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, 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 September 30, 1997 there were 19,331,846 shares of common stock, no par
value, outstanding.
This Report on Form 10-Q includes 18 pages with the Index to Exhibits located
on page 13.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Condensed Consolidated Income Statements - For the Three
and Nine Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 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 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
<PAGE>
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1997 1996 (1)
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,048 $ 3,239
Short-term investments 16,528 13,334
Accounts receivable, net 13,448 8,748
Inventories 10,763 13,922
Other current assets 3,074 3,038
-------- --------
Total current assets 45,861 42,281
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 29,820 17,476
OTHER ASSETS 212 251
-------- --------
TOTAL $ 75,893 $ 60,008
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,225 $ 2,409
Deferred income on shipments to distributors 1,520 1,180
Other current liabilities 6,220 5,714
-------- --------
Total current liabilities 10,965 9,303
LONG-TERM OBLIGATIONS 2,629 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 - 19,331,846; 1996 - 18,661,286 24,636 21,315
Net unrealized losses on short-term investments - (2)
Retained earnings 37,663 26,118
-------- --------
Total shareholders' equity 62,299 47,431
-------- --------
TOTAL $ 75,893 $ 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES $ 27,203 $ 17,614 $ 73,643 $ 46,841
COST OF REVENUES 12,660 8,602 34,817 22,965
-------- -------- -------- --------
GROSS MARGIN 14,543 9,012 38,826 23,876
OPERATING EXPENSES:
Research and development 3,532 2,338 9,916 6,094
Selling, general and administrative 4,473 3,191 12,087 8,581
-------- -------- -------- --------
Total operating expenses 8,005 5,529 22,003 14,675
-------- -------- -------- --------
INCOME FROM OPERATIONS 6,538 3,483 16,823 9,201
OTHER INCOME, NET 230 179 670 530
INCOME BEFORE INCOME TAXES 6,768 3,662 17,493 9,731
PROVISION FOR INCOME TAXES 2,301 1,244 5,948 3,308
-------- -------- -------- --------
NET INCOME $ 4,467 $ 2,418 $ 11,545 $ 6,423
======== ======== ======== ========
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 0.21 $ 0.12 $ 0.56 $ 0.32
======== ======== ======== ========
SHARES USED IN COMPUTING
PER SHARE AMOUNTS 21,054 20,076 20,775 19,942
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 17,804 $ 8,568
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements (16,818) (6,910)
Purchases of short-term investments (29,094) (17,694)
Proceeds from sales and maturities of
short-term investments 25,900 19,450
--------- ---------
Net cash used in investing activities (20,012) (5,154)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (904) (1,049)
Proceeds from the issuance of common stock 1,921 809
--------- ---------
Net cash provided by (used in)
financing activities 1,017 (240)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,191) 3,174
CASH AND CASH EQUIVALENTS - Beginning of period 3,239 1,901
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 2,048 $ 5,075
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 143 $ 232
========= =========
Cash paid for income taxes $ 4,084 $ 2,985
========= =========
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 September 30, 1997 and for the quarter and
nine months ended September 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. In July 1997, the Company declared a two-for-one
stock split of its common stock in the form of a 100% stock dividend payable
August 19, 1997, on all shares of common stock outstanding as of August 4,
1997. All share and per share information has been adjusted to retroactively
give effect to the stock split for all periods presented.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
September 30, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Finished goods $ 2,048 $ 2,735
Work in process 6,879 8,313
Raw materials 1,836 2,874
--------- ---------
$ 10,763 $ 13,922
========= =========
</TABLE>
3. BORROWING ARRANGEMENTS
Under a revolving line of credit and security agreement, the Company can borrow
up to 80% of its eligible accounts receivable to a maximum of $3.0 million.
Borrowings under the line of credit agreement bear interest at prime (8.5% at
September 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
September 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 had not borrowed against the line at September 30, 1997 and $5.0
million is available under this agreement through September 30, 1998.
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30,
1997.
Under another nonrevolving bank line of credit that expired, the Company had
$1.6 million outstanding at September 30, 1997 under term notes that are
collateralized by the equipment purchased.
