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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ] 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 0-25236
M I C R E L, I N C O R P O R A T E D
(Exact name of Registrant as specified in its charter)
California 94-2526744
(State or other jurisdiction (I.R.S Employer Identification No.)
of incorporation or Organization)
1849 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2000, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $2,676,187,000 based
upon the closing sales price of the Common Stock as reported on the Nasdaq
Stock Market on such date. Shares of Common Stock held by officers,
directors and holders of more than ten percent of the outstanding Common
Stock have been excluded from this calculation because such persons may be
deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 15, 2000, the Registrant had outstanding 41,723,200 shares of
Common Stock.
__________________________
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference in this
report: Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders (Part III).
This Report on Form 10-K includes 55 pages with the Index to Exhibits located
on page 32.
MICREL, INCORPORATED
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1999
Page
----
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 14
Item 3. Legal Proceedings..................................... 14
Item 4. Submission of Matters to a Vote of Security Holders... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters................................ 16
Item 6. Selected Financial Data............................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 27
Item 8. Financial Statements and Supplementary Data........... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 27
PART III
Item 10. Directors and Executive Officers of the Registrant.... 28
Item 11. Executive Compensation................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 29
Item 13. Certain Relationships and Related Transactions........ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 30
Signatures............................................ 55
2
PART I
ITEM 1. BUSINESS
General
The Company was incorporated in California in July 1978. References to the
"Company" and "Micrel" refer to Micrel, Incorporated and subsidiaries,
which also does business as Micrel Semiconductor. The Company's principal
executive offices are located at 1849 Fortune Drive, San Jose, California
95131. The Company's telephone number is (408) 944-0800.
Micrel designs, develops, manufactures and markets a range of high-
performance analog power integrated circuits and mixed-signal and digital
integrated circuits. The Company currently ships over 1,200 standard
products and has derived the majority of its product revenue for the year
ended December 31, 1999 from sales of standard analog integrated circuits for
power management. These analog power circuits are used in a wide variety of
electronic products, including those in the computer, telecommunications and
industrial markets. For the years ended December 31, 1999, 1998, and 1997, the
Company's standard products accounted for 77%, 71%, and 76%, respectively, of
the Company's net revenues. In addition, the Company manufactures custom
analog and mixed-signal circuits and provides wafer foundry services for a
diverse range of customers who produce electronic systems for communications,
consumer and military applications. With the Company's acquisition of Synergy
Semiconductor in November 1998, the Company broadened its standard product
offerings to include high performance bipolar integrated circuits sold to
customers within the communications, industrial and computing markets. This
product portfolio is comprised of more than 200 products including
communication transceivers, clock generators, distribution/clock recovery
circuits as well as high-speed logic and memory.
Continuing trends in the communications and computing markets have created
increased demand for power analog circuits, which control, regulate, convert
and route voltage and current in electronic systems. This demand for power
analog circuits has been fueled by the tremendous growth of battery powered
cellular telephones and computing devices and the emergence of lower voltage
microprocessors and Personal Computer Memory Card International Association
("PCMCIA") standards for peripheral devices. Micrel's standard analog products
business is focused on addressing this demand for high-performance power
analog circuits. The Company sells a wide range of regulators, references and
switches designed for cellular telephones and laptop computers. The Company
was one of the first companies to offer analog products for the PCMCIA Card
and universal serial bus ("USB") market and believes that it currently
provides a majority of the power analog circuits used in PC Card and USB
systems. The Company also offers standard analog products that address other
markets, including power supplies and industrial, defense, avionics, and
automotive electronics.
The Company's standard mixed-signal and digital integrated circuits have
also experienced increased demand in 1999. These products are used primarily
in the wide area network infrastructure and fiber optic communications
marketplaces which both have seen significant growth in recent years due to
the expansion in capacity required in the Internet backbone.
In addition to standard analog and mixed signal products, Micrel offers
customers various combinations of design, process and foundry services.
Through interaction with customers in its custom and foundry business, the
Company has been able to enhance its design and process technology
capabilities, which in turn provides engineering and marketing benefits to its
standard products business.
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Industry Background
Analog Circuit, Mixed-Signal and Digital Integrated Circuits Markets
Integrated circuits may be divided into three general categories - digital,
analog (also known as "linear") and mixed-signal. Digital circuits, such as
memories and microprocessors, process information in the form of on-off
electronic signals and are capable of implementing only two values, "1" or
"0". Analog circuits, such as regulators, converters and amplifiers, process
information in the form of continuously varying voltages and currents that
have an infinite number of values or states. Analog circuits condition,
process, and measure or control real world variables such as current, sound,
temperature, pressure or speed. Mixed-signal integrated circuits combine
analog and digital functions on one chip.
Analog circuits are used in virtually every electronic system, and the
largest markets for such circuits are computers, telecommunications and data
communications, industrial equipment, and military, consumer and automotive
electronics. Because of their numerous applications, analog circuits have a
wide range of operating specifications and functions. For each application,
different users may have unique requirements for circuits with specific
resolution, processing linearity, speed, power and signal amplitude
capability. Such differentiation results in a high degree of market
fragmentation, which provides smaller companies an opportunity to compete
successfully against larger suppliers in certain market segments.
Mixed-Signal and Digital Integrated Circuits may be divided into six
general categories, LSI/MSI logic, data processing, signal processing, memory,
FPGA and application specific.
Mixed-Signal and Digital Integrated Circuits are used in computer and
communication systems and in industrial products. The primary markets for such
circuits are consumer, communications, personal computer systems, and
industrial. The primary advantages of the Company's bipolar integrated
circuits are high speed and low noise.
As compared with the digital integrated circuit industry, the analog
integrated circuit industry has the following important characteristics:
- Dependence on Individual Design Teams. The design of analog circuits
involves the complex and critical placement of various circuits. Analog
circuit design has traditionally been highly dependent on the skills and
experience of individual design engineers.
- Interdependence of Design and Process. Analog designers, especially at
companies having their own wafer fabrication facility ("fab"), are able
to select from several wafer fabrication processes in order to achieve
higher performance and greater functionality from their designs.
- Longer Product Cycles and More Stable Pricing. Analog circuits
generally have longer product cycles as compared to digital circuits. As
a result, analog circuit pricing has historically been more stable than
most digital circuit pricing.
Analog, mixed-signal and digital integrated circuits are sold to customers
as either standard products or custom products. Standard analog products are
available to customers "off-the-shelf" and are often sold in large volumes
to a wide variety of customers in different industries. Custom products are
designed to an individual customer's specifications.
4
Recent Trends in Analog Power Management, Mixed-Signal and Digital
Integrated Circuits
Most electronic systems utilize analog circuits to perform power management
functions ("power analog circuits") such as the control, regulation,
conversion and routing of voltages and current. The computer and
communications markets have emerged as two of the largest markets for power
analog circuits. In particular, the recent growth and proliferation of
portable, battery powered devices, such as cellular telephones and laptop
computers, continue to increase demand and create new technological challenges
for power analog circuits.
Cellular telephones, which are composed of components and subsystems that
utilize several different voltage levels, require multiple power analog
circuits to precisely regulate and control voltage. Manufacturers are
replacing traditional pass regulators with higher performance low dropout
("LDO") regulators to lengthen battery life and are utilizing smaller, more
highly integrated power analog circuits, such as regulators and references.
The trend toward the use of lower voltage microprocessors in personal
computers and other computing devices has also increased market demand and
created new requirements for power analog circuits. These lower voltage
microprocessors reduce power consumption, thereby prolonging battery life for
portable and desktop personal computers. These mixed voltage personal
computers require multiple LDO regulators to manage power in the system.
Another recent trend is the emergence of PCMCIA standards that require a
voltage protection capability, thereby creating new specifications for higher
performance power analog switches.
The rapid adoption of the Internet for information exchange, in business
and consumer markets, has led to a significant increase in the need for
broadband communications technology. In addition, the use of more media-rich
technologies on the Internet, like graphics and movies with high bandwidth
requirements, has led to a growing need to increase the speed and capacity of
the Internet infrastructure. One major trend within the communications
industry is the worldwide adoption and deployment of high-speed fiber optic
networks. Such networks require the use of high-speed signal conditioning,
clock recovery and post processing in order to attain high speed data
throughput.
Micrel's Strategy
Micrel seeks to capitalize on the growth opportunities within the high-
performance analog and mixed signal semiconductor market. The Company's core
competencies are its analog design and process technology, its large, in-house
wafer fabrication capability and its manufacturing expertise. The Company also
seeks to capitalize on the growth opportunities within the high performance
bipolar semiconductor market. The Company has expanded upon its core
competencies through the addition of Synergy's expertise in the synchronous
optical network ("SONET") and fiber channel arenas. The Synergy design team,
process technology and wafer fabrication facility complement the historical
Micrel core strengths. The Company intends to build a leadership position in
its targeted markets by pursuing the following strategies:
- Focus on Standard Products for High Growth Markets. Currently, Micrel
ships over 1,200 standard products, with net revenues from standard
products generating 77% of the Company's net revenues for the year ended
December 31, 1999. In November 1998, through the acquisition of Synergy
Semiconductor, the Company has added over 200 new standard products to
its offerings. Micrel believes that its long-term growth will depend
substantially on its ability to increase standard products sales in its
existing markets and to penetrate new standard products markets. The
5
Company, however, will pursue additional custom and foundry business as
opportunities arise.
- Target Power Analog, High-Speed Mixed-signal and Digital Markets. Micrel
has leveraged its expertise in power analog circuits by addressing
market opportunities in cellular telephones, battery powered computers
and desktop personal computers. A majority of the Company's standard
products net revenues for the year ended December 31, 1999 were derived
from products relating to power management. Through the acquisition of
Synergy Semiconductor, the Company has gained expertise in high-speed,
mixed-signal and digital integrated circuits, required to address the
high bandwidth communication markets.
- Maintain Technological Leadership. The Company seeks to utilize its
design strengths and its process expertise to enhance what the Company
believes are its competitive advantages in LDO regulators, ECL Logic
products, high-speed communications devices, PCMCIA and USB devices. In
order to maintain its technology leadership, the Company has developed
plans for successive generations of products with increased
functionality. In order to maintain its technology leadership, the
Company has begun development of a sub-micron process and a high speed
silicon germanium process.
- Capitalize on In-house Wafer Fab Facilities. The Company believes that
its six-inch in-house wafer fab facilities provide a significant
competitive advantage because they facilitate close collaboration
between design and process engineers in the development of the Company's
products.
- Maintain a Strategic Level of Custom and Foundry Products Revenue.
Micrel believes that its custom and foundry products business
complements its standard products business by generating a broader
revenue base and lowering overall per unit manufacturing costs through
greater utilization of its manufacturing facilities. Through interaction
with customers, Micrel has been able to enhance its design and process
technology capabilities.
Products and Markets
Overview
The following table sets forth the net revenues attributable to the
Company's two segments, standard products and custom and foundry products
expressed in dollars and as a percentage of total net revenues.
Net Revenues by Segment
(Dollars in thousands)
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Net Revenues:
Standard Products $ 151,085 $ 99,902 $ 79,203
Custom and Foundry Products 44,037 40,606 24,955
--------- --------- ---------
Total net revenues $ 195,122 $ 140,508 $ 104,158
========= ========= =========
As a Percentage of Total Net Revenues:
Standard Products 77% 71% 76%
Custom and Foundry Products 23 29 24
--------- --------- ---------
Total net revenues 100% 100% 100%
========= ========= =========
6
For a discussion of the changes in net revenues from period to period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Standard Products
In recent years, the Company has directed a majority of its development,
sales and marketing efforts towards standard products in an effort to address
the larger markets for these products and to broaden its customer base. The
Company offers power analog circuits that address certain high growth markets
including cellular telephones, battery powered computers and desktop personal
computers. The Company's remaining standard products address other markets,
including power supplies and industrial, defense, avionics, and automotive
electronics. In November 1998, the Company broadened its standard product
offerings to include high-speed mixed-signal and digital integrated circuits
sold to customers within the networking, communications and computing markets.
Portable Battery Powered Computer Market. The Company makes power analog
circuits for laptop, palmtop computers and pocket organizers. Products in this
growing segment are differentiated on the basis of power efficiency, weight,
small size and battery life.
Cellular Telephone Market. Micrel offers a range of power control and
regulating analog circuits to address the demand for cellular telephones with
longer battery lives. Micrel also provides a range of high performance LDO
regulators that convert, regulate, switch and control the DC voltages used in
cellular telephones. Micrel's SuperBeta PNP T LDO regulators enable cellular
telephones to continue to operate effectively until the battery is almost
completely exhausted. Micrel products are designed to reduce board space and
decrease system cost. In addition, Micrel offers switch mode power supply
("SMPS") regulators that convert AC to useable DC power in battery chargers
and cellular base stations.
Universal Serial Bus Market. Universal Serial Bus ("USB") is a novel method
of connecting computer peripherals to a host computer that improves upon the
bandwidth and ease-of-use of previously used computer interconnect solutions.
In addition to implementing data communications between the connected devices,
USB also provides a power source capable of powering the peripheral. Micrel
believes that it is the leader in the design and manufacture of circuits that
safely control the delivery of this power source.
PCMCIA Card and Socket Markets. The Personal Computer Memory Card
International Association, of which Micrel is a member, has established
standards for personal computer cards that are the size of credit cards and
for sockets that allow insertion of such cards into personal computers.
Micrel believes that it is a leader in the design and manufacture of
integrated circuits that enable PC Card sockets to have such compatibility.
Power Supply Market. Most electronic equipment includes a power supply that
converts and regulates the electrical power source into usable current for the
equipment. In addition to SMPS controllers and single chip SMPS circuits,
Micrel offers a full line of MOSFET drivers, references, LDOs and Super LDOs.
