Cree, Inc.
CREE INC (Form: 10-Q, Received: 10/21/2009 06:03:06)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-21154

 

 

CREE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina   56-1572719

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4600 Silicon Drive

Durham, North Carolina

  27703
(Address of principal executive offices)   (Zip Code)

(919) 313-5300

(Registrant’s telephone number, including area code)

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x       Accelerated filer   ¨
Non-accelerated filer   ¨     (Do not check if a smaller reporting company)       Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of October 13, 2009, was 103,634,012.

 

 

 


Table of Contents

CREE, INC.

FORM 10-Q

For the Quarterly Period Ended September 27, 2009

INDEX

 

          Page No.

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Consolidated Balance Sheets as of September 27, 2009 (unaudited) and June 28, 2009    3
   Consolidated Statements of Income for the three months ended September 27, 2009 (unaudited) and September 28, 2008 (unaudited)    4
   Consolidated Statements of Cash Flow for the three months ended September 27, 2009 (unaudited) and September 28, 2008 (unaudited)    5
   Notes to Consolidated Financial Statements (unaudited)    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    28

Item 4.

   Controls and Procedures    28

Item 4T.

   Controls and Procedures    28

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    29

Item 1A.

   Risk Factors    29

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    40

Item 3.

   Defaults Upon Senior Securities    40

Item 4.

   Submission of Matters to a Vote of Security Holders    40

Item 5.

   Other Information    40

Item 6.

   Exhibits    40

SIGNATURE

   42

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

CREE, INC.

CONSOLIDATED BALANCE SHEETS

 

     September 27,
2009
(Unaudited)
   June 28, 2009
         (Thousands, except per share data)    

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 695,991    $ 290,154

Short-term investments:

     172,286      127,499
             

Total cash, cash equivalents, and short-term investments

     868,277      417,653

Accounts receivable, net

     93,059      103,035

Income tax receivable

     1,526      1,526

Inventories, net

     85,990      78,841

Deferred income taxes

     10,007      10,022

Prepaid expenses and other current assets

     19,599      18,359
             

Total current assets

     1,078,458      629,436

Property and equipment, net

     333,576      320,110

Long-term investments

     20,170      29,557

Intangible assets, net

     111,315      113,328

Goodwill

     304,791      304,791

Other assets

     5,925      7,345
             

Total assets

   $ 1,854,235    $ 1,404,567
             

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable, trade

   $ 55,177    $ 38,770

Accrued salaries and wages

     20,662      16,732

Income taxes payable

     9,559      8,139

Deferred income taxes

     379      122

Other current liabilities

     8,580      7,868

Contingent payment due related to COTCO acquisition

     —        57,050
             

Total current liabilities

     94,357      128,681

Long-term liabilities:

     

Deferred income taxes

     42,737      42,752

Other long-term liabilities

     8,386      8,386
             

Total long-term liabilities

     51,123      51,138

Commitments and contingencies (Note 12)

     

Shareholders’ equity:

     

Preferred stock, par value $0.01; 3,000 shares authorized at September 27, 2009 and June 28, 2009; none issued and outstanding

     —        —  

Common stock, par value $0.00125; 200,000 shares authorized at September 27, 2009 and June 28, 2009; 103,473 and 89,659 shares issued and outstanding at September 27, 2009 and June 28, 2009, respectively

     129      112

Additional paid-in-capital

     1,319,962      857,383

Accumulated other comprehensive income, net of taxes

     11,621      11,236

Retained earnings

     377,043      356,017
             

Total shareholders’ equity

     1,708,755      1,224,748
             

Total liabilities and shareholders’ equity

   $ 1,854,235    $ 1,404,567
             

The accompanying notes are an integral part of the consolidated financial statements

 

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CREE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

     Three Months Ended
         September 27,    
2009
       September 28,    
2008
     (Thousands, except per share data)

Revenue, net

   $ 169,130    $ 140,378

Cost of revenue, net

     95,352      91,015
             

Gross profit

     73,778      49,363

Operating expenses:

     

Research and development

     20,174      17,275

Sales, general and administrative

     23,613      22,918

Amortization of acquistion related intangibles

     3,045      4,062

Loss on disposal or impairment of long-lived assets

     293      405
             

Total operating expenses

     47,125      44,660

Operating income

     26,653      4,703

Non-operating income:

     

Gain on sale of investments, net

     —        12

Other non-operating income

     131      166

Interest income, net

     1,630      2,792
             

Income from operations before income taxes

     28,414      7,673

Income tax expense

     7,388      1,754
             

Net income

   $ 21,026    $ 5,919
             

Earnings per share:

     

Basic net income per share

   $ 0.23    $ 0.07
             

Diluted net income per share

   $ 0.23    $ 0.07
             

Shares used in per share calculation:

     

Basic

     91,160      87,851
             

Diluted

     92,730      88,732
             

The accompanying notes are an integral part of the consolidated financial statements

 

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CREE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Three Months Ended  
     September 27,
2009
    September 28,
2008
 
     (Thousands)  

Cash flows from operating activities:

    

Net income

   $ 21,026      $ 5,919   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     22,538        24,442   

Stock-based compensation

     5,612        5,433   

Excess tax benefit from share-based payment arrangements

     (2,072     (106

Impairment of inventory or loss on disposal or impairment of long-lived assets

     293        405   

Provision for doubtful accounts

     146        265   

Gain on sale of investment in securities

     —          (12

Amortization of premium/discount on investments

     705        102   

Changes in operating assets and liabilities:

    

Accounts receivable

     9,747        6,955   

Inventories

     (7,285     602   

Prepaid expenses and other assets

     176        (1,894

Accounts payable, trade

     4,388        3,423   

Accrued expenses and other liabilities

     5,914        (1,583
                

Net cash provided by operating activities

     61,188        43,951   
                

Cash flows from investing activities:

    

Purchases of property and equipment

     (20,389     (13,700

Payment of contingent consideration related to COTCO acquisition

     (57,050     (60,000

Purchases of investments

     (61,435     (138,688

Proceeds from maturities of investments

     25,972        84,215   

Proceeds from sale of property and equipment

     191        18   

Proceeds from sale of available-for-sale investments

     —          1,039   

Purchases of patent and licensing rights

     (2,142     (1,978
                

Net cash used in investing activities

     (114,853     (129,094
                

Cash flows from financing activities:

    

Net proceeds from issuance of common stock

     457,227        3,842   

Excess tax benefit from share-based payment arrangements

     2,072        106   

Repurchases of common stock

     —          (2,744
                

Net cash provided by financing activities

     459,299        1,204   
                

Effects of foreign exchange changes on cash and cash equivalents

     203        (250
                

Net increase (decrease) in cash and cash equivalents

     405,837        (84,189

Cash and cash equivalents:

    

Beginning of period

   $ 290,154      $ 261,633   

End of period

   $ 695,991      $ 177,444   
                

The accompanying notes are an integral part of the consolidated financial statements

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation and Changes in Significant Accounting Policies

Description of Business

Cree, Inc. (the “Company”) develops and manufactures semiconductor materials and devices primarily based on silicon carbide (“SiC”), gallium nitride (“GaN”) and related compounds. The Company primarily focuses its expertise in SiC and GaN on light emitting diodes (“LED”). The Company also develops power and radio frequency (“RF”) products, including power switching and RF devices. The Company’s revenues are classified as follows:

 

   

LED products.  The Company derives the largest portion of its revenue from the sale of its LED products. These products consist of LED components, LED chips, LED lighting products and SiC and GaN wafers. Also included are revenues derived from government agencies to support the development of LED lighting.

 

   

Power and RF products.  These products include power switching devices made from SiC, which provide faster switching speeds than comparable silicon-based power devices, and also include RF devices made from SiC or GaN, which allow for higher power densities as compared to silicon or gallium arsenide. Also included are revenues derived from government agencies to support the development of primarily SiC and GaN based technology.

The majority of the Company’s products are produced at its production facilities located in North Carolina and China. In some circumstances, the Company may also use contract manufacturers for certain aspects of product fabrication.

Basis of Presentation

The consolidated balance sheet at September 27, 2009 and the consolidated statements of income for the three months ended September 27, 2009 and September 28, 2008, and the consolidated statements of cash flows for the three months ended September 27, 2009 and September 28, 2008 have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows at September 27, 2009, and for all periods presented, have been made. The consolidated balance sheet at June 28, 2009 has been derived from the audited financial statements as of that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2009 (“fiscal 2009”). The results of operations for the period ended September 27, 2009 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 27, 2010 (“fiscal 2010”).

Certain fiscal 2009 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2010 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Recent Accounting Pronouncements

Accounting for Business Combinations

The Company adopted new U.S. GAAP guidance related to business combinations beginning in its first quarter of fiscal 2010. Earlier adoption was prohibited. The adoption of the new guidance did not have an immediate significant impact on its consolidated financial statements, however it will impact the accounting for any future business combinations. Under the new guidance, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for income taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.

Noncontrolling Interests in Consolidated Financial Statements

The Company adopted new U.S. GAAP guidance related to noncontrolling interests in consolidated financial statements beginning in its first quarter of fiscal 2010. Earlier adoption was prohibited. The Company’s adoption of this guidance did not have a significant impact on its consolidated financial statements. The guidance revises new accounting and reporting standards for the noncontrolling interest in a subsidiary and the accounting for the deconsolidation of a subsidiary. It also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The guidance also requires expanded disclosures regarding the interest of the parent and the noncontrolling interest.

Determination of the Useful Life of Intangible Assets

The Company adopted new U.S. GAAP guidance concerning the determination of the useful life of intangible assets beginning in its first quarter of fiscal 2010. The Company’s adoption of the new guidance did not have a significant impact on its consolidated financial statements. The new guidance amends the factors that are to be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows originally used to measure the fair value of the intangible asset under U.S. GAAP.

International Financial Reporting Standards

In November 2008, the Securities & Exchange Commission (“SEC”) released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, the Company may be required in fiscal 2015 to prepare financial statements in accordance with IFRS. However, the SEC announced it will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Transfers of Financial Assets

In June 2009, the FASB issued new guidance concerning the transfer of financial assets. This guidance amends the criteria for a transfer of a financial asset to be accounted for as a sale, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, changes the initial measurement of a transferor’s interest in transferred financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. This new guidance will be effective for the Company for transfers of financial assets beginning in its first quarter of fiscal 2011, with earlier adoption prohibited. The Company does not expect the impact of this guidance to be material to its consolidated financial statements.

Determining the Primary Beneficiary of a Variable Interest Entity

In June 2009, the FASB issued new guidance concerning the determination of the primary beneficiary of a variable interest entity (“VIE”). This new guidance amends current U.S. GAAP by: requiring ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE; amending the quantitative approach previously required for determining the primary beneficiary of the VIE; modifying the guidance used to determine whether an entity is a VIE; adding an additional reconsideration event (e.g. troubled debt restructurings) for determining whether an entity is a VIE; and requiring enhanced disclosures regarding an entity’s involvement with a VIE.

This new guidance will be effective for the Company beginning in its first quarter of fiscal 2011, with earlier adoption prohibited. The Company does not expect the impact of this new guidance to be material to its consolidated financial statements.

FASB Accounting Standards Codification

In June 2009, the FASB issued new guidance concerning the organization of authoritative guidance under U.S. GAAP. This new guidance created the FASB Accounting Standards Codification (“Codification”). The Codification has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification became effective for the Company in its first quarter of fiscal 2010. As the Codification is not intended to change or alter existing U.S. GAAP, it did not have any impact on the Company’s consolidated financial statements. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative.

Interactive Data Filing with the SEC

On January 30, 2009, the SEC released the final rules requiring all registered companies to use eXtensible Business Reporting Language (“XBRL”) when submitting financial statements to the SEC. The new rules initially will require interactive data reporting only by domestic and foreign large accelerated filers that prepare their financial statements in accordance with U.S. GAAP and have a worldwide public common equity float above $5.0 billion for their first quarterly period ending after June 15, 2009 and all periods thereafter. As the Company does not meet this requirement due to its market capitalization, this reporting requirement will apply to its first quarterly filing period ending after June 15, 2010 and all periods thereafter. Therefore, the Company plans to file its first quarter fiscal 2011 financial statements with the SEC in XBRL in compliance with the new SEC rules.

Measuring Liabilities at Fair Value

In August 2009, the FASB released new guidance concerning measuring liabilities at fair value. The new guidance provides clarification that in circumstances in which a quoted price in an active market for the

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques. Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability. This new guidance is effective for the first reporting period after its issuance, however earlier application is permitted. The application of this new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

Note 2. Acquisitions

Acquisition of LED Lighting Fixtures, Inc.

On February 29, 2008 the Company acquired LED Lighting Fixtures, Inc. (now Cree LED Lighting Solutions, Inc.) (“LLF”) through a wholly owned subsidiary. The Company acquired all of the outstanding share capital of LLF in exchange for total upfront consideration of $80.8 million, consisting of (1) $16.5 million in cash, (2) approximately 1.9 million shares of the Company’s common stock valued at $58.8 million, (3) the assumption of fully vested LLF employee stock options valued at $4.5 million, and (4) transaction costs of $1.0 million consisting primarily of professional fees incurred relating to attorneys, accountants and valuation advisors. Under the acquisition terms, additional consideration of up to $26.4 million would become payable to the former shareholders of LLF if defined product development targets and key employee retention measures were achieved over the three calendar years following the acquisition.

LLF achieved the defined employee retention goals and product development targets for the calendar year ended December 31, 2008 and as a result, the Company made a cash payment in the amount of $4.4 million to the former shareholders of LLF in the third quarter of fiscal 2009, thus increasing goodwill in the Company’s consolidated financial statements. If LLF meets the remaining defined employee retention goals and product development targets during the following two calendar years, additional contingent cash payments totaling up to $21.9 million would become payable to the former shareholders of LLF. If such contingent payments occur, these will be considered as additional purchase price and result in an increase in goodwill.

The assets, liabilities, and operating results of LLF have been included in the Company’s consolidated financial statements from the date of acquisition and are reflected in all periods presented in the accompanying financial statements.

Acquisition of COTCO Luminant Device Limited

On March 30, 2007, the Company acquired COTCO Luminant Device Limited, a Hong Kong company (now Cree Hong Kong Limited) (“COTCO”), from COTCO Holdings Limited, a Hong Kong company (now United Luminous International (Holdings) Limited) (“Holdings”). The Company acquired all of the outstanding share capital of COTCO in exchange for consideration consisting of approximately 7.6 million shares of the Company’s common stock and $77.3 million cash. Under the acquisition terms, additional consideration would become payable to Holdings or its designees in the event COTCO achieved specific EBITDA targets over the Company’s two full fiscal years following the acquisition. For fiscal 2008, the Company made a cash payment in the amount of $60.0 million. For fiscal 2009, the Company made a cash payment in the amount of $57.1 million.

