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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number 0-25236
M I C R E L, I N C O R P O R A T E D
(Exact name of Registrant as specified in its charter)
California 94-2526744
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or Organization)
1849 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 15, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $742,931,444
based upon the closing sales price of the Common Stock as reported on the
Nasdaq Stock Market(r) on such date. Shares of Common Stock held by
officers, directors and holders of more than ten percent of the outstanding
Common Stock have been excluded from this calculation because such persons
may be deemed to be affiliates. The determination of affiliate status is
not necessarily a conclusive determination for other purposes.
As of March 15, 1999, the Registrant had outstanding 20,188,170 shares of
Common Stock.
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference in
this report: Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders (Part III).
This Report on Form 10-K includes 76 pages with the Index to Exhibits
located on page 53.
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MICREL, INCORPORATED
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1998
Page
PART I
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for the Registrant's Common Equity and Related
Shareholder Matters 15
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk 25
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners
and Management 28
Item 13 Certain Relationships and Related Transactions 28
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 29
Signatures 52
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PART I
ITEM 1. BUSINESS
General
The Company was incorporated in California in July 1978. References to
the "Company" and "Micrel" refer to Micrel, Incorporated and
Subsidiaries, which also does business as Micrel Semiconductor. The
Company's principal executive offices are located at 1849 Fortune Drive, San
Jose, California 95131. The Company's telephone number is (408) 944-0800.
Micrel designs, develops, manufactures and markets a range of high-
performance analog power integrated circuits and mixed-signal and digital
integrated circuits. The Company currently ships over 1,000 standard
products and has derived the majority of its product revenue for the year
ended December 31, 1998 from sales of standard analog integrated circuits
for power management. These analog power circuits are used in a wide variety
of electronic products, including those in the communications, computer and
industrial markets. For the years ended December 31, 1998, 1997, and 1996,
the Company's standard products accounted for 71%, 76%, and 66%,
respectively, of the Company's net revenues. In addition, the Company
manufactures custom analog and mixed-signal circuits and provides wafer
foundry services for a diverse range of customers who produce electronic
systems for communications, consumer and military applications. With the
Company's acquisition of Synergy Semiconductor in November 1998, the Company
broadened its standard product offerings to include high performance bipolar
integrated circuits sold to customers within the networking,
telecommunications, computing and automatic test equipment
("ATE")/instrumentation markets. Through its Synergy division, the Company
manufactures over 200 products including communication transceivers, clock
generators, distribution/clock recovery circuits as well as high-speed logic
and memory.
Continuing trends in the communications and computing markets have
created increased demand for power analog circuits, which control, regulate,
convert and route voltage and current in electronic systems. This demand for
power analog circuits has been fueled by the tremendous growth of battery
powered cellular telephones and computing devices and the emergence of lower
voltage microprocessors and Personal Computer Memory Card International
Association ("PCMCIA") standards for peripheral devices. Micrel's standard
analog products business is focused on addressing this demand for high-
performance power analog circuits. The Company sells a wide range of
regulators, references and switches designed for cellular telephones and
laptop computers. The Company believes it was one of the first companies to
offer analog products for the PCMCIA Card and universal serial bus ("USB")
market and that it currently provides a majority of the power analog
circuits used in PC Card and USB systems. The Company also offers standard
analog products that address other markets, including power supplies and
industrial, defense, avionics, and automotive electronics.
In addition to standard analog products, Micrel offers customers
various combinations of design, process and foundry services. Through
interaction with customers in its custom and foundry business, the Company
has been able to enhance its design and process technology capabilities,
which in turn provides engineering and marketing benefits to its standard
analog products business. Micrel's product offerings through its Synergy
operations offer enhanced foundry capabilities including six-inch wafer
fabrication technologies.
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Industry Background
Analog Circuit, Mixed-Signal and Digital Integrated Circuits Markets
Integrated circuits may be divided into three general categories -
digital, analog (also known as "linear") and mixed-signal. Digital
circuits, such as memories and microprocessors, process information in the
form of on-off electronic signals and are capable of implementing only two
values, "1" or "0". Analog circuits, such as regulators, converters and
amplifiers, process information in the form of continuously varying voltages
and currents that have an infinite number of values or states. Analog
circuits condition, process, and measure or control real world variables
such as current, sound, temperature, pressure or speed. Mixed-signal
integrated circuits combine analog and digital functions on one chip.
Analog circuits are used in virtually every electronic system, and the
largest markets for such circuits are computers, telecommunications and data
communications, industrial equipment, and military, consumer and automotive
electronics. Because of their numerous applications, analog circuits have a
wide range of operating specifications and functions. For each application,
different users may have unique requirements for circuits with specific
resolution, processing linearity, speed, power and signal amplitude
capability. Such differentiation results in a high degree of market
fragmentation, which provides smaller companies an opportunity to compete
successfully against larger suppliers in certain market segments.
Mixed-Signal and Digital Integrated Circuits may be divided into six
general categories, LSI/MSI logic, data processing, signal processing,
memory, FPGA and application specific.
Mixed-Signal and Digital Integrated Circuits are used in computer and
communication systems and in industrial products. The primary markets for
such circuits are consumer, communications, personal computer systems, and
industrial. The primary advantages of the Company's bipolar integrated
circuits are high speed and low noise.
As compared with the digital integrated circuit industry, the analog
integrated circuit industry has the following important characteristics:
Dependence on Individual Design Teams. The design of analog circuits
involves the complex and critical placement of various circuits. Analog
circuit design has traditionally been highly dependent on the skills and
experience of individual design engineers.
Interdependence of Design and Process. Analog designers, especially at
companies having their own wafer fabrication facility ("fab"), are able to
select from several wafer fabrication processes in order to achieve higher
performance and greater functionality from their designs.
Longer Product Cycles and More Stable Pricing. Analog circuits generally
have longer product cycles as compared to digital circuits. As a result,
analog circuit pricing has historically been more stable than most digital
circuit pricing.
Analog, mixed-signal and digital integrated circuits are sold to
customers as either standard products or custom products. Standard analog
products are available to customers "off-the-shelf" and are often sold in
large volumes to a wide variety of customers in different industries. Custom
products are designed to an individual customer's specifications.
Recent Trends in Analog Power Management, Mixed-Signal and Digital
Integrated Circuits
Most electronic systems utilize analog circuits to perform power
management functions ("power analog circuits")
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such as the control, regulation, conversion and routing of voltages and
current. The computer and communications markets have emerged as two of the
largest markets for power analog circuits. In particular, the recent growth
and proliferation of portable, battery powered devices, such as cellular
telephones and laptop computers, continue to increase demand and create new
technological challenges for power analog circuits.
Cellular telephones, which are composed of components and subsystems
that utilize several different voltage levels, require multiple power analog
circuits to precisely regulate and control voltage. Manufacturers are
replacing traditional pass regulators with higher performance low dropout
("LDO") regulators to lengthen battery life and are utilizing smaller,
more highly integrated power analog circuits, such as regulators and
references.
The trend toward the use of lower voltage microprocessors in personal
computers and other computing devices has also increased market demand and
created new requirements for power analog circuits. These lower voltage
microprocessors reduce power consumption, thereby prolonging battery life
for portable and desktop personal computers. These mixed voltage personal
computers require multiple LDO regulators to manage power in the system.
Another recent trend is the emergence of PCMCIA standards that require a
voltage protection capability, thereby creating new specifications for
higher performance power analog switches.
The rapid adoption of the internet for information exchange, in
business and consumer markets, has led to a tremendous surge in the need for
broadband communications technology. When this is coupled with the use of
more media-rich technologies on the internet, like bandwidth hungry graphics
and movies, it is generally agreed that there is a growing need to improve
the infrastructure of the internet. One major trend within the industry is
the worldwide adaptation and deployment of high speed fiber optic networks.
Such networks require the use of very high-speed analog signal conditioning,
clock recovery and post processing to attain maximum data throughput.
Micrel's Strategy
Micrel seeks to capitalize on the growth opportunities within the
high-performance analog semiconductor market. The Company's core
competencies are its analog design and process technology, its large, in-
house wafer fabrication capability and its manufacturing expertise. The
Company also seeks to capitalize on the growth opportunities within the high
performance bipolar semiconductor market. The Company has expanded upon its
core competencies through the addition of Synergy's expertise in the
synchronous optical network ("SONET"), fiber channel and ATE arenas. The
Synergy division design team, process technology and wafer fabrication
facility complement the historical Micrel core strengths. The Company
intends to build a leadership position in its targeted markets by pursuing
the following strategies:
Focus on Standard Products for High Growth Markets. Currently, Micrel
ships over 1,000 standard products, with net revenues from standard products
generating 71% of the Company's net revenues for the year ended December 31,
1998. In November 1998, through the acquisition of Synergy Semiconductor,
the Company has added over 200 new standard products to its offerings.
Micrel believes that its long-term growth will depend substantially on its
ability to increase standard products sales in its existing markets and to
penetrate new standard products markets. The Company, however, will pursue
additional custom and foundry business as opportunities arise.
Target Power Analog, High-Speed Mixed-signal and Digital Markets.
Micrel has leveraged its expertise in power analog circuits by addressing
market opportunities in cellular telephones, battery powered computers and
desktop personal computers. A majority of the Company's standard products
net revenues for the year ended December 31, 1998 were derived from products
relating to power management. Through the acquisition of Synergy
Semiconductor, the Company has gained expertise in high-speed, mixed-signal
and digital integrated circuits, required to address the networking,
telecommunications, computing and ATE/instrumentation markets.
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Maintain Technological Leadership. The Company seeks to utilize its
design strengths and its process expertise to enhance what the Company
believes are its competitive advantages in LDO regulators, PCMCIA and USB
devices. In order to maintain its technology leadership, the Company has
developed plans for successive generations of products with increased
functionality. The Company seeks to utilize Synergy's design strengths and
its process expertise to enhance what the Company believes are its
competitive advantages in high speed, low jitter devices. In order to
maintain its technology leadership, the Company has begun development of a
sub-micron process.
Capitalize on In-house Wafer Fab Facilities. The Company believes
that its six-inch in-house wafer fab facilities provide a significant
competitive advantage because they facilitate close collaboration between
design and process engineers in the development of the Company's products.
Maintain a Strategic Level of Custom and Foundry Products Revenue.
Micrel believes that its custom and foundry products business complements
its standard products business by generating a broader revenue base and
lowering overall per unit manufacturing costs through greater utilization of
its manufacturing facilities. Through interaction with customers, Micrel has
been able to enhance its design and process technology capabilities.
Products and Markets
Overview
The following table sets forth the net revenues attributable to the
Company's two segments, standard products and custom and foundry products
expressed in dollars and as a percentage of total net revenues.
Net Revenues by Segment
(dollars in thousands)
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
Net Revenues:
Standard Products....................... $ 99,902 $ 79,203 $ 43,530
Custom and Foundry Products............. 40,606 24,955 22,714
-------- -------- --------
Total net revenues.................. $140,508 $104,158 $ 66,244
======== ======== ========
As a Percentage of Total Net Revenues:
Standard Products....................... 71% 76% 66%
Custom and Foundry Products............. 29 24 34
-------- -------- --------
Total net revenues.................. 100% 100% 100%
======== ======== ========
For a discussion of the changes in net revenues from period to period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Standard Products
In recent years, the Company has directed a majority of its
development, sales and marketing efforts towards standard products in an
effort to address the larger markets for these products and to broaden its
customer base. The Company offers power analog circuits that address certain
high growth markets including cellular telephones, battery powered computers
and desktop personal computers. The Company's remaining standard products
address other markets, including power supplies and industrial, defense,
avionics, and automotive electronics. In November 1998, the Company
broadened its standard product offerings to include high-speed mixed-signal
and digital integrated circuits sold to customers within the networking,
telecommunications, computing and ATE/instrumentation markets.
Portable Battery Powered Computer Market. The Company makes power
analog circuits for laptop, palmtop computers and pocket organizers.
Products in this growing segment are differentiated on the basis of power
efficiency, weight, small size and battery life. Micrel has developed a
family of 95% efficient SMPS controllers that it believes to be one of the
leading solutions for these applications.
Cellular Telephone Market. Micrel offers a range of power control and
regulating analog circuits to address the demand for cellular telephones
with longer battery lives. Micrel also provides a range of high performance
LDO regulators that convert, regulate, switch and control the DC voltages
used in cellular telephones. Micrel's SuperBeta PNP (tm) LDO regulators
enable cellular telephones to continue to operate effectively until the
battery is almost completely exhausted. Micrel products are designed to
reduce board space and decrease system cost. In addition, Micrel offers
switch mode power supply ("SMPS") regulators that convert AC to useable DC
power in battery chargers and cellular base stations.
Universal Serial Bus Market. Universal Serial Bus ("USB") is a novel
method of connecting computer peripherals to a host computer that improves
upon the bandwidth and ease-of-use of previously used computer interconnect
solutions. In addition to implementing data communications between the
connected devices, USB also provides a power source capable of powering the
peripheral. Micrel believes that it is the leader in the design and
manufacture of circuits that safely control the delivery of this power
source.
PCMCIA Card and Socket Markets. The Personal Computer Memory Card
International Association, of which Micrel is a member, has established
standards for personal computer cards that are the size of credit cards and
for sockets that allow insertion of such cards into personal computers.
Micrel believes that it is a leader in the design and manufacture of
integrated circuits that enable PC Card sockets to have such compatibility.