Automotive Electronics Market. Micrel's LDO products, including the line of
monolithic SuperBeta PNP T LDO regulators, have been designed in for such
automotive controller applications and safety features as automotive airbags
and antilock brake systems. Micrel is developing several other products for
the automotive electronic market. For each of the years ended
7
December 31, 1999, 1998, and 1997, the automotive electronics market
represented less than 2% of net revenues.
General Purpose Analog. During 1999, Micrel introduced a variety of general
purpose analog products including op-amps, comparators, a fan controller and
intelligent protected power switches. These products were focused on low
voltage and low current applications.
Radio Frequency Data Communications. Micrel continued to add new products
to the QwikRadio family of radio frequency ("RF") receivers in 1999. These
devices are designed for use in and system requiring a cost effective, low
data-rate wireless link. Typical examples include garage door openers,
wireless computer peripherals, lighting and fan controls, utility metering,
automotive keyless entry and security systems.
Networking and High-Speed Communications Circuits Market. The Company's
Synergy subsidiary has directed a majority of its development, sales and
marketing efforts towards high-speed media interface for SONET/synchronous
digital hierarchy ("SDH") markets. The Synergy subsidiary also develops and
produces communications products targeted at optical modules and wave division
multiplex ("WDM"), dense wave division multiplex ("DWDM") modules as well as
clock recovery and clock distribution circuits.
The Company's future success will depend in part upon the timely
completion, introduction, and market acceptance of new standard products. As
compared with the Company's custom and foundry products business, the standard
products business is characterized by generally shorter product lifecycles,
greater pricing pressure, larger competitors and more rapid technological
change. Generally, the standard products market is a rapidly changing market
in which the Company faces the risk that its product offerings will quickly
become obsolete. The success of new standard products depends on a variety of
factors, including product selection, successful and timely completion of
product development, achievement of acceptable manufacturing yields by the
Company's foundry and the Company's ability to offer products at competitive
prices.
Micrel's new products are generally incorporated into a customer's products
or systems at the design stage. The value of any design win largely depends
upon the commercial success of the customer's product and on the extent to
which the design of the customer's electronic system accommodates
incorporation of components manufactured by the Company's competitors. In
addition, products or systems may be subsequently redesigned so that they no
longer require the Company's products. No assurance can be given that the
Company will achieve design wins or that any design win will result in future
revenues. The failure of the Company to achieve design wins would materially
and adversely affect the Company's financial condition, results of operations
and cash flows.
Custom and Foundry Products
Micrel offers customers various combinations of design, process and foundry
services in order to provide them with the following alternatives:
- Full Service Custom - Based on a customer's specification, Micrel
designs and then manufactures integrated circuits for the customer.
- Custom and Semi-Custom - Based on a customer's high level or partial
circuit design, Micrel uses varying levels of its design and process
technologies to complete the design and then manufactures integrated
circuits for the customer.
8
- R&D Foundry - Micrel modifies a process or develops a new process for a
customer. Using that process and mask sets provided by the customer,
Micrel manufactures fabricated wafers for the customer.
- Foundry - Micrel duplicates a customer's process to manufacture
fabricated wafers designed by the customer.
Micrel's full service custom, custom and semi-custom products primarily
address high bandwidth communications, consumer, automotive and military
applications and use both analog and digital technologies. The military
applications include communications and transport aircraft.
With respect to R&D foundry and other foundry products, Micrel provides
wafers to a variety of companies. The Company believes that the custom and
foundry business reduces somewhat the Company's sensitivity to fluctuations in
its standard products markets as the Company's foundry customers are often in
different markets that are not affected by the same business cycles.
Sales, Distribution and Marketing
The Company sells its products through a worldwide network of independent
sales representative firms and distributor firms and through a direct sales
staff. In the year ended December 31, 1999, sales through North American
distributor firms accounted for 13% of the Company's net revenues.
The Company sells its products in Europe through a direct sales staff in
England as well as independent sales representative firms, independent
distributors and independent stocking representative firms. Asian sales are
handled through independent stocking representative firms with Micrel sales
offices in Korea, Japan and Taiwan. The stocking representatives firms may buy
and stock the Company's products for resale or may act as the Company's agent
in arranging for direct sales from the Company to an OEM customer.
Sales to customers in North America, Asia and Europe accounted for 53%, 36%
and 11%, respectively, of the Company's net revenues for the year ended
December 31, 1999 compared to 55%, 34% and 11%, respectively, of the Company's
net revenues for the year ended December 31, 1998 and 50%, 37% and 13%,
respectively, of the Company's net revenues for 1997. The Company's standard
products are sold throughout the world, while its custom and foundry products
are primarily sold to North American customers.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's products
in foreign markets and make the Company's products relatively more expensive
than competitors' products that are denominated in local currencies, leading
to a reduction in sales or profitability in those foreign markets. The Company
has not taken any protective measures against exchange rate fluctuations, such
as purchasing hedging instruments with respect to such fluctuations.
Customers
For the years ended December 31, 1999 and 1998, no customer accounted for
10% or more of the Company's net revenues. For the year ended December 31,
1997, one customer, Qualcomm, accounted for 11% of the Company's net revenues.
9
Design and Process Technology
Micrel's analog proprietary design technology depends on the skills of its
analog design team. The Company has experienced analog design engineers who
utilize an extensive macro library of analog and mixed-signal circuits and
computer simulation models.
Micrel can produce integrated circuits using a variety of manufacturing
processes, some of which are proprietary and provide enhanced product
features. Designers at companies that do not have in-house fabs or have a
limited selection of available processes often have to compromise design
methodology in order to match process parameters.
Micrel produces high-speed communication transceivers, clock
generation/distribution circuits, clock recovery circuits as well as high-
speed logic and memory using the Company's proprietary All Spacer Separated
Element Transistor ("ASSET") process.
The Company utilizes the following process technologies:
- Bipolar - Bipolar technology is one of the oldest technologies. It is
utilized where precision analog elements are required.
- High Speed Bipolar - This is a variation of bipolar technology that is
specially optimized for very fast transistors and is used where
high-speed switching or signal conditioning is required.
- SuperBeta PNP T - The Company's proprietary SuperBeta PNP T process
technology allows power transistors to be driven with much lower current
as compared to conventional PNP Bipolar technology, which gives such
transistors a competitive advantage.
- CMOS - CMOS technology is the technology most widely used in digital
applications. It has the advantages of low power consumption and high
packing density.
- BiCMOS - Bipolar/CMOS ("BiCMOS") merges the Bipolar and CMOS
technologies and offers the benefits of both technologies. This process,
however, adds more expense to a product.
- BCD - Bipolar/CMOS/DMOS ("BCD") merges three technologies, Bipolar, CMOS
and DMOS. DMOS is best suited for handling high current and is used in
the output section of the circuit. BCD combines the high speed,
ruggedness and power of DMOS and the benefits of BiCMOS.
- ASSET - ASSET technology is the Company's proprietary high-speed Bipolar
process developed by the Company's Synergy subsidiary. This technology
allows high speed with low jitter and is ideally suited for high-speed
mixed-signal designs.
Research and Development
The ability of the Company to compete will substantially depend on its
ability to define, design, develop and introduce on a timely basis new
products offering design or technology innovations. Research and development
in the analog integrated circuit industry is characterized primarily by
circuit design and product engineering that enables new functionality or
improved performance. Research and development in the high-speed
communications circuit industry is characterized primarily by innovative
process technologies, novel design techniques and high-speed test methodology.
10
The Company's research and development efforts are also directed at its
process technologies and focus on cost reductions to existing manufacturing
processes and the development of new process capabilities to manufacture new
products and add new features to existing products. With respect to more
established products, the Company's research and development efforts also
include product redesign, shrinkage of device size and the reduction of mask
steps in order to improve die yields per wafer and reduce per device costs.
The Company's analog design engineers principally focus on developing next
generation standard products. The Company's new product development strategy
emphasizes a broad line of standard products that are based on customer input
and requests. The Company often develops new standard analog products with the
cooperation of customers in order to better ensure market acceptance. The
Company is currently developing products to expand its line of USB and PCMCIA
switches, SMPS regulators, LDOs and MOSFET drivers. The Company's mixed-signal
design engineers principally focus on high speed, low noise media driving and
clock/data recovery devices used in communication and advanced computer
systems.
In 1999, 1998, and 1997 the Company spent approximately $26.3 million
$18.9 million, and $14.0 million, respectively, on research and development.
The Company expects that it will continue to spend substantial funds on
research and development activities. The Company is currently developing, and
may in the future develop, certain types of standard products with which the
Company has only limited experience. Certain of these new standard products
will be targeted at emerging market segments in which the Company has not
previously participated. Additionally, there can be no assurance that the
Company will be able to identify new standard product opportunities
successfully and develop and bring to market such new products or that the
Company will be able to respond effectively to new technological changes or
new product announcements by others.
Patents and Intellectual Property Protection
The Company seeks patent protection for those inventions and technologies
for which such protection is suitable and is likely to provide competitive
advantage to the Company. The Company currently holds 30 United States patents
on semiconductor devices and methods, with various expiration dates through
2018. The Company has applications for 10 United States patents pending. The
Company holds 7 issued foreign patents and has applications for 40 foreign
patents pending. The Company has also routinely protected its numerous
original mask sets under mask work laws. There can be no assurance that any
patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
patent applications will issue or will be issued with the scope of the claims
sought by the Company. Notwithstanding the Company's active pursuit of patent
and mask work protection, the Company believes that its future success will
depend primarily upon the technical expertise, creative skills and management
abilities of its officers and key employees rather than on patent and
copyright ownership.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent that
the Company becomes involved in such intellectual property litigation, it
could result in substantial costs and diversion of resources to the Company
and could have a material adverse effect on the Company's financial condition,
results of operations, or cash flows. See Item 3, Legal Proceedings, of this
report on Form 10-K.
11
Supply of Materials and Purchased Components
Micrel currently purchases certain components from a limited group of
vendors. The packaging of the Company's products which is performed by, and
certain of the raw materials included in such products are obtained from, a
limited group of suppliers. Although the Company seeks to reduce its
dependence on its sole and limited source suppliers, disruption or termination
of any of these sources could occur and such disruptions could have an adverse
effect on the Company's financial condition, results of operations, or cash
flows. The Company has rarely experienced delays in obtaining raw materials,
which have adversely affected production.
Manufacturing
The Company produces the majority of its wafers at the Company's wafer
fabrication facilities located in San Jose and Santa Clara, California while a
small percentage of wafer fabrication is subcontracted to outside foundries.
The San Jose facility includes a 57,000 square foot office and manufacturing
facility containing a 24,800 square foot clean room facility, which provides
production processes. The San Jose facility is classified as a Class 10
facility, which means that the facility achieves a clean room level of fewer
than 10 foreign particles larger than 0.5 microns in size in each cubic foot
of space. In the third quarter of 1997, the Company began processing certain
products using six-inch wafers. In the fourth quarter of 1998, approximately
61% of wafer fab outputs were produced using six-inch wafers. The Company
completed its conversion to six-inch wafer fabrication in the second quarter
of 1999. The Company leases approximately 63,000 square feet of additional
adjacent space in San Jose that is used as a testing facility. In November
1998, associated with the acquisition of Synergy, the Company acquired a
70,000 square foot office and manufacturing facility in Santa Clara,
California containing a 9,000 square foot clean room facility, which provides
production processes. The Santa Clara facility was upgraded from a Class 10
facility to Class 1 in 1999. The facility uses six-inch wafer technology. The
Company is planning to expand its clean room facilities with an additional
5,000 square foot Class I clean room in calendar 2000.
The fabrication of integrated circuits is a highly complex and precise
process. Minute impurities, contaminants in the manufacturing environment,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, manufacturing equipment failure, wafer breakage or other
factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be nonfunctional. There can be no assurance that
the Company in general will be able to maintain acceptable manufacturing
yields in the future.
Generally, each die on the Company's wafers is electrically tested for
performance, and most of the wafers are subsequently sent to independent
assembly and final test contract facilities in Malaysia and certain other
Asian countries. At such facilities, the wafers are separated into individual
circuits and packaged. The Company's reliance on independent assemblers may
subject the Company to longer manufacturing cycle times. The Company from time
to time has experienced competition with respect to these contractors from
other manufacturers seeking assembly of circuits by independent contractors.
Although the Company currently believes that alternate foreign assembly
sources could be obtained without significant interruption, there can be no
assurance that such alternate sources could be obtained quickly.
The Company manufactures the majority of its products at two wafer
fabrication facilities. Given the nature of the Company's products, it would
be difficult to arrange for independent manufacturing facilities to supply
such products. Any prolonged inability to utilize the Company's manufacturing
12
facilities as a result of fire, natural disaster or otherwise, would have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Competition
The semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the market for
standard products include product features, performance, price, the timing of
product introductions, the emergence of new technological standards, quality
and customer support. The Company believes that it competes favorably in all
these areas.
Because the standard products market for analog integrated circuits is
diverse and highly fragmented, the Company encounters different competitors in
its various market areas. The Company's principal analog circuit competitors
include Linear Technology Corporation, and National Semiconductor Corporation
in one or more of its product areas. Other competitors include Texas
Instruments, Motorola, On Semiconductor, Maxim Integrated Products, Inc., and
certain Japanese manufacturers. Each of these companies has substantially
greater technical, financial and marketing resources and greater name
recognition than the Company. Due to the increasing demands for analog
circuits, the Company expects intensified competition from existing analog
circuit suppliers and the entry of new competitors. The Company's principal
competitors for products targets at the high bandwidth communications market
are On Semiconductor, Applied Micro Circuits Corp and Vitesse Semiconductor
Corporation.
With respect to the custom and foundry products business, significant
competitive factors include product quality and reliability, established
relationships between customers and suppliers, timely delivery of products and
price. The Company believes that it competes favorably in all these areas.