The assets, liabilities, and operating results of COTCO have been included in the Company’s consolidated financial statements from the date of acquisition and are reflected in all periods presented in the accompanying financial statements.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Note 3. Financial Statement Details

Accounts Receivable, net

The following is a summary of the components of accounts receivable, net (in thousands):

 

     September 27,
2009
    June 28,
2009
 

Billed trade receivables

   $ 105,961      $ 113,085   

Unbilled contract receivables

     1,101        2,125   
                
     107,062        115,210   

Allowance for sales return

     (11,289     (9,644

Allowance for bad debts

     (2,714     (2,531
                

Total accounts receivable, net

   $ 93,059      $ 103,035   
                

Inventories, net

The following is a summary of the components of inventories, net (in thousands):

 

     September 27,
2009
    June 28,
2009
 

Raw material

   $ 18,042      $ 14,575   

Work-in-progress

     42,019        38,567   

Finished goods

     41,803        39,552   
                
     101,864        92,694   

Inventory reserve

     (15,874     (13,853
                

Total inventories, net

   $ 85,990      $ 78,841   
                

Note 4. Investments

Short-term and long-term investments consist of high grade corporate bonds and other debt securities. The Company classifies its marketable securities as available-for-sale. This is based upon management’s determination that the underlying cash invested in these securities is available for operations as necessary.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following tables provide a summary of short-term and long-term investments as of September 27, 2009 and June 28, 2009 (in thousands):

 

     September 27, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value

Short-term investments

   $ 168,332    $ 3,954    $ —        $ 172,286

Long-term investments

     19,518      652      —          20,170
                            

Total investments

   $ 187,850    $ 4,606    $ —        $ 192,456
                            
     June 28, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value

Short-term investments

   $ 124,472    $ 3,049    $ (22   $ 127,499

Long-term investments

     28,620      957      (20     29,557
                            

Total investments

   $ 153,092    $ 4,006    $ (42   $ 157,056
                            

The following table provides a summary of marketable investments by type as of September 27, 2009 and June 28, 2009 (in thousands):

 

     September 27, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value

U.S. government securities

   $ 13,050    $ 345    $ —        $ 13,395

U.S. agency securities

     20,913      561      —          21,474

Municipal bonds

     96,356      2,981      —          99,337

Corporate debt securities

     57,531      719      —          58,250
                            
   $ 187,850    $ 4,606    $ —        $ 192,456
                            
     June 28, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value

U.S. government securities

   $ 15,054    $ 454    $ —        $ 15,508

U.S. agency securities

     19,895      698      —          20,593

Municipal bonds

     94,745      2,483      (6     97,222

Corporate debt securities

     23,398      371      (36     23,733
                            
   $ 153,092    $ 4,006    $ (42   $ 157,056
                            

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The contractual maturities of marketable investments at September 27, 2009 were as follows (in thousands):

 

     Fiscal Years Ending
     June 27,
2010
   June 26,
2011
   June 24,
2012
   June 30,
2013
   June 29,
2014
   Thereafter    Total

U.S. government securities

   $ 5,586    $ 7,809    $ —      $ —      $ —      $ —      $ 13,395

U.S. agency securities

     5,148      11,031      3,651      1,644      —        —        21,474

Municipal bonds

     17,948      9,288      10,887      15,558      17,685      27,971      99,337

Corporate debt securities

     7,111      10,641      39,522      976      —        —        58,250
                                                
   $ 35,793    $ 38,769    $ 54,060    $ 18,178    $ 17,685    $ 27,971    $ 192,456
                                                

Note 5. Fair Value of Financial Instruments

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas, unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

   

Level 1—Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

   

Level 2—Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

   

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments. The financial assets for which the Company may be required to perform non-recurring fair value remeasurements (e.g., an impairment of assets) are any investments in privately-held companies. As of September 27, 2009, financial assets utilizing Level 1 inputs included cash equivalents and investments traded on active securities exchanges. Financial assets utilizing Level 2 inputs included corporate bonds, municipal bonds and other instruments. The Company does not have any significant financial assets requiring the use of Level 3 inputs.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy and using the lowest level of input as of September 27, 2009 (in thousands):

 

     Financial Instruments Carried at Fair Value
     Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total

Assets:

           

Cash equivalents

   $ 74,407    $ 108,870    $ —      $ 183,277

Short-term investments

     9,194      163,092      —        172,286

Long-term investments

     4,201      15,969      —        20,170
                           

Total assets

   $ 87,802    $ 287,931    $ —      $ 375,733
                           

Realized gains and losses from the sale of investments are included in “Gain on sale of investments, net” and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be “other-than-temporary.”

The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be “other-than-temporary” on a periodic basis. It considers such factors as the length of time and extent to which fair value has been below cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated recovery in market value.

Note 6. Intangible Assets and Goodwill

Intangible Assets, net

The following table reflects the components of intangible assets, net (in thousands):

 

     September 27,
2009
    June 28,
2009
 

Customer relationships

   $ 52,620      $ 52,620   

Developed technology

     51,860        51,860   

Patent and license rights

     64,744        62,733   
                
   $ 169,224      $ 167,213   

Accumulated amortization

     (57,909     (53,885
                

Intangible assets, net

   $ 111,315      $ 113,328   
                

Total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, recognized during the three months ended September 27, 2009 and September 28, 2008 was $4.0 million and $4.9 million, respectively.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Goodwill

There were no changes in goodwill during the three months ended September 27, 2009.

Note 7. Shareholders’ Equity

In September 2009, the Company issued and sold 12.65 million shares of its common stock, with net proceeds of approximately $434.2 million.

As of September 27, 2009, there remained approximately 4.5 million shares of the Company’s common stock approved for repurchase under a repurchase program authorized by the Board of Directors that extends through June 2010. During the fiscal quarter ended September 27, 2009, the Company did not repurchase any shares.

Note 8. Earnings Per Share

The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share data):

 

     Three Months Ended
     September 27,
2009
   September 28,
2008

Basic:

  

Net income

   $ 21,026    $ 5,919
             

Weighted average common shares

     91,160      87,851
             

Basic earnings per share

   $ 0.23    $ 0.07
             

Diluted:

     

Net income

   $ 21,026    $ 5,919
             

Weighted average common shares - basic

     91,160      87,851

Dilutive effect of stock options, unvested shares and ESPP purchase rights

     1,570      881
             

Weighted average common shares - diluted

     92,730      88,732
             

Diluted earnings per share

   $ 0.23    $ 0.07
             

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share. For the three months ended September 27, 2009 and September 28, 2008 there were 2.9 million and 6.3 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive.

The follow-on public offering resulted in an increase to the Company’s diluted weighted average common shares outstanding of approximately 1.4 million shares for the first quarter of fiscal 2010.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Note 9. Comprehensive Income, net

The following presents a summary of activity in comprehensive income, net (in thousands):

 

     Three Months Ended  
     September 27,
2009
   September 28,
2008
 

Net income

   $ 21,026    $ 5,919   

Other comprehensive income (loss):

     

Foreign currency translation adjustments

     —        386   

Net unrealized gain (loss) on available-for-sale securities, net of tax expense of $257 and tax benefit of $420, respectively

     385      (703
               

Total other comprehensive income (loss)

     385      (317
               

Comprehensive income

   $ 21,411    $ 5,602   
               

Note 10. Stock-Based Compensation

The Company currently has one equity-based compensation plan from which stock-based compensation awards can be granted to employees and directors. In addition, the Company has plans that have been terminated as to future grants, but under which options are currently outstanding. The Company also has an Employee Stock Purchase Plan that provides employees with the opportunity to purchase the Company’s common stock at 85% of the fair market value of the common stock at two designated times each year.

Stock Option Awards

The following table summarizes outstanding option awards as of September 27, 2009, and changes during the three months then ended (in thousands, except per share data):

 

     Number of
Shares
    Weighted-Average
Exercise Price

Outstanding at June 28, 2009

   8,978      $ 28.33

Granted

   1,995        35.83

Exercised

   (1,025     22.46

Forfeited or expired

   (33     29.45
        

Outstanding at September 27, 2009

   9,915      $ 30.44
        

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Restricted Stock Awards

A summary of nonvested shares of restricted stock awards outstanding under the Company’s 2004 Long-Term Incentive Compensation Plan as of September 27, 2009, and changes during the three months then ended, follows (in thousands, except per share data):

 

     Number of
Shares
    Weighted-
Average Grant-
Date Fair
Value

Nonvested at June 28, 2009

   369      $ 23.51

Granted

   166        35.89

Vested

   (120     23.17

Forfeited

   —          —  
        

Nonvested at September 27, 2009

   415      $ 28.58
        

Stock-Based Compensation Valuation and Expense

The Company accounts for its employee stock-based compensation plan using the fair value method. The fair value method requires the Company to estimate the grant date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

To estimate the fair value of the Company’s stock option awards the Company currently uses the Black-Scholes option-pricing model. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models available today, including future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.

For restricted stock awards, grant date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Total stock-based compensation expense, net of amounts capitalized into inventory was as follows (in thousands):

 

     Three Months Ended

Income Statement Classification

   September 27,
2009
   September 28,
2008

Cost of goods sold

   $ 825    $ 1,302

Research and development

     1,264      1,446

Sales, general and administrative

     3,523      2,685
             

Total operating expenses

     4,787      4,131
             

Total

   $ 5,612    $ 5,433
             

Approximately $0.6 million and $0.7 million of stock-based compensation has been recorded in inventory in the Company’s consolidated balance sheets as of September 27, 2009 and June 28, 2009, respectively.

Note 11. Income Taxes

The variation between the Company’s effective tax rate and the U.S. statutory rate of 35 percent is primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on the Company’s periodic effective tax rate.

Under U.S. GAAP, a two-step approach is followed to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement. At June 29, 2009, the Company had recorded $10.9 million of unrecognized tax benefits. During the three months ended September 27, 2009, there were no changes to that amount of unrecognized tax benefits. As a result, the total amount of unrecognized tax benefits as of September 27, 2009 is $10.9 million. If any portion of this $10.9 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that approximately $3.3 million of gross unrecognized tax benefits will change in the next 12 months.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense line item in the consolidated statements of income. As of September 27, 2009, the Company had accrued $1.0 million of interest and penalties.

The Company files U.S. federal, U.S. state, and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years ended June 24, 2007 and prior. For foreign purposes, the Company is no longer subject to examination for tax periods 2002 and prior. For U.S. state tax returns the Company is generally no longer subject to tax examinations for fiscal years prior to 2004. Certain federal and state carryforward tax attributes generated in prior years remain subject to examination and adjustment. The Company is currently under examination by the Internal Revenue Service for fiscal year 2008. Additionally, the Company is currently under examination by the North Carolina Department of Revenue for fiscal years 2004 – 2007.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Note 12. Commitments and Contingencies

Please refer to the section entitled “Litigation” under Note 13—Commitments and Contingencies of the Notes to the Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2009 for a description of material legal proceedings.

From time to time, various claims and litigation are asserted or commenced against the Company arising from or related to contractual matters, intellectual property matters, product warranties and personnel and employment disputes. Based on information currently available, management does not believe the ultimate outcome of any pending matters will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial position, results of operations or cash flows could be materially and adversely affected.

Note 13. Subsequent Events

The Company evaluated subsequent events through the time the financial statements were issued, which was the time of filing this Form 10-Q with the SEC on October 20, 2009.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made and we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report.

The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 28, 2009. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Overview of our Business and Products

Cree, Inc. (“Cree,” “we,” “our,” or “us,”) develops and manufactures semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. We primarily focus our expertise in SiC and GaN on light emitting diodes (LED). We also develop power and radio frequency (RF) products, including power switching and RF devices. Our revenues are classified as follows:

 

   

LED products.  We derive the largest portion of our revenue from the sale of our LED products. These products consist of LED components, LED chips, LED lighting products and SiC and GaN wafers. Also included are revenues derived from government agencies to support the development of LED lighting.

 

   

Power and RF products.  These products include power switching devices made from SiC, which provide faster switching speeds than comparable silicon-based power devices, and also include RF devices made from SiC or GaN, which allow for higher power densities as compared to silicon or gallium arsenide. Also included are revenues derived from government agencies to support the development of primarily SiC and GaN based technology.

The majority of our products are manufactured at our production facilities located in North Carolina and China. We also use contract manufacturers for certain aspects of product fabrication.

Operating Segments

We currently operate our business as one reportable segment.

Industry Dynamics

Our business is primarily focused on selling our LED products. LEDs are currently used in a variety of applications, including energy-efficient indoor and outdoor lighting, liquid crystal display (LCD) backlighting, video screens, gaming, signals, automotive applications and mobile phones. As LED technology continues to develop and improve, we believe the potential market for LED lighting applications will continue to expand.

Select industry factors affecting our business include, among others:

 

   

Overall demand for products and applications using LEDs . Although we have seen an increase in demand for LEDs for lighting products and backlighting in notebook and television applications, the global recession has reduced overall demand for LEDs in other consumer, mobile and automotive applications. The pace of adoption of LED lighting technology in the general illumination market, backlighting and other markets will impact the demand for LEDs as well as other factors.

 

   

Intense and constantly evolving competitive environment . Competition in the industry is intense. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share. To remain competitive, market participants’ generally must increase product performance and reduce costs to offset lower average sales prices.

 

   

Technological innovation and advancement. Innovations and advancements in LED technology continue to expand the potential applications for LEDs. However, new technologies could emerge or improvements could be made in existing technologies that may reduce the demand for LEDs in certain markets.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

   

Rising energy costs and regulatory actions concerning energy efficiency. Government regulations and programs designed to encourage or mandate increased energy efficiency, even in some cases banning forms of incandescent lighting, are advancing the adoption of more energy efficient lighting solutions including LEDs as well as other technologies.

 

   

Intellectual property issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. As such, steps including patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation commonly occurs.