This revolving line of credit and security agreement was renewed on October 6,
1997 and expires on September 30, 1998, subject to automatic renewal on a month
to month basis thereafter unless terminated by either party upon 30 days notice.
4. SIGNIFICANT CUSTOMERS
No single customer accounted for more than ten percent of net revenues during
the nine months ended September 30, 1997. During the comparable period in 1996,
one customer, Lexmark, accounted for $6.0 million (13%) of net revenues.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic $ 0.23 $ 0.13 $ 0.61 $ 0.35
Diluted $ 0.21 $ 0.12 $ 0.56 $ 0.32
</TABLE>
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these statements will not
impact the Company's consolidated financial position, results of operations or
cash flows. Both statements are effective for the fiscal years beginning after
December 15, 1997, with earlier application permitted.
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 77% of net revenues for the quarter ended September 30, 1997 as
compared to 63% for the same period in the prior year. For the first nine months
ended September 30, 1997 and 1996, the Company's standard products sales
accounted for 75% 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.
In July 1997, the Company declared a two-for-one stock split of its common stock
in the form of a 100% stock dividend payable August 19, 1997, on all shares of
common stock outstanding as of August 4, 1997. All share and per share
information has been adjusted to retroactively give effect to the stock split
for all periods presented.
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 Nine Months Ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 46.5 48.8 47.3 49.0
------ ------ ------ ------
Gross margin 53.5 51.2 52.7 51.0
------ ------ ------ ------
Operating expenses:
Research and development 13.0 13.3 13.4 13.0
Selling, general and administrative 16.5 18.1 16.4 18.3
------ ------ ------ ------
Total operating expenses 29.5 31.4 29.8 31.3
------ ------ ------ ------
Income from operations 24.0 19.8 22.9 19.7
Other income, net 0.9 1.0 0.9 1.1
------ ------ ------ ------
Income before income taxes 24.9 20.8 23.8 20.8
Provision for income taxes 8.5 7.1 8.1 7.1
------ ------ ------ ------
Net income 16.4% 13.7% 15.7% 13.7%
====== ====== ====== ======
</TABLE>
Net Revenues. Net revenues increased for the quarter and nine months ended
September 30, 1997 as compared to the corresponding periods of the prior year.
Net revenues were $27.2 million and $73.6 million for the quarter and nine
months ended September 30, 1997, respectively, an increase of 54% and 57% over
$17.6 million and $46.8 million for the 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 77% and 75% of net revenues for the
quarter and nine months ended September 30, 1997, respectively, from 63% and 64%
for each of the comparable periods in 1996. On a dollar basis, standard products
revenues increased 88% to $21.0 million for the quarter ended September 30,
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
1997 from $11.2 million for the comparable period in 1996 and by 85% to $55.4
million for the nine months ended September 30, 1997 from $29.9 million for the
comparable period in 1996. Sales of standard products by the Company during the
quarter and nine 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 third quarter of 1997, standard product customer demand
continued to be short-term focused due to shorter than historical order lead
times. These factors affect the Company's ability to predict future sales
growth, profitability and forward visibility. The Company's ability to predict
demand in future quarters also continues to be affected by the trend of its
customers to place orders close to desired shipment dates and to reduce their
long-term purchasing commitments, which is the result of less predictable
demand for such customers' products and increased product availability in the
semiconductor industry. The Company has sought to address these reduced order
lead times by implementing faster production cycles.
International sales represented 50% and 39% of net revenues for the quarters
ended September 30, 1997 and 1996, respectively. Revenues from international
sales for the nine months ended September 30, 1997 and 1996, accounted for 49%
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 54% and 53% for the quarter and the nine
months ended September 30, 1997 from 51% for each of the comparable periods in
1996. The improvement in gross margin reflected increased capacity utilization.
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 $1.2 million, or 51%, to $3.5
million for the quarter ended September 30, 1997 from $2.3 million for the
comparable period in 1996. For the nine months ended September 30, 1997,
research and development expenses increased by $3.8 million or 63%, to $9.9
million from $6.1 million for the comparable period in 1996. The increase in
research and development expenses during the quarter and nine months ended
September 30, 1997 was primarily due to increased costs associated with the
Company's conversion to six-inch wafer fabrication, 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased on a dollar basis to approximately $4.5
million or 16% of net revenues for the third quarter in 1997 from $3.2 million
or 18% of net revenues for the comparable period in 1996. For the nine months
ended September 30, 1997, these expenses increased on a dollar basis to $12.1
million from $8.6 million for the comparable period in 1996 while declining on a
percentage basis to 16% of net revenues for the nine months ended September 30,
1997 from 18% for the comparable period in 1996. The dollar increase during the
quarter and nine months ended September 30, 1997 was principally attributable to
higher commissions, advertising, and other sales and administrative expenses
associated with the growth of the Company's standard products revenues.
