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 June 30, 1997.
[ ] 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 Identification No.)
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
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 June 30, 1997 there were 9,535,998 shares of common stock, no par value,
outstanding.
This Report on Form 10-Q includes 17 pages with the Index to Exhibits located on
page 14.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1997
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3
Condensed Consolidated Income Statements - For the Quarter
and Six Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1997 and 1996 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 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
<PAGE>
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1997 1996 (1)
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,270 $ 3,239
Short-term investments 14,269 13,334
Accounts receivable, net 12,633 8,748
Inventories 11,071 13,922
Other current assets 2,883 3,038
-------- --------
Total current assets 44,126 42,281
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 26,390 17,476
OTHER ASSETS 149 251
-------- --------
TOTAL $ 70,665 $ 60,008
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,021 $ 2,409
Deferred income on shipments to distributors 1,691 1,180
Other current liabilities 5,999 5,714
-------- --------
Total current liabilities 10,711 9,303
LONG-TERM OBLIGATIONS 2,925 3,274
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: 1997 - 9,535,998;
1996 - 9,330,643 23,833 21,315
Net unrealized losses on short-term investments - (2)
Retained earnings 33,196 26,118
-------- --------
Total shareholders' equity 57,029 47,431
-------- --------
TOTAL $ 70,665 $ 60,008
======== ========
(1) Derived from the December 31, 1996 audited balance sheet included in the
1996 Annual Report on Form 10-K of Micrel, Incorporated.
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES $ 24,327 $ 15,317 $ 46,440 $ 29,227
COST OF REVENUES 11,426 7,505 22,157 14,363
-------- -------- -------- --------
GROSS MARGIN 12,901 7,812 24,283 14,864
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 3,203 1,891 6,384 3,756
Selling, general and administrative 4,102 2,880 7,614 5,390
-------- -------- -------- --------
Total operating expenses 7,305 4,771 13,998 9,146
-------- -------- -------- --------
INCOME FROM OPERATIONS 5,596 3,041 10,285 5,718
OTHER INCOME, NET 218 157 440 351
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 5,814 3,198 10,725 6,069
PROVISION FOR INCOME TAXES 1,977 1,086 3,647 2,064
-------- -------- -------- --------
NET INCOME $ 3,837 $ 2,112 $ 7,078 $ 4,005
======== ======== ======== ========
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 0.37 $ 0.21 $ 0.68 $ 0.40
======== ======== ======== ========
SHARES USED IN COMPUTING
PER SHARE AMOUNTS 10,377 9,932 10,365 9,938
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 12,051 $ 5,154
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (11,646) (4,215)
Purchases of short-term investments (15,435) (11,124)
Proceeds from sales and maturities of
short-term investments 14,500 11,345
-------- --------
Net cash used in investing activities (12,581) (3,994)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (557) (691)
Proceeds from the issuance of common stock 1,118 707
-------- --------
Net cash provided by financing activities 561 16
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31 1,176
CASH AND CASH EQUIVALENTS - Beginning of period 3,239 1,901
-------- --------
CASH AND CASH EQUIVALENTS - End of period $ 3,270 $ 3,077
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 129 $ 164
========= ========
Cash paid for income taxes $ 2,045 $ 2,468
========= ========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned subsidiaries
("Micrel" or the "Company") as of June 30, 1997 and for the quarter and six
months ended June 30, 1997 and 1996 are unaudited. In the opinion of management,
the condensed consolidated financial statements include all adjustments
(consisting only of normal recurring accruals) that management considers
necessary for a fair presentation of its financial position, operating results
and cash flows for the interim periods presented. Operating results and cash
flows for interim periods are not necessarily indicative of results for the
entire year.
This financial data should be read in conjunction with the audited financial
statements and notes thereto included in the Company's 1996 Annual Report on
Form 10-K for the year ended December 31, 1996.
