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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Uncle Frank who started this subject	12/2/2000 1:51:56 PM
From: Robert Jacobs	Read Replies (3) of 54805

Cree's investments that are questioned related to "accounting irregularities" have all been to further new lines of business in the blue laser (MVIS) and microwave devices (XEMOD, Ultra R/F). The Nitres acquisition which is primarily related to LED's is not questioned since it was a purchase outright. I am unsure of what The World Theatre Investment gives them other than a priveleged position in World's plans to use their LEDs. The C3 stuff is no longer an issue since they are not banking on any revenue from them. Think about the following: Cree raised $366m+- last January in the SPO not to engage in transfers from the balance sheet to operating profits but to grow the company in two ways 1) make investments in new lines of business (microwave and laser) which will lead to new operating divisions and 2) improve the current business (LED's) by enhanced performance of LEDs and new applications for them (Nitres/packaged lighting products). I would be concerned if they had purchased with these funds distributors/manufacturers who would then turn around and purchase LED's from them (like LHSP and the Korean companies). Instead, they used their funds to develop through R/D new lines of business in microwave and blue laser in an effort to commercialize these new lines. Of course they could have done this internally. Non of us can say whether the issuence of shares was more advantageous financially than the purchase of talent/IP/plant/equipment through investment or acquisition. To create a simplistic analysis of issuing stock vs hiring and paying for the talent, hard assets and IP gained through the acquisitions/investments is to say that the 3.289 m shares sold at the IPO netted 266m and diluted the shares outstanding by 10%. With the 500k issued to Nitres + the 908k to be issued to Ultra diluted the shares by another 3% resulting in a net change this year of 13% dilution. With this money, Cree has invested 12.5m in MViS, 11.3 in Xemod, 30m in Ultra, 5m in World = 58.8m. The net of all this is that the shares are diluted 13% and the cash raised was 266m - 53.8 = 207m net gain. Recent operating results show that after all this Cree continues to meet/exceed estimates operationally and has improved it's balance sheet by 212m while acquiring expertise, assets and IP in all areas of it's business and future business. This is a net gain for the bottom line, the balance sheet and the future. I would have been concerned if Hunter had said that all these investments and R/D expenses would have hurt operating results. The opposite is the case with Nitres/Ultra adding to the bottom line. So it appears to me that Cree continues to improve it's current operations, strengthen it's balance sheet and invest in new product opportunites while improving its bottom line results. I would appreciate some feedback from this analysis.

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