UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of January 30, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $407,743,199 based upon
the closing sales price of the Common Stock as reported on the Nasdaq National
Market on such date. Shares of Common Stock held by officers, directors and
holders of more than ten percent of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of January 30, 1998, the Registrant had outstanding 19,517,014 shares of
Common Stock.
__________________________________
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference in this
report: Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders (Part III).
This Report on Form 10-K includes 48 pages with the Index to Exhibits
located on pages 25 to 26.
<PAGE>
MICREL, INCORPORATED
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
Page
PART I
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for the Registrant's Common Equity and Related
Shareholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A Quantitative and Qualitative Disclosures About Market Risk 22
Item 8 Financial Statements and Supplementary Data 22
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 10 Directors and Executive Officers of the Registrant 23
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners
and Management 24
Item 13 Certain Relationships and Related Transactions 24
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 25
Signatures 44
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PART I
ITEM 1. BUSINESS
General
The Company was incorporated in California in July 1978. References to the
"Company" and "Micrel" refer to Micrel, Incorporated and Subsidiaries, which
also does business as Micrel Semiconductor. The Company's principal executive
offices are located at 1849 Fortune Drive, San Jose, California 95131. The
Company's telephone number is (408) 944-0800.
Micrel designs, develops, manufactures and markets a range of high-
performance analog integrated circuits. The Company currently ships over 850
standard products and has derived the majority of its standard products revenue
for the year ended December 31, 1997 from sales of analog integrated circuits
for power management. These circuits are used in a wide variety of electronic
products, including those in the communications, computer and industrial
markets. The Company's standard products business has represented the Company's
most rapidly growing revenue source. For the years ended December 31, 1997,
1996, and 1995, the Company's standard products accounted for 76%, 66% and 56%,
respectively, of the Company's net revenues. In addition, the Company
manufactures custom analog and mixed-signal circuits and provides wafer foundry
services for a diverse range of customers who produce electronic systems for
communications, consumer and military applications.
Recent trends in the communications and computing markets have created
increased demand for power analog circuits, which control, regulate, convert
and route voltage and current in electronic systems. This demand for power
analog circuits has been fueled by the recent growth of battery powered
cellular telephones and computing devices and the emergence of lower voltage
microprocessors and Personal Computer Memory Card International Association
("PCMCIA") standards for peripheral devices. Micrel's standard products
business is focused on addressing this demand for high-performance power analog
circuits. The Company sells a wide range of regulators, references and switches
designed for cellular telephones and laptop computers. The Company believes it
was one of the first companies to offer analog products for the PCMCIA Card
market and that it currently provides a majority of the power analog circuits
used in PC Card sockets. The Company also offers standard products that address
other markets, including power supplies and automotive, industrial, defense and
avionics electronics.
In addition to standard products, Micrel offers customers various
combinations of design, process and foundry services. Through interaction with
customers in its custom and foundry business, the Company has been able to
enhance its design and process technology capabilities, which in turn provides
engineering and marketing benefits to its standard products business.
Industry Background
Analog Circuit Market
Integrated circuits may be divided into three general categories - digital,
analog (also known as "linear") and mixed-signal. Digital circuits, such as
memories and microprocessors, process information in the form of on-off
electronic signals and are capable of implementing only two values ("1" or "0",
or "on" or "off"). Analog circuits, such as regulators, converters and
amplifiers, process information in the form of continuously varying voltages
and currents that have an infinite number of values or states. Analog circuits
condition, process, measure or control real world variables such as current,
sound, temperature, pressure or speed. Mixed-signal integrated circuits combine
analog and digital functions on one chip.
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Analog circuits are used in virtually every electronic system, and the
largest markets for such circuits are computers, telecommunications and data
communications, industrial equipment, and military, consumer and automotive
electronics. Because of their numerous applications, analog circuits have a
wide range of operating specifications and functions. For each application,
different users may have unique requirements for circuits with specific
resolution, processing linearity, speed, power and signal amplitude capability.
Such differentiation results in a high degree of market fragmentation, which
provides smaller companies an opportunity to compete successfully against
larger suppliers in certain market segments.
As compared with the digital integrated circuit industry, the analog
integrated circuit industry has the following important characteristics:
Dependence on Individual Design Teams. The design of analog circuits
involves the complex and critical placement of various circuits.
Computer-aided design is less effective for analog devices. Analog
circuit design has traditionally been highly dependent on the skills and
experience of individual design engineers.
Interdependence of Design and Process. Analog designers, especially at
companies having their own wafer fabrication facility ("fab"), are able
to select from several wafer fabrication processes in order to achieve
higher performance and greater functionality from their designs.
Longer Product Cycles and More Stable Pricing. Analog circuit
manufacturers offer a greater variety of circuits to a more diverse group
of customers, in a market characterized by greater fragmentation
emphasizing performance, functional value, quality and reliability.
Analog circuits generally have longer product cycles as compared to
digital circuits. As a result, analog circuit pricing has historically
been more stable than most digital circuit pricing.
Reduced Capital Requirements. As compared to digital circuits, analog
circuits are produced with larger line width geometries in wafer
fabrication facilities that are significantly less costly than
state-of-the-art digital fabrication facilities. The wafer fabrication
facilities for analog circuits generally utilize capital equipment that
is less subject to obsolescence than the capital equipment utilized in
digital fabrication facilities.
Analog circuits are sold to customers as either standard products or custom
products. Standard products are available to customers "off-the-shelf" and are
often sold in large volumes to a wide variety of customers in different
industries. Custom products are designed to an individual customer's
specifications.
Recent Trends in Analog Power Management
Most electronic systems utilize analog circuits to perform power management
functions ("power analog circuits") such as the control, regulation, conversion
and routing of voltages and current. The computer and communications markets
have emerged as two of the largest markets for power analog circuits. In
particular, the recent growth and proliferation of portable, battery powered
devices, such as cellular telephones and laptop computers, have increased
demand and created new technological challenges for power analog circuits.
Cellular telephones, which are composed of components and subsystems that
utilize several different voltage levels, require multiple power analog
circuits to precisely regulate and control voltage. Manufacturers are replacing
traditional pass regulators with higher performance low dropout ("LDO")
regulators to lengthen battery life and are utilizing smaller, more highly
integrated power analog circuits, such as regulators and references.
Certain trends in personal computers and other computing devices have also
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increased market demand and created new requirements for power analog circuits.
One major trend is the advent of lower voltage microprocessors, such as Intel's
Pentium product. These lower voltage microprocessors reduce power consumption,
thereby prolonging battery life for portable and desktop personal computers.
These mixed voltage personal computers require multiple LDO regulators to
manage power in the system. Another recent trend is the emergence of PCMCIA
standards that require rugged components and a voltage protection capability,
thereby creating new specifications for higher performance power analog
switches.
Micrel's Strategy
Micrel seeks to capitalize on the growth opportunities within the high
performance analog semiconductor market. The Company's core competencies are
its analog design and process technology, its large, in-house wafer fabrication
capability and its manufacturing expertise. The Company intends to build a
leadership position in its targeted markets by pursuing the following
strategies:
Focus on Standard Products for High Growth Markets. Currently, Micrel
ships over 850 standard products, with net revenues from standard
products generating 76% of the Company's net revenues for the year ended
December 31, 1997. Micrel intends to continue to transition to standard
products and believes that its long-term growth will depend substantially
on its ability to increase standard products sales in its existing
markets and to penetrate new standard products markets. The Company,
however, will from time to time pursue additional custom and foundry
business as opportunities arise.
Target Power Analog Circuit Markets. Micrel has leveraged its expertise in
analog circuits by addressing market opportunities in cellular
telephones, battery powered computers and desktop personal computers. A
majority of the Company's standard products net revenues for the year
ended December 31, 1997 were derived from standard products relating to
power management.
Maintain Technological Leadership. The Company seeks to utilize its design
strengths and its process expertise to enhance what the Company believes
are its competitive advantages in LDO regulators and PCMCIA sockets
devices. In order to maintain its technology leadership, the Company has
developed plans for successive generations of products with increased
functionality.
Capitalize on In-house Wafer Fab. The Company believes that its in-house
wafer fab provides a significant competitive advantage because it
facilitates close collaboration between design and process engineers in
the development of the Company's products. The Company intends to expand
its manufacturing capacity by adding additional equipment and employees
at its fabrication facility.
Maintain a Strategic Level of Custom and Foundry Products Revenue. Micrel
believes that its custom and foundry products business complements its
standard products business by generating a broader revenue base and
lowering overall per unit manufacturing costs through greater utilization
of its fab. Through interaction with customers, Micrel has been able to
enhance its design and process technology capabilities.
Products and Markets
Overview
The following table sets forth the net revenues attributable to the
Company's standard products and its custom and foundry products expressed in
dollars and as a percentage of total net revenues.
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<TABLE>
<CAPTION>
Net Revenues by Product Category
(dollars in thousands)
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C.
Net Revenues Data:
Standard Products $ 79,203 $ 43,530 $ 29,576
Custom and Foundry Products 24,955 22,714 23,459
--------- --------- ---------
Total net revenues $ 104,158 $ 66,244 $ 53,035
========= ========= =========
As a Percentage of Total Net Revenues:
Standard Products 76% 66% 56%
Custom and Foundry Products 24 34 44
--------- --------- ---------
Total net revenues 100% 100% 100%
========= ========= =========
</TABLE>
For a discussion of the changes in net revenues from period to period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Standard Products
In recent years, the Company has directed a majority of its development,
sales and marketing efforts towards standard products in an effort to address
the larger markets for these products and to broaden its customer base. The
Company offers power analog circuits that address certain high growth markets
including cellular telephones, battery powered computers and desktop personal
computers. The Company's remaining standard products address other markets,
including power supplies and automotive, industrial, defense and avionics
electronics.
