UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-25236
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
2180 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
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 [ ]
As of November 13, 2002 there were 91,662,884 shares of common stock, no par
value, outstanding.
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Operations - Three
and Nine Months Ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Evaluation of Disclosure Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Certifications 27
2
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
September 30, December 31,
2002 2001 (1)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 99,028 $ 130,406
Short-term investments -- 3,093
Accounts receivable, net 32,572 28,209
Inventories 43,977 35,394
Other current assets 4,016 8,754
Deferred income taxes 33,791 27,367
---------- ----------
Total current assets 213,384 233,223
PROPERTY, PLANT AND EQUIPMENT, NET 96,980 117,571
DEFERRED INCOME TAXES 8,888 --
INTANGIBLE ASSETS, NET 9,110 3,660
OTHER ASSETS 351 359
---------- ----------
TOTAL $ 328,713 $ 354,813
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,609 $ 12,737
Deferred income on shipments to distributors 8,403 9,777
Other current liabilities 12,573 10,154
Current portion of long-term debt 1,669 3,615
---------- ----------
Total current liabilities 36,254 36,283
LONG-TERM DEBT 10,960 1,299
OTHER LONG-TERM OBLIGATIONS 8,655 3,901
SHAREHOLDERS' EQUITY:
Preferred stock, no par value -
authorized: 5,000,000 shares;
issued and outstanding: none -- --
Common stock, no par value -
authorized: 250,000,000 shares;
issued and outstanding:
2002 - 92,048,655 shares;
2001 - 92,823,677 shares 169,429 194,384
Deferred stock compensation (32,106) (44,755)
Accumulated other comprehensive loss (26) (25)
Retained earnings 135,547 163,726
---------- ----------
Total shareholders' equity 272,844 313,330
---------- ----------
TOTAL $ 328,713 $ 354,813
========== ==========
(1) Derived from the audited balance sheet included in the Annual Report on
Form 10-K of Micrel, Incorporated for the year ended December 31, 2001.
See Notes to Condensed Consolidated Financial Statements.
3
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
NET REVENUES $ 50,367 $ 45,064 $ 154,055 $ 170,789
COST OF REVENUES* 37,110 29,838 101,926 96,842
--------- --------- --------- ---------
GROSS PROFIT 13,257 15,226 52,129 73,947
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 14,104 12,684 40,475 38,181
Selling, general and
administrative 7,940 7,680 24,809 26,733
Amortization of deferred
stock compensation* 2,358 2,593 7,410 6,887
Non-recurring acquisition
expenses* -- -- -- 8,894
Manufacturing facility impairment 23,357 -- 23,357 --
Restructuring expense 5,536 -- 5,536 --
--------- --------- --------- ---------
Total operating expenses 53,295 22,957 101,587 80,695
--------- --------- --------- ---------
LOSS FROM OPERATIONS (40,038) (7,731) (49,458) (6,748)
OTHER INCOME, NET 284 1,157 872 4,317
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (39,754) (6,574) (48,586) (2,431)
BENEFIT FOR INCOME TAXES (15,286) (4,820) (20,407) (1,710)
--------- --------- --------- ---------
NET LOSS $ (24,468) $ (1,754) $ (28,179) $ (721)
========= ========= ========= =========
NET LOSS PER SHARE:
Basic $ (0.26) $ (0.02) $ (0.30) $ (0.01)
========= ========= ========= =========
Diluted $ (0.26) $ (0.02) $ (0.30) $ (0.01)
========= ========= ========= =========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 92,563 92,533 92,845 91,786
========= ========= ========= =========
Diluted 92,563 92,533 92,845 91,786
========= ========= ========= =========
* Amortization of deferred stock
compensation related to:
Cost of revenues $ 770 $ 803 $ 2,322 $ 2,314
========= ========= ========= =========
Operating expenses:
Research and development $ 1,199 $ 1,382 $ 3,926 $ 3,625
Selling, general and
administrative 1,159 1,211 3,484 3,262
--------- --------- --------- ---------
2,358 2,593 7,410 6,887
Non-recurring acquisition
expenses -- -- -- 2,007
--------- --------- --------- ---------
Total operating expenses $ 2,358 $ 2,593 $ 7,410 $ 8,894
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
4
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
---------------------
2002 2001
--------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (28,179) $ (721)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,961 23,990
Manufacturing facility impairment 23,357 --
Stock based compensation 9,732 11,208
Loss on disposal of assets 73 16
Deferred rent (467) --
Deferred income taxes (18,193) (4,689)
Changes in operating assets and liabilities:
Accounts receivable (4,363) 37,356
Inventories (8,583) (4,129)
Prepaid expenses and other assets 2,855 (1,361)
Accounts payable 872 (9,428)
Income taxes payable -- (4,806)
Other accrued liabilities 5,367 (3,313)
Deferred income on shipments to distributors (1,374) (3,998)
--------- ---------
Net cash provided by operating activities 7,058 40,125
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (27,042) (32,922)
Purchases of intangible assets (2,054) --
Purchases of short-term investments -- (30,547)
Proceeds from sales and maturities of
short-term investments 3,092 64,251
--------- ---------
Net cash provided (used) by investing activities (26,004) 782
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowing 10,736 --
Repayments of long-term debt (3,021) (4,328)
Proceeds from the issuance of common stock, net 6,293 11,829
Repurchase of common stock (26,440) (3,156)
--------- ---------
Net cash provided (used) by financing activities (12,432) 4,345
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (31,378) 45,252
CASH AND CASH EQUIVALENTS - Beginning of period 130,406 86,137
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 99,028 $ 131,389
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 286 $ 494
========= =========
Income taxes $ 91 $ 8,896
========= =========
Non-cash transactions:
Deferred stock compensation (reversal) $ (2,917) $ 11,240
========= =========
Acquisition of intangible asset under patent
cross license and settlement agreement $ 5,154 $ --
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of September 30, 2002 and for
the three and nine months ended September 30, 2002 and 2001 are unaudited.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
accruals) that management considers necessary for a fair presentation of
its financial position, operating results and cash flows for the interim
periods presented. Operating results and cash flows for interim periods
are not necessarily indicative of results for the entire year.
This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
This financial data should also be read in conjunction with the Company's
critical accounting policies included in Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Net Loss per Common and Equivalent Share - Basic net loss per share is
computed by dividing net loss by the number of weighted average common
shares outstanding. Diluted net loss per share reflects potential dilution
from outstanding stock options using the treasury stock method. As the
Company was in a loss position for all periods presented, there were no
differences between basic and dilutive loss per share as the potential
effect of outstanding stock options would be anti-dilutive.
Reconciliation of weighted average shares used in computing net loss per
share is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Weighted average common
shares outstanding 92,563 92,533 92,845 91,786
Dilutive effect of stock options
outstanding using the treasury
stock method -- -- -- --
--------- --------- --------- ---------
Shares used in computing
diluted net loss per share 92,563 92,533 92,845 91,786
========= ========= ========= =========
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting
for restructuring and similar costs. SFAS 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force ("EITF") Issue
No. 94-3. The Company will adopt the provisions of SFAS 146 for
restructuring activities initiated after December 31, 2002. SFAS 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS
146 may affect the timing of recognizing future restructuring costs as well
as the amounts recognized.
