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Cree
Another Reflection

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By Wildhart
December 5, 2000

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How apropos of the current disputations arising out of our presidential election that we here on the Cree board should be involved in our own heated, contentious and controversial query. A query attendant, as the presidential incertitude, with a significant component of anxiety.

The question which appears to lie at the heart of this debate is "does Cree management have the integrity we as investors need in order to feel confident about our investment in the company's future?" An ancillary question is "do the issues being debated at this time alter the trajectory of the companies growth?"

Clearly, the news stories swirling around Cree Inc. impugning the character of various transactions of the company necessitate a review of these issues.

Let's begin answering this question by briefly looking over Cree's history. Cree was incorporated in 1987 and, I believe, went public in 1993. It began as Cree Research and grew past being simply a research organization into a significant proprietor of the composite semiconductors SiC, GaN and other useful materials. Thus, at the beginning of this year changed its name from Cree Research to Cree Inc.

Over the years Cree has become the world wide leader in producing high quality SiC to such a degree that is has a virtual monopoly in this regard. It has about 70 patents which protects it methodologies and creates high barriers to entry for competitors.

Cree has also utilized the SiC it produces to manufacture commercially desirable products such as gemstones, LEDs and, most recently, RF devices. In research are Blue Lasers and Power Devices.

LED growth yoy last qtr was 120% with respect to volume and 146% with respect to revenue. This difference is due to the mix of products shifting to hb-LED ie from 34% the year before to 80% this year. During this time Cree has met the standard of decreasing ASP by 50% per year while increasing both production and margins. The 5 years since Cree began to produce commercially viable LEDs has seen it become the world leader with 34% of the market, beating out Nichia with 31%.

As the volume of LEDs purchased by customers has grown LEDs have taken up an increasing percentage of SiC production which has more than offset the decreasing contribution of SiC by gemstones.

Since these gemstones are one of the key issues at the heart of this debate a quick review of this will be useful. At one time gemstones made up a significant contribution in percentage terms of Cree's revenues. It has now dwindled to nil. I have always been of the opinion that the idea of creating the gemstones was a good move for Cree. Remember that SiC is a material looking for a market. Therefore, the management is clearly acting within its fiduciary responsibility to its shareholders to find and or create markets for its products. The moissanite endeavor is clearly an attempt to create a market. I see nothing wrong with this. That there was a familial relationship involved with this is not intrinsically problematic. That the moissanite project has yet to pan out as hoped, also, is not indicative of a lack of integrity.

I would argue further that the business that was done with Charles and Colvard (CC) was helpful to the company in previous years and therefore supportive of its ongoing research in other endeavors that would be commercially far more attractive then gemstones but were not at that time productive of commercially viable or supportive products. Now those products, ie LEDs, have overwhelmed the need for gemstones. Gemstone market would be nice and may yet emerge however it did serve the corporation at one point and shouldn't be dismissed as simply some sort of "scheme". Another way of viewing this is that at one point the gemstone manufacturing my have been one of the highest best uses of corporate resources and no longer fills that function.

The final comment with regards to the CC relationship is that I see no lack of integrity. I do see behavior on part of management to maximize valuation of its stock by making choice of doing legitimate business in one way vs equally legitimate other way.

This brings me to MVIS. When the MVIS deal was announced I loved the arrangement. Cree invests in a company and the company turns around and pays Cree to do research for it. In order for the company to succeed it needs Cree. Cree may be the only outfit in the world that could produce the research necessary to create the edge emitting hb-LED that is needed by MVIS. Now, what I initially thought was smart business is being impugned as chicanery. Again, it comes back to a fiduciary responsibility. What arrangement between MVIS and CREE is best for CREE. Again, Cree is wise to create markets for its products. Cree is wise to own a portion of that company with a huge market potential creating added value on materials purchased from Cree. Has Cree's conduct in setting up the relationship between itself and MVIS violated any generally accepted accounting standards or SEC regulations. If the answer is "no" then what we have is smart business not fraudulence. Strategically deploying your assets to maximize shareholder value should be applauded not denigrated. I invest in you and you give me back the money along with equity because without me you can't create what you need. After I create the enabling technology your product has huge market potential of which I own a portion and which I was paid to create. I have also helped create more markets for my core products. A rulemaking proposition or lack of integrity? We all need to decide this one.

Has Cree's management struck me as knowledgeable, credible, dependable. YES. Have the facts of its business changed? NO. Is its LED business growing at a Gorilla pace? YES. Does it have a monumental IP advantage with certain explosively valuable composite semiconductors and the where-with-all to turn that advantage into a river of cash flow? YES. Is it recognized as the worldwide leader in it field by its peers? YES. Has the expected trajectory of its growth rate been changed by the recent so called revelations? NO.

Finally, we arrive back at the original question. Does management have the integrity we as shareholders need to remain investors? Integrity is a hard thing to know. The dealings in question can be construed in various lights depending on the perspective you choose to hold. I have been impressed with management and its choices up to now. Cree has in fact grown and does in fact produce extraordinary products. Who has more integrity Herb Greenberg and Marc Cohodes or Cree management? Who do you trust more Cree or Greenberg and Cohodes? If you trust Greenberg and Cohodes than sell the stock and find an investment of which these guys approve. If you believe that Hunter et. al. have more integrity than hang onto your shares.

Wildhart
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