<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________.
Commission File Number 0-25236
M I C R E L, I N C O R P O R A T E D
(Exact name of Registrant as specified in its charter)
California 94-2526744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1849 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 1996 there were 9,249,994 shares of common stock, no par
value, outstanding.
This Report on Form 10-Q includes 24 pages with the Index to Exhibits located on
page 14.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
<S> <C> <C>
Condensed Consolidated Balance Sheets -- September 30,
1996 and December 31, 1995.................................. 3
Condensed Consolidated Income Statements -- For the
Quarter and Nine Months Ended September 30,
1996 and 1995............................................... 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1996 and 1995............... 5
Notes to Condensed Consolidated Financial Statements.......... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 14
ITEM 2. Changes in Securities........................................... 14
ITEM 5. Other Information............................................... 14
ITEM 6. Exhibits and Reports on Form 8-K................................ 14
Signature....................................................... 15
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,075 $ 1,901
Short-term investments 10,411 12,174
Accounts receivable, net 8,442 9,281
Inventories 14,176 11,414
Other current assets 2,391 2,181
------- -------
Total current assets 40,495 36,951
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 15,790 11,284
OTHER ASSETS 219 107
------- -------
TOTAL $56,504 $48,342
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,840 $ 2,878
Deferred income on shipments to distributors 1,166 957
Other current liabilities 5,199 4,622
------- -------
Total current liabilities 10,205 8,457
LONG-TERM OBLIGATIONS 3,041 3,852
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:
1996 - 9,249,994; 1995 - 8,898,532 19,971 19,162
Net unrealized gains (losses) on short-term
investments (2) 5
Retained earnings 23,289 16,866
------- -------
Total shareholders' equity 43,258 36,033
------- -------
TOTAL $56,504 $48,342
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES $17,614 $13,928 $46,841 $39,101
COST OF REVENUES 8,602 7,003 22,965 19,924
------- ------- ------- -------
GROSS MARGIN 9,012 6,925 23,876 19,177
------- ------- ------- -------
OPERATING EXPENSES:
Research and development 2,338 1,722 6,094 4,742
Selling, general and administrative 3,191 2,298 8,581 6,834
------- ------- ------- -------
Total operating expenses 5,529 4,020 14,675 11,576
------- ------- ------- -------
INCOME FROM OPERATIONS 3,483 2,905 9,201 7,601
OTHER INCOME, NET 179 167 530 528
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,662 3,072 9,731 8,129
PROVISION FOR INCOME TAXES 1,244 1,075 3,308 2,845
------- ------- ------- -------
NET INCOME $ 2,418 $ 1,997 $ 6,423 $ 5,284
======= ======= ======= =======
NET INCOME PER COMMON AND EQUIVALENT SHARE $ 0.24 $ 0.20 $ 0.64 $ 0.53
======= ======= ======= =======
SHARES USED IN COMPUTING PER SHARE AMOUNTS 10,038 10,080 9,971 9,972
======= ======= ======= =======
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 8,568 $ 2,213
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (6,929) (4,088)
Proceeds from sale of equipment 19 --
Purchases of short-term investments (17,694) (18,341)
Maturities of short-term investments 19,450 14,143
-------- --------
Net cash used in investing activities (5,154) (8,286)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings -- 1,000
Principal payments on long-term debt (1,049) (767)
Proceeds from the issuance of common stock 809 731
-------- --------
Net cash provided by (used in) financing activities (240) 964
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,174 (5,109)
CASH AND CASH EQUIVALENTS - Beginning of period 1,901 6,894
-------- --------
CASH AND CASH EQUIVALENTS - End of period $ 5,075 $ 1,785
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 232 $ 369
======== ========
Cash paid for income taxes $ 2,985 $ 2,464
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying condensed consolidated
---------------------------
financial statements include the accounts of Micrel, Incorporated and its
wholly-owned subsidiaries ("Micrel" or the "Company"). All significant
intercompany accounts and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION -- The accompanying condensed consolidated
-----------------------------
financial statements of the Company as of September 30, 1996 and for the
three and nine months ended September 30, 1996 and 1995 are unaudited. In
the opinion of management, the condensed consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) that
management considers necessary for a fair presentation of its financial
position, operating results and cash flows for the interim periods
presented. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year.