In June 2001, the FASB issued SFAS No.142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the
accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite
useful lives be amortized and that goodwill and intangible assets with
indefinite lives will not be amortized, but will rather be tested at least
6
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
annually for impairment. The Company has adopted SFAS No. 142 for the
fiscal year beginning January 1, 2002. The impact of adopting this standard
is not expected to have a material effect on the Company's financial
position or results of operations.
3. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
2002 2001 (1)
------------ ------------
Finished goods $ 16,970 $ 16,812
Work in process 25,176 16,506
Raw materials 1,831 2,076
---------- ----------
$ 43,977 $ 35,394
========== ==========
4. BORROWING ARRANGEMENTS
Borrowing agreements consisted of $5.0 million under a revolving line of
credit. There were no borrowings under this agreement as of September 30,
2002. The revolving line of credit was scheduled to expire on June 30,
2002 and has been renewed on a month-to-month basis until terminated by
either party upon 30 days notice. Borrowings under the revolving line of
credit bear interest rates of, at the Company's election, the prime rate
(4.75% at September 30, 2002), or the bank's revolving offshore rate,
which approximates LIBOR (1.79% at September 30, 2002) plus 2.0%. The
agreement contains certain restrictive covenants that include a
restriction on the declaration and payment of dividends without the
lender's consent, minimum tangible net worth levels, maximum annual net
loss levels and minimum cash, cash equivalents and short-term investment
levels. As of September 30, 2002 the Company was not in compliance with
the minimum tangible net worth covenant and has obtained a waiver from the
bank as of September 30, 2002.
During September 2002, the Company borrowed $10.7 million through a
commercial mortgage financing agreement which was associated with the
purchase of its previously leased manufacturing facilities in San Jose,
CA. Borrowings under this agreement bear interest, at the Company's
election, at the daily floating prime rate (4.75% at September 30, 2002),
or adjustable monthly LIBOR (1.79% at September 30, 2002) plus 1.5%. The
principal balance of the loan shall be paid in 59 consecutive monthly
installments of $16,890 and one final installment in the amount necessary
to pay in full the remaining outstanding principal balance.
As of September 30, 2002, the Company had $12.6 million outstanding under
term notes outstanding.
5. SIGNIFICANT CUSTOMERS
During the nine months ended September 30, 2002, one customer, an Asian
based stocking representative, accounted for $19.9 million (13%) of net
revenues, but no direct O.E.M. customer accounted for more than 10% of net
revenues. During the nine months ended September 30, 2001, one foundry
customer accounted for $19.8 million (11.5%) of net revenues.
6. COMPREHENSIVE LOSS
Comprehensive loss, which was comprised of the Company's net loss for the
periods and changes in unrealized gains or losses on investments, was a
net loss of $24.5 million and $28.2 million for the three and nine months
ended September 30, 2002, respectively, and a net loss of $1.8 million and
$715,000 for the three and nine months ended September 30, 2001,
respectively.
7
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. SEGMENT REPORTING
The Company operates under two reportable segments, standard products and
custom and foundry products.
Net Revenues by Segment
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net Revenues:
Standard Products $ 42,811 $ 36,594 $ 135,219 $ 140,500
Custom and Foundry Products 7,556 8,470 18,836 30,289
--------- --------- --------- ---------
Total net revenues $ 50,367 $ 45,064 $ 154,055 $ 170,789
========= ========= ========= =========
As a Percentage of Total Net
Revenues:
Standard Products 85% 81% 88% 82%
Custom and Foundry Products 15% 19% 12% 18%
--------- --------- --------- ---------
Total net revenues 100% 100% 100% 100%
========= ========= ========= =========
8. LITIGATION AND OTHER CONTINGENCIES
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 infringed five National
Semiconductor patents. The complaint in the lawsuit sought unspecified
compensatory damages for infringement, and treble damages as well as
permanent injunctive relief against further infringement of the National
patents at issue. On May 23, 2002 the Company entered into a Patent Cross
License and Settlement Agreement with National which resolved all
outstanding disputes between the companies. The Court subsequently
dismissed the lawsuit (see Note 11).
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 continue to defend itself
against these claims. The case is currently in the motion and discovery
phase and no trial date has been set.
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
8
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. A notice of appeal of the
Judgment was filed by Linear with the United States Court of Appeal for
the Federal Circuit ("CAFC") on September 17, 1999. After briefing and
oral argument by both companies, on December 28, 2001 the CAFC reversed
the District Court's judgment of invalidity and remanded the case to the
District Court. On January 11, 2002 the Company filed a Petition for
Rehearing En Banc with the Court of Appeal, which was subsequently denied.
On July 3, 2002, the Company filed a Petition for Writ of Certiorari with
the Supreme Court of the Unites States. Linear filed an opposition to the
Petition on September 6, 2002. The Company filed a reply to the
opposition on September 19, 2002. The Company intends to continue to
vigorously defend itself against the claims set forth in the lawsuit.
On May 23, 2002, the Company filed a complaint against Nortel Networks
Limited ("Nortel") entitled Micrel, Incorporated v. Nortel Networks
Corporation, in the Superior Court of the State of California, alleging
various causes of action relating to breach of a relationship surrounding
the sale of certain custom products by Micrel to Nortel. In this lawsuit,
Micrel is alleging that Nortel reneged on its obligation to purchase
substantial quantities of a custom product from Micrel, leaving Micrel
with excess inventory, which was written down to fair market value in
2000. The complaint seeks compensatory damages, attorneys' fees and costs
of suit. On July 11, 2002, Nortel filed for removal of the case to the
United States District Court in San Jose, which removal was approved.
Nortel filed a Motion to Dismiss the Complaint on August 6, 2002. The
Company's response to this motion was filed on August 26, 2002. On
September 17, 2002, the Court issued an order granting in-part and denying
in-part the Motion to Dismiss with leave to amend as to one claim and
without leave to amend as to all remaining claims. On September 30,
2002, the Company filed a Motion for Reconsideration of the Court's order
granting the Motion to Dismiss without leave to amend. Nortel filed an
opposition to the Company's Motion for Reconsideration on October 15,
2002. The Court's ruling on the Motion for reconsideration is pending.
The Court has scheduled a Case Management Conference for January 27, 2003.
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.
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 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.
9
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
9. PURCHASE OF MANUFACTURING FACILITY
In July 2002 the Company completed the purchase of a 57,000 square foot
facility and an adjacent 63,000 square foot facility, located in San Jose,
California, for $18.0 million in cash. The Company previously leased
these same facilities, which house the majority of the Company's
manufacturing operations.