Backlog
At December 31, 1999, the Company's backlog was approximately
$87.4 million, all of which is scheduled to be shipped during the first six
months of 2000. At December 31, 1998, the Company's backlog was approximately
$31.3 million. Orders in backlog are subject to cancellation or rescheduling
by the customer, generally with a cancellation charge in the case of custom
and foundry products. The Company's backlog consists of distributor and
customer released orders required to be shipped within the next six months.
Shipments to United States, Canadian and certain other international
distributors are not recognized as revenue by the Company until the product is
sold from the distributor stock and through to the end-users. Because of
possible changes in product delivery schedules and cancellation of product
orders and because an increasing percentage of the Company's sales are shipped
in the same quarter that the orders are received, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any
succeeding period.
Environmental Matters
Federal, state and local regulations impose various environmental controls
on the storage, handling, discharge and disposal of chemicals and gases used
in the Company's manufacturing process. The Company believes that its
activities conform to present environmental regulations. Increasing public
attention has, however, been focused on the environmental impact of
semiconductor operations. While the Company has not experienced any materially
adverse effects on its operations from environmental regulations, there can be
no assurance that changes in such regulations will not impose the need for
13
additional capital equipment or other requirements or restrict the Company's
ability to expand its operations. Any failure by the Company to restrict the
discharge of hazardous substances adequately could subject the Company to
future liabilities or could cause its manufacturing operations to be
suspended.
Employees
As of December 31, 1999, the Company had 794 full-time employees. The
Company's employees are not represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The Company
believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's main executive, administrative, manufacturing and technical
offices are located in a 57,000 square foot facility and an adjacent 63,000
square foot facility in San Jose, California under lease agreements that
expire in May 2005. The Company fabricates the majority of its wafers at this
location in a 24,800 square foot clean room facility, which provides all
production processes. In addition to wafer fabrication, the Company also the
uses this location as a testing facility. Additional administrative,
manufacturing and wafer production facilities are maintained at a 70,000
square foot facility in Santa Clara, California which were acquired in
connection with the Company's purchase of Synergy Semiconductor. These
facilities are under lease agreements that expire in 2006. The Company
fabricates mixed-signal and digital integrated circuit wafers at this
location in a 9,000 square foot clean room facility, which provides all
production processes. In addition to wafer fabrication, the Company also uses
this location as a testing facility.
The Company believes that its existing and planned facilities are adequate
for its current manufacturing needs. The Company believes that if it should
need additional space, such space would be available at commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent that
the Company becomes involved in such intellectual property litigation, it
could result in substantial costs and diversion of resources to the Company
and could have a material adverse effect on the Company's financial condition
or results of operations.
On July 2, 1999, National Semiconductor Corporation ("National"), a
competitor of the Company, filed a complaint against the Company, entitled
National Semiconductor Corporation v. Micrel Semiconductor, Inc. in the United
States District Court, Northern District of California, in San Jose,
California, alleging that the Company infringes five National Semiconductor
patents. The complaint in the lawsuit seeks unspecified compensatory damages
for infringement, treble damages as well as permanent injunctive relief
against further infringement of the National patents at issue.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation
(the "Lemelson Partnership") filed a complaint which was served on the Company
on June 15, 1999, entitled Lemelson Medical, Education & Research Foundation,
Limited Partnership v. Lucent Technologies Inc., et al. in the United States
District Court in Phoenix, Arizona, against eighty-eight defendants, including
14
the Company, alleging infringement of Lemelson Foundation patents. The
complaint in the lawsuit seeks unspecified compensatory damages, treble
damages and attorneys' fees, as well as injunctive relief against further
infringement of the Lemelson patents at issue. The Company intends to defend
itself against these claims.
On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company, entitled
Linear Technology Corporation v. Micrel, Incorporated, in the United States
District Court in San Jose, California, alleging patent and copyright
infringement and unfair competition. All claims, except the patent
infringement claim, have been settled or dismissed. In this lawsuit, Linear
claimed that two of the Company's products infringed one of Linear's patents.
The complaint in the lawsuit sought unspecified compensatory damages, treble
damages and attorneys' fees as well as preliminary and permanent injunctive
relief against infringement of the Linear patent at issue. On August 20, 1999,
the United States District Court in San Jose adjudicated in favor of the
Company in this patent infringement suit brought by the plaintiff. The
plaintiff alleged in the suit that the Company had infringed upon U.S. Patent
No. 4,755,741 which covers design techniques used to increase the efficiency
of switching regulators. The United States District Court in San Jose found
the patent to be invalid under the "on sale bar" defense as the plaintiff had
placed integrated circuits containing the alleged invention on sale more than
a year before filing its patent application. The United States District Court
in San Jose dismissed the plaintiff's complaint on the merits of the case and
awarded the Company its legal costs. An appeal of the Judgment was filed by
Linear on September 17, 1999 and will be entered after the judge signs the
final Judgement order.
The Company believes that the ultimate outcome of the legal actions
discussed above will not result in a material adverse effect on the Company's
financial condition, results of operation or cash flows. However, litigation
is subject to inherent uncertainties, and no assurance can be given that the
Company will prevail in these lawsuits. Accordingly, the pending lawsuits as
well as potential future litigation with other companies, could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
Certain additional claims and lawsuits have arisen against the Company in
its normal course of business. The Company believes that these claims and
lawsuits will not have a material adverse effect on the Company's financial
condition, results of operation or cash flows.
In the event of an adverse ruling in any intellectual property litigation
that now exists or might arise in the future, the Company might be required to
discontinue the use of certain processes, cease the manufacture, use and sale
of infringing products, expend significant resources to develop non-infringing
technology or obtain licenses to the infringing technology. There can be no
assurance, however, that under such circumstances, a license would be
available under reasonable terms or at all. In the event of a successful claim
against the Company and the Company's failure to develop or license substitute
technology on commercially reasonable terms, the Company's financial
condition, results of operations, or cash flows could be adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the fourth quarter of 1999, no matters were submitted to a vote of
security holders.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market under the
Symbol "MCRL". The range of daily closing prices per share for the Company's
common stock from January 1, 1998 to December 31, 1999 was:
Year Ended December 31, 1999: High Low
------- -------
Fourth quarter $ 57.50 $ 41.78
Third quarter $ 50.06 $ 36.34
Second quarter $ 37.19 $ 24.45
First quarter $ 28.63 $ 22.44
Year Ended December 31, 1998: High Low
------- -------
Fourth quarter $ 27.50 $ 12.00
Third quarter $ 19.00 $ 13.25
Second quarter $ 20.10 $ 14.44
First quarter $ 19.90 $ 13.13
In August 1999, the Company declared a two-for-one stock split of its Common
Stock in the form of a 100% stock dividend payable September 15, 1999, on
shares of Common Stock outstanding as of August 30, 1999. All share and per
share information has been adjusted to retroactively give effect to the stock
split for all periods presented.
The reported last sale price of the Company's Common Stock on the Nasdaq
Stock Market on December 31, 1999 was $56.94. The approximate number of holders
of record of the shares of the Company's Common Stock was 144 as of March 15,
2000. This number does not include shareholders whose shares are held in trust
by other entities. The actual number of shareholders is greater than this
number of holders of record. The Company estimates that the number of
beneficial shareholders of the shares of the Company's Common Stock as of March
15, 2000 was approximately 3,000.
The Company has authorized Common Stock, no par value and Preferred Stock,
no par value. The Company has not issued any Preferred Stock.
The Company has not paid any cash dividends on its capital stock. The
Company currently intends to retain its earnings to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's existing
credit facilities prohibit the payment of cash or stock dividends on the
Company's capital stock without the lender's prior written consent. See Item 7
- - "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 5 of Notes to
Consolidated Financial Statements contained in Item 8.
During the year ended December 31, 1999, the Company did not sell any equity
securities that were not registered under the Securities Act of 1933, as
amended.
16
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Income Statement Data:
Net revenues $ 195,122 $ 140,508 $ 104,158 $ 66,244 $ 53,035
Cost of revenues 85,629 69,324 48,641 32,407 26,843
--------- --------- --------- --------- ---------
Gross profit 109,493 71,184 55,517 33,837 26,192
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 26,328 18,931 13,986 8,613 6,469
Selling, general and
administrative 28,157 21,658 17,128 11,936 9,083
Purchased in-process
technology 603 3,737 - - -
--------- --------- --------- --------- ---------
Total operating
expenses 55,088 44,326 31,114 20,549 15,552
--------- --------- --------- --------- ---------
Income from operations 54,405 26,858 24,403 13,288 10,640
Other income, net 610 1,092 971 730 682
--------- --------- --------- --------- ---------
Income before income taxes 55,015 27,950 25,374 14,018 11,322
Provision for income taxes 18,356 10,774 8,627 4,766 3,963
--------- --------- --------- --------- ---------
Net income $ 36,659 $ 17,176 $ 16,747 $ 9,252 $ 7,359
========= ========= ========= ========= =========
Net income per share:
Basic $ 0.90 $ 0.43 $ 0.44 $ 0.25 $ 0.21
========= ========= ========= ========= =========
Diluted $ 0.82 $ 0.41 $ 0.40 $ 0.23 $ 0.18
========= ========= ========= ========= =========
Shares used in computing
per share amounts:
Basic 40,830 39,610 38,138 36,606 35,008
========= ========= ========= ========= =========
Diluted 44,896 42,406 41,644 40,096 39,900
========= ========= ========= ========= =========
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
Balance Sheet Data:
Working capital $ 83,706 $ 50,868 $ 41,694 $ 32,978 $ 28,494
Total assets 203,094 145,370 85,527 60,008 48,342
Long-term debt 8,854 14,007 552 1,287 2,523
Total shareholders'
equity 148,669 95,711 70,568 47,431 36,033
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high
performance standard analog integrated circuits. These circuits are used in a
wide variety of electronics products, including those in the communications,
computer and industrial markets. In addition to standard products, the Company
manufactures custom analog and mixed-signal circuits and provides wafer
foundry services. With the Company's acquisition of Synergy Semiconductor in
November 1998, the Company broadened its standard product offerings to include
high-speed mixed-signal and digital integrated circuits, which are primarily
used in electronic products in the high bandwidth communications and computer
markets. The Company's financial statements include the results of Synergy
Semiconductor from the acquisition date forward.
The Company derives a substantial portion of its net revenues from standard
products. For 1999, 1998, and 1997 the Company's standard products sales
accounted for 77%, 71%, and 76%, respectively, of the Company's net revenues.
The Company believes that a substantial portion of its net revenues in the
future will depend upon standard products sales, although such sales as a
proportion of net revenues may vary as the Company adjusts product output
levels to correspond with varying economic conditions and demand levels in the
markets which it serves. The standard products business is characterized by
short-term orders and shipment schedules, and customer orders typically can be
canceled or rescheduled without significant penalty to the customer. Since
most standard products backlog is cancelable without significant penalty, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company is limited in its ability to reduce
costs quickly in response to any revenue shortfalls.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products sold,
competitive pricing pressures, the successful development of new products, and
the Company's ability to ramp up manufacturing to meet increasing demand. As a
result of the foregoing or other factors, there can be no assurance that the
Company will not experience material fluctuations in future operating results
on a quarterly or annual basis, which would materially and adversely affect
the Company's business, financial condition, results of operations or cash
flows.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
Years Ended December 31,
-------------------------
1999 1998 1997
----- ----- -----
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 43.9 49.3 46.7
----- ----- -----
Gross profit 56.1 50.7 53.3
----- ----- -----
Operating expenses:
Research and development 13.5 13.5 13.4
Selling, general and
administrative 14.4 15.4 16.5
Purchased in-process
technology 0.3 2.6 -
----- ----- -----
Total operating
expenses 28.2 31.5 29.9
----- ----- -----
Income from operations 27.9 19.1 23.4
Other income, net 0.3 0.8 1.0
----- ----- -----
Income before income taxes 28.2 19.9 24.4
Provision for income taxes 9.4 7.7 8.3
----- ----- -----
Net income 18.8% 12.2% 16.1%
===== ===== =====
Net Revenues. Net revenues increased 39% to $195.1 million for the year
ended December 31, 1999 from $140.5 million in 1998 due primarily to higher
standard product revenues and, to a lesser extent, higher custom and foundry
revenues. Standard product revenues increased to $151.1 million, which
represented 77% of net revenues for the year ended December 31, 1999, compared
to $99.9 million and 71% of net revenues for 1998. Sales of standard products
were led by the increased sales of low dropout regulators, high bandwidth
communications products and computer peripheral devices. Such products were
sold to manufacturers of communications, portable computing, computing
peripherals and industrial products. The increase in the standard high
bandwidth product revenues results from the November 1998 acquisition of
Synergy Semiconductor. Custom and foundry revenues increased to $44.0 million,
which represented 23% of net revenues for the year ended December 31, 1999,
compared to $40.6 million and 29% of net revenues for 1998. This decline as a
percent of total revenues reflects a reduced emphasis on custom and foundry
products as compared to the same periods in 1998, in which the Company
increased its emphasis on custom and foundry products as an interim response to
the Asian financial crisis.
The Company believes that pricing pressures that were prevalent during 1998
and the first half of 1999 have lessened as customers become more concerned
about product availability. Increasing end customer demand throughout 1999 has
resulted in capacity constraints and increasing order lead times for
semiconductor suppliers in general. During the third and fourth quarters of
1999, standard product customer order lead times slightly increased as
compared to the same period in 1998, but customer demand continues to be
short-term focused. These factors limit forward visibility and affect the
Company's ability to predict future sales levels and profitability.