Cellular Telephone Market. Micrel offers a range of power control and
regulating analog circuits to address the demand for cellular telephones with
longer battery lives. Micrel also provides a range of high performance LDO
regulators that convert, regulate, switch and control the DC voltages used in
cellular telephones. Micrel's SuperBeta PNP LDO regulators enable cellular
telephones to continue to operate effectively until the battery is almost
completely exhausted. Micrel products are designed to reduce board space and
decrease system cost. In addition, Micrel offers switch mode power supply
("SMPS") regulators that convert AC to useable DC power in battery chargers and
cellular base stations.
PCMCIA Card and Socket Markets. The Personal Computer Memory Card
International Association, of which Micrel is a member, has established
standards for personal computer cards that are the size of credit cards and for
sockets that allow insertion of such cards into personal computers. Micrel
believes that it is a leader in the design and manufacture of integrated
circuits that enable PC Card sockets to have such compatibility.
Portable Battery Powered Computer Market. The Company makes power analog
circuits for laptop, palmtop computers and pocket organizers. Products in this
growing segment are differentiated on the basis of power efficiency, weight,
small size and battery life. Micrel has developed a family of 95% efficient
SMPS controllers that it believes to be one of the leading solutions for these
applications.
Power Supply Market. Most electronic equipment includes a power supply that
converts and regulates the electrical power source into usable current for the
equipment. In addition to SMPS controllers and single chip SMPS circuits,
Micrel offers a full line of MOSFET drivers, references, LDOs and Super LDOs.
Automotive Electronics Market. Micrel's LDO products, including the line of
monolithic SuperBeta PNP LDO regulators, have been designed in for such
automotive controller applications and safety features as automotive airbags
and antilock brake systems. Micrel is developing several other products for
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the automotive electronic market. For each of the years ended December 31,
1997, 1996, and 1995, the automotive electronics market represented less than
2% of net revenues.
General Purpose Analog. During 1997, Micrel introduced a variety of general
purpose analog products including timers, op-amps, and a family of intelligent
controlled one and two amp switches. These products were focused on the low
voltage and low current applications.
The Company's future success will depend in part upon the timely completion,
introduction, and market acceptance of new standard products. As compared with
the Company's custom and foundry products business, the standard products
business is characterized by shorter product lifecycles, greater pricing
pressure, larger competitors and more rapid technological change. Generally,
the standard products market is a rapidly changing market in which the Company
faces the risk that its product offerings will quickly become obsolete. The
success of new standard products depends on a variety of factors, including
product selection, successful and timely completion of product development,
achievement of acceptable manufacturing yields by the Company's foundry and the
Company's ability to offer products at competitive prices.
Micrel's new products are generally incorporated into a customer's products
or systems at the design stage. The value of any design win largely depends
upon the commercial success of the customer's product and on the extent to
which the design of the customer's electronic system accommodates incorporation
of components manufactured by the Company's competitors. In addition, products
or systems may be subsequently redesigned so that they no longer require the
Company's products. No assurance can be given that the Company will achieve
design wins or that any design win will result in future revenues. The failure
of the Company to achieve design wins would materially and adversely affect the
Company's financial condition and results of operations.
Custom and Foundry Products
Micrel offers customers various combinations of design, process and foundry
services in order to provide them with the following alternatives:
Full Service Custom - Based on a customer's specification, Micrel designs
and then manufactures integrated circuits for the customer.
Custom and Semi-Custom - Based on a customer's high level or partial
circuit design, Micrel uses varying levels of its design and process
technologies to complete the design and then manufactures integrated
circuits for the customer.
R&D Foundry - Micrel modifies a process or develops a new process for a
customer. Using that process and mask sets provided by the customer,
Micrel manufactures fabricated wafers for the customer.
Foundry - Micrel duplicates a customer's process to manufacture fabricated
wafers designed by the customer.
Micrel's full service custom, custom and semi-custom products primarily
address consumer and military applications and use both analog and digital
technologies. The military applications include communications, transport
aircraft and cruise missile technology.
With respect to R&D foundry and other foundry products, Micrel provides
wafers to a variety of companies as well as to the military. The Company
believes that the foundry business reduces somewhat the Company's sensitivity
to fluctuations in its standard products markets as the Company's foundry
customers are often in different markets that are not affected by the same
business cycles.
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Sales, Distribution and Marketing
The Company sells its products through a worldwide network of independent
sales representative firms and distributor firms and through a direct sales
staff. The Company currently utilizes 20 independent sales representative firms
in the United States and Canada. The Company currently utilizes four national
distributor firms. In the year ended December 31, 1997, sales through North
American distributor firms accounted for 11% of the Company's net revenues. As
the Company continues its transition to standard products, the Company believes
that its sales through representative firms and distributor firms will be
increasingly important and will account for an increasing percentage of the
Company's net revenues.
The Company sells its products in Europe through a direct sales staff in
England as well as independent sales representative firms, independent
distributors and independent stocking representative/distributor firms. Asian
sales are handled through independent stocking representative/distributor firms
with Micrel sales offices in Korea and Taiwan. The stocking
representatives/distributor firms may buy and stock the Company's products for
resale or may act as the Company's agent in arranging for direct sales from the
Company to an OEM customer.
Sales to customers in North America, Asia and Europe accounted for 50%, 37%
and 13%, respectively, of the Company's net revenues for the year ended
December 31, 1997 compared to 59%, 30% and 11%, respectively, of the Company's
net revenues for 1996 and 66%, 22% and 12%, respectively, of the Company's net
revenues for 1995. The Company's standard products are sold throughout the
world, while its custom and foundry products are primarily sold to North
American customers.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's products
in foreign markets and make the Company's products relatively more expensive
than competitors' products that are denominated in local currencies, leading to
a reduction in sales or profitability in those foreign markets. The Company has
not taken any protective measures against exchange rate fluctuations, such as
purchasing hedging instruments with respect to such fluctuations.
Customers
For the year ended December 31, 1997, one customer, Qualcomm, accounted for
11% of the Company's net revenues. For the year ended December 31, 1996, one
customer, Lexmark, accounted for 11% of the Company's net revenues. For the
year ended December 31, 1995, no single customer accounted for ten percent or
more of the Company's net revenues.
Design and Process Technology
Micrel's proprietary design technology depends on the skills of its analog
design team. The Company has experienced analog design engineers who utilize an
extensive macro library of analog and mixed-signal circuits and computer
simulation models.
Micrel can produce integrated circuits using a variety of manufacturing
processes, some of which are proprietary and provide enhanced product features.
Designers at companies that do not have in-house fabs or have a limited
selection of available processes often have to compromise design methodology in
order to match process parameters.
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The Company utilizes the following process technologies:
Bipolar - Bipolar technology is one of the oldest technologies. It is
utilized where precision analog elements are required.
SuperBeta PNP - The Company's proprietary SuperBeta PNP process
technology allows power transistors to be driven with much lower current
as compared to conventional PNP Bipolar technology, which gives such
transistors a competitive advantage.
CMOS - CMOS technology is the technology most widely used in digital
applications. It has the advantages of low power consumption and high
packing density.
BiCMOS - Bipolar/CMOS ("BiCMOS") merges the Bipolar and CMOS technologies
and offers the benefits of both technologies. This process, however, adds
more expense to a product.
BCD - Bipolar/CMOS/DMOS ("BCD") merges three technologies, Bipolar, CMOS
and DMOS. DMOS is best suited for handling high current and is used in
the output section of the circuit. BCD combines the high speed,
ruggedness and power of DMOS and the benefits of BiCMOS.
Research and Development
The ability of the Company to compete will substantially depend on its
ability to define, design, develop and introduce on a timely basis new products
offering design or technology innovations. Research and development in the
analog integrated circuit industry is characterized primarily by circuit design
and product engineering that enables new functionality or improved performance.
The Company's research and development efforts are also directed at its process
technologies and focus on cost reductions to existing manufacturing processes
and the development of new process capabilities to manufacture new products and
add new features to existing products. With respect to more established
products, the Company's research and development efforts also include product
redesign, shrinkage of device size and the reduction of mask steps in order to
improve yields per wafer and reduce per device costs.
The Company's design engineers principally focus on developing next
generation standard products. The Company's new product development strategy
emphasizes a broad line of standard products that are based on customer input
and requests. The Company often develops new standard products with the
cooperation of customers in order to better ensure market acceptance. The
Company is currently developing products to expand its line of PCMCIA switches,
SMPS regulators, LDOs and MOSFET drivers.
In 1997, 1996, and 1995 the Company spent approximately $14.0 million, $8.6
million, and $6.5 million, respectively, on research and development. The
Company expects that it will continue to spend substantial funds on research
and development activities. The Company is currently developing, and may in the
future develop, certain types of standard products with which the Company has
only limited experience. Certain of these new standard products will be
targeted at emerging market segments in which the Company has not previously
participated. Additionally, there can be no assurance that the Company will be
able to identify new standard product opportunities successfully and develop
and bring to market such new products or that the Company will be able to
respond effectively to new technological changes or new product announcements
by others.
Patents and Intellectual Property Protection
The Company seeks patent protection for those inventions and technologies
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for which such protection is suitable and is likely to provide competitive
advantage to the Company. The Company currently holds 28 United States patents
on semiconductor devices and methods, with various expiration dates through
2016. The Company has applications for 6 United States patents pending. The
Company holds no issued foreign patents and has applications for 29 foreign
patents pending. The Company has also routinely protected its numerous original
mask sets under mask work laws. There can be no assurance that any patent owned
by the Company will not be invalidated, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will issue or
will be issued with the scope of the claims sought by the Company.
Notwithstanding the Company's active pursuit of patent and mask work
protection, the Company believes that its future success will depend primarily
upon the technical expertise, creative skills and management abilities of its
officers and key employees rather than on patent and copyright ownership.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. To the extent that the Company
becomes involved in such intellectual property litigation, it could result in
substantial costs and diversion of resources to the Company and could have a
material adverse effect on the Company's financial condition or results of
operations.
