UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-25236
M I C R E L, I N C O R P O R A T E D
(Exact name of Registrant as specified in its charter)
California 94-2526744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1849 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1998 there were 19,846,144 shares of common stock, no par
value, outstanding.
This Report on Form 10-Q includes 24 pages with the Index to Exhibits
located on page 15.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1998
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Condensed Consolidated Income Statements - For the
Three and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
[LEGEND]
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1998 1997 (1)
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,746 $ 2,581
Short-term investments 22,823 17,565
Accounts receivable, net 21,790 16,938
Inventories 11,255 10,664
Other current assets 6,175 5,176
--------- ---------
Total current assets 64,789 52,924
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 46,077 32,423
OTHER ASSETS 237 180
--------- ---------
TOTAL $ 111,103 $ 85,527
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,338 $ 2,858
Deferred income on shipments to distributors 3,020 1,940
Other current liabilities 8,385 6,432
--------- ---------
Total current liabilities 19,743 11,230
LONG-TERM OBLIGATIONS 4,989 3,729
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized:
5,000,000 shares; issued and outstanding: none - -
Common stock, no par value - authorized:
50,000,000 shares; issued and outstanding:
1998 - 19,820,489; 1997 - 19,483,319 31,484 27,703
Net unrealized losses on short-term investments (3) -
Retained earnings 54,890 42,865
--------- ---------
Total shareholders' equity 86,371 70,568
--------- ---------
TOTAL $ 111,103 $ 85,527
========= =========
(1) Derived from the December 31, 1997 audited balance sheet included in
the 1997 Annual Report on Form 10-K of Micrel, Incorporated.
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
[LEGEND]
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES $ 34,502 $ 24,327 $ 67,161 $ 46,440
COST OF REVENUES 15,380 11,426 30,076 22,157
-------- -------- -------- --------
GROSS MARGIN 19,122 12,901 37,085 24,283
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 4,708 3,203 8,823 6,384
Selling, general and
administrative 5,228 4,102 10,745 7,614
-------- -------- -------- --------
Total operating expenses 9,936 7,305 19,568 13,998
-------- -------- -------- --------
INCOME FROM OPERATIONS 9,186 5,596 17,517 10,285
OTHER INCOME, NET 359 218 703 440
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 9,545 5,814 18,220 10,725
PROVISION FOR INCOME TAXES 3,246 1,977 6,195 3,647
-------- -------- -------- --------
NET INCOME $ 6,299 $ 3,837 $ 12,025 $ 7,078
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.32 $ 0.20 $ 0.61 $ 0.38
======== ======== ======== ========
Diluted $ 0.30 $ 0.18 $ 0.57 $ 0.34
======== ======== ======== ========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 19,736 18,934 19,660 18,834
======== ======== ======== ========
Diluted 21,180 20,754 21,140 20,730
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
[LEGEND]
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 20,729 $ 12,051
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (18,447) (11,646)
Purchases of short-term investments (27,458) (15,435)
Proceeds from sales and maturities of
short-term investments 22,200 14,500
--------- ---------
Net cash used in investing activities (23,705) (12,581)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 2,000 -
Repayments of long-term debt (540) (557)
Proceeds from the issuance of common stock, net 1,681 1,118
--------- ---------
Net cash provided by financing activities 3,141 561
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 165 31
CASH AND CASH EQUIVALENTS - Beginning of period 2,581 3,239
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 2,746 $ 3,270
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 51 $ 129
========= =========
Cash paid for income taxes $ 4,699 $ 2,045
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of June 30, 1998 and for the
quarter and six months ended June 30, 1998 and 1997 are unaudited. In
the opinion of management, the condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
accruals) that management considers necessary for a fair presentation of
its financial position, operating results and cash flows for the interim
periods presented. Operating results and cash flows for interim periods
are not necessarily indicative of results for the entire year.
This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
Net Income per Common and Equivalent Share - Basic net income per share
is computed by dividing net income by the number of weighted average
common shares outstanding. Diluted net income per share reflects
potential dilution from outstanding stock options, using the treasury
stock method.
Reconciliation of weighted average shares used in computing net income
per share is as follows (in thousands):
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 19,736 18,934 19,660 18,834
Dilutive effect of stock
options outstanding, using
the treasury stock method 1,444 1,820 1,480 1,896
-------- -------- -------- --------
Shares used in computing
diluted net income per share 21,180 20,754 21,140 20,730
======== ======== ======== ========
</TABLE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Finished goods $ 2,572 $ 2,480
Work in process 6,465 6,351
Raw materials 2,218 1,833
--------- ---------
$ 11,255 $ 10,664
========= =========
</TABLE>
3. 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 the prime rate (8.5% at June
30, 1998) and are collateralized by substantially all of the assets of
the Company. There were no borrowings under this revolving line of
credit at June 30, 1998.
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the prime rate. In June 1998,
the Company borrowed $2.0 million under this non-revolving line of
credit. This amount was subsequently converted to a four-year
installment note and was outstanding at June 30, 1998.
Under another non-revolving bank line of credit that expired, the
Company had $800,000 outstanding at June 30, 1998 under term notes that
are collateralized by the equipment purchased.
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 June 30, 1998.
4. SIGNIFICANT CUSTOMERS
No single customer accounted for 10% or more of net revenues during the
six months ended June 30, 1998. One customer, Qualcomm, accounted for
$5.1 million (11%) of net revenues during the six months ended June 30,
1997.
5. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and
as a single total, the change in net assets during the period from non-
owner sources. Comprehensive income includes all changes in equity
during a period except those resulting from investments by and
distributions to the Company's shareholders. Comprehensive income, which
was comprised of the Company's net income for the periods and unrealized
losses on investments, was $6.3 million and $12.0 million for the quarter
and six months ended June 30, 1998, respectively, and $3.8 million and
$7.1 million for the comparable periods in 1997.
6. EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 this statement will not impact the
Company's consolidated financial position, results of operations or cash
flows. The Company will adopt this statement in its financial statements
for the year ending December 31, 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high performance
standard analog integrated circuits. These circuits are used in
a wide variety of electronics products, including those in the
communications, computer and industrial markets. In addition to standard
products, the Company manufactures custom analog and mixed-signal circuits
and provides wafer foundry services. The Company derives a substantial
portion of its net revenues from standard products. While the Company
continues to maintain a long-term strategy that focuses on standard
products sales revenues, the Company has recently emphasized custom and
foundry product sales as an interim response to the Asian situation.
Standard products sales represented 67% of net revenues for the quarter
ended June 30, 1998 as compared to 73% for the similar period in the prior
year. For the six months ended June 30, 1998 and 1997, the Company's
standard products sales accounted for 71% and 74% of the Company's net
revenues, respectively. The Company believes that a substantial portion of
its net revenues in the future will depend upon standard products sales,
although such sales as a proportion of net revenues may vary in the short-
term due to the Asian financial situation.
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, the Asian financial situation, 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 could materially and adversely affect the Company's
business, financial condition or results of operations.
Results of Operations
The following table sets forth certain operating data as a percentage of total
net revenues for the periods indicated.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 44.6 47.0 44.8 47.7
------ ------ ------ ------
Gross margin 55.4 53.0 55.2 52.3
------ ------ ------ ------
Operating expenses:
Research and development 13.6 13.2 13.1 13.8
Selling, general and
Administrative 15.2 16.8 16.0 16.4
------ ------ ------ ------
Total operating expenses 28.8 30.0 29.1 30.2
------ ------ ------ ------
Income from operations 26.6 23.0 26.1 22.1
Other income, net 1.1 0.9 1.0 1.0
------ ------ ------ ------
Income before income taxes 27.7 23.9 27.1 23.1
Provision for income taxes 9.4 8.1 9.2 7.9
------ ------ ------ ------
Net income 18.3% 15.8% 17.9% 15.2%
====== ====== ====== ======
</TABLE>
Net Revenues. Net revenues increased for the quarter and six months ended
June 30, 1998 as compared to the comparable prior year periods. Net
revenues were $34.5 million and $67.2 million for the quarter and six
months ended June 30, 1998, respectively, increases of 42% and 45% over
$24.3 million and $46.4 million for the comparable periods for 1997. The
growth in net revenues on a quarterly and year-to-date basis is due, in
part, to higher standard products revenues which grew in absolute dollars
while declining on a percentage basis to 67% and 71% of net revenues for
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
the quarter and six months ended June 30, 1998, respectively, from 73% and
74% for each of the comparable periods in 1997. On a dollar basis, standard
products revenues increased 31% to $23.1 million for the quarter ended June
30, 1998 from $17.7 million for the comparable period in 1997 and by 39% to
$47.8 million for the six months ended June 30, 1998 from $34.4 million for
the comparable period in 1997. Sales of standard products by the Company
during the quarter and six months were led by the increased sales of low
dropout regulators and computer peripheral devices. Such products were
sold to manufacturers of telecommunications, portable computing, computing
peripherals and industrial products. Custom and foundry revenues increased
71% to $6.6 million for the quarter ended June 30, 1998 from $4.7 million
for the comparable period in 1997 and by 62% to $19.3 million for the six
months ended June 30 1998 from $12.0 million for the comparable period in
1997. Management believes that the range of the Company's products - from
standard products to custom and foundry products - as well as the
geographic diversity of its customers should enable the Company's continued
sales and profit growth despite economic conditions in Asia.
The Company believes that pricing pressures continue to be experienced by
the general technology sector and by companies in the analog segment of the
semiconductor industry. During the second quarter of 1998, standard product
customer demand continued to be short-term focused due to shorter than
historical order lead times. These factors affect the Company's ability to
predict future sales growth, profitability and forward visibility. The
Company's ability to predict demand in future quarters also continues to be
affected by the trend of its customers to place orders close to desired
shipment dates and to reduce their long-term purchasing commitments, which
is the result of less predictable demand for such customers' products and
increased product availability in the semiconductor industry. The Company
has sought to address these reduced order lead times by implementing faster
production cycles.
International sales represented 43% and 45% of net revenues for the quarter
and six months ended June 30, 1998 as compared to 47% for the comparable
periods in the prior year, respectively as a result of the change in
product mix emphasizing custom and foundry product sales as an interim
response to the Asian situation. On a dollar basis, international sales
totaled $14.9 million and $30.5 million for the quarter and six months
ended June 30, 1998, increases of 30% and 38% over $11.5 million and $22.0
million for the comparable periods in 1997, respectively. The dollar
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 North
American distributors until such distributors resell the Company's products
to their customers. Sales to international distributors are recognized upon
shipment. The Company estimates international distributor returns and
provides an allowance as the revenue is recognized.