Net revenues increased 35% to $140.5 million for the year ended
December 31, 1998 from $104.2 million in 1997 due to higher standard product
revenues and higher custom and foundry revenues. Standard product revenues
increased to $99.9 million, which represented 71% of net revenues for the year
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ended December 31, 1998, compared to $79.2 million and 76% of net revenues for
1997. Sales of standard products were led by the increased sales of low
dropout regulators, computer peripheral IC components, dricers, and switching
regulators. Such products were sold to manufacturers of portable computing,
computing peripherals, telecommunications and industrial products. During 1998
the Company increased its emphasis on custom and foundry product sales as an
interim response to the Asian financial situation. Custom and foundry revenues
increased to $40.6 million, which represented 29% of net revenues for the year
ended December 31, 1998, compared to $24.9 million and 24% of net revenues for
1997.
International sales represented 47%, 45%, and 50% of net revenues for the
years ended December 31, 1999, 1998 and 1997, respectively. On a dollar basis,
international sales increased 45% to $92.3 million for the year ended
December 31, 1999 from $63.4 million for the comparable period in 1998. The
dollar increase in international sales resulted from shipments to
manufacturers of personal computers and communications products and demand for
the Company's products primarily in Asia and, to a lesser extent, in Europe.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's products
in foreign markets and make the Company's products relatively more expensive
than competitors' products that are denominated in local currencies, leading
to a reduction in sales or profitability in those foreign markets. The Company
has not taken any protective measures against exchange rate fluctuations, such
as purchasing hedging instruments with respect to such fluctuations.
The Company defers recognition of revenue derived from sales to domestic,
Canadian and certain other international distributors until such distributors
resell the Company's products to their customers. Sales to stocking
representatives and O.E.M. customers are recognized upon shipment. The Company
estimates returns and warranty costs and provides an allowance as revenue is
recognized.
Gross Profit. Gross profit is affected by the volume of product sales,
product mix, manufacturing utilization, product yields and average selling
prices. The Company's gross margin increased to 56% for the year ended
December 31, 1999 from 51% for the year ended December 31, 1998. The gross
margin improved from the prior year level, which was depressed by the write-
off, in the fourth quarter of 1998 of approximately $7.0 million in excess
inventory in response to a reduced sales forecast of Synergy products.
Excluding the Synergy inventory write-off, gross margin for 1998 was 55%. In
addition, the improvement in gross margin reflected an increase in
manufacturing efficiency due to greater capacity utilization and reductions in
contract assembly and test unit costs, which were partially offset by
declining average selling prices.
The Company's gross margin decreased to 51% for the year ended December 31,
1998 from 53% for the year ended December 31, 1997. The decrease in gross
margin resulted primarily from the $7.0 million fourth quarter write-off of
excess Synergy inventory that was offset in part by an increase in
manufacturing efficiency resulting from greater capacity utilization.
Manufacturing yields, which affect gross margin, may from time to time
decline because the fabrication of integrated circuits is a highly complex and
precise process. Factors such as minute impurities and difficulties in the
fabrication process can cause a substantial percentage of wafers to be
rejected or numerous die on each wafer to be nonfunctional. There can be no
assurance that the Company in general will be able to maintain acceptable
manufacturing yields in the future.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Research and Development Expenses. Research and development expenses
include costs associated with the development of new processes and the
definition, design and development of standard products. The Company also
expenses prototype wafers and new production mask sets related to new products
as research and development costs until products based on new designs are
fully characterized by the Company and are demonstrated to support published
data sheets and satisfy reliability tests.
As a percentage of net revenues, research and development expenses
represented 14% for each of the years ended December 31, 1999 and 1998. On a
dollar basis, research and development expenses increased $7.4 million or 39%
to $26.3 million for the year ended December 31, 1999 from $18.9 million in
1998. The increase in research and development expenses for the year ended
December 31, 1999 was primarily due to increased engineering staffing costs
associated with the acquisition of Synergy and the development of new standard
products. The Company believes that the development and introduction of new
standard products is critical to its future success and expects that research
and development expenses will increase on a dollar basis in the future.
As a percentage of net revenues, research and development expenses
represented 14% and 13% for the years ended December 31, 1998 and 1997,
respectively. On a dollar basis, research and development expenses increased
$4.9 million or 35% to $18.9 million for the year ended December 31, 1998 from
$14.0 million in 1997. The increase in research and development expenses for
the year ended December 31, 1998 was primarily due to increased costs
associated with the Company's conversion to six-inch wafer fabrication, and
increased expenses due to engineering staffing, design services, and prototype
wafers to support the development of new standard products.
Selling, General and Administrative Expenses. As a percentage of net
revenues, selling, general and administrative expenses represented 14% and 15%
for the years ended December 31, 1999 and 1998, respectively. On a dollar
basis, selling, general and administrative expenses increased $6.5 million or
30% to $28.2 million for the year ended December 31, 1999 from $21.7 million
for the comparable period in 1998. The dollar increase was principally
attributable to higher wages and salaries, commissions, advertising and other
administrative expenses associated with the growth of the Company's revenues.
The Company expects that selling, general and administrative expenses will
increase on a dollar basis in the future.
As a percentage of net revenues, selling, general and administrative
expenses represented 15% and 16% for the years ended December 31, 1998 and
1997, respectively. On a dollar basis, selling, general and administrative
expenses increased $4.5 million or 26% to $21.7 million for the year ended
December 31, 1998 from $17.1 million for the comparable period in 1997. The
dollar increase was due, in part, to increased wages and salaries, higher
commissions, advertising and other sales and administrative expenses
associated with the growth of the Company's revenues.
Purchased In-Process Technology. On December 15, 1999, the Company acquired
all the outstanding capital stock of Altos Semiconductor for a cash purchase
price of $1.8 million. The transaction was accounted for as a purchase.
Approximately $1.7 million of the total purchase cost was allocated to
intangible assets. Of that amount, $603,000 was allocated to purchased in-
process technology, which has not reached technological feasibility and has no
alternative future use, for which the Company recorded charges in the year
ended December 31, 1999.
The purchased in-process technology related to four individual development
projects that had not reached technological feasibility and, therefore, the
successful completion of such projects was uncertain. Those development
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
projects correspond to temperature sensing devices. At the time of the
acquisition, further development remained on these projects and the estimated
costs to complete were approximately $120,000.
Significant assumptions used to determine the value of in-process
technology included: (i) forecast of net cash flows that were expected to
result from the development effort; (ii) an estimate of percentage complete
for each project which averaged 55% for all projects; (iii) a discount rate of
approximately 40%.
On November 9, 1998, the Company acquired all the outstanding capital stock
of Synergy Semiconductor for a cash purchase price of $9.9 million,
transaction fees of $1.3 million, direct merger costs of approximately
$300,000, and the assumption of liabilities of approximately $20.1 million.
The transaction was accounted for as a purchase. Approximately $12.9 million
of the total purchase cost was allocated to intangible assets. Of that
amount, approximately $3.7 million was allocated to purchased in-process
technology, which has not reached technological feasibility and has no
alternative future use, for which the Company recorded charges in the year
ended December 31, 1998.
The purchased in-process technology related to approximately 50 individual
development projects that had not reached technological feasibility and,
therefore, the successful completion of such projects was uncertain. Those
development projects correspond to three existing product lines: supercom,
clockworks and logic.
Significant assumptions used to determine the value of in-process
technology included: (i) forecast of net cash flows that were expected to
result from the development effort; (ii) an estimate of percentage complete
for each project which ranged from 20% to 90% with an average for all projects
of 80%; (iii) a discount rate of approximately 30%.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities partially offset by
interest incurred on line of credit borrowings and term notes. Other income,
net decreased $482,000 to $610,000 in 1999 from $1.1 million in 1998. Such
decrease was due to an increase in average long-term debt associated with the
Synergy acquisition. The Company expects to continue to utilize term financing
as appropriate to finance its capital equipment needs.
Other income, net increased by approximately $121,000 to $1.1 million in
1998 from $971,000 in 1997. Such increase reflected a $419,000 increase in
interest income due to an increase in average cash and investment balances,
partially offset by an increase in interest expense by $255,000 due to an
increase in the average amount of notes payable.
Provision for Income Taxes. For the year ended December 31, 1999 the
provision for taxes on income was 33% of income before tax excluding the
$603,000 charge for purchased in-process technology, which is a non-deductible
charge for federal income tax purposes. For the year ended December 31, 1998
the provision for taxes on income was 34% of income before tax excluding the
$3.7 million charge for purchased in-process technology. The 1999 and 1998
income tax provisions differ from taxes computed at the federal statutory rate
due to the effect of state taxes and the non-deductible charges for purchased
in-process technology offset by the benefit from the foreign sales
corporation, federal and state research and development credits, and state
manufacturing credits.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been its
cash from operations, bank borrowings and sales of common stock. Principal
sources of liquidity at December 31, 1999 consisted of cash and short-term
investments of $51.7 million and borrowing facilities consisting of (i) $5.0
million under a revolving line of credit, of which all was unused and
available at December 31, 1999, and (ii) $20.0 million under a non-revolving
line of credit of which $9.9 million was unused and available at December 31,
1999. The two lines of credit are covered by the same loan and security
agreement and expire March 31, 2000 and are subject to automatic renewal on a
month to month basis thereafter unless terminated by either party upon 30 days
notice. Borrowings are collateralized by substantially all of the Company's
assets. The agreement contains certain restrictive covenants that include a
restriction on the declaration and payment of dividends without the lender's
consent. The Company was in compliance with all such covenants at December 31,
1999.
The non-revolving bank line of credit that is covered by the loan agreement
described above, can be used to fund purchases of capital equipment whereby
the Company may borrow up to 100% of the acquisition cost. Amounts borrowed
under this credit line are automatically converted to four-year installment
notes. All equipment notes are collateralized by substantially all of the
Company's manufacturing equipment and bear interest rates of, at the Company's
election, the prime rate (8.50% at December 31, 1999), a fixed rate based on
the four-year U.S. Treasury Bill rate (6.34% at December 31, 1999) plus 3.0%
or an annual adjustable rate based on the one-year U.S. Treasury Bill rate
(5.98% at December 31, 1999) plus 3.0%.
On March 8, 2000, the loan agreements described above were subsequently
replaced with a new loan and security agreement. Under the new agreement, the
revolving line of credit remained at $5 million and the non-revolving line of
credit was increased to $40 million dollars. The new agreement expires April
30, 2001 and is subject to automatic renewal on a month to month basis
thereafter unless terminated by either party upon 30 days notice. Borrowings
under the new revolving line of credit bear interest rates of, at the
Company's election, the prime rate (8.50% at December 31, 1999), or the bank's
revolving offshore rate, which approximates LIBOR (5.82% at December 31, 1999)
plus 2.0%. Borrowings under the new non-revolving line of credit bear interest
rates of, at the Company's election, the prime rate (8.50% at December 31,
1999), the bank's non-revolving offshore rate, which approximates LIBOR (5.82%
at December 31, 1999) plus 2.13%, a fixed rate based on the four-year U.S.
Treasury Bill rate (6.34% at December 31, 1999) plus 2.75% or an annual
adjustable rate based on the one-year U.S. Treasury Bill rate (5.98% at
December 31, 1999) plus 2.75%. All other terms and conditions remain
substantially unchanged from the prior agreement.
As of December 31, 1999, the Company had $14.0 million outstanding under
term notes that are collateralized by substantially all of the Company's
manufacturing equipment.
The Company's working capital increased by $32.8 million to $83.7 million
as of December 31, 1999 from $50.9 million as of December 31, 1998. The
increase was primarily attributable to increases in cash, cash equivalents and
short-term investments of $23.3 million, accounts receivable of $15.4 million,
inventories of $7.8 million, and decreases in other accrued liabilities of
$1.3 million which were partially offset by increases in income taxes payable
of $7.9 million, accounts payable of $3.2 million, deferred income of
$2.1 million, and accrued compensation of $1.4 million. The Company's short-
term investments were principally invested in investment grade, interest-
bearing securities.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's cash flows provided by operating activities increased to
$51.7 million for the year ended December 31, 1999 from $40.6 million for the
year ended December 31, 1998 primarily as a result of increased net income and
income taxes payable, partially offset by increases in accounts receivable and
inventories. The Company's cash flows provided by operating activities in the
year ended December 31, 1999 were primarily attributable to net income of
$53.5 million after adding back non-cash activities, an $8.0 million tax
benefit from employee stock transactions combined with a $7.9 million increase
in income taxes payable, accounts payable of $3.2 million, deferred income of
$2.1 million, and accrued compensation of $1.4 million which were partially
offset by increases in accounts receivable of $15.4 million and inventories of
$7.8 million which increased with higher revenues.
The Company's investing activities during the year ended December 31, 1999
used cash of $52.5 million as compared to $38.6 million of cash used for
investing activities during the year ended December 31, 1998. Cash used for
investing activities during the year ended December 31, 1999 resulted
primarily from net purchases of $29.4 million of property, plant and equipment
principally associated with the Company's conversion to six-inch wafer
production and additional wafer fab and testing equipment to increase
production capacity, combined with net purchases of $21.3 million of short-
term investments, and $1.8 million for the purchase of Altos Semiconductor.
The Company's financing activities during the year ended December 31, 1999
provided cash of approximately $2.7 million as compared to cash provided of
$8.8 million during the year ended December 31, 1998. Cash provided by
financing activities during the year ended December 31, 1999 was the result of
$8.3 million in proceeds from the issuance of common stock through the
exercise of employee stock options and employee stock purchase plan activity
and proceeds from long-term borrowings of $2.1 million, which was partially
offset by $7.7 million net repayments of long-term debt.