Highlights of the First Quarter of Fiscal 2010

The following is a summary of our financial results for the three months ended September 27, 2009:

 

   

Our year over year revenues increased approximately 20.5% to $169.1 million;

 

   

Our year over year gross margin percentage (gross profit as a percent of revenue) increased to 43.6% in the first quarter of fiscal 2010 from 35.2% in the first quarter of fiscal 2009;

 

   

We achieved operating income of $26.7 million in the first quarter of fiscal 2010 compared to $4.7 million in the first quarter of fiscal 2009. Net income per diluted share was $0.23 compared to $0.07 for the first quarter of fiscal 2009; We raised $434.2 million net of direct expenses through a follow-on public offering of our common stock;

 

   

We generated positive cash flow from operations of $61.2 million in the first quarter of fiscal 2010 compared to $44.0 million in the first quarter of fiscal 2009;

 

   

We made the second and final contingent cash payment related to our acquisition of COTCO in the amount of $57.1 million;

 

   

Combined cash, cash equivalents and marketable investments increased to $888.4 million at September 27, 2009 compared to $447.2 million at June 28, 2009;

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Results of Operations

The following table sets forth certain consolidated statement of income data for the periods indicated:

 

     Three Months Ended
September 27, 2009
    Three Months Ended
September 28, 2008
 

(Dollars in Thousands, Except Per Share Data)

   Dollars    % of
Revenue
    Dollars    % of
Revenue
 

Revenue, net

   $ 169,130    100.0   $ 140,378    100.0

Cost of revenue, net

     95,352    56.4     91,015    64.8
                          

Gross profit

     73,778    43.6     49,363    35.2
                          

Research and development

     20,174    11.9     17,275    12.3

Sales, general and administrative

     23,613    14.0     22,918    16.3

Amortization of acquisition related intangibles

     3,045    1.8     4,062    2.9

Loss on disposal or impairment of long-lived assets

     293    0.2     405    0.3
                          

Operating income

     26,653    15.7     4,703    3.4

Gain on sale of investments, net

     —      0.0     12    0.0

Other non-operating income

     131    0.1     166    0.1

Interest income, net

     1,630    1.0     2,792    2.0
                          

Income before income taxes

     28,414    16.8     7,673    5.5

Income tax expense

     7,388    4.4     1,754    1.2
                          

Net income

     21,026    12.4     5,919    4.3
                          

Diluted earnings per share

   $ 0.23      $ 0.07   
                  

Revenues

Revenues for the first quarter of fiscal 2010 and fiscal 2009 were comprised of the following (in thousands, except percentages):

 

     Three Months Ended        
     September 27,
2009
    September 28,
2008
    Change  

LED products

   $ 156,027      $ 129,886      $ 26,141    20

Percent of total revenues

     92     93     

Power and RF products

     13,103        10,492        2,611    25

Percent of total revenues

     8     7     
                         

Total revenues

   $ 169,130      $ 140,378      $ 28,752    20
                         

LED Products

We derive the largest portion of our revenue from the sale of our LED products which comprised approximately 92% and 93% of our total revenues for the first quarter of fiscal 2010 and fiscal 2009, respectively.

Revenue from our LED products increased approximately 20% to $156.0 million in the first quarter of fiscal 2010 from $129.9 million in the first quarter of fiscal 2009. The continuing adoption of LEDs in general lighting in addition to an increase in demand for LEDs in backlighting applications for notebooks and televisions, drove year over year sales increases in both our LED components and LED chips products. The blended average selling price (ASP) for our LED products decreased by 3.1% in the first quarter of fiscal 2010 from the first quarter of fiscal 2009 due to the ongoing competitive pricing environment for our LED products.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Power and RF Products

Revenue from power and RF increased approximately 25% to $13.1 million in the first quarter of fiscal 2010 from $10.5 million in the first fiscal quarter of 2009. The increase in our power and RF products revenue was primarily due to an increase in orders for SiC Schottky diodes and GaN RF devices. Revenues from our power and RF products comprised approximately 8% and 7% of our total revenues for the first quarter of fiscal 2010 and fiscal 2009, respectively. The blended ASP for our power and RF products decreased by 43.2% in the first quarter of fiscal 2010 from the first quarter of fiscal 2009 due to a change in product mix to a higher proportion of sales of products with lower selling prices. Included within revenues from power and RF products were revenues related to research contracts which declined approximately 32% from the first quarter of fiscal 2009 to the first quarter of fiscal 2010.

Gross Profit

Cost of revenue includes materials, labor and overhead costs incurred internally or paid to contract manufacturers to produce our products. Gross profit and gross margin (gross profit as a percentage of revenue) were as follows (in thousands, except percentages):

 

     Three Months Ended        
     September 27,
2009
    September 28,
2008
    Change  

Total gross profit

   $ 73,778      $ 49,363      $ 24,415    49

Total gross margin

     43.6     35.2     

Gross profit in the first quarter of fiscal 2010 increased approximately 49% to $73.8 million from $49.4 million in the first quarter of fiscal 2009. Our gross margin also increased from 35.2% to 43.6%. Factors contributing to the increase in gross margin were changes in product mix to higher margin products, reduced LED chip pricing pressures and lower production costs across our product lines due to greater utilization and higher production yields.

Research and Development

Research and development (R&D) expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consist primarily of employee salaries and benefits, occupancy costs, consulting costs and the cost of development equipment and supplies.

The following sets forth our research and development expenses in dollars and as a percentage of revenues (in thousands, except percentages):

 

     Three Months Ended        
     September 27,
2009
    September 28,
2008
    Change  

Research and development

   $ 20,174      $ 17,275      $ 2,899    17

Percent of total revenues

     12     12     

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Research and development expenses in the first quarter of fiscal 2010 increased 17% to $20.2 million from $17.3 million in the first quarter of fiscal 2009. The increase was due to our continued research and development activities focusing on higher brightness LED chips, new and improved LED products, transition to larger wafers and power and RF initiatives.

Sales, General and Administrative

Sales, general and administrative expenses are composed primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, legal, finance, information technology and human resources personnel) and consist of 1) salaries and related compensation costs, 2) consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs), 3) facilities and insurance costs, and 4) travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenues (in thousands, except percentages):

 

     Three Months Ended        
     September 27,
2009
    September 28,
2008
    Change  

Sales, general and administrative

   $ 23,613      $ 22,918      $ 695    3

Percent of total revenues

     14     16     

Sales, general and administrative expenses in the first quarter of fiscal 2010 increased 3% to $23.6 million from $22.9 million in the first quarter of fiscal 2009. The increase was due primarily to increased spending on sales and marketing as we continued to expand our sales channels. Additionally, costs increased due to the general expansion of our business and increased employee compensation costs.

Amortization of Acquisition Related Intangibles

As a result of our acquisitions, we have recorded various intangible assets that require amortization, principally customer relationships and developed technologies. Amortization of intangible assets related to our acquisitions is as follows (in thousands):

 

     Three Months Ended       
     September 27,
2009
   September 28,
2008
   Change  

INTRINSIC

   $ 186    $ 186    $ —     

COTCO

     2,073      3,090      (1,017

LLF

     786      786      —     
                      

Total

   $ 3,045    $ 4,062    $ (1,017
                      

Amortization of acquisition related intangibles was $3.0 million in the first quarter of fiscal 2010 compared to $4.1 million in the first quarter of fiscal 2009. The year over year decline in amortization expense is attributable to lower amortization expense related to the intangibles acquired through the COTCO acquisition.

Loss on Disposal or Impairment of Long-Lived Assets, net

We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

process, we regularly review our equipment for possible impairments in value. The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands):

 

     Three Months Ended       
     September 27,
2009
   September 28,
2008
       Change  

Loss on disposal or impairment of long-lived assets, net

   $ 293    $ 405    $ (112

We recorded a net loss of $0.3 million on the disposal of long-lived assets in the first quarter of fiscal 2010 compared to a net loss of $0.4 million in the first quarter of fiscal 2009. These losses are due to the impairment or disposal of certain equipment and the impairment of certain capitalized patent costs.

Non-Operating Income

The following table sets forth our non-operating income (in thousands):

 

     Three Months Ended       
     September 27,
2009
   September 28,
2008
       Change  

Gain on sale of investments, net

   $ —      $ 12    $ (12

Other non-operating income

   $ 131    $ 166    $ (35

Interest income, net

   $ 1,630    $ 2,792    $ (1,162

During the first quarter of fiscal 2010, we did not have any significant gains or losses realized from the sale of our investments.

We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities, and other fixed interest rate investments. The primary objective of our investments is to preserve principal while maximizing our yields.

Net interest income was $1.6 million compared to $2.8 million for the first quarter of fiscal 2010 and fiscal 2009, respectively. Year over year interest income decreased due to declining interest rates on our cash and investments.

Other non-operating income is comprised primarily of foreign exchange gains and losses.

Income Tax Benefit or Expense

The following table sets forth our income tax expense in dollars and our effective tax rate (in thousands, except percentages):

 

     Three Months Ended      
     September 27,
2009
    September 28,
2008
        Change

Income tax expense

   $ 7,388      $ 1,754      $ 5,634

Effective tax rate

     26.0     22.9  

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The variation between the Company’s effective tax rate and the U.S. statutory rate of 35 percent is primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on our periodic effective tax rate.

We recorded income tax expense of $7.4 million for an effective tax rate of 26.0% in the first quarter of fiscal 2010 as compared to income tax expense of $1.8 million for an effective tax rate of 22.8% in the first quarter of fiscal 2009. The increase in our effective tax rate is primarily due to an increase in U.S. taxable profits at the higher U.S. tax rates.

Liquidity and Capital Resources

Overview

We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, and to make capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable investments and cash generated from operations. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have no debt or lines of credit and have minimal lease commitments. Based on past performance and current expectations, we believe our cash and cash equivalents, investments, and cash generated from operations, and our ability to access capital markets will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, contractual obligations, commitments and other liquidity requirements associated with our operations through at least the next 12 months.

From time to time, we evaluate strategic opportunities and potential investments in complementary businesses and we anticipate continuing to make such evaluations. We may also access capital markets through the issuance of new debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.

Financial Condition

Our liquidity and capital resources depend on our cash flows from operations and our working capital. Our working capital increased to $984.1 million as of September 27, 2009 from $500.8 million at June 28, 2009, primarily due to our public offering of 12.65 million common shares as well as positive cash flows from operations and cash generated through the exercise of employee stock options. The following table presents the components of our cash conversion cycle for our first fiscal quarter of 2010 and fourth fiscal quarter of 2009:

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

     September 27,
2009
    June 28,
2009
    Change  

Days of sales outstanding (a)

   50      63      (13

Days of supply in inventory (b)

   81      79      2   

Days in accounts payable (c)

   (52   (39   (13
                  

Cash conversion cycle

   79      103      (24
                  

 

(a) Days of sales outstanding (DSO) calculates the average collection period of our accounts receivable. DSO is based on the ending net trade receivables and the most recent quarterly revenue for each period. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts and revenue reserves, by average net revenue for the current quarter (90 days).
(b) Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on net ending inventory and most recent quarterly cost of sales for each period. DSI is calculated by dividing net ending inventory by average cost of goods sold for the current quarter (90 days).
(c) Days in accounts payable (DPO) calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly cost of sales for each period. DPO is calculated by dividing accounts payable by average cost of goods sold for the current quarter (90 days).

Overall our cash conversion cycle, or days to cash, improved by a net 24 days.

As of September 27, 2009, substantially all of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 27, 2009 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. When evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value has been below our cost basis, the financial condition of the entity in which the investment is made, and our ability and intent to hold the investment for a period of time that may be sufficient for anticipated recovery in market value. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of September 27, 2009.

We believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for the remainder of fiscal 2010. We have and may continue to use a portion of our available cash and cash equivalents, or funds underlying our marketable securities, to repurchase shares of our common stock. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties, or expand our production capacity.

Cash Flows

In summary, our cash flows were as follows (in thousands):

 

     Three Months Ended      
     September 27,
2009
    September 28,
2008
    Change

Cash provided by operating activities

   $ 61,188      $ 43,951      $ 17,237

Cash used in investing activities

     (114,853     (129,094     14,241

Cash provided by financing activities

     459,299        1,204        458,095

Effects of foreign exchange changes

     203        (250     453
                      

Net increase (decrease) in cash and cash equivalents

   $ 405,837      $ (84,189   $ 490,026

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.

Cash Flows from Operating Activities

Net cash provided by operating activities was $61.2 million in the first quarter of fiscal 2010 compared to $44.0 million in the first quarter of fiscal 2009. The increase in cash provided by operating activities during the first quarter of fiscal 2010 compared to the same period of the prior year is primarily due to higher net income in the current year and the timing of cash payments to our vendors, offset somewhat by increases in our inventory in the current year.

Cash Flows from Investing Activities

Net cash used in investing activities was $114.9 million in the first quarter of fiscal 2010 compared to $129.1 million in the first quarter of fiscal 2009. Our investing activities primarily relate to transactions within our investments, strategic acquisitions, purchase of property, plant and equipment and purchase of patent and license rights. Cash used in investing activities also included a $57.1 million cash expenditure related to the second and final contingent consideration payment related to the COTCO acquisition and is comparable to the first contingent consideration payment of $60.0 million made in the first quarter of 2009. In addition we increased expenditures related to the acquisition of property and equipment in the current quarter to $20.4 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was $459.3 million in the first quarter of fiscal 2010 compared to $1.2 million in the first quarter of fiscal 2009. In the current year, cash provided by financing activities increased primarily due to our sale of 12.65 million shares of our common stock with net proceeds of approximately $434.2 million. Our cash flows from financing activities are also composed of cash proceeds from the issuance of common stock including employee stock option exercises and employee stock plan purchases in the amount of $23.2 million.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 27, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain of our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 28, 2009, in the section entitled “Contractual Obligations” for the future minimum lease payments due under our operating leases as of June 28, 2009.

Critical Accounting Policies and Estimates

For information about our other critical accounting policies and estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 28, 2009.

 

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CREE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Recent Accounting Pronouncements

See Note 1, “Basis of Presentation and Changes in Significant Accounting Policies,” to our unaudited financial statements in Part I, Item 1 of this Quarterly Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about our market risks, see Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 28, 2009.

 

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures are effective in that they provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the United States Securities and Exchange Commission’s rules and forms.

We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. There have been no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the first quarter of fiscal 2010 that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 4T. Controls and Procedures

Not applicable.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

Please refer to Note 13, “Commitments and Contingencies,” in our consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 28, 2009 for a description of material legal proceedings.

Other Matters

We are currently a party to other legal proceedings incidental to our business. Although the resolution of these matters cannot be predicted with certainty, management’s present judgment is that the final outcome will not likely have a material adverse effect on our consolidated financial condition or results of operations. If an unfavorable resolution occurs, our business, results of operations and financial condition could be materially adversely affected.

 

Item 1A. Risk Factors

Described below are various risks and uncertainties that may affect our business. If any of the risks described below actually occurs, our business, financial condition or results of operations could be materially and adversely affected.

Our business may be adversely affected by the global economic downturn, the continuing uncertainties in the financial markets and our, or our customers’ or suppliers’ ability to access the capital markets.

The global economy is currently in a pronounced economic downturn. Global financial markets are continuing to experience disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. Given these uncertainties, there is no assurance that there will not be further deterioration in the global economy, the global financial markets and consumer confidence. We are unable to predict the likely duration and severity of the current global economic downturn or disruptions in the financial markets. If economic conditions deteriorate further, our business and results of operations could be materially and adversely affected.