Gross Margin. Gross margin is affected by the volume of product sales,
product mix, manufacturing utilization, product yields and average selling
prices. The Company's gross margin increased to 55% for the quarter and the
six months ended June 30, 1998 from 53% and 52% for the quarter and the six
months ended June 30, 1997, respectively. The improvement in gross margin
reflected an increase in manufacturing efficiency due to greater capacity
utilization that was partially offset by declining average selling prices.
The Company believes that continued gross margin expansion is likely as
revenue and production output increases throughout the balance of 1998.
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
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 $1.5 million
to $4.7 million for the quarter ended June 30, 1998 from $3.2 million for
the comparable period in 1997. For the six months ended June 30, 1998,
research and development expenses increased by $2.4 million to $8.8 million
from $6.4 million for the comparable prior year period. As a percentage of
net revenues, research and development expenses increased to 14% of net
revenues for the quarter ended June 30, 1998 compared to 13% for the
similar period in the prior year. For the six months ended June 30, 1998,
research and development declined to 13% of net revenues as compared to 14%
for the comparable period in 1997. The dollar increase in research and
development expenses during the quarter and six months ended June 30, 1998
was primarily due to increased costs associated with the Company's
conversion to six-inch wafer fabrication and increased engineering staffing
to support the development of new products and new wafer fabrication
processes. The Company believes that the development and introduction of
new standard products is critical to its future success and expects that
research and development expenses will increase on a dollar basis in the
future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased on a dollar basis to approximately $5.2
million or 15% of net revenues for the second quarter in 1998 from $4.1
million or 17% of net revenues for the comparable period in 1997. For the
six months ended June 30, 1998, these expenses increased on a dollar basis
to $10.7 million or 16% of net revenues from $7.6 million or 16% for the
comparable period in 1997. The dollar increase during the quarter ended
June 30, 1998 was principally attributable to increased wages and salaries,
profit sharing accruals to promote personnel retention, sales commissions,
and other sales and administrative expenses associated with the growth of
the Company's revenues. The dollar increase during the six months ended
June 30, 1998 was principally attributable to increased wages and salaries,
higher legal accruals, profit sharing accruals to promote personnel
retention, sales commissions, and other sales and administrative expenses
associated with the growth of the Company's revenues.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities offset by interest
expense incurred on line of credit borrowings and term notes. Other income,
net increased by $141,000 to $359,000 for the quarter ended June 30, 1998
from $218,000 for the comparable period in 1997. For the six months ended
June 30, 1997, other income, net increased to $703,000 from $440,000 for
the comparable period in 1997. Such increases in the quarter and six months
ended June 30, 1998 reflected an increase in interest income due to an
increase in average cash and investment balances and a decrease in interest
expense 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.
Provision for Income Taxes. For each of the quarters and six months ended
June 30, 1998 and 1997, the provision for income taxes was 34% of income
before taxes for each quarter. The income tax provision for such interim
periods reflects the Company's estimated annual income tax rate. The 1998
and 1997 income tax provisions differ from taxes computed at the federal
statutory rate due to the effect of state taxes offset by the benefit from
the foreign sales corporation, federal and state research and development
credits, and state manufacturing credits.
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been its
cash from operations, bank borrowings and sales of common stock. Principal
sources of liquidity at June 30, 1998 consisted of cash and short-term
investments of $25.6 million and borrowing facilities consisting of (i)
$3.0 million under a revolving line of credit, of which all was unused and
available, and (ii) $5.0 million under a non-revolving line of credit. In
June 1998, the Company borrowed $2.0 million under this non-revolving line
of credit. This amount was subsequently converted to a four-year
installment note and was outstanding at June 30, 1998. 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
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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
June 30, 1998.
The non-revolving bank line of credit that is covered by the loan agreement
described above, can be used to fund purchases of capital equipment whereby
the Company may borrow up to 100% of the cost, 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 another notes payable, the Company had $800,000 outstanding at June
30, 1998. The note is collateralized by equipment purchased.
The Company's working capital increased by $3.4 million to $45.0 million as
of June 30, 1998 from $41.7 million as of December 31, 1997. The increase
was primarily attributable to a $5.4 million increase in cash, cash
equivalents and short-term investments combined with increases in accounts
receivable of $4.9 million, other current assets of $1.0 million, and
inventories of $0.6 million, which were partially offset by a $5.5 million
increase in accounts payable, a $2.0 million increase in other current
liabilities and a $1.1 million increase in deferred income. The Company's
short-term investments were principally invested in investment grade,
interest-bearing securities.
The Company's cash flows from operating activities increased to $20.7
million for the six months ended June 30, 1998 from $12.1 million for the
comparable prior year period. The cash flows from operating activities
generated by the Company in the six months ended June 30, 1998 were
primarily attributable to net income (plus non-cash charges for
depreciation and amortization) of approximately $16.8 million combined with
increases in accounts payable of $5.5 million, income taxes payable of $2.3
million, accrued compensation and other liabilities of $1.4 million and
deferred income of $1.1 million, which were partially offset by increases
in accounts receivable of $4.9 million and inventories of $0.6 million. The
Company's cash flows from operating activities generated by the Company for
the six months ended June 30, 1997 were primarily due to net income (plus
non-cash charges for depreciation and amortization) of $9.9 million
combined with a $2.9 million decrease in inventory and a $1.5 million
increase in income taxes payable, which were partially offset by a $3.9
million increase in accounts receivable.