The Company currently intends to spend up to approximately $100 million
during the next twelve months primarily for the purchase of additional wafer
and test manufacturing equipment and leasehold improvements. The Company
expects that its cash requirements through 2000 will be met by its cash from
operations, existing cash balances and short-term investments, and its
existing credit facilities.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include: statements regarding future revenue levels and income, statements
regarding future products or product development; statements regarding future
research and development spending and the Company's product development
strategy; statements regarding the levels of international sales; statements
regarding future expenditures; statements regarding the impact of Year 2000 on
the Company, statements regarding Year 2000 compliance costs; and statements
regarding current or future acquisitions. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Some of the factors that could cause actual results to differ materially are
set forth in Item 1. "Business", Item 3. "Legal Proceedings", Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Operations" and in the additional factors set forth below.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products sold,
market acceptance of the Company's and its customers' products, competitive
pricing pressures, the Company's ability to timely acquire and install capital
equipment to expand manufacturing capacity to meet increasing demand,
availability of production capacity at assembly subcontractors, the Company's
ability to introduce new products on a timely basis, the timing of new product
announcements and introductions by the Company or its competitors, the timing
and extent of research and development expenses, fluctuations in manufacturing
yields, cyclical semiconductor industry conditions, the Company's ability to
hire and retain key technical and management personnel, the Company's access
to advanced process technologies and the timing and extent of process
development costs. As a result of the foregoing or other factors, there can be
no assurance that the Company will not experience material fluctuations in
future operating results on a quarterly or annual basis, which would
materially and adversely affect the Company's business, financial condition,
results of operations or cash flows.
The Company believes that a substantial portion of its net revenues in the
future will continue to depend upon standard products sales. As compared with
the custom and foundry products business, the standard products business is
characterized by shorter product lifecycles, greater pricing pressures, larger
competitors and more rapid technological change. Generally, the standard
products market is a rapidly changing market in which the Company faces the
risk that, as the market changes, its product offerings will become obsolete.
The Company competes in the standard products market with established
companies, most of which have substantially greater financial, engineering,
manufacturing and marketing resources than the Company. No assurance can be
given that the Company will be able to compete successfully in the standard
products market or that it will be able to successfully introduce new standard
products in the future. The failure of the Company to compete successfully in
the standard products business would materially and adversely affect the
Company's financial condition, results of operations, or cash flows.
The semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors include product
features, performance, price, timing of product introductions, emergence of
new computer standards, quality and customer support. Because the standard
products market for integrated circuits is diverse and highly fragmented, the
Company encounters different competitors in its various market areas. Most of
these competitors have substantially greater technical, financial and
marketing resources and greater name recognition than the Company. Due to the
increasing demands for integrated circuits, the Company expects intensified
competition from existing integrated circuit suppliers and the entry of new
competition. Increased competition could adversely affect the Company's
financial condition or results of operations. There can be no assurance that
the Company will be able to compete successfully in either the standard
products or custom and foundry products business in the future or that
competitive pressures will not adversely affect the Company's financial
condition, results of operations, or cash flows.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights (see Note 11 of Notes
to Consolidated Financial Statements contained in Item 8). There can be no
assurance that these existing claims or any other assertions (or claims for
indemnity resulting from infringement claims) will not materially adversely
affect the Company's business, financial condition, results of operations, or
cash flows.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing technology
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products. There
can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications will be issued with the scope
of the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company.
The Company has generated a substantial portion of its net revenues from
export sales (see Note 12 of Notes to Consolidated Financial Statements
contained in Item 8). The Company believes that a substantial portion of its
future net revenues will depend on export sales to customers in international
markets including Asia. International markets are subject to a variety of
risks, including changes in policy by foreign governments, social conditions
such as civil unrest, and economic conditions including high levels of
inflation, fluctuation in the value of foreign currencies and currency
exchange rates and trade restrictions or prohibitions. In addition, the
Company sells to domestic customers that do business worldwide and cannot
predict how the businesses of these customers may be affected by economic
conditions in Asia or elsewhere. Such factors could adversely affect the
Company's future revenues, financial condition, results of operations or cash
flows.
Historically, the Company has not experienced significant individual
product gross margin differences on export sales compared to domestic sales.
However, as a result of the foregoing international market risks or other
factors, there can be no assurance that the Company will not experience
material gross margin fluctuations in the future, which could materially and
adversely affect the Company's business, financial condition, results of
operations or cash flows.
The fabrication of integrated circuits is a highly complex and precise
process. Minute impurities, contaminants in the manufacturing environment,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, manufacturing equipment failures, wafer breakage or other
factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be nonfunctional. Moreover, there can be no
assurance that the Company will be able to maintain acceptable manufacturing
yields in the future.
Readiness Disclosure for Year 2000
The Year 2000 issue refers to whether computer systems will properly
recognize two digit year values as the year 2000 versus the year 1900. Systems
that do not properly recognize such information could generate erroneous data
or cause a system to fail. During the past year, the Company has implemented a
Year 2000 project designed to identify and assess the risks associated with
its information systems, products, operations and infrastructure, suppliers
and customers that are not Year 2000 compliant, and to develop, implement and
test remediation and contingency plans to mitigate these risks. To date, the
Company has not experienced any significant disruptions related to the Year
2000 issue and has not been informed of any failures of the Company's products
related to the year 2000 issue.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the Company held $36.3 million in short-term
investments consisting of corporate debt securities (commercial paper) with
maturities of less than one year. These available-for-sale securities are
subject to interest rate risk and will fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly
by 10 percent from levels at December 31, 1999, the fair value of the short-
term investments would decline by an immaterial amount. The Company generally
expects to have the ability to hold its fixed income investments until maturity
and therefore would not expect operating results or cash flows to be affected
to any significant degree by the effect of a sudden change in market interest
rates on short-term investments.
At December 31, 1999, the Company had fixed rate long-term debt of
approximately $9.5 million. A hypothetical 10 percent decrease in interest
rates would not have a material impact on the fair market value of this debt.
The Company does not hedge any interest rate exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth on pages 33 through 54,
which follow Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is included in the
Company's Proxy Statement to be filed in connection with the Company's 2000
annual meeting of shareholders under the caption "Election of Directors" and
is incorporated herein by reference. The information concerning the executive
officers of the Company required by this item is as follows:
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of December 31,
1999, are as follows:
Name Age Position
--------------------- ----- -------------------------------------------
Raymond D. Zinn 62 President, Chief Executive Officer
Warren H. Muller 60 Chief Technical Officer, Secretary
Robert Whelton 60 Executive Vice President of Operations
Richard D. Crowley, Jr. 43 Vice President, Finance and Chief
Financial Officer
Barry Small 51 Vice President, Wafer Fab
Scott Ward 45 Vice President, Test Operations
George T. Anderl 60 Vice President, Sales and Marketing
Carlos Mejia 49 Vice President, Human Resources
Mr. Zinn is a co-founder of the Company and has been its President, Chief
Executive Officer and Chairman of its Board of Directors since its
incorporation in 1978. Prior to co-founding Micrel, Mr. Zinn held various
management and manufacturing executive positions in the semiconductor industry
at Electromask TRE, Electronic Arrays, Inc., Teledyne, Inc., Fairchild
Semiconductor Corporation and Nortek, Inc. He holds a B.S. in Industrial
Management from Brigham Young University and a M.S. in Business Administration
from San Jose State University.
Mr. Muller is a co-founder of the Company and has served as a member of the
Company's Board of Directors and as its Vice President of Test Operations
since its incorporation in 1978. In 1999, Mr. Muller assumed the position of
Chief Technical Officer. He was previously employed in various positions in
semiconductor processing and testing at Electronic Arrays, Inc. and General
Instruments Corporation. Mr. Muller holds a B.S.E.E. from Clarkson College.
Mr. Whelton joined the Company as Executive Vice President of Operations in
January 1998. From 1996 to 1997, Mr. Whelton was employed by Micro Linear
Corp., where he held the position of Executive Vice President in charge of
operations, design, sales and marketing. Prior to Micro Linear, Mr. Whelton
was employed by National Semiconductor Corp., from 1985 to 1996 where he held
the position of Vice President of the Analog Division. Mr. Whelton holds a
B.S.E.E. from U.C. Berkeley, and a M.S.E.E. from the University of Santa
Clara.
28
Mr. Crowley joined the Company as Vice President, Finance and Chief
Financial Officer in September 1999. From December 1998 until he joined
Micrel, Mr. Crowley was employed by Vantis Corporation as its Vice President,
Chief Financial Officer. From 1980 to 1998 Mr. Crowley was employed by
National Semiconductor Corporation, where his last position was Vice
President, Corporate Controller. He holds a B.B.A. in Finance from the
University of Notre Dame and a Masters in Management in Accounting and Finance
from Northwestern University.
Mr. Small joined the Company in April 1998 as its Vice President, Wafer
Fab. Prior to joining the Company, Mr. Small was employed by IC Works from
1996 to 1998, where he was Vice President of Operations. From 1971 to 1995,
Mr. Small was employed by National Semiconductor Corp. where he held the
position of Vice President of Linear Standard Products. Mr. Small holds a
B.A. in Physics from U.C. Berkeley and an M.A. in Physics and an M.B.A. from
University of California at Los Angeles.
Mr. Anderl joined the Company in June 1996 as its Vice President, Sales and
Marketing. From 1991 until he joined Micrel, Mr. Anderl was employed by
Quality Semiconductor, where his last position was Vice President, Worldwide
Sales. His prior employers include Austek Microsystems, Advanced Micro
Devices, and Monolithic Memories. Mr. Anderl holds a B.S.E.E. degree from
Purdue University and a M.S.E.E. from Santa Clara University.
Mr. Ward joined the Company in August 1999 as Vice President, Test
Division. From 1997 until he joined Micrel, Mr. Ward was employed by
QuickLogic Corporation as Vice President of Engineering. From 1980 to 1997,
Mr. Ward was employed by National Semiconductor Corporation where he held
various Product Line Director positions in the Analog Division. Mr. Ward holds
a B.S.E.T. degree from California Polytechnic University at San Luis Obispo.
Mr. Mejia joined the Company in June 1999 as Vice President, Human
Resources. From 1976 until he joined Micrel, Mr. Mejia was employed by Analog
Devices, Inc. where his last position was Director, Human Resources. Prior to
Analog Devices, Inc., Mr. Mejia held various human resource positions at ROHR
Industries and California Computer Products. He holds a B.S. in Industrial
Technology and a M.A.H.R. from the University of Redlands.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" and "Stock Option Grants and Exercise" in the
Company's Proxy Statement to be filed in connection with the Company's 2000
annual meeting of shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be filed in connection with the Company's 2000
annual meeting of shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement to be filed in connection with
the Company's 2000 annual meeting of shareholders and is incorporated herein by
reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following financial statements of
the Company and the Report of Deloitte & Touche LLP, Independent
Auditors, are included in this Report on the pages indicated:
Page
----
Independent Auditors' Report............................ 33
Consolidated Balance Sheets as of December 31,
1999 and 1998........................................ 34
Consolidated Income Statements for the Years ended
December 31, 1999, 1998 and 1997..................... 35
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the Years ended December 31,
1999, 1998 and 1997.................................. 36
Consolidated Statements of Cash Flows for the Years
ended December 31, 1999, 1998 and 1997.............. 37
Notes to Consolidated Financial Statements.............. 38
2. Financial Statement Schedules. The following financial
statement schedule of the Company for the years ended
December 31, 1999, 1998 and 1997 is filed as part of this report
on Form 10-K and should be read in conjunction with the financial
statements.
Schedule Title Page
-------- ------------------------------------ -----
Independent Auditors' Report.................... 53
II Valuation and Qualifying Accounts............... 54
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set
forth therein is included in the Consolidated Financial
Statements or notes thereto.
3. Exhibits. See Exhibit Index on page 31 hereof for a list of
exhibits filed or incorporated by reference as a part of this
report.
(b) Reports on Form 8-K. No report on Form 8-K was filed by the Company in
the quarter ended December 31, 1999.
30
(c) Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
------- ----------------------------------------------------------------
2.1 Merger Agreement dated October 21, 1998, by and between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.2 Letter agreement dated November 9, 1998, between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.3 Escrow Agreement dated November 9, 1998, between Micrel,
Incorporated, John F. Stockton, as representative of the former
Synergy shareholders, and Bank of the West. (1)
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (2)
3.2 Certificate of Amendment of Articles of Incorporation of the
Registrant. (3)
3.3 Amended and Restated Bylaws of the Registrant. (3)
4.1 Certificate for Shares of Registrant's Common Stock. (4)
10.1 Indemnification Agreement between the Registrant and each of its
officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (2) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (2) *
10.4 1994 Stock Purchase Plan. (4)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and
GOCO Realty Fund I, as amended August 6, 1992 and February 5,
1993. (2)
10.7 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended February 11, 1991, August 6, 1991, October 31, 1991,
June 24, 1992, September 24, 1992, August 16, 1993, April 29,
1994, July 2, 1994, August 23, 1994, September 30, 1994,
October 24, 1994. (2)
10.8 Form of Domestic Distribution Agreement. (3)
10.9 Form of International Distributor Agreement. (3)
10.10 Second Amendment dated February 20, 1995 between the Registrant
and TR Brell Cal Corporation to Lease Agreement dated June 24,
1992 between the Registrant and GOCO Realty Fund I, as amended
August 6, 1992 and February 5, 1993. (4)
10.11 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended March 31, 1995. (5)
10.12 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended September 30, 1996. (6)
10.13 Amended and Restated 1994 Employee Stock Purchase Plan, as
amended January 1, 1996. (7)
10.14 Commercial Lease between Harris Corporation and Synergy
Semiconductor Corporation dated February 29, 1996. (8)
10.15 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended October 6, 1997. (9)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
27.0 Financial Data Schedule.
* Management contract or compensatory plan or agreement.
(1) Incorporated herein by reference to the Company's Current Report on Form
8-K dated November 9, 1998 filed with the Commission on November 23,
1998 in which this exhibit bears the same number, unless otherwise
indicated.