Our business and results of operations could also be impacted by a number of follow-on effects of the disruptions in the financial markets, including the inability of our customers, or their customers, to obtain sufficient financing to purchase historical or projected quantities of our products. Our revenues and gross margins are dependent upon customer demand, and if our projections of their expenditures fail to materialize, due to reductions in customer purchases or otherwise, our revenues and gross margins could be adversely affected.

Additionally, the inability of our customers and suppliers to access capital efficiently, or at all, may have other adverse effects on our financial condition. For example, financial difficulties experienced by our customers or suppliers could result in product delays; increased accounts receivable defaults; and an increase in our inventory exposure. These risks may increase if our customers and suppliers do not adequately manage their business or do not properly disclose their financial condition to us.

Although we believe we have adequate liquidity and capital resources to fund our operations internally, our inability to access the capital markets on favorable terms in the future, or at all, may adversely affect our financial performance. The inability to obtain adequate financing from debt or capital sources in the future could force us to self-fund strategic initiatives or even forgo certain opportunities, which in turn could potentially harm our performance.

 

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Our results of operations, financial condition and business could be harmed if we were unable to balance customer demand and capacity.

As customer demand for our products changes, we must be able to ramp up or adjust our production capacity to meet demand. We are continually taking steps to address our manufacturing capacity needs for our products. If we are not able to increase our capacity or if we increase our capacity too quickly, our business and results of operations could be adversely impacted. If we experience delays or unforeseen costs associated with adjusting our capacity levels, we may not be able to achieve our financial targets.

Conversely, due to the proportionately high fixed cost nature of our business, when demand decreases, we may not be able to reduce manufacturing expenses or overhead costs at the same rate as demand, which could result in lower margins and adversely impact our business and results of operations.

If we fail to evaluate, implement and integrate strategic opportunities successfully, our business may suffer.

From time to time we evaluate strategic opportunities available to us for product, technology or business acquisitions. For example, in July 2006 we acquired INTRINSIC, in March 2007 we acquired COTCO, and in February 2008 we acquired LLF. If we choose to make acquisitions, we face certain risks, such as failure of the acquired business to meet our performance expectations, diversion of management attention, retention of existing customers of our current and acquired businesses, and difficulty in integrating the acquired business’s operations, personnel and financial and operating systems into our current business. For example, through our acquisitions of COTCO and LLF we acquired certain customer relationships, some of which were considered related persons (see Note 16 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2009), that we may not be able to successfully retain.

We may not be able to adequately address these risks or any other problems that arise from our recent or future acquisitions. Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any acquisition could adversely affect our business, results of operations or financial condition.

We face significant challenges managing our growth.

We have experienced a period of significant growth over the past few years that may challenge our management and other resources. We continue to transform our business to support a global components and LED lighting product customer base. In order to manage our growth and change in our strategy effectively, we must continue to:

 

   

maintain, expand and/or purchase adequate manufacturing facilities and equipment to meet customer demand;

 

   

maintain a sufficient supply of raw materials to support our growth;

 

   

expand research and development, sales and marketing, technical support, distribution capabilities and administrative functions;

 

   

expand the skills and capabilities of our current management team;

 

   

add experienced senior level managers; and

 

   

attract and retain qualified employees.

 

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While we intend to focus on managing our costs and expenses, over the long term we expect to invest substantially to support our growth and may have additional unexpected costs. We may not be able to expand quickly enough to exploit potential market opportunities.

We are also increasingly dependent on information technology to enable us to improve the effectiveness of our operations and to maintain financial accuracy and efficiency. In fiscal 2009, we substantially completed the implementation of our primary financial reporting system at the operations assumed through the LLF and COTCO acquisitions. If we do not allocate and effectively manage the resources necessary to build, implement and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property through security breach.

In connection with our efforts to cost-effectively manage our growth, we have increasingly relied on subcontractors for production capacity, logistics support and certain administrative functions, such as payroll processing. If these service providers do not perform effectively, we may not be able to achieve the expected cost savings and may incur additional costs to correct errors or fulfill customer demand. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies or the loss of or damage to intellectual property through security breach, or impact employee morale. Our operations may also be negatively impacted if any of these service providers do not have the financial capability to meet our growing needs.

If we are unable to effectively develop, manage and expand our distribution channels for our products, our operating results may suffer.

We have expanded into new business channels that are different from those that we have historically operated in as we grow our business and sell LED lighting products and more LED components versus LED chips. If we are unable to effectively penetrate these new distribution channels to ensure our products are reaching the appropriate customer base, our financial results may be adversely impacted. In addition, if we successfully penetrate these new distribution channels, we cannot guarantee that customers will accept our products or that we will be able to manufacture and deliver them in the timeline established by our customers.

The markets in which we operate are highly competitive and have evolving technical requirements.

The markets for our products are highly competitive. In the LED market, we compete with companies that manufacture or sell nitride-based LED chips as well as those that sell LED components. Competitors are offering new blue, green and white LEDs with aggressive prices and improved performance. These competitors may reduce average sales prices faster than we are able to reduce costs, and competitive pricing pressures may accelerate the rate of decline of our average sales prices. The market for SiC wafers is also becoming more competitive as other firms in recent years have begun offering SiC and GaN products or announced plans to do so.

As competition increases, in order to achieve our revenue growth objectives in fiscal 2010 and beyond, we need to continue to develop new products that enable our customers to win new designs and increase market share. Additionally, we anticipate that increased competition for these designs will result in pressure to lower the selling prices of our products. Therefore, our ability to continually produce more efficient, higher brightness LEDs that meet the evolving needs of our customers at lower costs will be critical to our success. Competitors may also try to align with some of our strategic customers. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Competitors could also invent new technologies that may make our products obsolete. Any of these developments could have an adverse effect on our business, results of operations or financial condition.

 

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Our LED revenues are highly dependent on our customers’ ability to produce and sell more integrated products using our LED products.

Because our customers generally integrate our LED products into the products that they market and sell, our LED revenues depend on getting our LED products designed into a larger number of our customers’ products and our customers’ ability to sell those products. For example, some of our current customers, as well as prospective customers, create white LED components using our blue LEDs, in combination with phosphors. Sales of blue LED chips are highly dependent upon our customers’ ability to procure efficient phosphors, develop high quality and highly efficient white LED components and gain access to the necessary intellectual property rights. Even if our customers are able to develop competitive white LED components using our blue LED chips, there can be no assurance that our customers will be successful in the marketplace.

We also have current and prospective customers that create lighting systems using our LED components. Sales of LED components for these applications are highly dependent upon our customers’ ability to develop high quality and highly efficient lighting products, including thermal design, optical design and power conversion. The lighting industry has traditionally not had this level of technical expertise for LED related designs, which may limit the success of our customers’ products. Even if our customers are able to develop efficient systems, there can be no assurance that our customers will be successful in the marketplace.

As a result of our continued expansion in new markets, such as LED components and LED lighting products, our traditional customers may reduce orders.

Through acquisitions and organic growth, we continue to expand in new markets, such as LED components and LED lighting products. In these new markets, some of our current customers may now perceive us as a competitor. In response, our customers may reduce their orders for our products. This reduction in orders could occur faster than our sales growth in these new markets, which could adversely affect our business, results of operations or financial condition.

Our operating results are substantially dependent on the development and acceptance of new products.

Our future success may depend on our ability to develop new and lower cost solutions for existing and new markets and for customers to accept those solutions. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we historically have experienced delays in completing the development and introduction of new products. The successful development and introduction of these products depends on a number of factors, including the following:

 

   

achievement of technology breakthroughs required to make commercially viable devices;

 

   

the accuracy of our predictions for market requirements and evolving standards;

 

   

acceptance of our new product designs;

 

   

acceptance of new technology in certain markets;

 

   

the availability of qualified research and development personnel;

 

   

our timely completion of product designs and development;

 

   

our ability to expand sales and influence key customers to adopt our products;

 

   

our ability to develop repeatable processes to manufacture new products in sufficient quantities and at low enough costs for commercial sales;

 

   

our ability to effectively transfer products and technology developed in one country to our manufacturing facilities in other countries;

 

   

our customers’ ability to develop competitive products incorporating our products; and

 

   

acceptance of our customers’ products by the market.

 

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If any of these or other factors becomes problematic, we may not be able to develop and introduce these new products in a timely or cost-effective manner.

Litigation could adversely affect our operating results and financial condition.

We are often involved in patent infringement litigation as described in Note 13, “Commitments and Contingencies,” to our consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 28, 2009. Defending against existing and potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which could adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially adversely affect our results of operations and financial condition.

Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights. Any such litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. Moreover, there is no assurance that we will be successful in any such litigation.

Our business may be impaired by claims that we, or our customers, infringe intellectual property rights of others.

Vigorous protection and pursuit of intellectual property rights characterize our industry. These traits have resulted in significant and often protracted and expensive litigation. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:

 

   

pay substantial damages;

 

   

indemnify our customers;

 

   

stop the manufacture, use and sale of products found to be infringing;

 

   

incur asset impairment charges

 

   

discontinue the use of processes found to be infringing;

 

   

expend significant resources to develop non-infringing products or processes; or

 

   

obtain a license to use third party technology.

There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect to our products. In addition, our customers may face infringement claims directed to the customer’s products that incorporate our products, and an adverse result could impair the customer’s demand for our products. We have also promised certain of our customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under these indemnification obligations we may be responsible for future payments to resolve infringement claims against them. From time to time we receive correspondence asserting that our products or processes are or may be infringing patents or other intellectual property rights of others. If we believe the assertions may have merit or in other appropriate circumstances, we take steps to seek to obtain a license or to avoid the infringement. However, we cannot predict whether a license will be available; that we would find the terms of any license offered acceptable; or that we would be able to develop an alternative solution. Failure to obtain a necessary license or develop an alternative solution could cause us to incur substantial liabilities and costs and to suspend the manufacture of affected products.

 

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There are limitations on our ability to protect our intellectual property.

Our intellectual property position is based in part on patents owned by us and patents exclusively licensed to us. We intend to continue to file patent applications in the future, where appropriate, and to pursue such applications with U.S. and foreign patent authorities.

However, our existing patents are subject to expiration and we cannot be sure that additional patents will be issued on any new applications around the covered technology or that our existing or future patents will not be successfully contested by third parties. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents, or patents issued to others and licensed to us, will provide significant commercial protection, especially as new competitors enter the market.

In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information through appropriate efforts to maintain its secrecy, including requiring employees and third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or that the confidentiality agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such agreements or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.

If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items.

The manufacture of our products involves highly complex processes. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects or flaws that only become evident after shipment. Even if our products meet standard specifications, our customers may attempt to use our products in applications they were not designed for or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.

We have experienced product quality, performance or reliability problems from time to time and defects or failures may occur in the future. If failures or defects occur, we may need to recall our products. These recalls could result in significant losses due to:

 

   

costs associated with the removal, collection and destruction of the product recalled;

 

   

payments made to replace recalled product;

 

   

a rise in warranty expense and costs associated with customer support;

 

   

the write down or destruction of existing inventory subject to the recall;

 

   

lost sales due to the unavailability of product for a period of time;

 

   

delays, cancellations or rescheduling of orders for our products; or

 

   

increased product returns.

We also may be the target of product liability lawsuits, and could suffer losses from a significant product liability judgment against us if the use of our products at issue is determined to have caused injury. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of customer confidence in our products.

 

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Our operations in foreign countries, including China and other Asian countries, expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.

As a result of acquisitions and organic growth, we have operations, manufacturing facilities and subcontract arrangements in foreign countries that expose us to certain risks. For example, fluctuations in exchange rates may affect our revenues, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:

 

   

protection of intellectual property and trade secrets;

 

   

tariffs and other barriers;

 

   

timing and availability of export licenses;

 

   

rising labor costs;

 

   

disruptions in the infrastructure of the foreign countries where we operate;

 

   

difficulties in accounts receivable collections;

 

   

difficulties in staffing and managing international operations;

 

   

the burden of complying with foreign and international laws and treaties; and

 

   

the burden of complying with and changes in international taxation policies.

In some instances, we have been provided and may continue to receive competing incentives from foreign governments to encourage our investment in certain countries, regions, or areas outside of the United States. In particular, we have received and may continue to receive such incentives in connection with our operations in China, as the Chinese national and local governments seek to encourage the development of the technology industry in China. Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us due to our foreign operations. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any reduction or elimination of incentives currently provided to our operations could adversely affect our business and results of operations.

In addition, abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could result in an adverse effect on our business and results of operations.

We are subject to risks related to international purchases and sales.

We expect that revenue from international sales will continue to represent the majority of our total revenue. We also purchase a portion of the materials included in our products from overseas sources. As a result, our international sales and purchases are subject to numerous U.S. and foreign laws and regulations, including, without limitation, tariffs, trade barriers, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. If we fail to comply with these laws and regulations, we could be liable for administrative, civil or criminal liabilities, and in the extreme case, we could be suspended or debarred from government contracts or our export privileges could be suspended, which could have a material adverse effect on our business.

International sales and purchases are also subject to a variety of other risks, including risks arising from currency fluctuations, collection issues and taxes. Our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S. Dollar and more competitive in countries with currencies that are increasing in value against the U.S. Dollar. In addition, our international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies in which we are billed.

We have not entered into any foreign currency derivative financial instruments; however, we may choose to do so in the future in an effort to manage or hedge our foreign exchange rate risk.

 

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Variations in our production yields and limitations in the amount of process improvements we can implement could impact our ability to reduce costs and could cause our margins to decline and our operating results could suffer.

All of our products are manufactured using technologies that are highly complex. The number of usable items, or yield, from our production processes may fluctuate as a result of many factors, including but not limited to the following:

 

   

variability in our process repeatability and control;

 

   

contamination of the manufacturing environment;

 

   

equipment failure, power outages or variations in the manufacturing process;

 

   

lack of consistency and adequate quality and quantity of piece parts and other raw materials;

 

   

losses from broken wafers, inventory shrinkage or human errors;

 

   

defects in packaging either within our facilities or at our subcontractors; and

 

   

any transitions or changes in our production process, planned or unplanned.

In the past, we have experienced difficulties in achieving acceptable yields on new products, which has adversely affected our operating results. We may experience similar problems in the future, and we cannot predict when they may occur or their severity.

In addition, our ability to convert volume manufacturing to larger diameter substrates can be an important factor in allowing for a more cost effective manufacturing process. If we are unable to make this transition in a timely or cost effective manner, our results could be negatively impacted.

In some instances, we may offer products for future delivery at prices based on planned yield improvements or increased cost efficiencies from other production advances. Failure to achieve these planned improvements or advances could significantly affect our margins and operating results.