10. CLOSURE OF WAFER FABRICATION FACILITY
During the quarter ended September 30, 2002, the Company approved a plan
to close its Santa Clara, CA wafer fabrication facility within the next 12
months in order to reduce costs and improve operating efficiencies through
improved capacity utilization. Management believes that these actions are
prudent given the current excess capacity levels with in its wafer
fabrication facilities combined with the uncertain demand in the high-
speed communications market. Associated with the facility closure the
Company accrued $5.5 million in restructuring expenses, primarily for
equipment de-installation costs and contractual building lease costs that
will provide no future benefit. These restructuring costs are expected to
be paid in cash over the remaining facility lease term, which expires in
October 2006. Of the $5.5 million in accrued restructuring costs, $1.0
million has been classified as other current liabilities and the remaining
$4.5 million has been classified as other long-term obligations. Also
related to the planned facility closure, the Company recorded a $23.4
million impairment of long-lived assets to reduce the net book value of
the facility's leasehold improvements and equipment to fair value. The
fair value was based on a third party estimate of the current net sales
value.
11. PATENT CROSS LICENSE AND SETTLEMENT AGREEMENT
On May 23, 2002 the Company entered into a Patent Cross License and
Settlement Agreement with National Semiconductor which settled all
outstanding patent disputes between the companies and cross licensed the
entire patent portfolio of each company. Some of the National patents
within certain field of use areas are licensed for the life of the
patents, all other patents of both companies are licensed through May 22,
2009. Under the terms of the agreement Micrel agreed to pay National $9.0
million of which $3.0 million was paid on May 23, 2002 and the remaining
$6.0 million balance will be paid in $2.0 million annual installments over
the next three years.
Based on the estimated historical and future benefits of the Patent Cross
License and Settlement Agreement, the Company has allocated the present
value of the payments as follows (in thousands):
Settlement of patent disputes $ 947
Patent license 7,207
-------
Present value of payments $ 8,154
=======
The $947,000 valuation of the settlement of patent disputes has been
expensed to other income (expense), net in the period ended June 30, 2002.
The patent license valuation of $7.2 million has been recorded as an
intangible asset and is being amortized over its estimated useful life of
7-years.
10
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. STOCK REPURCHASE PROGRAM
On February 12, 2002, the Company's Board of Directors announced a stock
repurchase program under which the Company may purchase up to $20.0 million
of its common stock. On July 24, 2002, the Board of Directors approved an
additional $20.0 million stock repurchase program by increasing the total
authorized stock repurchase to $40.0 million of common stock in 2002. Shares
of common stock purchased pursuant to the repurchase program are used to
offset dilution from the Company's stock option plans, employee stock
purchase plans and 401(k). For the nine months ended September 30, 2002,
$26.4 million have been used to repurchase 1,783,000 shares of common
stock.
13. SUBSEQUENT EVENT
On November 8, 2002 the Company filed a Schedule TO with the Securities
and Exchange Commission in order to initiate an offer to its employees to
exchange certain of their outstanding options for new options to be
granted six months and two days after expiration of the exchange offer.
The Company's Directors, CEO and CFO are not eligible to participate in
the stock option exchange program. This offer to exchange contemplates a
grant of new options to eligible employees in a ratio equivalent to one
new option granted for every two options elected for exchange and
cancelled with respect to employees who currently hold the position of
vice president or higher, and two new options granted for every three
options elected for exchange and cancelled with respect to all other
employees.
The replacement options will have an exercise price equal to the closing
sales price of our common stock as quoted on the Nasdaq National Market on
the date preceding the replacement grant date. The only options eligible
to be exchanged are those outstanding employee stock options with an
exercise price of $13 or higher. Options to purchase 5,761,102 shares of
the Company's common stock are eligible to be surrendered and replaced in
this exchange offer, which represents 44% of the currently issued and
outstanding options. The eligible options represent approximately 6% of
the aggregate of the outstanding shares of Micrel common stock and all
currently outstanding options.
Certain employee stock options that were granted prior to December 21,
2001 have been previously determined to be compensatory per APB 25 and a
non-cash, deferred stock compensation expense has been recorded on
Micrel's financial statements for these options. Should any of these
options be tendered for cancellation and exchange, all unrecognized
deferred compensation expense associated with the cancelled options will
accelerate to the period of cancellation. Based on an expected
cancellation date of December 11, 2002, a charge will be recorded by
Micrel in the fourth quarter of 2002 related to the acceleration of non-
cash, deferred stock compensation expense associated with options
cancelled under this exchange offer. The size of the charge will depend
on the percentage of employee acceptance of this offer and the actual
number of stock options with deferred stock compensation expense that are
cancelled. Based on an estimated range of participation, the non-cash
charge is expected to be between $17 million and $23 million before income
taxes.
As a result of the anticipated acceleration of deferred compensation
expense in the fourth quarter of 2002, there is likely to be a reduction
in deferred compensation expense in subsequent periods beginning in the
first quarter of 2003. Furthermore, the stock option exchange program is
expected to reduce the overall number of outstanding stock options after
replacement option grants are issued. The combined effect of the
reduction in deferred compensation expense and fewer outstanding stock
options is expected have a beneficial effect on Micrel's earnings per
share in future periods.
11
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 and high-speed mixed-signal and digital
integrated circuits. These circuits are used in a wide variety of electronics
products, including those in the computer, telecommunications, industrial and
networking markets. In addition to standard products, the Company
manufactures custom analog and mixed-signal circuits and provides wafer
foundry services.
The Company derives a substantial portion of its net revenues from standard
products. Standard products sales represented 85% and 88% of net revenues for
the three and nine months ended September 30, 2002, respectively, as compared
to 81% and 82% for the similar periods in the prior year. 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,
the utilization level of manufacturing capacity, competitive pricing pressures
and the successful development of new products. These and other factors are
described in further detail later in this discussion. 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 could materially and adversely affect the
Company's business, financial condition, results of operations or cash flows.
Critical Accounting Policies
The financial statements included in this Form 10-Q and discussed within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been prepared in accordance with accounting principles
generally accepted in the United States. Preparation of these financial
statements requires management to make 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. On an on-going basis, management evaluates its estimates and
judgements. Management bases its estimates and judgements on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company considers
certain accounting policies related to revenue recognition, inventory
valuation, income taxes, and litigation to be critical to the fair
presentation of its financial statements. For a detailed discussion of the
Company's significant accounting policies, see Note 1 of Notes to Consolidated
Financial Statements in Item 14 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
Change in Certifying Accountant
On September 6, 2002, the Company filed a Current Report on Form 8-K
disclosing a change in certifying accountant. Deloitte & Touche LLP
("Deloitte") was previously the principal accountants for Micrel. On August
30, 2002, the Company notified Deloitte that it would not be retained as
independent auditors for the fiscal year 2002. This action followed the
Company's extensive evaluation of Deloitte and other firms to audit Micrel's
consolidated financial statements for its fiscal year ending December 31,
2002. The Audit Committee has recommended, and the Board of Directors of the
Company has approved, the appointment of PricewaterhouseCoopers LLP ("PwC") as
the Company's independent auditors for fiscal year 2002.