Investing activities during the six months ended June 30, 1998 used cash of
approximately $23.7 million as compared to $12.6 million of cash used for
investing activities during the comparable period in 1997. Cash used for
investing activities during the six months ended June 30, 1998 resulted
primarily from net purchases of $18.4 million of property, plant and
equipment combined with net purchases of short-term investments of $5.3
million. Cash used for investing activities during the six months ended
June 30, 1997 were due to net purchases of property, plant and equipment of
$11.6 million combined with short-term investments of $0.9 million.
The Company's financing activities during the six months ended June 30,
1998 provided cash of approximately $3.1 million as compared to $0.6
million during the comparable period in 1997. Cash provided by financing
activities during the six months ended June 30, 1998 resulted from $2.0
million in proceeds from long-term borrowings and $1.7 million in proceeds
from the issuance of common stock through the exercise of stock options,
which were partially offset by $0.5 million in repayments of long-term debt
during the same period. Cash provided by financing activities during the
six months ended June 30, 1997 was the result of $1.1 million in proceeds
from the issuance of common stock through the exercise of stock options,
which were partially offset by $0.6 million in repayments of long-term debt
during the same period.
The Company currently intends to spend up to approximately $35 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Forward-looking
statements include: statements regarding future products or product
development; statements regarding future research and development spending
and the Company's product development strategy; statements regarding the
levels of international sales; statements regarding future expenditures;
and statements regarding Year 2000 compliance costs. All forward-looking
statements included in this document are based on information available to
the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements. It is important to note that
the Company's actual results could differ materially from those in such
forward-looking statements. Some of the factors that could cause actual
results to differ materially are set forth below.
The Company has generated a substantial portion of its net revenues from
export sales. 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.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products
sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to meet increasing
demand, the Company's ability to introduce new products on a timely basis,
the timing of new product announcements and introductions by the Company or
its competitors, the timing and extent of research and development
expenses, fluctuations in manufacturing yields, cyclical semiconductor
industry conditions, the Company's access to advanced process technologies
and the timing and extent of process development costs. As a result of the
foregoing or other factors, there can be no assurance that the Company will
not experience material fluctuations in future operating results on a
quarterly or annual basis, which could materially and adversely affect the
Company's business, financial condition and results of operations.
The Company has transitioned its business to rely more heavily on the sale
of standard products. The Company believes that a substantial portion of
its net revenues in the future will continue to depend upon standard
products sales. As compared with the custom and foundry products business,
the standard products business is characterized by shorter product
lifecycles, greater pricing pressure, larger competitors and more rapid
technological change. Generally, the standard products market is a rapidly
changing market in which the Company faces the risk that, as the market
changes, its product offerings will become obsolete. The Company competes
in the standard products market with established companies, most of which
have substantially greater financial, engineering, manufacturing and
marketing resources than the Company. No assurance can be given that the
Company will be able to compete successfully in the standard products
market or that it will be able to successfully introduce new standard
products in the future. The failure of the Company to compete successfully
in the standard products business would materially and adversely affect the
Company's financial condition and results of operations.
The Company is also currently transitioning to the processing of six-inch
wafers, which will involve process lithography that will handle items as
small as one micron. There can be no assurance that the transition to
six-inch wafer processing will be achieved on schedule without encountering
any delays in the process implementation. Nor can there be any assurance that
the Company will achieve acceptable manufacturing yields or that the
operating income margins on such products will be comparable to those
realized in connection with the Company's four inch wafer fabrication
processes. Failure to achieve acceptable yields or margins could adversely
affect the Company's financial condition and results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The analog semiconductor industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the analog
market include product features, performance, price, timing of product
introductions, emergence of new computer standards, quality and customer
support. Because the standard products market for analog integrated
circuits is diverse and highly fragmented, the Company encounters different
competitors in its various market areas. Most of these competitors have
substantially greater technical, financial and marketing resources and
greater name recognition than the Company. Due to the increasing demands
for analog circuits, the Company expects intensified competition from
existing analog circuit suppliers and the entry of new competition,
including international companies. Increased competition could adversely
affect the Company's financial condition or results of operations. There
can be no assurance that the Company will be able to compete successfully
in either the standard products or custom and foundry products business in
the future or that competitive pressures will not adversely affect the
Company's financial condition and results of operations.
The fabrication of integrated circuits is a highly complex and precise
process. Minute impurities, contaminants in the manufacturing environment,
difficulties in the fabrication process, defects in the masks used to print
circuits on a wafer, manufacturing equipment failures, wafer breakage or
other factors can cause a substantial percentage of wafers to be rejected
or numerous die on each wafer to be nonfunctional. Moreover, there can be
no assurance that the Company will be able to maintain acceptable
manufacturing yields in the future.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. There can be no
assurance that these existing claims or any other assertions (or claims for
indemnity resulting from infringement claims) will not materially adversely
affect the Company's business, financial condition and results of
operations.
The Company is aware of the "Year 2000 Issue" which is a result of computer
programs being written using two digits rather than four to define the
applicable year. If the computer programs with date-sensitive functions are
not Year 2000 compliant, they may recognize a date using "00" as the year
1900 rather than the year 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its computer systems for Year 2000
compliance. The Company estimates that all reprogramming efforts will be
completed by December 31, 1998 and has not developed a contingency plan for
the event of non-compliance before the year 2000. The Year 2000 compliance
process includes obtaining confirmation from the Company's primary vendors
that plans are being developed or are already in place to address processing
of transactions in the Year 2000. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will also be
converted in a timely manner or that any such failure by another company
would not have an adverse effect on the Company's systems. Management is in
the process of completing its assessment of the Year 2000 compliance costs
and, based on information to date (excluding the possible impact of vendor
systems), management believes that total costs of Year 2000 compliance will
be immaterial to the Company's financial condition or results of operations.
