SiC. The objective of the proposed program is to design, fabricate and evaluate various types of 4H-SiC power devices. REFERENCES 1. J.A. Edmond, D.G. Waltz, S. Brueckner. H.S. Kong, I.W. Palmour, and C.H. Carter. Jr., Proceedings of the First International High Temperature Electronics Conference, D.B. King and F.V. Theme, eds., (Sandia National Labs, Albuquerque, 1991), p. 500. 2 . G.A. Slack, J. Phvs. Chem. Solids, 34, 321 (1973). 3. W. J. Schaffer, G.H. Negley, K.G. Irvine, and J.W. Palmour, Diamond, SiC, and Nitride Wide- Bandgap Semiconductors, C.H. Carter, Jr., G. Gildenblatt, S. Nakamura, and R.J. Nemanich, eds., Mater Res Soc Proc 339, (MRS, Pittsburgh, PA, 1994) p. 595. 4. J.W. Palmour, J.A. Edmond. H.S. Kong and C.H. Carter, Jr, in Silicon Carbide and Related Materials, M.G. Spencer, R.P. Devatv, J.A. Edmond. M.A. Khan, R. Kaplan, and M. Rahman, eds, Inst. of Phys. Conf. Series 137. (IOP, Bristol, 1993) pp 499-502. 5 . J.W. Palmour, V.F. Tsverkov, L.A. Lipkin, and C.H. Carter, Jr., Inst. Phys. Conf. Ser. No 141, H- Gioronkin and U. Mishra, eds., (IOP Publishing. Philadelphia, PA, 1995) pp. 377-382. 6. K. Shenai, R.S. Scott, and B.J. Baliga, IEEE Trans. Electron Devices, 36, 1811 (1989). 7. B.J. Baliga, IEEE Trans. Electron Devices Lett., EDL-10, 455 (1989). STATEMENT OF WORK
3 Year Base Program Contract Months 1) Study defect limiting minority carrier lifetime in SiC for bipolar devices. 1-36 2) Fabricate prototype SiC MOSFETS. 1-24 3) Fabricate full-size SiC MOSFETS. 18-36 4) Fabricate prototype SiC thyristors and/or IGBTS. 12-36 5) Fabricate full-size SiC thvristors and/or IGBTS. 24-36 Years 4 and 5 Option Program 1) Fabricate full-size SiC MOSFETS. 36-60 2) Fabricate prototype SiC thvristors and/or IGBTS. 36-42 3) Fabricate full-size SiC thyristors and/or IGBTS. 36-60
COST PROPOSAL (REVISED RATES 8/17/95) Name of Offeror: Cree Research, Incorporated 2810 Meridian Pkwy, Suite 176 Durham, NC 27713 Title of proposed effort: MANUFACTURABLE POWER SWITCHING DEVICES Total Base Contract Cost: $977,058 Cost of Base to Government: $857,988 Cost of Option to Govt: $589,899
DETAILED DESCRIPTION OF COST ELEMENTS Year 1 Year 2 Year 3 Year 4 Option Year 5 Option 1. Clean Room Processing $50,000 $50,000 $50,000 $50,000 $50,000 2. Package & Test Department Costs Direct Labor 1.04 x Yr 1 Rate 1.04 x Yr 2 Rate 1.04 x Yr 3 Rate 1.04 x Yr 4 Rate P & T Technicians $11.25 Hours 200 200 300 300 300 $2,250 $2,340 $3,650 $3,796 $3,948 Total P & T Labor $2,250 $2,340 $3,650 $3,796 $3,948 P & T Fringe Benefit Cost 28.33% x Base = $637 $663 $1,034 $1,075 $1,118 P & T Overhead 154.40% x Base = $3,474 $3,613 $5,636 $5,861 $6,096 Total P & T Department Costs $6,361 $6,616 $10,320 $10,732 $11,162 3. Mfg. Admin. Expenses = Total Direct Costs x 15.01% $8,460 $8,498 $9,054 $9,116 $9,180 Total Mfg. Direct Costs + Mfg. Overhead = $64,821 $65,114 $69,374 $69,848 $70,342 4. R&D Department Costs R&D Labor Rate/Hour 1.04 x Yr. 1 Rate 1.04 x Yr 2 Rate 1.04 x Yr 3 Rate 1.04 x Yr 4 Rate Pl- John W. Palmour $47.12 Hours 200 200 200 200 200 9,424 $9,801 $10,193 $10,601 $11,025 Pm- Calvin H. Carter, Jr. $50.48 Hours 200 200 200 100 100 $10,096 $10,500 $10,920 $5,678 $5,905 Ranbir Singh $31.25 Hours 1,000 1,000 1,000 1,000 1,000 $31,250 $32,500 $33,800 $35,152 $36,558 Doug Waltz 32.24 Hours 200 200 300 300 300 $6,448 $6,706 $10,461 $10,880 $11,315 Total R&D Labor $57,218 $59,507 $65,374 $62,311 $64,803 R&D Fringe & Occupancy 28.33% x Base = $16,210 $16,858 $18,520 $17,653 $18,359 R&D Overhead 29.78% x Base = $17,040 $17,721 $19,468 $18,556 $19,298 Total R&D Department Costs $90,468 $94,086 $103,362 $98,520 $102,460 5. Services Ion Implantation $4,400 $4,400 $4,400 $4,400 $4,400 Poly Si Deposition $9,000 $9,000 $9,000 $9,000 $9,000 Deposited Oxide $10,000 $10,000 $10,000 $10,000 $10,000 Total Services $23,400 $23,400 $23,400 $23,400 $23,400 6. Supplies and Materials a. SiC Wafers w/Epi (Catalog Pricing) $79,380 $79,380 $79,380 $79,380 $79,380 b. Photomasks $10,000 $10,000 $10,000 $10,000 $10,000 Total Supplies and Materials $89,380 $89,380 $89,380 $89,380 $89,380 7. Travel $7,594 $12,254 $7,594 $12,254 $7,594 Total Direct Cost and Overhead $275,663 $284,234 $293,110 $293,402 $293,176 8. G&A Expense = Total Cost Input x 12.13% $33,438 $34,478 $35,554 $35,590 $35,562 SUBTOTAL $309,101 $318,712 $328,664 $328,992 $328,738 9. Facilities Capital Cost of Money = $6,551 $7,091 $6,939 $6,176 $5,372 TOTAL YEARLY COST $315,652 $325,803 $335,603 $335,168 $334,110 LESS COST SHARE $36,690 $36,690 $36,690 $36,690 $36,690 COST TO GOVERNMENT $275,962 $286,113 $295,913 $295,478 $294,420 Funded: 9/29/95 - 4/30/96 $208,975
ATTACHMENT C GENERAL PROVISIONS CLAUSES INCORPORATED BY REFERENCE (FAR 52.252-2) (JUN 1988) This contract incorporates the following clauses, and any updates or revisions thereto, by reference with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. a. FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1) CLAUSES 1. 52.202-1 Definitions. . . . . . . . . . . . . . . . . . (SEP 1991) 2. 52.203-1 Officials Not to Benefit. . . . . . . . . . . .(APR 1984) 3. 52.203-3 Gratuities. . . . . . . . . . . . . . . . . . .(APR 1984) 4. 52.203-5 Covenant Against Contingent Fees. . . . . . . .(APR 1984) 5. 52.203-6 Restrictions on Subcontractor Sales to the Government . . . . . . .. . . . . . . . . . . (JUL 1985) 6. 52.203-7 Anti-Kickback Procedures . . . . . . . . . (OCT 1988) 7. 52-203-10 Price or Fee Adjustment for Illegal or Improper Activity . . . . . .. . . . . . . . . . . (SEP 1990) 8. 52.203-12 Limitation on Payments to Influence Certain Federal Transactions . . . . . . . . . . . . . . . . (JAN 1990) 9. 52-203-8 Requirement for Certification of Procurement Integrity . . . . . . . . . . . . . . . . . (NOV 1990) *10. 52.204-2 Security Requirements . . . . . . . . . . . (APR 1994) 11. 52.209-6 Protecting the Government's Interest when Subcontracting with Contractors barred, Suspended, or Proposed for Debarrment . . . . . . . . (NOV 1992) *12. 52.212-8 Defense Priority Allocation Requirements . . (SEP 1990) 13. 52.212-13 Stop Work Order (Negotiation Acquisition) . . (AUG 1989) 14. 52.215-1 Examination of Records by Comptroller General . . . . . . . . . . . . . . . . . . (FEB 1993) 15. 52.215-2 Audit - Negotiation . . . . . . . . . . . . (FEB 2993) 16. 52.215-22 Price Reduction for Defective Cost or Pricing Data . . . . . . . . . . . . . . . . . . . . (JAN 1991) 17. 52.215-24 Subcontractor Cost or Pricing Data . . . . . (DEC 1991) 18. 52.215-26 Integrity of Unit Prices . . . . . . . . . . (APR 1991) 19. 52.215-27 Termination of Deferred Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . (SEP 1989) 20. 52.215-30 Facilities Capital Cost of Money . . . . . . . (SEP 1987) *21. 52.215-31 Waiver of Facilities Capital Cost of Money . . (SEP 1987) 22. 52.215-33 Order of Precedence . . . . . . . . . . . . . (JAN 1986) 23. 52.216-7 Allowable Cost and Payment . . . . . . . . . . (JUL 1991) *24. 52.216-8 Fixed Fee . . . . . . . . .. . . . . . . . . (APR 1984) 25. 52.217-9 Option to Extend the Term of the Contract - Services "60 months" . . . . .. . . . . . . . . . . . (MAR 1989) 26. 52.219-8 Utilization of Small Business Concerns and Small Disadvantaged Business Concern . . . . (FEB 1990) *27. 52.219-9 Small Business and Small Disadvantaged Business Subcontracting Plan . .. . . . . . . . . . . (JAN 1991) *28. 52.219-13 Utilization of Women-Owned Small Businesses . .(AUG 1986) *29. 52.219-16 Liquidated Damages - Small Business Subcontracting Plan . . . . . . . . . . . . . . . . . . . (JAN 1991) *30. 52.220-3 Utilization of Labor Surplus Area Concerns . . (APR 1984) *31. 52.220-4 Labor Surplus Area Subcontracting Program . . .(APR 1984) 32. 52.222-1 Notice to the Government of Labor Disputes. . .(APR 1984) *33. 52.222-2 Payment for Overtime Premiums "30" . . . . (JUL 1990) *34. 52.222-3 Convict Labor . . . . . . . . . . . . . . . (APR 1984) 35. 52.222-26 Equal Opportunity . . . . . . . . . . . . . (APR 1984) *36. 52.222-28 Equal Opportunity Preaward Clearance of Subcontracts . . .. . . . . . . . . . . . . (APR 1984) *37. 52.222-29 Notification of Visa Denial . .. . . . . . . (APR 1984) 38. 52.222-35 Affirmative Action for Special Disabled and Vietnam Era Veterans . . . . . . . . . . . . . . . (APR 1984) 39. 52.222-36 Affirmative Action for Handicapped Workers . . (APR 1984) 40. 52.222-37 Employment Reports on Special Disabled Veterans and Veterans of the Vietnam Era . . . . . . . (JAN 1988) 41. 52.223-2 Clean Air and Water . . . . . . . . . . . . . (APR 1984) 42. 52.223-6 Drug-Free Workplace . . . . . . . . . . . . (JUL 1990) 43. 52.224-1 Privacy Act Notification . . . . . . . . . . (APR 1984) *44. 52.224-2 Privacy Act . . . . . . . . . . . . . . . . (APR 1984) *45. 52.225-13 Restrictions on Contracting with Sanctioned Persons . . . . . . . . . . . . . . . . . . (APR 1991) 46. 52.227-1 Authorization and Consent. . . . . . . . . . (APR 1984) Alternate I . . . . . . . . . . . . . . . . (APR 1984) 47. 52.227-2 Notice and Assistance Regarding Patent and Copyright Infringement . . . . . . . . . . . . . . . (APR 1984) 48. 52.227-11 Patent Rights - Retention by the Contractor (Short Form) . . . . . . . . . . . . . . . (JUN 1989) *49. 52.227-12 Patent Rights - Retention by the Contractor (Long Form) . . . . . . . . . . . . . . . . (JUN 1989) *50. 52.228-6 Insurance - Immunity from Tort Liability . . . (APR 1984) 51. 52.228-7 Insurance - Liability to Third Persons . . . (APR 1984) 52. 52.230-2 Cost Accounting Standards . . . . . . . . . . (AUG 1992) 53. 52.230-3 Disclosure and Consistency of Cost Accounting Practices . . . . . . . . . . . . . . . . . (AUG 1992) 54. 52.230-5 Administration of Cost Accounting Standards . .(AUG 1992) 55. 52.232-8 Discounts for Prompt Payment . . . . . . . . . (APR 1989) 56. 52.232-9 Limitation on Withholding of Payments . . . . (APR 1984) 57. 52.232-17 Interest . . . . . . . . . . . . . . . . . . . (JAN 1991) 58. 52.232-18 Availability of Funds . . . . . . . . . . . . .(APR 1984) 59. 52.232-22 Limitation of Funds . . . . . . . . . . . . . .(APR 1984) 60. 52.232-23 Assignment of Claims . . . . . . . . . . . . . (JAN 1986) 61. 52.232-25 Prompt Payment . . . . . . . . . . . . . . . . (MAR 1994) 62. 52.232-28 Electronic Funds Transfer Payment Methods (When available) . . . . . . . . . . . . . . . . . (APR 1989) 63. 52.233-1 Disputes . . . . . . . . . . . . . . . . . . (MAR 1994) 64. 52.233-3 Protest After Award .. . . . . . . . . . . . (AUG 1989) Alternate I . . . . . . . . . . . . . . . . . (JUN 1985) 65. 52.242-1 Notice of Intent to Disallow Costs . . . . (APR 1984) 66. 52.243-2 Changes - Cost Reimbursement . . . . . . . . (AUG 1987) Alternate V . . . . . . . . . . . . . .. . . (APR 1984) *67. 52.243-7 Notification of Changes . . . . . . . .. . . (APR 1984) 68. 52.244-2 Subcontracts (Cost Reimbursement and Letter Contracts . . . . . . . . . . . . . . . . . . (FEB 1995) Alternate I . . . . . . . . . . . . . . . .. (APR 1985) 69. 52.244-5 Competition in Subcontracting . . . . . . . (APR 1984) 70. 52.245-5 Government Property (Cost Reimbursement, Time and Material or Labor-Hour Contracts) . . . . . (JAN 1986) 71. 52.246-25 Limitation of Liability - Services . . . . . (APR 1984) *72. 52.247-1 Commercial Bill of Lading Notations (F.O.B. Destination) . . . . . . . . . . . . . . . . .(APR 1984) 73. 52.249-6 Termination (Cost Reimbursement) . . . . . . . (MAY 1986) 74. 52.249-14 Excusable Delays . . . . . . . . . . . . . . (APR 1984) 75. 52.251-1 Government Supply Sources . . . . . . . .. . (APR 1984) b. DEPARTMENT OF DEFENSE FAR SUPPLEMENT (48 CFR CHAPTER 2) CLAUSES 1. 252.203-7000 Statutory Prohibitions on Compensation to Former Department of Defense Employees . . . . . . . (DEC 1991) 2. 252.203-7001 Special Prohibitions on Employment . . . . . . (APR 1993) 3. 252.203-7002 Display of DOD Hotline Poster . . . . . . . . (DEC 1991) 4. 252.205-7000 Provision of Information to Cooperative Agreement Holders . . . . . . . . . . . . . . . . . . . (DEC 1991) 5. 252.209-7000 Acquisitions from Subcontractors Subject to On-Site Inspection Under the Intermediate . . . . . . . . . . . Range Nuclear Forces (INF) Treaty . . .. . . . (DEC 1991) 6. 252.215-7000 Pricing Adjustments . . . . . . . . . . . . . (DEC 1991) 7. 252.215-7002 Cost Estimating System Requirements . .. . . (DEC 1991) *8. 252.219-7003 Small Business and Small Disadvantaged Business Subcontracting Plan (DOD Contracts) . . . . (DEC 1991) *9. 252.219-7005 Incentive Program for Subcontracting with Small and Small Disadvantaged Business . . . . . . . . . . . . . . Concerns. Historically Black Colleges and Universities and Minority Institutions . . . . . . . . . (APR 1990) *10. 252.223-7005 Drug-Free Workforce . . . . . . . . . . . . . (SEP 1988) 11. 252.225-7026 Reporting of Overseas Subcontracts . . . . . . (MAY 1995) 12. 252.227-7013 Rights in Technical Data - Noncommercial Items . . . . . . . . . . . . . . . . . . . (JUN 1995) *13. 252.227-7018 Rights in Noncommercial Technical Data and Computer Software - Small Business . . . . . . . . . . . . . . . Innovative Research (SBIR) Program . . . .. . .(JUN 1995) 14. 252.227-7019 Validation of Asserted Restrictions - Computer Software . . . . . . . . . . . . . . . . . . (JUN 1995) 15. 252.227-7028 Technical Data or Computer Software Previously Delivered to the Government . . . . . . . . . . . . . (JUN 1995) 16. 252.227-7030 Technical Data - Withholding of Payment . . . (OCT 1988) 17. 252.227-7036 Certification of Technical Data Conformity . . (MAY 1987) 18. 252.227-7037 Validation of Restrictive Markings on Technical Data . . . . . . . . . . . . . . . . . . . . (JUN 1995) 19. 252.231-7000 Supplemental Cost Principles . . . . . . . . . (DEC 1991) 20. 252.231-7001 Penalties for Unallowable Costs .. . . . . . . (DEC 1991) 21. 252.233-7000 Certification of Claims and Requests for Adjustment or Relief . . . . . . . . . . . . . . . . . . (MAY 1994) 22. 