We depend on a limited number of customers for a substantial portion of our revenues, and the loss of, or a significant reduction in purchases by, one or more of these customers could adversely affect our operating results.

We receive a significant amount of our revenues from a limited number of customers. For example, in fiscal 2009, two customers, Seoul Semiconductor Co., Ltd. and Arrow Electronics, Inc. individually accounted for more than 10% of our net revenue, for a combined total of 24% of our total net revenue. Sales to these and most of our other large customers are made on a purchase order basis, which does not generally require any long-term customer commitments. Therefore, these customers may alter their past purchasing behavior with little or no notice to us for various reasons, including: developing their own product solutions; choosing to purchase product from our competitors; or experiencing a reduction in their market share in the markets for which they purchase our products. If our customers alter their past (or expected) purchasing behavior, or if we encounter any problems collecting amounts due from them, our financial condition and results of operations could be negatively impacted.

We rely on a few key sole source and limited source suppliers, and are subject to high price volatility on certain commodity inputs.

We depend on a small number of sole source and limited source suppliers for certain raw materials, components, services and equipment used in manufacturing our products, including key materials and equipment used in critical stages of our manufacturing processes. Although alternative sources generally exist for these items, qualification of many of these alternative sources could take up to six months or longer. Where possible, we attempt to identify and qualify alternative sources for our sole and limited source suppliers.

 

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We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply arrangements with such suppliers. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us. In the past, we have experienced decreases in our production yields when suppliers have varied from previously agreed upon specifications that have impacted our cost of sales.

Additionally, the inability of our suppliers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours. This risk may increase if the general economic downturn negatively affects key suppliers or a significant number of our other suppliers. Any delay in product delivery or other interruption or variation in supply from these suppliers could prevent us from meeting commercial demand for our products. If we were to lose key suppliers, our key suppliers were unable to support our demand or we were unable to identify and qualify alternative suppliers, our manufacturing operations could be interrupted or hampered significantly.

In our fabrication process we consume a number of precious metals and other commodities, which are subject to high price volatility. Our operating margins could be significantly affected if we are not able to anticipate price changes correctly, or if we are not able to pass along price increases to our customers.

If government agencies discontinue or curtail their funding for our research and development programs, our business may suffer.

Changes in federal budget priorities could adversely affect our contract revenue. Historically, government agencies have funded a significant portion of our research and development activities. When the government changes budget priorities, such as in times of war or financial crisis, our funding has the risk of being redirected to other programs. Government contracts are also subject to the risk that the government agency may not appropriate and allocate all funding contemplated by the contract. In addition, our government contracts generally permit the contracting authority to terminate the contracts for the convenience of the government. The full value of the contracts would not be realized if they were prematurely terminated. Furthermore, we may be unable to incur sufficient allowable costs to generate the full estimated contract values and there is some risk that any technologies developed under these contracts may not have commercial value. If government funding is discontinued or reduced, our ability to develop or enhance products could be limited, and our business, results of operations and financial condition could be adversely affected.

Our failure to comply with applicable environmental laws and regulations worldwide could harm our business and results of operations.

The manufacturing, assembling and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:

 

   

regulatory penalties, fines and legal liabilities;

 

   

suspension of production;

 

   

alteration of our fabrication, assembly and test processes; and

 

   

curtailment of our operations or sales.

In addition, our failure to manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify our product designs or incur other expenses associated with such laws and regulations. Many new materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter our manufacturing processes.

 

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Changes in our effective tax rate may have an adverse effect on our results of operations.

Our future effective tax rates may be adversely affected by a number of factors including:

 

   

changes in government administrations, such as the Presidency and Congress of the U.S. as well as in the states and countries in which we operate;

 

   

changes in tax laws or interpretation of such tax laws and changes in generally accepted accounting principles;

 

   

the jurisdiction in which profits are determined to be earned and taxed;

 

   

the resolution of issues arising from tax audits with various authorities;

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

adjustments to estimated taxes upon finalization of various tax returns;

 

   

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;

 

   

changes in available tax credits;

 

   

the recognition and measurement of uncertain tax positions;

 

   

the lack of sufficient excess tax benefits (credits) in our additional paid in capital (“APIC”) pool in situations where our realized tax deductions for certain stock-based compensation awards (such as non-qualified stock options and restricted stock) are less than those originally anticipated; and

 

   

the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes, or any changes in legislation that may result in these earnings being taxed within the U.S., regardless of our decision regarding repatriation of funds.

For example, current proposals have been made by various U.S. governmental bodies to change the U.S. tax laws that include, among other things, limiting U.S. tax deductions for expenses related to un-repatriated foreign-source income and modifying the U.S. foreign tax credit rules. Although the scope of the proposed changes is unclear, it is possible that these or other changes in U.S. tax laws could increase our U.S. income tax liability and adversely affect our profitability. At this time, we cannot determine the timing that the proposed changes, if enacted, are to become effective.

Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the determination of our income tax provision requires complex estimations, significant judgments and significant knowledge and experience concerning the applicable tax laws. To the extent our income tax liability materially differs from our income tax provisions and accruals due to factors, including the above, which were not anticipated at the time we estimated our tax provision, our net income or cash flows could be adversely affected.

In order to compete, we must attract, motivate and retain key employees, and our failure to do so could harm our results of operations.

In order to compete, we must attract, motivate and retain executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Hiring and retaining qualified executives, scientists, engineers, technical staff and sales personnel are critical to our business, and competition for experienced employees in our industry can be intense. To help attract, motivate and retain key employees, we use stock-based compensation awards such as non-qualified stock options and

 

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restricted stock. If the value of such stock awards does not appreciate, as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate employees could be weakened, which could harm our business and results of operations.

We are exposed to fluctuations in the market value of our investment portfolio and in interest rates, and therefore, impairment of our investments or lower investment income could harm our earnings.

We are exposed to market value and the inherent interest rate risk related to our investment portfolio. We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities and other fixed interest rate investments. The primary objective of our investments is to preserve principal and we only acquire investments rated “AAA.”. However, our investments are not all FDIC insured and may lose value and/or become illiquid regardless of their rating; in addition, declines in underlying interest rates will have a negative impact on the income generated from our investments, which could materially adversely affect our results of operations.

We may be required to record a significant charge to earnings if our goodwill or amortizable intangible assets become impaired.

We are required under generally accepted accounting principles to review our amortizable intangible assets and investments in equity interests for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets or goodwill may not be recoverable include a decline in stock price and market capitalization and slower growth rates in our industry. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our amortizable intangible assets or goodwill is determined to exist. This could adversely impact our results of operations.

Catastrophic events may disrupt our business.

A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as an influenza outbreak within our workforce, or man-made catastrophic event could cause delays in completing sales, continuing production or performing other critical functions of our business, especially in the case of our single site for SiC wafer and LED fabrication. A catastrophic event that results in the destruction or disruption to our supply chain or any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected.

Our results of operations could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies, including changes in the accounting regulations to be applied.

The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 28, 2009). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.

 

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Likewise, our results of operations may be impacted due to changes in the accounting rules to be applied, such as the increased use of fair value measurement rules and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards.

Our stock price may be volatile.

Historically, our common stock has experienced substantial price volatility, particularly as a result of significant fluctuations in our revenue, earnings and margins over the past few years and variations between our actual financial results and the published expectations of analysts. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price will likely decline.

Speculation in the press or investment community about our strategic position, financial condition, results of operations, or significant transactions can also cause changes in our stock price. In particular, speculation around our market opportunities for energy efficient lighting may have dramatic effects on our stock price, especially as various government agencies announce their planned investments in energy efficient technology, including lighting.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

 

Item 5. Other Information

Not applicable.

 

Item 6. Exhibits

The following exhibits are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:

 

Exhibit No.

  

Description

  3.1    Bylaws, as amended and restated (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated August 17, 2009, as filed with the Securities and Exchange Commission on August 21, 2009)
10.1    Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 17, 2009, as filed with the Securities and Exchange Commission on August 21, 2009)
10.2    Notice of Grant to Charles M. Swoboda, dated August 17, 2009 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated August 17, 2009, as filed with the Securities and Exchange Commission on August 21, 2009)

 

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Exhibit No.

  

Description

10.3    Non-Employee Director Stock Compensation and Deferral Program
10.4    Schedule of Compensation for Non-Employee Directors
10.5    Addendum to Form of Master Stock Option Award Agreement Terms and Conditions for Grants of Nonqualified Stock Options to Non-Employee Directors
31.1    Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CREE, INC.

Date: October 20, 2009

   
   

/ S /    J OHN T. K URTZWEIL      

    John T. Kurtzweil
   

Executive Vice President, Chief Financial

Officer and Treasurer

   

(Authorized Officer and Principal Financial

and Chief Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

 3.1    Bylaws, as amended and restated (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated August 17, 2009, as filed with the Securities and Exchange Commission on August 21, 2009)
10.1    Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 17, 2009, as filed with the Securities and Exchange Commission on August 21, 2009)
10.2    Notice of Grant to Charles M. Swoboda, dated August 17, 2009 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated August 17, 2009, as filed with the Securities and Exchange Commission on August 21, 2009)
10.3    Non-Employee Director Stock Compensation and Deferral Program
10.4    Schedule of Compensation for Non-Employee Directors
10.5    Addendum to Form of Master Stock Option Award Agreement Terms and Conditions for Grants of Nonqualified Stock Options to Non-Employee Directors
31.1    Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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Exhibit 10.3

CREE, INC. NON-EMPLOYEE DIRECTOR STOCK COMPENSATION AND

DEFERRAL PROGRAM

ARTICLE I—INTRODUCTION

Cree, Inc. has established the Cree, Inc. Non-Employee Director Stock Compensation and Deferral Program to permit its non-employee directors to defer certain compensation paid to them as directors.

ARTICLE II—DEFINITIONS

When used in the Plan, the following underlined terms shall have the meanings set forth below unless a different meaning is plainly required by the context:

2.01 Account:

The account maintained for a Participant on the books of the Company to determine, from time to time, the Participant’s interest under the Plan. The balance in such Account shall be determined by the Plan Administrator. Each Participant’s Account shall consist of one Deferral Subaccount for each separate deferral under Section 4.01. The Plan Administrator may also establish such additional Deferral Subaccounts or subaccounts to a Deferral Subaccount as it deems necessary for the proper administration of the Plan. The Plan Administrator may also combine Deferral Subaccounts to the extent it deems separate accounts are not needed for sound recordkeeping. Where appropriate, a reference to a Participant’s Account shall include a reference to each applicable Deferral Subaccount that has been established thereunder.

2.02 Act:

The Securities Exchange Act of 1934, as amended from time to time.

2.03 Beneficiary:

The person or persons (including a trust or trusts) properly designated by a Participant in accordance with Section 4.02(c), as determined by the Plan Administrator, to receive the amounts in one or more of the Participant’s Deferral Subaccounts in the event of the Participant’s death.

2.04 Code:

The Internal Revenue Code of 1986, as amended from time to time.

2.05 Company:

Cree, Inc., a corporation organized and existing under the laws of the State of North Carolina, or its successor or successors.

2.06 Cree Organization:

The controlled group of organizations of which the Company is a part, within the meaning of Code Sections 414(b) and (c) and the corresponding regulations. An entity shall be considered a member


of the Cree Organization only during the period it is one of the group of organizations described in the preceding sentence.

2.07 Deferral Subaccount:

A subaccount of a Participant’s Account maintained to reflect his or her interest in the Plan attributable to each deferral of Director Compensation, as adjusted in accordance with Section 5.03.

2.08 Director:

A member of the Board of Directors of the Company who is not treated by any member of the Cree Organization as an employee of the Cree Organization for payroll purposes.

2.09 Director Compensation:

The quarterly cash retainer amounts payable in cash by the Company to the Director for certain services performed during the applicable quarter as well as meeting fees payable in cash by the Company to the Director for certain meetings attended in the preceding quarter; provided that, any Deferred Compensation paid after the Plan Year in which it was earned shall in any event be subject to the deferral election applicable to the Plan Year in which the fees were earned.

2.10 Effective Date:

The Plan is hereby established effective January 1, 2010.

2.11 Election Form:

The form prescribed by the Plan Administrator on which a Participant specifies the percentage of his or her Director Compensation to be paid in Shares and whether payment of such Shares will be deferred, and, if so, the timing and form of his or her deferral payout, all pursuant to the provisions of Article IV. An Election Form need not exist in a paper format, and it is expressly authorized that the Plan Administrator may make available for use such technologies, including voice response systems, Internet-based forms and any other electronic forms, as it deems appropriate from time to time.

2.12 ERISA:

The Employee Retirement Income Security Act of 1974, as amended from time to time.

2.13 Fair Market Value:

The Fair Market Value of a Share on any date is the consolidated closing bid price for a Share as reported on The Nasdaq Stock Market (i) at the end of the regular trading session on the preceding business day if the transaction occurs before the end of the regular trading session on such date, or (ii) at the end of the regular trading session on such date if the transaction occurs after the end of the regular trading session on such date.

2.14 Fiscal Quarter:

Each fiscal quarter used by the Company for Securities and Exchange Commission reporting purposes.

 

2


2.15 Fiscal Year:

Each fiscal year used by the Company for Securities and Exchange Commission reporting purposes.

2.16 Key Employee:

The individuals identified in accordance with the principles set forth below.

(a) General . Any Participant who at any time during the applicable year is:

(1) an officer of any member of the Cree Organization having annual compensation greater than $130,000 (as adjusted for the applicable year under Code Section 416(i)(1));

(2) a 5-percent owner of any member of the Cree Organization; or

(3) a 1-percent owner of any member of the Cree Organization having annual compensation of more than $150,000.

For purposes of (1) above, no more than 50 employees identified in the order of their annual compensation shall be treated as officers. For purposes of this Section, annual compensation means compensation as defined in Treas. Reg. §1.415(c)-2(a), without regard to Treas. Reg. §§1.415(c)-2(d), 1.415(c)-2(e), and 1.415(c)-2(g). The Plan Administrator shall determine who is a Key Employee in accordance with Code Section 416(i) and the applicable regulations and other guidance of general applicability issued thereunder or in connection therewith (provided, that Code Section 416(i)(5) shall not apply in making such determination), and provided further that the applicable year shall be determined in accordance with Section 409A and that any modification of the foregoing definition that applies under Section 409A shall be taken into account.

(b) Applicable Year . The Plan Administrator shall determine Key Employees as of the last day of each calendar year (the “determination date”), based on compensation for such year, and the designation for a particular determination date shall be effective for purposes of the Plan for the twelve month period commencing on April 1 of the next following calendar year ( e.g., the Key Employees determined by the Plan Administrator as of December 31, 2009, shall apply to the period from April 1, 2010 to March 31, 2011).