Power Supply Market. Most electronic equipment includes a power supply
that converts and regulates the electrical power source into usable current
for the equipment. In addition to SMPS controllers and single chip SMPS
circuits, Micrel offers a full line of MOSFET drivers, references, LDOs and
Super LDOs.
Automotive Electronics Market. Micrel's LDO products, including the
line of monolithic SuperBeta PNP (tm) LDO regulators, have been designed in
for such automotive controller applications and safety features as
automotive airbags and antilock brake systems. Micrel is developing several
other products for the automotive electronic market. For each of the years
ended December 31, 1998, 1997, and 1996, the automotive electronics market
represented less than 2% of net revenues.
General Purpose Analog. During 1998, Micrel introduced a variety of
general purpose analog products including op-amps, comparators, a fan
controller and intelligent protected power switches. These products were
focused on low voltage and low current applications.
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Networking and high-speed Telecommunications Circuits Market. The
Company's Synergy subsidiary has directed a majority of its development,
sales and marketing efforts towards high-speed media interface for
SONET/synchronous digital hierarchy ("SDH") markets. The Synergy
Subsidiary's remaining telecommunications products address other markets,
including optical modules and wave division multiplex ("WDM"), dense wave
division multiplex ("DWDM"), clock recovery and clock distribution.
The Company's future success will depend in part upon the timely
completion, introduction, and market acceptance of new standard products. As
compared with the Company's custom and foundry products business, the
standard products business is characterized by generally shorter product
lifecycles, greater pricing pressure, larger competitors and more rapid
technological change. Generally, the standard products market is a rapidly
changing market in which the Company faces the risk that its product
offerings will quickly become obsolete. The success of new standard products
depends on a variety of factors, including product selection, successful and
timely completion of product development, achievement of acceptable
manufacturing yields by the Company's foundry and the Company's ability to
offer products at competitive prices.
Micrel's new products are generally incorporated into a customer's
products or systems at the design stage. The value of any design win largely
depends upon the commercial success of the customer's product and on the
extent to which the design of the customer's electronic system accommodates
incorporation of components manufactured by the Company's competitors. In
addition, products or systems may be subsequently redesigned so that they no
longer require the Company's products. No assurance can be given that the
Company will achieve design wins or that any design win will result in
future revenues. The failure of the Company to achieve design wins would
materially and adversely affect the Company's financial condition, results
of operations and cash flows.
Custom and Foundry Products
Micrel offers customers various combinations of design, process and
foundry services in order to provide them with the following alternatives:
Full Service Custom - Based on a customer's specification, Micrel
designs and then manufactures integrated circuits for the customer.
Custom and Semi-Custom - Based on a customer's high level or
partial circuit design, Micrel uses varying levels of its design and process
technologies to complete the design and then manufactures integrated
circuits for the customer.
R&D Foundry - Micrel modifies a process or develops a new process
for a customer. Using that process and mask sets provided by the customer,
Micrel manufactures fabricated wafers for the customer.
Foundry - Micrel duplicates a customer's process to manufacture
fabricated wafers designed by the customer.
Micrel's full service custom, custom and semi-custom products primarily
address consumer and military applications and use both analog and digital
technologies. The military applications include communications, transport
aircraft and cruise missile technology.
With respect to R&D foundry and other foundry products, Micrel provides
wafers to a variety of companies as well as to the military. The Company
believes that the custom and foundry business reduces somewhat the Company's
sensitivity to fluctuations in its standard products markets as the
Company's foundry customers are often in different markets that are not
affected by the same business cycles.
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Sales, Distribution and Marketing
The Company sells its products through a worldwide network of
independent sales representative firms and distributor firms and through a
direct sales staff. The Company currently utilizes 22 independent sales
representative firms in the United States and Canada. The Company currently
utilizes 4 national distributor firms. In the year ended December 31, 1998,
sales through North American distributor firms accounted for 10% of the
Company's net revenues.
The Company sells its products in Europe through a direct sales staff
in England as well as independent sales representative firms, independent
distributors and independent stocking representative/distributor firms.
Asian sales are handled through independent stocking
representative/distributor firms with Micrel sales offices in Korea and
Taiwan. The stocking representatives/distributor firms may buy and stock the
Company's products for resale or may act as the Company's agent in arranging
for direct sales from the Company to an OEM customer.
Sales to customers in North America, Asia and Europe accounted for 55%,
34% and 11%, respectively, of the Company's net revenues for the year ended
December 31, 1998 compared to 50%, 37% and 13%, respectively, of the
Company's net revenues for 1997 and 59%, 30% and 11%, respectively, of the
Company's net revenues for 1996. The Company's standard products are sold
throughout the world, while its custom and foundry products are primarily
sold to North American customers.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local
currencies, leading to a reduction in sales or profitability in those
foreign markets. The Company has not taken any protective measures against
exchange rate fluctuations, such as purchasing hedging instruments with
respect to such fluctuations.
Customers
For the year ended December 31, 1998, no customer accounted for 10% or
more of the Company's net revenues. For the year ended December 31, 1997,
one customer, Qualcomm, accounted for 11% of the Company's net revenues. For
the year ended December 31, 1996, one customer, Lexmark, accounted for 11%
of the Company's net revenues.
Design and Process Technology
Micrel's analog proprietary design technology depends on the skills of
its analog design team. The Company has experienced analog design engineers
who utilize an extensive macro library of analog and mixed-signal circuits
and computer simulation models.
Micrel can produce integrated circuits using a variety of manufacturing
processes, some of which are proprietary and provide enhanced product
features. Designers at companies that do not have in-house fabs or have a
limited selection of available processes often have to compromise design
methodology in order to match process parameters.
Micrel, through its Synergy division, can produce communication
transceivers, clock generators, distribution/clock recovery circuits as well
as high-speed logic and memory.
The Company utilizes the following analog process technologies:
Bipolar - Bipolar technology is one of the oldest technologies. It
is utilized where precision analog elements
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are required.
High Speed Bipolar - This is a variation of bipolar technology which
is specially optimized for very fast transistors and is used where high
speed switching or signal conditioning is required.
SuperBeta PNP (tm) - The Company's proprietary SuperBeta PNP (tm)
process technology allows power transistors to be driven with much lower
current as compared to conventional PNP Bipolar technology, which gives such
transistors a competitive advantage.
CMOS - CMOS technology is the technology most widely used in digital
applications. It has the advantages of low power consumption and high
packing density.
BiCMOS - Bipolar/CMOS ("BiCMOS") merges the Bipolar and CMOS
technologies and offers the benefits of both technologies. This process,
however, adds more expense to a product.
BCD - Bipolar/CMOS/DMOS ("BCD") merges three technologies,
Bipolar, CMOS and DMOS. DMOS is best suited for handling high current and is
used in the output section of the circuit. BCD combines the high speed,
ruggedness and power of DMOS and the benefits of BiCMOS.
ASSET - All Spacer Separated Element Transistor ("ASSET") technology
is the Company's proprietary high-speed Bipolar process developed by the
Company's Synergy division. This technology allows high speed with low
jitter and is ideally suited for high-speed mixed-signal designs.
Research and Development
The ability of the Company to compete will substantially depend on its
ability to define, design, develop and introduce on a timely basis new
products offering design or technology innovations. Research and development
in the analog integrated circuit industry is characterized primarily by
circuit design and product engineering that enables new functionality or
improved performance. Research and development in the high-speed
telecommunications circuit industry is characterized primarily by innovative
process technologies and novel design techniques. The Company's research
and development efforts are also directed at its process technologies and
focus on cost reductions to existing manufacturing processes and the
development of new process capabilities to manufacture new products and add
new features to existing products. With respect to more established
products, the Company's research and development efforts also include
product redesign, shrinkage of device size and the reduction of mask steps
in order to improve yields per wafer and reduce per device costs.
The Company's analog design engineers principally focus on developing
next generation standard products. The Company's new product development
strategy emphasizes a broad line of standard products that are based on
customer input and requests. The Company often develops new standard analog
products with the cooperation of customers in order to better ensure market
acceptance. The Company is currently developing products to expand its line
of USB and PCMCIA switches, SMPS regulators, LDOs and MOSFET drivers. The
Company's telecommunications design engineers principally focus on high
speed, low noise media driving and data recovery.
In 1998, 1997, and 1996 the Company spent approximately $18.9 million,
$14.0 million, and $8.6 million, respectively, on research and development.
The Company expects that it will continue to spend substantial funds on
research and development activities. The Company is currently developing,
and may in the future develop, certain types of standard products with which
the Company has only limited experience. Certain of these new standard
products will be targeted at emerging market segments in which the Company
has not previously participated. Additionally, there can be no assurance
that the Company will be able to identify new standard product opportunities
successfully and develop and bring to market such new products or that the
Company will be able to respond
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effectively to new technological changes or new product announcements by
others.
Patents and Intellectual Property Protection
The Company seeks patent protection for those inventions and
technologies for which such protection is suitable and is likely to provide
competitive advantage to the Company. The Company currently holds 40 United
States patents on semiconductor devices and methods, with various expiration
dates through 2017. The Company has applications for six United States
patents pending. The Company holds two issued foreign patents and has
applications for 33 foreign patents pending. The Company has also routinely
protected its numerous original mask sets under mask work laws. There can be
no assurance that any patent owned by the Company will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's pending
or future patent applications will issue or will be issued with the scope of
the claims sought by the Company. Notwithstanding the Company's active
pursuit of patent and mask work protection, the Company believes that its
future success will depend primarily upon the technical expertise, creative
skills and management abilities of its officers and key employees rather
than on patent and copyright ownership.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent that
the Company becomes involved in such intellectual property litigation (see
Item 3. entitled "Legal Proceedings"), it could result in substantial costs
and diversion of resources to the Company and could have a material adverse
effect on the Company's financial condition, results of operations, or cash
flows.
Supply of Materials and Purchased Components
Micrel currently purchases certain components from a limited group of
vendors. The packaging of the Company's products which is performed by, and
certain of the raw materials included in such products are obtained from, a
limited group of suppliers. Although the Company seeks to reduce its
dependence on its sole and limited source suppliers, disruption or
termination of any of these sources could occur and such disruptions could
have an adverse effect on the Company's financial condition, results of
operations, or cash flows. The Company has rarely experienced delays in
obtaining raw materials, which have adversely affected production.
Manufacturing
All of Micrel's wafers are manufactured at its facilities in San Jose
and Santa Clara, California. The San Jose facility includes a 57,000 square
foot office and manufacturing facility containing a 24,800 square foot clean
room facility, which provides production processes. The San Jose facility is
classified as a Class 10 facility, which means that the facility achieves a
clean room level of fewer than 10 foreign particles larger than 0.5 microns
in size in each cubic foot of space. In the third quarter of 1997, the
Company began processing certain products using six-inch wafers. In the
fourth quarter of 1998, approximately 61% of wafer fab outputs were produced
using six-inch wafers. The Company leases approximately 63,000 square feet
of additional adjacent space in San Jose that is used as a testing facility.
In November 1998, associated with the acquisition of Synergy, the Company
acquired a 70,000 square foot office and manufacturing facility in Santa
Clara, California containing a 9,000 square foot clean room facility, which
provides production processes. A portion of the Santa Clara facility is
classified as a Class 10 facility and the remainder is scheduled to be
upgraded to class 10 in 1999. The facility uses six-inch wafer technology.
The fabrication of integrated circuits is a highly complex and precise
process. Minute impurities, contaminants in the manufacturing environment,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, manufacturing equipment failure, wafer breakage or
other factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be nonfunctional. There can be no assurance
that the Company in
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general will be able to maintain acceptable manufacturing yields in the
future.
Generally, each die on the Company's wafers is electrically tested for
performance, and most of the wafers are subsequently sent to independent
assembly and final test contract facilities in Malaysia and other Asian
countries. At such facilities, the wafers are separated into individual
circuits and packaged. The Company's reliance on independent assemblers may
subject the Company to longer manufacturing cycle times. The Company from
time to time has experienced competition with respect to these contractors
from other manufacturers seeking assembly of circuits by independent
contractors. Although the Company currently believes that alternate foreign
assembly sources could be obtained without significant interruption, there
can be no assurance that such alternate sources could be obtained quickly.
The Company manufactures all of its products at two wafer fabrication
facilities. Given the nature of the Company's products, it would be
difficult to arrange for independent manufacturing facilities to supply such
products. Any prolonged inability to utilize the Company's manufacturing
facilities as a result of fire, natural disaster or otherwise, would have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Competition
The analog semiconductor industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the analog
market for standard products include product features, performance, price,
the timing of product introductions, the emergence of new computer
standards, quality and customer support. The Company believes that it
competes favorably in all these areas.
Because the standard products market for analog integrated circuits is
diverse and highly fragmented, the Company encounters different competitors
in its various market areas. The Company's principal competitors include
Linear Technology Corporation and National Semiconductor Corporation in one
or more of its product areas. Other competitors include Texas Instruments,
Motorola, Maxim Integrated Products, Inc. and certain Japanese
manufacturers. Each of these companies has substantially greater technical,
financial and marketing resources and greater name recognition than the
Company. Due to the increasing demands for analog circuits, the Company
expects intensified competition from existing analog circuit suppliers and
the entry of new competitors.
With respect to the custom and foundry products business, significant
competitive factors include product quality and reliability, established
relationships between customers and suppliers, timely delivery of products
and price. The Company believes that it competes favorably in all these
areas.