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 $51,000 to $230,000 for the quarter
ended September 30, 1997 from $179,000 for the comparable period in 1996. For
the nine months ended September 30, 1997, other income, net increased to
$670,000 from $530,000 for the comparable period in 1996. During both the
quarter and nine months ended September 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 nine months ended
September 30, 1997 and 1996, the provision for income taxes was 34% of income
before taxes. The income tax provision for such interim 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, bank borrowings and sales of common stock. Principal sources
of liquidity at September 30, 1997 consisted of cash and short-term investments
of $18.6 million and borrowing facilities 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 line of credit, under which there were no
borrowings outstanding at September 30, 1997. The two lines of credit are
covered by the same loan and security agreement. This agreement was renewed on
October 6, 1997 and expires on September 30, 1998, 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
September 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 $0.3 million and $1.3 million
outstanding at September 30, 1997. The notes are collateralized by the
equipment purchased.
The Company's working capital increased by $1.9 million to $34.9 million as of
September 30, 1997 from $33.0 million as of December 31, 1996. The increase was
primarily attributable to a $4.7 million increase in accounts receivable
combined with increases in cash, cash equivalents and short-term investments of
$2.0 million for the nine months ended September 30, 1997 which were partially
offset by a $3.2 million decrease in inventory combined with a $0.8 million
increase in accounts payable and a $0.4 million increase in income taxes
payable. The Company's short-term investments were principally invested in
investment grade, interest-bearing securities.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company's cash flows from operating activities increased to approximately
$17.8 million for the nine months ended September 30, 1997 from $8.6 million
for the comparable prior year period. The increase was primarily attributable
to an increase in net income to $11.5 million for the nine months ended
September 30, 1997 from $6.4 million for the comparable prior year period and
to a $3.2 million decrease in inventory combined with a $1.7 million increase
in current liabilities, which were partially offset by a $4.7 million increase
in accounts receivable resulting from higher sales.
The Company's investing activities during the nine months ended September 30,
1997 used cash of approximately $20.0 million compared to $5.2 million of cash
used for investing activities during the comparable period in 1996. The
increase in cash used resulted primarily from an incremental $9.9 million
increase in equipment purchases and leasehold improvements primarily relating
to the six-inch wafer fabrication operation during the nine months ended
September 30, 1997 and $5.0 million in net additional purchases of short-term
investments.
Financing activities during the nine months ended September 30, 1997 provided
cash of approximately $1.0 million compared to $0.2 million of cash used in
financing activities during the comparable period in 1996. This change was the
result of an increase of $1.1 million in proceeds from the issuance of common
stock through the exercise of stock options during the nine months ended
September 30, 1997 as compared to the same period in 1996, and a $145,000
reduction in repayments of long-term debt during the same periods.
The Company currently intends to spend up to approximately $25.0 million during
the next twelve months primarily for the purchase of additional wafer and test
manufacturing equipment and leasehold improvements. The Company expects that
its cash requirements through 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-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward looking statements
include: statements regarding future products or product development;
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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
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.
12
<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 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(a) Exhibits.
---------
Exhibit
Number Description Page
------- ------------------------------------------------------ -----
<S> <C> <C>
10.1 Twelfth Amendment dated October 6, 1997 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 and September 30, 1996. 15
11.1 Statement regarding calculation of net income per share. 17
27.1 Financial Data Schedule. 18
</TABLE>
(b) Reports on Form 8-K. The Company filed Report on Form 8-K, dated
--------------------
August 13, 1997, in connection with its declaration of a two-for-one
stock split of the registrant's common stock ("Common Stock") effected
in the form of a 100% dividend payable August 19, 1997 on all shares
of the Common Stock outstanding as of August 4, 1997.
