Note 3 - Acquisitions

Acquisition of LED Lighting Fixtures, Inc.

In February 2008, the Company acquired LED Lighting Fixtures, Inc. (LLF) through a wholly owned subsidiary that merged into Cree, Inc. June 27, 2010. Through this acquisition the Company acquired a research and development center, a commercialized LED lighting portfolio, sales channels and manufacturing subcontractor relationships to accelerate the adoption of energy-efficient LED lighting for the general illumination market.

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.

The initial purchase price for this acquisition was as follows (in thousands):


Cash consideration paid to LLF stockholders	$	16,450
Fair value of common stock issued by the Company		58,830
Fair value of vested LLF stock options assumed by the Company		4,486
Direct transaction fees and expenses		1,042

Total purchase price	$	80,808

The purchase price for this acquisition has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):


Tangible assets:
Cash and cash equivalents	$	10,312
Accounts receivable		982
Inventories		1,603
Deferred tax assets		2,573
Property and equipment		596
Other assets		1,093

Total tangible assets	$	17,159

Intangible assets:
Customer relationships	$	1,300
Non-compete agreements		440
Developed technology		39,500
Goodwill		39,450

Total intangible assets	$	80,690

Liabilities assumed:
Accounts payable	$	1,525
Accrued expenses		770
Deferred tax liability		14,746

Total liabilities assumed	$	17,041

Net assets acquired	$	80,808

The identifiable assets acquired as a result of the acquisition are being amortized over their respective estimated useful lives as follows (in thousands, except for years):


	Asset Amount		Estimated Life in Years
Customer relationships	$	1,300		8
Non-compete agreements		440		3
Developed technology		39,500		14

Total identifiable assets	$	41,240

The goodwill associated with the acquisition of LLF is not deductible for tax purposes.

The assets, liabilities, and operating results of LLF have been included in the Company's consolidated financial statements from the date of acquisition. Pro forma information giving effect to this acquisition has not been presented because the pro forma information would not differ materially from the Company's historical results.

LLF met the conditions necessary for the earn-out payment for the calendar years ended December 31, 2008, 2009 and 2010 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, a cash payment in the amount of $8.8 million to the former shareholders of LLF in the third quarter of fiscal 2010 and a cash payment in the amount of $13.2 million to the former shareholders of LLF in the third quarter of fiscal 2011, thus increasing goodwill in the Company's consolidated financial statements.

Acquisition of COTCO Luminant Device Limited

In March 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"). Cree Hong Kong Limited is headquartered in Hong Kong and has production facilities in China. This acquisition provided us expanded packaging, research and development capabilities, a broader LED component portfolio, a lower cost manufacturing facility and expanded our sales channels in China.

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 of up to $125.0 million 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. Any such additional consideration would be treated as an incremental purchase price of COTCO, and thus result in an increase to goodwill in the Company's consolidated financial statements in the period earned.

The initial purchase price for this acquisition was as follows (in thousands):


Cash consideration paid to COTCO shareholder	$	77,334
Fair value of common stock issued by the Company		126,943
Direct transaction fees and expenses		3,065

Total purchase price	$	207,342

The purchase price for this acquisition has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):


Tangible assets:
Cash and cash equivalents	$	1,110
Accounts receivable		20,376
Inventories		22,916
Other current assets		54
Property and equipment		24,066

Total tangible assets	$	68,522

Intangible assets:
Customer relationships	$	51,000
Trade names and license agreements		150
Developed technology		7,220
In-process research and development charge		950
Goodwill		108,249

Total intangible assets	$	167,569

Liabilities assumed:
Accounts payable	$	10,870
Accrued expenses		5,576
Deferred tax liability		12,303

Total liabilities assumed	$	28,749

Net assets acquired	$	207,342

The identifiable assets acquired as a result of the acquisition are being amortized over their respective estimated useful lives as follows (in thousands, except for years):


	Asset Amount		Estimated Life in Years
Customer relationships	$	51,000		8
Trade names and license agreements		150		1
Developed technology		7,220		7

Total identifiable assets	$	58,370

The estimated fair value of in-process research and development was recorded immediately as an expense in fiscal 2007 and was reflected in research and development expenses in the Consolidated Statement of Income. This represented the estimated fair value of certain acquired technologies under development that had not yet reached technological feasibility and had no alternative future use.

The goodwill associated with the acquisition of COTCO is not deductible for tax purposes.

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 results, the Company made a cash payment in the amount of $60.0 million in fiscal 2009. For fiscal 2009 results, the Company made a cash payment in the amount of $57.1 million in fiscal 2010. These incremental payments were treated as additional purchase price and resulted in an increase to goodwill in the Company's consolidated financial statements.