It is suggested that this financial data be read in conjunction with the
audited financial statements and notes thereto included in the Company's
1995 Annual Report to Shareholders and Report on Form 10-K for the year
ended December 31, 1995.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
----------------------------
subject the Company to concentrations of credit risk consist of cash and
equivalents, short-term investments, and accounts receivable. Cash and
equivalents and short-term investments consist primarily of commercial
paper and bank certificates of deposit and are regularly monitored by
management. Credit risk with respect to the trade receivables is spread
over a large number of geographically diverse customers, who make up the
Company's customer base.
NET INCOME PER COMMON AND EQUIVALENT SHARE -- Net income per common and
------------------------------------------
equivalent share is calculated based on the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include common stock options (using the treasury stock
method).
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Finished goods $ 3,337 $ 2,363
Work in process 8,162 7,317
Raw materials 2,677 1,734
------- -------
$14,176 $11,414
======= =======
</TABLE>
3. BORROWING ARRANGEMENTS
Under a revolving bank line of credit and security agreement, the Company can
borrow up to 80% of its eligible accounts receivable to a maximum borrowing
of $3.0 million. This operating line of credit expires September 30, 1997.
Borrowings under the line of credit agreement bear interest at prime (8.25%
at
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1996) and are subject to collateralization by substantially
all assets of the Company. The line of credit contains certain restrictive
covenants, including maintenance of a quick ratio of not less than 1.75:1,
tangible net worth of not less than $30 million and a ratio of total debt
(less debt subordinated to the bank) to total net worth of less than 0.75:1.
The Company must also maintain on a fiscal year basis a ratio of net after-
tax profit plus depreciation and amortization to current maturities of long-
term liabilities and capitalized leases of not less than 1.5:1. In addition,
the Company must remain profitable on a quarterly basis, although the Company
is permitted one calendar quarter in which it does not earn an after-tax
profit from operations so long as the loss from operations during such
quarter does not exceed $500,000, and is prohibited from declaring and paying
dividends without the lender's consent. The Company was in compliance with
these covenants at September 30, 1996. There were no borrowings under this
revolving line of credit at September 30, 1996.
Under the same loan agreement, the Company has a non-revolving bank line of
credit of $5.0 million for funding purchases of capital equipment under which
the Company may borrow up to 100% of the cost, excluding installation
charges, sales tax, freight and software charges. Amounts borrowed under this
credit line may be converted to four-year installment notes. All equipment
notes are collateralized by the equipment purchased, bear interest at prime
and are subject to the same restrictive covenants as the operating line of
credit. The Company has not borrowed against the line at September 30, 1996
and $5.0 million is available under the renewed agreement through September
30, 1997.
Under two other non-revolving bank lines of credit that have expired, the
Company had $0.9 million and $2.0 million outstanding at September 30, 1996.
The notes are collateralized by the equipment purchased.
4. SIGNIFICANT CUSTOMERS AND EXPORT SALES
At September 30, 1996 one customer accounted for $1.6 million or 19 percent
of total accounts receivable. At December 31, 1995 no single customer
accounted for ten percent or more of total accounts receivable. One customer
accounted for $6.0 million (13%) of net revenues during the nine months ended
September 30, 1996. During the comparable period in 1995, a different
customer accounted for 11% of net revenues. Export sales were $18.6 million
(40%) of net revenues and $13.9 million (35%) of net revenues for the first
nine months of 1996 and 1995, respectively. Export sales are principally to
Asia and Europe.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Micrel was founded in 1978 and was initially engaged in the business of
providing semiconductor test services. In 1981, Micrel expanded its business
operations and began providing wafer fabrication services and manufacturing
custom integrated circuits. Presently, the Company continues to shift its focus
and revenue base from custom and foundry products to standard products. Standard
products sales increased to 63% of net revenues for the quarter ended September
30, 1996 as compared to 61% for the same period in the prior year. For the nine
months ended September 30, 1996 and 1995, the Company's standard products sales
accounted for 64% and 56% of the Company's net revenues, respectively. The
Company believes that a substantial portion of its net revenues in the future
will depend upon standard products sales.
The Company has experienced and expects to continue to experience 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 and 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 and
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 48.8 50.3 49.0 51.0
----- ----- ----- -----
Gross margin........................... 51.2 49.7 51.0 49.0
----- ----- ----- -----
Operating expenses:
Research and development............... 13.3 12.4 13.0 12.1
Selling, general and administrative.... 18.1 16.4 18.3 17.5
----- ----- ----- -----
Total operating expenses............... 31.4 28.8 31.3 29.6
----- ----- ----- -----
Income from operations.................. 19.8 20.9 19.7 19.4
Other income, net....................... 1.0 1.2 1.1 1.4
----- ----- ----- -----
Income before income taxes.............. 20.8 22.1 20.8 20.8
Provision for income taxes.............. 7.1 7.8 7.1 7.3
----- ----- ----- -----
Net income.............................. 13.7% 14.3% 13.7% 13.5%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues increased for the quarter and nine months ended
- - ------------
September 30, 1996 as compared to the corresponding periods of the prior year.