2.17 Participant:

A Director with an Account. An active Participant is one who is currently deferring Director Compensation under Section 4.01.

 

3


2.18 Plan:

The Cree, Inc. Non-Employee Director Stock Compensation and Deferral Program set forth herein, as it may be amended and restated from time to time (subject to the limitations on amendments that are applicable hereunder).

2.19 Plan Administrator:

The Board of Directors of the Company or its delegate or delegates, which shall have the authority to administer the Plan as provided in Article VII. As of the Effective Date, the Board of Directors of the Company has delegated the responsibility for the administration of the Plan to the Compensation Committee of the Board of Directors, and the Compensation Committee has delegated responsibility for the operational administration of the Plan to the Company’s Stock Plan Manager. The Stock Plan Manager has the authority to re-delegate his or her responsibilities to other persons or parties. References in this document to the Plan Administrator shall be understood as referring to the Board of Directors, the Compensation Committee, the Stock Plan Manager, and those persons or parties to whom the Stock Plan Manager has delegated responsibilities, except to the extent expressly provided otherwise. All delegations made under the authority granted by this Section are subject to Section 7.06.

2.20 Plan Year:

The 12-consecutive month period beginning on January 1 and ending on December 31.

2.21 Section 409A:

Code Section 409A and the applicable regulations and other guidance of general applicability issued thereunder.

2.22 Share:

One share of common stock, par value $0.00125 per share, of the Company, as such Share may be adjusted pursuant to the provisions of Section 6.01(c).

2.23 Separation from Service:

A Participant’s “separation from service” within the meaning of Section 409A. In the event the Participant also provides services to the Cree Organization other than as a Director, such other services shall not be taken into account in determining when a Separation from Service occurs to the extent permitted under Treas. Reg. § 1.409A-1(h)(5). The term may also be used as a verb ( i.e. , “Separates from Service”) with no change in meaning.

2.24 Unforeseeable Emergency:

A severe financial hardship to the Participant resulting from –

(a) an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary or the Participant’s dependent (as defined in Code Section 152 without regard to Code Sections 152(b)(1), 152(b)(2) and 152(d)(1)(B));

(b) loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to the home not otherwise covered by insurance); or

 

4


(c) any other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

The Plan Administrator shall determine the occurrence of an Unforeseeable Emergency in accordance with Treas. Reg. §1.409A-3(i)(3) and any guidelines that may be established by the Plan Administrator.

ARTICLE III—ELIGIBILITY AND PARTICIPATION

3.01 Eligibility to Participate:

(a) Eligibility . An individual shall be eligible to elect to receive Director Compensation in Shares and to defer receipt of such Shares under the Plan during the period that he or she is a Director hereunder.

(b) Active Participation . A Director shall become an active Participant on the effective date of the Director’s election under Subsection (a) pursuant to an Election Form submitted by the Director to the Plan Administrator under Section 4.01.

3.02 Termination of Eligibility to Defer:

An individual’s eligibility to participate actively in the Plan shall cease as soon as administratively practicable following the date he or she ceases to be a Director.

3.03 Termination of Participation:

An individual, who has been an active Participant under the Plan, ceases to be a Participant on the date his or her Account is fully paid out.

ARTICLE IV—DIRECTOR ELECTIONS REGARDING

FORM AND TIME OF PAYMENT

4.01 Elections:

(a) General . Each Director may elect in the manner described in Section 4.02 (i) to receive either 25%, 50%, 75% or 100% of his or her Director Compensation in Shares; and (ii) to defer the time of receipt of such Shares. Any such election shall apply to Director Compensation that is earned for services performed in the corresponding calendar year. When an individual first becomes a Director, he or she may only elect to defer the portion of his or her eligible Director Compensation for the calendar year in which he or she becomes a Director that is earned for services performed after the date of his or her election as a Director. Director Compensation that is deferred by a Director for a calendar year will be deducted for each payment period during the calendar year for which he or she has Director Compensation. Director Compensation paid after the end of a calendar year for services performed during such initial calendar year shall be treated as Director Compensation for services performed during such initial calendar year.

(b) Election Forms . To be effective, a Director’s Election Form must set forth the percentage of Director Compensation covered by the election, whether payment of such Shares will be deferred, and any other information that may be requested by the Plan Administrator from time to time. In addition, the Election Form must meet the requirements of Section 4.02.

 

5


4.02 Time and Manner of Deferral Election:

(a) Deferral Election Deadlines . A Director must make a deferral election for Director Compensation earned for services performed in a calendar year no later than December 31 st of the immediately preceding calendar year (or any earlier date and time specified by the Plan Administrator). If such December 31 st is not a business day, then the deadline for deferral elections will be the first business day preceding such December 31 st . In addition, an individual who newly becomes a Director during a calendar year will have 30 days from the date the individual becomes a Director to submit an Election Form with respect to Director Compensation earned for Fiscal Quarters beginning in such calendar year after the date on which the Election Form is received by the Plan Administrator.

(b) General Provisions . A separate deferral election under Subsection (a) above must be made by a Director for each calendar year’s Director Compensation. If a properly completed and executed Election Form is not actually received by the Plan Administrator by the prescribed time in Subsection (a) above, the Director will be deemed to have elected not to receive any Director Compensation in Shares for the applicable calendar year and not to defer any Director Compensation for the applicable calendar year. Except as provided in the next sentence, an election is irrevocable once received and determined by the Plan Administrator to be properly completed (and such determination shall be made not later than December 31 st of the immediately preceding calendar year). Increases or decreases in the amount or percentage a Participant elects to defer shall not be permitted after the beginning of the applicable calendar year; provided that if a Participant receives a distribution on account of an Unforeseeable Emergency pursuant to Section 6.06, the Plan Administrator may cancel the Participant’s deferral election for the year in which such distribution occurs. If an election is cancelled because of a distribution on account of an Unforeseeable Emergency, such cancellation shall permanently apply to the deferral election for such calendar year, and the Participant will only be eligible to make a new deferral election for the next calendar year pursuant to the rules in Sections 4.01 and 4.02.

(c) Beneficiaries . A Participant may designate, on a form prescribed by the Plan Administrator, one or more Beneficiaries to receive payment of amounts credited to the Participant’s Account in the event of the Participant’s death; provided that, to be effective, any Beneficiary designation must be in writing, signed by the Participant, and must meet such other standards (including any requirement for spousal consent) as the Plan Administrator shall require from time to time. The Beneficiary designation must also be filed with the Plan Administrator prior to the Participant’s death. An incomplete Beneficiary designation, as determined by the Plan Administrator, shall be void and no effect. A Beneficiary designation of an individual by name remains in effect regardless of any change in the designated individual’s relationship to the Participant. Any Beneficiary designation submitted to the Plan Administrator that only specifies a Beneficiary by relationship shall not be considered an effective Beneficiary designation and shall be void and of no effect. If more than one Beneficiary is specified and the Participant fails to indicate the respective percentage applicable to two or more Beneficiaries, then each Beneficiary for whom a percentage is not designated will be entitled to an equal share of the portion of the Account (if any) for which percentages have not been designated. At any time, a Participant may change a Beneficiary designation for his or her Account in a writing that is signed by the Participant and filed with the Plan Administrator prior to the Participant’s death, and that meets such other standards as the Plan Administrator shall require from time to time. An individual who is otherwise a Beneficiary with respect to a Participant’s Account ceases to be a Beneficiary when all payments have been made from the Account.

 

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4.03 Time and Form of Payment:

A Director making a deferral election shall specify on his or her Election Form for a Deferral Subaccount either (i) a lump sum payment to be made on January 10 th of the first, second, third, fourth or fifth Plan Year following the date of the Director’s Separation from Service, or (ii) annual installment payments to be made during the period beginning on January 10 th of the first, second, third or fourth Plan Year following the date of the Director’s Separation from Service and ending on January 10 th of the second, third, fourth or fifth Plan Year following the date of the Director’s Separation from Service. If a Director fails to affirmatively designate a time and form of payment on his or her Election Form for a Deferral Subaccount, the Director shall be deemed to have specified a lump sum payment to be made on January 10 th of the first Plan Year following the date of the Director’s Separation from Service. If any such January 10 th is not a business day, the time of payment shall be deemed to mean the first business day following such January 10 th .

ARTICLE V—INTERESTS OF PARTICIPANTS

5.01 Share Payments That Are Not Deferred:

If a Director elects to receive Director Compensation in Shares but does not elect to defer receipt of such Shares pursuant to Article IV, the amount of Director Compensation to be paid in Shares shall be converted into Shares after The Nasdaq Stock Market closes on the first business day following the announcement of the Company’s earnings results for the immediately prior Fiscal Quarter (or Fiscal Year, in the case of the August announcement) by dividing the amount of Director Compensation to be paid in Shares by the Fair Market Value of a Share on the conversion date, and the Shares shall be issued in accordance with the Director’s instructions as soon as practicable after the conversion date, but in any event no later than the end of the fiscal quarter that immediately follows the fiscal quarter in which the Deferred Compensation was earned. If the number of Shares to be distributed is not a whole number, the number of Shares to be distributed will be rounded down to the closest whole number and the remaining amount will be paid in cash.

5.02 Deferral Subaccounts:

Each Participant shall have one separate Deferral Subaccount for each calendar year’s deferral of Director Compensation made by the Participant under the Plan. A Participant’s deferral shall be credited to a Deferral Subaccount as soon as administratively practicable following the date the Director Compensation would be paid in the absence of a deferral. A Participant’s Account is a bookkeeping device to track the value of the Participant’s deferrals and the Company’s liability therefor. No assets shall be reserved or segregated in connection with any Account, and no Account shall be insured or otherwise secured.

5.03 Deferred Cree, Inc. Common Stock:

(a) General . Each of a Participant’s Deferral Subaccounts shall be deemed invested on a deferred basis in shares of Cree, Inc. Common Stock to the extent provided in Subsection (b) below. The Plan provides only for “phantom investments,” and therefore such investments are hypothetical and not actual. However, they shall be applied to measure the value of a Participant’s Account and the amount of the Company’s liability to make deferred payments to or on behalf of the Participant.

 

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(b) Deferred Cree, Inc. Common Stock .

(1) Director Compensation deferred into a Deferral Subaccount for a Fiscal Quarter shall be converted into deferred shares of Cree, Inc. Common Stock of the Company of equivalent value after The Nasdaq Stock Market closes on the first business day following the announcement of the Company’s earnings results for the immediately prior Fiscal Quarter (or Fiscal Year, in the case of the August announcement) by dividing the amount of Director Compensation to be paid in Shares by the Fair Market Value of a Share on the conversion date. If the resulting number of deferred shares is not a whole number, the number of deferred shares credited to the Deferral Subaccount will be rounded down to the closest whole number and the remaining amount will be credited to the Deferral Subaccount in cash.

(2) A Deferral Subaccount shall be credited with a number of deferred shares of Cree, Inc. Common Stock equal to the number of Shares that would have been paid as a Share dividend (if any) with respect to a number of actual Shares equal to the number of deferred shares of Cree Inc. Common Stock credited to the Deferral Subaccount on the record date for such Share dividend. However, if the number of deferred shares to be credited to the Deferral Subaccount on account of a Share dividend pursuant to the previous sentence is not a whole number, the number of deferred shares actually credited to the Deferral Subaccount will be rounded down to the closest whole number and an amount of cash equal to the Fair Market Value of the resulting fractional share on the payment date of such Share dividend will be credited to the Deferral Subaccount effective immediately after the close of The Nasdaq Stock Market on the Share dividend payment date.

(3) The amount of cash that would have been paid as a cash dividend (if any) with respect to a number of actual Shares equal to the number of deferred shares of Cree Inc. Common Stock credited to the Deferral Subaccount on the record date for such cash dividend shall be converted into deferred shares of Cree, Inc. Common Stock by dividing such amount by the Fair Market Value of a Share on the payment date of such cash dividend. The resulting number of deferred shares shall be credited to the Deferral Subaccount. However, if the resulting number of deferred shares is not a whole number, the number of deferred shares actually credited to the Deferral Subaccount will be rounded down to the closest whole number, and an amount of cash equal to the Fair Market Value of the resulting fractional deferred share on the payment date of such dividend will be credited to the Deferral Subaccount effective immediately after the close of The Nasdaq Stock Market on the cash dividend payment date.

(4) If Shares change by reason of any stock split, stock dividend, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or any other corporate change treated as subject to this provision by the Plan Administrator, such equitable adjustment shall be made in the number and kind of deferred shares credited to an Account or Deferral Subaccount as the Plan Administrator may determine to be necessary or appropriate. If such equitable adjustment would result in the Deferral Subaccount holding a number of deferred shares that is not a whole number, the number of deferred shares actually credited to the Deferral Subaccount will be rounded down to the closest whole number and an amount of cash equal to the Fair Market Value on the date of such stock split or other corporate change of the resulting fractional share will be credited to the Deferral Subaccount effective immediately after the close of The Nasdaq Stock Market on the date of such stock split or other corporate change.

(5) In no event will Shares actually be purchased or held under the Plan, and no Participant shall have any rights as a shareholder of the Company on account of an interest in deferred shares of Cree, Inc. Common Stock.

 

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(c) Deferred Cree, Inc. Common Stock Restrictions . Notwithstanding the preceding provisions of this Section, the Plan Administrator may at any time alter the effective date of any investment or allocation involving deferred shares of Cree, Inc. Common Stock pursuant to Section 7.03(j) (relating to safeguards against insider trading). The Plan Administrator may also impose blackout periods pursuant to the requirements of the Sarbanes-Oxley Act of 2002 and other applicable law whenever the Plan Administrator determines that circumstances warrant. These provisions shall apply notwithstanding any provision of the Plan to the contrary except Section 7.07 (relating to compliance with Section 409A).

5.04 Vesting of a Participant’s Account:

A Participant’s interest in the value of his or her Account shall at all times be 100% vested and non-forfeitable.

ARTICLE VI—DISTRIBUTIONS

6.01 General:

(a) General Distribution Rules . A Participant’s Deferral Subaccount(s) shall be distributed as provided in this Article, subject in all cases to Section 7.03(j) (relating to safeguards against insider trading) and Section 7.06 (relating to compliance with Section 16 of the Act). Distributions shall be made in Shares and in cash, as specified in Section 6.05 below. In no event shall any portion of a Participant’s Account be distributed earlier or later than is allowed under Section 409A.

(b) Shares Authorized for Issuance . Subject to adjustment as provided in Subsection (c) below, the aggregate number of Shares that may be issued to Participants under the Plan is one hundred thousand (100,000).