The cost of Year 2000 compliance and the date on which the Company believes
it will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources,
third-party modification plans and other factors. There can be no assurance
that these estimates will be achieved and actual results could differ
materially from those anticipated.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that these claims and lawsuits
will not have a material adverse effect on the Company's financial
position, cash flow or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 21, 1998 at 12:00 noon local time, at its principal corporate
offices located at 1931 Fortune Drive, San Jose, California. The Annual
Meeting was held for the purpose of (a) electing five members of the Board
of Directors, (b) ratifying and approving the appointment of Deloitte &
Touche LLP as the Company's independent auditors for the fiscal year ending
December 31, 1998 and (c) transacting such other business as may properly
come before the Annual Meeting. The two matters below were voted upon and
approved:
Matter No. 1 - Election of five members of the Board of Directors:
The following persons were duly elected to the Board by the shareholders
for a one year term and until their successors are elected and qualified:
NOMINATION FOR ABSTAINED
---------- ---------- ---------
Raymond D. Zinn 18,634,372 8,935
Warren H. Muller 18,634,092 9,215
Larry L. Hansen 18,633,182 10,125
George Kelly 18,633,542 9,765
Dale L. Peterson 18,634,132 9,175
Matter No. 2 - Ratification of the Appointment of Deloitte & Touche LLP as
the Company's Independent Auditors for the Fiscal Year Ending December 31,
1998:
NOMINATION FOR AGAINST ABSTAINED
---------- ---------- ------- ---------
Deloitte & Touche LLP 18,632,586 2,136 8,585
ITEM 5. OTHER INFORMATION
Any shareholder proposal submitted with respect to the Company's 1999
Annual Meeting of Shareholders, which proposal is submitted outside the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, will be considered untimely for purposes of Rules 14a-4 and 14a-5
if notice thereof is received by the Company after March 2, 1999.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- --------------
10.1 Indemnification Agreement between the Registrant and
Mr. J. Barry Small, an officer of the Company.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the quarter ended June 30, 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICREL, INCORPORATED
----------------------
(Registrant)
Date: August 10, 1998 By /s/ ROBERT J. BARKER
--------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
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EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into, effective as of April 21, 1998 by and
between MICREL, INCORPORATED, a California corporation (the "Company"), and
J. Barry Small ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the Company;
WHEREAS, both the company and Indemnitee recognize the increased risk of
litigation and other claims currently being asserted against directors and
officers of corporations; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company, and in order to induce Indemnitee to
provide services to the Company as a director and/or officer, the Company
wishes to provide in this Agreement for the indemnification of and the
advancing of expenses to Indemnitee to the fullest extent (whether partial
or complete) permitted by California law and as set forth in this
Agreement, and, to the extent insurance is maintained, for the coverage of
Indemnitee under the Company's directors' and officers' liability insurance
policies.
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's continuing to serve the Company directly or, at its request,
with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. Certain Definitions:
(a) Board: the Board of Directors of the Company.
(b) Change in Control: shall be deemed to have occurred if (I) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Act"), other than a
trustee or other fiduciary holding securities under an employee benefit
plan of the company or a corporation owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "Beneficial Owner" (as
defined in Rule 13d-3 under the Act), directly or indirectly, of securities
of the company representing 30% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or (ii)
during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board and any new director whose
election by the Board or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period of whose election or nomination for election was previously
so approved, cease for any reason to constitute a majority of the Board,
or, or (iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation that would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 80% of the total voting power
represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (iv)
the shareholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company (in
one transaction or a series of transactions) of all or substantially all of
the Company's assets.
(c) Expenses: any expense, liability, or loss, including attorneys'
fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or
to be paid in settlement, any interest, assessments, or other charges
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imposed thereon, and any federal, state, local, or foreign taxes imposed as
a result of the actual or deemed receipt of any payments under this
Agreement, paid or incurred in connection with investigating, defending,
being a witness in, or participating in (including on appeal), or preparing
for any of the foregoing in, any Proceeding relating to any Indemnifiable
Event.
(d) Indemnifiable Event: any event or occurrence that takes place
either prior to or after the execution of this Agreement, related to the
fact that Indemnitee is or was a director or an officer of the company, or
while a director or officer is or was serving at the request of the Company
as a director, officer, employee, trustee, agent, or fiduciary of another
foreign or domestic corporation, partnership, joint venture, employee
benefit plan, trust, or other enterprise, or was a director, officer,
employee, or agent of a foreign or domestic corporation that was a
predecessor corporation of the Company or of another enterprise at the
request of such predecessor corporation, or related to anything done or not
done by Indemnitee in any such capacity, whether or not the basis of the
Proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent of the Company, as described above.
(e) Independent Counsel: the person or body appointed in connection
with Section 3.