Net revenues increased 27% to $17.6 million for the quarter ended September 30,
1996 from $13.9 million for the comparable period in 1995. Net revenues
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
for the first nine months of 1996 totaled $46.8 million, an increase of 20% over
the $39.1 million level recorded in the same prior year period. The growth in
net revenues on a quarterly and year-to-date basis is due primarily to higher
standard products revenues which grew to 63% and 64% of net revenues for the
quarter and nine months ended September 30, 1996, respectively, from 61% and 56%
for each of the comparable periods in 1995. Sales of standard products by the
Company increased principally as a result of increased shipments to
manufacturers of portable computing, computing peripherals, industrial and
telecommunications products.
International sales represented 39% and 35% of net revenues for the quarters
ended September 30, 1996 and 1995, respectively. Revenues from international
sales in the first nine months of 1996 and 1995 accounted for 40% and 35% of net
revenues, respectively. The $4.7 million increase in international sales
resulted from shipments to manufacturers of personal computers and
communications products, and reflected growing demand for the Company's products
primarily in Asian markets and, to a lesser extent, in Europe. The Company
believes that if the Company's standard products sales continue to increase as a
percentage of net revenues, international sales will similarly increase as a
percentage of net revenues.
The Company believes that the lessening of demand experienced by the general
technology sector, which was discussed in the Company's Report on Form 10-Q for
the quarter ended June 30, 1996, is continuing, and such lessening is also being
experienced by other companies in the analog segment of the semiconductor
industry which are still experiencing weak order patterns, pricing pressures and
shorter than normal 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 continues to be effected
by the increased ability of its customers to place orders closer to desired
shipment dates, which is the result of the Company's customers reducing their
long term purchasing commitments in response to less predictable demand for
their products and increased product availability in the semiconductor industry.
The Company is positioning itself to respond to these reduced order lead times
through faster production cycles.
Gross Margin. 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 increased to 51% for the quarter and the nine months
ended September 30, 1996 from 50% and 49% for the comparable periods in 1995.
The improvement in gross margin reflects an increase in manufacturing efficiency
resulting from greater capacity utilization and increased sales of standard
products which carry proportionately higher margins than the Company's
traditional foundry products which were partially offset by an increase in fixed
expense levels associated with the expansion of manufacturing. In addition,
gross margins in the first nine months of the prior year were adversely affected
by the low margin sales of foundry products to one major customer, which have
been discontinued.
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 by approximately $0.6
million, or 35%, to $2.3 million for the quarter ended September 30, 1996 from
$1.7 million for the comparable period in 1995. During the nine months ended
September 30, 1996, research and development expenses increased by $1.4 million
or 30%, to $6.1 million from $4.7 million for the comparable period in 1995. The
increase in
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
research and development expenses for the quarter and nine months ended
September 30, 1996 was primarily due to increased costs associated with the
Company's conversion to six inch wafer fabrication, design services, and
prototype wafers. In addition to these factors, the increase in research and
development expenses for the nine months ended September 30, 1996 was also due
to increased salary expenses associated with expanded engineering staffing 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 in the
future.
Selling, General and Administrative Expenses. Selling, general and
- - --------------------------------------------
administrative expenses increased on a dollar basis to approximately $3.2
million or 18% of net revenues for the quarter ended September 30, 1996 from
$2.3 million or 16% of net revenues for the comparable period in 1995. For the
nine months ended September 30, 1996, these expenses increased on a dollar basis
by $1.8 million or 26% to $8.6 million from $6.8 million for the same period in
1995 while remaining unchanged on a percentage basis at approximately 18% of net
revenues. The dollar increase was principally attributable to higher
commissions, compensation, and other sales and marketing and promotion expenses
associated with the growth of the Company's sales organization to support
continuing revenue growth.
Other Income, Net. Other income, net reflects interest income realized by the
- - -----------------
Company from the investment of cash balances and short-term investments, which
is partially offset by interest incurred by the Company on its line of credit
borrowings and term notes. Other income, net increased by $12,000 to $179,000
for the quarter ended September 30, 1996 from $167,000 for the comparable period
in the prior year. For the nine months ended September 30, 1996 and 1995, other
income, net remained unchanged at approximately $530,000 for each nine month
period. During the quarter ended September 30, 1996, interest income decreased
by $20,000 due to a decline in average interest rates as interest expense
remained unchanged and the Company benefited from $30,000 in gains on settlement
of litigation. During the nine months ended September 30, 1996, interest income
declined by $106,000 due to a decline in average interest rates while interest
expenses increased by $44,000 due to higher average outstanding loan balances,
partially offset by a $100,000 gain on the settlement of litigation.