31
(2) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 ("Registration Statement"), File No. 33-85694, in which this
exhibit bears the same number, unless otherwise indicated.
(3) Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless otherwise
indicated.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, in which this exhibit bears the same
number, unless otherwise indicated.
(5) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 1995.
(6) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1996.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, in which this exhibit bears the number
10.14.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, in which this exhibit bears the same
number, unless otherwise indicated.
(9) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1997.
(d) Financial Statement Schedules. The financial statement schedule
required by this Item is listed under Item 14(a)(2) above.
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the accompanying consolidated balance sheets of Micrel,
Incorporated and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and of cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 2000
33
MICREL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In thousands, except share amounts)
_______________________________________________________________________________
1999 1998
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,360 $ 13,415
Short-term investments 36,337 15,029
Accounts receivable, less allowances:
1999, $2,547; 1998, $1,613 39,472 24,079
Inventories 23,851 16,069
Prepaid expenses and other 1,108 693
Deferred income taxes 11,388 11,967
---------- ----------
Total current assets 127,516 81,252
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 67,162 54,920
INTANGIBLE ASSETS, NET 7,933 8,878
OTHER ASSETS 483 320
---------- ----------
TOTAL $ 203,094 $ 145,370
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,241 $ 7,942
Accrued compensation 5,272 3,899
Accrued commissions 1,952 1,510
Income taxes payable 12,230 4,316
Other accrued liabilities 1,442 2,724
Deferred income on shipments to distributors 6,541 4,414
Current portion of long-term debt 5,132 5,579
---------- ----------
Total current liabilities 43,810 30,384
LONG-TERM DEBT 8,854 14,007
DEFERRED RENT 624 790
DEFERRED INCOME TAXES 1,137 4,478
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized:
5,000,000 shares; issued and outstanding: none - -
Common stock, no par value - authorized:
100,000,000 shares; issued and outstanding:
1999 - 41,417,576; 1998 - 40,182,392 51,954 35,660
Accumulated other comprehensive income 15 10
Retained earnings 96,700 60,041
---------- ----------
Total shareholders' equity 148,669 95,711
---------- ----------
TOTAL $ 203,094 $ 145,370
========== ==========
See notes to consolidated financial statements.
34
MICREL, INCORPORATED
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except per share amounts)
_______________________________________________________________________________
1999 1998 1997
--------- --------- ---------
NET REVENUES $ 195,122 $ 140,508 $ 104,158
COST OF REVENUES 85,629 69,324 48,641
--------- --------- ---------
GROSS PROFIT 109,493 71,184 55,517
--------- --------- ---------
OPERATING EXPENSES:
Research and development 26,328 18,931 13,986
Selling, general and administrative 28,157 21,658 17,128
Purchased in-process technology 603 3,737 -
--------- --------- ---------
Total operating expenses 55,088 44,326 31,114
--------- --------- ---------
INCOME FROM OPERATIONS 54,405 26,858 24,403
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 2,049 1,507 1,088
Interest expense (1,468) (416) (161)
Other income, net 29 1 44
--------- --------- ---------
Total other income, net 610 1,092 971
--------- --------- ---------
INCOME BEFORE INCOME TAXES 55,015 27,950 25,374
PROVISION FOR INCOME TAXES 18,356 10,774 8,627
--------- --------- ---------
NET INCOME $ 36,659 $ 17,176 $ 16,747
========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.90 $ 0.43 $ 0.44
========= ========= =========
Diluted $ 0.82 $ 0.41 $ 0.40
========= ========= =========
SHARES USED IN COMPUTING PER SHARE
AMOUNTS:
Basic 40,830 39,610 38,138
========= ========= =========
Diluted 44,896 42,406 41,644
========= ========= =========
See notes to consolidated financial statements.
35
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except share amounts)
________________________________________________________________________________________________________________
Accumulated
Common Stock Other Total
------------------- Comprehensive Retained Shareholders' Comprehensive
Shares Amount Income (Loss) Earnings Equity Income
---------- --------- ------------- --------- ------------- -------------
Balances, January 1, 1997 37,322,572 $ 21,315 $ (2) $ 26,118 $ 47,431
Net income - - - 16,747 16,747 $ 16,747
Other comprehensive income,
net of tax - Change in net
unrealized gains from
short-term investments - - 2 - 2 2
---------
Comprehensive income $ 16,749
=========
Employee stock transactions 1,644,066 2,748 - - 2,748
Tax benefit of employee stock
transactions - 3,640 - - 3,640
---------- --------- --------- --------- ---------
Balances, December 31, 1997 38,966,638 27,703 - 42,865 70,568
Net income - - - 17,176 17,176 $ 17,176
Other comprehensive income,
net of tax - Change in net
unrealized gains from
short-term investments - - 10 - 10 10
---------
Comprehensive income $ 17,186
=========
Employee stock transactions 1,215,754 4,088 - - 4,088
Tax benefit of employee stock
transactions - 3,869 - - 3,869
---------- --------- --------- --------- ---------
Balances, December 31, 1998 40,182,392 35,660 10 60,041 95,711
Net income - - - 36,659 36,659 $ 36,659
Other comprehensive income,
net of tax - Change in net
unrealized gains from
short-term investments - - 5 - 5 5
---------
Comprehensive income $ 36,664
=========
Employee stock transactions 1,235,184 8,301 - - 8,301
Tax benefit of employee stock
transactions - 7,993 - - 7,993
---------- --------- --------- --------- ---------
Balances, December 31, 1999 41,417,576 $ 51,954 $ 15 $ 96,700 $ 148,669
========== ========= ========= ========= =========
See notes to consolidated financial statements.
36
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
_______________________________________________________________________________
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,659 $ 17,176 $ 16,747
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,267 12,332 6,509
Purchased in-process technology 603 3,737 -
Gain on disposal of assets (31) (3) (44)
Deferred rent (166) (126) (1)
Deferred income taxes (2,848) (3,642) (990)
Changes in operating assets and
liabilities, net of effects of
acquisition:
Accounts receivable (15,393) (4,896) (8,190)
Inventories (7,782) 4,553 3,258
Prepaid expenses and other assets (415) (149) 114
Accounts payable 3,249 2,893 449
Accrued compensation 1,373 364 475
Accrued commissions 442 299 289
Income taxes payable 15,908 7,033 3,879
Other accrued liabilities (1,282) 61 55
Deferred income on shipments to
distributors 2,127 997 760
--------- --------- ---------
Net cash provided by operating
activities 51,711 40,629 23,310
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements, net (29,364) (30,880) (21,410)
Purchases of short-term investments (65,321) (38,754) (37,531)
Proceeds from sales and maturities of
short-term investments 44,018 41,300 33,300
Purchase of company, net of cash acquired (1,800) (10,271) -
--------- --------- ---------
Net cash used in investing
activities (52,467) (38,605) (25,641)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings - (3,132) -
Proceeds from long-term borrowings 2,100 12,000 -
Repayments of long-term debt (7,700) (4,146) (1,075)
Proceeds from the issuance of common stock 8,301 4,088 2,748
--------- --------- ---------
Net cash provided by financing
activities 2,701 8,810 1,673
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,945 10,834 (658)
CASH AND CASH EQUIVALENTS - Beginning of year 13,415 2,581 3,239
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of year $ 15,360 $ 13,415 $ 2,581
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 1,468 $ 291 $ 152
========= ========= =========
Income taxes $ 5,293 $ 7,384 $ 5,625
========= ========= =========
See notes to consolidated financial statements.
37
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Micrel, Incorporated and wholly-owned subsidiaries
(the "Company") develops, manufactures and markets analog and mixed-signal
semiconductor devices. The Company also provides custom and foundry
services which include silicon wafer fabrication, integrated circuit
assembly and testing. The Company's standard integrated circuits are sold
principally in North America, Asia, and Europe for use in a variety of
products, including those in the computer, communication, and industrial
markets. The Company's custom circuits and wafer foundry services are
provided to a wide range of customers that produce electronic systems for
communications, consumer, automotive and military applications. The
Company produces the majority of its wafers at the Company's wafer
fabrication facilities located in San Jose and Santa Clara, California.
After wafer fabrication, the completed wafers are then separated into
individual circuits and packaged at independent assembly and final test
contract facilities primarily located in Malaysia.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Micrel, Incorporated and its wholly-
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates - In accordance with generally accepted accounting
principles, management utilizes certain estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with remaining maturities of three months or less to
be cash equivalents.
Short-term Investments - Short-term investments consist primarily of
highly liquid debt instruments purchased with remaining maturity dates of
greater than three months. Short-term investments are classified as
available-for-sale securities and are stated at market value with
unrealized gains and losses included in shareholders' equity, net of
income taxes. At December 31, 1999 and 1998, short-term investments
consisted of corporate debt securities (commercial paper) with maturities
of less than one year.
Short-term investments include the following available-for-sale securities
at December 31, 1999 and 1998 (in thousands):
Unrealized Unrealized
Amortized Market Holding Holding
Cost Value Gains Losses
--------- --------- ---------- ---------
December 31, 1999 $ 36,322 $ 36,337 $ 15 $ -
December 31, 1998 $ 15,019 $ 15,029 $ 10 $ -
38
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Certain Significant Risks and Uncertainties - Financial instruments that
potentially subject the Company to concentrations of credit risk consist
of cash and cash equivalents, short-term investments, and accounts
receivable. Risks associated with cash are mitigated by banking with
creditworthy institutions. Cash equivalents and short-term investments
consist primarily of commercial paper and bank certificates of deposit and
are regularly monitored by management. Credit risk with respect to the
trade receivables is spread over a large number of geographically diverse
customers, who make up the Company's customer base. At December 31, 1999,
two customers accounted for 10% or more of total accounts receivable. At
December 31, 1998, no customer accounted for 10% or more of total accounts
receivable.
The Company participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a material
adverse effect on the Company's future financial position, results of
operations, or cash flows: advances and trends in new technologies and
industry standards; competitive pressures in the form of new products or
price reductions on current products; changes in product mix; changes in
the overall demand for products offered by the Company; changes in third-
party manufacturers; changes in key suppliers; changes in certain
strategic relationships or customer relationships; litigation or claims
against the Company based on intellectual property, patents (Note 11),
product, regulatory or other factors; risk associated with necessary
components; risks associated with the Company's ability to attract and
retain employees necessary to support its growth.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Equipment and Leasehold Improvements - Equipment and leasehold improvements
are stated at cost. Depreciation on equipment is computed using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized over the shorter of the lease term or
the useful lives of the improvements.
Intangible Assets - Intangible assets (net of accumulated amortization of
1999, $2.3 million; 1998 $300,000) at December 31, consist of the following
(in thousands):
Amortization
Period
1999 1998 (Years)
--------- --------- ---------
Developed and core technology $ 5,323 $ 5,740 5
Assembled workforce 576 962 3
Tradename and patents 1,031 1,043 5
Customer relationships 1,003 1,133 5
--------- ---------
$ 7,933 $ 8,878
========= =========
Impairment of Long-Lived Assets - Long-lived assets and certain
intangibles held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable.
39
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Revenue Recognition - Revenues from products sold directly to customers is
recognized upon shipment. A portion of the Company's sales are made to
United States, Canadian and certain other international distributors under
agreements allowing certain rights of return and price protection on
merchandise unsold by these distributors. Accordingly, the Company defers
recognition of such revenues until the merchandise is sold by the
distributors to their customers. The Company records a provision for
estimated returns, allowances and warranty costs at the time revenue is
recognized. Warranty costs have not been material in any period
presented.
Research and Development Expenses - Research and development expenses
include costs associated with the development of new wafer fabrication
processes and the definition, design and development of standard products.
The Company also expenses prototype wafers and new production mask sets
related to new products as research and development costs until products
based on new designs are fully characterized by the Company and are
demonstrated to support published data sheets and satisfy reliability
tests.
Income Taxes - Income taxes are provided at current rates. Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Stock-based Awards - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees".
Net Income per Share - Basic earnings per share ("EPS") is computed by
dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding
stock options, using the treasury stock method.
Reconciliation of weighted average shares used in computing earnings per
share is as follows (in thousands):
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Weighted average common shares
outstanding 40,830 39,610 38,138
Dilutive effect of stock options
outstanding, using the treasury
stock method 4,066 2,796 3,506
--------- --------- ---------
Shares used in computing diluted
earnings per share 44,896 42,406 41,644
========= ========= =========
Fair Value of Financial Instruments - Financial instruments included in
the Company's consolidated balance sheets at December 31, 1999 and 1998
consist of cash, cash equivalents, short-term investments and long-term
debt. For cash, the carrying amount is a reasonable estimate of the fair
value. The carrying amount for cash equivalents and short-term investments
approximates fair value because of the short maturity of those
investments. The fair value of long-term debt approximates the carrying
amount.
40
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Comprehensive Income - Comprehensive income represents the change in net
assets during the period from nonowner sources. Consolidated statements
of comprehensive income for the years ended December 31, 1999, 1998, and
1997 have been included within the consolidated statements of
shareholders' equity and comprehensive income.
Geographic Operating Information - The Company reports segment data
pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures
about its products, services, geographic areas and major customers. The
Company operates in two reportable segments, standard products and custom
and foundry products (Note 12).
New Accounting Standards - In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Adoption of this
statement is not expected to materially impact the Company's consolidated
financial position, results of operations or cash flows. The Company is
required to adopt this statement in the first quarter of fiscal year 2001,
with early adoption permitted.
2. ACQUISITIONS
On December 15, 1999, the Company acquired the outstanding capital stock
of Altos Semiconductor for a cash purchase price of $1.8 million. The
acquisition was accounted for as a purchase and, accordingly, the results
of operations of Altos from the date of acquisition forward have been
included in the Company's consolidated financial statements. Approximately
$1.7 million of the total purchase cost was allocated to intangible
assets. Of that amount, $603,000 was allocated to purchased in-process
technology, which has not reached technological feasibility and has no
alternative future use, for which the Company recorded charges in the year
ended December 31, 1999. The remaining intangible assets of $1.1 million,
consisting of existing technology, assembled workforce, and patents, are
included in intangible assets in the accompanying balance sheets and are
being amortized over their useful lives of five years.