252.242-7001 Certification of Indirect Costs . . . . . . .. (DEC 1991) 23. 252.246-7001 Warranty of Data . . . . . . . . . . . . . . . (DEC 1991) (*) Deleted REQUIREMENT FOR CERTIFICATE OF PROCUREMENT INTEGRITY (NOV 1990) ALTERNATE I - (SEP 1990) NOTE: The offeror is required to execute and forward this certificate with submission of its proposal. If Best and Final Offer (BAFO) are requested, the offeror will be required to submit an updated certificate with the submission of its BAFO. REQUIREMENT FOR CERTIFICATE OF PROCUREMENT INTEGRITY (NOV 1990) ALTERNATE I - (SEP 1990) a. Definitions. The definitions at FAR 3.104-4 are hereby incorporated in this provision. b. Certifications. As required in paragraph (c) of this provision, the officer or employee responsible for this offer shall execute the following certification: CERTIFICATE OF PROCUREMENT INTEGRITY (1) I, Calvin H. Carter, Jr., (Name of Offeror), am the officer or employee responsible for the preparation of this offer and hereby certify that, to the best of my knowledge and belief, with the exception of any information described in this certificate, I have no information concerning a violation or possible violation of subsection 27(a), (b), (d), or (f) of the Office of Federal Procurement Policy Act as amended(*) (41 U.S.C. 423), (hereinafter referred to as "the Act"), as implemented in the FAR, occurring during the conduct of this procurement (solicitation number). (2) As required by subsection 27(e)(1)(B) of the Act, I further certify that, to the best of my knowledge and belief, each officer, employee, agent, representative, and consultant of Cree Research, Inc., (Name of Offeror) who has participated personally and substantially in the preparation or submission of this offer has certified that he or she is familiar with, and will comply with, the requirements of subsection 27(a) of the Act, as implemented in the FAR, and will report immediately to me any information concerning a violation or possible violation of subsections 27(a), (b), (d) or (f) of the Act, as implemented in the FAR, pertaining to this procurement. (3) Violations or possible violations: (Continue on plain bond paper if necessary and label Certificate of Procurement Integrity (Continuation Sheet), ENTER NONE IF NONE EXISTS) [NONE] (4) I agree that, if awarded a contract under this solicitation, the certifications required by subsection 27(e)(1)(B) of the Act shall be maintained in accordance with paragraph (f) of this provision. SIGNATURE: /s/ Calvin H. Carter, Jr. TYPED NAME: Calvin H. Carter, Jr. DATE: 1-30-96 *Subsections 27(a), (b), and (d) are effective on December 1, 1990. Subsection 27(f) is effective on June 1, 1991. CERTIFICATION REGARDING LOBBYING; DEBARMENT, SUSPENSION AND OTHER RESPONSIBILITY MATTERS; AND DRUG-FREE WORKPLACE REQUIREMENTS Applicants should refer to the regulations cited below to determine the certification to which they are required to attest. Applicants should also review the instructions for certification included in the regulations before completing this form. Signature of this form provides for compliance with certification requirements under 34 CFR Part 42, "New Restrictions on Lobbying," and 34 CFR Part 85, "Government-wide Debarment and Suspension (Nonprocurement) and Government-wide Requirements for Drug-Free Workplace (Grants)." The certification shall be treated as a material representation of fact upon which reliance will be placed when the Department of Defense determines to award the covered transaction, grant, or cooperative agreement. 1. LOBBYING The undersigned certifies, to the best of his or her knowledge and belief, that: (1) No Federal appropriated funds have been paid or will be paid, by or on behalf of the undersigned, to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with the awarding of any Federal contract, the making of any federal grant, the making of any Federal loan, the entering into of any cooperative agreement, and the extension, continuation, renewal, amendment, or modification of any Federal contract, grant, loan, or cooperative agreement. (2) If any funds other than Federal appropriated funds have been paid or will be paid to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with this Federal contract, grant, loan, or cooperative agreement, the undersigned shall complete and submit Standard Form L11, "Disclosure Form to Report Lobbying," in accordance with its instructions. (3) The undersigned shall require that the languahg4e of this certification be included in the award documents for all subawards at all times (including subcontracts, subgrants, and contracts under grants, loans, and cooperative agreements) and that all subrecipients shall certify and disclose accordingly. This certification is a material representation of fact upon which reliance was placed when this transaction was made or entered into. Submission of this certification is a prerequisite for making or entering into this transaction imposed by section 1352, title 31, U.S. Code. Any person who fails to file the required certification shall be subject to a civil penalty of not less than $10,000 and not more than $100,000 for each such failure. 2. DEBARMENT, SUSPENSION, AND OTHER RESPONSIBILITY MATTERS (1) The prospective primary participant certifies to the best of its knowledge and belief, that it and its principals: (a) Are not presently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from covered transactions by any Federal department or agency; (b) Have not within a three-year period preceding this proposal been convicted of or had a civil judgment rendered against them for commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a public (federal, State or local) transaction or contract under a public transaction; violation of Federal or State antitrust statutes or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, or receiving stolen property; [c] Are not presently indicted for or otherwise criminally or civilly charged by a governmental entity (Federal, State or local) with commission of any of the offenses enumerated in paragraph (1)(b) of this certification; and (d) Have not within a three-year period preceding this application/proposal had one or more public transactions (Federal, State or local) terminated for cause or default. (2) Where the prospective primary participant is unable to certify to any of the statements in this certification, such prospective participant shall attach an explanation to this proposal. 3. DRUG-FREE WORKPLACE This certification is required by the Drug-Free Workplace Act of 1988 (Pub. L. 100-690, Title V, Subtitle D) and is implemented through additions to the Debarment and Suspension regulations published in the Federal Register on January 31, 1989, and May 25, 1990. ALTERNATE 1 (GRANTERS OTHER THAN INDIVIDUALS) (1) The grantee certifies that it will or will continue to provide a drug-free workplace by: (a) Publishing a statement notifying employees that the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance is prohibited in the grantee's workplace and specifying the actions that will be taken against employees for violation of such prohibition; (b) Establishing an ongoing drug-free awareness program to inform employees about: (1) The dangers of drug abuse in the workplace; (2) The grantee's policy of maintaining a drug-free workplace; (3) Any available drug counseling, rehabilitation, and employee assistance programs; and (4) The penalties that may be imposed upon employees for drug abuse violations occurring in the workplace; [c] Making it a requirement that each employee to be engaged in the performance of the grant be given a copy of the statement required by paragraph (a); (d) Notifying the employee in the statement required by paragraph (a) that, as a condition of employment under the grant, the employee will: (1) Abide by the terms of the statement; and (2) Notify the employer in writing of his or her conviction for a violation of a criminal drug statute occurring the workplace not later than five calendar days after such conviction; (e) Notifying the agency, in writing, within ten calendar days after receiving notice under subparagraph (d)(2) from an employer or otherwise receiving actual notice of such conviction. Employers of convicted employees must provide notice, including position title, to every grant officer or other designee on whose grant activity the convicted employee was working, unless the Federal agency has designated a central point for the receipt of such notices. Notice shall include the indemnification number(s) of each affected grant; (f) Taking one of the following actions, within 30 calendar days of receiving notice under subparagraph (d)(2), with respect to any employee who is so convicted: (1) Taking appropriate personnel action against such an employee, up to and including termination, consistent with the requirements of the Rehabilitation Act of 1973, as amended; or (2) Requiring such employee to participate satisfactorily in a drug abuse assistance or rehabilitation program approved by such purposes by a Federal, State or local health, law enforcement, or other appropriate agency. (g) Making a good faith effort to continue to maintain a drug-free workplace through implementation of paragraphs (a), (b), [c], (d), (e), and (f). (2) The grantee may insert in the space provided below the s (s) for the performance of work done in connection with the specific grant: Place of Performance: (Street address, city, county, state, zip code) 2810 Meridian Parkway Suite 176 Durham, Durham County, NC 27713 X Check if there are workplaces on file that are not identified here. ALTERNATE II (GRANTEES WHO ARE INDIVIDUALS) (1) The grantee certifies that, as a condition of the grant, he or she will not engage in the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance in conducting any activity with the grant. (2) If convicted of a criminal drug offense resulting from a violation occurring during the conduct of any grant activity, he or she will report the conviction, in writing, within 10 calendar days of the conviction, to every grant officer or other designee, unless the Federal agency designates a central point for the receipt of such notices. When notice is made to such a central point, it shall include the identification number(s) of each affected grant. As the duly authorized representative of the applicant, I hereby certify that the applicant will comply with the above certifications. NAME OF APPLICANT PR/AWARD NUMBER AND/OR PROJECT NAME Cree Research, Inc. PRINTED NAME AND TITLE OF AUTHORIZED RESPRESENTATIVE Calvin H. Carter, Jr., Vice President SIGNATURE DATE /s/ Calvin H. Carter, Jr. 1-30-96 EX-10 3 EXHIBIT 10.52 AWARD/CONTRACT 1. Page 1 of 23 2. Procurement Instrument ID No. (PIIN): F19628-96-C-0066 3. Effective Date: Mailing Date 4. Requisition/Purchase Request/Project NO.: None 5. Certified for National Defense under BDC Reg 2/DMS Reg 1 rating DO-A7 6. Issued by: Electronic Systems Center/PKR Code FA8718 Air Force Material Command, USAF 104 Barksdale Street Hanscom AFB MA 01731-1806 Buyer: Barbara A. Cook, ESC/PKRC, 617-377-2259 7. Administrered by: DCMAO Atlanta Code S1103A 805 Walker Street Marietta, GA 30060-2789 PAS: NONE 8. Contractor Name and Address: Cree Research Code 0C9J8 2810 Meridian Parkway, Suite 176 Durham County Durham, NC 27713 9. Submit invoices (4 copies unless otherwise specified) to address shown in BLANK 10. Discount for Prompt Payment: NONE 11. Authorized Rate A. Progress Pay B. Recoup 12. Contract Percent Fee 13. Payment will be made by: DFAS Columbus Center Code SC1020 DFAS-CO-JSA/Southease Division PO Box 182225 Columbus OH 43218-2225 14. Purchase Office Point of Contact: HNR/H12/HLB 15. Svc/Agency Use 16. Type Contractor: B 17. Security: A. Class U B. Date of DD254 18. Contract Administration Data: A. Fast Pay (1) Kind 2 (2) Type T 19. Reserved 20. Date Signed 21. Surv Crit: C 22. Total Amount: $4,756,556.00 23. Authority for using other than full and open competition: Blank 24. Table of Contents (The following sections marked "x" are contained in the contract) Part 1 - THE SCHEDULE (X) SEC Description Page(s) X A SOLICITATION/CONTRACT FORM 1 X B SUPPLIES OR SERVICES AND PRICES/COSTS 2 X C DESCRIPTION/SPECS/WORK STATEMENT 4 X D PACKAGING AND MARKING 5 X E INSPECTION AND ACCEPTANCE 6 X F DELIVERIES OR PERFORMANCE 7 X G CONTRACT ADMINISTRATION DATA 8 X H SPECIAL CONTRACT REQUIREMENTS 10 Part 2 - CONTRACT CLAUSES X I CONTRACT CLAUSES 11 Part 3 - LIST OF DOCUMENTS, EXHIBITS AND OTHER ATTACH X J LIST OF ATTACHMENTS 23 Part 4 - REPRESENTATIONS AND INSTRUCTIONS * K REPRESENTATIONS, CERTIFICATIONS AND OTHER STATEMENTS OF OFFERORS L INSTRS., CONDS., AND NOTICES TO OFFER M EVALUATION FACTORS FOR AWARD * incorporated by reference CONTRACTING OFFICER WILL COMPLETE BLOCK 25 OR 29, AS APPLICABLE 25. X CONTRACTOR'S NEGOTIATED AGREEMENT (Contractor is required to sign this document and return 1 copy to issuing office.) Contractor agrees to furnish and deliver all items or perform all the sevices set forth or otherwise identified herein for the consideration stated herein. The rights and obligations of the parties to this contract shall be subject to and governed by the following documents: (a) this award/contract, (b) the solicitation, if any, (c) such provisions, representations, certifications, and specifications, as are attached or incorporated by reference herin. (Attachments are listed herein.) 26. CONTRACTOR Calvin H. Carter Jr. \s\ -------------------------- 27. NAME AND TITLE OF SIGNER (TYPE OR PRINT) Calvin H. Carter Jr., Vice President 28. DATE SIGNED: 96JUN26 29. AWARD (not marked) (Contractor is not required to sign this document.) Your offer on Solicitation Number ___________________, including the additions or changes made by you which additions or changes are set forth in full above, is hereby accepted as to the items listed herein. This award consummates the contract which consist of the following documents (a) the Government's solicitation and your offer, and (b) this award/contract. No further contractual document is necessary. 