Provision for Income Taxes. For the quarter and nine months ended September 30,
- - --------------------------
1996 the provision for taxes on income was approximately $1.2 million and $3.3
million, respectively, or 34% of income before income taxes for both such
periods. The provision for taxes on income for the quarter and nine months ended
September 30, 1996 was $1.1 million and $2.8 million, respectively, or 35% of
income before income taxes, for both such periods. The income tax provision for
interim periods reflects the Company's estimated annual income tax rate. The
1996 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 established by the Company in the first quarter of 1995, state
research and experimentation credits, state manufacturing credits and the
reinstitution of the federal research and development tax credit in July 1996.
Such difference in 1995 was due to the effect of state taxes offset in part by
the benefit of research and experimentation credits.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's principal sources of funding have been its cash
from operations, a bank line of credit and sales of common stock. Principal
sources of funding at September 30, 1996 consisted of cash and short-term
investments of $15.5 million and a borrowing facility consisting of (i) $3.0
million under a revolving line of credit, of which all was unused and available,
and (ii) $5.0 million under a non-revolving
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
line of credit, under which there were no outstanding borrowings at September
30, 1996. Under two other non-revolving bank lines of credit that have expired,
the Company has $0.9 million and $2.0 million outstanding at September 30, 1996.
The notes are collateralized by the equipment purchased. The revolving and non-
revolving lines of credit are covered by the same loan and security agreement.
This agreement expires on September 30, 1997, subject to automatic renewal on a
month to month basis thereafter unless terminated by either party upon 30 days
notice. This agreement is collateralized by substantially all of the Company's
assets and contains restrictive covenants that apply to both the revolving and
non-revolving lines of credit, including maintenance of a quick ratio of not
less than 1.75:1, tangible net worth of $30 million and a ratio of total debt
(less debt subordinated to the bank) to total net worth of less than 0.75:1. The
Company must also maintain on a fiscal year basis a ratio of net after-tax
profit plus depreciation and amortization to current maturities of long-term
liabilities and capitalized leases of not less than 1.5:1. In addition, the
Company must remain profitable on a quarterly basis, although the Company is
permitted one calendar quarter in which it does not earn an after-tax profit
from operations so long as the loss from operations during such quarter does not
exceed $500,000, and is prohibited from declaring and paying dividends without
the lender's consent. The Company was in compliance with these covenants at
September 30, 1996.
The Company's working capital increased by $1.8 million to $30.3 million as of
September 30, 1996 from $28.5 million as of December 31, 1995. The increase was
primarily attributable to increases in inventories partially offset by decreases
in accounts receivable and increases in accounts payable. The Company's working
capital was principally invested in short-term investment grade, interest-
bearing securities.
The Company's operating activities provided net cash of approximately $8.6
million for the nine months ended September 30, 1996 as net income, adjusted for
non-cash items, and increases in accounts payable and other current liabilities
and decreases in accounts receivable were partially offset by increases in
inventories and other current assets.
The Company's investing activities during the nine months ended September 30,
1996 used cash of approximately $5.2 million. Approximately $19.5 million of
maturing short-term investments were used to purchase $17.7 million of short-
term investments. The remaining proceeds, combined with cash from operations,
was used to purchase $6.9 million of equipment and leasehold improvements.
Financing activities during the nine months ended September 30, 1996 used cash
of approximately $240,000 as $1.0 million in principal payments on long-term
debt were partially offset by $810,000 in proceeds from the issuance of common
stock upon exercise of stock options.
The Company currently intends to spend up to approximately $10 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 1997 will be met by its existing cash balances and
short-term investments, cash from operations and its existing credit facilities.
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward looking statements
include: statements regarding
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
future products or product development; statements regarding future research and
development spending and the Company's product development strategy; and
statements regarding the levels of international sales. 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 experienced and expects to continue to experience 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, changing customer requirements, delays in new product
qualifications, 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 and results of operations.
The Company is currently 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 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
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, as the market changes, its products being offered 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 and results of operations.