Net Income per Common and Equivalent Share - Net income per share is 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
<TABLE>
Inventories consist of the following (in thousands):
June 30, December 31,
1997 1996
-------- -----------
<S> <C> <C>
Finished goods $ 1,655 $ 2,735
Work in process 7,135 8,313
Raw materials 2,281 2,874
-------- --------
$ 11,071 $ 13,922
======== ========
</TABLE>
3. BORROWING ARRANGEMENTS
Under a revolving line of credit and security agreement, expiring September 30,
1997, the Company can borrow up to 80% of its eligible accounts receivable to a
maximum of $3.0 million. Borrowings under the line of credit agreement bear
interest at prime (8.5% at June 30, 1997) and are collateralized by
substantially all of the assets of the Company. There were no borrowings under
this revolving line of credit at June 30, 1997.
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 June 30, 1997 and $5.0 million is
available under this agreement through September 30, 1997.
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under another nonrevolving bank line of credit that expired, the Company has
$1.9 million outstanding at June 30, 1997. The notes are collateralized by the
equipment purchased.
The borrowing agreement contains certain restrictive covenants which 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 June 30, 1997.
4. SIGNIFICANT CUSTOMERS
One customer, Qualcomm, accounted for $5.1 million (11%) of net revenues during
the six months ended June 30, 1997. During the comparable period in 1996, a
different customer, Lexmark, accounted for $3.5 million (12%) of net revenues.
5. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and
will restate at that time earnings per share ("EPS") data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Pro Forma amounts for basic and diluted EPS assuming SFAS 128 had been in effect
since January 1, 1996 are as follows:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic $ 0.41 $ 0.23 $ 0.75 $ 0.44
Diluted $ 0.37 $ 0.21 $ 0.68 $ 0.40
</TABLE>
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. The Company has shifted its focus and revenue base
from custom and foundry products to standard products. Standard products sales
increased to 73% of net revenues for the quarter ended June 30, 1997 as compared
to 65% for the same period in the prior year. For the first six months ended
June 30, 1997 and 1996, the Company's standard products sales accounted for 74%
and 64% 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 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 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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 47.0 49.0 47.7 49.1
----- ----- ----- -----
Gross margin 53.0 51.0 52.3 50.9
Operating expenses:
Research and development 13.2 12.3 13.8 12.9
Selling, general and administrative 16.8 18.8 16.4 18.4
----- ----- ----- -----
Total operating expenses 30.0 31.1 30.2 31.3
----- ----- ----- -----
Income from operations 23.0 19.9 22.1 19.6
Other income, net 0.9 1.0 1.0 1.2
----- ----- ----- -----
Income before income taxes 23.9 20.9 23.1 20.8
Provision for income taxes 8.1 7.1 7.9 7.1
----- ----- ----- -----
Net income 15.8% 13.8% 15.2% 13.7%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues increased for the quarter and six months ended June
30, 1997 as compared to the corresponding periods of the prior year. Net
revenues were $24.3 million and $46.4 million for the
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
quarter and six months ended June 30, 1997, respectively, an increase of 59%
over $15.3 million and $29.2 million for both comparable periods in 1996. The
growth in net revenues on a quarterly and year-to-date basis is due, in part, to
higher standard products revenues which grew to 73% and 74% of net revenues for
the quarter and six months ended June 30, 1997, respectively, from 65% and 64%
for each of the comparable periods in 1996. On a dollar basis, standard products
revenues increased 77% to $17.7 million for the quarter ended June 30, 1997 from
$10.0 million for the comparable period in 1996 and by 84% to $34.4 million for
the six months ended June 30, 1997 from $18.7 million for the comparable period
in 1996. Sales of standard products by the Company during the quarter and six
months 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.
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 despite an increase in unit demand for integrated
circuits. During the second quarter of 1997, standard product customer demand
continued to be short-term focused due to shorter than historical order lead
times: customer requested lead times, however, did begin to increase slightly
during the quarter ended June 30, 1997. 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.
International sales represented 47% and 41% of net revenues for the quarters
ended June 30, 1997 and 1996, respectively. Revenues from international sales
for the six months ended June 30, 1997 and 1996, accounted for 47% and 40% of
net revenues, respectively. The increase in international sales resulted from
shipments to manufacturers of personal computers and communications products
and 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'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 and
Canadian distributors until such distributors resell the Company's products to
their customers. Sales to international distributors are recognized upon
shipment. The Company estimates international distributor returns and provides
an allowance as the revenue is recognized.