On November 9, 1998, the Company acquired all outstanding shares of
Synergy Semiconductor ("Synergy") common stock for a cash purchase price
of $9.9 million plus $1.6 million of transaction fees and direct merger
costs.
The acquisition was accounted for as a purchase and, accordingly,
the results of operations of Synergy from the date of acquisition forward
have been included in the Company's consolidated financial statements. In
connection with the acquisition, intangible assets of $12.9 million were
acquired, of which $3.7 million was reflected as a one-time charge to
operations for the write-off of purchased in-process technology that had
not reached technological feasibility and, in management's opinion, had no
probable alternative future use. The $3.7 million one-time charge for
purchased in-process technology has been reflected in the Company's fiscal
1998 consolidated income statement within operating expenses. The
remaining intangible assets of $9.2 million, consisting of existing
technology, assembled workforce, tradename and patents, and customer
relationships, are included in intangible assets in the accompanying
41
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
balance sheets and are being amortized over their useful lives of three to
five years.
In connection with the Synergy acquisition, net assets acquired were as
follows (in thousands):
Current assets $ 13,564
Equipment and other, net 5,074
Intangible assets, including purchased in-process technology 12,945
Liabilities assumed 20,110)
---------
Net assets acquired $ 11,473
=========
The following unaudited pro forma information shows the results of
operations for the two fiscal years ended December 31, 1998, as if the
Synergy acquisition had occurred at the beginning of the earliest period
presented and at the purchase price established in November 1998
(in thousands, except per share amounts):
Years ended December 31, 1998 1997
--------- ---------
Net revenues $ 163,819 $ 141,586
Net income $ 11,295 $ 16,769
Net income per share, basic $ 0.57 $ 0.88
Net income per share, diluted $ 0.53 $ 0.81
The pro forma results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of the
earliest period presented or of future operations of the combined
companies. The pro forma results combine the Company's results of
operations for the two fiscal years ended December 31, 1998, with the
results of Synergy through the date of acquisition and give effect to
certain adjustments, including the amortization of intangible assets,
changes in cost of revenues and depreciation expense associated with the
allocation of purchase price to inventory and fixed assets, interest
income associated with funding the acquisition, and related tax benefits.
The $3.7 million charge for purchased in-process technology has been
excluded from the pro forma results as it is a non-recurring charge.
3. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
1999 1998
---------- ----------
Finished goods $ 5,958 $ 4,540
Work in process 16,125 9,745
Raw materials 1,768 1,784
---------- ----------
$ 23,851 $ 16,069
========== ==========
42
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31 consist of the
following (in thousands):
1999 1998
---------- ----------
Manufacturing equipment $ 105,370 $ 79,694
Leasehold improvements 2,909 2,651
Office furniture and equipment 3,110 2,281
---------- ----------
111,389 84,626
Accumulated depreciation and amortization (44,227) (29,706)
---------- ----------
$ 67,162 $ 54,920
========== ==========
5. BORROWING ARRANGEMENTS
Under a revolving line of credit and security agreement, the Company can
borrow up to 80% of its eligible accounts receivable to a maximum of $5.0
million. Borrowings under the line of credit agreement bear interest rates
of, at the Company's election, the prime rate (8.50% at December 31, 1999)
or the bank's offshore rate, which approximates LIBOR (5.82% at
December 31, 1999) plus 2.25%. Borrowings are collateralized by
substantially all of the assets of the Company. There were no borrowings
under this revolving line of credit at December 31, 1999.
Under the same security agreement, the Company has a non-revolving bank
line of credit of $20.0 million for funding purchases of capital equipment
under which the Company may borrow up to 100% of the cost of such
equipment of which $9.9 million was unused and available as of
December 31, 1999. Amounts borrowed under this credit line are converted
to four-year installment notes. All equipment notes are collateralized by
substantially all of the Company's manufacturing equipment and bear
interest rates of, at the Company's election, a fixed rate based on the
four-year U.S. Treasury Bill rate (6.34% at December 31, 1999) plus 3.0%
or an annual adjustable rate based on the one-year U.S. Treasury Bill rate
(5.98% at December 31, 1999) plus 3.0%.
The two lines of credit are covered by the same loan and security
agreement. The lines of credit expire March 31, 2000 and are subject to
automatic renewal on a month to month basis thereafter unless terminated
by either party upon 30 days notice.
The agreements contain certain restrictive covenants that include a
restriction on the declaration and payment of dividends without the
lender's consent. The Company was in compliance with all such covenants at
December 31, 1999.
On March 8, 2000, the loan agreements described above were subsequently
replaced with a new loan and security agreement. Under the new agreement,
the revolving line of credit remained at $5.0 million and the non-
revolving line of credit was increased to $40.0 million dollars. The new
agreement expires April 30, 2001 and is subject to automatic renewal on a
month to month basis thereafter unless terminated by either party upon 30
days notice. Borrowings under the new revolving line of credit bear
interest rates of, at the Company's election, the prime rate (8.50% at
December 31, 1999), or the bank's revolving offshore rate, which
approximates LIBOR (5.82% at December 31, 1999) plus 2.0%. Borrowings
under the new non-revolving line of credit bear interest rates of, at the
43
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Company's election, the prime rate (8.50% at December 31, 1999), the
bank's non-revolving offshore rate, which approximates LIBOR (5.82% at
December 31, 1999) plus 2.13%, a fixed rate based on the four-year U.S.
Treasury Bill rate (6.34% at December 31, 1999) plus 2.75% or an annual
adjustable rate based on the one-year U.S. Treasury Bill rate (5.98% at
December 31, 1999) plus 2.75%. All other terms and conditions remain
substantially unchanged from the prior agreement.
Long-term debt at December 31, collateralized by equipment, consists of
the following (in thousands):
1999 1998
---------- ----------
Notes payable bearing interest at prime, payable
in monthly installments through September 2002 $ 2,639 $ 4,161
Notes payable bearing a fixed interest rate of
7.5%, payable in monthly installments through
November 2002 5,833 7,833
Notes payable bearing interest at annual
adjustable rate based on the one-year U.S.
Treasury Bill rate plus 3.0%, payable in monthly
installments through June 2003 1,838 -
Notes payable assumed from Synergy Semiconductor
bearing fixed rates ranging from 8.9% to 9.4%,
payable in monthly installments through
January 2003 3,676 7,592
---------- ----------
Total debt 13,986 19,586
Current portion (5,132) (5,579)
---------- ----------
Long-term debt $ 8,854 $ 14,007
========== ==========
Maturities of long-term debt subsequent to December 31, 1999 are as
follows (in thousands): $5,132 in 2000, $5,429 in 2001, $3,162 in 2002,
and $263 in 2003.
6. SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, no par
value, of which none were issued or outstanding at December 31, 1999. The
preferred stock may be issued from time to time in one or more series.
The Board of Directors is authorized to determine or alter the rights,
preferences, privileges and restrictions of such preferred stock.
Stock Split
In September 1999, the Company effected a two-for-one stock split of the
outstanding shares of common stock. All share and per share amounts in
these consolidated financial statements have been adjusted to
retroactively give effect to the stock split for all periods presented.
Stock Option Plans
Under the Company's 1994 and 1989 Stock Option Plans (the "Option Plans"),
17,929,336 shares of common stock are authorized for issuance to key
employees. The Option Plans provide that the option price will be
determined by the Board of Directors at a price not less than the fair
44
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
value at the date of grant. Certain shareholder/employees of the Company
are granted options at 110% of the current fair market value. Options
granted become exercisable in not less than cumulative annual increments
of 20% per year from the date of grant. At December 31, 1999, 3,796,942
shares were available for future grants under the Option Plans and
10,894,574 total shares are reserved for future issuance.
Option activity under the Option Plans is as follows:
Weighted
Average
Number Exercise
of Shares Price
---------- ----------
Outstanding, January 1, 1997 (1,538,616
exercisable at a weighted average price of
$0.79 per share) 5,231,616 $ 2.45
Granted 1,730,500 12.80
Exercised (1,566,700) 1.34
Canceled (283,800) 3.57
---------- ---------
Outstanding, December 31, 1997 (905,316
exercisable at a weighted average price of
$1.83 per share) 5,111,616 6.22
Granted 2,863,200 16.52
Exercised (1,142,700) 2.73
Canceled (199,200) 6.65
---------- ---------
Outstanding, December 31, 1998 (954,816
exercisable at a weighted average price of
$5.61 per share) 6,632,916 11.25
Granted 2,062,750 31.02
Exercised (1,184,434) 5.75
Canceled (413,600) 15.68
---------- ---------
Outstanding, December 31, 1999 7,097,632 $ 17.75
========== =========
Additional information regarding options outstanding as of
December 31, 1999 is as follows:
Stock Options Outstanding Options Exercisable
------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
---------------- ----------- --------- ------- ----------- -------
$ 0.25 to $ 4.75 1,179,000 4.9 $ 3.57 547,600 $ 3.36
$ 4.76 to $ 9.50 289,800 6.7 $ 6.58 90,000 $ 6.32
$ 9.51 to $14.25 1,184,600 7.6 $ 12.75 263,200 $ 12.63
$14.26 to $19.00 2,460,982 8.4 $ 17.04 463,182 $ 17.02
$19.01 to $23.75 201,500 9.1 $ 22.56 2,400 $ 21.71
$23.76 to $28.50 810,500 9.2 $ 25.48 2,800 $ 24.25
$28.51 to $33.25 84,000 9.4 $ 29.56 - -
$33.26 to $38.00 200,500 9.6 $ 36.61 - -
$38.01 to $42.75 636,250 9.7 $ 40.12 - -
$42.76 to $47.50 50,500 9.9 $ 44.86 - -
--------- ---------
$ 0.25 to $47.50 7,097,632 7.9 $ 17.75 1,369,182 $ 10.03
45
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan, (the "Purchase Plan"),
eligible employees are permitted to have salary withholdings to purchase
shares of common stock at a price equal to 85% of the lower of the market
value of the stock at the beginning or end of each six-month offer period,
subject to an annual limitation. Shares of common stock issued under the
Purchase Plan were 50,750, 73,054, and 77,366, in 1999, 1998, and 1997,
respectively, at weighted average prices of $29.50, $13.25, and $8.375,
respectively. At December 31, 1999, there were 548,282 shares of common
stock issued under the Purchase Plan and 651,718 shares are reserved for
future issuance under the Purchase Plan. The Purchase Plan excludes all
Company Officers (as defined in the Purchase Plan) from participation in
the Purchase Plan.
Additional Stock - Based Award Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock volatility and expected
time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life, 60
months; stock volatility, 70.7% in 1999, 74.1% in 1998, and 74.3% in 1997;
risk free interest rates, 5.46% in 1999, 5.36% in 1998, and 5.44% in 1997;
and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are
recognized as they occur. The weighted average fair value of options
granted under the stock option plans during 1999, 1998, and 1997 was
$10.85, $10.74, and $8.28 per share. If the computed fair values of the
1999, 1998 and 1997 awards under both the Option Plans and the Purchase
Plan had been amortized to expense over the vesting period of the awards,
pro forma net income and net income per share would have been as follows
(in thousands, except per share amounts):
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Pro forma net income $ 21,854 $ 9,194 $ 13,975
Pro forma net income per share:
Basic $ 0.50 $ 0.24 $ 0.36
Diluted $ 0.48 $ 0.22 $ 0.35
46
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
The amounts used above are based on calculated tax effected values for
option awards in 1999, 1998 and 1997 aggregating $25.6 million. The impact
of outstanding stock options granted prior to 1995 has been excluded from
the pro forma calculation; accordingly, the pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable stock options.
7. INCOME TAXES
The provision for income taxes for the years ended December 31 consists of
the following (in thousands):
1999 1998 1997
--------- --------- ---------
Currently payable:
Federal $ 19,873 $ 13,147 $ 9,617
State 1,331 1,269 -
--------- --------- ---------
Total currently payable 21,204 14,416 9,617
--------- --------- ---------
Deferred income taxes:
Federal 556 (2,987) (814)
State (3,404) (655) (176)
--------- --------- ---------
Total deferred (2,848) (3,642) (990)
--------- --------- ---------
Total provision $ 18,356 $ 10,774 $ 8,627
========= ========= =========
A reconciliation of the statutory federal income tax rate to the effective
tax rate for the years ended December 31 is as follows:
1999 1998 1997
------ ------ ------
Statutory federal income tax rate 35% 35% 35%
State income taxes (net of federal
income tax benefit) 2 1 1
Federal research and experimentation tax
credits (2) (2) (2)
Export sales tax credit (1) (2) (2)
Non-deductible purchased in-process technology - 5 -
Other (1) 2 2
------ ------ ------
Effective tax rate 33% 39% 34%
====== ====== ======
47
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Temporary differences that give rise to deferred tax assets and
liabilities at December 31 are as follows (in thousands):
1999 1998
-------- --------
Deferred tax assets:
Accruals and reserves not currently deductible $ 6,133 $ 9,531
Deferred income 2,747 1,898
Tax net operating loss and credit carryforwards 6,691 4,514
Capitalized research and development 2,604 602
Valuation allowance - (3,563)
-------- --------
Total deferred tax asset 18,175 12,982
-------- --------
Deferred tax liabilities:
Depreciation (3,246) (1,500)
State income taxes (1,387) (175)
Intangible assets (3,291) (3,818)
-------- --------
Total deferred tax liability (7,924) (5,493)
-------- --------
Net deferred tax asset $ 10,251 $ 7,489
======== ========
Due to the Company's acquisition of Synergy, the Company has available
pre-ownership change federal and state net operating loss carryforwards of
approximately $7.0 million and $2.0 million, respectively, which expire
beginning in 2006 and 2000. These pre-ownership change net operating loss
carryforwards are subject under Section 382 of the Internal Revenue Code
to an annual limitation estimated to be approximately $500,000. In
addition, the Company has available federal research and state credit
carryforwards of approximately $800,000 and $2.9 million, respectively.