On May 9, 1994, Linear Technology Corporation ("Linear"), a competitor of
the Company, filed a complaint against the Company, entitled Linear Technology
Corporation v. Micrel, Incorporated, in the United States District Court in San
Jose, California, alleging patent and copyright infringement and unfair
competition. All claims, except the patent infringement claim, have been
settled or dismissed. In this lawsuit, Linear claims that two of the Company's
products infringe one of Linear's patents. The complaint in the lawsuit seeks
unspecified compensatory damages, treble damages and attorneys' fees as well as
preliminary and permanent injunctive relief against infringement of the Linear
patent at issue. The Company has asserted defenses of invalidity and
unenforceability of the Linear patent at issue, as well as noninfringement of
such patent. The Company believes that the ultimate outcome of this action will
not result in a material adverse effect on the Company's financial condition or
results of operation. However, litigation is subject to inherent uncertainties,
and no assurance can be given that the Company will prevail in such litigation.
Accordingly, the pending litigation with Linear as well as potential future
litigation with other companies could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's
financial condition or results of operations. In addition, Linear has
previously notified the Company that certain of the Company's products may
infringe other Linear patents.
Supply of Materials and Purchased Components
Micrel currently purchases certain components from a limited group of
vendors. The packaging of the Company's products which is performed by, and
certain of the raw materials included in such products are obtained from a
limited group of suppliers. For example, four-inch, and six-inch going forward,
silicon substrates, which are a key ingredient in the Company's products, are
currently available from four suppliers and are subject to long ordering lead
times. Although the Company seeks to reduce its dependence on its sole and
limited source suppliers, disruption or termination of any of these sources
could occur and such disruptions could have at least a temporary adverse effect
on the Company's financial condition or results of operations. The Company has
rarely experienced delays in obtaining raw materials, which have adversely
affected production.
Manufacturing
All of Micrel's wafers are manufactured at its facility in San Jose,
California. This 57,000 square foot office and manufacturing facility contains
a 24,800 square foot clean room facility, which provides all production
processes. The San Jose facility is classified as a Class 10 facility, which
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means that the facility achieves a clean room level of fewer than 10 foreign
particles larger than 0.5 microns in size in each cubic foot of space. In the
third quarter of 1996, the Company began purchasing equipment that will allow
the processing of six inch wafers and allow process lithography as small as one
micron. In the third quarter of 1997, the Company began processing certain
products using six inch wafers. In the fourth quarter of 1997, approximately 5%
of wafer fab outputs were produced using six inch wafers. In February 1995, the
Company leased approximately 63,000 square feet of additional adjacent space in
San Jose and began using the structure as a testing facility in June 1995.
The fabrication of integrated circuits is a highly complex and precise
process. Minute impurities, contaminants in the manufacturing environment,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, manufacturing equipment failure, wafer breakage or other
factors can cause a substantial percentage of wafers to be rejected or numerous
die on each wafer to be nonfunctional. There can be no assurance that the
Company in general will be able to maintain acceptable manufacturing yields in
the future.
Generally, each die on the Company's wafers is electrically tested for
performance, and most of the wafers are subsequently sent to independent
assembly and final test contract facilities in Malaysia and other Asian
countries. At such facilities, the wafers are separated into individual
circuits and packaged. The Company's reliance on independent assemblers may
subject the Company to longer manufacturing cycle times. The Company from time
to time has experienced competition with respect to these contractors from
other manufacturers seeking assembly of circuits by independent contractors.
Although the Company currently believes that alternate foreign assembly sources
could be obtained without significant interruption, there can be no assurance
that such alternate sources could be obtained quickly.
The Company manufactures all of its products at one wafer fabrication
facility. Given the nature of the Company's products, it would be difficult to
arrange for independent manufacturing facilities to supply such products. Any
prolonged inability to utilize the Company's manufacturing facility as a result
of fire, natural disaster or otherwise, would have a material adverse effect on
the Company's financial condition or results of operations.
Competition
The analog semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the analog market for
standard products include product features, performance, price, the timing of
product introductions, the emergence of new computer standards, quality and
customer support. The Company believes that it competes favorably in all these
areas.
Because the standard products market for analog integrated circuits is
diverse and highly fragmented, the Company encounters different competitors in
its various market areas. The Company's principal competitors include Linear
Technology Corporation and National Semiconductor Corporation in one or more of
its product areas. Other competitors include Texas Instruments, Motorola, Maxim
Integrated Products, Inc. and certain Japanese manufacturers. Each of these
companies has substantially greater technical, financial and marketing
resources and greater name recognition than the Company. Due to the increasing
demands for analog circuits, the Company expects intensified competition from
existing analog circuit suppliers and the entry of new competitors.
With respect to the custom and foundry products business, significant
competitive factors include product quality and reliability, established
relationships between customers and suppliers, timely delivery of products and
price. The Company believes that it competes favorably in all these areas. The
Company's principal competitors in the custom and foundry products business
include American Microelectronics, Inc., Callogic Corporation and certain local
foundry companies.
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Backlog
At December 31, 1997, the Company's backlog was approximately $39.9 million,
all of which is scheduled to be shipped during the first six months of 1998. At
December 31, 1996, the Company's backlog was approximately $21.6 million.
Orders in backlog are subject to cancellation or rescheduling by the customer,
generally with a cancellation charge in the case of custom and foundry
products. The Company's backlog consists of distributor and customer released
orders required to be shipped within the next six months. Shipments to United
States and Canadian distributors are not recognized as revenue by the Company
until the product is sold from the distributor stock and through to the end-
users. Because of possible changes in product delivery schedules and
cancellation of product orders and because the Company's sales will often
reflect orders shipped in the same quarter that they are received, the
Company's backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.
Environmental Matters
Federal, state and local regulations impose various environmental controls
on the storage, handling, discharge and disposal of chemicals and gases used in
the Company's manufacturing process. The Company believes that its activities
conform to present environmental regulations. Increasing public attention has,
however, been focused on the environmental impact of semiconductor operations.
While the Company has not experienced any materially adverse effects on its
operations from environmental regulations, there can be no assurance that
changes in such regulations will not impose the need for additional capital
equipment or other requirements or restrict the Company's ability to expand its
operations. Any failure by the Company to adequately restrict the discharge of
hazardous substances could subject the Company to future liabilities or could
cause its manufacturing operations to be suspended.
Employees
As of December 31, 1997, the Company had 546 full-time employees. The
Company's employees are not represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The Company
believes that its employee relations are good.
12
<PAGE>
ITEM 2. PROPERTIES
The Company's main executive, administrative, manufacturing and technical
offices are located in a 57,000 square foot facility and an adjacent 63,000
square foot facility in San Jose, California under lease agreements that expire
in May 2000 and May 2005 respectively. The Company fabricates its wafers at
this location in a 24,800 square foot clean room facility, which provides all
production processes. In addition to wafer fabrication, the Company also the
uses this location as a testing facility.
The Company believes that its existing and planned facilities are adequate
for its current manufacturing needs. The Company believes that if it should
need additional space, such space would be available at commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
On May 9, 1994, Linear Technology Corporation, a competitor of the Company,
filed a complaint against the Company, entitled Linear Technology Corporation
v. Micrel, Incorporated, in the United States District Court in San Jose,
California, alleging patent and copyright infringement and unfair competition.
All claims, except the patent infringement claim, have been settled or
dismissed. In this lawsuit, Linear claims that two of the Company's products
infringe one of Linear's patents. The complaint in the lawsuit seeks
unspecified compensatory damages, treble damages and attorneys' fees as well as
preliminary and permanent injunctive relief against infringement of the Linear
patent at issue. The Company has asserted defenses of invalidity and
unenforceability of the Linear patent at issue, as well as noninfringement of
such patent. The Company believes that the ultimate outcome of this action will
not result in a material adverse effect on the Company's financial condition or
results of operation. However, litigation is subject to inherent uncertainties,
and no assurance can be given that the Company will prevail in such litigation.
Accordingly, the pending litigation with Linear as well as potential future
litigation with other companies could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's
financial condition or results of operations. In addition, Linear has
previously notified the Company that certain of the Company's products may
infringe other Linear patents.
Certain additional claims and lawsuits have also arisen against the Company
in its normal course of business. The Company believes that these claims and
lawsuits will not have a material adverse effect on the Company's results of
operation or financial position.
In the event of an adverse ruling in any intellectual property litigation
that now exists or might arise in the future, the Company might be required to
discontinue the use of certain processes, cease the manufacture, use and sale
of infringing products, expend significant resources to develop non-infringing
technology or obtain licenses to the infringing technology. There can be no
assurance, however, that under such circumstances, a license would be available
under reasonable terms or at all. In the event of a successful claim against
the Company and the Company's failure to develop or license substitute
technology on commercially reasonable terms, the Company's financial position
and results of operations could be adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market tier of
The Nasdaq National Market under the trading Symbol "MCRL". The range of daily
closing prices per share for the Company's common stock from January 1, 1996 to
December 31, 1997 was:
<TABLE>
<S> <C> <C>
Year Ended December 31, 1997: High Low
Fourth quarter $ 46.313 $ 23.000
Third quarter $ 42.313 $ 23.813
Second quarter $ 26.625 $ 13.500
First quarter $ 20.000 $ 14.500
Year Ended December 31, 1996: High Low
Fourth quarter $ 16.250 $ 9.625
Third quarter $ 11.875 $ 6.250
Second quarter $ 9.375 $ 6.125
First quarter $ 10.125 $ 6.250
</TABLE>
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 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.
The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on December 31, 1997 was $28.000. The approximate number of
holders of record of the shares of the Company's Common Stock was 98 as of
January 30, 1998. This number does not include shareholders whose shares are
held in trust by other entities. The actual number of shareholders is greater
than this number of holders of record. The Company estimates that the number
of beneficial shareholders of the shares of the Company's Common Stock as of
January 30, 1998 was approximately 2000.