The analog semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the analog market
include product features, performance, price, the timing of product
introductions, the emergence of new computer standards, quality and customer
support. Because the standard products market for analog 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 analog circuits, the Company
expects intensified competition from existing analog circuit suppliers and the
entry of new competition, including companies from Japan. 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 and results of operations.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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. There can be no assurance that
these existing claims or any other assertions (or claims for indemnity resulting
from infringement claims) will not materially adversely affect the Company's
business, financial condition and results of operations.
The Company's future success depends in part upon its intellectual property,
including patents, trade secrets, expertise 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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain claims and lawsuits have arisen against the Company in its normal course
of business. The Company believes that these claims and lawsuits will not have a
material adverse effect on the Company's financial position, cash flow or
results of operation.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
<TABLE>
<CAPTION>
Exhibit
Number Description Page(s)
- - ------- ------------------------------------------------------ -------
<S> <C> <C>
10.1 Eleventh Amendment dated September 30, 1996 to 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, and October 24, 1994. 16
11.1 Statement Regarding Calculation of Net Income Per Share. 23
27.0 Financial Data Schedule. 24
</TABLE>
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
-------------------
during the quarter ended September 30, 1996.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICREL, INCORPORATED
--------------------
(Registrant)
----------
Date: October 31, 1996 By /S/ ROBERT J. BARKER
---------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
----------------------
Principal Financial Officer)
---------------------------
15
<PAGE>
EXHIBIT 10.1
ELEVENTH AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
(RECEIVABLES AND INVENTORY)
THIS ELEVENTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (RECEIVABLES AND INVENTORY) (this "Eleventh Amendment") is dated as of
September 30, 1996 and is entered into between MICREL INCORPORATED, a California
corporation (the "Borrower"), and BANK OF THE WEST, a California banking
corporation (the "Bank").
RECITALS:
---------
A. Borrower and Bank have entered into that certain Amended and
Restated Loan and Security Agreement (Receivables and Inventory) dated November
29, 1990, that certain First Amendment to Amended and Restated Loan and Security
Agreement (Receivables and Inventory) dated February 11, 1991, that certain
Second Amendment to Amended and Restated Loan and Security Agreement
(Receivables and Inventory) dated August 6, 1991, that certain Third Amendment
to Amended and Restated Loan and Security Agreement (Receivables and Inventory)
dated as of October 31, 1991, that certain Fourth Amendment to Amended and
restated Loan and Security Agreement (Receivables and Inventory) dated as of
June 24, 1992, that certain Fifth Amendment to Amended Restated Loan and
Security Agreement (Receivables and Inventory) dated as of September 24, 1992,
that certain Sixth Amendment to Amended and Restated Loan and Security Agreement
(Receivables and Inventory) dated as of August 6, 1993, that certain Seventh
Amendment to Amended and Restated Loan and Security Agreement (Receivables and
Inventory) dated as of April 29, 1994, that certain Eighth Amendment to Amended
and Restated Loan and Security Agreement (Receivables and Inventory) dated as of
July 2, 1994, that certain Ninth Amendment to Amended and Restated Loan and
Security Agreement (Receivables and Inventory) dated as of August 23, 1994, and
that certain Tenth Amendment to Amended and Restated Loan and Security Agreement
(Receivables and Inventory) dated as of March 31, 1995 (collectively, the "Loan
Agreement");
B. Borrower and Bank intend to further amend the Loan Agreement as
provided by this Eleventh Amendment.
AGREEMENT:
----------
NOW, THEREFORE, Borrower and Bank hereby agree as follows:
1. Unless otherwise expressly provided by this Eleventh Amendment,
this Eleventh Amendment shall modify and, to the extent inconsistent with,
amend the Loan Agreement and shall be effective upon the last to occur of (i)
the date of full execution of this Eleventh Amendment or (ii) the satisfaction
or waiver by Bank of all conditions precedent set forth herein. Any capitalized
term not specifically defined herein shall have the meaning assigned to it in
the Loan Agreement.