Backlog
At December 31, 1998, the Company's backlog was approximately $31.3
million, all of which is scheduled to be shipped during the first six months
of 1999. At December 31, 1997, the Company's backlog was approximately $39.9
million. The Company believes that the 22% decline in six-month backlog at
December 31, 1998 compared to the prior year resulted from the industry-wide
trend toward just-in-time and build-to-order programs being implemented at
most systems manufactures. Orders in backlog are subject to cancellation or
rescheduling by the customer, generally with a cancellation charge in the
case of custom and foundry products. The Company's backlog consists of
distributor and customer released orders required to be shipped within the
next six months. Shipments to United States, Canadian and certain other
international distributors are not recognized as revenue by the Company
until the product is sold from the distributor stock and through to the end-
users. Because of possible changes in product delivery schedules and
cancellation of product orders and because an increasing percentage of the
Company's sales are shipped in the same quarter that the orders are
received, the Company's backlog at any particular date is not
12
12
necessarily indicative of actual sales for any succeeding period.
Environmental Matters
Federal, state and local regulations impose various environmental
controls on the storage, handling, discharge and disposal of chemicals and
gases used in the Company's manufacturing process. The Company believes that
its activities conform to present environmental regulations. Increasing
public attention has, however, been focused on the environmental impact of
semiconductor operations. While the Company has not experienced any
materially adverse effects on its operations from environmental regulations,
there can be no assurance that changes in such regulations will not impose
the need for additional capital equipment or other requirements or restrict
the Company's ability to expand its operations. Any failure by the Company
to restrict the discharge of hazardous substances adequately could subject
the Company to future liabilities or could cause its manufacturing
operations to be suspended.
Employees
As of December 31, 1998, the Company had 675 full-time employees. The
Company's employees are not represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The
Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's main executive, administrative, manufacturing and
technical offices are located in a 57,000 square foot facility and an
adjacent 63,000 square foot facility in San Jose, California under lease
agreements that expire in May 2005. The Company fabricates the majority of
its wafers at this location in a 24,800 square foot clean room facility,
which provides all production processes. In addition to wafer fabrication,
the Company also the uses this location as a testing facility. Additional
administrative, manufacturing and technical wafer production facilities are
maintained at a 70,000 square foot facility in Santa Clara, California which
were acquired in connection with the Company's purchase of Synergy
Semiconductor. These facilities are under lease agreements that expire in
2006. The Company fabricates mixed-signal and digital integrated circuits
wafers at this location in a 9,000 square foot clean room facility, which
provides all production processes. In addition to wafer fabrication, the
Company also uses this location as a testing facility.
The Company believes that its existing and planned facilities are
adequate for its current manufacturing needs. The Company believes that if
it should need additional space, such space would be available at
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent that
the Company becomes involved in such intellectual property litigation, it
could result in substantial costs and diversion of resources to the Company
and could have a material adverse effect on the Company's financial
condition or results of operations.
On May 9, 1994, Linear Technology Corporation ("Linear"), 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
claims that two of the
13
13
Company's products infringe one of Linear's patents. The complaint in the
lawsuit seeks unspecified compensatory damages, treble damages and
attorneys' fees as well as preliminary and permanent injunctive relief
against infringement of the Linear patent at issue. The Company has asserted
defenses of invalidity and unenforceability of the Linear patent at issue,
as well as noninfringement of such patent. The Company believes that the
ultimate outcome of this action will not result in a material adverse effect
on the Company's financial condition or results of operation. However,
litigation is subject to inherent uncertainties, and no assurance can be
given that the Company will prevail in such litigation. Accordingly, the
pending litigation with Linear 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.
In another legal proceeding, The Lemelson Medical, Education & Research
Foundation, Limited Partnership (the "Lemelson Partnership") alleges to be
the owner of certain patents issued to Jerome Lemelson (now deceased).
During 1998, representatives of the Lemelson Partnership sent letters to the
Company referencing the Lemelson patents. On February 26, 1999, the
Lemelson Partnership filed a complaint for patent infringement, naming
eighty-eight defendants, including the Company. The suit is entitled
Lemelson Medical, Education & Research Foundation, Limited Partnership v.
Lucent Technologies Inc., et al., and was filed in the United States
District Court in Phoenix, Arizona. In this lawsuit, the Lemelson
Partnership claims that the Company infringes the Lemelson patents-in-suit.
The complaint in the lawsuit seeks judgment that the Lemelson patents-in-
suit are not invalid and have been willfully and deliberately infringed;
unspecified compensatory damages; treble damages and attorneys' fees; as
well as injunctive relief against further infringement of the Lemelson
patents at issue. The Company has not yet filed an answer, but expects to
defend against the charges raised in the suit. The Company believes that
the ultimate outcome of this action 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 such litigation.
Accordingly, the pending litigation with the Lemelson Partnership, as well
as potential future litigation with other companies, could result in
substantial costs and diversion of resources and could have a material
adverse effect on the Company's financial condition, results of operations
or cash flows.
Certain additional claims and lawsuits have also 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 operations or cash flows.
In the event of an adverse ruling in any intellectual property
litigation that now exists or might arise in the future, the Company might
be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology. There can be no assurance, however, that under such
circumstances, a license would be available under reasonable terms or at
all. In the event of a successful claim against the Company and the
Company's failure to develop or license substitute technology on
commercially reasonable terms, the Company's financial condition, results of
operations, or cash flows could be adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the fourth quarter of 1998, no matters were submitted to a vote of
security holders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market under
the Symbol "MCRL". The range of daily closing prices per share for the
Company's common stock from January 1, 1997 to December 31, 1998 was:
Year Ended December 31, 1998: High Low
Fourth quarter $ 55.00 $ 24.00
Third quarter $ 38.00 $ 26.50
Second quarter $ 40.19 $ 28.88
First quarter $ 39.88 $ 26.25
Year Ended December 31, 1997: High Low
Fourth quarter $ 46.31 $ 23.00
Third quarter $ 42.31 $ 23.81
Second quarter $ 26.63 $ 13.50
First quarter $ 20.00 $ 14.50
The reported last sale price of the Company's Common Stock on the
Nasdaq Stock Market on December 31, 1998 was $55.00. The approximate number
of holders of record of the shares of the Company's Common Stock was 89 as
of March 15, 1999. This number does not include shareholders whose shares
are held in trust by other entities. The actual number of shareholders is
greater than this number of holders of record. The Company estimates that
the number of beneficial shareholders of the shares of the Company's Common
Stock as of March 15, 1999 was approximately 2000.
The Company has authorized Common Stock, no par value and Preferred
Stock, no par value. The Company has not issued any Preferred Stock.
The Company has not paid any cash dividends on its capital stock. The
Company currently intends to retain its earnings to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's existing
credit facilities prohibit the payment of cash or stock dividends on the
Company's capital stock without the lender's prior written consent. See Item
7 - "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" and Note 5 of Notes to
Consolidated Financial Statements contained in Item 8.
During the year ended December 31, 1998, the Company did not sell any
equity securities that were not registered under the Securities Act of 1933,
as amended.
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ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(in thousands, except per share amounts)
Income Statement Data:
Net revenues............. $140,508 $104,158 $ 66,244 $ 53,035 $35,941
Cost of revenues......... 69,324 48,641 32,407 26,843 20,863
-------- -------- -------- -------- -------
Gross profit........... 71,184 55,517 33,837 26,192 15,078
-------- -------- -------- -------- -------
Operating expenses:
Research and development 18,931 13,986 8,613 6,469 3,792
Selling, general and
administrative........ 21,658 17,128 11,936 9,083 6,457
Purchased in-process
technology............ 3,737 - - - -
-------- -------- -------- -------- -------
Total operating
expenses.......... 44,326 31,114 20,549 15,552 10,249
-------- -------- -------- -------- -------
Income from operations... 26,858 24,403 13,288 10,640 4,829
Other income (expenses),
net..................... 1,092 971 730 682 (231)
-------- -------- -------- -------- -------
Income before income taxes 27,950 25,374 14,018 11,322 4,598
Provision for income taxes 10,774 8,627 4,766 3,963 1,656
-------- -------- -------- -------- -------
Net income............... $ 17,176 $ 16,747 $ 9,252 $ 7,359 $ 2,942
======== ======== ======== ======== =======
Net income per share:
Basic................... $ 0.87 $ 0.88 $ 0.51 $ 0.42 $ 0.22
======== ======== ======== ======== =======
Diluted................. $ 0.81 $ 0.80 $ 0.46 $ 0.37 $ 0.19
======== ======== ======== ======== =======
Shares used in computing per share amounts:
Basic................... 19,805 19,069 18,303 17,504 13,424
======== ======== ======== ======== =======
Diluted................. 21,203 20,822 20,048 19,950 15,532
======== ======== ======== ======== =======
December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(in thousands)
Balance Sheet Data:
Working capital.......... $ 50,868 $ 41,694 $ 32,978 $ 28,494 $23,313
Total assets............. 145,370 85,527 60,008 48,342 36,482
Long-term debt........... 14,007 552 1,287 2,523 1,561
Total shareholders' equity 95,711 70,568 47,431 36,033 26,634
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high
performance standard analog integrated circuits. These circuits are used in
a wide variety of electronics products, including those in the
communications, computer and industrial markets. In addition to standard
products, the Company manufactures custom analog and mixed-signal circuits
and provides wafer foundry services. With the Company's acquisition of
Synergy Semiconductor in November 1998, the Company broadened its standard
product offerings to include high-speed mixed-signal and digital integrated
circuits.
The Company derives a substantial portion of its net revenues from
standard products. While the Company continues to maintain a long-term
strategy that focuses on standard products sales, the Company has recently
increased its emphasis on custom and foundry product sales as an interim
response to the Asian financial situation. For 1998, 1997, and 1996 the
Company's standard products sales accounted for 71%, 76%, and 66%,
respectively, of the Company's net revenues. The Company believes that a
substantial portion of its net revenues in the future will depend upon
standard products sales, although such sales as a proportion of net revenues
may vary as the Company adjusts product output levels to correspond with
varying economic conditions and demand levels in the markets which it
serves. The standard products business is characterized by short-term orders
and shipment schedules, and customer orders typically can be canceled or
rescheduled without significant penalty to the customer. Since most standard
products backlog is cancelable without significant penalty, the Company
typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can
fluctuate substantially. In addition, the Company is limited in its ability
to reduce costs quickly in response to any revenue shortfalls.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products
sold, competitive pricing pressures and the Company's ability to meet
increasing demand. As a result of the foregoing or other factors, there can
be no assurance that the Company will not experience material fluctuations
in future operating results on a quarterly or annual basis, which would
materially and adversely affect the Company's business, financial condition
or results of operations.
Results of Operations
The following table sets forth certain operating data as a percentage
of total net revenues for the periods indicated.
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
Net revenues.............................. 100.0% 100.0% 100.0%
Cost of revenues.......................... 49.3 46.7 48.9
----- ----- -----
Gross profit............................ 50.7 53.3 51.1
----- ----- -----
Operating expenses:
Research and development................ 13.5 13.4 13.0
Selling, general and administrative..... 15.4 16.5 18.0
Purchased in-process technology......... 2.6 - -
----- ----- -----
Total operating expenses............ 31.5 29.9 31.0
----- ----- -----
Income from operations.................... 19.1 23.4 20.1
Other income, net......................... 0.8 1.0 1.1
----- ----- -----
Income before income taxes................ 19.9 24.4 21.2
Provision for income taxes................ 7.7 8.3 7.2
----- ----- -----
Net income................................ 12.2% 16.1% 14.0%
===== ===== =====
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Revenues. Net revenues increased approximately 35% to $140.5
million for the year ended December 31, 1998 from $104.2 million in 1997 due
to higher standard product revenues and higher custom and foundry revenues.
Standard product revenues increased to $99.9 million, which represented 71%
of net revenues for the year ended December 31, 1998, compared to $79.2
million and 76% of net revenues for 1997. Sales of standard products were
led by the increased sales of low dropout regulators, computer peripheral IC
components, drivers, and switching regulators. Such products were sold to
manufacturers of portable computing, computing peripherals,
telecommunications and industrial products. During 1998 the Company
increased its emphasis on custom and foundry product sales as an interim
response to the Asian financial situation. Custom and foundry revenues
increased to $40.6 million, which represented 29% of net revenues for the
year ended December 31, 1998, compared to $24.9 million and 24% of net
revenues for 1997.
The Company believes that pricing pressures continue to be experienced
by the general technology sector and by companies in the analog segment of
the semiconductor industry. During 1998, standard product customer demand
continued to be short-term focused due to shorter than historical order lead
times. These factors affect the Company's ability to predict future sales
growth, profitability and forward visibility. The Company's ability to
predict demand in future quarters also continues to be affected by the trend
of its customers to place orders close to desired shipment dates and to
reduce their long-term purchasing commitments, which is the result of less
predictable demand for such customers' products and increased product
availability in the semiconductor industry. The Company has sought to
address these reduced order lead times by implementing faster production
cycles and increasing inventory levels as a percent of revenues.
Net revenues increased approximately 57% to $104.2 million for the year
ended December 31, 1997 from $66.2 million in 1996 principally due to higher
standard product revenues, which grew to 76% of net revenues from 66% in
1996. Sales of standard products were led by the increased sales of low
dropout regulators, computer peripheral IC components, MOS drivers, and
switching regulators. Such products were sold to manufacturers of portable
computing, computing peripherals, telecommunications and industrial
products.
International sales represented 45%, 50%, and 41% of net revenues for
the years ended December 31, 1998, 1997 and 1996, respectively. The
decrease during 1998 in international sales as a percentage of net revenues
resulted from the change in product mix emphasizing custom and foundry
product sales as an interim response to the Asian financial situation.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local
currencies, leading to a reduction in sales or profitability in those
foreign markets. The Company has not taken any protective measures against
exchange rate fluctuations, such as purchasing hedging instruments with
respect to such fluctuations.