(f) Potential Change in Control: shall be deemed to have occurred if
(I) the Company enters into an agreement or arrangement, the consummation
of which would result in the occurrence of a Change in Control; (ii) any
person (including the Company) publicly announces an intention to take or
to consider taking actions that, if consummated, would constitute a Change
in Control; (iii) any person (other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in
such capacity or a corporation owned, substantially the same proportions as
their ownership of stock of the Company), who is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing
10% or more of the combined voting power of the Company's then outstanding
Voting Securities, increase his beneficial ownership of such securities by
5% or more over the percentage so owned by such person on the date hereof,
or (iv) the board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
(g) Proceeding: (I) any threatened, pending, or completed action,
suit, or proceeding, or whether civil, criminal, administrative,
investigative, or other; (ii) any inquiry, hearing, or investigation,
whether conducted by the Company or any other party, that Indemnitee in
good faith believes might lead to the institution of any such action, suit,
or proceeding.
(h) Reviewing Party: the person or body appointed in accordance with
Section 3.
(i)Voting Securities: any securities of the Company that vote
generally in the election of officers.
2. Agreement to Indemnify.
(a) General Agreement. In the event Indemnitee was, is, or becomes a
party to or witness or other participant in, or is threatened to be made a
party to or witness or other participant in, a Proceeding by reason of (or
arising in part out of) an Indemnifiable Event, the company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent
permitted by law, as the same exits or may hereafter be amended or
interpreted (but in the case of any such amendment or interpretation, only
to the extent that such amendment or interpretation permits the company to
provide broader indemnification rights than were permitted prior thereto).
The parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the
Company's Articles of Incorporation, its bylaws, vote of its shareholders
or disinterested directors, or applicable law.
(b) Initiation of Proceeding. Notwithstanding anything in this
Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any
Proceeding initiated by Indemnitee against the Company or any director or
officer of the Company unless (i) the Company has joined in or the Board
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<PAGE>
has consented to the initiation of such Proceeding; (ii) the Proceeding is
one to enforce indemnification rights under Section 5; or (iii) the
Proceeding is instituted after a Change in Control and Independent Counsel
has approved its initiation.
(c) Expense Advances. If so requested by Indemnitee, the Company
shall advance (within ten business days of such request) any and all
Expenses to Indemnitee (an "Expense Advance"); proved that, if and to the
extent that the Reviewing Party determines that Indemnitee would not be
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid. If Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure
a determination that Indemnitee should be indemnified under applicable law,
as provided in Section 4, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable
law shall not be binding and Indemnitee shall not be required to reimburse
the Company for any Expense Advance unit a final judicial determination is
made with respect thereto (as to which all rights of appeal therefrom have
been exhausted or have lapsed). Indemnitee's obligation to reimburse the
Company for Expense Advances shall be unsecured and no interest shall be
charged thereon.
(d) Mandatory Indemnification. Notwithstanding any other provision
of this Agreement (other than Section 2(f) below), to the extent that
Indemnitee has been successful on the merits in defense or any Proceeding
relating in whole or in part to an Indemnifiable Event or in defense of any
issue or matter therein, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
(e) Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expense, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to
which Indemnitee is entitled.
(f) Prohibited Indemnification. No indemnification pursuant to this
Agreement shall be paid by the Company on account of any Proceeding in
which judgment is rendered against Indemnitee for an accounting of profits
made from the purchase or sale by Indemnitee of securities of the Company
pursuant to the provisions of Section 16(b) of the Act or similar
provisions of any federal, state or local laws.
3. Reviewing Party. Prior to any Change in Control, the Reviewing Party
shall be any appropriate person or body consisting of a member or members
of the Board or any other person or body appointed by the board who is not
a party to the particular Proceeding with respect to which Indemnitee is
seeking indemnification; after a Change in Control, the Reviewing Party
shall be the Independent Counsel referred to below. With respect to all
matters arising after a Change in Control (other than a Change in Control
approved by a majority of the directors on the Board who were directors
immediately prior to such Change in Control) concerning the rights of
Indemnitee to indemnity payments and Expense Advances under this Agreement
or any other agreement or under applicable law or the company's Articles of
Incorporation of bylaws now or hereafter in effect relating to
indemnification for Indemnifiable Events, the Company shall seek legal
advice only from Independent Counsel selected by Indemnitee and approved by
the Company (which approval shall not be unreasonably withheld), and who
has not otherwise performed services for the Company or the Indemnitee
(other than in connection with indemnification matters ) within the last
five years. The Independent Counsel shall not include any person who,
under the applicable standards of professional conduct then prevailing,
would have a conflict of interest in representing either the Company or
Indemnitee in an action to determine Indemnitee's rights under this
Agreement. Such counsel, among other things, shall render its written
opinion to the Company and Indemnitee as to whether and to what extent the
Indemnitee should be permitted to be indemnified under applicable law. the
Company agrees to pay the reasonable fees of the Independent Counsel and to
indemnify fully such counsel against any and all expenses (including
attorney's fees), claims, liabilities, loss, and damages arising out of or
relating to this Agreement or the engagement of Independent Counsel
pursuant hereto.
4. Indemnification Process and Appeal.
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(a) Indemnification Payment. Indemnitee shall be entitled to
indemnification of Expenses, and shall receive payment thereof, from the
Company in accordance with this Agreement as soon as practicable after
Indemnitee has made written demand on the company for indemnification,
unless the Reviewing Party has given a written opinion to the company that
Indemnitee is not entitled to indemnification under applicable law.