12
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:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 73.7 66.2 66.2 56.7
--------- --------- --------- ---------
Gross profit 26.3 33.8 33.8 43.3
--------- --------- --------- ---------
Operating expenses:
Research and development 28.0 28.2 26.3 22.4
Selling, general and
administrative 15.7 17.0 16.1 15.6
Amortization of deferred
stock compensation 4.7 5.8 4.8 4.0
Non-recurring acquisition
expenses -- -- -- 5.2
Manufacturing facility
impairment 46.4 -- 15.1 --
Restructuring expense 11.0 -- 3.6 --
--------- --------- --------- ---------
Total operating expenses 105.8 51.0 65.9 47.2
--------- --------- --------- ---------
Loss from operations (79.5) (17.2) (32.1) (3.9)
Other income, net 0.6 2.6 0.6 2.5
--------- --------- --------- ---------
Loss before income taxes (78.9) (14.6) (31.5) (1.4)
Benefit for income taxes (30.3) (10.7) (13.2) (1.0)
--------- --------- --------- ---------
Net loss (48.6)% (3.9)% (18.3)% (0.4)%
Net Revenues. For the three months ended September 30, 2002, net revenues
increased 12% to $50.4 million from $45.1 million for the same period in
the prior year. This increase was due to increased standard products
revenues which were partially offset by lower custom and foundry products
revenues. For the nine months ended September 30, 2002, net revenues
decreased 10% to $154.1 million from $170.8 million for the same period in
the prior year. This decrease was due to decreased standard products
revenues combined with lower custom and foundry products revenues. The
Company derives a substantial portion of its net revenues from standard
products. Standard products sales represented 85% and 88% of net revenues
for the three and nine months ended September 30, 2002, respectively, as
compared to 81% and 82%, respectively, for the similar periods in the prior
year.
For the three months ended September 30, 2002, standard products revenues
increased 17% to $42.8 million from $36.6 million for the same period in
the prior year. Such increases resulted from increased unit shipments of
computer, industrial, telecommunications and high-bandwidth communications
products, which were partially offset by decreased average selling prices
across all product lines. Sales of standard products by the Company during
the three months ended September 30, 2002 were led by low dropout
regulators, Ethernet communications and computer peripheral products. Such
products were sold primarily to manufacturers within the computer, network
communications, telecommunications and industrial markets. For the nine
months ended September 30, 2002, standard products revenues decreased 4% to
$135.2 million from $140.5 million for the same period in the prior year.
Such decreases resulted primarily from decreased average selling prices
across all product lines combined with decreased unit shipments of high
bandwidth communications products, which were partially offset by increased
unit shipments of telecommunications, computer and Ethernet communications
products.
For the three months ended September 30, 2002, custom and foundry products
revenues decreased 11% to $7.6 million representing 15% of net revenues
from $8.5 million or 19% of net revenues for the same period in the prior
year. For the nine months ended September 30, 2002, custom and foundry
products revenues decreased 38% to $18.8 million representing 12% of net
revenues from $30.3 million or 18% of net revenues for the same period in
the prior year. Such decreases for the three and nine months ended
September 30, 2002 were primarily due to decreased unit shipments of
foundry products.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Customer demand for semiconductors can change quickly and unexpectedly. As
a result of the slowing global economy, a rapid build-up of semiconductor
inventories in global sales channels occurred during 2001, causing lead
times for components to fall precipitously. The short lead time
environment has continued from the middle of 2001 through the end of the
third quarter of 2002. Customers perceive that semiconductor components
are readily available and continue to order only for their short-term
needs. New order rates have improved in the three and nine months ended
September 30, 2002 as compared to the same periods in 2001, however there
is not sufficient backlog for the Company to predict future revenue levels
with certainty. The Company's revenue levels are highly dependent on the
amount of new orders that are received for which product can be delivered
to the customer within the same period. Within the semiconductor industry
these orders that are booked and shipped within the period are called
"turns fill" orders. Currently, the uncertainty of customer demand, the
high turns fill requirement, and associated uncertainty of product mix and
pricing, make it difficult to predict future levels of sales and
profitability.
International sales represented 67% and 64% of net revenues for the three
months ended September 30, 2002 and 2001, respectively. On a dollar basis,
international sales increased 17% to $33.9 million for the three months
ended September 30, 2002 from $29.0 million for the comparable period in
2001. This increase in international sales resulted primarily from
increased shipments of telecommunications and personal computer products,
primarily in Asia, offset in part by decreased shipments of Ethernet
communications products, primarily in Asia. For the nine months ended
September 30, 2002 and 2001, international sales represented 69% and 57% of
net revenues, respectively. On a dollar basis, international sales
increased 9% to $106.3 million for the nine months ended September 30, 2002
from $97.7 million for the comparable period in 2001. This increase in
international sales for the nine months ended September 30, 2002 resulted
primarily from increased shipments of telecommunications, personal computer
and Ethernet communications products, primarily in Asia. The increased
unit shipments to Asian based customers is primarily a result of customers
transferring their manufacturing operations to Asia seeking lower cost
structures.
The Company's international sales are 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 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 a variety of factors including
the volume of product sales, product mix, manufacturing utilization,
product yields and average selling prices. For the three months ended
September 30, 2002 the Company's gross margin decreased to 26% from 34% for
the same period in 2001 For the nine months ended September 30, 2002,
gross margin decreased to 34% from 43% for the same period in 2001. The
decreases in gross margin for the three and nine month periods ended
September 30, 2002 resulted primarily from a $4.5 million charge for excess
inventory resulting form reduced sales and product transitions for certain
Ethernet communications products combined with decreased capacity
utilization, a greater sales mix of lower margin products and decreased
average selling prices as compared to the same periods in 2001. The
Company believes pricing pressure will continue to effect gross profit
until order lead times extend significantly beyond current levels.
Research and Development Expenses. Research and development expenses
include costs associated with the development of new processes and the
definition, design and development of new 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 28% for the three months ended September 30, 2002 and 2001. On
a dollar basis, research and development expenses increased $1.4 million or
11% to $14.1 million for the three months ended September 30, 2002 from
$12.7 million for the comparable period in 2001. For the nine months ended
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
September 30, 2002 and 2001, research and development expenses represented
26% and 22% of net revenues, respectively. On a dollar basis, research and
development expenses increased $2.3 million or 6% to $40.5 million for the
nine months ended September 30, 2002 from $38.2 million for the comparable
period in 2001. The dollar increases were primarily due to increased
prototype fabrication and new process development costs. The Company
believes that the development and introduction of new products is critical
to its future success and expects to continue its investment in research
and development activities in the future.
Selling, General and Administrative Expenses. As a percentage of net
revenues, selling, general and administrative expenses represented 16% and
17% for the three months ended September 30, 2002 and 2001, respectively.