16
<PAGE>
2. The first of Section 1.8 of the Loan is hereby deleted in its
entirety and the following is inserted in place thereof:
The term "Collateral" means and includes each and all of the following:
all items of new and used equipment purchased or otherwise acquired by
Borrower pursuant to Equipment Purchase line A, Equipment Purchase Line
B, Equipment Purchase Line C, Equipment Purchase Line D, Equipment
Purchase Line E, Equipment Purchase Line F, Equipment Purchase Line G,
Equipment Purchase Line H, and Equipment Purchase Line I contained in
the Eleventh Amendment to Amended and Restated Loan and Security
Agreement (Receivables and Inventory) between Borrower and Bank (the
"Eleventh Amendment") (individually an "Equipment Purchase Line" and
collectively the "Equipment Purchase Lines"), with respect to which
amounts are outstanding and unpaid under the applicable Equipment
Purchase Line used to purchase such item of equipment; all deposit and
other accounts maintained by Borrower with Bank; all money, deposit
accounts and other assets of Borrower which hereafter come into the
possession, custody or control of bank; and all proceeds of the
foregoing, including but not limited to (i) proceeds of insurance
covering the Collateral and (ii) proceeds resulting from the sale or
other disposition of the Collateral (which proceeds from sale or other
disposition shall include, without limitation, any Receivables,
Intangibles, Negotiable Collateral, Inventory, equipment, money, deposit
accounts or other tangible and intangible property of Borrower resulting
from the sale or other disposition of the Collateral). Bank shall
release its security interest in the items of new or used equipment that
were purchased with the advances under any Equipment Purchase Line upon
the full payment and performance of all Obligations relating such
Equipment Purchase Line.
3. This first paragraph of Section 5.1 of the Loan Agreement is
hereby deleted in its entirety and is replaced with the following:
5.1 This Agreement shall remain in full force and effect until one
(1) year after the date of the Eleventh Amendment and shall continue on
a month-to-month basis thereafter until terminated by either party on
thirty (30) days prior written notice. Notice of termination shall be
effectuated by the mailing of a registered or certified letter of notice
properly addressed to the other party. Notwithstanding the foregoing,
upon the occurrence of an Event of Default, Bank may terminate its
obligations under this Agreement without notice.
4. The second paragraph of Section 8.15 of the Loan Agreement is
hereby deleted in its entirety and is replaced with the following:
Borrower agrees to deliver to Bank the following reports, audits and
certifications within the time period hereinafter specified:
(a) within twenty (20) days after the end of each calendar month, an
accounts receivable and accounts payable aging, which agings shall be
prepared under the direction of and approved by an authorized officer of
Borrower, shall be in a form and content satisfactory to Bank, and shall
cover Borrower's operations during such period;
17
<PAGE>
(b) within fifty (50) days after the end of each calendar quarter, a
statement of the financial condition of Borrower for each such calendar
quarter (including, but not limited to, a long-form balance sheet and
profit and loss statement), which quarterly financial statement shall be
prepared by an authorized officer of Borrower, shall be in a form and
content satisfactory to Bank, and shall cover Borrower's operations
during such period, and a full true and correct photocopy of Borrower's
Form 10-Q filed by Borrower with the Securities and Exchange Commission;
(c) within ninety-five (95) days after the end of each of Borrower's
fiscal years, a statement of the financial condition of Borrower for
each such fiscal year (including, but not limited to, a long-form
balance sheet and profit and loss statement), which statement shall be
in a form and content satisfactory to Bank, shall cover Borrower's
operations during such period, shall be prepared or audited by
independent certified public accountants acceptable to Bank, and shall
be accompanied by an unqualified opinion thereof by said accountants,
and a full true and correct photocopy of Borrower's Form 10-K filed by
Borrower with the Securities and Exchange Commission; and (d) any other
Borrower-prepared report requested by Bank relating to the Collateral or
the financial condition of Borrower, together with a certificate signed
by an authorized employee of Borrower to the effect that all reports,
statements, computer disc or tape files, printouts, runs, or other
computer prepared information of any kind or nature relating to the
foregoing, or documents delivered or caused to be delivered to Bank
under this Section 8.15, are complete, correct, and thoroughly present
the financial condition of Borrower and that there exists on the date of
delivery to Bank no condition or event which constitutes a breach of or
Event of Default under this Agreement. Borrower shall comply with any
request and shall treat any written request as a continuing obligation
until expressly modified or terminated in writing.
5. Section 8.18 of the Loan Agreement is hereby deleted in its
entirety and is replaced with the following:
8.18 Borrower shall maintain:
(a) a ratio of total debt (less debt subordinated to Bank) to Total
Net Worth of less than 0.75 to 1.0;
(b) Tangible Net Worth in an amount not less than Thirty Million
Dollars ($30,000,000.00);
(c) a ratio of (i) the sum of cash, cash equivalents, short-term
investments, and accounts receivable to (ii) current liabilities of not
less than 1.75 to 1.0;
(d) a after-tax profit from operations for each calendar quarter;
provided, however, that Borrower may experience one (1) calendar quarter
in which it does not earn an after-tax profit from operations so long as
the loss from operations during such quarter does not exceed Five
Hundred Thousand Dollars ($500,000.00); and
18
<PAGE>
(e) a ratio of net after-tax profit plus depreciation and
amortization, on a fiscal year basis, to current maturities of long term
liabilities and capitalized leases of not less than one and one-half
(1.5) to one (1.0).