The Company has authorized Common Stock, no par value and Preferred Stock,
no par value. The Company has not issued any Preferred Stock.
The Company has not paid any cash dividends on its capital stock. The
Company currently intends to retain its earnings to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's existing credit
facilities prohibit the payment of cash or stock dividends on the Company's
capital stock without the lender's prior written consent. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 4 of Notes to
Consolidated Financial Statements contained in Item 8.
During the year ended December 31, 1997, the Company did not sell any equity
securities that were not registered under the Securities Act of 1933, as
amended.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993(1)
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues $104,158 $ 66,244 $ 53,035 $ 35,941 $ 17,615
Cost of revenues 48,641 32,407 26,843 20,863 10,739
-------- -------- -------- -------- --------
Gross margin 55,517 33,837 26,192 15,078 6,876
-------- -------- -------- -------- --------
Operating expenses:
Research and development 13,986 8,613 6,469 3,792 2,573
Selling, general and
administrative 17,128 11,936 9,083 6,457 3,836
Relocation - - - - 225
-------- -------- -------- -------- --------
Total operating expenses 31,114 20,549 15,552 10,249 6,634
-------- -------- -------- -------- --------
Income from operations 24,403 13,288 10,640 4,829 242
Other income
(expenses), net 971 730 682 (231) (64)
-------- -------- -------- -------- --------
Income before income taxes
and cumulative effect of
accounting change 25,374 14,018 11,322 4,598 178
Income tax expense (benefit) 8,627 4,766 3,963 1,656 (132)
-------- -------- -------- -------- --------
Income before cumulative
effect of accounting
change 16,747 9,252 7,359 2,942 310
Cumulative effect of change
in accounting for
income taxes - - - - 401
-------- -------- -------- -------- --------
Net income $ 16,747 $ 9,252 $ 7,359 $ 2,942 $ 711
======== ======== ======== ======== ========
Net income per share:
Basic $ 0.88 $ 0.51 $ 0.42 $ 0.22 $ 0.05
======== ======== ======== ======== ========
Diluted $ 0.80 $ 0.46 $ 0.37 $ 0.19 $ 0.05
======== ======== ======== ======== ========
Shares used in computing
per share amounts:
Basic 19,069 18,303 17,504 13,424 13,064
======== ======== ======== ======== ========
Diluted 20,822 20,048 19,950 15,532 14,232
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995 1994 1993(1)
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 41,694 $ 32,978 $ 28,494 $ 23,313 $ 6,066
Total assets 85,527 60,008 48,342 36,482 12,962
Long-term debt 552 1,287 2,523 1,561 1,416
Total shareholders' equity 70,568 47,431 36,033 26,634 7,662
</TABLE>
________________
(1) Net income per basic and diluted share includes the cumulative effect of
adoption of the change in accounting for income taxes in 1993 of $.03 per
share.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high
performance standard analog integrated circuits. These circuits are used in a
wide variety of electronics products, including those in the communications,
computer and industrial markets. In addition to standard products, the Company
manufactures custom analog and mix-signal circuits and provides wafer foundry
services.
The Company has shifted its focus and revenue base from custom and foundry
products to standard products. For 1997, 1996, and 1995 the Company's standard
products sales accounted for 76%, 66%, and 56%, respectively, of the Company's
net revenues. The Company believes that a substantial portion of its net
revenues in the future will depend upon standard products sales. The standard
products business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without
significant penalty to the customer. Since most standard products backlog is
cancelable without significant penalty, the Company typically plans its
production and inventory levels based on internal forecasts of customer demand,
which is highly unpredictable and can fluctuate substantially. In addition, the
Company is limited in its ability to reduce costs quickly in response to any
revenue shortfalls.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include the
volume and timing of orders received, changes in the mix of products sold,
competitive pricing pressures and the Company's ability to meet increasing
demand. As a result of the foregoing or other factors, there can be no
assurance that the Company will not experience material fluctuations in future
operating results on a quarterly or annual basis, which would materially and
adversely affect the Company's business, financial condition or results of
operations.
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 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
<TABLE>
<CAPTION>
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
Years Ended December 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 46.7 48.9 50.6
------ ------ ------
Gross margin 53.3 51.1 49.4
------ ------ ------
Operating expenses:
Research and development 13.4 13.0 12.2
Selling, general and administrative 16.5 18.0 17.1
------ ------ ------
Total operating expenses 29.9 31.0 29.3
------ ------ ------
Income from operations 23.4 20.1 20.1
Other income, net 1.0 1.1 1.3
------ ------ ------
Income before income taxes 24.4 21.2 21.4
Provision for Income Taxes 8.3 7.2 7.5
------ ------ ------
Net income 16.1% 14.0% 13.9%
====== ====== ======
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Revenues. Net revenues increased approximately 57% to $104.2 million
for the year ended December 31, 1997 from $66.2 million in 1996 principally due
to higher standard product revenues, which grew to 76% of net revenues from 66%
in 1996. Sales of standard products were led by the increased sales of low
dropout regulators, computer peripheral IC components, MOS drivers, and
switching regulators. Such products were sold to manufacturers of portable
computing, computing peripherals, telecommunications and industrial products.
While the Company has experienced some slowdown in Asian orders recently, the
Company believes that growth in other revenue channels will be sufficient to
offset any slowdown in orders from the Company's Asian customers.
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. In the fourth 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.
Net revenues increased approximately 25% to $66.2 million for the year ended
December 31, 1996 from $53.0 million in 1995 principally due to higher standard
product revenues, which grew to 66% of net revenues from 56% in 1995. Sales of
standard products by the Company were led by the increased sales of low dropout
regulators, computer peripherals, latched drivers and metal oxide semiconductor
drivers and such products were sold to manufacturers of portable computing,
computing peripherals, industrial and telecommunications products.
International sales represented 50%, 41% and 34% of net revenues for the
years ended December 31, 1997, 1996 and 1995, 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'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 when 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% for the year ended
December 31, 1997 from 51% for the year ended December 31, 1996. The
improvement in gross margin reflected an increase in manufacturing efficiency
resulting from greater capacity utilization.
The Company's gross margin increased to 51% for the year ended December 31,
1996 from 49% for the year ended December 31, 1995. The improvement in gross
margin reflects an increase in manufacturing efficiency resulting from greater
capacity utilization, cost reductions, yield improvements and spreading of
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
overhead over a larger sales base that was partially offset by an increase in
fixed expense levels associated with the expansion of manufacturing facilities.
Manufacturing yields, which affect gross margin, may from time to time
decline because the fabrication of integrated circuits is a highly complex and
precise process. Factors such as minute impurities and difficulties in the
fabrication process can cause a substantial percentage of wafers to be rejected
or numerous die on each wafer to be nonfunctional. There can be no assurance
that the Company in general will be able to maintain acceptable manufacturing
yields in the future.
Research and Development Expenses. Research and development expenses
include costs associated with the development of new processes and the
definition, design and development of standard products. The Company also
expenses prototype wafers and new production mask sets related to new products
as research and development costs until products based on new designs are fully
characterized by the Company and are demonstrated to support published data
sheets and satisfy reliability tests.
The Company's research and development expenses increased by approximately
$5.4 million or 62% to $14.0 million for the year ended December 31, 1997 from
$8.6 million in 1996. The increase in research and development expenses for the
year ended December 31, 1997 was primarily due to increased costs associated
with the Company's conversion to six-inch wafer fabrication, and increased
expenses due to engineering staffing, design services, and prototype wafers to
support the development of new standard products. The Company believes that the
development and introduction of new standard products is critical to its future
success and expects that research and development expenses will increase on a
dollar basis in the future.
The Company's research and development expenses increased by approximately
$2.1 million or 33% to $8.6 million for the year ended December 31, 1996 from
$6.5 million in 1995. The increase in research and development expenses for the
year ended December 31, 1996 was primarily due to increased costs associated
with the Company's conversion to six inch wafer fabrication and with design
services, and prototype wafers used to support the development of new standard
products. In addition to these factors, the increase in research and
development expenses for the year ended December 31, 1996 was also due to
increased salary expenses associated with expanded engineering staffing to
support the development of new standard products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased on a dollar basis to approximately $17.1
million for the year ended December 31, 1997 from $11.9 million for 1996 while
decreasing on a percentage basis to 16% in 1997 from 18% of net revenues in
1996. The dollar increase was due, in part, to higher commissions, advertising
and other sales and administrative expenses associated with the growth of the
Company's standard products revenues. Although the Company expects that
selling, general and administrative expenses will increase on a dollar basis in
the future, the Company seeks to have such expenses not increase as a
percentage of net revenues.
Selling, general and administrative expenses increased on a dollar basis to
approximately $11.9 million for the year ended December 31, 1996 from $9.1
million for 1995 while increasing on a percentage basis to 18% in 1996 from 17%
of net revenues in 1995. The dollar increase was due, in part, 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 as well as a profit sharing accrual to promote
personnel retention.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities offset by interest
incurred on line of credit borrowings and term notes. Other income, net
increased by approximately $241,000 to $971,000 in 1997 from $730,000 in 1996.
Such increase reflected a $222,000 increase in interest income due to an
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
increase in average cash and investment balances and decrease in interest
expense by $120,000 due to a reduction in the average amount of notes payable.
The Company expects to continue to utilize term financing as appropriate to
finance its capital equipment needs.
Other income, net increased by approximately $48,000 to $730,000 in 1996
from $682,000 in 1995. Such increase reflected a $120,000 gain on the
settlement of litigation, which was offset by a $84,000 decrease in interest
income due to a decline in average interest rates and an increase in interest
expense of $18,000 due to higher average outstanding loan balances.
Provision for Income Taxes. For the year ended December 31, 1997 the
provision for taxes on income was $8.6 million or 34% of income before
provision for income taxes compared to $4.8 million or 34% for 1996. The 1997
income tax provision differs from taxes computed at the federal statutory rate
due to the effect of state taxes offset by the benefit from the foreign sales
corporation, federal and state research and development credits, and state
manufacturing credits.