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 53% and 52% for the quarter and the six
months ended June 30, 1997 from 51% for each of the comparable
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
periods in 1996. The improvement in gross margin reflected increased capacity
utilization and the continuing shift in product mix to standard products.
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's research and
development expenses increased by approximately $1.3 million, or 69%, to $3.2
million for the quarter ended June 30, 1997 from $1.9 million for the comparable
period in 1996. For the six months ended June 30, 1997, research and
development expenses increased by $2.6 million or 70%, to $6.4 million from $3.8
million for the comparable period in 1996. The increase in research and
development expenses during the quarter and six months ended June 30, 1997 was
primarily due to increased costs associated with the Company's conversion to six
inch wafer fabrication, design services, prototype wafers and increased
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 on a dollar basis in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased on a dollar basis to approximately $4.1
million or 17% of net revenues for the second quarter in 1997 from $2.9 million
or 19% of net revenues for the comparable period in 1996. For the six months
ended June 30, 1997, these expenses increased on a dollar basis by $2.2 million
or 41% to $7.6 million from $5.4 million for the comparable period in 1996 while
declining on a percentage basis to 16% of net revenues for the six months ended
June 30, 1997 from 18% for the comparable period in 1996. The dollar increase
during the quarter and six months ended June 30, 1997 was principally
attributable to higher commissions, advertising, and other sales and marketing
and promotion expenses associated with the growth of the Company's standard
products sales organization.
Other Income, Net. Other income, net reflects interest income 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 $61,000 to $218,000 for the quarter
ended June 30, 1997 from $157,000 for the comparable period in 1996. For the six
months ended June 30, 1997, other income, net increased to $440,000 from
$351,000 for the comparable period in 1996. During both the quarter and six
months ended June 30, 1997, interest income increased slightly as compared to
the comparable periods in the prior year due to an increase in average cash and
investment balances and interest expenses decreased due to a reduction in
average amount of notes payable.
Provision for Income Taxes. For each of the quarters and six months ended June
30, 1997 and 1996, the provision for income taxes was 34% of income before taxes
for each quarter. The income tax provision for such interim periods reflects the
Company's estimated annual income tax rate. The 1997 and 1996 income tax
provisions differ 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, a bank line of credit and sales of common stock. Principal
sources of liquidity at June 30, 1997 consisted of cash and short-term
investments of $17.5 million and borrowing facilities consisting of (i) $3.0
million
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
under a revolving line of credit, of which all was unused and available, and
(ii) $5.0 million under a non-revolving line of credit, under which there were
no borrowings outstanding at June 30, 1997. The two 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. These
borrowings are collateralized by substantially all of the Company's assets. The
agreement contains certain restrictive covenants which 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 June 30, 1997.
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, 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 revolving line of credit.
Under two other notes payable, the Company had $0.4 million and $1.5 million
outstanding at June 30, 1997. The notes are collateralized by the equipment
purchased.
The Company's working capital increased by $0.4 million to $33.4 million as of
June 30, 1997 from $33.0 million as of December 31, 1996. The increase was
primarily attributable to a $3.9 million increase in accounts receivable
combined with increases in cash, cash equivalents and short-term investments of
$1.0 million for the six months ended June 30, 1997 which were partially offset
by a $2.9 million decrease in inventory combined with a $1.1 million increase
in accrued compensation and a $0.6 million increase in accounts payable. The
Company's short-term investments were principally invested in investment grade,
interest-bearing securities.
The Company's cash flows from operating activities increased to approximately
$12.0 million for the six months ended June 30, 1997 from approximately $5.2
million for the six months ended June 30, 1996. The increase was primarily
attributable to net income of $7.1 million and a $2.9 million decrease in
inventory combined with an increase in current liabilities of $1.4 million ,
which were partially offset by an increase in accounts receivable.
The Company's investing activities during the six months ended June 30, 1997
used cash of approximately $12.6 million compared to $4.0 million of cash used
for investing activities during the same period in 1996. The increase in cash
usage resulted primarily from an incremental $7.4 million increase in equipment
purchases primarily relating to the six-inch wafer fabrication operation during
the six months ended June 30, 1997 and $1.2 million in net additional purchases
of short-term investments.