30. UNITED STATES OF AMERICA Karen M. Stone \s\ by______________________ (Signature of Contracting Officer) 31. NAME OF CONTRACTING OFFICER (TYPE OR PRING) KAREN M. STONE 32. DATE SIGNED: 96JUL02 70B - PART I, SECTION B OF THE SCHEDULE A. Quantity Unit Price Item No Supplies/Services Purch Unit Total Item Amount 0001 Service CLIN sec class: U E$4,756,556.00 desc of services: R&D SERVICES completion date: ASREQ acrn: 9 pr/mipr data: See Info SubCLIN 000101 descriptive data: A. Perform research in accordance with Section C, Description/Specifications/Work Statement. B. Commencement Date: Date of Contract Award (defined as the Mailing Date of the Contract) C. Completion Date: 36 MAC (Months after Contract Award). D. F.O.B. Destination E. Line Items 0001 and 0002 (1) Total estimated cost: $4,756,556 (2) Government's Estimated Cost Share: 4,284,214 (3) Contractor's Estimated Cost Share: 472,342 (4) Government's share shall be 90% of costs incurred of all allowable costs. The Contractor's share shall be 10% of costs incurred of all allowable costs. 000101 Info SubCLIN sec class: U noun: $840,000.00 acrn: AA pr/mipr data: FY7620-96-RL7293 descriptive dat: Breakout for funding/payment purposes. See Section G for payment instructions. 0002 Service CLIN sec class: U NSP desc of services: R&D DATA completion date: ASREQ acrn: 9 pr/mipr data: NONE descriptive data: A. Delivery of data in accordance with Contract Data Requirements List (CDRL), DD Form 1423, Exhibit A, dated 96APR11. Place of Delivery is the addressee(s) on the Exhibit. B. Completion Date: As required in accordance with CDRL, Exhibit A. C. F.O.B. Destination. D. Not Separately Priced (NSP). Cost is included in CLIN 0001. SECTION B - SUPPLIES OR SERVICES AND PRICES/COST (cont'd) B. AFMC FAR Sup Clauses in Full Text 5352.232-9000 IMPLEMENTATION OF LIMITATION OF FUNDS (DEC 1995) The sum allotted to this contract and available for payment of costs under CLINs 0001 and 0002 through 96OCT30 in accordance with the clause in Section I entitled "Limitation of Funds" is $840,000.00. SECTION C - DESCRIPTION/SPECIFICATIONS/WORK STATEMENT A. The Contractor shall furnish the supplies and/or services set forth in Section B as follows: Line Item 0001 - Design, fabricate and deliver a blue laser diode for high density optical storage in accordance with CREE Research technical proposal entitled, "Low Defect Density Short Wavelength III-Nitride Laser Diode," dated 95DEC07, incorporated herein by reference. Line Item 0002 - Provide R&D Data in accordance with Contract Data Requirements List (CDRL), DD Form 1423, Exhibit A, dated 96APR11. SECTION D - PACKAGING AND MARKING A. AFMC FAR Sup Clauses in Full Text 5352.247-9007 SPECIFICATION COMMERCIAL PACKAGING AND MARKING (FEB 1996) Items shall be packaged and marked in accordance with American Society for Testing and Materials (ASTM) D3951, "Standard Practice for Commercial Packaging." Individual shipments exceeding 150 pounds or 108 inches in length or 130 inches in girth plus length, shall be packaged on skidded crates or palletized to allow handling by forklift. SECTION E - INSPECTION AND ACCEPTANCE A. 52.252-2 CLAUSES INCORPORATED BY REFERENCE (JUN 1988) This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. I. FEDERAL ACQUISITION REGULATION CLAUSES 52.246-8 INSPECTION OF RESEARCH AND DEVELOPMENT - COST-REIMBURSEMENT (APR 1984) ALTERNATE I (APR 1984) II. DEFENSE FAR SUPPLEMENT CLAUSES 252.246-7000 MATERIAL INSPECTION AND RECEIVING REPORT (DEC 1991) B. Inspection and Acceptance shall be accomplished as follows: Line Item 0001 - shall be delivered F.O.B. Destination and inspected and accepted at Rome Laboratory (RL/EROC), 80 Scott Road, Hanscom AFB, MA 01731-2909. Acceptance shall be evidenced by execution of a DD Form 250, Material Inspection and Receiving Report, by an authorized Government representative. Line Item 0002 - all data under Line Item 0002 shall be inspected and accepted at Rome Laboratory (RL/EROC), 80 Scott Road, Hanscom AFB, MA 01731-2909. All data shall be accepted on a DD Form 250, Material Inspection and Receiving Report, on a one-time basis only, to be submitted with the last CDRL item required to be delivered. SECTION F - DELIVERIES OR PERFORMANCE A. 52.252-2 CLAUSES INCORPORATED BY REFERENCE (JUN 1988) This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. I. FEDERAL ACQUISITION REGULATION CLAUSES 52.242-15 STOP-WORK ORDER (AUG 1989) ALTERNATE I (APR 1984) 52.247-34 F.O.B. DESTINATION (NOV 1991) B. AFMC FAR Sup Clauses in Full Text 5352.247-9004 COMMERCIAL BILL OF LADING SHIPMENTS--CARRIER'S RATES (JAN 1996) Before making any shipment, the contractor shall ensure that the proposed carrier offers acceptable service at reduced rates under Interstate Commerce Commission Section 10721, if available, or other rate schedule of equal or lower rates. In order to comply with this requirement, the contractor shall contact the transportation officer for this contract, as identified by the Administrative Contracting Officer, for confirmation that the proposed carrier's rates are no higher than those otherwise available to the government. The contractor shall separately list the shipping costs on the invoice to the government and attach a copy of the carrier's billing. Failure to properly annotate the invoice and provide a copy of the carrier's billing may result in those costs not being reimbursed or only partially reimbursed. C. Completion dates for the effort in Section C are as follows: Line Item 0001 - 36 MAC (Months After Contract Award) Line Item 0002 - In accordance with CDRL, Exhibit A 69G - PART I, SECTION G OF THE SCHEDULE Appropriation/Lmt Subhead/CPN Recip DODAAD Obligation ACRN Acct Class data Supplemental Accounting Classification Amount AA ACCOUNT UNCLASSIFIED 9760400 1302 F03000 $840,000.00 D16 4713 6D1000 OD7340 67293 61101E 503000 pr/mipr data: FY7620-96-RL7293 (Complete) descriptive data: JON: D734AR10 HS96-0060 Payment Instructions for Multiple Acounting Classification Citations a. This contract will be funded by multiple accounting classification citations. Payment shall be made from ACRNs in alphabetical order (AA, AB, etc.). DO NOT USE A PRORATED METHOD to pay, disburse and liquidate funds. Do not liquidate any funds from an ACRN unless the preceding ACRNs have been fully liquidated, or if revised payment instructions are provided per paragraph b. below. b. Additional ACRNs will be assigned when new accounting classifications are available. When adding new ACRNs or changing existing ACRNs, the above payment instructions shall apply, unless specific revised payment instructions are provided as part of a contract modification. c. Incremental funding shall be in accordance with AFMC 5352.232-9000 in Section B of this contract. SECTION G - CONTRACT ADMINISTRATION DATA (cont'd) 2. Administrative Information: a. Contracting Office Representative: TBD b. Contracting Officer: Karen M. Stone c. Symbol of Purchasing Officer: ESC/PKRC d. Telephone Number and Extension: (617)377-5914 3. Instructions Re Patents Clause The ACO will forward all documentation (reports, invention disclosures, notices, requests) and other information concerning patents to the following addressee: ESC/JANP (Patent Counsel) 35 Hamilton Street Hanscom AFB, MA 01731-2010 4. Transportation Office: Transportation Officer (Address - Same as Office of Administration) 5. Technical Contract Manager: Joe Lorenzo Alternate: E. Martin Location: Rome Laboratory (RL/EROC) 80 Scott Road Hanscom AFB, MA 01731-2909 6. Submit Invoices/Vouchers to: DCMAO 805 Walker Street Marietta, GA 33030-2789 7. Auditor's Address and Telephone: DCAA 415A North Edgeworth Street Greensboro, NC 27401-2107 Tel: (910)333-5287 8. AFMC FAR Sup Clauses in Full Text 5352.232-9000 REMITTANCE ADDRESS (MAY 1996) If the remittance address is different from the mailing address, enter the remittance address below. Failure to provide this information may impact payment. SECTION H - SPECIAL CONTRACT REQUIREMENTS A. Other Special Contract Requirements 1. PRINCIPAL INVESTIGATOR (JUL 1993) (ESC/H-18) The CREE Research Principal Investigator for this effort is Dr. Gary Bulman. No substitution shall be made without the prior written approval of the Air Force Procuring Contracting Officer (PCO). SECTION I - CONTRACT CLAUSES Contract clauses in this section from the FAR, Defense FAR Sup, Air Force FAR Sup, and Air Force Materiel Command FAR Sup are current through the following updates: FAR: 1990 Edition through FAC 90-37; Defense FAR Sup: 1991 Edition through DAC 91-10; AF FAR Sup: 1996 Edition; AFMC FAR Sup: 1992 Edition through AFMCAC 96-1 & through IPL 96-009 & IPL 96-011 through IPL 96-13 & 96-15 A. 52.252-2 CLAUSES INCORPORATED BY REFERENCE (JUN 1988) This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. I. FEDERAL ACQUISITION REGULATION CLAUSES 52.202-1 DEFINITIONS (OCT 1995) 52.203-3 GRATUITIES (APR 1984) 52.203-5 COVENANT AGAINST CONTINGENT FEES (APR 1984) 52.203-6 RESTRICTIONS ON SUBCONTRACTOR SALES TO THE GOVERNMENT (JUL 1995) 52.203-7 ANTI-KICKBACK PROCEDURES (JUL 1995) 52.203-10 PRICE OR FEE ADJUSTMENT FOR ILLEGAL OR IMPROPER ACTIVITY (SEP 1990) 52.203-12 LIMITATION ON PAYMENTS TO INFLUENCE CERTAIN FEDERAL TRANSACTIONS (JAN 1990) 52.204-4 PRINTING/COPYING DOUBLE-SIDED ON RECYCLED PAPER (MAY 1995) 52.209-6 PROTECTING THE GOVERNMENT'S INTEREST WHEN SUBCONTRACTING WITH CONTRACTORS DEBARRED, SUSPENDED, OR PROPOSED FOR DEBARMENT (JUL 1995) 52.211-15 DEFENSE PRIORITY AND ALLOCATION REQUIREMENTS (SEP 1990) 52.215-2 AUDIT AND RECORDS--NEGOTIATION (OCT 1995) 52.215-22 PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA (OCT 1995) 52.215-24 SUBCONTRACTOR COST OR PRICING DATA (OCT 1995) 52.215-26 INTEGRITY OF UNIT PRICES (OCT 1995) 52.215-27 TERMINATION OF DEFINED BENEFIT PENSION PLANS (MAR 1996) 52.215-31 WAIVER OF FACILITIES CAPITAL COST OF MONEY (SEP 1987) 52.215-33 ORDER OF PRECEDENCE (JAN 1986) 52.215-39 REVERSION OR ADJUSTMENT OF PLANS FOR POSTRETIREMENT BENEFITS (PRB) OTHER THAN PENSIONS (MAR 1996) 52.215-40 NOTIFICATION OF OWNERSHIP CHANGES (FEB 1995) 52.216-7 ALLOWABLE COST AND PAYMENT (DEVIATION AFAC 92-49) (JUL 1995) 52.216-12 COST-SHARING CONTRACT - NO FEE (APR 1984) 52.219-8 UTILIZATION OF SMALL, SMALL DISADVANTAGED AND WOMEN-OWNED SMALL BUSINESS CONCERNS (OCT 1995) 52.219-14 LIMITATIONS ON SUBCONTRACTING (JAN 1991) 52.222-1 NOTICE TO THE GOVERNMENT OF LABOR DISPUTES (APR 1984) 52.222-2 PAYMENT FOR OVERTIME PREMIUMS (JUL 1990) (Insert "zero" in para (a)) 52.222-3 CONVICT LABOR (APR 1984) 52.222-26 EQUAL OPPORTUNITY (APR 1984) 52.222-28 EQUAL OPPORTUNITY PREAWARD CLEARANCE OF SUBCONTRACTS (APR 1984) 52.222-35 AFFIRMATIVE ACTION FOR SPECIAL DISABLED AND VIETNAM ERA VETERANS (APR 1984) 52.222-36 AFFIRMATIVE ACTION FOR HANDICAPPED WORKERS (APR 1984) 52.222-37 EMPLOYMENT REPORTS ON SPECIAL DISABLED VETERANS AND VETERANS OF THE VIETNAM ERA (JAN 1988) 52.223-2 CLEAN AIR AND WATER (APR 1984) 52.223-6 DRUG-FREE WORKPLACE (JUL 1990) 52.223-14 TOXIC CHEMICAL RELEASE REPORTING (OCT 1995) 52.225-11 RESTRICTIONS ON CERTAIN FOREIGN PURCHASES (MAY 1992) 52.227-1 AUTHORIZATION AND CONSENT (JUL 1995) ALTERNATE I (APR 1984) 52.227-2 NOTICE AND ASSISTANCE REGARDING PATENT AND COPYRIGHT INFRINGEMENT (APR 1984) 52.227-11 PATENT RIGHTS -- RETENTION BY THE CONTRACTOR (SHORT FORM)(JUN 1989) 52.228-7 INSURANCE - LIABILITY TO THIRD PERSONS (MAR 1996)(See AFMC 5352.228-9004 for implementation) 52.232-9 LIMITATION ON WITHHOLDING OF PAYMENTS (APR 1984) 52.232-17 INTEREST (JAN 1991) 52.232-22 LIMITATION OF FUNDS (APR 1984) (See AFMC 5352.232-9000 in Section B for implementation) 52.232-23 ASSIGNMENT OF CLAIMS (JAN 1986) 52.232-25 PROMPT PAYMENT (MAR 1994) (Insert "14th day" in para (b)(2)) 52.232-28 ELECTRONIC FUNDS TRANSFER PAYMENT METHODS (APR 1989) 52.233-1 DISPUTES (OCT 1995) 52.233-3 PROTEST AFTER AWARD (OCT 1995) ALTERNATE I (JUN 1985) 52.242-1 NOTICE OF INTENT TO DISALLOW COSTS (APR 1984) 52.242-3 PENALTIES FOR UNALLOWABLE COSTS (OCT 1995) 52.242-4 CERTIFICATION OF INDIRECT COSTS (OCT 1995) 52.242-13 BANKRUPTCY (JUL 1995) 52.243-2 CHANGES - COST-REIMBURSEMENT (AUG 1987) ALTERNATE V (APR 1984) 52.243-6 CHANGE ORDER ACCOUNTING (APR 1984) 52.243-7 NOTIFICATION OF CHANGES (APR 1984) (In paragraphs (b) & (d), insert "...within 30 calendar days...".) 