For the year ended December 31, 1996 the provision for taxes on income was
$4.8 million or 34% of income before provision for income taxes compared to
$4.0 million or 35% for 1995. 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 development credits, state
manufacturing credits and the reinstitution of the federal research and
development tax credit in July 1996.
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 December 31, 1997 consisted of cash and short-term
investments of $20.1 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 December 31, 1997. The two lines
of credit are covered by the same loan and security agreement. This agreement
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.
Borrowings are collateralized by substantially all of the Company's assets. The
agreement contains certain restrictive covenants that include a restriction on
the declaration and payment of dividends without the lender's consent. The
Company was in compliance with all such covenants at December 31, 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 $0.2 million and $1.2 million
outstanding at December 31, 1997. The notes are collateralized by the equipment
purchased.
The Company's working capital increased by $8.7 million to $41.7 million as
of December 31, 1997 from $33.0 million as of December 31, 1996. The increase
was primarily attributable to increases in accounts receivable of $8.2 million
combined with increases in cash, cash equivalents and short-term investments of
$3.6 million which was partially offset by a $3.3 million reduction in
inventories as of December 31, 1997. The Company's short-term investments were
principally invested in investment grade, interest-bearing securities.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's cash flows from operating activities increased to
approximately $23.3 million for the year ended December 31, 1997 from
approximately $12.3 million for the year ended December 31, 1996. The increase
was primarily attributable to an increase in net income to $16.7 million for
the year ended December 31, 1997 from $9.3 million for the comparable prior
year period and to a $3.3 million decrease in inventory combined with a $3.6
million tax benefit from employee stock transactions, which were partially
offset by a $8.2 million increase in accounts receivable resulting from higher
sales. For the year ended December 31, 1996, cash flows from operating
activities increased to approximately $12.3 million from approximately $3.8
million for the year ended December 31, 1995. The increase in 1996 was
primarily attributable to net income of $9.3 million for the year ended
December 31, 1996 and increases in income taxes payable and accrued
compensation coupled with decreases in accounts receivable, which were offset
by increases in inventories.
The Company's investing activities in the year ended December 31, 1997 used
cash of approximately $25.6 million compared to $10.8 million for 1996. The
increase in cash used by investing activities resulted primarily from an
incremental $11.8 million increase in equipment purchases and leasehold
improvements primarily relating to the six-inch wafer fabrication operation for
the year ended December 31, 1997 and $3.1 million in net additional purchases
of short-term investments.
Financing activities for the year ended December 31, 1997 provided cash of
approximately $1.7 million as compared to $0.2 million of cash used in
financing activities for the comparable period in 1996. This change was the
result of an increase of $1.4 million in proceeds from the issuance of common
stock through the exercise of stock options in the year ended December 31, 1997
as compared to the same period in 1996, and a $0.4 million reduction in
repayments of long-term debt during the same periods.
The Company currently intends to spend up to approximately $44.0 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-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; 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 may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include the
volume and timing of orders received, changes in the mix of products sold,
market acceptance of the Company's and its customers' products, competitive
pricing pressures, the Company's ability to meet increasing demand, the
Company's ability to introduce new products on a timely basis, the timing of
new product announcements and introductions by the Company or its competitors,
the timing and extent of research and development expenses, fluctuations in
manufacturing yields, cyclical semiconductor industry conditions, the Company's
access to advanced process technologies and the timing and extent of process
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
development costs. As a result of the foregoing or other factors, there can be
no assurance that the Company will not experience material fluctuations in
future operating results on a quarterly or annual basis, which would materially
and adversely affect the Company's business, financial condition or results of
operations.
The Company 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 pressures, larger competitors and more rapid technological change.
Generally, the standard products market is a rapidly changing market in which
the Company faces the risk that, as the market changes, its product offerings
will become obsolete. The Company competes in the standard products market with
established companies, most of which have substantially greater financial,
engineering, manufacturing and marketing resources than the Company. No
assurance can be given that the Company will be able to compete successfully in
the standard products market or that it will be able to successfully introduce
new standard products in the future. The failure of the Company to compete
successfully in the standard products business would materially and adversely
affect the Company's financial condition or 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. 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 or 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 or 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.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company has generated a substantial portion of its net revenues from
export sales. See Note 10 of Notes to Consolidated Financial Statements
contained in Item 8. The Company believes that a substantial portion of its
future net revenues will depend on export sales to customers in international
markets including Asia. International markets are subject to a variety of
risks, including changes in policy by foreign governments, social conditions
such as civil unrest, and economic conditions including high levels of
inflation, fluctuation in the value of foreign currencies and currency exchange
rates and trade restrictions or prohibitions. In addition, the Company sells to
domestic customers that do business worldwide and cannot predict how the
businesses of these customers may be affected by economic conditions in Asia or
elsewhere. Such factors could adversely affect the Company's future revenues,
financial condition or results of operations.
Readiness for Year 2000
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000 compliant.
The financial impact to the Company has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosures under this item are not required for the current fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth on pages 27 through 42,
which follow Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is included in the
Company's Proxy Statement to be filed in connection with the Company's 1998
annual meeting of shareholders under the caption "Election of Directors" and is
incorporated herein by reference. The information concerning the executive
officers of the Company required by this item is as follows:
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of December 31,
1997, are as follows:
Name Age Position
-------------------- ----- ------------------------------------------
Raymond D. Zinn 60 President, Chief Executive Officer
Warren H. Muller 58 Vice President, Test Operations, Secretary
Robert J. Barker 51 Vice President, Finance and
Chief Financial Officer
John D. Husher 65 Vice President, Wafer Fabrication Division
George T. Anderl 58 Vice President, Sales and Marketing
Lawrence R. Sample 51 Vice President, Design
Mr. Zinn is a co-founder of the Company and has been its President, Chief
Executive Officer and a member of its Board of Directors since its
incorporation in 1978. Prior to co-founding Micrel, Mr. Zinn held various
management and manufacturing executive positions in the semiconductor industry
at Electromask TRE, Electronic Arrays, Inc., Teledyne, Inc., Fairchild
Semiconductor Corporation and Nortek, Inc. He holds a B.S. in Industrial
Management from Brigham Young University and a M.S. in Business Administration
from San Jose State University.
Mr. Muller is a co-founder of the Company and has served as a member of the
Company's Board of Directors and as its Vice President of Test Operations since
its incorporation in 1978. He was previously employed in various positions in
semiconductor processing and testing at Electronic Arrays, Inc. and General
Instruments Corporation. Mr. Muller holds a B.S.E.E. from Clarkson College.
Mr. Barker joined the Company as Vice President, Finance and Chief Financial
Officer in April 1994. From April 1984 until he joined Micrel, Mr. Barker was
employed by Waferscale Integration, Inc., where his last position was Vice
President of Finance and Secretary. Prior to 1984, Mr. Barker held various
accounting and financial positions at Monolithic Memories and Lockheed Missiles
and Space Co. He holds a B.S. in Electrical Engineering and a M.B.A. from
University of California at Los Angeles.
Mr. Husher joined the Company in May 1982 and his current position is Vice
President and General Manager, Wafer Fabrication Division. He was previously
employed in engineering and management positions with Sprague Semiconductor and
Fairchild Semiconductor Corp. Mr. Husher received his B.S.E.E. from the
23
<PAGE>
University of Pittsburgh.
Mr. Anderl joined the Company in June 1996 as its Vice President, Sales and
Marketing. From 1991 until he joined Micrel, Mr. Anderl was employed by Quality
Semiconductor, where his last position was Vice President, Worldwide Sales. His
prior employers include Austek Microsystems, Advanced Micro Devices, and
Monolithic Memories. Mr. Anderl holds a B.S.E.E. degree from Purdue University
and a M.S.E.E. from Santa Clara University.
Mr. Sample joined the Company in September 1989 and is currently its Vice
President, Design. Prior to joining Micrel, Mr. Sample was employed by Motorola
and National Semiconductor Corporation in various engineering positions of
analog semiconductor products. Mr. Sample received his B.S.E.E. degree from the
University of Illinois and his M.S.E.E. from Arizona State University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" and "Stock Option Grants and Exercise" in the
Company's Proxy Statement to be filed in connection with the Company's 1998
annual meeting of shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be filed in connection with the Company's 1998
annual meeting of shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement to be filed in connection with
the Company's 1998 annual meeting of shareholders and is incorporated herein by
reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following financial statements of the
company and the Report of Deloitte & Touche LLP, Independent
Auditors, are included in this Report on the pages indicated:
Page
----
Independent Auditors' Report 27
Consolidated Balance Sheets as of December 31, 1997 and 1996 28
Consolidated Income Statements for the Years ended
December 31, 1997, 1996 and 1995 29
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1997, 1996 and 1995 30
Consolidated Statements of Cash flows for the Years ended
December 31, 1997, 1996 and 1995 31
Notes to Consolidated Financial Statements 32
2. Financial Statement Schedules. The following financial statement
schedule of the Company for the years ended December 31, 1997, 1996
and 1995 is filed as part of this report on Form 10-K and should be
read in conjunction with the financial statements.
Schedule Title Page
-------- ------------------------------------------------ ----
Independent Auditors' Report 43
II Valuation and Qualifying Accounts 44
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes
thereto.
3. Exhibits. See Exhibit Index on pages 25 and 26 hereof for a list of
exhibits filed or incorporated by reference as a part of this report.
(b) Reports on Form 8-K. No Report on Form 8-K was filed by the Company in
the quarter ended December 31, 1997.