(c) Adjustment of Shares . If any change in corporate capitalization, such as a stock split, reverse stock split, or stock dividend; or any corporate transaction such as a reorganization, reclassification, merger or consolidation or separation, including a spin-off, of the Company or sale or other disposition by the Company of all or a portion of its assets, any other change in the Company’s corporate structure, or any distribution to shareholders (other than a cash dividend) results in the outstanding Shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares or other securities of the Company, or for shares of stock or other securities of any other corporation (including unpaired shares replacing paired Shares); or new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding Shares; then equitable adjustments shall be made by the Plan Administrator, as determined to be necessary and appropriate, in the number of Shares that may be issued under the Plan as set forth in Subsection (b) above.

6.02 Distributions Based on Separation from Service:

(a) Lump Sum . If a Participant’s Deferral Subaccount is to be paid in the form of a lump sum pursuant to Section 4.03, the Deferral Subaccount shall be paid in a lump sum on the date on which distribution is to be made pursuant to Section 4.03. For example, if the Participant elects to receive a lump sum payment on January 10 th of the third Plan Year following the date of the Participant’s Separation from Service and the Participant Separates from Service on May 15, 2012, the Deferral Subaccount will be paid on January 10, 2015. The composition of the payment shall be determined pursuant to Section 6.05(a).

 

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(b) Installments . If a Participant’s Deferral Subaccount is to be paid in the form of installments pursuant to Section 4.03, the first installment payment shall be paid on the date on which distribution is to commence pursuant to Section 4.03. Thereafter, installment payments shall continue on each successive January 10 th in accordance with the schedule elected by the Participant for such Deferral Subaccount pursuant to Section 4.03, except as provided in Sections 6.03 and 6.04 (relating to distributions on account of death and Unforeseeable Emergency). For example, if the Participant elects to receive a three installment payments beginning on January 10 th of the third Plan Year following the date of the Participant’s Separation from Service and the Participant Separates from Service on May 15, 2012, the Deferral Subaccount will be paid in installments on January 10, 2015, January 10, 2016 and January 10, 2017. The amount and composition of each installment shall be determined under Section 6.05(b). Notwithstanding the preceding provisions of this Subsection (b), if before the date the last installment distribution is processed for payment the Participant would be entitled to a distribution in accordance with Sections 6.03 (relating to a distribution on account of death), the remaining balance of the Participant’s Deferral Subaccounts that would otherwise be distributed based on such Separation from Service shall instead be distributed in accordance with Section 6.03 (relating to distributions on account of death), but only to the extent it would result in an earlier distribution of the Participant’s Deferral Subaccounts in the case of Section 6.03.

(c) Key Employees . Notwithstanding Subsections (a) and (b) above, if the Participant is classified as a Key Employee at the time of the Participant’s Separation from Service (or at such other time for determining Key Employee status as may apply under Section 409A), then no portion of such Participant’s Account shall be paid, as a result of the Participant’s Separation from Service, earlier than the date that is six months after the date of the Participant’s Separation from Service. In such event:

(1) any lump sum payment that would otherwise have been paid during such six month period shall be distributed on the date that is six months after the date of the Participant’s Separation from Service; and

(2) any installment payment that would otherwise have been paid during such six month period shall be paid on the date that is six months after the date of the Participant’s Separation from Service, and the installment stream shall continue in accordance with the original installment payment schedule.

6.03 Distributions on Account of Death:

(a) General . Upon a Participant’s death, the Participant’s Account under the Plan shall be distributed in a single lump sum payment within 90 days following the date of the Participant’s death. If the Participant is receiving installment payments at the time of the Participant’s death, such installment payments shall continue in accordance with the terms of the Participant’s deferral election that governs such payments until the time that the lump sum payment is due to be paid under the provisions of the preceding sentence of this Subsection. Immediately prior to the time that such lump sum payment is to be paid all installment payments shall cease and the remaining balance of the Participant’s Account shall be distributed at such scheduled payment time in a single lump sum. Amounts paid following a Participant’s death, whether a lump sum or continued installments, shall be paid to the Participant’s Beneficiary. If some but not all of the persons designated as Beneficiaries by a Participant to receive his or her Account at death predecease the Participant, the Participant’s surviving Beneficiaries shall be entitled to the portion of the Participant’s Account intended for such pre-deceased persons in proportion to the surviving Beneficiaries’ respective shares.

 

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(b) Beneficiary . If no designation is in effect at the time of a Participant’s death (as determined by the Plan Administrator) or if all persons designated as Beneficiaries have predeceased the Participant, then the payments to be made pursuant to this Section shall be distributed as follows:

(1) if the Participant is married at the time of his or her death, all payments made pursuant to this Section shall be paid to the Participant’s spouse; and

(2) if the Participant is not married at the time of his or her death, all payments made pursuant to this Section shall be paid to the Participant’s estate.

The Plan Administrator shall determine whether a Participant is “married” and shall determine a Participant’s “spouse” based on the state or local law where the Participant has his or her primary residence at the time of death. The Plan Administrator is authorized to make any applicable inquires and to request any documents, certificates or other information that it deems necessary or appropriate in order to make the above determinations.

(c) Unforeseeable Emergency . Prior to the time the value of the Participant’s Account is distributed under this Section, the Participant’s Beneficiary may apply for a distribution under Section 6.06 (relating to a distribution on account of an Unforeseeable Emergency).

(d) Notice by Beneficiary . A Participant’s Beneficiary (or if there is no living Beneficiary, the administrator of the Participant’s estate) shall notify the Plan Administrator of the Participant’s death within 60 days following the date of the Participant’s death. If the Beneficiary fails to notify the Plan Administrator of the Participant’s death within 60 days following the date of the Participant’s death, neither the Company, the Board of Directors, the Compensation Committee of the Board of Directors, the Plan Administrator or any delegate thereof shall be responsible for any adverse tax treatment resulting from payment of the Participant’s Account after the date specified in Subsection (a) above.

(e) Claims for Benefits . Any claim to amounts standing to the credit of a Participant in connection with the Participant’s death must be received by the Plan Administrator at least 14 days before any such amount is paid out by the Plan Administrator. Any claim received thereafter is untimely, and it shall be unenforceable against the Plan, the Company, the Plan Administrator or any other party acting for one or more of them.

6.04 Distributions on Account of Unforeseeable Emergency:

Prior to the time that an amount would become distributable under Sections 6.02 and 6.03, a Participant may file a written request with the Plan Administrator for accelerated payment of all or a portion of the amount credited to the Participant’s Account based upon an Unforeseeable Emergency. After an individual has filed a written request pursuant to this Section, along with all supporting material that may be required by the Plan Administrator from time to time, the Plan Administrator shall determine within 60 days (or such other number of days that is necessary if special circumstances warrant additional time) whether the individual meets the criteria for an Unforeseeable Emergency. If the Plan Administrator determines that an Unforeseeable Emergency has occurred, the Participant shall receive a distribution from his or her Account on the date that such determination is finalized by the Plan Administrator. However, such distribution shall not exceed the dollar amount necessary to satisfy the Unforeseeable Emergency (plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution) after taking into account the extent to which the Unforeseeable Emergency is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the

 

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Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

6.05 Amount and Composition of Distributions:

(a) Lump Sum Distributions . All Shares credited to the Deferral Subaccount on the business day immediately prior to the date of distribution will be distributed in Shares, and all cash credited to the Deferral Subaccount on the business day immediately prior to the date of distribution will be distributed in cash.

(b) Installment Distributions . The amount to be distributed in an installment distribution shall consist of (i) all cash credited to the Deferral Subaccount (determined before reduction of the Deferral Subaccount in accordance with the last sentence of this Section) on the business day immediately prior to the date of such installment distribution, and (ii) a number of Shares determined by dividing the number of Shares credited to the Deferral Subaccount (determined before reduction of the Deferral Subaccount in accordance with the last sentence of this Section) by the remaining number of installments to be paid with respect to the Deferral Subaccount. If the number of Shares to be distributed in an installment distribution is not a whole number, the number of Shares to be distributed will be rounded down to the closest whole number. In determining the amount credited to a Participant’s remaining Deferral Subaccount following an installment distribution from the Deferral Subaccount (or a partial distribution under Section 6.04 relating to a distribution on account of an Unforeseeable Emergency), such distribution shall reduce the amounts credited to the Participant’s Deferral Subaccount as of the close of the business day used for purposes of such installment (or partial distribution).

6.06 Potential Delays in Distribution:

The provisions of Sections 6.02(c) and 7.06 shall apply in determining whether a Participant’s distribution shall be delayed beyond the date applicable under the preceding provisions of this Article VI.

6.07 Actual Payment Date:

An amount payable on a date or event as provided in this Article VI shall be paid no later than the later of (a) the end of the calendar year in which the date or event occurs, or (b) the 15 th day of the third calendar month following such date or event. In addition, the Participant (or Beneficiary) is not permitted to designate the taxable year of the payment.

ARTICLE VII—PLAN ADMINISTRATION

7.01 Plan Administrator:

The Plan Administrator is responsible for the administration of the Plan. The Plan Administrator has the authority to name one or more delegates to carry out certain responsibilities hereunder, as specified in the definition of Plan Administrator. To the extent not already set forth in the Plan, any such delegation shall state the scope of responsibilities being delegated and is subject to Section 7.06 below.

7.02 Action:

Action by the Plan Administrator may be taken in accordance with legally permissible procedures adopted by the Plan Administrator from time to time or prescribed by the Company’s Law Department.

 

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7.03 Powers of the Plan Administrator:

The Plan Administrator shall administer and manage the Plan and shall have (and shall be permitted to delegate) all powers necessary to accomplish that purpose, including the following:

(a) to exercise its discretionary authority to construe, interpret, and administer the Plan;

(b) to exercise its discretionary authority to make all decisions regarding eligibility, participation and deferrals, to make allocations and determinations required by the Plan, and to maintain records regarding Participants’ Accounts;

(c) to compute and certify to the Company the amount and kinds of payments to Participants or their Beneficiaries, and to determine the time and manner in which such payments are to be paid;

(d) to authorize all disbursements by the Company pursuant to the Plan;

(e) to maintain (or cause to be maintained) all the necessary records for administration of the Plan;

(f) to make and publish such rules for the regulation of the Plan as are not inconsistent with the terms hereof;

(g) to delegate to other individuals or entities from time to time the performance of any of its duties or responsibilities hereunder;

(h) to change the phantom investment to the extent provided in Article V;

(i) to hire agents, accountants, actuaries, consultants and legal counsel to assist in operating and administering the Plan; and

(j) notwithstanding any other provision of the Plan except Section 7.07 (relating to compliance with Section 409A), the Plan Administrator may take any action the Plan Administrator determines is necessary to ensure compliance with insider trading laws or any policy of the Company respecting insider trading as may be in effect from time to time. Such actions may include altering the distribution date of Deferral Subaccounts. Any such actions shall alter the normal operation of the Plan to the minimum extent necessary.

The Plan Administrator has the exclusive and discretionary authority to construe and to interpret the Plan, to decide all questions of eligibility for benefits, to determine the amount and manner of payment of such benefits and to make any determinations that are contemplated by (or permissible under) the terms of the Plan, and its decisions on such matters will be final and conclusive on all parties. Any such decision or determination shall be made in the absolute and unrestricted discretion of the Plan Administrator, even if (1) such discretion is not expressly granted by the Plan provisions in question, or (2) a determination is not expressly called for by the Plan provisions in question, and even though other Plan provisions expressly grant discretion or call for a determination. As a result, benefits under the Plan will be paid only if the Plan Administrator decides in its discretion that the applicant is entitled to them. In the event of a review by a court, arbitrator or any other tribunal, any exercise of the Plan Administrator’s discretionary authority shall not be disturbed unless it is clearly shown to be arbitrary and capricious.

 

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7.04 Compensation, Indemnity and Liability:

The Plan Administrator will serve without bond and without compensation for services hereunder. All expenses of the Plan and the Plan Administrator will be paid by the Company. No member of the Board of Directors (who serves as the Plan Administrator), and no individual acting as the delegate of the Board of Directors, shall be liable for any act or omission of any other member or individual, nor for any act or omission on his or her own part, excepting his or her own willful misconduct. The Company will indemnify and hold harmless each member of the Board of Directors and any employee of the Company (or a Company affiliate, if recognized as an affiliate for this purpose by the Plan Administrator) acting as the delegate of the Board of Directors against any and all expenses and liabilities, including reasonable legal fees and expenses, arising in connection with the Plan out of his or her membership on the Board of Directors (or his or her serving as the delegate of the Board of Directors), excepting only expenses and liabilities arising out of his or her own willful misconduct or bad faith.

7.05 Withholding:

The Company shall withhold from amounts due under the Plan any amount necessary to enable the Company to remit to the appropriate government entity or entities on behalf of the Participant as may be required by the federal income tax provisions of the Code, by an applicable state’s income tax provisions, and by an applicable city’s, county’s or municipality’s earnings or income tax provisions. Further, the Company shall withhold from the payroll of, or collect from, a Participant the amount necessary to remit on behalf of the Participant any Social Security and/or Medicare taxes which may be required with respect to amounts deferred or accrued by a Participant hereunder, as determined by the Company. In addition, to the extent required by Section 409A, amounts deferred under the Plan shall be reported to the Internal Revenue Service as provided by Section 409A, and any amounts that become taxable hereunder pursuant to Section 409A shall be reported as taxable compensation to the Participant as provided by Section 409A.

7.06 Section 16 Compliance:

In the case of a deferral or other action under the Plan that constitutes a transaction that could be covered by Rule 16b-3(d) or (e) if it were approved by the Company’s Board of Directors or Compensation Committee (“Board Approval”), it is intended that the Plan shall be administered by delegates of the Board of Directors, in the case of a Participant who is subject to Section 16 of the Act, in a manner that will permit the Board Approval of the Plan to avoid any additional Board Approval of specific transactions to the maximum possible extent.

7.07 Conformance with Section 409A:

The Plan shall be operated at all times in accordance with the requirements of Section 409A. In all cases, the provisions of this Section shall apply notwithstanding any contrary provision of the Plan that is not contained in this Section.

ARTICLE VIII—CLAIMS PROCEDURE

8.01 Claims for Benefits:

If a Participant, Beneficiary or other person (hereafter, “Claimant”) does not receive timely payment of any benefits which he or she believes are due and payable under the Plan, he or she may make a claim for benefits to the Plan Administrator. The claim for benefits must be in writing and

 

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addressed to the Plan Administrator, c/o Cree, Inc. Stock Plan Manager, 4600 Silicon Dr., Durham, North Carolina 27703, or such other address specified in writing by the Stock Plan Manager. If the claim for benefits is denied, the Plan Administrator will notify the Claimant within 90 days after the Plan Administrator initially received the benefit claim. However, if special circumstances require an extension of time for processing the claim, the Plan Administrator will furnish notice of the extension to the Claimant prior to the termination of the initial 90-day period and such extension may not exceed one additional, consecutive 90-day period. Any notice of a denial of benefits shall advise the Claimant of the basis for the denial, any additional material or information necessary for the Claimant to perfect his or her claim, and the steps which the Claimant must take to appeal his or her claim for benefits.