The Company defers recognition of revenue derived from sales to
domestic, Canadian and certain other international distributors until such
distributors resell the Company's products to their customers. Generally,
sales to international distributors are recognized upon shipment. The
Company estimates returns and provides an allowance as revenue is
recognized.
Gross Profit. Gross margin is affected by the volume of product sales,
product mix, manufacturing utilization, product yields and average selling
prices. The Company's gross margin decreased to 51% for the year ended
December 31, 1998 from 53% for the year ended December 31, 1997. The
decrease in gross margin resulted primarily from the write-off, in the
fourth quarter, of approximately $7.0 million in excess inventory in
response to a reduced sales forecast for Synergy products and a decline in
average selling prices, which were offset in part, by an
18
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
increase in manufacturing efficiency resulting from greater capacity
utilization.
The Company's gross margin increased to 53% for the year ended December
31, 1997 from 51% for the year ended December 31, 1996. The improvement in
gross margin reflects an increase in manufacturing efficiency resulting from
greater capacity utilization.
Manufacturing yields, which affect gross margin, may from time to time
decline because the fabrication of integrated circuits is a highly complex
and precise process. Factors such as minute impurities and difficulties in
the fabrication process can cause a substantial percentage of wafers to be
rejected or numerous die on each wafer to be nonfunctional. There can be no
assurance that the Company in general will be able to maintain acceptable
manufacturing yields in the future.
Research and Development Expenses. Research and development expenses
include costs associated with the development of new processes and the
definition, design and development of standard products. The Company also
expenses prototype wafers and new production mask sets related to new
products as research and development costs until products based on new
designs are fully characterized by the Company and are demonstrated to
support published data sheets and satisfy reliability tests.
The Company's research and development expenses increased
approximately $4.9 million or 35% to $18.9 million for the year ended
December 31, 1998 from $14.0 million in 1997. The increase in research and
development expenses for the year ended December 31, 1998 was primarily due
to increased costs associated with the Company's conversion to six-inch
wafer fabrication, and increased expenses due to engineering staffing,
design services, and prototype wafers to support the development of new
standard products. The Company believes that the development and
introduction of new standard products is critical to its future success and
expects that research and development expenses will increase on a dollar
basis in the future.
The Company's research and development expenses increased by
approximately $5.4 million or 62% to $14.0 million for the year ended
December 31, 1997 from $8.6 million in 1996. The increase in research and
development expenses for the year ended December 31, 1997 was primarily due
to increased costs associated with the Company's conversion to six-inch
wafer fabrication, and increased expenses due to engineering staffing,
design services, and prototype wafers to support the development of new
standard products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased on a dollar basis to approximately $21.7
million for the year ended December 31, 1998 from $17.1 million for 1997
while decreasing on a percentage basis to 15% in 1998 from 16% of net
revenues in 1997. The dollar increase was due, in part, to increased wages
and salaries, higher commissions, advertising and other sales and
administrative expenses associated with the growth of the Company's
revenues. The Company expects that selling, general and administrative
expenses will increase on a dollar basis in the future.
Selling, general and administrative expenses increased on a dollar
basis to approximately $17.1 million for the year ended December 31, 1997
from $11.9 million for 1996 while decreasing on a percentage basis to 16% in
1997 from 18% of net revenues in 1996. The dollar increase was due, in part,
to higher commissions, advertising and other sales and administrative
expenses associated with the growth of the Company's standard products
revenues.
Purchased In-Process Technology. On November 9, 1998, the Company
acquired all the outstanding capital stock of Synergy Semiconductor for a
cash purchase price of $9.9 million, transaction fees of $1.3 million,
direct merger costs of approximately $300,000, and the assumption of
liabilities of approximately $20.1 million. The transaction was accounted
for as a purchase. Approximately $12.9 million of the total purchase cost
was allocated to
19
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
intangible assets. Of that amount, approximately $3.7 million was allocated
to purchased in-process technology, which has not reached technological
feasibility and has no alternative future use, for which the Company
recorded a one-time charge in the year ended December 31, 1998. The amount
of the one-time charge was derived from a valuation based on the Securities
and Exchange Commission guidance issued in a September 9, 1998 letter to the
American Institute of Certified Public Accountants.
The purchased in-process technology related to approximately 50
individual development projects that had not reached technological
feasibility and, therefore, the successful completion of such projects was
uncertain. Those development projects correspond to three existing product
lines: supercom, clockworks and logic. At the time of the acquisition,
further development remained on these projects and the estimated costs to
complete were approximately $1.0 million. Management has not determined
whether any product resulting from these projects will become available for
sale in fiscal 1999 and, therefore, no assurances can be given as to when
revenues from these projects will commence. While the Company perceives a
future benefit related to completion of these projects, it believes that the
failure to reach successful completion would not have a material adverse
effect on the Company's business, financial condition, results of operations
or cash flows.
Significant assumptions used to determine the value of in-process
technology included: (i) forecast of net cash flows that were expected to
result from the development effort; (ii) an estimate of percentage complete
for each project which ranged from 20% to 90% with an average for all
projects of 80%; (iii) a discount rate of approximately 30%.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities offset by interest
incurred on line of credit borrowings and term notes. Other income, net
increased by approximately $121,000 to $1.1 million in 1998 from $971,000 in
1997. Such increase reflected a $419,000 increase in interest income due to
an increase in average cash and investment balances, partially offset by an
increase in interest expense by $255,000 due to an increase in the average
amount of notes payable. The Company expects to continue to utilize term
financing as appropriate to finance its capital equipment needs.
Other income, net increased by approximately $241,000 to $971,000 in
1997 from $730,000 in 1996. Such increase reflected a $222,000 increase in
interest income due to an increase in average cash and investment balances
and decrease in interest expense by $120,000 due to a reduction in the
average amount of notes payable.
Provision for Income Taxes. For the year ended December 31, 1998 the
provision for taxes on income was $10.8 million, which represents 34% of
income before tax excluding the $3.7 million one-time charge for purchased
in-process technology, which is a non-deductible charge for federal income
tax purposes. For the year ended December 31, 1997 the provision for taxes
on income was $8.6 million or 34%. The 1998 income tax provision differs
from taxes computed at the federal statutory rate due to the effect of state
taxes and the non-deductible charge for purchased in-process technology
offset by the benefit from the foreign sales corporation, federal and state
research and development credits, and state manufacturing credits.
For the year ended December 31, 1997 the provision for taxes on income
was $8.6 million or 34% of income before provision for income taxes compared
to $4.8 million or 34% for 1996. The 1997 income tax provision differs from
taxes computed at the federal statutory rate due to the effect of state
taxes offset by the benefit from the foreign sales corporation, federal and
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
20
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
borrowings and sales of common stock. Principal sources of liquidity at
December 31, 1998 consisted of cash and short-term investments of $28.4
million and borrowing facilities consisting of (i) $5.0 million under a
revolving line of credit, of which all was unused and available, and (ii)
$20.0 million under a non-revolving line of credit, under which there was
$7.8 million outstanding at December 31, 1998. The two lines of credit are
covered by the same loan and security agreement. This agreement expires on
September 30, 1999, subject to automatic renewal on a month to month basis
thereafter unless terminated by either party upon 30 days notice. Borrowings
are collateralized by substantially all of the Company's assets. The
agreement contains certain restrictive covenants that include a restriction
on the declaration and payment of dividends without the lender's consent.
The Company was in compliance with all such covenants at December 31, 1998.
The non-revolving bank line of credit that is covered by the loan
agreement described above, can be used to fund purchases of capital
equipment whereby the Company may borrow up to 100% of the cost. Amounts
borrowed under this credit line are automatically converted to four-year
installment notes. All equipment notes are collateralized by the equipment
purchased, and bear interest rates of, at the Company's election, a fixed
rate based on the four-year U.S. Treasury Bill rate (4.5% at December 31,
1998) plus 3.0% or an annual adjustable rate based on the one-year U.S.
Treasury Bill rate (4.5% at December 31, 1998) plus 3.0%. During 1998, the
Company borrowed $8.0 million under the non-revolving line of credit, which
was converted to a four-year installment note at a fixed rate of 7.5%.
Under a previous non-revolving bank line of credit, the Company
borrowed $4.0 million in 1998, which was converted to four-year installment
notes bearing interest at the bank's prime rate (7.75% at December 31,
1998).
In November 1998, in connection with the acquisition of Synergy
Semiconductor, the Company assumed $3.1 million in short-term bank debt and
$10.4 million in long-term installment notes. Shortly thereafter, in 1998
all of the assumed short-term debt was repaid and $2.8 million of the long-
term installment notes was repaid. The remaining unpaid long-term debt
consists of four-year installment notes, collateralized by equipment
purchased by Synergy prior to the acquisition, and bears fixed interest
rates ranging from 8.9% to 9.4%.
The Company's working capital increased by $9.2 million to $50.9
million as of December 31, 1998 from $41.7 million as of December 31, 1997.
The increase was primarily attributable to increases in cash, cash
equivalents and short-term investments of $8.3 million, deferred income
taxes of $7.2 million, accounts receivable of $7.1 million and increases in
inventories of $5.4 million which was partially offset by increases in
accounts payable of $5.1 million, current portion of long-term debt of $4.8
million, income taxes payable of $3.2 million, deferred income of $2.5
million, other accrued liabilities of $1.9 million and accrued compensation
of $1.2 million. The Company's short-term investments were principally
invested in investment grade, interest-bearing securities.
The Company's cash flows from operating activities increased $17.3
million to $40.6 million for the year ended December 31, 1998 from $23.3
million for the year ended December 31, 1997. The increase was primarily
attributable to a $7.3 million increase in net income after deducting non-
cash activities, to $29.5 million for the year ended December 31, 1998 from
$22.2 million in the prior year and to a $4.5 million decrease in
inventories, $3.8 million tax benefit from employee stock transactions
combined with $3.2 million increase in income taxes payable, and a $2.9
million increase in accounts payable, which were partially offset by a $4.9
million increase in accounts receivable resulting from higher sales.
The Company's cash flows from operating activities increased $11.0
million to $23.3 million for the year ended December 31, 1997 from $12.3
million for the year ended December 31, 1996. The increase was primarily
attributable to a $9.6 million increase in net income after deducting non-
cash activities, to $22.2 million for the year ended December 31, 1997 from
$12.6 million for the comparable prior year period and to a $3.3 million
decrease in inventory combined with a $3.6 million tax benefit from employee
stock transactions, which were partially offset by a $8.2 million increase
in accounts receivable resulting from higher sales.
21
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's investing activities in the year ended December 31, 1998
used cash of $38.6 million compared to $25.6 million for 1997. The increase
in cash used by investing activities reflects the acquisition cost of
Synergy Semiconductor, net of cash acquired, of $10.3 million and an
incremental $9.4 million increase in equipment purchases and leasehold
improvements primarily relating to the six-inch wafer fabrication operation
for the year ended December 31, 1998 offset in part by $6.8 million in net
additional maturities of short-term investments.
Financing activities for the year ended December 31, 1998 provided cash
of approximately $8.8 million as compared to $1.7 million of cash provided
in financing activities for 1997. This increase was the result of $12.0
million in additional long-term borrowings and an increase of $1.3 million
in proceeds from the issuance of common stock through the exercise of stock
options in 1998 as compared to 1997, offset in part by a $6.2 million
increase in repayments of short-term and long-term debt during the same
periods.
The Company currently intends to spend up to approximately $34.0
million during the next twelve months primarily for the purchase of
additional wafer and test manufacturing equipment and leasehold
improvements. The Company expects that its cash requirements through 1999
will be met by its cash from operations, existing cash balances and short-
term investments, and its existing credit facilities.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-K that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectations, hopes, intentions or strategies regarding the future. Forward-
looking statements include: statements regarding future products or product
development; statements regarding future research and development spending
and the Company's product development strategy; statements regarding the
levels of international sales; statements regarding future expenditures;
statements regarding Year 2000 compliance costs; and statements regarding
current or future acquisitions. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below.
The Company has generated a substantial portion of its net revenues
from export sales (see Note 12 of Notes to Consolidated Financial Statements
contained in Item 8). The Company believes that a substantial portion of its
future net revenues will depend on export sales to customers in
international markets including Asia. International markets are subject to a
variety of risks, including changes in policy by foreign governments, social
conditions such as civil unrest, and economic conditions including high
levels of inflation, fluctuation in the value of foreign currencies and
currency exchange rates and trade restrictions or prohibitions. In addition,
the Company sells to domestic customers that do business worldwide and
cannot predict how the businesses of these customers may be affected by
economic conditions in Asia or elsewhere. Such factors could adversely
affect the Company's future revenues, financial condition or results of
operations.
Historically, the Company has not experienced significant individual
product gross margin differences on export sales compared to domestic sales.
However, as a result of the foregoing international market risks or other
factors, there can be no assurance that the Company will not experience
material gross margin fluctuations in the future, which could materially and
adversely affect the Company's business, financial condition or results of
operations.
22
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In November 1998, the Company acquired Synergy Semiconductor, which is
its first major acquisition. It is not certain that the Company will be able
to successfully integrate into its operations Synergy's business, products,
technology or personnel. The Company's failure to do so could have a
material adverse effect on its financial condition or results of operations.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products
sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to meet increasing
demand, the Company's ability to introduce new products on a timely basis,
the timing of new product announcements and introductions by the Company or
its competitors, the timing and extent of research and development expenses,
fluctuations in manufacturing yields, cyclical semiconductor industry
conditions, the Company's access to advanced process technologies and the
timing and extent of process development costs. As a result of the foregoing
or other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly
or annual basis, which would materially and adversely affect the Company's
business, financial condition or results of operations.