(c) Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (1)
3.2 Certificate of Amendment of Articles of Incorporation of
the Registrant. (2)
3.3 Amended and Restated Bylaws of the Registrant. (2)
4.1 Certificate for Shares of Registrant's Common Stock. (3)
10.1 Indemnification Agreement between the Registrant and each
of its officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (1) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (1) *
10.4 1994 Stock Purchase Plan. (4)
10.5 Lease Agreement dated November 1, 1981 between the Registrant
and Pastoria Limited Partnership, as amended March 3, 1988. (1)
25
<PAGE>
10.6 Lease Agreement dated June 24, 1992 between the Registrant and
GOCO Realty Fund I, as amended August 6, 1992 and February 5,
1993. (1)
10.7 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West,
as amended February 11, 1991, August 6, 1991, October 31, 1991,
June 24, 1992, September 24, 1992, August 16, 1993, April 29,
1994, July 2, 1994, August 23, 1994, September 30, 1994,
October 24, 1994. (1)
10.8 Form of Domestic Distribution Agreement. (2)
10.9 Form of International Distributor Agreement. (2)
10.10 Second Amendment dated February 20, 1995 between the Registrant
and TR Brell Cal Corporation to Lease Agreement dated June 24,
1992 between the Registrant and GOCO Realty Fund I, as amended
August 6, 1992 and February 5, 1993. (3)
10.11 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West,
as amended March 31, 1995. (4)
10.12 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West,
as amended September 30, 1996. (5)
10.13 Amended and Restated 1994 Employee Stock Purchase Plan, as
amended January 1, 1996. (6)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
27.1 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(1)Incorporated herein by reference to the Company's Registration
Statement on Form S-1 ("Registration Statement"), File No. 33-85694,
in which this exhibit bears the same number, unless otherwise
indicated.
(2)Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless
otherwise indicated.
(3)Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, in which this exhibit bears the
same number, unless otherwise indicated.
(4)Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 1995.
(5)Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1996.
(6)Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, in which this exhibit bears the
number 10.14.
(d) Financial Statement Schedules. The financial statement schedule required
by this Item is listed under Item 14(a)(2) above.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the accompanying consolidated balance sheets of Micrel,
Incorporated and its subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
January 22, 1998
27
<PAGE>
<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(in thousands, except share amounts)
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,581 $ 3,239
Short-term investments 17,565 13,334
Accounts receivable, less allowances:
1997, $2,015; 1996, $1,224 16,938 8,748
Inventories 10,664 13,922
Prepaid expenses and other 404 447
Deferred income taxes 4,772 2,591
-------- --------
Total current assets 52,924 42,281
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 32,423 17,476
OTHER ASSETS 180 251
-------- --------
TOTAL $ 85,527 $ 60,008
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,858 $ 2,409
Accrued compensation 2,719 2,244
Accrued commissions 974 685
Income taxes payable 1,152 913
Other accrued liabilities 775 720
Deferred income on shipments to domestic distributors 1,940 1,180
Current portion of long-term debt 812 1,152
-------- --------
Total current liabilities 11,230 9,303
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 552 1,287
DEFERRED RENT 916 917
DEFERRED INCOME TAXES 2,261 1,070
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized: 5,000,000
shares; issued and outstanding: none - -
Common stock, no par value - authorized: 50,000,000
shares; issued and outstanding: 1997 - 19,483,319;
1996 - 18,661,286 27,703 21,315
Net unrealized losses on short-term investments - (2)
Retained earnings 42, 865 26,118
-------- --------
Total shareholders' equity 70,568 47,431
-------- --------
TOTAL $ 85,527 $ 60,008
======== ========
See notes to consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except per share amounts)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES $ 104,158 $ 66,244 $ 53,035
COST OF REVENUES 48,641 32,407 26,843
-------- -------- --------
GROSS MARGIN 55,517 33,837 26,192
-------- -------- --------
OPERATING EXPENSES:
Research and development 13,986 8,613 6,469
Selling, general and administrative 17,128 11,936 9,083
-------- -------- --------
Total operating expenses 31,114 20,549 15,552
-------- -------- --------
INCOME FROM OPERATIONS 24,403 13,288 10,640
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 1,088 866 950
Interest expense (161) (281) (263)
Other, net 44 145 (5)
-------- -------- --------
Total other income, net 971 730 682
-------- -------- --------
INCOME BEFORE INCOME TAXES 25,374 14,018 11,322
PROVISION FOR INCOME TAXES 8,627 4,766 3,963
-------- -------- --------
NET INCOME $ 16,747 $ 9,252 $ 7,359
======== ======= =======
NET INCOME PER SHARE:
Basic $ 0.88 $ 0.51 $ 0.42
======== ======= =======
Diluted $ 0.80 $ 0.46 $ 0.37
======== ======= =======
SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic 19,069 18,303 17,504
======== ======= =======
Diluted 20,822 20,048 19,950
======== ======= =======
See notes to consolidated financial statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except share amounts)
Net Unreal-
ized Gains
Common Stock (Losses)on
-------------------- Short-Term Retained
Shares Amount Investments Earnings Total
---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1,
1994 17,300,738 $ 17,127 $ - $ 9,507 $ 26,634
Employee stock
transactions 496,326 806 - - 806
Tax benefit of employee
stock transactions - 1,229 - - 1,229
Change in net unrealized
gains from short-term
investments - - 5 - 5
Net income - - - 7,359 7,359
---------- -------- ----------- -------- --------
Balances, December 31,
1995 17,797,064 19,162 5 16,866 36,033
Employee stock
transactions 864,222 1,309 - - 1,309
Tax benefit of employee
stock transactions - 844 - - 844
Change in net unrealized
gains from short-term
investments - - (7) - (7)
Net income - - - 9,252 9,252
---------- -------- ----------- -------- --------
Balances, December 31,
1996 18,661,286 21,315 (2) 26,118 47,431
Employee stock
transactions 822,033 2,748 - - 2,748
Tax benefit of employee
stock transactions - 3,640 - - 3,640
Change in net unrealized
gains from short-term
investments - - 2 - 2
Net income - - - 16,747 16,747
---------- -------- ----------- -------- --------
Balances, December 31,
1997 19,483,319 $ 27,703 $ - $ 42,865 $ 70,568
========== ======== =========== ======== ========
See notes to consolidated financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,747 $ 9,252 $ 7,359
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,509 3,420 2,176
Loss on disposal of assets (44) 6 -
Deferred rent (1) 114 113
Deferred income taxes (990) (171) (365)
Changes in operating assets and liabilities:
Accounts receivable (8,190) 533 (3,662)
Inventories 3,258 (2,508) (3,650)
Prepaid expenses and other assets 114 (296) (45)
Accounts payable 449 (469) (425)
Accrued compensation 475 994 173
Accrued commissions 289 101 379
Income taxes payable 3,879 1,264 922
Other accrued liabilities 55 (142) 96
Deferred income on shipments to domestic
distributors 760 223 721
-------- -------- --------
Net cash provided by operating
activities 23,310 12,321 3,792
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements (21,410) (9,608) (7,719)
Purchases of short-term investments (37,531) (29,118) (26,567)
Proceeds from sales and maturities of
short-term investments 33,300 27,951 23,242
-------- -------- --------
Net cash used in investing activities (25,641) (10,775) (11,044)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,075) (1,517) (1,047)
Proceeds from the issuance of common stock 2,748 1,309 806
Proceeds from long-term borrowings - - 2,500
-------- -------- --------
Net cash provided by (used in)
financing activities 1,673 (208) 2,259
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (658) 1,338 (4,993)
CASH AND CASH EQUIVALENTS - Beginning of year 3,239 1,901 6,894
-------- -------- --------
CASH AND CASH EQUIVALENTS - End of year $ 2,581 $ 3,239 $ 1,901
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 152 $ 103 $ 257
======== ======== ========
Income taxes $ 5,625 $ 2,598 $ 3,407
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
31
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Micrel, Incorporated (the "Company") develops,
manufactures and markets analog semiconductor devices and provides custom and
foundry services which include silicon wafer fabrication, integrated circuit
assembly and testing. The Company's standard integrated circuits are sold
principally in North America, Asia, and Europe for use in a variety of
products, including those in the computer, communication, and industrial
markets. The Company's custom circuits and wafer foundry services are provided
to a wide range of customers that produce electronic systems for
communications, consumer and military applications. All wafers are processed
at the Company's wafer fabrication facility located in San Jose, California.
After wafer fabrication, the completed wafers are then separated into
individual circuits and packaged at independent assembly and final test
contract facilities located in Malaysia.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Micrel, Incorporated and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates - In accordance with generally accepted accounting principles,
management utilizes certain estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include the allowance for doubtful accounts receivable,
reserves for sales returns, and net realizable value of inventory. Actual
results could differ from those estimates.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with remaining maturities of less than three months to be cash
equivalents.
Short-term Investments - Short-term investments consist primarily of highly
liquid debt instruments purchased with an original maturity date of greater
than 90 days. Short-term investments are classified as available for sale
securities and are stated at market value with unrealized gains and losses
included in shareholders' equity, net of income taxes. At December 31, 1997
and 1996, short-term investments consisted of corporate debt securities
(commercial paper) and repurchase agreements with a financial institution with
maturities of less than one year.
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. Risks associated with cash
are mitigated by banking with creditworthy institutions. Cash equivalents and
short-term investments consist primarily of commercial paper and bank
certificates of deposit and are regularly monitored by management. Credit risk
with respect to the trade receivables is spread over a large number of
geographically diverse customers, who make up the Company's customer base. At
December 31, 1997, two customers accounted for 13% and 10% of total accounts
receivable and at December 31, 1996, one customer accounted for 15% of total
accounts receivable.
Inventories - Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Equipment and Leasehold Improvements - Equipment and leasehold improvements are
stated at cost. Depreciation on equipment is computed using straight-line and
accelerated methods over estimated useful lives of three to five years.
Leasehold improvements are amortized over the shorter of the lease term or the
useful lives of the improvements. The Company evaluates the recoverability of
long-lived assets at least annually.
32
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
Revenue Recognition - Revenues from products sold directly to customers is
recognized upon shipment. Certain of the Company's sales are made to United
States and Canadian distributors under agreements allowing certain rights of
return and price protection on merchandise unsold by these distributors.