8.02 Appeals of Denied Claims:

Each Claimant whose claim for benefits has been denied may file a written appeal for a review of his or her claim by the Plan Administrator at the address set forth in Section 8.01. The request for review must be filed by the Claimant within 60 days after he or she received the notice denying his or her claim. The decision of the Plan Administrator will be communicated to the Claimant within 60 days after receipt of a request for appeal. The notice shall set forth the basis for the Plan Administrator’s decision. If special circumstances require an extension of time for processing the appeal, the Plan Administrator will furnish notice of the extension to the Claimant prior to the termination of the initial 60-day period and such extension may not exceed one additional, consecutive 60-day period. In no event shall the Plan Administrator’s decision be rendered later than 120 days after receipt of a request for appeal.

ARTICLE IX—AMENDMENT AND TERMINATION

9.01 Amendment of Plan:

The Board of Directors of the Company has the right in its sole discretion to amend the Plan in whole or in part at any time and in any manner, including the manner of making deferral elections, the terms on which distributions are made, and the form and timing of distributions. However, except for mere clarifying amendments necessary to avoid an inappropriate windfall, no Plan amendment shall reduce the amount credited to the Account of any Participant as of the date such amendment is adopted. Any amendment shall be in writing and adopted by the Board of Directors. All Participants and Beneficiaries shall be bound by such amendment. Any amendments made to the Plan shall be subject to any restrictions on amendment that are applicable to ensure continued compliance under Section 409A.

9.02 Termination of Plan:

(a) General . The Company expects to continue the Plan, but does not obligate itself to do so. The Company reserves the right to discontinue and terminate the Plan at any time, in whole or in part, for any reason (including a change, or an impending change, in the tax laws of the United States or any State) by action of the Board of Directors of the Company or the Compensation Committee of the Board of Directors of the Company. Termination of the Plan will be binding on all Participants (and a partial termination shall be binding upon all affected Participants) and their Beneficiaries, but in no event may such termination reduce the amounts credited at that time to any Participant’s Account. If the Plan is terminated (in whole or in part), the termination resolution shall provide for how amounts theretofore credited to affected Accounts will be distributed.

(b) Change in Control . This Section is subject to the same restrictions related to compliance with Section 409A that apply to Section 9.01. In accordance with these restrictions, the Company intends to have the maximum discretionary authority to terminate the Plan and make distributions in connection with a change in ownership or effective control of the Company or a change

 

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in ownership of a substantial portion of the assets of the Company, all within the meaning of Section 409A (a “Change in Control”) by action of the Board of Directors of the Company, and the maximum flexibility with respect to how and to what extent to carry this out following a Change in Control as is permissible under Section 409A. The previous sentence contains the exclusive terms under which a distribution may be made in connection with any change in control.

ARTICLE X—MISCELLANEOUS

10.01 Limitation on Participant’s Rights:

Participation in the Plan does not give any Participant the right to be retained in the service of the Company. The Company reserves the right to terminate the service of any Participant without any liability for any claim against the Company under the Plan, except for a claim for payment of deferrals as provided herein.

10.02 ERISA:

For federal income tax purposes, the Plan is intended to be a nonqualified deferred compensation plan that is unfunded and unsecured. To the extent ERISA applies to the Plan, the Plan is intended to be exempt from ERISA coverage as a plan that solely benefits non-employees (or alternatively, a plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA providing benefits to a select group of management or highly compensated employees).

10.03 Unfunded Obligation of the Company:

The benefits provided by the Plan are unfunded. All amounts payable under the Plan to Participants are paid from the general assets of the Company. Nothing contained in the Plan requires the Company to set aside or hold in trust any amounts or assets for the purpose of paying benefits to Participants. No Participant, Beneficiary, or any other person shall have any property interest, legal or equitable, in any specific Company asset. The Plan creates only a contractual obligation on the part of the Company, and the Participant has the status of a general unsecured creditor of the Company with respect to amounts of compensation deferred hereunder. Such a Participant shall not have any preference or priority over, the rights of any other unsecured general creditor of the Company. No other Company affiliate guarantees or shares such obligation, and no other Company affiliate shall have any liability to the Participant or his or her Beneficiary.

10.04 Other Plans:

The Plan shall not affect the right of any Director or Participant to participate in and receive benefits under and in accordance with the provisions of any other Director compensation plans which are now or hereafter maintained by the Company, unless the terms of such other plan or plans specifically provide otherwise or it would cause such other plan to violate a requirement for tax favored treatment.

10.05 Receipt or Release:

Any payment to a Participant in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan Administrator and the Company, and the Plan Administrator may require such Participant, as a condition precedent to such payment, to execute a receipt and release to such effect.

 

16


10.06 Governing Law:

The Plan shall be construed, administered, and governed in all respects in accordance with applicable federal law and, to the extent not preempted by federal law, in accordance with the laws of the State of North Carolina. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective.

10.07 Gender, Tense and Examples:

In the Plan, whenever the context so indicates, the singular or plural number and the masculine, feminine, or neuter gender shall be deemed to include the other. Whenever an example is provided or the text uses the term “including” followed by a specific item or items, or there is a passage having a similar effect, such passage of the Plan shall be construed as if the phrase “without limitation” followed such example or term (or otherwise applied to such passage in a manner that avoids limitation on its breadth of application).

10.08 Successors and Assigns; Nonalienation of Benefits:

The Plan inures to the benefit of and is binding upon the parties hereto and their successors, heirs and assigns; provided, however, that the amounts credited to the Account of a Participant are not (except as provided in Section 7.05) subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to any benefits payable hereunder, including, without limitation, any assignment or alienation in connection with a separation, divorce, child support or similar arrangement, will be null and void and not binding on the Plan or the Company.

10.09 Facility of Payment:

Whenever, in the Plan Administrator’s opinion, a Participant or Beneficiary entitled to receive any payment hereunder is under a legal disability or is incapacitated in any way so as to be unable to manage his or her financial affairs, the Plan Administrator may direct the Company to make payments to such person or to the legal representative of such person for his or her benefit, or to apply the payment for the benefit of such person in such manner as the Plan Administrator considers advisable. Any payment in accordance with the provisions of this Section shall be a complete discharge of any liability for the making of such payment to the Participant or Beneficiary under the Plan.

ARTICLE XI—AUTHENTICATION

The Plan was authorized, adopted and approved by the Company’s Board of Directors at its duly authorized meeting held on August 18, 2009.

 

17

Exhibit 10.4

As approved August 17, 2009

SCHEDULE OF COMPENSATION FOR

NON-EMPLOYEE DIRECTORS

This schedule describes the compensation payable by Cree, Inc. (the “Company”) to individuals who are not employed by the Company but serve as members of the Company’s Board of Directors. The compensation consists of cash and equity compensation components as described below. In addition, the Company will pay or reimburse directors for reasonable expenses incurred in performing the duties of the director in accordance with the Company’s business expense reimbursement policy and procedures. This schedule is not intended to create any contractual obligation with any director and may be amended by the Company at any time.

Cash Compensation

Quarterly retainer for indicated role:

 

Member of the Board of Directors

   $ 8,750

Lead Independent Director

   $ 1,250

Chair of the Audit Committee

   $ 5,000

Chair of the Compensation Committee

   $ 2,500

Chair of the Governance & Nominations Committee

   $ 1,250

Member of the Audit Committee

   $ 5,000

Member of the Compensation Committee

   $ 2,500

Member of the Governance & Nominations Committee

   $ 1,250

 

  1. Each non-employee director will be paid the retainer listed above for membership on the Board of Directors and for each other role in which the director serves. Committee Chairs will receive the retainer for service as chairman or chairwoman in addition to the retainer for committee membership. The retainer will be earned on the first day of the fiscal quarter on which the director serves in the indicated role. If a director is elected or appointed to the role after the first day of the fiscal quarter, a portion of the retainer, prorated based on the number of days remaining in the quarter, will be earned on the day on which the director’s election or appointment is effective. No adjustment will be made nor any repayment due in the event that a director does not serve in the indicated role for the remainder of the quarter.

 

  2. Retainers are in lieu of meeting fees except as provided in this paragraph. In the event that a non-employee director is appointed to serve on a Board committee not listed above, the director will earn a fee of $1,000 for each meeting of the committee attended, or $2,000 for each meeting attended if serving as Chair or acting Chair of the committee.

 

  3. Retainers and any meeting fees earned will be paid promptly following the first day of each fiscal quarter. Non-employee directors may elect to receive Company stock in lieu of retainers and meeting fees, and to defer all or a portion of retainers and meeting fees earned, pursuant to the Non-Employee Director Stock Compensation and Deferral Program while such plan is in effect.

Equity Compensation

 

  1. Each non-employee director then serving on the Board who has been nominated for re-election at the next annual meeting of shareholders will be granted an option to purchase 5,000 shares of


       the Company’s common stock on the first business day of September. The option will be granted pursuant to the Company’s 2004 Long-Term Incentive Compensation Plan with an exercise price equal to the closing market price on the grant date. The option vests and becomes exercisable on a quarterly basis, at the rate of 25% of the number of shares awarded, on the earlier of (a) the last day of each calendar quarter, with the first vesting date being December 31 following the annual meeting of shareholders in the year the option is awarded; and (b) the date of the annual meeting of shareholders held the next year after the option is awarded; provided that the director is serving as a member of the Board of Directors or as an employee of the Company or other Employer under the Plan on the date of vesting.

 

  2. Each non-employee director then serving on the Board who has been nominated for re-election at the next annual meeting of shareholders will also be granted a restricted stock award of 5,000 shares of the Company’s common stock on the first business day of September. The restricted stock award will be granted pursuant to the Company’s 2004 Long-Term Incentive Compensation Plan. The restricted stock vests in full on the first anniversary of the grant date, provided that the director is then serving as a member of the Board of Directors or as an employee of the Company or other Employer under the Plan.

 

  3. If a non-employee director is first elected to the Board after the first business day of September, the director will be granted a option to purchase shares, and a restricted stock award, as provided above except that the number of shares subject to the option and the restricted stock award will be prorated based upon the number of whole calendar quarters remaining through the following September 30. The option and restricted stock awards will vest on the same dates as the vesting schedules of the awards granted to non-employee directors the preceding September, provided that the director is then serving as a member of the Board of Directors or as an employee of the Company or other Employer under the Plan.

 

  4. The option and restricted stock awards described above will be awarded only if recommended by the Compensation Committee and approved by the Governance and Nominations Committee on or before the grant date. Awards under this schedule will be made pursuant to the applicable form of master award agreement and notice of grant as approved by the Compensation Committee from time to time.

 

2

Exhibit 10.5

ADDENDUM TO MASTER STOCK OPTION AWARD AGREEMENT

TERMS AND CONDITIONS

(For Grants of Nonqualified Stock Options to Outside Directors)

This Addendum to Master Stock Option Award Agreement (this “Addendum”) is entered into between you (the “Participant” named below) and Cree, Inc., a corporation formed under the laws of the State of North Carolina (the “Company”) and modifies the existing Master Stock Option Award Agreement (the “Agreement”) between you and the Company.

1. This Addendum shall be effective as of the 1st day of September 2009 (the “Effective Date”). Capitalized terms used in this Addendum which are not defined herein but are defined in the Agreement or the Plan shall have the meanings specified in the Agreement or the Plan, respectively.

2. The following new Section 2 shall apply with respect to Options granted to the Participant on or after the Effective Date so long as the Participant is an Outside Director at the time of the grant:

“2. Term of Options . Unless sooner terminated in accordance with the Plan or this Agreement or as otherwise provided in the Notice of Grant, each Option will expire and cease to be exercisable upon the first to occur of the following:

(a) the later of the expiration of (i) one (1) year following your Termination of Service as a member of the Board, whether or not you become an employee of the Company or any other Employer prior to or upon terminating service as a member of the Board, or (ii) the ninety (90) calendar days following your Termination of Service, provided that at the time of such termination you were a regular full-time employee of the Company or any other Employer or a regular part-time employee of the Company or any other Employer scheduled to work a minimum of 30 hours per week, except where the termination in either scenario results from your death or Disability or where your death occurs following the termination but while the Option is otherwise still exercisable;

(b) the expiration of one (1) year following your Termination of Service if the termination results from your death;

(c) the expiration of one (1) year following your Termination of Service if the termination results from your Disability, except where your death occurs after the termination but while the Option is otherwise still exercisable;

(d) the expiration of one (1) year following your death if your death occurs after your Termination of Service but while the Option is otherwise still exercisable; or

(e) the seventh (7th) anniversary of the Grant Date of the Option, at 11:59 P.M., local time, Durham, North Carolina.

Upon expiration or termination of an Option, the Option will have no further effect and cannot thereafter be exercised to purchase any Shares.”

3. The original Section 2 of the Agreement shall continue to apply with respect to all Options granted prior to the Effective Date and, if the Participant ceases to be an Outside Director after the Effective Date, to any Option granted to the Participant thereafter. The provisions of the Agreement, as amended hereby, shall continue in effect. In the event of any inconsistency between the terms of this Addendum and the terms of the Agreement, the terms of this Addendum shall have precedence.

 

CREE, INC.

     PARTICIPANT:

By:

          
 

Charles M. Swoboda, Chairman, President

and Chief Executive Officer

     Signature:     
       Print Name:     

Exhibit 31.1

Certification by Chief Executive Officer

pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Charles M. Swoboda, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Cree, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 20, 2009  
 

/ S /    C HARLES M. S WOBODA      

  Charles M. Swoboda
  Chairman, President and Chief Executive Officer

Exhibit 31.2

Certification by Chief Financial Officer

pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John T. Kurtzweil, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Cree, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 20, 2009  
 

/ S /    J OHN T. K URTZWEIL      

  John T. Kurtzweil
  Executive Vice President, Chief Financial
Officer and Treasurer

Exhibit 32.1

Certification by Chief Executive Officer

pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Cree, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 27, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles M. Swoboda, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/ S /    C HARLES M. S WOBODA      

Charles M. Swoboda

Chairman, Chief Executive Officer and

President

October 20, 2009

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

Certification by Chief Financial Officer

pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Cree, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 27, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Kurtzweil, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/ S /    J OHN T. K URTZWEIL      

John T. Kurtzweil
Executive Vice President, Chief Financial
Officer and Treasurer
October 20, 2009

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.