52.244-2 SUBCONTRACTS (COST-REIMBURSEMENT AND LETTER CONTRACTS) (MAR 1996) (In paragraph (e) insert: NONE) ALTERNATE I (JUL 1995) 52.244-5 COMPETITION IN SUBCONTRACTING (JAN 1996) 52.245-5 GOVERNMENT PROPERTY (COST-REIMBURSEMENT, TIME-AND-MATERIAL, OR LABOR-HOUR CONTRACTS) (JAN 1986) 52.246-23 LIMITATION OF LIABILITY (APR 1984) 52.247-1 COMMERCIAL BILL OF LADING NOTATIONS (APR 1984) 52.249-6 TERMINATION (COST-REIMBURSEMENT) (MAY 1986) 52.251-1 GOVERNMENT SUPPLY SOURCES (APR 1984) 52.253-1 COMPUTER GENERATED FORMS (JAN 1991) II. DEFENSE FAR SUPPLEMENT CLAUSES 252.203-7000 STATUTORY PROHIBITION ON COMPENSATION TO FORMER DEPARTMENT OF DEFENSE EMPLOYEES (NOV 1995) 252.203-7001 SPECIAL PROHIBITION ON EMPLOYMENT (NOV 1995) 252.204-7000 DISCLOSURE OF INFORMATION (DEC 1991) 252.204-7003 CONTROL OF GOVERNMENT PERSONNEL WORK PRODUCT (APR 1992) 252.205-7000 PROVISION OF INFORMATION TO COOPERATIVE AGREEMENT HOLDERS (DEC 1991) 252.209-7000 ACQUISITION FROM SUBCONTRACTORS SUBJECT TO ON-SITE INSPECTION UNDER THE INTERMEDIATE-RANGE NUCLEAR FORCES (INF) TREATY (NOV 1995) 252.215-7000 PRICING ADJUSTMENTS (DEC 1991) 252.215-7002 COST ESTIMATING SYSTEM REQUIREMENTS (DEC 1991) 252.225-7012 PREFERENCE FOR CERTAIN DOMESTIC COMMODITIES (NOV 1995) 252.225-7026 REPORTING OF CONTRACT PERFORMANCE OUTSIDE THE UNITED STATES (NOV 1995) 252.225-7031 SECONDARY ARAB BOYCOTT OF ISRAEL (JUN 1992) 252.227-7013 RIGHTS IN TECHNICAL DATA--NONCOMMERCIAL ITEMS (NOV 1995) 252.227-7016 RIGHTS IN BID OR PROPOSAL INFORMATION (JUN 1995) 252.227-7030 TECHNICAL DATA--WITHHOLDING OF PAYMENT (OCT 1988) 252.227-7034 PATENTS -- SUBCONTRACTS (APR 1984) 252.227-7036 CERTIFICATION OF TECHNICAL DATA CONFORMITY (MAY 1987) 252.227-7037 VALIDATION OF RESTRICTIVE MARKINGS ON TECHNICAL DATA (NOV 1995) 252.227-7039 PATENTS -- REPORTING OF SUBJECT INVENTIONS (APR 1990) 252.231-7000 SUPPLEMENTAL COST PRINCIPLES (DEC 1991) 252.232-7006 REDUCTION OR SUSPENSION OF CONTRACT PAYMENTS UPON FINDING OF FRAUD (AUG 1992) 252.233-7000 CERTIFICATION OF CLAIMS AND REQUESTS FOR ADJUSTMENT OR RELIEF (MAY 1994) 252.235-7010 ACKNOWLEDGEMENT OF SUPPORT AND DISCLAIMER (MAY 1995) (In paragraphs (a) and (b) insert "Air Force Materiel Command (AFMC)"; in para (a) insert "F19628-96-C-0066") 252.235-7011 FINAL SCIENTIFIC OR TECHNICAL REPORT DISCLAIMER (MAY 1995) 252.242-7000 POSTAWARD CONFERENCE (DEC 1991) 252.242-7004 MATERIAL MANAGEMENT AND ACCOUNTING SYSTEM (DEC 1991) 252.245-7001 REPORTS OF GOVERNMENT PROPERTY (MAY 1994) 252.249-7002 NOTIFICATION OF PROPOSED PROGRAM TERMINATION OR REDUCTION (MAY 1995) 252.251-7000 ORDERING FROM GOVERNMENT SUPPLY SOURCES (MAY 1995) B. FAR Clauses in Full Text 52.203-9 REQUIREMENT FOR CERTIFICATE OF PROCUREMENT INTEGRITY -- MODIFICATION (SEP 1995) (a) Definitions. The definitions set forth in FAR 3.104-4 are hereby incorporated in this clause. (b) The Contractor agrees that it will execute the certification set forth in paragraph (c) of this clause when requested by the Contracting Officer in connection with the execution of any modification of this contract. (c) Certification. As required in paragraph (b) of this clause, the officer or employee responsible for the modification proposal shall execute the following certification. The certification in paragraph (c)(2) of this clause is not required for a modification which procures commercial items. CERTIFICATE OF PROCUREMENT INTEGRITY - MODIFICATION (NOV 1990) (1) I, ** , am the officer or employee responsible for the preparation of this modification proposal and hereby certify that, to the best of my knowledge and belief, with the exception of any information described in this certification, I have no information concerning a violation or possible violation of subsection 27(a), (b), (d), or (f) of the Office of Federal Procurement Policy Act, as amended* (41 U.S.C. 423), (hereinafter referred to as "the Act"), as implemented in the FAR, occurring during the conduct of this procurement ** [contract and modification number]. (2) As required by subsection 27(e)(1)(B) of the Act, I further certify that to the best of my knowledge and belief, each officer, employee, agent, representative, and consultant of ** [Name of Offeror] who has participated personally and substantially in the preparation or submission of this proposal has certified that he or she is familiar with, and will comply with, the requirements of subsection 27(a) of the Act, as implemented in the FAR, and will report immediately to me any information concerning a violation or possible violation of subsections 27(a), (b), (d), or (f) of the Act, as implemented in the FAR, pertaining to this procurement. (3) Violations or possible violations: (Continue on plain bond paper if necessary and label Certificate of Procurement Integrity - Modification (Continuation Sheet), ENTER NONE IF NONE EXIST) ** ** [Signature of the officer or employee responsible for the modification proposal and date] ** [Typed name of the officer or employee responsible for the modification proposal] * Subsections 27(a), (b), and (d) are effective on December 1, 1990. Subsection 27(f) is effective on June 1, 1991. ** To be completed ONLY for a modification THIS CERTIFICATION CONCERNS A MATTER WITHIN THE JURISDICTION OF AN AGENCY OF THE UNITED STATES AND THE MAKING OF A FALSE, FICTITIOUS, OR FRAUDULENT CERTIFICATION MAY RENDER THE MAKER SUBJECT TO PROSECUTION UNDER TITLE 18, UNITED STATES CODE, SECTION 1001. (End of Certification) (d) In making the certification in paragraph (2) of the certificate, the officer or employee of the competing Contractor responsible for the offer or bid, may rely upon a one-time certification from each individual required to submit a certification to the competing Contractor, supplemented by periodic training. These certifications shall be obtained at the earliest possible date after an individual required to certify begins employment or association with the contractor. If a contractor decides to rely on a certification executed prior to the suspension of section 27 (i.e. prior to December 1, 1989), the Contractor shall ensure that an individual who has so certified is notified that section 27 has been reinstated. These certifications shall be maintained by the Contractor for a period of 6 years from the date a certifying employee's employment with the company ends or, for an agency, representative, or consultant, 6 years from the date such individual ceases to act on behalf of the contractor. (e) The certification required by paragraph (c) of this clause is a material representation of fact upon which reliance will be placed in executing this modification. 52.215-42 REQUIREMENTS FOR COST OR PRICING DATA OR INFORMATION OTHER THAN COST OR PRICING DATA--MODIFICATIONS (OCT 1995) ALTERNATE I (OCT 1995) (a) Exceptions from cost or pricing data. (1) In lieu of submitting cost or pricing data for modifications under this contract, for price adjustments expected to exceed the threshold set forth at FAR 15.804-2(a)(1) on the date of the agreement on price or the date of the award, whichever is later, the Contractor may submit a written request for exception by submitting the information described in the following subparagraphs. The Contracting Officer may require additional supporting information, but only to the extent necessary to determine whether an exception should be granted, and whether the price is fair and reasonable-- (i) Information relative to an exception granted for prior or repetitive acquisitions. (ii) Catalog price information as follows: (A) Attach a copy of or identify the catalog and its date, or the appropriate pages for the offered items, or a statement that the catalog is on file in the buying office to which this proposal is being made. (B) Provide a copy or describe current discount policies and price lists (published or unpublished), e.g., wholesale, original equipment manufacturer, and reseller. (C) Additionally, for each catalog item that exceeds $1,000 (extended value not unit price), provide evidence of substantial sales to the general public. This may include sales order, contract, shipment, invoice, actual recorded sales or other records that are verifiable. In addition, if the basis of the price proposal is sales of essentially the same commercial item by affiliates, other manufacturers or vendors, those sales may be included. The offeror shall explain the basis of each offered price and its relationship to the established catalog price. When substantial general public sales have also been made at prices other than catalog or price list prices, the offeror shall indicate how the proposed price relates to the price of such recent sales in quantities similar to the proposed quantities. (iii) Market price information. Include the source and date or period of the market quotation or other basis for market price, the base amount, and applicable discounts. The nature of the market should be described. The supply or service being purchased should be the same as or similar to the market price supply or service. Data supporting substantial sales to the general public is also required. (iv) Identification of the law or regulation establishing the price offered. If the price is controlled under law by periodic rulings, reviews, or similar actions of a governmental body, attach a copy of the controlling document, unless it was previously submitted to the contracting office. (v) Information on modifications of contracts or subcontracts for commercial items. (A) If (1) The original contract or subcontract was granted an exception from cost or pricing data requirements because the price agreed upon was based on adequate price competition, catalog or market prices of commercial items, or prices set by law or regulation; and (2) the modification (to the contract or subcontract) is not exempted based on one of these exceptions, then the Contractor may provide information to establish that the modification would not change the contract or subcontract from a contract or subcontract for the acquisition of a commercial item to a contract or subcontract for the acquisition of an item other than a commercial item. (B) For a commercial item exception, the Contractor may provide information on prices at which the same item or similar items have been sold in the commercial market. (2) The Contractor grants the Contracting Officer or an authorized representative the right to examine, at any time before award, books, records, documents, or other directly pertinent records to verify any request for an exception under this clause, and the reasonableness of price. Access does not extend to cost or profit information or other data relevant solely to the Contractor's determination of the prices to be offered in the catalog or marketplace. (3) By submitting information to qualify for an exception, an offeror is not representing that this is the only exception that may apply. (b)(1) The Contractor shall submit cost or pricing data on Standard Form (SF) 1411, Contract Pricing Proposal Cover Sheet (Cost or Pricing Data Required), with supporting attachments prepared in the following format: (2) As soon as practicable after agreement on price, but before award (except for unpriced actions), the Contractor shall submit a Certificate of Current Cost or Pricing Data, as prescribed by FAR 15.804-4. 52.244-6 SUBCONTRACTS FOR COMMERCIAL ITEMS AND COMMERCIAL COMPONENTS (OCT 1995) (a) Definition. Commercial item, as used in this clause, has the meaning contained in the clause at 52.202-1, Definitions. Subcontract, as used in this clause, includes a transfer of commercial items between divisions, subsidiaries, or affiliates of the Contractor or subcontractor at any tier. (b) To the maximum extent practicable, the Contractor shall incorporate, and require its subcontractors at all tiers to incorporate, commercial items or nondevelopmental items as components of items to be supplied under this contract. (c) Notwithstanding any other clause of this contract, the Contractor is not required to include any FAR provision or clause, other than those listed below to the extent they are applicable and as may be required to establish the reasonableness of prices under Part 15, in a subcontract at any tier for commercial items or commercial components: (1) 52.222-26, Equal Opportunity (E.O. 11246); (2) 52.222-35, Affirmative Action for Special Disabled and Vietnam Era Veterans (38 U.S.C. 4212(a)); (3) 52.222-36, Affirmative Action for Handicapped Workers (29 U.S.C. 793); and (4) 52.247-64, Preference for Privately Owned U.S.-Flagged Commercial Vessels (46 U.S.C. 1241) (flow down not required for subcontracts awarded beginning May 1, 1996). (d) The Contractor shall include the terms of this clause, including this paragraph (d), in subcontracts awarded under this contract. 52.252-6 AUTHORIZED DEVIATIONS IN CLAUSES (APR 1984) (a) The use in this solicitation or contract of any Federal Acquisition Regulation (48 CFR Chapter 1) clause with an authorized deviation is indicated by the addition of "(DEVIATION)" after the date of the clause. (b) The use in this solicitation or contract of any Department of Defense FAR Supplement (48 CFR Chapter 2) clause with an authorized deviation is indicated by the addition of "(DEVIATION)" after the name of the regulation. C. Defense FAR Sup Clauses in Full Text 252.247-7023 TRANSPORTATION OF SUPPLIES BY SEA (NOV 1995) (a) Definitions. As used in this clause -- (1) "Components" means articles, materials, and supplies incorporated directly into end products at any level of manufacture, fabrication, or assembly by the Contractor or any subcontractor. (2) "Department of Defense" (DoD) means the Army, Navy, Air Force, Marine Corps, and defense agencies. (3) "Foreign flag vessel" means any vessel that is not a U.S.-flag vessel. (4) "Ocean transportation" means any transportation aboard a ship, vessel, boat, barge, or ferry through international waters. (5) "Subcontractor" means a supplier, materialman, distributor, or vendor at any level below the prime contractor whose contractual obligation to perform results from, or is conditioned upon, award of the prime contract and who is performing any part of the work or other requirement of the prime contract. However, effective May 1, 1996, the term does not include a supplier, materialman, distributor, or vendor of commercial items or commercial components. (6) "Supplies" means all property, except land and interests in land, that is clearly identifiable for eventual use by or owned by the DoD at the time of transportation by sea. (i) An item is clearly identifiable for eventual use by the DoD if, for example, the contract documentation contains a reference to a DoD contract number or a military destination. (ii) "Supplies" includes (but is not limited to) public works; buildings and facilities; ships; floating equipment and vessels of every character, type, and description, with parts, subassemblies, accessories, and equipment; machine tools; material; equipment; stores of all kinds; end items; construction materials; and components of the foregoing. (7) "U.S.-flag vessel" means a vessel of the United States or belonging to the United States, including any vessel registered or having national status under the laws of the United States. (b) The Contractor shall employ U.S.