Accordingly, the Company defers recognition of such revenues until the
merchandise is sold by the distributors. Sales to international distributors
are recognized upon shipment. The Company estimates international distributor
returns and warranty costs, and provides allowances as revenue is recognized.
Warranty costs have not been material in any period.
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.
Income Taxes - Income taxes are provided at current rates. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes.
Stock-based Awards - The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
Net Income per Common and Equivalent Share -In the fourth quarter of 1997 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share" and, retroactively, restated the earnings per share (EPS)
for 1996 and 1995. SFAS 128 requires presentation of basic and diluted EPS.
Basic EPS is computed by dividing net income by the number of weighted average
common shares outstanding. Diluted EPS reflects potential dilution from
outstanding stock options, using the treasury stock method.
<TABLE>
<CAPTION>
Reconciliation of weighted average shares used in computing earnings per share
are as follows (in thousands):
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Weighted average common shares outstanding 19,069 18,303 17,504
Dilutive effect of stock options outstanding,
using the treasury stock method 1,753 1,745 2,446
-------- -------- --------
Shares used in computing diluted earnings
per share 20,822 20,048 19,950
======== ======== ========
</TABLE>
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 shares
of common stock outstanding as of August 4, 1997. All share and per share
information, in the accompanying consolidated financial statements, have been
adjusted to retroactively give effect to the stock split for all periods
presented.
33
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
Fair Value of Financial Instruments - Financial instruments included in the
Company's consolidated balance sheets at December 31, 1997 and 1996 consist of
cash, cash equivalents, short-term investments and long-term debt. For cash,
the carrying amount is a reasonable estimate of the fair value. The carrying
amount for cash equivalents approximates fair value because of the short
maturity of those investments. The fair value of long-term debt approximates
the carrying amount as the borrowings are at adjustable interest rates and
repriced based on fluctuations in market conditions.
2. INVENTORIES
<TABLE>
<CAPTION>
Inventories at December 31 consist of the following (in thousands):
1997 1996
-------- --------
<S> <C> <C>
Finished goods $ 2,480 $ 2,735
Work in process 6,351 8,313
Raw materials 1,833 2,874
-------- --------
$ 10,664 $ 13,922
======== ========
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
Equipment and leasehold improvements at December 31 consist of the following
(in thousands):
1997 1996
-------- --------
<S> <C> <C>
Manufacturing equipment $ 47,619 $ 28,510
Leasehold improvements 2,223 1,620
Office furniture and equipment 1,520 884
-------- --------
51,362 31,014
Accumulated depreciation and amortization (18,939) (13,538)
-------- --------
$ 32,423 $ 17,476
======== ========
</TABLE>
4. BORROWING ARRANGEMENTS
Under a revolving line of credit and security agreement expiring September 30,
1998, 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 December 31, 1997) and are collateralized by
substantially all of the assets of the Company. There were no borrowings under
this revolving line of credit at December 31, 1997.
Under the same security 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. Amounts borrowed under this credit line may be
converted to four-year installment notes. All equipment notes are
collateralized by the equipment purchased and bear interest at prime. There
were no borrowings under this non-revolving line of credit at December 31,
1997.
34
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
Under another nonrevolving bank line of credit that expired, the Company had
$1.4 million outstanding at December 31, 1997 under term notes that are
collateralized by the equipment purchased.
<TABLE>
<CAPTION>
Long-term debt at December 31, collateralized by equipment, consists of the
following (in thousands):
1997 1996
-------- --------
<S> <C> <C>
Notes payable bearing interest at prime plus 0.75%,
payable in monthly installments through September 1998 $ 187 $ 689
Notes payable bearing interest at prime, payable in
monthly installments through January 2000 1,177 1,750
-------- --------
Total long-term debt 1,364 2,439
Current portion (812) (1,152)
-------- --------
Long-term debt $ 552 $ 1,287
</TABLE>
Maturities of long-term debt subsequent to December 31, 1997 are as follows:
$812,000 in 1998, $521,000 in 1999 and $31,000 in 2000.
The agreements contain certain restrictive covenants that include a restriction
on the declaration and payment of dividends without the lender's consent. The
Company was in compliance with all such covenants at December 31, 1997.
5. SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, no par value,
of which none were issued or outstanding at December 31, 1997. The preferred
stock may be issued from time to time in one or more series. The Board of
Directors is authorized to determine or alter the rights, preferences,
privileges and restrictions of such preferred stock.
Stock Option Plans
Under the Company's 1994 and 1989 Stock Option Plans (the "Option Plans"),
6,964,668 shares of common stock were authorized for issuance to key employees.
The Option Plans provide that the option price will be determined by the Board
of Directors at a price not less than the fair value at the date of grant.
Certain shareholder/employees of the Company are granted options at 110% of the
current fair market value. Options granted become exercisable in not less than
cumulative annual increments of 20% per year from the date of grant. In 1996,
the shareholders approved an amendment to the 1994 Stock Option Plan which
authorized an additional 1,000,000 shares to be made available for issuance
under the 1994 Stock Option Plan. At December 31, 1997, 2,053,046 shares were
available for future grants under the Option Plans.
35
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Option activity under the Option Plans is as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- --------
<S> <C> <C>
Outstanding, January 1, 1995 2,830,200 $ 1.11
Granted 438,500 9.84
Exercised (388,192) 1.02
Canceled (26,400) 3.48
---------
Outstanding, December 31, 1995 (1,165,308 exercisable
at a weighted average price of $0.71) 2,854,108 2.44
Granted 937,000 8.35
Granted (at 110% of fair market value) 100,000 7.57
Exercised (798,800) 1.06
Canceled (476,500) 3.97
---------
Outstanding, December 31, 1996 (769,308 exercisable
at a weighted average price of $1.58) 2,615,808 4.89
Granted 865,250 25.60
Exercised (783,350) 2.68
Canceled (141,900) 7.14
---------
Outstanding, December 31, 1997 (452,658 exercisable
at a weighted average price of $3.65) 2,555,808 $ 12.44
=========
</TABLE>
<TABLE>
<CAPTION>
Additional information regarding options outstanding as of December 31, 1997
is as follows:
Stock Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 to $ 6.84 685,508 5.4 $ 1.68 320,008 $ 1.23
$ 6.85 to $10.25 822,850 7.7 $ 7.75 87,350 $ 8.02
$10.26 to $13.67 219,700 8.4 $11.88 36,300 $11.51
$13.68 to $17.09 66,000 8.7 $15.57 9,000 $15.51
$17.10 to $25.64 410,000 9.7 $23.90 - -
$25.65 to $34.19 761,750 9.7 $27.07 - -
--------- --------
2,555,808 $12.44 452,658 $3.65
========= ========
</TABLE>
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to have salary withholdings to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of each six-month offer period, subject to an
annual limitation. Stock issued under the Purchase Plan were 38,683, 65,422
and 108,134 in 1997, 1996 and 1995, respectively, at weighted average prices of
$16.75, $7.08 and $3.83, respectively. At December 31, 1997, there are 212,239
36
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
shares of common stock issued under the Purchase Plan and 387,761 shares were
reserved for future issuance under the Purchase Plan. The Purchase Plan
excludes all Company Officers (as defined in the Purchase Plan) from
participation in the Purchase Plan.
Additional Stock - Based Award Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-
Scholes option pricing model with the following weighted average assumptions:
expected life, 60 months; stock volatility, 74.3% in 1997, 75.3% in 1996 and
1995; risk free interest rates, 5.44% in 1997, 6.16% in 1996 and 1995; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1997, 1996 and 1995 awards under
both the Option Plans and the Purchase Plan had been amortized to expense over
the vesting period of the awards, pro forma net income and net income per share
would have been as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income $ 13,975 $ 7,718 $ 6,748
Pro forma net income per share:
Basic $ 0.73 $ 0.42 $ 0.39
Diluted $ 0.71 $ 0.41 $ 0.38
</TABLE>
The amounts used above are based on calculated values for option awards in
1997, 1996 and 1995 aggregating $4,917,000. The impact of outstanding stock
options granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1997, 1996 and 1995 pro forma adjustments are not indicative
of future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
37
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
6. INCOME TAXES
<TABLE>
<CAPTION>
The provision for income taxes for the years ended December 31 consists of the
following (in thousands):
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Currently payable:
Federal $ 10,735 $ 4,440 $ 4,365
Research and experimentation tax credits (1,118) (451) (285)
-------- -------- --------
9,617 3,989 4,080
-------- -------- --------
State 1,576 1,309 1,097
Research and experimentation and
manufacturing tax credits (1,576) (361) (849)
-------- -------- --------
- 948 248
-------- -------- --------
Total currently payable 9,617 4,937 4,328
-------- -------- --------
Deferred income taxes:
Federal (814) (148) (283)
State (176) (23) (82)
-------- -------- --------
Total deferred (990) (171) (365)
-------- -------- --------
Total provision $ 8,627 $ 4,766 $ 3,963
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
A reconciliation of the statutory federal income tax rate to the effective tax
rate for the years ended December 31 is as follows:
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
State income taxes (net of federal
income tax benefit) 1 2 2
Research and experimentation and
manufacturing tax credits (2) (1) (3)
Export sales tax credit (2) (2) -
Other 2 - 1
------- ------- -------
Effective tax rate 34% 34% 35%
======= ======= =======
</TABLE>
38
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Temporary differences that give rise to deferred tax assets and liabilities at
December 31 are as follows (in thousands):
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and capitalization $ 1,805 $ 812
Accrued compensation 873 342
Allowance for doubtful accounts 866 510
Deferred revenue 834 433
Deferred rent 394 337
State income taxes - 157
-------- --------
Total deferred tax asset 4,772 2,591
-------- --------
Deferred tax liabilities:
Depreciation (2,035) (1,070)
State income taxes (226) -
-------- --------
Total deferred tax liability (2,261) (1,070)
-------- --------
Net deferred tax asset $ 2,511 $ 1,521
======== ========
</TABLE>
7. OPERATING LEASES AND COMMITMENTS
The Company leases two manufacturing and office facilities through 2000 and
2005 (with an option to extend the terms for five years) under operating lease
agreements. The lease agreements provide for escalating rental payments over
the lease periods. Rent expense is recognized on a straight-line basis over
the term of the lease. Deferred rent represents the difference between rental
payments and rent expense recognized on a straight-line basis. Future minimum
payments under these agreements are as follows (in thousands):
<TABLE>
Year Ending
December 31,
- ------------
<S> <C>
1998 $ 1,056
1999 1,095
2000 829
2001 633
2002 650
Thereafter 1,570
--------
$ 5,833
========
</TABLE>
Rent expense under operating leases was $1,031,000, $1,014,000, and $896,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
8. PROFIT-SHARING 401(k) PLAN
The Company has a profit-sharing plan and deferred compensation plan (the
"Plan"). All employees completing six months of service are eligible to
participate in the Plan. Participants may contribute 1% to 12% of their annual
compensation on a before tax basis, subject to Internal Revenue Service
limitations. Profit-sharing contributions by the Company are determined at the
39
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
discretion of the Board of Directors. The Company accrued $605,000 in 1997,
$400,000 in 1996, and $100,000 in 1995. Participants vest in Company
contributions ratably over six years of service.
