Cree, as my Investment

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By Imshaken
August 22, 2002

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Since April I've been trading Cree a bit because of its volatility and trading ranges in order to get more shares. I've been fairly successful doing so recently. Of course, buying at the expected lows and selling at the highs has its risks. For example, selling out in the $15 range meant I missed the move to the $17 range. Always, my goal was to acquire more shares because for years I've seen Cree as a GREAT investment.

However, after the recent run up someone whom I respect a great deal, and a Cree investor, suggested Cree may never become the company it should or could become with the current management team. Great management will be required to drive Cree from the company it is to the company us investors hope it will become. In my mind it's become questionable whether Cree currently has management with the ability to achieve the goal.

Swoboda has been CEO for just over a year now and it might be a good time to review his performance.

My first observation is that Mr. Swoboda appears to be quite willing to sell his Cree stock. Granted, he has bought some stock, or rather exercised some options to acquire shares. However, he's sold FAR more than he's kept, even when he's acquiring stock to hold in the bargain. As the leader of the company, the example Swoboda sets is that Cree is a prudent investment for a small part of his portfolio. I know he can claim that the greatest part of his assets are in Cree. Un-exercisable options for the most part as far as I can tell. While it's Swoboda's right to sell his options the fact he does so doesn't inspire others as to his confidence in Cree's future. Every now and then you will read about executives who, when they become CEO of a company, will immediately go out and invest significant portions of their personal fortune in their company as a show of faith. This is leading by example. Swoboda's leadership methods clearly follow another path. I'm not condemning Swoboda for his decisions regarding his investment in Cree, but his actions can leave a funny taste in some investors' mouths. Some people believe you should watch a person's feet and not what they're saying when it comes to money.

I wonder [about] the effects of Cynthia and Fran, who go on numerous road trips educating institutional investors about Cree, and convincing them to buy Cree, only to see Swoboda sell 100,000 shares a week later.

My second observation is that UltraRF should not have been able to blindside Cree's management about the slow pace of LDMOS 8 of development. I presume Swoboda would require regular progress reports. However, it seems Cree was blindsided. The fact this occurred at all indicates someone wasn't watching the left coast close enough. I understand the timing of technological breakthroughs can't be legislated or timed. However, keeping track of what stage of development a product is would seem to be a straightforward and ongoing thing.

Another observation is that it appears that Cree has put out devices, that when used in the field, fail in short order. This has happened with both RF devices and LEDs. If true reliability testing was being performed in house at Cree, I don't understand how these failure modes could occur in the field. It seems plausible that in the rush to make numbers, Cree's management could be making decisions to take some shortcuts.

The sad thing here is that Cree really does have the greatest minds working there. These people have busted their rear ends to make Cree a success and create a bright future. If my concerns are valid, Cree's reputation for quality devices could become tainted and it might be costly to regain credibility. Not to mention losing market share.

Then we come to a conference call where Cree's largest customer defers 43% of its contract to the future and this material event isn't discussed. Oh sure, they claim it was obliquely discussed, and maybe a lawyer could prove their case. Unfortunately I prefer my explanations in plain English. The disturbing part for me wasn't the deferral itself, which was just the result of a lousy business climate, and not indicative of Cree as a company. The disturbing part was the underhanded and vague disclosure, which was only made clear in the 10Q thanks to Cyndy Merrel. Now, when Swoboda says something, how can we know he's being straightforward, plain spoken and honest? If I can't, how can the market?

At one point I believed in Cree to the extent where I sold my small business and used the funds to invest in Cree. I was frequently willing to give Cree the benefit of the doubt on many issues because I knew what great people they had working there. So I find it quite sad to admit that at this point I'm seriously reconsidering my investment in Cree.

I posted a list of questions and emailed them to Cree. The silence on the option expensing issue was, unfortunately, not a surprise. Couldn't it have been at least discussed? If Cree has reasons for not wanting to follow Coke's lead they could explain the logic of their position.

At this point I would have to agree with Libra that us shareholders should not vote to reinstate Cree directors who regularly sell Cree stock while Cree is losing money and doesn't meet the goals Cree's management set. I also believe Cree's board should be more independent than it is. Since Hunter and Dr. Palmour founded Cree I believe they have a rightful place at the table, as Cree is probably their baby. However, I don't believe Swoboda should be on the board and don't plan to vote for him at the next ASM.

So when considering the initial question of does Cree's current management have the ability to take Cree to that place we envision.... The answer I come up with is it doesn't seem like it.

I'm not looking for perfection from Swoboda. He puts his pants on one leg at a time like everyone else. However, I'm looking for integrity, honesty, competence, wisdom, diligence, patience and moderation in some order. Because of several events in the last year I'm less certain today than in the past that he has the right stuff. Thus, I've cut way back on my investment in Cree until I'm convinced management is providing what I'm looking for. I've recently let my friends and family know my feelings on this matter as well, since I got them into Cree to begin with. (I feel a certain responsibility to be honest with them.)

I don't blame Hunter for sticking us with Swoboda. You never know how a person is going to handle a new situation, and I'm sure Swoboda was up to snuff on prior tasks. Maybe he's just a better President than CEO. Just a thought.

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