13
<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 24, 1997 By: /S/ ROBERT J. BARKER
---------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
14
<PAGE>
EXHIBIT 10.1
TWELFTH AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
(RECEIVABLES AND INVENTORY)
THIS TWELFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(RECEIVABLES AND INVENTORY) (this "Twelfth Amendment") is dated as of October 6,
1997 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 and 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, 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"), and
that certain Eleventh Amendment to Amended and Restated Loan and Security
Agreement (Receivables and Inventory) dated as of September 30, 1996
(collectively, the "Loan Agreement");
B. Borrower and Bank intend to further amend the Loan Agreement as
provided by this Twelfth Amendment.
AGREEMENT:
NOW, THEREFORE, Borrower and Bank hereby agree as follows:
1. This Twelfth 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 Twelfth 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.
2. The 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 September
30, 1998 and shall continue on a month-to-month basis thereafter until
terminated by either party on thirty (30) day's 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.
3. Section 23 of the Loan Agreement is hereby amended as follows:
For the purpose of Equipment Purchase Line I, "Draw Period I" shall mean
the period between September 30, 1996 and the earlier to occur of the following
(the "Term Date I"): (i) September 30, 1998 or (ii) the date on
15
<PAGE>
which the aggregate of all advances made pursuant to Equipment Purchase Line
I equals Five Million and 00/100 Dollars ($5,000,000.00).
4. Bank's duties to extend and renew the Obligations and to make advances
in accordance with this Twelfth 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, an environmental assessment, evidence of insurance
in the form 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 Twelfth Amendment, (b) a
Corporate Resolution to Borrow and Pledge in the form and content attached
hereto as Exhibit "A" or otherwise acceptable to Bank, (c) an Amended and
Restated Equipment Purchase Line Note I in the form and content of the attached
Exhibit I-1, (d) Representations and Warranties in a form and content acceptable
to Bank, and (d) such other documents as Bank may request.
5. Borrower hereby ratifies, 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 Twelfth
Amendment.
6. Except as amended by this Twelfth 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 Twelfth
Amendment to Bank on the date first above written at San Jose, California.
"BORROWER"
MICREL INCORPORATED,
a California corporation
By: /S/ ROBERT J. BARKER
-----------------------
Robert J. Barker
Vice President, Finance
IN WITNESS WHEREOF, Bank hereby accepts this Twelfth Amendment effective as
of October 6, 1997 at San Jose, California.
"BANK"
BANK OF THE WEST,
a California banking corporation
By: /S/ ROBERT J. GALLI
---------------------
Robert J. Galli
Regional Vice President
/S/ Barbara B. Jenkins
[SEAL OF BARBARA B. JENKINS,
Comm. #1107420
Notary Public - California
Santa Clara County
Comm. Exp. Aug. 4, 2000]
16
<PAGE>
<TABLE>
EXHIBIT 11.1
MICREL, INCORPORATED
COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 19,198 18,498 18,955 18,214
Dilutive effect of stock options 1,856 1,578 1,820 1,728
------- ------- -------- -------
Number of shares used in computing
per share amounts 21,054 20,076 20,775 19,942
======= ======= ======== =======
Net income $ 4,467 $ 2,418 $ 11,545 $ 6,423
======= ======= ======== =======
Net income per common and equivalent
share $ 0.21 $ 0.12 $ 0.56 $ 0.32
======= ======= ======== =======
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1997 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-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,048
<SECURITIES> 16,528
<RECEIVABLES> 13,448
<ALLOWANCES> 0
<INVENTORY> 10,763
<CURRENT-ASSETS> 45,861
<PP&E> 29,820
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,893
<CURRENT-LIABILITIES> 10,965
<BONDS> 0
0
0
<COMMON> 24,636
<OTHER-SE> 37,663
<TOTAL-LIABILITY-AND-EQUITY> 75,893
<SALES> 73,643
<TOTAL-REVENUES> 73,643
<CGS> 34,817
<TOTAL-COSTS> 34,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,493
<INCOME-TAX> 5,948
<INCOME-CONTINUING> 11,545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,545
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.56
<PAGE>
</TABLE>