On a dollar basis, selling, general and administrative expenses increased
$260,000 or 3% to $7.9 million for the three months ended September 30,
2002 from $7.7 million for the comparable period in 2001. The dollar
increases were principally attributable to increased commissions as a
result of increased revenues. For each of the nine months ended September
30, 2002 and 2001, selling, general and administrative expenses represented
16% of net revenues. On a dollar basis, selling, general and
administrative expenses decreased $1.9 million or 7% to $24.8 million for
the nine months ended September 30, 2002 from $26.7 million for the
comparable period in 2001. The dollar decreases were principally
attributable to decreased sales commissions, decreased staffing expenses
and decreased profit sharing accruals, which were partially offset by
increased legal costs.
Amortization of deferred stock compensation. The Company accounts for
stock-based awards to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees". The Company's practices in
effect through December 2001 related to employee stock option pricing
resulted in stock compensation expense under APB 25. For the three months
ended September 30, 2002 total amortization of deferred stock compensation
was $3.1 million of which $770,000 was included in cost of revenues and
$2.4 million was included in amortization of deferred stock compensation.
For the three months ended September 30, 2001 total amortization of
deferred stock compensation was $3.4 million of which $803,000 was included
in cost of revenues, $2.6 million was included in amortization of deferred
stock compensation. For the nine months ended September 30 2002 total
amortization of deferred stock compensation was $9.7 million of which $2.3
million was included in cost of revenues and $7.4 million was included in
amortization of deferred stock compensation. For the nine months ended
September 30, 2001 total amortization of deferred stock compensation was
$11.2 million of which $2.3 million was included in cost of revenues, $6.9
million was included in amortization of deferred stock compensation and
$2.0 million was included in non-recurring acquisition expenses.
On November 8, 2002 the Company filed a Schedule TO with the Securities and
Exchange Commission in order to initiate an offer to its employees to
exchange certain of their outstanding options for new options to be granted
six months and two days after expiration of the exchange offer. Certain
employee stock options that were granted prior to December 21, 2001 have
been previously determined to be compensatory per APB 25 and a non-cash,
deferred stock compensation expense has been recorded on Micrel's financial
statements for these options. Should any of these options be tendered for
cancellation and exchange, all unrecognized deferred compensation expense
associated with the cancelled options will accelerate to the period of
cancellation. Based on an expected cancellation date of December 11, 2002,
a charge will be recorded by Micrel in the fourth quarter of 2002 related
to the acceleration of non-cash, deferred stock compensation expense
associated with options cancelled under this exchange offer. The size of
the charge will depend on the percentage of employee acceptance of this
offer and the actual number of stock options with deferred stock
compensation expense that are cancelled. Based on an estimated range of
participation, the non-cash charge is expected to be between $17 million
and $23 million before income taxes.
As a result of the anticipated acceleration of deferred compensation
expense in the fourth quarter of 2002, there is likely to be a reduction in
deferred compensation expense in subsequent periods beginning in the first
quarter of 2003. Furthermore, the stock option exchange program is
expected to reduce the overall number of outstanding stock options after
replacement option grants are issued. The combined effect of the reduction
in deferred compensation expense and fewer outstanding stock options is
expected have a beneficial effect on Micrel's earnings per share in future
periods.
Manufacturing Facility Impairment and Restructuring Expense. During the
quarter ended September 30, 2002, the Company approved a plan to close its
Santa Clara, CA wafer fabrication facility within the next 12 months in
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
order to reduce costs and improve operating efficiencies through improved
capacity utilization. Management believes that these actions are prudent
given the current excess capacity levels with in its wafer fabrication
facilities combined with the uncertain demand in the high-speed
communications market. As a result of this action, overall operating
expenses are expected to decline by approximately $500,000 per quarter
beginning in the fourth quarter of 2002, with a total expense reduction of
over $2 million per quarter after the Santa Clara facility is exited in the
fall of 2003. Associated with the facility closure the Company accrued
$5.5 million in restructuring expenses, primarily for equipment de-
installation costs and contractual building lease costs that will provide
no future benefit. These restructuring costs are expected to be paid in
cash over the remaining facility lease term, which expires in October 2006.
Of the $5.5 million in accrued restructuring costs, $1.0 million has been
classified as other current liabilities and the remaining $4.5 million has
been classified as other long-term obligations. Also related to the
planned facility closure, the Company recorded a $23.4 million impairment
of long-lived assets to reduce the net book value of the facility's
leasehold improvements and equipment to fair value. The fair value was
based on a third party estimate of the current net sales value.
Other Income, Net. Other income, net reflects interest income from
investments in short-term, investment-grade, securities and money market
funds offset by interest expense incurred on term notes, combined with
other non-operating income or expenses. Other income, net decreased
$873,000 to $284,000 for the three months ended September 30, 2002 from
$1.2 million for the comparable period in 2001. The decrease was primarily
due to decreased rates of return on cash, cash equivalents and short-term
investments. For the nine months ended September 30, 2002, other income,
net decreased $3.4 million to $872,000 from $4.3 million for the comparable
period in 2001. The decrease was primarily due to decreased rates of
return on cash, cash equivalents and short-term investments combined with a
non-recurring expense of $947,000 for the settlement of a patent dispute,
partially offset by $490,000 in non-recurring other income.
Benefit for Income Taxes. For the three and nine months ended September
30, 2002, the benefit for income taxes was $15.3 million and $20.4 million,
respectively. The income tax amounts reflect the Company's revised year
2002 estimated annual effective tax rate of 42% of loss before tax,
compared to 70% of loss before tax recorded for the same period in 2001.
During the three months ended September 30, 2002 the Company revised its
2002 estimated annual effective tax rate to 42% from 58% of loss before
tax, primarily due to the impact of state research and development credits
in relation to revised estimated annual loss before tax. The estimated
benefit for income taxes differs from taxes computed at the federal
statutory rate primarily due to the effect of state income taxes, state
research and development credits, and state manufacturing credits.
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 September 30, 2002 consisted of cash and cash
equivalents of $99.0 million and bank borrowing arrangements. Borrowing
agreements consisted of $5.0 million under a revolving line of credit.
There were no borrowings under this agreement as of September 30, 2002 (for
a full discussion of these borrowing arrangements, see Note 4 of Notes to
Condensed Consolidated Financial Statements).
The Company's working capital decreased by $19.8 million to $177.1 million
as of September 30, 2002 from $196.9 million as of December 31, 2001. The
decrease was primarily attributable to a $34.5 million decrease in cash and
short-term investments combined with a $4.7 million decrease in other
current assets, which were partially offset by a $8.6 million increase in
inventories, a $6.4 million increase in deferred income taxes and a $4.4
million increase in accounts receivable.