For purposes of this Section 8.18 "after-tax profit from operations"
means after tax profit from operations as determined in accordance with
generally accepted accounting principles consistently applied increased by
extraordinary losses and capital losses from the sale of assets outside the
ordinary course of business and decreased by interest income, extraordinary
gains, capital gains fro the sale of assets outside the ordinary course of
business and investment income earned outside the ordinary course of business.
6. The Loan Agreement is hereby amended to add a new Section 23,
which reads in its entirety as follows:
23. EQUIPMENT PURCHASE LINE I.
-------------------------
23.1 (a) Upon the request of Borrower made at any time, and from
time to time, during Draw Period I (as hereinafter defined), subject to
and upon the terms and conditions of this Agreement, and so long as no
Event of Default has occurred, Bank agrees to make advances to Borrower
for the purpose of purchasing new and/or used equipment for use in
connection with Borrower's business (the "Equipment Purchase Line I").
For the purpose of this Agreement, "Draw Period I" shall mean the period
between the date of the Eleventh Amendment and the earlier to occur of
the following (the "Term Date I"): (i) one (1) year after the date of
the Eleventh Amendment or (ii) the date on which the aggregate of all
advances made pursuant to this Section 23.1 equals Five Million and
00/100 Dollars ($5,000,000.00).
(b) Each advance under Equipment Purchase Line I shall be
in amount not exceeding one hundred percent (100%) of the cost,
excluding installation charges, sales tax, freight, and software charges
(as determined by Bank), of items of new and/or used equipment approved
by Bank. The aggregate of all advances made by Bank under Equipment
Purchase Line I shall not exceed Five Million and 00/100 Dollars
($5,000,000.00). Upon execution of the Eleventh Amendment, Borrower's
right, power, and authority to borrow amounts under any of the Equipment
Purchase Lines over and above the amount of advances made by Bank
thereunder prior to the date of this Eleventh Amendment (the
"Outstanding Equipment Purchase Line Advances") shall cease. The
Outstanding Equipment Purchase Line Advances shall continue to be
subject to the promissory notes previously executed and delivered by
Borrower respecting the Outstanding Equipment Purchase Lines and shall
be repaid in accordance with the terms thereof.
(c) Each advance made by Bank under Equipment Purchase
Line I, if approved by Bank, shall be made either to Borrower or to the
vendor of any new or used equipment financed with the proceeds of such
advance (at Bank's option). In no event shall said
19
<PAGE>
proceeds be used by Borrower for any purpose other than purchase of the
new or used equipment approved by Bank. In the event that Bank opts to
disburse the proceeds of any such advance directly to the vendor(s) of
any new or used equipment, Borrower shall deliver to Bank an amount
equal to the difference between the cost (including all installation
charges, sales tax, freight, and software charges) and the amount of
such advance, which difference shall be remitted to said vendors(s) with
the advance by Bank. Bank shall not be obligated to make any advance
under this Section 23.1 unless and until Bank has received and approved
the following: (1) a copy of Borrower's purchase order, (2) an original
delivery and acceptance certificate executed by Borrower with respect to
any new equipment to be purchased, (3) a financing statement relative to
such new or used equipment and (4) such other documentation as Bank may
require (including, without limitation, schedules describing said new or
used equipment). Amounts once borrowed and repaid under Equipment
Purchase Line I shall not be available for reborrowing.
23.2 All advances made under Equipment Purchase Line I shall be
evidenced by and subject to the terms of a promissory note executed by
Borrower in substantially the form of Exhibit "I" attached to the
Eleventh Amendment, with appropriate insertions (the "Equipment Purchase
Line Note I"). All loans and advances made under Equipment Purchase Line
I shall be added to and deemed a part of the Obligations.
23.3 (a) Prior to Term Date I, Borrower may make draws and advances
under Equipment Purchase Line I (each a "Draw") for the purposes
permitted by the Loan Agreement (as amended by the Eleventh Amendment).
Commencing at the end of the calendar month in which each such Draw was
made and continuing until the end of the calendar quarter in which such
Draw was made, Borrower shall make monthly interest payments at the Rate
on the outstanding amount of all such Draws made during such calendar
quarter.