(b) Suit to Enforce Rights. Regardless of any action by the
Reviewing Party, if Indemnitee has not received full indemnification within
thirty days after making a demand in accordance with Section 4(a),
Indemnitee shall have the right to enforce its indemnification rights under
this Agreement by commencing litigation in any court in the State of
California having subject matter jurisdiction thereof and in which venue is
proper seeking an initial determination by the court or challenging any
determination by the Reviewing Party or any aspect thereof. The Company
hereby consents to service of process and to appear in any such proceeding.
Any determination by the Reviewing Party not challenged by the Indemnitee
shall be binding on the company and Indemnitee. The remedy provided for in
this Section 4 shall be in addition to any other remedies available to
Indemnitee in law or equity.
(c) Defense to Indemnification, Burden of Proof, and Presumptions.
It shall be a defense to any action brought by Indemnitee against the
Company to enforce this Agreement (other than an action brought to enforce
a claim for Expenses incurred in defending a Proceeding in advance of its
final disposition where the required undertaking has been tendered to the
Company) that it is not permissible under applicable law for the company to
indemnify Indemnitee for the amount claimed. In connection with any such
action or any determination by the Reviewing Party or otherwise as to
whether Indemnitee is entitled to be indemnified hereunder, the burden of
proving such a defense or determination shall be on the Company. Neither
the failure of the Reviewing Party or the company (including its board,
independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action by Indemnitee that
indemnification of the claimant is proper under the circumstances because
Indemnitee has met the standard of conduct set forth in applicable law, nor
an actual determination by the Reviewing Party of Company (including it
Board, independent counsel, or its shareholders) that the Indemnitee had
not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the Indemnitee has not met the
applicable standard of conduct. For purposes of this Agreement, the
termination of any claim, action, suit, or proceeding, by judgment, order
settlement (whether with or without court approval), conviction, or upon a
plea of nolo contendere, or its equivalent, shall not create a presumption
that Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is
not permitted by applicable law.
5. Indemnification for Expenses Incurred in Enforcing Rights. The
Company shall indemnify Indemnitee against any and all Expenses and, if
requested by Indemnitee, shall (within ten business days of such request),
advance such Expenses to Indemnitee, that are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee
for
(i) Indemnification of Expenses or Expense Advances by the Company
under this Agreement or any other agreement or under applicable law or the
company's Articles of Incorporation or Bylaws now or hereafter in effect
relating to indemnification for Indemnifiable Events, and/or
(ii) Recovery under directors' and officers' liability insurance
policies maintained by the Company, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, Expense
Advances, or insurance recovery, as the case may be.
6. Notification and Defense of Proceeding.
(a) Notice. Promptly after receipt by Indemnitee of notice of the
commencement of any Proceeding, Indemnitee shall, if a claim in respect
thereof is to be made against the Company under this Agreement, notify the
Company of the commencement thereof; but the omission so to notify the
Company will not relieve the Company from any liability that it may have to
Indemnitee, except as provided in Section 6(c).
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(b) Defense. With respect to any Proceeding as to which Indemnitee
notifies the Company of the commencement thereof, the Company shall be
entitled to participate in the Proceeding at its own expense and except as
otherwise provided below, to the extent the Company so wishes, it may
assume the defense thereof with counsel reasonably satisfactory to
Indemnitee. After notice from the Company to Indemnitee of its election to
assume the defense of any Proceeding, the Company shall not be liable to
Indemnitee under this Agreement or otherwise for any Expenses subsequently
incurred by Indemnitee in connection with the defense of such Proceeding
other than reasonable costs of investigation or as otherwise provided
below. Indemnitee shall have the right to employ his or her own legal
counsel in such Proceeding, but all Expenses related thereto incurred after
notice from the Company of its assumption of the defense shall be at
Indemnitee's expense unless: (I) the employment of legal counsel by
Indemnitee has been authorized by the Company, (ii) Indemnitee has
reasonably determined that there may be a conflict of interest between
Indemnitee and the Company in the defense of the Proceeding, (iii) after a
Change in Control, the employment of counsel by Indemnitee has been
approved by the Independent Counsel, or (iv) the Company shall not in fact
have employed counsel to assume the defense of such Proceeding, in each of
which case all Expenses of the Proceeding shall be borne by the company.
The company shall not be entitled to assume the defense of any Proceeding
brought by or on behalf of the Company or as to which Indemnitee shall have
made the determination provided for in (ii) above.
(c) Settlement of Claims. The Company shall not be liable to
indemnify Indemnitee under this Agreement or otherwise for any amounts paid
in settlement of any Proceeding effected without the Company's written
consent, provided, however, that if a Change in Control has occurred, the
Company shall be liable for indemnification of Indemnitee for amounts paid
in settlement if the Independent counsel has approved the settlement. The
Company shall not settle any Proceeding in any manner that would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent.
Neither the Company nor the Indemnitee will unreasonably withhold their
consent to any proposed settlement. The Company shall not be liable to
indemnify the Indemnitee under this Agreement with regard to any judicial
award if the Company was not given a reasonable and timely opportunity, at
its expense, to participate in the defense of such action; the Company's
liability hereunder shall not be excused if participation in the Proceeding
by the Company was barred by this Agreement.