-flag vessels in the transportation by sea of any supplies to be furnished in the performance of this contract. The Contractor and its subcontractors may request that the Contracting Officer authorize shipment in foreign-flag vessels, or designate available U.S.-flag vessels, if the Contractor or a subcontractor believes that -- (1) U.S.-flag vessels are not available for timely shipment; (2) The freight charges are inordinately excessive or unreasonable; or (3) Freight charges are higher than charges to private persons for transportation of like goods. (c) The Contractor must submit any request for use of other than U.S.-flag vessels in writing to the Contracting Officer at least 45 days prior to the sailing date necessary to meet its delivery schedules. The Contracting Officer will process requests submitted after such date(s) as expeditiously as possible, but the Contracting Officer's failure to grant approvals to meet the shipper's sailing date will not of itself constitute a compensable delay under this or any other clause of this contract. Requests shall contain at a minimum - -- (1) Type, weight, and cube of cargo; (2) Required shipping date; (3) Special handling and discharge requirements; (4) Loading and discharge points; (5) Name of shipper and consignee; (6) Prime contract number; and (7) A documented description of efforts made to secure U.S.-flag vessels, including points of contact (with names and telephone numbers) with at least two U.S.-flag carriers contacted. Copies of telephone notes, telegraphic and facsimile message or letters will be sufficient for this purpose. (d) The Contractor shall, within 30 days after each shipment covered by this clause, provide the Contracting Officer and the Division of National Cargo, Office of Market Development, Maritime Administration, U.S. Department of Transportation, Washington, DC 20590, one copy of the rated on board vessel operating carrier's ocean bill of lading, which shall contain the following information -- (1) Prime contract number; (2) Name of vessel; (3) Vessel flag of registry; (4) Date of loading; (5) Port of loading; (6) Port of final discharge; (7) Description of commodity; (8) Gross weight in pounds and cubic feet if available; (9) Total ocean freight in U.S. dollars; and (10) Name of the steamship company. (e) The Contractor agrees to provide with its final invoice under this contract a representation that to the best of its knowledge and belief -- (1) No ocean transportation was used in the performance of this contract; (2) Ocean transportation was used and only U.S.-flag vessels were used for all ocean shipments under the contract; (3) Ocean transportation was used, and the Contractor had the written consent of the Contracting Officer for all non-U.S.-flag ocean transportation; or (4) Ocean transportation was used and some or all of the shipments were made on non-U.S.-flag vessels without the written consent of the Contracting Officer. The Contractor shall describe these shipments in the following format: ITEM CONTRACT DESCRIPTION LINE ITEMS QUANTITY TOTAL (f) If the final invoice does not include the required representation, the Government will reject and return it to the Contractor as an improper invoice for the purposes of the Prompt Payment clause of this contract. In the event there has been unauthorized use of non-U.S.-flag vessels in the performance of this contract, the Contracting Officer is entitled to equitably adjust the contract, based on the unauthorized use. (g) The Contractor shall include this clause, including this paragraph (g) in all subcontracts under this contract, which exceed the simplified acquisition threshold in Part 13 of the Federal Acquisition Regulation. 252.247-7024 NOTIFICATION OF TRANSPORTATION OF SUPPLIES BY SEA (NOV 1995) (a) The Contractor has indicated by the response to the solicitation provision, Representation of Extent of Transportation by Sea, that it did not anticipate transporting by sea any supplies. If, however, after the award of this contract, the Contractor learns that supplies, as defined in the Transportation of Supplies by Sea clause of this contract, will be transported by sea, the Contractor-- (1) Shall notify the Contracting Officer of that fact; and (2) Hereby agrees to comply with all the terms and conditions of the Transportation of Supplies by Sea clause of this contract. (b) The Contractor shall include this clause, including this paragraph (b), revised as necessary to reflect the relationship of the contracting parties, in all subcontracts hereunder, except (effective May 1, 1996) subcontracts for the acquisition of commercial items or components. D. AF FAR Sup Clauses in Full Text 5352.223-9000 ELIMINATION OF USE OF CLASS I OZONE DEPLETING SUBSTANCES (ODS) (MAY 1996) (a) It is Air Force policy to preserve mission readiness while minimizing dependency on Class I Ozone Depleting Substances (ODS), and their release into the environment, to help protect the Earth's stratospheric ozone layer. (b) Unless a specific waiver has been approved, Air Force procurements: (1) May not include any specification, standard, drawing or other document that requires the use of a Class I ODS in the design, manufacture, test, operation, or maintenance of any system, subsystem, item, component or process; and (2) May not include any specification, standard, drawing or other document that establishes a requirement that can only be met by use of a Class I ODS; (c) For the purposes of Air Force policy, the following are Class I ODS: (1) Halons: 1011, 1202, 1211, 1301, and 2402; (2) Chlorofluorocarbons (CFCs): CFC-11, CFC-12, CFC-13, CFC-111, CFC-112, CFC-113, CFC-114, CFC-115, CFC-211, CFC-212, CFC-213, CFC-214, CFC-215, CFC-216, and CFC-217, and the blends R-500, R-501, R-502, and R-503; and (3) Other Controlled Substances: Carbon Tetrachloride, Methyl Chloroform, and Methyl Bromide. (d) The Air Force has reviewed the requirements specified in this contract to reflect this policy. Where considered essential, specific approval has been obtained to continue use of the following substances: Substance Application/Use Quantity (lbs) NONE (e) To assist the Air Force in implementing this policy, the offeror/contractor is encouraged, but not required, to notify the contracting officer if any Class I ODS not specifically listed above is required in the performance of this contract. 5352.235-9000 SCIENTIFIC/TECHNICAL INFORMATION (STINFO) (JAN 1992) If not already registered, the Contractor shall register for Defense Technical Information Center (DTIC) service by contacting the following: Defense Technical Information Center ATTN: Registration Section (DTIC-BCS) Bldg 5 Cameron Station, Alexandria, Virginia 22304-6145 (703)274-6871 To avoid duplication of effort and conserve scientific and technical resources, the Contractor shall search existing sources in DTIC to determine the current state-of-the-art concepts, studies, etc. E. AFMC FAR Sup Clauses in Full Text 5352.212-9000 CONTRACTOR REPORTING REQUIREMENTS (JUL 1992) Any report required by 15 CFR 700, Subpart D, Section 700.13(d) of the Defense Priorities and Allocation System regulation relating to an actual or anticipated delayed shipment, reason for delay, and/or new projected shipment date is to be sent concurrently by the Contractor to both the Procuring Contracting Officer (PCO) and the Administrative Contracting Officer (ACO) within the specified ten (10) calendar days. 5352.215-9020 INCORPORATION OF CONTRACTOR'S TECHNICAL PROPOSAL (DEC 1995) a. The following documents are incorporated herein by reference and made a part of this contract: CREE Research technical proposal entitled, "Low Defect Density Short Wavelength III-Nitride Laser Diode," dated 95DEC07. b. Nothing contained in the contractor's technical proposal shall constitute a waiver to any other requirement of this contract. In the event of any conflict between the contractor's technical proposal and any other requirement of the contract, the conflict shall be resolved in accordance with the Order of Precedence clause. For purposes of the Order of Precedence clause the document(s) listed above shall rank last. c. The detailed technical content of the contractor's proposal was an important factor in the selection of the contractor for award of this contract. The documents listed above are now contractually binding. The contractor shall not change or otherwise deviate from the content of these documents without prior written approval from the contracting officer. d. If it is necessary to change the performance, design, configuration, or other items specified in the technical proposal in order to comply with the requirements of the contract clauses, special contract requirements, or statement of work, the contract shall be modified appropriately. e. The contractor agrees that the documents listed above will reflect the results/responses to all discussions, Clarification Requests (CRs), and/or Deficiency Reports (DRs) issued during the negotiation process. If, after contract award, it is discovered that changes made during negotiations were not incorporated in the SOW and/or technical proposal, such changes to the contractor's documents shall be considered administrative in nature and shall be made by unilateral modification to the contract, at no change in contract cost or price or other terms and conditions. 5352.228-9004 INSURANCE CLAUSE IMPLEMENTATION (FEB 1996) The contractor shall obtain and maintain the minimum kinds and amounts of insurance during performance of this contract as specified by FAR 28.307-2 and contemplated by FAR 52.228-5 and/or 52.228-7. SECTION J - LIST OF DOCUMENTS, EXHIBITS, AND OTHER ATTACHMENTS 1. Exhibit A - Contract Data Requirements List (CDRL), DD Form 1423, dated 96APR11, on 2 pages with backup on 6 pages for a total of 8 pages. - -23- F19628-96-C-0066 EX-10 4 EXHIBIT 10.53 [*] -- Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. PURCHASE AGREEMENT between CREE RESEARCH, INC. Durham, North Carolina, USA ("Seller") and SIEMENS AKTIENGESELLSCHAFT Berlin and Munich Federal Republic of Germany ("Purchaser") Dated September 6, 1996 TABLE OF CONTENTS 1. CONTRACT DOCUMENTS; DEFINITIONS................................................................................1 1.1. Documents...........................................................................................1 1.2. Definitions.........................................................................................1 2. PURCHASE AND SALE..............................................................................................2 2.1. Purchase Commitment.................................................................................2 2.2. Price...............................................................................................2 2.3. Payment Terms.......................................................................................2 3. DELIVERY.......................................................................................................3 3.1. Shipment Schedule...................................................................................3 3.2. Packaging...........................................................................................3 3.3. Manner of Shipment..................................................................................3 4. NON-CONFORMING SHIPMENTS.......................................................................................3 4.1. Reporting of Claims.................................................................................3 4.2. Remedies for Non-Conforming Shipments...............................................................4 4.3. Compliance with Instructions........................................................................4 5. TECHNICAL COOPERATION..........................................................................................4 6. WARRANTIES.....................................................................................................4 6.1. Limited Warranty....................................................................................4 6.2. Warranty Disclaimer.................................................................................5 7. INDEMNIFICATION................................................................................................5 7.1. By Seller...........................................................................................5 7.2. Conditions of Indemnification.......................................................................5 8. LIMITATIONS OF LIABILITY.......................................................................................5 9. FORCE MAJEURE..................................................................................................5 10. TERMINATION...................................................................................................6 10.1. Termination upon Default or Insolvency.............................................................6 10.2. Effect of Termination..............................................................................6 11. CONFIDENTIAL INFORMATION......................................................................................6 11.1. Definition.........................................................................................6 Page i 11.2. Identification.....................................................................................6 11.3. Confidentiality Obligations........................................................................7 11.4. Terms of Agreement.................................................................................7 12. ADDITIONAL UNDERTAKINGS.......................................................................................7 12.1. Publicity..........................................................................................7 12.2. Use of Trademarks, Etc.............................................................................7 13. GENERAL.......................................................................................................8 13.1. Notices............................................................................................8 13.2. Authority; No Conflicting Obligations..............................................................8 13.3. Relationship of the Parties........................................................................8 13.4. Assignment.........................................................................................8 13.5. Dispute Resolution.................................................................................8 13.6. Severability.......................................................................................9 13.7. Amendments; Waiver.................................................................................9 13.8. No Implied License.................................................................................9 13.9. Export Regulation..................................................................................9 13.10. Enforcement Costs.................................................................................9 13.11. Governing Law.....................................................................................9 13.12. Construction......................................................................................9 13.13. United Nations Convention.........................................................................9 13.14. Entire Agreement..................................................................................9