The Company's cash flows from operating activities were $7.1 million for
the nine months ended September 30, 2002 as compared to $40.1 million for
the same period in the prior year. This cash flow decrease resulted
primarily from an increase in accounts receivables balances of $4.4 million
for the nine months ended September 30, 2002 as compared to a decrease of
$37.4 million for the same period in 2001, which resulted from declining
revenue levels in 2001. The cash flows from operating activities generated
by the Company in the nine months ended September 30, 2002 were primarily
attributable to a net loss of $28.2 million plus additions for non-cash
activities of $40.5 million which were partially offset by a $5.2 million
use in cash from changes in operating assets and liabilities. Cash flow
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
used by changes in operating assets and liabilities consisted of an
increase in inventories of $8.6 million, an increase in accounts
receivables of $4.4 million combined with a decrease in deferred income on
shipments to distributors of $1.3 million, which were partially offset by a
decrease in other current assets of $2.9 million (excluding $1.8 million in
non-cash tax benefits from employee stock transactions) and an increase in
other accrued liabilities of $5.4 million.
The Company's investing activities during the nine months ended
September 30, 2002 used cash of $26.0 million as compared to $782,000 of
cash provided during the comparable period in the prior year. This
increase in cash used resulted primarily from a $30.6 million decrease in
net sales of short-term investments combined with the purchase of $2.1
million in intangible assets, which were partially offset by a $5.9 million
decrease in net purchases of property, plant and equipment. Cash used by
investing activities during the nine months ended September 30, 2002
resulted from the purchase of $27.0 in net purchases of property, plant and
equipment, which includes $18.0 million for the purchase of the Company's
previously leased manufacturing facilities located in San Jose, CA,
combined with the purchase of $2.1 million in intangible assets, which was
partially offset by $3.1 million in net sales of short-term investments.
The Company's financing activities during the nine months ended
September 30, 2002 used cash of $12.4 million as compared to cash provided
of $4.3 million during the comparable period in the prior year. Cash used
by financing activities during the nine months ended September 30, 2002 was
the result of $26.4 million to repurchase 1,783,000 shares of common stock
and $3.0 million in repayments of long-term debt, which was partially
offset by proceeds from long-term debt borrowings of $10.7 million related
to the purchase of the company's previously leased manufacturing facilities
and proceeds from the issuance of common stock through the employee stock
transactions of $6.3 million.
The Company currently estimates its capital equipment purchases, excluding
the above mentioned $18.0 million purchase of manufacturing facilities, to
be approximately $12 million for year 2002, of which $9.0 million was
expended in the first nine months. The Company expects to purchase
primarily additional research and development related equipment and
building improvements. The Company expects that its current manufacturing
capacity to be sufficient to support internally manufactured annual
revenues in excess of $500 million. The Company expects that its cash
requirements through 2002 will be met by its cash from operations, existing
cash balances and short-term investments, and its credit facility.
The Company has contractual obligations under facility operating lease
agreements that expire in 2003, 2006 and 2001. Future minimum payments
under these agreements are $716,000 for the three months ended December 31,
2002, $2.5 million, $2.6 million, $2.7 million, $2.4 million and $1.0
million for the years ending 2003, 2004, 2005, 2006 and 2007, respectively
and $3.7 million thereafter.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-Q 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 products or product
development; future research and development spending and the Company's
product development strategy; the levels of international sales; future
expansion or utilization of manufacturing capacity; future expenditures;
expectations concerning the outcome of pending litigation, and 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 below. Additional factors that may affect
operating results are contained within the Company's Form 10-K for the year
ended December 31, 2001.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company is exposed to risks because of the uncertain rate of growth in
the global economy.
Although the global economy appears to have grown in the first nine months
of 2002 after shrinking for a period in 2001, recent events have cast doubt
on the sustainability of future economic growth. Consumer confidence is
waning due in part to the recent sharp decline in global equity markets.
Reduced corporate profits and weak capital spending, especially for
technology related end markets that the Company serves such as the high-
speed communications, enterprise computing and telecommunications markets,
continue to dampen demand for the Company's products. If economic
conditions in the global economy worsen, or if a wider global economic
recession materializes, the Company's business, financial condition and
results of operations may be materially and adversely affected.
The Company's operating results may fluctuate because of a number of
factors, many of which are beyond its control.
If the Company's operating results are below the expectations of public
market analysts or investors, then the market price of its Common Stock
could decline. Some of the factors that affect the Company's quarterly and
annual results, but which are difficult for the Company to control or
predict are:
- - the volume and timing of orders received
- - changes in the mix of products sold
- - market acceptance of the Company's products and its customers' products
- - competitive pricing pressures
- - cyclical semiconductor industry conditions
- - dependence on third party suppliers
- - the 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
- - the ability to hire and retain key technical and management personnel
- - access to advanced process technologies
- - the timing and extent of process development costs
Customer demand for the Company's products is volatile and difficult to
predict
The Company's customers continuously adjust their inventories in response
to changes in end market demand for their products and the availability of
semiconductor components. This results in frequent changes in demand for
the Company's products. The volatility of customer demand limits the
Company's ability to predict future levels of sales and profitability. The
supply of semiconductors can quickly and unexpectedly match or exceed
demand because end customer demand can change very quickly. Also,
semiconductor suppliers can rapidly increase production output. This can
lead to a sudden oversupply situation and a subsequent reduction in order
rates and revenues as customers adjust their inventories to true demand
rates. A rapid and sudden decline in customer demand for the Company's
products can result in excess quantities of certain of the Company's
products relative to demand. Should this occur the Company's operating
results may be adversely effected as a result of charges to reduce the
carrying value of the Company's inventory to the estimated demand level or
market price.
The current weakness in the global economy has caused the end markets that
the Company's customers serve to grow less rapidly, or in some cases,
contract. The resulting uncertainty of demand has caused most of the
Company's customers to err on the side of caution until they see signs of
order strength for their end products. In addition, many customers are
continuing to deplete excess inventories, particularly contract
manufacturers and high bandwidth communication OEM's. Semiconductors are
perceived to be readily available and supplier lead times are at or near
historic lows. In this environment customers are not making large purchase
commitments, only ordering small quantities to fill known short-term
requirements, greatly reducing our visibility into customer demand. As a
result, the Company's revenues are highly dependent upon turns fill orders
(orders booked and shipped in the same quarter). The reduced level of
order backlog coupled with the short-term nature of customer demand makes
it extremely difficult to predict near term revenues and profits.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's stock option exchange program will likely lead to a
significant non-cash charge in the fourth quarter of 2002.
As a result of the Company's stock exchange program (see Note 13 of Notes
to Condensed Consolidated Financial Statements) it is likely that a
significant number of employee stock options will be cancelled that have
previously been determined to be compensatory per APB 25. A non-cash
deferred stock compensation expense has been recorded on Micrel's financial
statements for these options. Should any of these options be tendered for
cancellation and exchange, all unrecognized deferred compensation expense
associated with the cancelled options will accelerate to the period of
cancellation. Based on an expected cancellation date of December 11, 2002,
a significant charge will be recorded by Micrel in the fourth quarter of
2002 related to the acceleration of non-cash, deferred stock compensation
expense associated with options cancelled under this exchange offer. The
size of the charge will depend on the percentage of employee acceptance of
this offer and the actual number of stock options with deferred stock
compensation expense that are cancelled. Based on an estimated range of
participation, the non-cash charge is expected to be between $17 million
and $23 million before income taxes.