9. SIGNIFICANT CUSTOMERS
In 1997 one customer accounted for $11.2 million (11%) of net revenues. In 1996
a different customer accounted for $7.1 million (11%) of net revenues. In 1995,
no single customer accounted for ten percent or more of net revenues.
10. EXPORT SALES INFORMATION
The Company develops, manufactures and markets analog semiconductor devices and
provides custom and foundry services which include silicon wafer fabrication,
integrated circuit assembly and testing in its one industry segment.
Micrel's products are manufactured at the Company's wafer fabrication facility
located in San Jose, California and are sold principally in North America,
Asia, and Europe. The Company markets internationally through both exports, a
foreign-based sales force and international distributors. The following table
presents a summary of export sales by geographic region for the years ended
December 31 (in thousands).
<TABLE>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Net revenues by geographical region:
United States of America $ 52,275 $ 38,982 $ 34,747
Taiwan 13,300 10,726 6,883
Korea 11,898 2,843 870
Other Asian Countries 13,197 5,559 3,893
Europe 13,402 7,562 6,642
Other 86 220 -
--------- -------- --------
Consolidated net revenues $ 104,158 $ 66,244 $ 53,035
</TABLE>
11. CONTINGENCIES
On May 9, 1994, Linear Technology Corporation, a competitor of the Company,
filed a complaint against the Company, entitled Linear Technology Corporation
v. Micrel, Incorporated, in the United States District Court in San Jose,
California, alleging patent and copyright infringement and unfair competition.
All claims, except the patent infringement claim, have been settled or
dismissed. In this lawsuit, Linear claims that two of the Company's products
infringe one of Linear's patents. The complaint in the lawsuit seeks
unspecified compensatory damages, treble damages and attorneys' fees as well as
preliminary and permanent injunctive relief against infringement of the Linear
patent at issue. The Company has asserted defenses of invalidity and
unenforceability of the Linear patent at issue, as well as noninfringement of
such patent. Management believes that the ultimate outcome of this action will
not result in a material adverse effect on the Company's financial condition or
results of operation.
Certain additional claims and litigation against the Company have also arisen
in the normal course of business. Management believes that it is unlikely that
the outcome of these claims and lawsuits will have a material adverse effect on
the Company's financial position or results of operations.
40
<PAGE>
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
12. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued 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 Company in 1998.
13. QUARTERLY RESULTS - UNAUDITED
<TABLE>
<CAPTION>
(in thousands, except per Three Months Ended
share amounts) --------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 22,113 $ 24,327 $ 27,203 $ 30,515
Gross margin $ 11,382 $ 12,901 $ 14,543 $ 16,691
Net income $ 3,241 $ 3,837 $ 4,467 $ 5,202
Net income per share:
Basic $ 0.17 $ 0.20 $ 0.23 $ 0.27
Diluted $ 0.16 $ 0.18 $ 0.21 $ 0.25
Shares used in computing per
share amounts:
Basic 18,734 18,934 19,198 19,409
Diluted 20,518 20,754 21,054 20,960
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 13,910 $ 15,317 $ 17,614 $ 19,403
Gross margin $ 7,052 $ 7,812 $ 9,012 $ 9,961
Net income $ 1,893 $ 2,112 $ 2,418 $ 2,829
Net income per share:
Basic $ 0.11 $ 0.12 $ 0.13 $ 0.15
Diluted $ 0.10 $ 0.11 $ 0.12 $ 0.14
Shares used in computing per
share amounts:
Basic 17,958 18,190 18,498 18,566
Diluted 19,888 19,864 20,076 20,362
</TABLE>
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the consolidated financial statements of Micrel, Incorporated
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated January 22,
1998. Our audits also included the financial statement schedule of Micrel,
Incorporated, listed in Item 14 (a) (2). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
San Jose, California
January 22, 1998
42
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
MICREL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996 and 1995
(Amounts in thousands)
Balance at Additions Write-offs Balance at
Beginning Charges to and End
Description of Year Expenses Deductions Of Year
- -------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Accounts receivable allowance $ 1,224 $ 863 $ (72) $ 2,015
======= ======= ======= =======
Year Ended December 31, 1996
Accounts receivable allowance $ 688 $ 536 $ - $ 1,224
======= ======= ======= =======
Year Ended December 31, 1995
Accounts receivable allowance $ 752 $ - $ (64) $ 688
======= ======= ======= =======
</TABLE>
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 27th day of February, 1998.
MICREL, INCORPORATED
By /S/ RAYMOND D. ZINN
--------------------
Raymond D. Zinn
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Raymond D. Zinn and Robert J. Barker, and each
of them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
- ----------------------- -------------------------------- ----------------
/S/ RAYMOND D. ZINN President, Chief Executive February 27,1998
- ----------------------- Officer and Chairman of the
Raymond D. Zinn Board of Directors (Principal
Executive Officer)
/S/ ROBERT J. BARKER Vice President, Finance and February 27, 1998
- ----------------------- Chief Financial Officer
Robert J. Barker (Principal Financial and
Accounting Officer)
/S/ WARREN H. MULLER Vice President, Secretary and February 27, 1998
- ----------------------- Director
Warren H. Muller
/S/ GEORGE KELLY Director February 27, 1998
- -----------------------
George Kelly
/S/ DALE L. PETERSON Director February 27, 1998
- -----------------------
Dale L. Peterson
/S/ LARRY L. HANSEN Director February 27, 1998
- -----------------------
Larry L. Hansen
44
<PAGE>
Micrel, Incorporated
Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (1)
3.2 Certificate of Amendment of Articles of Incorporation of
the Registrant. (2)
3.3 Amended and Restated Bylaws of the Registrant. (2)
4.1 Certificate for Shares of Registrant's Common Stock. (3)
10.1 Indemnification Agreement between the Registrant and each
of its officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (1) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (1) *
10.4 1994 Stock Purchase Plan. (4)
10.5 Lease Agreement dated November 1, 1981 between the Registrant
and Pastoria Limited Partnership, as amended March 3, 1988. (1)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and
GOCO Realty Fund I, as amended August 6, 1992 and February 5,
1993. (1)
10.7 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West,
as amended February 11, 1991, August 6, 1991, October 31, 1991,
June 24, 1992, September 24, 1992, August 16, 1993, April 29,
1994, July 2, 1994, August 23, 1994, September 30, 1994,
October 24, 1994. (1)
10.8 Form of Domestic Distribution Agreement. (2)
10.9 Form of International Distributor Agreement. (2)
10.10 Second Amendment dated February 20, 1995 between the Registrant
and TR Brell Cal Corporation to Lease Agreement dated June 24,
1992 between the Registrant and GOCO Realty Fund I, as amended
August 6, 1992 and February 5, 1993. (3)
10.11 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West,
as amended March 31, 1995. (4)
10.12 Amended and Restated Loan and Security Agreement dated
November 29, 1990 between the Registrant and Bank of the West,
as amended September 30, 1996. (5)
10.13 Amended and Restated 1994 Employee Stock Purchase Plan, as
amended January 1, 1996. (6)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
27.1 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(1)Incorporated herein by reference to the Company's Registration
Statement on Form S-1 ("Registration Statement"), File No. 33-85694,
in which this exhibit bears the same number, unless otherwise
indicated.
(2)Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless
otherwise indicated.
(3)Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, in which this exhibit bears the
same number, unless otherwise indicated.
45
<PAGE>
(4)Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 1995.
(5)Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30, 1996.
(6)Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, in which this exhibit bears the
number 10.14.
46
<PAGE>
INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statements Nos.
33-87222 and 333-10167 of Micrel, Incorporated on Form S-8 of our reports dated
January 22, 1998, appearing in this Annual Report on Form 10-K of Micrel,
Incorporated for the year ended December 31, 1997.
Deloitte & Touche LLP
San Jose, California
February 26, 1998
47
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,581
<SECURITIES> 17,565
<RECEIVABLES> 16,938
<ALLOWANCES> 2,015
<INVENTORY> 10,664
<CURRENT-ASSETS> 52,924
<PP&E> 32,423
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,527
<CURRENT-LIABILITIES> 11,230
<BONDS> 0
0
0
<COMMON> 27,703
<OTHER-SE> 42,865
<TOTAL-LIABILITY-AND-EQUITY> 85,527
<SALES> 104,158
<TOTAL-REVENUES> 104,158
<CGS> 48,641
<TOTAL-COSTS> 48,641
<OTHER-EXPENSES> 31,114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> 25,374
<INCOME-TAX> 8,627
<INCOME-CONTINUING> 16,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,747
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.80
</TABLE>