Regarding the state credit carryforwards, approximately $1.6 million
represents pre-ownership change carryforwards subject to the Section 382
annual limitation.
8. OPERATING LEASES
The Company leases its facilities under operating lease agreements that
expire in 2005 and 2006. The lease agreements provide for escalating
rental payments over the lease periods. Rent expense is recognized on a
straight-line basis over the term of the lease. Deferred rent represents
the difference between rental payments and rent expense recognized on a
straight-line basis. Future minimum payments under these agreements are
as follows (in thousands):
Year Ending
December 31,
------------
2000 $ 2,626
2001 2,699
2002 2,726
2003 2,775
2004 2,787
Thereafter 3,566
--------
$ 17,179
========
48
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Rent expense under operating leases was (in thousands): $2,604, $1,346,
and $1,031 for the years ended December 31, 1999, 1998, and 1997,
respectively.
9. PROFIT-SHARING 401(k) PLAN
The Company has a profit-sharing plan and deferred compensation plan (the
"Plan"). All employees completing one month of service are eligible to
participate in the Plan. Participants may contribute 1% to 12% of their
annual compensation on a before tax basis, subject to Internal Revenue
Service limitations. Profit-sharing contributions by the Company are
determined at the discretion of the Board of Directors. The Company
accrued $830,000 in 1999, $870,000 in 1998, and $605,000 in 1997.
Participants vest in Company contributions ratably over six years of
service.
10. SIGNIFICANT CUSTOMERS
In 1999 and 1998, no single customer accounted for ten percent or more of
net revenues. In 1997 one customer accounted for $11.2 million (11%) of
net revenues.
11. LITIGATION
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent
that the Company becomes involved in such intellectual property
litigation, it could result in substantial costs and diversion of
resources to the Company and could have a material adverse effect on the
Company's financial condition or results of operations.
On July 2, 1999, National Semiconductor Corporation ("National"), a
competitor of the Company, filed a complaint against the Company, entitled
National Semiconductor Corporation v. Micrel Semiconductor, Inc. in the
United States District Court, Northern District of California, in
San Jose, California, alleging that the Company infringes five National
Semiconductor patents. The complaint in the lawsuit seeks unspecified
compensatory damages for infringement, treble damages as well as permanent
injunctive relief against further infringement of the National patents at
issue.
On February 26, 1999, the Lemelson Medical, Education & Research
Foundation (the "Lemelson Partnership") filed a complaint which was served
on the Company on June 15, 1999, entitled Lemelson Medical, Education &
Research Foundation, Limited Partnership v. Lucent Technologies Inc.,
et al. in the United States District Court in Phoenix, Arizona, against
eighty-eight defendants, including the Company, alleging infringement of
Lemelson Foundation patents. The complaint in the lawsuit seeks
unspecified compensatory damages, treble damages and attorneys' fees, as
well as injunctive relief against further infringement of the Lemelson
patents at issue. The Company intends to defend itself against these
claims.
On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company, entitled
Linear Technology Corporation v. Micrel, Incorporated, in the United
States District Court in San Jose, California, alleging patent and
49
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
copyright infringement and unfair competition. All claims, except the
patent infringement claim, have been settled or dismissed. In this
lawsuit, Linear claimed that two of the Company's products infringed one
of Linear's patents. The complaint in the lawsuit sought unspecified
compensatory damages, treble damages and attorneys' fees as well as
preliminary and permanent injunctive relief against infringement of the
Linear patent at issue. On August 20, 1999, the United States District
Court in San Jose adjudicated in favor of the Company in this patent
infringement suit brought by the plaintiff. The plaintiff alleged in the
suit that the Company had infringed upon U.S. Patent No. 4,755,741 which
covers design techniques used to increase the efficiency of switching
regulators. The United States District Court in San Jose found the patent
to be invalid under the "on sale bar" defense as the plaintiff had placed
integrated circuits containing the alleged invention on sale more than a
year before filing its patent application. The United States District
Court in San Jose dismissed the plaintiff's complaint on the merits of the
case and awarded the Company its legal costs. An appeal of the Judgment
was filed by Linear on September 17, 1999 and will be entered after the
judge signs the final Judgement order.
The Company believes that the ultimate outcome of the legal actions
discussed above will not result in a material adverse effect on the
Company's financial condition, results of operation or cash flows.
However, litigation is subject to inherent uncertainties, and no assurance
can be given that the Company will prevail in these lawsuits.
Accordingly, the pending lawsuits as well as potential future litigation
with other companies, could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
Certain additional claims and lawsuits have arisen against the Company in
its normal course of business. The Company believes that these claims and
lawsuits will not have a material adverse effect on the Company's
financial condition, results of operation or cash flows.
In the event of an adverse ruling in any intellectual property litigation
that now exists or might arise in the future, the Company might be
required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology. There can be no assurance, however, that under such
circumstances, a license would be available under reasonable terms or at
all. In the event of a successful claim against the Company and the
Company's failure to develop or license substitute technology on
commercially reasonable terms, the Company's financial condition, results
of operations, or cash flows could be adversely affected.
12. SEGMENT REPORTING
SFAS No.131 requires disclosures regarding products and services,
geographic areas, and major customers. The Company operates in two
reportable segments: standard products and custom and foundry products.
For the year ended December 31, 1999, the Company recorded revenue from
customers throughout the United States; France, the U.K., Finland,
Germany, Italy, Switzerland, Israel, Spain, Ireland, Sweden, and The
Netherlands (collectively referred to as "Europe"); Korea; Japan; Taiwan;
Singapore, Hong Kong, China, and Malaysia (collectively referred to as
"Other Asian Countries"); and Canada.
50
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Net Revenues by Segment (in thousands):
CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Standard Products $ 151,085 $ 99,902 $ 79,203
Custom and Foundry Products 44,037 40,606 24,955
--------- --------- ---------
Total net revenues $ 195,122 $ 140,508 $ 104,158
========= ========= =========
Geographic Information (in thousands):
1999 1998 1997
------------------ ------------------ --------
Long- Long-
Total Lived Total Lived Total
Revenues Assets Revenues Assets Revenues*
-------- -------- -------- -------- --------
United States of America $ 80,695 $ 70,210 $ 76,731 $ 63,526 $ 52,275
Korea 30,037 13 15,441 56 11,898
Japan 14,147 - 12,887 - 8,256
Taiwan 19,112 14 12,444 3 13,300
Other Asian Countries 7,593 5,295 7,108 496 4,941
Europe 21,364 46 15,550 37 13,402
Canada 22,174 - 347 - 86
-------- -------- -------- -------- --------
Total $195,122 $ 75,578 $140,508 $ 64,118 $104,158
======== ======== ======== ======== ========
* Total revenues are attributed to countries based on "ship to" location
of customer.
13. QUARTERLY RESULTS - UNAUDITED
(in thousands, except per share amounts)
Three Months Ended
Mar. 31, June 30, Sep. 30, Dec. 31,
1999 1999 1999 1999
-------- -------- -------- --------
Net revenues $ 40,571 $ 44,178 $ 50,091 $ 60,282
Gross profit $ 22,626 $ 24,739 $ 28,128 $ 34,000
Net income $ 7,359 $ 8,139 $ 9,368 $ 11,793 (1)
Net income per share:
Basic $ 0.18 $ 0.20 $ 0.23 $ 0.29 (1)
Diluted $ 0.17 $ 0.18 $ 0.21 $ 0.26 (1)
Shares used in computing
per share amounts:
Basic 40,290 40,676 41,064 41,288
Diluted 43,830 44,452 45,352 45,949
Note (1): Consolidated financial results for the fourth quarter ended
December 31, 1999 reflect a charge of $603,000 related to purchased
in-process technology associated with the acquisition of Altos
Semiconductor.
51
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1999, 1998 and 1997
Three Months Ended
Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998
-------- -------- -------- --------
Net revenues $ 32,659 $ 34,502 $ 35,426 $ 37,921
Gross profit $ 17,963 $ 19,122 $ 19,712 $ 14,387
Net income (loss) $ 5,726 $ 6,299 $ 6,597 $ (1,446) (1)
Net income (loss) per share:
Basic $ 0.15 $ 0.16 $ 0.17 $ (0.04) (1)
Diluted $ 0.14 $ 0.15 $ 0.16 $ (0.04) (1)
Shares used in computing per
share amounts:
Basic 39,166 39,472 39,764 40,024
Diluted 42,218 42,360 42,266 40,024
Note (1): Consolidated financial results for the fourth quarter ended
December 31, 1998 reflect the write-off of approximately $7.0 million
in excess inventory and a charge of approximately $3.7 million related
to purchased in-process technology associated with the acquisition of
Synergy Semiconductor.
52
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the consolidated financial statements of Micrel, Incorporated
as of December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, and have issued our report thereon dated
January 24, 2000. Our audits also included the financial statement schedule
of Micrel, Incorporated, listed in Item 14 (a) (2). This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 2000
53
SCHEDULE II
MICREL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998, and 1997
(Amounts in thousands)
Balance at Additions Write-offs
Beginning and Charges and Balance at
Description of Year to Expenses Deductions End of Year
- ---------------------------- ---------- ----------- ---------- -----------
Year Ended December 31, 1999
- ----------------------------
Accounts receivable allowance $ 1,613 $ 941 $ (7) $ 2,547
Year Ended December 31, 1998
- ----------------------------
Accounts receivable allowance $ 2,015 $ - $ (402) $ 1,613
Year Ended December 31, 1997
- ----------------------------
Accounts receivable allowance $ 1,224 $ 863 $ (72) $ 2,015
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 24th day of March, 2000.
MICREL, INCORPORATED
By /S/ RAYMOND D. ZINN
---------------------
Raymond D. Zinn
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Raymond D. Zinn and Richard D. Crowley, Jr., and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/S/ RAYMOND D. ZINN President, Chief Executive March 24, 2000
- --------------------------- Officer and Chairman of the
Raymond D. Zinn Board of Directors (Principal
Executive Officer)
/S/ RICHARD D. CROWLEY, JR. Vice President, Finance and March 24, 2000
- --------------------------- Chief Financial Officer
Richard D. Crowley, Jr. (Principal Financial and
Accounting Officer)
/S/ WARREN H. MULLER Vice President, Secretary March 24, 2000
- --------------------------- and Director
Warren H. Muller
/S/ GEORGE KELLY Director March 24, 2000
- ---------------------------
George Kelly
/S/ DALE L. PETERSON Director March 24, 2000
- ---------------------------
Dale L. Peterson
/S/ LARRY L. HANSEN Director March 24, 2000
- ---------------------------
Larry L. Hansen
55
Micrel, Incorporated
Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
------- ----------------------------------------------------------------
2.1 Merger Agreement dated October 21, 1998, by and between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.2 Letter agreement dated November 9, 1998, between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.3 Escrow Agreement dated November 9, 1998, between Micrel,
Incorporated, John F. Stockton, as representative of the former
Synergy shareholders, and Bank of the West. (1)
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (2)
3.2 Certificate of Amendment of Articles of Incorporation of the
Registrant. (3)
3.3 Amended and Restated Bylaws of the Registrant. (3)
4.1 Certificate for Shares of Registrant's Common Stock. (4)
10.1 Indemnification Agreement between the Registrant and each of its
officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (2) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (2) *
10.4 1994 Stock Purchase Plan. (4)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and
GOCO Realty Fund I, as amended August 6, 1992 and February 5,
1993. (2)
10.7 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended February 11, 1991, August 6, 1991, October 31, 1991,
June 24, 1992, September 24, 1992, August 16, 1993, April 29,
1994, July 2, 1994, August 23, 1994, September 30, 1994,
October 24, 1994. (2)
10.8 Form of Domestic Distribution Agreement. (3)
10.9 Form of International Distributor Agreement. (3)
10.10 Second Amendment dated February 20, 1995 between the Registrant
and TR Brell Cal Corporation to Lease Agreement dated June 24,
1992 between the Registrant and GOCO Realty Fund I, as amended
August 6, 1992 and February 5, 1993. (4)
10.11 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended March 31, 1995. (5)
10.12 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended September 30, 1996. (6)
10.13 Amended and Restated 1994 Employee Stock Purchase Plan, as
amended January 1, 1996. (7)
10.14 Commercial Lease between Harris Corporation and Synergy
Semiconductor Corporation dated February 29, 1996. (8)
10.15 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West, as
amended October 6, 1997. (9)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
27.0 Financial Data Schedule.
* Management contract or compensatory plan or agreement.
(1) Incorporated herein by reference to the Company's Current Report on Form
8-K dated November 9, 1998 filed with the Commission on November 23,
1998 in which this exhibit bears the same number, unless otherwise
indicated.
(2) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 ("Registration Statement"), File No. 33-85694, in which this
exhibit bears the same number, unless otherwise indicated.
(3) Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless otherwise
indicated.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, in which this exhibit bears the same
number, unless otherwise indicated.
(5) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 1995.
(6) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1996.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, in which this exhibit bears the number
10.14.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, in which this exhibit bears the same
number, unless otherwise indicated.
(9) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1997.
INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statements Nos.
33-87222, 33-90396, 333-10167 and 333-89223 of Micrel, Incorporated on Form
S-8 of our reports dated January 24, 2000, appearing in this Annual Report on
Form 10-K of Micrel, Incorporated for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
March 24, 2000