The market price of the Company's stock is highly volatile. If the market
price of Micrel stock increases substantially from its current levels by
the time the replacement option grants are issued, the strike price of the
replacement option grants may be higher than the strike price of the
original grants for some employees. If this occurs the Company may
experience difficulty retaining the effected employees.
The cyclical nature of the semiconductor industry can result in downturns
that can negatively effect the Company's operating results.
The semiconductor industry has historically been cyclical and periodically
subject to significant economic downturns. These downturns have been
characterized by diminished product demand, accelerated erosion of selling
prices and over capacity levels as well as rapidly changing technology and
evolving industry standards. The Company's net revenues may continue to be
adversely affected if this downturn continues. In general, the Company may
experience future substantial period-to-period fluctuations in its business
and operating results due to general semiconductor industry conditions,
overall economic conditions or other factors.
The semiconductor industry is highly competitive.
The semiconductor industry is highly competitive and subject to rapid
technological change, price-erosion and increased international
competition. Significant competitive factors include:
- - product features
- - performance
- - price
- - timing of product introductions
- - emergence of new computer and communications standards
- - quality and customer support
In times of weak economic conditions, such as the semiconductor industry is
now experiencing and due to uncertain customer demand and under-utilization
of semiconductor fabrication capacity, price competition becomes more
prevalent. Both the semiconductor industry and the Company have
experienced significant price erosion since the beginning of 2001. If this
price erosion continues it will have the effect of reducing revenue levels
and gross margins in future periods.
Because the standard products market for integrated circuits is diverse and
highly fragmented, the Company encounters different competitors in various
market areas. Most of these competitors have substantially greater
technical, financial and marketing resources and greater name recognition
than the Company has. 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
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
or that competitive pressures will not adversely affect the Company's
financial condition, results of operations, or cash flows.
Market conditions may lead the Company to initiate cost reduction plans
which may negatively effect near term operating results.
As a result of weak customer demand, competitive pricing pressures, excess
capacity, weak economic conditions or other factors, the Company may decide
to initiate actions, such as closing its Santa Clara wafer fabrication
facility, to reduce the Company's cost structure and improve the Company's
future operating results. The cost reduction actions may require
incremental costs to implement which could negatively effect the Company's
operating results in periods when the incremental costs or liabilities are
incurred.
The Company's gross margin is dependent upon a number of factors, including
the level of capacity utilization.
Semiconductor manufacturing is a capital-intensive business resulting in
high fixed costs. If the Company is unable to utilize its installed wafer
fabrication or test capacity at a high level, the costs associated with
these facilities and equipment is not fully absorbed, resulting in higher
average unit costs and lower sales margins. The decline in new customer
order rates has resulted in reduced capacity utilization of the Company's
factories as it has attempted to match production with anticipated customer
demand. The Company's gross margins have declined as a result of this
reduced utilization of production capacity. Gross margins may deteriorate
further should production activity be curtailed in response to lower
customer demand in the future.
The Company may not be able to protect its intellectual property
adequately, or could be harmed by litigation involving its patents and
proprietary rights.
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 or that
any of its pending or future patent applications will be issued with the
scope of the claims sought, 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 technology or design around
the patents owned by the Company. Additionally, the semiconductor industry
is characterized by frequent litigation regarding patent and other
intellectual property rights. There can be no assurance that existing
claims or any other assertions or claims for indemnity resulting from
infringement claims will not adversely affect the Company's business,
financial condition, results of operations, or cash flows.
The Company's product offering, while diversified, is highly dependent on
certain select end markets.
The Company currently sells a significant portion of its products in the
high-speed communications, computer, networking and wireless handset
markets. These markets are characterized by short product life cycles,
rapidly changing customer demand, evolving and competing industry standards
and seasonal demand trends. Additionally, there can be no assurance that
these markets will continue to grow. If the markets for high speed
communications, computers, networking or wireless handsets that the Company
serves fail to grow, or grows more slowly than it currently anticipates, or
if there is increased competition in these markets, the Company's business,
results of operations and financial condition could be adversely affected.
The Company's Ethernet products have become an important portion of the
Company's revenues with the acquisition of Kendin. If the Company fails to
develop new products to serve this market in a timely manner, or if the
market acceptance of the Company's new Ethernet products is poor, or if a
competitor's products unfavorably effect pricing or demand for the
Company's products, the Company's revenues and results of operations could
be adversely effected.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company currently derives the majority of its product revenues from
sales of standard analog and mixed-signal integrated circuits and expects
these products to continue to account for the majority of its revenues for
the foreseeable future. As a result, factors adversely affecting the
pricing of or demand for standard analog integrated and mixed-signal
circuits, such as competition, product performance or technological change,
could have a material adverse effect on the Company's business and
consolidated results of operations and financial condition.
A significant portion of the Company's revenues in recent periods has been
derived from sales of products based on SONET, SDH and ATM transmission
standards. If the communications market evolves to new standards, the
Company may not be able to successfully design and manufacture new products
that address the needs of its customers or gain substantial market
acceptance. Although the Company has developed products for the Gigabit
Ethernet and Fibre Channel communications standards, volume sales of these
products are modest, and it may not be successful in addressing other
market opportunities for products based on these standards.
An important part of the Company's strategy is to continue to focus on the
market for high-speed communications integrated circuits, or ICs. If the
Company is unable to penetrate this market further, the Company's revenues
could stop growing and may decline.
The markets that the Company serves frequently undergo transitions in which
products rapidly incorporate new features and performance standards on an
industry-wide basis. If the Company's products are unable to support the
new features or performance levels required by OEMs in these markets, it
would likely lose business from existing or potential customers and would
not have the opportunity to compete for new design wins until the next
product transition. If the Company fails to develop products with required
features or performance standards, or experiences even a short delay in
bringing a new product to market, or if its customers fail to achieve
market acceptance of their products, its revenues could be significantly
reduced for a substantial period of time.
The Company encounters risks associated with its international operations.
The Company has generated a substantial portion of its net revenues from
export sales. 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.
The Company is reliant on certain key suppliers for wafer fabrication,
circuit assembly and testing services. Most of these suppliers are based
outside of the U.S. The Company's supply could be interrupted as a result
of any of the previously mentioned risk factors relating to international
markets.
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 of the Company's products in the local
currencies of the foreign markets it serves. This would result in making
the Company's products relatively more expensive than its 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.
Dependence on third-party manufacturing and supply relationships increases
the risk that the Company will not have an adequate supply of products to
meet demand or that its cost of materials will be higher than expected.
The Company faces many risks associated with its dependence upon third
parties that manufacture, assemble or package certain of our products.