The Company is transitioning its business to rely more heavily on the
sale of standard products. The Company believes that a substantial portion
of its net revenues in the future will continue to depend upon standard
products sales. As compared with the custom and foundry products business,
the standard products business is characterized by shorter product
lifecycles, greater pricing pressures, larger competitors and more rapid
technological change. Generally, the standard products market is a rapidly
changing market in which the Company faces the risk that, as the market
changes, its product offerings will become obsolete. The Company competes in
the standard products market with established companies, most of which have
substantially greater financial, engineering, manufacturing and marketing
resources than the Company. No assurance can be given that the Company will
be able to compete successfully in the standard products market or that it
will be able to successfully introduce new standard products in the future.
The failure of the Company to compete successfully in the standard products
business would materially and adversely affect the Company's financial
condition, results of operations, or cash flows.
The semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the analog market
include product features, performance, price, timing of product
introductions, emergence of new computer standards, quality and customer
support. Because the standard products market for integrated circuits is
diverse and highly fragmented, the Company encounters different competitors
in its various market areas. Most of these competitors have substantially
greater technical, financial and marketing resources and greater name
recognition than the Company. Due to the increasing demands for integrated
circuits, the Company expects intensified competition from existing
integrated circuit suppliers and the entry of new competition. Increased
competition could adversely affect the Company's financial condition or
results of operations. There can be no assurance that the Company will be
able to compete successfully in either the standard products or custom and
foundry products business in the future or that competitive pressures will
not adversely affect the Company's financial condition, results of
operations, or cash flows.
The fabrication of integrated circuits is a highly complex and precise
process. Minute impurities, contaminants in the manufacturing environment,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, manufacturing equipment failures, wafer breakage or
other factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be nonfunctional. Moreover, there can be no
assurance that the Company will be able to maintain acceptable manufacturing
yields in the future.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights (see Note 11 of
Notes to Consolidated Financial Statements contained in Item 8). There can
be no
23
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
assurance that these existing claims or any other assertions (or claims for
indemnity resulting from infringement claims) will not materially adversely
affect the Company's business, financial condition, results of operations,
or cash flows.
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing
technology innovation. There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products. There can be no assurance that any patent owned by the Company
will not be invalidated, circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to the Company or that any of
the Company's pending or future patent applications will be issued with the
scope of the claims sought by the Company, if at all. Furthermore, there can
be no assurance that others will not develop technologies that are similar
or superior to the Company's technology, duplicate the Company's technology
or design around the patents owned by the Company.
Readiness Disclosure for Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 problem is pervasive and complex, as virtually every computer
operation will be affected by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company has initiated a Year 2000 project designed to
identify and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers and customers that are
not Year 2000 compliant, and to develop, implement and test remediation and
contingency plans to mitigate these risks. The Company is replacing or
upgrading systems, equipment and facilities that are known to be Year 2000
non-compliant. For the Year 2000 non-compliance issues identified to date,
management believes the cost of upgrade or remediation will not exceed
$100,000, which is not expected to be material to the Company's operating
results. If implementation of replacement systems is delayed, or if
significant new non-compliance issues are identified, the Company's
financial condition, results of operations, or cash flows could be
materially adversely affected.
Information Systems. A review of the Company's information systems has
been completed and the Company has initiated the work necessary for the
existing systems to become Year 2000 compliant. Testing of all information
systems will be conducted throughout 1999. The Company is also actively
reviewing its hardware and systems infrastructure, such as networks, in
order to ensure that they are Year 2000 compliant. Based on the current
status of the assessments and remediation plans made to date, and as the
costs incurred to date have not been material, the Company does not expect
total Year 2000 related costs pertaining to its information systems and
hardware and systems infrastructure to be material.
Products. The Company has assessed the capabilities of its products
sold to customers and has not identified any problems related to Year 2000
compliance. The Company believes its current products are Year 2000
compliant; however, since all customer situations cannot be anticipated,
particularly those involving third party products, the Company may see an
increase in warranty and other claims as a result of the Year 2000
transition. In addition, litigation against the Company regarding Year 2000
compliance issues may occur in the future. For these reasons, the impact of
customer claims could have a material adverse impact on the Company's
financial condition, results of operations , or cash flows.
Operations and Infrastructure. Machinery and equipment and other items
used in the operations and facilities of the Company have been inventoried
and are currently being assessed for Year 2000 compliance. The assessment to
date
24
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
has not uncovered any material issues.
Suppliers. The Company is in the process of contacting its critical
suppliers to determine whether their operations, products and services are
Year 2000 compliant. Where practicable, The Company will attempt to mitigate
its risks with respect to the failure of suppliers to be Year 2000
compliant. In the event that suppliers are not Year 2000 compliant, the
Company will seek alternative sources of supplies. However, such failures
remain a possibility and could have a material impact on the Company's
financial condition, results of operations, or cash flows.
Customers. The Company is actively responding to all customer requests
for compliance, surveys and other general information related to its Year
2000 programs. The Company will also request assurance from its key
customers that they, and their products which incorporate The Company's
products, are Year 2000 compliant.
General. The Company does not currently expect its costs associated
with the Year 2000 problem to be material, and expects to be able to fund
these costs through operating cash flows. However, the Company has not yet
completed its assessments, developed remediation plans for all problems,
developed contingency plans, or completely implemented or tested any of its
remediation plans. The risks associated with the Year 2000 problem can be
difficult to identify and to address, and could result in material adverse
consequences to the Company. Even if the Company, in a timely manner,
completes all of its assessments, identifies and tests remediation plans
believed to be adequate, and develops contingency plans believed to be
adequate, some problems may not be identified or corrected in time to
prevent material adverse consequences to the Company.
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test
remediation or contingency plans in a timely manner, or may find that the
costs of these activities exceed current expectations and become material.
In many cases, the Company is relying on assurances from suppliers and
customers that new and upgraded information systems and other products will
be Year 2000 compliant. The Company plans to test certain third-party
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed by the supplier in a timely
and satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the
Company cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will
not suffer business interruptions, either because of its own Year 2000
problems or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments to the
Company. If the Company fails to satisfactorily resolve Year 2000 issues
related to its products in a timely manner, it could be exposed to liability
to third parties.
The Company has not developed a "worst case" scenario with respect to
Year 2000 issues, but instead has focused its resources on identifying
material, remediable problems and reducing uncertainties generally, through
the Year 2000 project described above.
If the Company or the third parties with which it has relationships
were to cease or not successfully complete its or their Year 2000
remediation efforts, the Company would encounter disruptions to its business
that could have a material adverse effect on its business, financial
position and results of operations. The Company could be materially and
adversely impacted by widespread economic or financial market disruption or
by Year 2000 computer system failures at third parties with which it has
relationships.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1998, the Company held $15.0 million in short-term
investments consisting of corporate debt securities (commercial paper) and
repurchase agreements with a financial institution with maturities of less
than one
25
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
year. These available-for-sale securities are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels
at December 31, 1998, the fair value of the short-term investments would
decline by an immaterial amount. The Company generally expects to have the
ability to hold its fixed income investments until maturity and therefore
would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates
on short-term investments.
At December 31, 1998, the Company had fixed rate long-term debt of
approximately $15.4 million. A hypothetical 10 percent decrease in interest
rates would not have a material impact on the fair market value of this
debt. The Company does not hedge any interest rate exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth on pages 32 through
51, which follow Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is included in
the Company's Proxy Statement to be filed in connection with the Company's
1999 annual meeting of shareholders under the caption "Election of
Directors" and is incorporated herein by reference. The information
concerning the executive officers of the Company required by this item is as
follows:
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of December
31, 1998, are as follows:
Name Age Position
--------------- ---- ------------------------------------------
Raymond D. Zinn 61 President, Chief Executive Officer
Robert Whelton 59 Executive Vice President of Operations
Warren H. Muller 59 Vice President, Test Operations, Secretary
Robert J. Barker 52 Vice President, Finance and Chief Financial Officer
Barry Small 50 Vice President, Wafer Fab
George T. Anderl 59 Vice President, Sales and Marketing
Lawrence R. Sample 52 Vice President, Design
Mr. Zinn is a co-founder of the Company and has been its President,
Chief Executive Officer and Chairman of its Board of Directors since its
incorporation in 1978. Prior to co-founding Micrel, Mr. Zinn held various
management and manufacturing executive positions in the semiconductor
industry at Electromask TRE, Electronic Arrays, Inc., Teledyne, Inc.,
Fairchild Semiconductor Corporation and Nortek, Inc. He holds a B.S. in
Industrial Management from Brigham Young University and a M.S. in Business
Administration from San Jose State University.
Mr. Whelton joined the Company as Executive Vice President of
Operations in January 1998. From 1996 to 1997, Mr. Whelton was employed by
Micro Linear Corp., where he held the position of Executive Vice President
in charge of operations, design, sales and marketing. Prior to Micro Linear,
Mr. Whelton was employed by National Semiconductor Corp., from 1985 to 1996
where he held the position of Vice President of the Analog Division. Mr.
Whelton holds a B.S.E.E. from U.C. Berkeley, and a M.S.E.E. from the
University of Santa Clara.
Mr. Muller is a co-founder of the Company and has served as a member of
the Company's Board of Directors and as its Vice President of Test
Operations since its incorporation in 1978. He was previously employed in
various positions in semiconductor processing and testing at Electronic
Arrays, Inc. and General Instruments Corporation. Mr. Muller holds a
B.S.E.E. from Clarkson College.
27
27
Mr. Barker joined the Company as Vice President, Finance and Chief
Financial Officer in April 1994. From April 1984 until he joined Micrel, Mr.
Barker was employed by Waferscale Integration, Inc., where his last position
was Vice President of Finance and Secretary. Prior to 1984, Mr. Barker held
various accounting and financial positions at Monolithic Memories and
Lockheed Missiles and Space Co. He holds a B.S. in Electrical Engineering
and a M.B.A. from University of California at Los Angeles.
Mr. Small joined the Company in April 1998 as its Vice President, Wafer
Fab. Prior to joining the Company, Mr. Small was employed by IC Works from
1996 to 1998, where he was Vice President of Operations. From 1971 to 1995,
Mr. Small was employed by National Semiconductor Corp. where he held the
position of Vice President of Linear Standard Products. Mr. Small holds a
B.A. in Physics from U.C. Berkeley and a M.A.in Physics and a M.B.A. from
University of California at Los Angeles.
Mr. Anderl joined the Company in June 1996 as its Vice President, Sales
and Marketing. From 1991 until he joined Micrel, Mr. Anderl was employed by
Quality Semiconductor, where his last position was Vice President, Worldwide
Sales. His prior employers include Austek Microsystems, Advanced Micro
Devices, and Monolithic Memories. Mr. Anderl holds a B.S.E.E. degree from
Purdue University and a M.S.E.E. from Santa Clara University.
Mr. Sample joined the Company in September 1989 and served as its Vice
President, Design until his resignation in January 1999. Prior to joining
Micrel, Mr. Sample was employed by Motorola and National Semiconductor
Corporation in various engineering positions of analog semiconductor
products. Mr. Sample received his B.S.E.E. degree from the University of
Illinois and his M.S.E.E. from Arizona State University. Mr. Sample resigned
his position with the Company in January 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" and "Stock Option Grants and Exercise" in the
Company's Proxy Statement to be filed in connection with the Company's 1999
annual meeting of shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be filed in connection with the Company's 1999
annual meeting of shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Certain Transactions" in the Company's Proxy Statement to be filed in
connection with the Company's 1999 annual meeting of shareholders and is
incorporated herein by reference.
28
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following financial statements of
--------------------
the Company and the Report of Deloitte & Touche LLP, Independent
Auditors, are included in this Report on the pages indicated:
Page
----
Independent Auditors' Report................................ 32
Consolidated Balance Sheets as of December 31, 1998 and 1997 33
Consolidated Income Statements for the Years ended
December 31, 1998, 1997 and 1996........................... 34
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the Years ended December 31,
1998, 1997 and 1996........................................ 35
Consolidated Statements of Cash Flows for the Years
ended December 31, 1998, 1997 and 1996..................... 36
Notes to Consolidated Financial Statements.................. 37
2. Financial Statement Schedules. The following financial statement
-----------------------------
schedule of the Company for the years ended December 31, 1998, 1997
and 1996 is filed as part of this report on Form 10-K and should be
read in conjunction with the financial statements.
Schedule Title Page
-------- ----- ----
Independent Auditors' Report................. 50
II Valuation and Qualifying Accounts............ 51
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set
forth therein is included in the Consolidated Financial Statements
or notes thereto.
3. Exhibits. See Exhibit Index on page 30 hereof for a list of
--------
exhibits filed or incorporated by reference as a part of this
report.
(b) Reports on Form 8-K. The following reports on Form 8-K was filed
-------------------
during the year for which this report is filed:
1. On November 9, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 2 Micrel, Inc. had purchased 100% of the
capital stock of Synergy Semiconductor Corporation.
2. On January 25, 1999, the Company filed an Amended Current Report on
Form 8-K/A, amending the Current Report filed on November 9, 1998.
The Amended Report provides financial statements of Synergy
Semiconductor Corporation and pro forma financial information.