(b) At the end of the calendar quarter in which any Draw or Draws
are made hereunder, the Rate with respect to all outstanding Draws made
during such calendar quarter shall be fixed at the amount of the Rate in
effect at the end of such calendar quarter (the "Fixed Rate I").
Commencing one month after the end of each calendar quarter in which a
Draw or Draws are made hereunder and at the end of each of the next
forty-seven (47) calendar months thereafter, Borrower shall make (i)
equal and consecutive monthly principal payments, with each payment
being in an amount sufficient to repay the principal amount of all Draws
during such immediately preceding calendar quarter over forty-eight (48)
months on a straight-line basis and (ii) month interest payments at the
Fixed Rate I on the outstanding amount of all Draws during such calendar
quarter.
23.4 Bank shall render monthly statements of all amounts owing by
Borrower to Bank under Equipment Purchase Line I, including statements
of all principal and interest owing to Bank and such statements shall be
conclusively presumed to be correct and accurate and constitute an
account between Borrower and Bank unless, within thirty (30) days after
receipt thereof
20
<PAGE>
by Borrower, Borrower, delivers a written objection specifying the error
or errors, if any, contained in any such statement to Bank, which
objection must be sent to Bank's place of business by registered or
certified mail.
7. Bank's duties to extend and renew the Obligations and to make
advances in accordance with this Eleventh Amendment shall be subject to the
satisfaction or written waiver by Bank of the following conditions precedent:
(i) There being no outstanding and uncured defaults under
the Loan Agreement or any other obligations owing by Borrower to Bank;
(ii) the satisfaction of each of the conditions precedent set
forth in Article 7 of the Loan Agreement (including, without limitation,
Bank's receipt of a secured lending audit and environmental assessment,
evidence of insurance in the for and content required by the Loan
Agreement, and a landlord's waiver), each of which is incorporated
herein by this reference; and
(iii) the execution and delivery of (a) this Eleventh
Amendment, (b) a Corporate Resolution to Borrow and Pledge in a and
content acceptable to Bank, (c) Representations and Warranties in a form
and content acceptable to Bank, and (d) such other documents as Bank may
request.
8. Borrower hereby ratified, reaffirms, and remakes as of the date
hereof each and every representation and warranty contained in the Loan
Agreement or in any document incident thereto or connected therewith as amended
by this Eleventh Amendment.
9. Except as amended by this Eleventh Amendment, all of the terms
and conditions of the Loan Agreement remain in full force and effect.
IN WITNESS WHEREOF, borrower has executed and delivered this Eleventh
Amendment to Bank on the date first above written at San Jose, California.
"BORROWER"
MICREL INCORPORATED,
a California corporation
[SEAL OF BARBARA B. JENKINS]
/s/ Barbara B. Jenkins By: /s/ Robert J. Barker
Dated 30 September 1996 before me, -------------------------------
BARBARA B. JENKINS, appeared and Robert J. Barker
formally known to me ROBERT J. BARKER. Vice President, Finance
21
<PAGE>
IN WITNESS WHEREOF, Bank hereby accepts this Eleventh Amendment
effective as of September 30, 1996 in San Jose, California.
"BANK"
BANK OF THE WEST
a California banking corporation
By: /s/ Damon Doe
------------------------------
Its: Vice President
-----------------------------
22
<PAGE>
EXHIBIT 11.1
MICREL, INCORPORATED
COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
(In thousands except per share data)
----------
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended
September 30, September 30,
----------------- -----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding............................ 9,249 8,805 9,107 8,708
Dilutive effect of stock options....... 789 1,275 864 1,264
------- ------- ------ ------
Number of shares used in computing per
share amounts......................... 10,038 10,080 9,971 9,972
======= ======= ======= =======
Net income.............................. $ 2,418 $ 1,997 $6,423 $5,284
======= ======= ====== ======
Net income per common and equivalent
share.................................. $ 0.24 $ 0.20 $ 0.64 $ 0.53
======= ======= ====== ======
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,075
<SECURITIES> 10,411
<RECEIVABLES> 8,442
<ALLOWANCES> 0
<INVENTORY> 14,176
<CURRENT-ASSETS> 40,495
<PP&E> 15,790
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,504
<CURRENT-LIABILITIES> 10,205
<BONDS> 0
0
0
<COMMON> 19,971
<OTHER-SE> 23,287
<TOTAL-LIABILITY-AND-EQUITY> 56,504
<SALES> 46,841
<TOTAL-REVENUES> 46,841
<CGS> 0
<TOTAL-COSTS> 22,965
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,731
<INCOME-TAX> 3,308
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,423
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.64
</TABLE>