These risks include:
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- - reduced control over delivery schedules and quality
- - risks of inadequate manufacturing yields and excessive costs
- - the potential lack of adequate capacity during periods of excess demand
- - difficulties selecting and integrating new subcontractors
- - limited warranties on wafers or products supplied to the Company
- - potential increases in prices
- - potential misappropriation of the Company's intellectual property
Any of these risks may lead to increased costs or delay delivery of the
Company's products, which would harm its profitability and customer
relationships.
Additionally, the Company's wafer and product requirements typically
represent a relatively small portion of the total production of the third-
party foundries and outside assembly, testing and packaging contractors.
As a result, Micrel is subject to the risk that a foundry will provide
delivery or capacity priority to other larger customers at the expense of
Micrel, resulting in an inadequate supply to meet customer demand or higher
costs to obtain the necessary product supply. Also, there is a risk that
third party manufacturer will cease production on an older or lower volume
process that it uses to produce the Company's products. The Company cannot
be certain that its outside manufacturers will continue to devote resources
to the production of its products or continue to advance the process design
technologies on which the manufacturing of its products are based. Each of
these events could increase the Company's costs and harm its ability to
deliver our products on time.
The Company is subject to the risk of litigation and regulatory action in
connection with the restatement of its financial statements, and the
potential liability from any such litigation or regulatory action could
harm its business.
On January 28, 2002, the Company announced that it would restate its
consolidated financial statements for the fiscal years ended December 31,
1998, 1999, and 2000, and the fiscal quarters ended March 31, 2001, June
30, 2001, and September 30, 2001. As a result of this restatement, the
Company could become subject to litigation or regulatory proceedings, or
both. As of the date hereof, the Company is not aware of any litigation
having been commenced against it related to this restatement. However,
such litigation could be commenced against the Company in the future and,
if so, the Company cannot predict the outcome of any such action at this
time. However, if an unfavorable result occurred in any such action, the
Company's business and financial condition could be harmed. In addition,
regulatory agencies, such as the Securities and Exchange Commission, could
commence a formal investigation of the Company's restatement. At this time
management cannot predict whether or not any regulatory investigation
related to the restatement will be commenced or, if it is, the outcome of
any such investigation. However, if any such investigation were to result
in a regulatory proceeding or action against the Company, its business and
financial condition could be harmed. The restatement also involves certain
tax issues that need to be resolved with the appropriate taxing
authorities. The Company has recorded a liability in its financial
statements with respect to these tax issues. The Company cannot predict
the results of its discussions with the appropriate tax authorities
regarding the tax implications of its restatement and accordingly, the
amount of actual financial impact may differ from the amount recorded in
the Company's financial statements.
The Company's operating results substantially depend on manufacturing
output and yields, which may not meet expectations.
The Company manufactures most of its semiconductors at its San Jose and
Santa Clara, California fabrication facilities. Manufacturing
semiconductors requires manufacturing tools that are unique to each product
being produced. If one of these unique manufacturing tools was damaged or
destroyed, then the Company's ability to manufacture the related product
would be impaired and its business would suffer until the tool was repaired
or replaced. Additionally, the fabrication of integrated circuits is a
highly complex and precise process. Small 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company faces risks associated with acquisitions it has completed and
will face risks associated with any future acquisitions.
The Company has made acquisitions in the past and may make acquisitions in
the future. The risks involved with acquisitions include:
- - diversion of management's attention
- - failure to retain key personnel
- - amortization of acquired intangible assets
- - customer dissatisfaction or performance problems with the acquired
company
- - the cost associated with acquisitions and the integration of acquired
operations
- - assumption of unknown liabilities
Any of these risks could materially harm the Company's business, financial
condition and results of operations. Additionally, any acquisition
involves a significant amount of integration of two companies that have
previously operated independently. No assurance can be given that
difficulties will not be encountered in integrating certain products,
technologies or operations of the acquired companies or that the benefits
expected from such integration will be realized. There can be no assurance
that any of the acquired companies will retain its key personnel, that the
engineering teams of Micrel and the acquired companies will successfully
cooperate and realize any technological benefits or that Micrel or the
acquired companies will realize any of the other anticipated benefits of
the acquisitions. In addition, the consummation of an acquisition could
result in the cancellation, termination or non-renewal of arrangements with
the acquired company by suppliers, distributors or customers, or the
termination of negotiations or delays in ordering by prospective customers
as a result of uncertainties that may be perceived as a result of the
acquisition. Any significant amount of cancellations, terminations, delays
or non-renewals of arrangements with the acquired company or loss of key
employees or termination of negotiations or delays in ordering could have a
material adverse effect on the business, operating results or financial
condition of the acquired company and Micrel after the acquisition.
In addition, some of the past acquisitions have been accounted for using
the pooling-of-interests method of accounting which means the acquisitions
are subject to rules established by the Financial Accounting Standards
Board and the Securities and Exchange Commission. These rules are complex
and the interpretation of them is subject to change. Additionally, the
availability of pooling of interests accounting treatment for a business
combination depends in part upon circumstances and events occurring after
the acquisition. The failure of a past business combination that has been
accounted for under the pooling of interests accounting method to qualify
for this accounting treatment would materially harm the Company's reported
and future earnings and likely, the price of its Common Stock.
The Company's future success depends in part on the continued service of
its key design engineering, sales, marketing and executive personnel and
its ability to identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers, and the Company may not be able
to continue to attract and train engineers or other qualified personnel
necessary for the development of its business or to replace engineers or
other qualified personnel who may leave its employ in the future. Loss of
the services of, or failure to recruit, key design engineers or other
technical and management personnel could be significantly detrimental to
the Company's product and process development programs.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 2001 Form 10-K have
not changed significantly during the nine months ended September 30, 2002.
ITEM 4: EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
reports under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission, and that such information
is accumulated and communicated to the Company's management, including its
chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the
Company's management, including the Company's chief executive officer and
chief financial officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's chief executive officer and chief financial
officer concluded that the Company's disclosure controls and procedures
appear to be effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 8 of Notes to Condensed Consolidated
Financial Statements under the caption "Litigation and Other Contingencies"
in Item 1 of Part I is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Commercial Mortgage Financing Agreement between Micrel,
Incorporated and Bank of the West, dated September 27, 2002.
(b) Reports on Form 8-K. On August 14, 2002, the Company filed a
Current Report on Form 8-K which contained the officer
certifications Pursuant to 18 U.S.C. section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002 to accompany its
Form 10-Q Report for the quarterly period ended June 30, 2002. On
September 6, 2002, the Company filed a Current Report on Form 8-K
disclosing a change of certifying accountant.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICREL, INCORPORATED
--------------------
(Registrant)
Date: November 14, 2002 By /s/ Richard D. Crowley, Jr.
---------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
26
CERTIFICATIONS
I, Raymond D. Zinn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Micrel,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 By /s/ Raymond D. Zinn
--------------------------
Raymond D. Zinn
President, Chief Executive Officer and Director
(Principal Executive Officer)
27
I, Richard D. Crowley, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Micrel,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 By /s/ Richard D. Crowley, Jr.
--------------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
28