Page ii [*] -- Certain information omitted and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. PURCHASE AGREEMENT PURCHASE AGREEMENT (this "Agreement"), made and effective as of the 6th day of September, 1996 (the "Effective Date"), by and between CREE RESEARCH, INC. (hereinafter referred to as "Seller"), a corporation organized under the laws of the State of North Carolina, the United States of America, and SIEMENS AKTIENGESELLSCHAFT (hereinafter referred to as "Purchaser"), a corporation organized under the laws of the Federal Republic of Germany. Recitals WHEREAS, Seller is engaged in the business, among others, of manufacturing and selling LED's in die form; and WHEREAS, Purchaser is engaged in the business, among others, of manufacturing LED's packaged in lamp form and desires to purchase a quantity of custom LED die products from Seller; and WHEREAS, the parties have agreed on the terms and conditions under which Seller will sell such LED's to Purchaser and desire to memorialize such terms in this Agreement; and NOW, THEREFORE, in consideration of the foregoing and the mutual obligations undertaken in this Agreement, the parties agree as follows: 1. CONTRACT DOCUMENTS; DEFINITIONS 1.1. Documents. The following documents are annexed to and made a part of this Agreement: (a) Schedule 1 -- Quantity and Shipment Schedule (b) Schedule 2 -- Price and Payment Schedule (c) -- Product Specifications (d) Schedule 4 -- Technical Cooperation 1.2. Definitions. For purposes of this Agreement, the terms defined in this Section 1.2 shall have the meaning specified and such definitions shall apply to both singular and plural forms: (a) "Affiliates" of a designated corporation, company or other entity (as such term is used in Articles 11 and 12) means all entities which control, are controlled by, or are under common control with the named entity, whether directly or through one or more intermediaries. For purposes of this definition "controlled" and "control" mean ownership of more than fifty percent (50%) of the voting capital stock or other interest having voting rights with respect to the election of the board of directors or similar governing authority. (b) "Confidential Information" shall have the meaning defined in Section 11.1. (c) "Product Specifications" means the specifications set forth in Schedule 3, as the same may be amended from time to time by mutual written agreement of the parties or pursuant to the terms and conditions set forth in such schedule. (d) "Products" mean LED chips conforming to the Product Specifications. 2. PURCHASE AND SALE 2.1. Purchase Commitment. (a) Purchaser will purchase from Seller and Seller will sell to Purchaser the quantity of Products shown in Schedule 1, subject to and in accordance with the terms and conditions of this Agreement. (b) Concurrently with the execution of this Agreement, Purchaser shall issue a purchase order to Seller evidencing Purchaser's commitment to purchase Products hereunder. The terms and conditions of this Agreement shall govern the purchase of Products hereunder notwithstanding any contrary provisions of such purchase order. (c) Purchaser shall be entitled to reduce the quantity of Products to be purchased under this Agreement only under the terms and conditions and upon payment of the cancellation charges specified in Schedule 1. 2.2. Price. (a) The purchase price of the Products is set forth in Schedule 2. (b) The prices stated in this Agreement do not include transportation or insurance costs, or any sales, use, excise or other taxes, duties, fees or assessments imposed by any jurisdiction. (c) All applicable taxes, duties, fees or assessments imposed by any jurisdiction with respect to the purchase of the Products (other than taxes on Seller's net income) will be paid by Purchaser. Any taxes, duties, fees or assessments at any time paid by Seller which are to be paid by Purchaser under this Agreement shall be invoiced to Purchaser and reimbursed to Seller. 2.3. Payment Terms. (a) Purchaser will pay for Products to be purchased under this Agreement in accordance with the payment terms in Schedule 2. (b) Payment will be made in U.S. dollars by wire transfer to an account designated in writing by Seller, without reduction for any currency exchange or other charges. (c) Seller will provide Purchaser an invoice and/or shipping documentation for each shipment showing the quantity shipped, the applicable price, any amounts prepaid by Purchaser for the shipment, and any taxes, duties, fees or other assessments due from Purchaser with respect to the shipment. Page 2 (d) Amounts not paid when due under this Agreement shall accrue interest at the rate of twelve percent (12%) per annum or, if less, the maximum rate permitted by law. 3. DELIVERY 3.1. Shipment Schedule. (a) Seller will use all commercially reasonable efforts to ship Products in accordance with the shipment schedule set forth in Schedule 1. Seller reserves the right to ship quantities prior to the scheduled dates; provided, however, that no shipment shall be made such that Purchaser receives the shipment earlier than the calendar month immediately preceding the month such quantity was originally scheduled to be shipped. (b) Seller shall be deemed in default due to a delay in meeting the shipment schedule set forth in Schedule 1 only if, immediately after the last day of any calendar month specified therein, the cumulative quantity actually shipped by Seller is less than ninety-five percent (95%) of the cumulative quantity due to have been shipped. (c) In the event of a default by Seller as provided in Section 3.1(b), Purchaser shall be entitled to liquidated damages of *** percent (*%) per week of the purchase price of the delayed Products, subject to a maximum of *** percent (**%) of such purchase price. If Product shipments are delayed six weeks or more due to circumstances within Seller's reasonable control, then in lieu of the foregoing liquidated damages Purchaser may claim damages actually resulting from the delay up to ***** percent (**%) of the purchase price of the delayed Products. 3.2. Packaging. Seller will ship Products in Seller's standard packaging or packaged in such other manner as the parties may mutually agree in writing. 3.3. Manner of Shipment. Products shall be shipped F.O.B. Seller's manufacturing facilities by delivery to a transportation company designated by Purchaser. Products shall be deemed delivered to Purchaser when delivered to the transportation company at the shipping point. Title and risk of loss or damage shall pass to Purchaser upon delivery. All transportation charges and expenses, including the cost of insurance against loss or damage in transit, shall be Purchaser's sole responsibility. Any such amounts paid by Seller will be invoiced to and paid by Purchaser. 4. NON-CONFORMING SHIPMENTS. 4.1. Reporting of Claims. Except for warranty claims under Article 6, in the event any shipment does not conform to the ordered amount and type of Product or suffers other faults or defects clearly discernible upon reasonable inspection, such non-conformity will be reported in writing to Seller as soon as possible and in any event no later than thirty (30) days after shipment of the Product to Purchaser. All other non-conformities in shipments shall be reported in Page 3 writing to Seller promptly upon discovery. If not so reported, the non-conformity shall be deemed waived. 4.2. Remedies for Non-Conforming Shipments. Seller's sole obligation with respect to shipments determined to be non-conforming shall be, at its option, to replace the non-conforming Products (with shipment at Seller's expense) or to issue a credit to Purchaser in the amount of the price paid for such Products with interest calculated at the rate of twelve percent (12%) per annum from the date of payment to the date of credit. This paragraph states Seller's sole obligations with respect to non-conforming shipments. After acceptance of any shipment Purchaser's sole remedies for defects in such shipment shall be as provided in the warranty provisions of this Agreement. 4.3. Compliance with Instructions. In addition to such other duties as may be imposed by law, Purchaser will comply with all of Seller's reasonable instructions regarding rejected goods. If Purchaser incurs any expenses in complying with such instructions, Seller shall reimburse Purchaser for such expenses promptly upon receipt of Purchaser's written request therefor. 5. TECHNICAL COOPERATION Purchaser and Seller agree to cooperate in the development of improvements to the Products in the manner set forth in and subject to the terms and conditions of Schedule 4. 6. WARRANTIES 6.1. Limited Warranty. (a) Seller warrants to Purchaser that Products purchased from Seller under this Agreement will conform to and perform in accordance with the applicable Product Specifications. (b) This warranty is extended only to Purchaser and does not constitute a warranty to Purchaser's customers or any other person. This warranty shall not apply to any defect or failure to perform resulting in whole or in part from improper use, application, installation or operation, and Seller shall have no liability of any kind for failure of any equipment or other items in which the Products are incorporated. (c) All claims under this warranty must be reported in writing to Seller (with such report accompanied by the Product claimed to be defective, including the die "package" in the case of Products sold in die form) as soon as possible, but in any event no later than three hundred sixty (360) days after shipment of the Products to Purchaser. If not so reported, such claims shall be waived. (d) Seller's sole obligation with respect to Products determined not to meet the terms of this warranty shall be, at its option, to replace such Products or to issue a credit or refund to Purchaser in the amount of the price received by Seller for the Products. This paragraph states the exclusive remedy against Seller with respect to breach of the warranty given herein or other alleged defects in the Products. Page 4 6.2. Warranty Disclaimer. THE WARRANTY IN SECTION 6.1 ABOVE IS GIVEN IN LIEU OF ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, OR IMPOSED BY STATUTE OR OTHERWISE. ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE AND MERCHANTABILITY ARE EXPRESSLY DISCLAIMED BY SELLER. 7. INDEMNIFICATION 7.1. By Seller. (a) Seller at its expense will defend any claim or judicial action brought against Purchaser by a third party, and indemnify Purchaser against any liability for damages finally awarded in any such action, insofar as the same is based on a claim that Products purchased under this Agreement infringe any patent of a third party. (b) If any Products are held to be infringing and their use or sale enjoined, or if in the opinion of Seller any Products are likely to become the subject of such a claim of infringement, Seller may, in its sole discretion and at its own expense, procure a license which will protect Purchaser against such claim without cost to Purchaser, replace Seller's inventory of Products with non-infringing Products, or require return of Products in Seller's inventory and refund the price paid by Purchaser for such Products. (c) Seller shall have no obligation hereunder for or with respect to claims, actions or demands alleging infringement that arise by reason of combination of noninfringing items with any items not supplied by Seller. (d) This Section 7.1 states the entire liability of Seller with respect to any claim of infringement. 7.2. Conditions of Indemnification. Seller's obligations under the foregoing indemnity are subject to the condition that the Purchaser give the Seller: (1) prompt written notice of any claim or action for which indemnity is sought; (2) complete control of the defense and settlement thereof by Seller; and (3) cooperation of the Purchaser in such defense. The obligations under the foregoing indemnity are also subject to the condition that the Purchaser not enter into any compromise or settlement or make any admission of liability without the prior written consent of the Seller. 