7. Establishment of Trust. In the event of a Change in Control or a
Potential Change in Control, the Company shall, upon written request by
Indemnitee, create a Trust for the benefit of the Indemnitee and from time
to time upon written request of Indemnitee shall fund the Trust in an
amount sufficient to satisfy any and all Expense reasonably anticipated at
the time of each such request to be incurred in connection with
investigating, preparing for, participating in, and/or defending any
Proceeding relating to an Indemnifiable Event. The amount or amounts to be
deposited in the Trust pursuant to the foregoing funding obligation shall
be determined by the Reviewing Party. The terms of the Trust shall provide
that upon a Change in Control, (I) the Trust shall not be revoked or the
principal thereof invaded, without the written consent of the Indemnitee,
(ii) the Trustee shall advance, within ten business days of a request by
the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee
hereby agrees to reimburse the Trust under the same circumstances for which
the Indemnitee would be required to reimburse the Company under Section
2(c) of this Agreement), (iii) the Trust shall continue to be funded by the
Company in accordance with the funding obligation set forth above, (iv) the
Trustee shall promptly pay to the Indemnitee all amounts for which the
Indemnitee shall be entitled to indemnification pursuant to this Agreement
or otherwise, and (v) all unexpended funds in the Trust shall revert to the
Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that the Indemnitee has been
fully indemnified under the terms of this Agreement. The Trustee shall be
chosen by the Indemnitee. Nothing in this Section 7 shall relieve the
Company of any of its obligations under this Agreement. All income earned
on the assets held in the Trust shall be reported as income by the Company
for federal, state, local, and foreign tax purposes. The Company shall pay
all costs of establishing and maintaining the Trust and shall indemnify the
Trustee against any and all expenses (including attorneys' fees), claims,
liabilities, loss, and damages arising out of or relating to this Agreement
or the establishment and maintenance of the Trust.
8. Non-Exclusivity. The rights of Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation, Bylaws, applicable law, or otherwise. To the
extent that a change in applicable law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be
21
<PAGE>
afforded currently under the Company's Articles of Incorporation, Bylaws,
applicable law, or this Agreement, it is the intent of the parties that
Indemnitee enjoy by this Agreement the greater benefits so afforded by such
change.
9. Liability Insurance. To the extent the company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or on behalf of the company or any affiliate
of the Company against Indemnitee, Indemnitee's spouse, heirs, executors,
or personal or legal representatives after the expiration of two years from
the date of accrual of such cause of action, or such longer period as may
be required by state law under the circumstances. Any claim or cause of
action of the Company or its affiliate shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such
period; provided, however that if any shorter period of limitations is
otherwise applicable to any such cause of action the shorter period shall
govern.
11. Amendment of this Agreement. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall operate as a waiver of any other provisions hereof (whether
or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided herein, no failure to exercise or any delay
in exercising any right or remedy hereunder shall constitute a waiver
thereof.
12. Subrogation. In the event of payment under this Agreement, the
Company shall be subjugated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including
the execution of such documents necessary to enable the Company effectively
to bring suite to enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
Indemnifiable hereunder.
14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by
purchase, merger, consolidation, or otherwise to all or substantially all
of the business and/or assets of the Company), assigns, spouses, heirs, and
personal and legal representatives. The Company shall require and cause
any successor (whether direct or indirect by purchase, merger,
consolidation, or otherwise) to all, substantially all, or a substantial
part, of the business and/or assets of the Company, by written agreement in
form and substance satisfactory to Indemnitee, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had
taken place. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity pertaining to an Indemnifiable Event even though
he or she may have ceased to serve in such capacity at the time of any
Proceeding.
15. Severability. If any provision (or portion thereof) of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, or otherwise unenforceable, the remaining provision shall remain
enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of this Agreement containing any provision
held to be invalid, void, or otherwise unenforceable, that is not itself
invalid, void, or unenforceable) shall be construed so as to give effect to
the intent manifested by the provision held invalid, void, or
unenforceable.
22
<PAGE>
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California applicable
to contracts made and to be performed in such State without giving effect
to the principles of conflicts of laws.
17. Notices. All notices, demands, and other communications required or
permitted hereunder shall be made in writing and shall be deemed to have
been duly given if delivered by hand, against receipt, or mailed, postage
prepaid, certified or registered mail, return receipt requested, and
addressed to the Company at:
Micrel, Incorporated
1849 Fortune Drive
San Jose, California 95131
Attn: President
and to Indemnitee at:
J. Barry Small
936 Lundy Lane
Los Altos, CA 94024
Notice of change of address shall be effective only when given in
accordance with this Section. All notices complying with this Section
shall be deemed to have been received on the date of delivery or on the
third business day after mailing.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the day specified above.
MICREL, INCORPORATED
By: /s/ Warren H. Muller
---------------------
Title: Vice President, Secretary
INDEMNITEE:
/s/ J. Barry Small
-------------------
J. Barry Small
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,746
<SECURITIES> 22,823
<RECEIVABLES> 21,790
<ALLOWANCES> 0
<INVENTORY> 11,255
<CURRENT-ASSETS> 64,789
<PP&E> 46,077
<DEPRECIATION> 0
<TOTAL-ASSETS> 111,103
<CURRENT-LIABILITIES> 19,743
<BONDS> 0
0
0
<COMMON> 31,484
<OTHER-SE> 54,887
<TOTAL-LIABILITY-AND-EQUITY> 111,103
<SALES> 67,161
<TOTAL-REVENUES> 67,161
<CGS> 30,076
<TOTAL-COSTS> 30,076
<OTHER-EXPENSES> 19,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,220
<INCOME-TAX> 6,195
<INCOME-CONTINUING> 12,025
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,025
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.57
</TABLE>