29
29
(c) Exhibits Pursuant to Item 601 of Regulation S-K
-----------------------------------------------
Exhibit
Number Description
- ------ -----------
2.1 Merger Agreement dated October 21, 1998, by and between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.2 Letter agreement dated November 9, 1998, between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.3 Escrow Agreement dated November 9, 1998, between Micrel,
Incorporated, John F. Stockton, as representative of the former
Synergy shareholders, and Bank of the West. (1)
3.1 Amended and Restated Articles of Incorporation of the Registrant.
(2)
3.2 Certificate of Amendment of Articles of Incorporation of the
Registrant. (3)
3.3 Amended and Restated Bylaws of the Registrant. (3)
4.1 Certificate for Shares of Registrant's Common Stock. (4)
10.1 Indemnification Agreement between the Registrant and each of its
officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (2) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (2) *
10.4 1994 Stock Purchase Plan. (5)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and GOCO
Realty Fund I, as amended August 6, 1992 and February 5, 1993. (2)
10.7 Amended and Restated Loan and Security Agreement dated November 29,
1990 between the Registrant and Bank of the West, as amended
February 11, 1991, August 6, 1991, October 31, 1991, June 24, 1992,
September 24, 1992, August 16, 1993, April 29, 1994, July 2, 1994,
August 23, 1994, September 30, 1994, October 24, 1994. (2)
10.8 Form of Domestic Distribution Agreement. (3)
10.9 Form of International Distributor Agreement. (3)
10.10 Second Amendment dated February 20, 1995 between the Registrant and
TR Brell Cal Corporation to Lease Agreement dated June 24, 1992
between the Registrant and GOCO Realty Fund I, as amended August 6,
1992 and February 5, 1993. (4)
10.11 Amended and Restated Loan and Security Agreement dated November 29,
1990 between the Registrant and Bank of the West, as amended March
31, 1995. (5)
10.12 Amended and Restated Loan and Security Agreement dated November 29,
1990 between the Registrant and Bank of the West, as amended
September 30, 1996. (6)
10.13 Amended and Restated 1994 Employee Stock Purchase Plan, as amended
January 1, 1996. (7)
10.14 Commercial Lease between Harris Corporation and Synergy Semiconductor
Corporation dated February 29, 1996.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
27.0 Financial Data Schedule.
* Management contract or compensatory plan or agreement.
(1) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 9, 1998 filed with the Commission on
November 23, 1998 in which this exhibit bears the same number, unless
otherwise indicated.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 ("Registration Statement"), File No. 33-85694,
in which this exhibit bears the same number, unless otherwise
indicated.
30
30
(3) Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless
otherwise indicated.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, in which this exhibit bears the
same number, unless otherwise indicated.
(5) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 1995.
(6) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30,
1996.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, in which this exhibit bears the
number 10.14.
(d) Financial Statement Schedules. The financial statement schedule
-----------------------------
required by this Item is listed under Item 14(a)(2) above.
31
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the accompanying consolidated balance sheets of Micrel,
Incorporated and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and of cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 26, 1999 (February 26, 1999 as to paragraph 2 of Note 11)
32
32
MICREL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands, except share amounts)
- ----------------------------------------------------------------------------
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,415 $ 2,581
Short-term investments 15,029 17,565
Accounts receivable, less allowances: 1998,
$1,613; 1997, $2,015 24,079 16,938
Inventories 16,069 10,664
Prepaid expenses and other 693 404
Deferred income taxes 11,967 4,772
-------- --------
Total current assets 81,252 52,924
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 54,920 32,423
INTANGIBLE ASSETS, NET 8,878 -
OTHER ASSETS 320 180
-------- --------
TOTAL $145,370 $ 85,527
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,942 $ 2,858
Accrued compensation 3,899 2,719
Accrued commissions 1,510 974
Income taxes payable 4,316 1,152
Other accrued liabilities 2,724 775
Deferred income on shipments to distributors 4,414 1,940
Current portion of long-term debt 5,579 812
-------- --------
Total current liabilities 30,384 11,230
-------- --------
LONG-TERM DEBT 14,007 552
DEFERRED RENT 790 916
DEFERRED INCOME TAXES 4,478 2,261
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized: 5,000,000
shares; issued and outstanding: none - -
Common stock, no par value - authorized: 50,000,000
shares; issued and outstanding: 1998 - 20,091,196;
1997 - 19,483,319 35,660 27,703
Accumulated other comprehensive income 10 -
Retained earnings 60,041 42,865
-------- --------
Total shareholders' equity 95,711 70,568
-------- --------
TOTAL $145,370 $ 85,527
======== ========
See notes to consolidated financial statements.
33
33
MICREL, INCORPORATED
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
NET REVENUES $140,508 $104,158 $ 66,244
COST OF REVENUES 69,324 48,641 32,407
-------- -------- --------
GROSS PROFIT 71,184 55,517 33,837
-------- -------- --------
OPERATING EXPENSES:
Research and development 18,931 13,986 8,613
Selling, general and administrative 21,658 17,128 11,936
Purchased in-process technology 3,737 - -
-------- -------- --------
Total operating expenses 44,326 31,114 20,549
-------- -------- --------
INCOME FROM OPERATIONS 26,858 24,403 13,288
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 1,507 1,088 866
Interest expense (416) (161) (281)
Other, net 1 44 145
-------- -------- --------
Total other income, net 1,092 971 730
-------- -------- --------
INCOME BEFORE INCOME TAXES 27,950 25,374 14,018
PROVISION FOR INCOME TAXES 10,774 8,627 4,766
-------- -------- --------
NET INCOME $ 17,176 $ 16,747 $ 9,252
======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.87 $ 0.88 $ 0.51
======== ======== ========
Diluted $ 0.81 $ 0.80 $ 0.46
======== ======== ========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 19,805 19,069 18,303
======== ======== ========
Diluted 21,203 20,822 20,048
======== ======== ========
See notes to consolidated financial statements.
34
34
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other Total
------------------- Comprehensive Retained Shareholders' Comprehensive
Shares Amount Income (Loss) Earnings Equity Income (Loss)
---------- ------- ------------- -------- ------------- -------------
Balances, January 1, 1996 17,797,064 $19,162 $ 5 $16,866 $36,033
Comprehensive income -
Net income - - - 9,252 9,252 $ 9,252
Other comprehensive income,
net of tax - Change in
net unrealized gains from
short-term investments - - (7) - (7) (7)
-------
Comprehensive income $ 9,245
=======
Employee stock transactions 864,222 1,309 - - 1,309
Tax benefit of employee
stock transactions - 844 - - 844
---------- ------- --- ------- -------
Balances, December 31, 1996 18,661,286 21,315 (2) 26,118 47,431
Comprehensive income -
Net income - - - 16,747 16,747 $16,747
Other comprehensive income,
net of tax - Change in
net unrealized gains from
short-term investments - - 2 - 2 2
-------
Comprehensive income $16,749
=======
Employee stock transactions 822,033 2,748 - - 2,748
Tax benefit of employee
stock transactions - 3,640 - - 3,640
---------- ------- --- ------- -------
Balances, December 31, 1997 19,483,319 27,703 - 42,865 70,568
Comprehensive income -
Net income - - - 17,176 17,176 17,176
Other comprehensive income,
net of tax - Change in
net unrealized gains from
short-term investments - - 10 - 10 10
-------
Comprehensive income $17,186
=======
Employee stock transactions 607,877 4,088 - - 4,088
Tax benefit of employee
stock transactions - 3,869 - - 3,869
---------- ------- --- ------- -------
Balances, December 31, 1998 20,091,196 $35,660 $10 $60,041 $95,711
========== ======= === ======= =======
35
35
See notes to consolidated financial statements.
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
- ----------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,176 $ 16,747 $ 9,252
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,332 6,509 3,420
Purchased in-process technology 3,737 - -
(Gain) loss on disposal of assets (3) (44) 6
Deferred rent (126) (1) 114
Deferred income taxes (3,642) (990) (171)
Changes in operating assets and
liabilities, net of effects of acquisition:
Accounts receivable (4,896) (8,190) 533
Inventories 4,553 3,258 (2,508)
Prepaid expenses and other assets (149) 114 (296)
Accounts payable 2,893 449 (469)
Accrued compensation 364 475 994
Accrued commissions 299 289 101
Income taxes payable 7,033 3,879 1,264
Other accrued liabilities 61 55 (142)
Deferred income on shipments 997 760 223
-------- -------- --------
Net cash provided by operating activities 40,629 23,310 12,321
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements (30,880) (21,410) (9,608)
Purchases of short-term investments (38,754) (37,531) (29,118)
Proceeds from sales and maturities of
short-term investments 41,300 33,300 27,951
Purchase of Synergy, net of cash acquired (10,271) - -
-------- -------- --------
Net cash used in investing activities (38,605) (25,641) (10,775)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings (3,132) - -
Proceeds from long-term borrowings 12,000 - -
Repayments of long-term debt (4,146) (1,075) (1,517)
Proceeds from the issuance of common stock 4,088 2,748 1,309
-------- -------- --------
Net cash provided by (used in)
financing activities 8,810 1,673 (208)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 10,834 (658) 1,338
CASH AND CASH EQUIVALENTS - Beginning of year 2,581 3,239 1,901
-------- -------- --------
CASH AND CASH EQUIVALENTS - End of year $ 13,415 $ 2,581 $ 3,239
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 291 $ 152 $ 103
-------- -------- --------
Income taxes $ 7,384 $ 5,625 $ 2,598
======== ======== ========
See notes to consolidated financial statements.
36
36
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Micrel, Incorporated (the "Company") develops,
manufactures and markets analog and mixed-signal semiconductor devices.
The Company also provides custom and foundry services which include
silicon wafer fabrication, integrated circuit assembly and testing. The
Company's standard integrated circuits are sold principally in North
America, Asia, and Europe for use in a variety of products, including
those in the computer, communication, and industrial markets. The
Company's custom circuits and wafer foundry services are provided to a
wide range of customers that produce electronic systems for
communications, consumer and military applications. All wafers are
processed at the Company's wafer fabrication facilities located in San
Jose and Santa Clara, California. After wafer fabrication, the completed
wafers are then separated into individual circuits and packaged at
independent assembly and final test contract facilities located in
Malaysia.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Micrel, Incorporated and its wholly-
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates - In accordance with generally accepted accounting
principles, management utilizes certain estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with remaining maturities of less than three
months to be cash equivalents.
Short-term Investments - Short-term investments consist primarily of
highly liquid debt instruments purchased with remaining maturity dates
of greater than 90 days. Short-term investments are classified as
available-for-sale securities and are stated at market value with
unrealized gains and losses included in shareholders' equity, net of
income taxes. At December 31, 1998 and 1997, short-term investments
consisted of corporate debt securities (commercial paper) with
maturities of less than one year.
Short term investments include the following available-for-sale
securities at December 31, 1998 and 1997 (in thousands):
Unrealized Unrealized
Amortized Market Holding Holding
Cost Value Gains Losses
------- ------ -------- --------
December 31, 1998 $ 15,019 $ 15,029 $ 10 $ -
December 31, 1997 $ 17,565 $ 17,565 $ 1 $( 1)
Certain Significant Risks and Uncertainties - Financial instruments that
potentially subject the Company to concentrations of credit risk consist
of cash and cash equivalents, short-term investments, and accounts
receivable. Risks associated with cash are mitigated by banking with
creditworthy institutions. Cash equivalents and short-term investments
consist primarily of commercial paper and bank certificates of deposit
and are regularly monitored by management. Credit risk with respect to
the trade receivables is
37
37
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
spread over a large number of geographically diverse customers, who make up
the Company's customer base. At December 31, 1998, no customer accounted
for 10% or more of total accounts receivable. At December 31, 1997, two
customers accounted for 13% and 10% of total accounts receivable.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse
effect on the Company's future financial position, results of operations,
or cash flows: advances and trends in new technologies and industry
standards; competitive pressures in the form of new products or price
reductions on current products; changes in product mix; changes in the
overall demand for products offered by the Company; changes in third-party
manufacturers; changes in key suppliers; changes in certain strategic
relationships or customer relationships; litigation or claims against the
Company based on intellectual property, patents (Note 11), product,
regulatory or other factors; risk associated with necessary components;
risks associated with Year 2000 compliance and the Company's ability to
attract and retain employees necessary to support its growth.
Inventories - Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Equipment and Leasehold Improvements - Equipment and leasehold improvements
are stated at cost. Depreciation on equipment is computed using straight-
line and accelerated methods over estimated useful lives of three to five
years. Leasehold improvements are amortized over the shorter of the lease
term or the useful lives of the improvements. The Company evaluates the
recoverability of long-lived assets at least annually.
Intangible Assets - Intangible assets of $8.9 million (net of accumulated
amortization of $0.3 million) at December 31, 1998, consist of the
following (in thousands):
Amortization
Period (Years)
--------------
Developed and core technology $ 5,740 5
Assembled workforce 962 3
Tradename and patents 1,043 5
Customer relationships 1,133 5
--------
$ 8,878
========
Revenue Recognition - Revenues from products sold directly to customers is
recognized upon shipment. Certain of the Company's sales are made to
United States, Canadian and certain other international distributors under
agreements allowing certain rights of return and price protection on
merchandise unsold by these distributors. Accordingly, the Company defers
recognition of such revenues until the merchandise is sold by the
distributors. Generally, sales to international distributors are
recognized upon shipment. The Company estimates returns and warranty
costs, and provides allowances as revenue is recognized. Warranty costs
have not been material in any period presented.