Financing activities during the six months ended June 30, 1997 provided cash of
approximately $0.6 million compared to $16,000 of cash provided by financing
activities during the same period in 1996. This change was the result of an
increase of $0.4 million in proceeds from the issuance of common stock through
the exercise of stock options during the six months ended June 30, 1997 as
compared to the same period in 1996, and a $134,000 reduction in repayments of
long-term debt during the same periods.
The Company currently intends to spend up to approximately $20.0 million during
the next twelve months primarily for the purchase of additional wafer and test
manufacturing equipment and leasehold
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
improvements. The Company expects that its cash requirements through mid-1998
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-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 future capital expenditures
and financing requirements; 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 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 and results of operations.
The Company has transitioned 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
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 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 and results of operations.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company is also currently transitioning to the processing of six inch
wafers, which will involve process lithography that will handle items as small
as one micron. The Company has begun purchasing equipment and preparing
production facilities to provide for such manufacturing capabilities. There
can be no assurance that the transition to six inch wafer processing will be
achieved on schedule without encountering any delays in the process
implementation. Nor can there be any assurance that the Company will achieve
acceptable manufacturing yields or that the operating income margins on such
products will be comparable to those realized in connection with the Company's
four inch wafer fabrication processes. Failure to achieve acceptable yields or
margins could 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, timing of product introductions,
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.
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, 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was held on
May 22, 1997 at 10:00 a.m., local time, at its principal corporate offices
located at 1931 Fortune Drive, San Jose, California. The Annual Meeting was held
for the purpose of (a) electing the Board of Directors, (b) ratifying and
approving the Company's independent auditors for the fiscal year ending December
31, 1997 and (c) transacting other business as may properly come before the
Annual Meeting. The two matters below were voted upon and approved:
Matter No. 1 - Election of Board of Directors:
The following persons were duly elected to the Board for the ensuing year and
until their successors are duly elected and qualified:
<TABLE>
NOMINATION FOR ABSTAINED
---------------- --------- ---------
<S> <C> <C>
Raymond D. Zinn 8,639,758 7,200
Warren H. Muller 8,643,758 3,200
Larry L. Hansen 8,643,298 3,660
George Kelly 8,643,578 3,380
Dale L. Peterson 8,643,758 3,200
</TABLE>
Matter No. 2 - Ratification of the Appointment of Deloitte & Touche LLP as the
Independent Auditors for the Fiscal Year Ending December 31, 1997:
<TABLE>
NOMINATION FOR AGAINST ABSTAINED
--------------------- --------- ------- ---------
<S> <C> <C> <C>
Deloitte & Touche LLP 8,646,008 150 800
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
Exhibit
Number Description Page
------- ------------------------------------------------------- ----
<S> <C> <C>
11.1 Statement regarding calculation of net income per share. 16
27.1 Financial Data Schedule. 17
</TABLE>
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
--------------------
during the quarter ended June 30, 1997.
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: July 24, 1997 By /S/ ROBERT J. BARKER
---------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
15
<PAGE>
<TABLE>
EXHIBIT 11.1
MICREL, INCORPORATED
COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
(In thousands, except per share data)
-------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 9,467 9,095 9,417 9,037
Dilutive effect of stock options 910 837 948 901
------- ------- ------- -------
Number of shares used in
computing per share amounts 10,377 9,932 10,365 9,938
======= ======= ======= =======
Net income $ 3,837 $ 2,112 $ 7,078 $ 4,005
======= ======= ======= =======
Net income per common and
equivalent share $ 0.37 $ 0.21 $ 0.68 $ 0.40
======= ======= ======= =======
</TABLE>
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,270
<SECURITIES> 14,269
<RECEIVABLES> 12,633
<ALLOWANCES> 0
<INVENTORY> 11,071
<CURRENT-ASSETS> 44,126
<PP&E> 26,390
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,665
<CURRENT-LIABILITIES> 10,711
<BONDS> 0
0
0
<COMMON> 23,833
<OTHER-SE> 33,196
<TOTAL-LIABILITY-AND-EQUITY> 70,665
<SALES> 46,440
<TOTAL-REVENUES> 46,440
<CGS> 22,157
<TOTAL-COSTS> 22,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,725
<INCOME-TAX> 3,647
<INCOME-CONTINUING> 7,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,078
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.68
<PAGE>
</TABLE>