8. LIMITATIONS OF LIABILITY EXCEPT AS PROVIDED IN ARTICLE 7, NEITHER SELLER NOR PURCHASER WILL HAVE ANY LIABILITY TO THE OTHER FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT OR SPECIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF ANY PRODUCTS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS LIMITATION APPLIES REGARDLESS OF WHETHER SUCH CLAIM IS BASED ON TORT, CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR ANY OTHER THEORY. This limitation shall not apply if liability is mandatory by law, as for example in cases of intent or gross negligence. Page 5 9. FORCE MAJEURE Seller shall not be in default or liable for any delay or failure in performance of this Agreement due to strike, lockout, riot, war, fire, act of God, accident, delays caused by Purchaser or compliance with any law, regulation, order or direction, whether valid or invalid, of any governmental authority or instrumentality thereof or due to any causes beyond its reasonable control, whether similar or dissimilar to the foregoing and whether or not foreseen. Seller shall use all commercially reasonable efforts to avoid or remove such causes of non-performance or to limit the impact of the event on Seller's performance and shall continue performance with the utmost dispatch whenever such causes as removed. 10. TERMINATION 10.1. Termination upon Default or Insolvency. Either party may terminate this Agreement by giving written notice of termination to the other: (a) if the other party commits a material breach of its obligations under this Agreement or any other agreement between the parties (including but not limited to the Development, License and Supply Agreement dated October 25, 1995) and does not cure such breach within thirty (30) after receipt of written notice of the breach from the non-breaching party; or (b) if the other party becomes insolvent, or any voluntary or involuntary petition for bankruptcy or for reorganization is filed by or against the other party, or a receiver is appointed with respect to all or any substantial portion of the assets of the other party, or a liquidation proceeding is commenced by or against the other party; provided that, in the case of any involuntary petition or proceeding filed or commenced against a party, the same is not dismissed within sixty (60) days. 10.2. Effect of Termination. Nothing in this Article 10 shall affect, be construed or operate as a waiver of any right of the party aggrieved by any breach of this Agreement to recover any loss or damage incurred as a result of such breach, either before or after the termination hereof. 11. CONFIDENTIAL INFORMATION 11.1. Definition. "Confidential Information" means any information received by one party or its Affiliates (the "receiving party") from the other party or its Affiliates (the "disclosing party") and which the receiving party has been informed or has a reasonable basis to believe is confidential to the disclosing party, unless such information: (1) was known to the receiving party prior to receipt from the disclosing party; (2) was lawfully available to the public prior to receipt from the disclosing party; (3) becomes lawfully available to the public after receipt from the disclosing party, through no act or omission on the part of the receiving party; (4) corresponds in substance to any information received in good faith by the receiving party from any third party without restriction as to confidentiality; or (5) is independently developed by an employee or agent of the receiving party who has not received or had access to such information. Page 6 11.2. Identification. Information which the disclosing party wishes to have treated as Confidential Information under this Agreement shall be identified at the time of disclosure as "confidential" by marking, or in the case of oral disclosures, shall be confirmed as such in writing within thirty (30) days following the oral disclosure. 11.3. Confidentiality Obligations. (a) Each party agrees to maintain Confidential Information received from the other in confidence and neither use nor disclose such Confidential Information, without the prior written approval of the disclosing party, except as required to comply with any order of a court or any applicable rule, regulation or law of any jurisdiction or as provided in Section 11.4. (b) In the event that a receiving party is required by judicial or administrative process to disclose Confidential Information of the disclosing party, it shall promptly notify the disclosing party and allow the disclosing party a reasonable time to oppose such process. (c) Within each party and their respective Affiliates, Confidential Information shall be disclosed only on a need-to-know basis. Each party shall protect Confidential Information of the other by using the same degree of care, but not less than a reasonable degree of care, to prevent unauthorized disclosure or use as that party uses to protect its own confidential information of like nature. (d) The foregoing obligations shall remain in force for five (5) years following any termination or expiration of this Agreement. (e) Each party represents and warrants to the other that its employees, agents or consultants having access to any Confidential Information of the other party shall be subject to a valid, binding and enforceable agreement to maintain such Confidential Information in confidence. (f) Each party agrees upon request of the other party to return all Confidential Information received from the other party under this Agreement. 11.4. Terms of Agreement. Purchaser and Seller agree that the terms of this Agreement shall be treated as Confidential Information of each other subject to this Article 11; provided, however, that either party may, upon notice to the other, make such public disclosures regarding this Agreement as in the opinion of counsel for such party are required by applicable securities laws or regulations. 12. ADDITIONAL UNDERTAKINGS 12.1. Publicity. The parties agree to cooperate in the preparation of a mutually acceptable joint press release, to be issued promptly following execution of this Agreement, but shall otherwise make no public announcement regarding the terms of this Agreement. Page 7 12.2. Use of Trademarks, Etc. Neither party will, without the prior written consent of the other, (a) use in advertising, publicity or otherwise in connection with any Products sold under this Agreement, any trade name, trademark, trade device, service mark, or symbol owned by the other party or its Affiliates; or (b) represent, either directly or indirectly, that any product of such party or its Affiliates is a product manufactured by the other party or its Affiliates, or vice versa. 13. GENERAL 13.1. Notices. All notices under this Agreement shall be in writing and sent by prepaid airmail post, by reputable courier service, or by facsimile message (with a confirmation copy concurrently dispatched by prepaid airmail post or courier service), to the addresses of the respective parties as set forth by their signatures below or to such other address as the party may hereafter specify by written notice so given. Notices shall be effective upon receipt at the location of the specified address. 13.2. Authority; No Conflicting Obligations. Each party warrants that its has all requisite power and authority to enter into and perform this Agreement, and that it has no agreement with any third party or commitments or obligations which conflict in any way with its obligations hereunder. 13.3. Relationship of the Parties. The relationship of Purchaser and Seller under this Agreement is intended to be that of independent contractors. Nothing herein shall be construed to create any partnership, joint venture or agency relationship of any kind. Neither party has any authority under this Agreement to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking with any third party. 13.4. Assignment. Except as expressly provided for in this Agreement, neither this Agreement nor any right or obligations hereunder shall be assignable by either party without the prior written consent of the other party and any purported assignment without such consent shall be void. Either party may assign this Agreement without such consent in connection with the sale or transfer of all or substantially all of the assets of the assigning party. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment shall relieve any party of responsibility for the performance of its obligations hereunder. 13.5. Dispute Resolution. Any disputes or claims arising from this Agreement or its breach shall be submitted to and resolved exclusively by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration shall be conducted by three (3) arbitrators appointed in accordance with such rules. The place of arbitration shall be in Geneva, Switzerland. An award rendered in the arbitration shall be Page 8 final and binding upon the parties and judgment may be entered thereon in any court of competent jurisdiction. 13.6. Severability. If any provision of this Agreement is found invalid or unenforceable, the remaining provisions will be given effect as if the invalid or unenforceable provision were not a part of this Agreement. 13.7. Amendments; Waiver. This Agreement may not be amended except in a writing signed by the authorized representatives of both parties. No waiver of any provision of this Agreement shall be effective unless made in writing and signed by the party sought to be charged therewith. The failure of either party to enforce any provision of this Agreement shall not constitute or be construed as a waiver of such provision or of the right to enforce it at a later time. 13.8. No Implied License. Nothing in this Agreement shall be construed to convey any license under any patent, copyright, trademark or other proprietary rights owned or controlled by either party, whether relating to the Products sold or any other matter. 13.9. Export Regulation. Purchaser shall comply in all respects with all laws and regulations of the United States government or any agency thereof pertaining to exports. 13.10. Enforcement Costs. The prevailing party in any arbitration or judicial action brought to enforce the provisions of this Agreement shall be entitled to recover its costs and expenses, including reasonable attorneys' fees, incurred in filing and prosecuting or defending such action. 13.11. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of Switzerland, without regard to conflicts of laws principles. 13.12. Construction. The captions contained in this Agreement are for reference only and shall not be used in its construction or interpretation. The provisions of this Agreement shall be construed and interpreted fairly to both parties without regard to which party drafted the same. 13.13. United Nations Convention. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. Page 9 13.14. Entire Agreement. This Agreement sets forth the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements and understandings between the parties, whether oral or written, relating to such subject matter. IN WITNESS WHEREOF, the parties, through their respective duly authorized officers, have executed this Agreement to be effective as of the Effective Date set out in the preamble hereto. CREE RESEARCH, INC. SIEMENS AKTIENGESELLSCHAFT By /s/ F. Neal Hunter By /s/ R. Mueller /s/ C. Hagan Name F. Neal Hunter Name R. Mueller C. Hagan Title President Title President Opto Semicond. VP Fin.&Adm. Date Sept. 11, 1996 Date Sept. 11, 1996 Sept. 11, 1996 Address for Notices Address for Notices Cree Research, Inc. Siemens AG 2810 Meridian Parkway, Suite 176 Semiconductor Group, Opto Semiconductors Durham, North Carolina 27713 Wernerwerkstr. 2 USA 8400 Regensburg 1, Germany Attention: President Attention: R. Mueller and C. Hagan Fax No: (919) 361-4630 Fax No: 49 341 202 2951 Page 10 *=Information for which the company has sought confidential treatment pursuant to applicable SEC rules. SCHEDULE 1 Quantity and Shipment Schedule A. Quantity. Purchaser will purchase ********** units of the Product (one unit being one LED die) from Seller under this Agreement. 2. Shipment Schedule. The shipment schedule for the Products is as follows, with each monthly quantity commencing in ************* to be shipped in approximately equal installments on a weekly basis during the month: ------------------------------------ -------------------------- Month Quantity ------------------------------------ -------------------------- * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ------------------------------------ -------------------------- ------------------------------------ -------------------------- Total * ------------------------------------ -------------------------- *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** *********************************************************************** Seller will use all commercially reasonable efforts to ramp up its manufacturing capacity as necessary meet the shipment schedule above. Without limiting the foregoing, in order to provide a margin of safety to meet such schedule, Seller will use all commercially reasonable efforts to increase its capacity to manufacture Products available for shipment under this Agreement to a minimum planned capacity of ********* units per month by the end of **************. If Seller determines that such increase will not be completed by that date, Seller will promptly notify Purchaser of the delay and Seller and Purchaser shall in good faith negotiate and use their best efforts to implement a mutually agreeable emergency program to rectify the delay. Page 11 3. Delay and Cancellation of Shipments. Purchaser shall be entitled to delay or cancel shipment of all or any portion of the quantities scheduled to be shipped during the period from ************* through ***************** under the following terms and conditions: (a) Purchaser may without charge reschedule shipment of such quantities to a date not later than ***************** provided Purchaser gives Seller written notice at least ninety (90) days prior to the beginning of the calendar month in which such quantities are scheduled to be shipped. Purchaser's notice must specify the quantities to be deferred and the calendar month in which shipment of such quantities is to be made. In no event, however, shall Seller be obligated to ship more than ********* units in any calendar month. Subject to the foregoing, a shipment may be rescheduled any number of times under this paragraph. (b) Purchaser may cancel shipment of such quantities provided Purchaser pays Seller a cancellation charge of $******* per unit for all quantities canceled and gives Seller written notice specifying the canceled quantities at least ninety (90) days prior to the beginning of the calendar month in which such quantities are scheduled to be shipped. The cancellation charges shall be due and payable within thirty (30) days after the date notice of cancellation is given. The parties agree that the amount of such cancellation charges represents a reasonable estimate of Seller's damages resulting from cancellation of the shipments scheduled during the period from *********** through *************** and shall be due and payable as liquidated damages and not as a penalty. Page 12 *=Information for which the company has sought confidential treatment pursuant to applicable SEC rules. SCHEDULE 2 Price and Payment Schedule 1. Prices. The prices for Products purchased under this Agreement shall be as follows:
--------------------------------------- ------------------------- ------------------------- Incremental Quantities Shipped Unit Price (US$) Extended Price --------------------------------------- ------------------------- ------------------------- * * * * * * * * * * * * --------------------------------------- ------------------------- ------------------------- --------------------------------------- ------------------------- ------------------------- Total * --------------------------------------- ------------------------- -------------------------
Before shipment of more than ********** units under this Agreement, representatives of Seller and Purchaser will meet to review the price applicable to quantities in excess of ********** units. If mutually agreed the parties may reduce the price stated above. Purchaser acknowledges that the Products to be shipped hereunder have different specifications than the standard products generally offered by Seller and that the prices stated above may be higher than the prices Seller charges for its standard products. If Seller commences offering a standard product having the same specifications as the Products to be purchased under this Agreement, and if the prices charged by Seller for purchase of the standard product, under terms and conditions comparable to those of this Agreement, are less than the prices applicable to the Products not then shipped hereunder, Seller will offer in writing to amend this Agreement to reduce the prices applicable to Products not then shipped hereunder to the prices Seller charges for the standard product. 2. Payment Terms. The purchase price of the first ********* units, or $*********, shall be due and payable in ********* equal installments on or before *********************** and *******************. The purchase price of the next ********** units, or $*********, shall be due and payable in ****** equal installments on **********************************************************************. The purchase price of the remaining units shall be invoiced to Purchaser upon shipment and shall be due and payable within ten (10) days from the date of the invoice. If Seller fails to ship Products in accordance with the shipment schedule set forth in Schedule 1 and Purchaser terminates this Agreement on account of such failure in accordance with Section 10.1, then upon such termination Seller refund to Purchaser any payment made in advance for Products not then shipped. Seller agrees to grant Purchaser a security interest in certain manufacturing equipment -- namely, two epi reactor systems to be ordered by Seller upon or promptly after execution of this Agreement -- to secure such obligation of Seller to refund any payment made in advance for Products not shipped. The security interest shall be granted pursuant to a mutually agreeable Security Agreement to be executed by the parties on or before October 1, 1997. Page 13 *=Information for which the company has sought confidential treatment pursuant to applicable SEC rules. SCHEDULE 3 Product Specifications 1. Product Specifications for Products purchased under this Agreement shall be the current published specifications for Seller's Model DH-85 LED die product (as set forth in Attachment A hereto), except that the Products purchased under this Agreement shall have: (a) ************************************************************** (b) ************************************************************** 2. Seller may elect to substitute a version of the Products ************************************************ subject to Purchaser's approval which shall be given under the terms and conditions set forth below. Commencing thirty (30) days after the date of such approval, or such earlier date as may be agreed by the parties, the Product Specifications applicable to shipments made thereafter shall be the specifications of the new version supplied by Seller as provided below, and Seller may not ship the original version without Purchaser's prior written consent. (a) The new version must meet the original specifications except that ********************************************************* ************************************************************** *************************************************************. (b) Seller will provide Purchaser with production prototypes of the new version manufactured from wafers from at least three different epi runs and will provide Purchaser the specifications applicable to the new version and such qualification data as may then be available to Seller. (c) Purchaser will give Seller notice of Purchaser's approval or disapproval within seventy-five (75) days after receipt of the prototypes and specifications. (d) Purchaser may withhold its approval only if new version does not meet the minimum specifications described in (a) above. Page 14 *=Information for which the company has sought confidential treatment pursuant to applicable SEC rules. SCHEDULE 4 Technical Cooperation 1. Seller and Purchaser intend to work to improve the forward voltage, brightness and ESD of the Product (with an ESD target of *********) and to develop a conductive buffer layer version. Such efforts shall be conducted as part of the Joint Development Program under the Development, License and Supply Agreement dated October 25, 1995 between the parties (the "Development Agreement"), and all of the terms and conditions of the Development Agreement (including without limitation the provisions regarding joint ownership of inventions) shall be applicable to such work. 2. To facilitate such additional work in the Joint Development Program, Purchaser agrees with Seller as follows: (a) Purchaser will make available to Seller, at Seller's facilities for a period of six months beginning not later than September 30, 1996, the full-time services of one scientist and one specialist, each with expertise in epitaxial growth, and two device fabrication engineers, all of whom shall be Purchaser's employees with adequate qualifications. (b) Purchaser will be responsible for all compensation, benefits and expenses of such personnel. (c) Purchaser's scientific personnel will work on tasks, in accordance with the mutually agreed Joint Development Program, which shall be directed to (i) improving device yields, (ii) improving forward voltage, brightness and ESD, and (iii) developing an improved product using a conductive buffer layer. (e) Purchaser's fabrication engineers will work on tasks, in accordance with the mutually agreed Joint Development Program, which shall be directed to the production of Products to be purchased by Purchaser and to providing assistance to Purchaser's scientific personnel in carrying out the work described above. (f) Purchaser agrees to hold Seller harmless from any claims by Purchaser's personnel arising from work performed at Seller's facilities, other than claims for intentional misconduct or gross negligence of Seller. (g) Purchaser's personnel assigned to Seller may be required by Seller to execute an acknowledgment of confidentiality obligations in the form annexed hereto as Attachment B. Page 15 ATTACHMENT A Information attached in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. C430-DH85 PRODUCT SPECIFICATIONS ATTACHMENT A Information attached in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. ATTACHMENT A Information attached in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. ATTACHMENT A Information attached in its entirety and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2 of the Commission. ATTACHMENT B ACKNOWLEDGMENT OF CONFIDENTIALITY OBLIGATIONS As a condition of being permitted access to premises of Cree Research, Inc. ("Cree"), and to induce Cree to disclose to the undersigned certain confidential information, the undersigned, an employee of Siemens AG ("Siemens"), hereby acknowledges and represents as follows: 1. The undersigned has been advised that: (a) Siemens and Cree entered into a Development, License and Supply Agreement dated as of October 25, 1995 (the "Development Agreement"). (b) The Development Agreement imposes certain obligations regarding "Confidential Information" (as defined in the agreement) disclosed by either party to the other. (c) Siemens and Cree represented and warranted to each other in the Development Agreement that their respective employees having access to Confidential Information of the other party would be subject to a valid, binding and enforceable agreement to maintain such information in confidence. (d) The Development Agreement defines Confidential Information, with certain exceptions, to include "any information, including data, diagrams, drawings, reports, samples, research results and in general all information or know-how, whether in written form or oral and whether on tape, diskette, paper, files or on whatever other material, . . . which the receiving party has been informed or has a reasonable basis to believe is confidential to the disclosing party or is treated by the disclosing party as confidential . . . ." (e) The Development Agreement further provides that: "In the event that visiting personnel are present on the premises of the host party, all information of the host Party received or learned by the visiting personnel shall be treated as Confidential Information of the host party, regardless of whether such information is related to the Subject Technology [as defined in the agreement] or marked or otherwise identified as confidential." 2. The undersigned hereby represents to Cree that he or she is subject to a valid, binding and enforceable agreement to maintain in confidence all Confidential Information of Cree disclosed to the undersigned pursuant to the Development Agreement, including all Confidential Information of Cree received or learned while present on Cree's premises. Signed this the ___ day of __________, 19____. Signature Typed or Printed Name EX-11 5 EXHIBIT 11 CREE RESEARCH, INC. EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED JUNE 30, 1996 1995 1994 1993 1992 -------------------------------------------------------------------------------- (In thousands, except per share data) PRIMARY Weighted average common stock outstanding 11,825,857 10,367,290 10,336,646 8,073,174 3,169,148 Net effect of dilutive stock options and warrants - based on treasury stock method 789,107 - - 529,152 - ------------- ------------- ------------- ---------------- ------------- Total 12,614,964 10,367,290 10,336,646 8,602,326 3,169,148 ============= ============= ============= ================ ============= Net income (loss) 242,855 (17,074) (430,883) 593,535 (978,340) ============= ============= ============= ================ ============= Net income (loss) per common share $ 0.02 $ (0.00) $ (0.04) $ 0.07 $ (0.31) ============= ============= ============= ================ ============= FULLY DILUTED Weighted average common stock outstanding 11,825,857 10,367,290 10,336,646 8,073,174 3,169,148 Net effect of dilutive stock options and warrants - based on treasury stock method 821,582 - - 647,940 - ------------- ------------- ------------- ---------------- ------------- Total 12,647,439 10,367,290 10,336,646 8,721,114 3,169,148 ============= ============= ============= ================ ============= Net income (loss) 242,855 (17,074) (430,883) 593,535 (978,340) ============= ============= ============= ================ ============= Net income (loss) per common share $ 0.02 $ (0.00) $ (0.04) $ 0.07 $ (0.31) ============= ============= ============= ================ =============
EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Cree Research, Inc. on Form S-8 (Numbers 33-98956 and 33-98958) and Form S-3 (Number 33-98728) of our report dated August 29, 1996, on our audits of the consolidated financial statements and financial statement schedule of Cree Research, Inc. as of June 30, 1996 and 1995, and for the years ended June 30, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. Raleigh, North Carolina September 27, 1996 EX-27 7 EXHIBIT 27
5 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 10,161,706 1,787,271 6,907,447 49,800 3,226,484 21,719,845 27,374,226 7,156,125 0 3,124,255 0 0 0 45,403,500 (4,731,412) 40,672,088 16,974,955 16,974,955 14,249,031 17,598,575 0 0 5,478 242,855 0 242,855 0 0 0 242,855 0.02 0.02
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