Research and Development Expenses - Research and development expenses
include costs associated with the development of new processes and the
definition, design and development of standard products. The Company also
expenses prototype wafers and new production mask sets related to new
products as research and development costs until products based on new
designs are fully characterized by the Company and are demonstrated to
support published data sheets and satisfy reliability tests.
38
38
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
Income Taxes - Income taxes are provided at current rates. Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Stock-based Awards - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Net Income per Share - Basic earnings per share ("EPS") is computed by
dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding
stock options, using the treasury stock method.
Reconciliation of weighted average shares used in computing earnings per
share is as follows (in thousands):
Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Weighted average common shares outstanding 19,805 19,069 18,303
Dilutive effect of stock options outstanding,
using the treasury stock method 1,398 1,753 1,745
-------- -------- --------
Shares used in computing diluted earnings
per share 21,203 20,822 20,048
======== ======== ========
Fair Value of Financial Instruments - Financial instruments included in the
Company's consolidated balance sheets at December 31, 1998 and 1997 consist
of cash, cash equivalents, short-term investments and long-term debt. For
cash, the carrying amount is a reasonable estimate of the fair value. The
carrying amount for cash equivalents and short-term investments approximates
fair value because of the short maturity of those investments. The fair
value of long-term debt approximates the carrying amount.
Comprehensive Income - In 1998, the Company adopted issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as
a single total, the change in net assets during the period from nonowner
sources. Consolidated statements of comprehensive income for the years
ended December 31, 1998, 1997, and 1996 have been included within the
consolidated statements of shareholders' equity and comprehensive income.
Geographic Operating Information - In 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. The Company operates in two
reportable segments, standard products and custom and foundry products (Note
12).
Recently Issued Accounting Standards - In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the
39
39
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
statement of financial position and measure those instruments at fair
value. Adoption of this statement is not expected to impact the
Company's consolidated financial position, results of operations or cash
flows materially. The Company is required to adopt this statement in
the first quarter of fiscal year 2000, with early adoption permitted.
2. ACQUISITION
On November 9, 1998, the Company acquired all outstanding shares of
Synergy Semiconductor ("Synergy") common stock for a cash purchase price
of $9.9 million plus $1.6 million of transaction fees and direct merger
costs. Synergy provides high performance bipolar integrated circuits to
companies within the networking, telecommunications, computing, and
ATE/Instrumentation markets.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Synergy from the date of acquisition forward
have been included in the Company's consolidated financial statements.
In connection with the acquisition, intangible assets of $12.9 million
were acquired, of which $3.7 million was reflected as a one-time charge
to operations for the write-off of purchased in-process technology that
had not reached technological feasibility and, in management's opinion,
had no probable alternative future use. The $3.7 million one-time
charge for purchased in-process technology has been reflected in the
Company's fiscal 1998 consolidated income statement within operating
expenses. The remaining intangible assets of $9.2 million, consisting of
existing technology, assembled workforce, tradename and patents, and
customer relationships, are included in other assets in the accompanying
balance sheets and are being amortized over their useful lives of three
to five years.
In connection with the acquisition, net assets acquired were as follows
(in thousands):
Current assets $ 13,564
Equipment and other, net 5,074
Intangible assets, including purchased in-process technology 12,945
Liabilities assumed (20,110)
--------
Net assets acquired $ 11,473
========
The following unaudited pro forma information shows the results of
operations for the two fiscal years ended December 31, 1998, as if the
Synergy acquisition had occurred at the beginning of the earliest period
presented and at the purchase price established in November 1998 (in
thousands, except per share amounts):
Years ended December 31, 1998 1997
--------- ---------
Net revenues $ 163,819 $ 141,586
Net income $ 11,295 $ 16,769
Net income per share, basic $ 0.57 $ 0.88
Net income per share, diluted $ 0.53 $ 0.81
The pro forma results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of the
earliest period presented or of future operations of the combined
companies. The pro forma results combine the Company's results of
operations for the two fiscal years ended December 31, 1998, with the
results of Synergy through the date of acquisition and give effect to
40
40
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
certain adjustments, including the amortization of intangible assets,
changes in cost of revenues and depreciation expense associated with the
allocation of purchase price to inventory and fixed assets, interest
income associated with funding the acquisition, and related tax
benefits. The $3.7 million charge for purchased in-process technology
has been excluded from the pro forma results as it is a non-recurring
charge.
3. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
1998 1997
Finished goods $ 4,540 $ 2,480
Work in process 9,745 6,351
Raw materials 1,784 1,833
-------- --------
$ 16,069 $ 10,664
-------- --------
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31 consist of the
following (in thousands):
1998 1997
Manufacturing equipment $ 79,694 $ 47,619
Leasehold improvements 2,651 2,223
Office furniture and equipment 2,281 1,520
-------- --------
84,626 51,362
Accumulated depreciation and amortization (29,706) (18,939)
-------- --------
$ 54,920 $ 32,423
======== ========
5. BORROWING ARRANGEMENTS
Under a revolving line of credit and security agreement expiring
September 30, 1999, the Company can borrow up to 80% of its eligible
accounts receivable to a maximum of $5.0 million. Borrowings under the
line of credit agreement bear interest rates of, at the Company's
election, the prime rate (7.75% at December 31, 1998) or the bank's
offshore rate, which approximates LIBOR (5.1% at December 31, 1998) plus
2.25%. Borrowings are collateralized by substantially all of the assets
of the Company. There were no borrowings under this revolving line of
credit at December 31, 1998.
41
41
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
Under the same amended security agreement, the Company has a non-
revolving bank line of credit of $20.0 million for funding purchases of
capital equipment under which the Company may borrow up to 100% of the
cost of such equipment. Amounts borrowed under this credit line are
converted to four-year installment notes. All equipment notes are
collateralized by the equipment purchased and bear interest rates of, at
the Company's election, a fixed rate based on the four-year U.S.
Treasury Bill rate (4.5% at December 31, 1998) plus 3.0% or an annual
adjustable rate based on the one-year U.S. Treasury Bill rate (4.5% at
December 31, 1998) plus 3.0%. In November 1998, the Company borrowed
$8.0 million at a fixed rate of 7.5% under the amended line of credit.
Under the previous non-revolving bank line of credit, the Company
borrowed $2.0 million in June 1998 and $2.0 million in September 1998,
each of which was subsequently converted to a four-year installment note
bearing interest at the prime rate (7.75% at December 31, 1998).
The agreements contain certain restrictive covenants that include a
restriction on the declaration and payment of dividends without the
lender's consent. The Company was in compliance with all such covenants
at December 31, 1998.
In November 1998, associated with the acquisition of Synergy
Semiconductor, the Company assumed $3.1 million in short-term bank debt
and $10.4 million in long-term installment notes. Shortly thereafter,
in 1998, all of the assumed short-term debt was repaid and $2.8 million
of the long-term installment notes was repaid. The remaining unpaid
long-term debt consists of four-year installment notes, collateralized
by equipment purchased, and bears fixed interest rates ranging from 8.9%
to 9.4%
Long-term debt at December 31, collateralized by equipment, consists of
the following (in thousands):
1998 1997
------- -------
Notes payable bearing interest at prime plus 0.75%,
payable in monthly installments through September 1998 $ - $ 187
Notes payable bearing interest at prime, payable in
monthly installments through September 2002 4,161 1,177
Notes payable bearing a fixed interest rate of 7.5%,
payable in monthly installments through November 2002 7,833 -
Notes payable assumed from Synergy Semiconductor
bearing fixed rates ranging from 8.9% to 9.4%, payable
in monthly installments through January 2003 7,592 -
------- -------
Total debt 19,586 1,364
Current portion (5,579) (812)
------- -------
Long-term debt $14,007 $ 552
======= =======
Maturities of long-term debt subsequent to December 31, 1998 are as
follows (in thousands): $5,579 in 1999, $5,275 in 2000, $5,637 in 2001,
$2,957 in 2002, and $138 in 2003.
6. SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, no par
value, of which none were issued or outstanding at December 31, 1998.
The preferred stock may be issued from time to time in one or more
series. The Board of Directors is authorized to determine or alter the
rights, preferences, privileges and restrictions of such preferred stock.
Stock Option Plans
Under the Company's 1994 and 1989 Stock Option Plans (the "Option Plans"),
7,964,668 shares of common stock are authorized for issuance to key
employees. The Option Plans provide that the option price will be determined
by the Board of Directors at a price not less than the fair value at the
date of grant. Certain shareholder/employees of the Company are granted
options at 110% of the current fair
42
42
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
market value. Options granted become exercisable in not less than cumulative
annual increments of 20% per year from the date of grant. At
December 31, 1998, 721,046 shares were available for future grants under the
Option Plans and 4,037,504 total shares are reserved for future issuance.
Option activity under the Option Plans is as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- --------
Outstanding, January 1, 1996 (1,165,308 exercisable
at a weighted average price of $0.71 per share) 2,854,108 $ 2.44
Granted 937,000 8.35
Granted (at 110% of fair market value) 100,000 7.57
Exercised (798,800) 1.06
Canceled (476,500) 3.97
---------
Outstanding, December 31, 1996 (769,308 exercisable
at a weighted average price of $1.58 per share) 2,615,808 4.89
Granted 865,250 25.60
Exercised (783,350) 2.68
Canceled (141,900) 7.14
---------
Outstanding, December 31, 1997 (452,658 exercisable
at a weighted average price of $3.65 per share) 2,555,808 12.44
Granted 1,431,600 33.03
Exercised (571,350) 5.46
Canceled (99,600) 13.29
---------
Outstanding, December 31, 1998 3,316,458 $ 22.49
=========
Additional information regarding options outstanding as of December 31, 1998
is as follows:
Stock Options Outstanding Options Exercisable
------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
--------------- ----------- --------- ------- ----------- -------
$ 0.50 to $ 6.84 355,058 5.1 $ 1.98 183,158 $ 1.71
$ 6.85 to $ 9.25 603,100 5.7 $ 7.63 123,100 $ 7.99
$ 9.26 to $19.09 239,000 7.4 $12.78 45,200 $11.99
$19.10 to $25.64 392,200 8.4 $24.31 61,500 $24.80
$25.65 to $29.19 358,000 9.1 $27.40 17,000 $27.17
$29.20 to $34.80 672,600 8.4 $31.24 47,450 $32.28
$34.81 to $48.50 696,500 9.4 $37.14 - -
--------- --------
3,316,458 $22.49 477,408 $11.22
========= =======
43
43
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to have salary withholdings to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of each six-month offer period, subject to an
annual limitation. Shares of common stock issued under the Purchase Plan
were 36,527, 38,683, and 65,422 in 1998, 1997, and 1996, respectively, at
weighted average prices of $26.51, $16.75, and $7.08, respectively. At
December 31, 1998, there were 248,766 shares of common stock issued under
the Purchase Plan and 351,234 shares are reserved for future issuance under
the Purchase Plan. The Purchase Plan excludes all Company Officers (as
defined in the Purchase Plan) from participation in the Purchase Plan.
Additional Stock - Based Award Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
and its related interpretations. Accordingly, no compensation expense has
been recognized in the financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 60 months; stock
volatility, 74.1% in 1998, 74.3% in 1997, and 75.3% in 1996; risk free
interest rates, 5.36% in 1998, 5.44% in 1997 and 6.16% in 1996; and no
dividends during the expected term. The Company's calculations are based on
a multiple option valuation approach and forfeitures are recognized as they
occur. The weighted average fair value of options granted under the stock
option plans during 1998, 1997, and 1996 was $21.48, $16.56 and $5.50 per
share. If the computed fair values of the 1998, 1997 and 1996 awards under
both the Option Plans and the Purchase Plan had been amortized to expense
over the vesting period of the awards, pro forma net income and net income
per share would have been as follows (in thousands, except per share
amounts):
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
Pro forma net income $ 9,194 $13,975 $ 7,718
Pro forma net income per share:
Basic $ 0.47 $ 0.73 $ 0.42
Diluted $ 0.45 $ 0.71 $ 0.41
The amounts used above are based on calculated tax effected values for
option awards in 1998, 1997 and 1996 aggregating $12.3 million. The
impact of outstanding tock options granted prior to 1995 has been
excluded from the pro forma calculation; accordingly, the pro forma
adjustments are not indicative of
44
44
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
7. INCOME TAXES
The provision for income taxes for the years ended December 31 consists
of the following (in thousands):
1998 1997 1996
-------- -------- --------
Currently payable:
Federal $ 14,572 $ 10,735 $ 4,440
Research and experimentation tax credits (1,425) (1,118) (451)
-------- -------- --------
13,147 9,617 3,989
-------- -------- --------
State 3,506 1,576 1,309
Research and experimentation and
manufacturing tax credits (2,237) (1,576) (361)
-------- -------- --------
1,269 - 948
-------- -------- --------
Total currently payable 14,416 9,617 4,937
-------- -------- --------
Deferred income taxes:
Federal (2,987) (814) (148)
State (655) (176) (23)
-------- -------- --------
Total deferred (3,642) (990) (171)
-------- -------- --------
Total provision $ 10,774 $ 8,627 $ 4,766
======== ======== ========
A reconciliation of the statutory federal income tax rate to the
effective tax rate for the years ended December 31 is as follows:
1998 1997 1996
-------- -------- --------
Statutory federal income tax rate 35% 35% 35%
State income taxes (net of federal
income tax benefit) 1 1 2
Research and experimentation and
manufacturing tax credits (2) (2) (1)
Export sales tax credit (2) (2) (2)
Non-deductible purchased in-process
technology 5 - -
Other 2 2 -
-------- -------- --------
Effective tax rate 39% 34% 34%
======== ======== ========
45
45
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
Temporary differences that give rise to deferred tax assets and
liabilities at December 31 are as follows (in thousands):
1998 1997
-------- --------
Deferred tax assets:
Accruals and reserves not currently deductible $ 9,531 $ 3,938
Deferred revenue 1,898 834
Tax net operating loss and credit carryforwards 4,514 -
Capitalized research and development 602 -
Valuation allowance (3,563) -
-------- --------
Total deferred tax asset 12,982 4,772
-------- --------
Deferred tax liabilities:
Depreciation (1,500) (2,035)
State income taxes (175) (226)
Intangible assets (3,818) -
-------- --------
Total deferred tax liability (5,493) (2,261)
-------- --------
Net deferred tax asset $ 7,489 $ 2,511
======== ========
Due to the Company's acquisition of Synergy, the Company has available
pre-ownership change federal and state net operating loss carryforwards
of approximately $10.0 million and $2.0 million, respectively, which
expire beginning in 2006 and 1999. These pre-ownership change net
operating loss carryforwards are subject under Section 382 of the
Internal Revenue Code to an annual limitation estimated to be
approximately $0.5 million. In addition, the Company has available pre-
ownership change state research credit carryforwards of approximately
$1.4 million subject to the Section 382 annual limitation.
8. OPERATING LEASES
The Company leases its facilities under operating lease agreements that
expire in 2005 and 2006. The lease agreements provide for escalating
rental payments over the lease periods. Rent expense is recognized on a
straight-line basis over the term of the lease. Deferred rent
represents the difference between rental payments and rent expense
recognized on a straight-line basis. Future minimum payments under
these agreements are as follows (in thousands):
Year Ending
December 31,
-----------
1999 $ 2,583
2000 2,626
2001 2,699
2002 2,726
2003 2,775
Thereafter 6,353
--------
$ 19,762
========
Rent expense under operating leases was (in thousands): $1,346, $1,031,
and $1,014 for the years ended December 31, 1998, 1997, and 1996,
respectively.
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46
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
9. PROFIT-SHARING 401(k) PLAN
The Company has a profit-sharing plan and deferred compensation plan
(the "Plan"). All employees completing three months of service are
eligible to participate in the Plan. Participants may contribute 1% to
12% of their annual compensation on a before tax basis, subject to
Internal Revenue Service limitations. Profit-sharing contributions by
the Company are determined at the discretion of the Board of Directors.
The Company accrued $870,000 in 1998, $605,000 in 1997, and $400,000 in
1996. Participants vest in Company contributions ratably over six years
of service.
10. SIGNIFICANT CUSTOMERS
In 1998, no single customer accounted for ten percent or more of net
revenues. In 1997 one customer accounted for $11.2 million (11%) of net
revenues. In 1996 a different customer accounted for $7.1 million (11%)
of net revenues.
11. LITIGATION
On May 9, 1994, Linear Technology Corporation ("Linear"), 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 claims that two of the Company's products infringe one of
Linear's patents. The complaint in the lawsuit seeks unspecified
compensatory damages, treble damages and attorneys' fees as well as
preliminary and permanent injunctive relief against infringement of the
Linear patent at issue. The Company has asserted defenses of invalidity
and unenforceability of the Linear patent at issue, as well as
noninfringement of such patent. The Company believes that the ultimate
outcome of this action will not result in a material adverse effect on
the Company's financial condition or results of operation. However,
litigation is subject to inherent uncertainties, and no assurance can be
given that the Company will prevail in such litigation. Accordingly, the
pending litigation with Linear 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.
In another legal proceeding, The Lemelson Medical, Education & Research
Foundation, Limited Partnership (the "Lemelson Partnership") alleges to
be the owner of certain patents issued to Jerome Lemelson (now
deceased). During 1998, representatives of the Lemelson Partnership
sent letters to the Company referencing the Lemelson patents. On
February 26, 1999, the Lemelson Partnership filed a complaint for patent
infringement, naming eighty-eight defendants, including the Company.
The suit is entitled Lemelson Medical, Education & Research Foundation,
Limited Partnership v. Lucent Technologies Inc., et al., and was filed
in the United States District Court in Phoenix, Arizona. In this
lawsuit, the Lemelson Partnership claims that the Company infringes the
Lemelson patents-in-suit. The complaint in the lawsuit seeks judgment
that the Lemelson patents-in-suit are not invalid and have been
willfully and deliberately infringed; unspecified compensatory damages;
treble damages and attorneys' fees; as well as injunctive relief against
further infringement of the Lemelson patents at issue. The Company has
not yet filed an answer, but expects to defend against the charges
raised in the suit. The Company believes that the ultimate outcome of
this action 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 such litigation.
Accordingly, the pending litigation with the Lemelson Partnership, as
well as potential future litigation with other companies, could result
in substantial costs and diversion of resources and could have a
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47
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Certain additional claims and lawsuits have also 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 operations or cash flows.
In the event of an adverse ruling in any intellectual property
litigation that now exists or might arise in the future, the Company
might be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms
or at all. In the event of a successful claim against the Company and
the Company's failure to develop or license substitute technology on
commercially reasonable terms, the Company's financial condition,
results of operations, or cash flows could be adversely affected.
12. SEGMENT REPORTING
The Company operates in two reportable segments: standard products and
custom and foundry products. The Company is compliant with the segment
reporting requirements of SFAS No.131, which requires disclosures
regarding products and services, geographic areas, and major customers.
For the year ended December 31, 1998, the Company recorded revenue from
customers throughout the United States; France, the U.K., Finland,
Germany, Italy, Switzerland, Israel, Spain, Ireland, Sweden, and The
Netherlands (collectively referred to as "Europe"); Korea; Japan;
Taiwan; Singapore, Hong Kong, China, and Malaysia (collectively referred
to as "Other Asian Countries"); and Canada.
Net Revenues by Segment (in thousands):
Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Standard Products $ 99,902 $ 79,203 $ 43,530
Custom and Foundry Products 40,606 24,955 22,714
-------- -------- --------
Total net revenues $140,508 $104,158 $ 66,244
======== ======== ========
Geographic Information (in thousands):
1998 1997 1996
------------------- ------------------- --------
Long- Long-
Total Lived Total Lived Total
Revenues Assets Revenues* Assets Revenues*
-------- ------- --------- ------- ---------
United States of
America $ 76,731 $ 63,526 $ 52,275 $ 31,799 $ 38,982
Korea 15,441 56 11,898 49 2,843
Japan 12,887 - 8,256 - 2,703
Taiwan 12,444 3 13,300 5 10,726
Other Asian
Countries 7,108 496 4,941 706 3,208
Europe 15,550 37 13,402 44 7,562
Canada 347 - 86 - 220
-------- -------- -------- -------- --------
Total $140,508 $ 64,118 $104,158 $ 32,603 $ 66,244
======== ======== ======== ======== ========
* Total revenues are attributed to countries based on "ship to" location
of customer.
48
48
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
13. QUARTERLY RESULTS - UNAUDITED
(in thousands, except per
share amounts) Three Months Ended
------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
-------- -------- --------- --------
1998 1998 1998 1998
------ ------ ------ -------
Net revenues $ 32,659 $ 34,502 $ 35,426 $ 37,921
Gross profit $ 17,963 $ 19,122 $ 19,712 $ 14,387
Net income (loss) $ 5,726 $ 6,299 $ 6,597 $ (1,446)(1)
Net income (loss)
per share:
Basic $ 0. 29 $ 0.32 $ 0.33 $ (0.07)(1)
Diluted $ 0. 27 $ 0.30 $ 0.31 $ (0.07)(1)
Shares used in
computing per
share amounts:
Basic 19,583 19,736 19,882 20,012
Diluted 21,109 21,180 21,133 20,012
Three Months Ended
------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
-------- -------- --------- --------
1997 1997 1997 1997
------ ------ ------ ------
Net revenues $ 22,113 $ 24,327 $ 27,203 $ 30,515
Gross profit $ 11,382 $ 12,901 $ 14,543 $ 16,691
Net income $ 3,241 $ 3,837 $ 4,467 $ 5,202
Net income per share:
Basic $ 0.17 $ 0.20 $ 0.23 $ 0.27
Diluted $ 0.16 $ 0.18 $ 0.21 $ 0.25
Shares used in
computing per
share amounts:
Basic 18,734 18,934 19,198 19,409
Diluted 20,518 20,754 21,054 20,960
Note (1): Consolidated financial results for the fourth quarter ended
December 31, 1998 reflect the write-off of approximately $7.0 million
in excess inventory and a one-time charge of approximately $3.7 million
related to purchased in-process technology associated with the acquisition
of Synergy Semiconductor.
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49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the consolidated financial statements of Micrel,
Incorporated as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, and have issued our report
thereon dated January 26, 1999 (February 26, 1999 as to paragraph 2 of Note
11). Our audits also included the financial statement schedule of Micrel,
Incorporated, listed in Item 14 (a) (2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 26, 1999 (February 26, 1999 as to paragraph 2 of Note 11 to the
Consolidated Financial Statements)
50
50
SCHEDULE II
MICREL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997, and 1996
(Amounts in thousands)
Balance at Additions Write-offs
Beginning of and Charges and Balance at
Description Year to Expenses Deductions End of Year
- ----------------------- ---------- ----------- ---------- -----------
Year Ended December 31, 1998
- ----------------------------
Accounts receivable
allowance $ 2,015 $ - $( 402) $ 1,613
======= ===== ====== =======
Year Ended December 31, 1997
- ----------------------------
Accounts receivable
allowance $ 1,224 $ 863 $ (72) $ 2,015
======= ===== ====== =======
Year Ended December 31, 1996
- ----------------------------
Accounts receivable
allowance $ 688 $ 536 $ - $ 1,224
======= ===== ====== =======
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in San
Jose, California on the 31st day of March, 1999.
MICREL, INCORPORATED
By /S/ RAYMOND D. ZINN
-----------------------
Raymond D. Zinn
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Raymond D. Zinn and Robert J. Barker,
and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to
this Report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/S/ RAYMOND D. ZINN President, Chief Executive Officer and March 31, 1999
- --------------------- Chairman of the Board of Directors
Raymond D. Zinn (Principal Executive Officer)
/S/ ROBERT J. BARKER Vice President, Finance and March 31, 1999
- --------------------- Chief Financial Officer
Robert J. Barker (Principal Financial and
Accounting Officer)
/S/ WARREN H. MULLER Vice President, Secretary March 31, 1999
- --------------------- and Director
Warren H. Muller
/S/ GEORGE KELLY Director March 31, 1999
- ---------------------
George Kelly
/S/ DALE L. PETERSON Director March 31, 1999
- ---------------------
Dale L. Peterson
/S/ LARRY L. HANSEN Director March 31, 1999
- ---------------------
Larry L. Hansen
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55
Micrel, Incorporated
Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
- ------ -----------
2.1 Merger Agreement dated October 21, 1998, by and between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.2 Letter agreement dated November 9, 1998, between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.3 Escrow Agreement dated November 9, 1998, between Micrel,
Incorporated, John F. Stockton, as representative of the former
Synergy shareholders, and Bank of the West. (1)
3.1 Amended and Restated Articles of Incorporation of the Registrant.
(2)
3.2 Certificate of Amendment of Articles of Incorporation of the
Registrant. (3)
3.3 Amended and Restated Bylaws of the Registrant. (3)
4.1 Certificate for Shares of Registrant's Common Stock. (4)
10.1 Indemnification Agreement between the Registrant and each of its
officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (2) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (2) *
10.4 1994 Stock Purchase Plan. (5)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and GOCO
Realty Fund I, as amended August 6, 1992 and February 5, 1993. (2)
10.7 Amended and Restated Loan and Security Agreement dated November 29,
1990 between the Registrant and Bank of the West, as amended
February 11, 1991, August 6, 1991, October 31, 1991, June 24, 1992,
September 24, 1992, August 16, 1993, April 29, 1994, July 2, 1994,
August 23, 1994, September 30, 1994, October 24, 1994. (2)
10.8 Form of Domestic Distribution Agreement. (3)
10.9 Form of International Distributor Agreement. (3)
10.10 Second Amendment dated February 20, 1995 between the Registrant and
TR Brell Cal Corporation to Lease Agreement dated June 24, 1992
between the Registrant and GOCO Realty Fund I, as amended August 6,
1992 and February 5, 1993. (4)
10.11 Amended and Restated Loan and Security Agreement dated November 29,
1990 between the Registrant and Bank of the West, as amended March
31, 1995. (5)
10.12 Amended and Restated Loan and Security Agreement dated November 29,
1990 between the Registrant and Bank of the West, as amended
September 30, 1996. (6)
10.13 Amended and Restated 1994 Employee Stock Purchase Plan, as amended
January 1, 1996. (7)
10.14 Commercial Lease between Harris Corporation and Synergy
Semiconductor Corporation dated February 29, 1996.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
27.0 Financial Data Schedule.
[FN]
* Management contract or compensatory plan or agreement.
(1) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 9, 1998 filed with the Commission on
November 23, 1998 in which this exhibit bears the same number, unless
otherwise indicated.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 ("Registration Statement"), File No. 33-85694, in
which this exhibit bears the same number, unless otherwise indicated.
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53
(3) Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless
otherwise indicated.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, in which this exhibit bears the
same number, unless otherwise indicated.
(5) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 1995.
(6) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1996.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, in which this exhibit bears the
number 10.14.
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54