UNITED STATES SECURITIES AND EXCHANGE COMMISSION PRIVATE
WASHINGTON, D.C. 20549
F O R M 1 0 - 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 March 31, 1999.
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 Identification No.)
incorporation or organization)
1849 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1999 there were 20,195,990 shares of common stock, no par
value, outstanding.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1999
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Income Statements - Three
Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 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 6. Exhibits and Reports on Form 8-K 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14
Signature 15
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 (1)
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,291 $ 13,415
Short-term investments 14,941 15,029
Accounts receivable, net 25,591 24,079
Inventories 18,838 16,069
Deferred income taxes 10,530 11,967
Other current assets 1,174 693
--------- ---------
Total current assets 88,365 81,252
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 56,852 54,920
INTANGIBLE ASSETS, NET 8,290 8,878
OTHER ASSETS 318 320
--------- ---------
TOTAL $ 153,825 $ 145,370
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,697 $ 7,942
Income taxes payable 5,477 4,316
Deferred income on shipments to distributors 3,828 4,414
Current portion of long-term debt 5,481 5,579
Other current liabilities 7,222 8,133
--------- ---------
Total current liabilities 31,705 30,384
LONG-TERM DEBT 12,558 14,007
OTHER LONG-TERM OBLIGATIONS 4,701 5,268
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:
1999 - 20,192,290; 1998 - 20,091,196 37,458 35,660
Accumulated other comprehensive income 3 10
Retained earnings 67,400 60,041
--------- ---------
Total shareholders' equity 104,861 95,711
--------- ---------
TOTAL $ 153,825 $ 145,370
========= =========
</TABLE>
Derived from the December 31, 1998 audited balance sheet included in the
1998 Annual Report on Form 10-K of Micrel, Incorporated.
See notes to condensed consolidated financial statements.
3
<PAGE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
NET REVENUES $ 40,571 $ 32,659
COST OF REVENUES 17,945 14,696
--------- ---------
GROSS PROFIT 22,626 17,963
--------- ---------
OPERATING EXPENSES:
Research and development 5,818 4,115
Selling, general and administrative 5,821 5,517
--------- ---------
Total operating expenses 11,639 9,632
--------- ---------
INCOME FROM OPERATIONS 10,987 8,331
OTHER INCOME (LOSS), NET (4) 344
--------- ---------
INCOME BEFORE INCOME TAXES 10,983 8,675
PROVISION FOR INCOME TAXES 3,624 2,949
--------- ---------
NET INCOME $ 7,359 $ 5,726
========= =========
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.29
========= =========
Diluted $ 0.34 $ 0.27
========= =========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 20,145 19,583
========= =========
Diluted 21,915 21,109
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 10,175 $ 9,873
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (5,655) (5,226)
Purchases of short-term investments (14,919) (13,433)
Proceeds from sales and maturities of short-term
investments 15,000 9,800
--------- ---------
Net cash used in investing activities (5,574) (8,859)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,547) (308)
Proceeds from the issuance of common stock, net 822 579
--------- ---------
Net cash provided by (used in) financing
activities (725) 271
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,876 1,285
CASH AND CASH EQUIVALENTS - Beginning of period 13,415 2,581
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 17,291 $ 3,866
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 394 $ 27
========= =========
Cash paid for income taxes $ 577 $ 210
========= =========
</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 March 31, 1999 and for the
quarter ended March 31, 1999 and 1998 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, 1998.
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>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Weighted average common shares
outstanding 20,145 19,583
Dilutive effect of stock options
outstanding using the treasury
stock method 1,770 1,526
--------- ---------
Shares used in computing diluted
net income per share 21,915 21,109
========= =========
</TABLE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Finished goods $ 3,602 $ 4,540
Work in process 13,350 9,745
Raw materials 1,886 1,784
--------- ---------
$ 18,838 $ 16,069
========= =========
</TABLE>
3. SIGNIFICANT CUSTOMERS
No single customer accounted for 10% or more of net revenues during the
quarter ended March 31, 1999. At March 31, 1998, one customer, Qualcomm,
accounted for $3.9 million (12%) of net revenues.
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. 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 changes in unrealized gains
or losses on investments, was $7.4 million and $5.7 million for the
quarter ended March 31, 1999 and 1998, respectively.
5. SEGMENT REPORTING
In 1998, the Company adopted SFAS 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. The Company operates under two reportable segments,
standard products and custom and foundry products.
<TABLE>
<CAPTION>
Net Revenues by Segment
(Dollars in thousands)
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net Revenues:
Standard Products $ 31,461 $ 24,726
Custom and Foundry Products 9,110 7,933
--------- ---------
Total net revenues $ 40,571 $ 32,659
========= =========
As a Percentage of Total Net Revenues:
Standard Products 78% 76%
Custom and Foundry Products 22 24
--------- ---------
Total net revenues 100% 100%
========= =========
</TABLE>
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. Adoption of this statement is not expected to impact the
Company's consolidated financial position, results of operations or cash
flows materially. The Company is required to adopt this statement in the
first quarter of fiscal year 2000, with early adoption permitted.
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.
With the Company's acquisition of Synergy Semiconductor in November 1998, the
Company broadened its standard product offerings to include high-speed mixed-
signal and digital integrated circuits.
The Company derives a substantial portion of its net revenues from standard
products. Standard products sales represented 78% of net revenues for the
quarter ended March 31, 1999 as compared to 76% for the similar period in the
prior year. 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 as the Company adjusts product
output levels to correspond with varying economic conditions and demand levels
in the markets which it serves. 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 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>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of revenues 44.2 45.0
------- -------
Gross profit 55.8 55.0
------- -------
Operating expenses:
Research and development 14.3 12.6
Selling, general and administrative 14.4 16.9
------- -------
Total operating expenses 28.7 29.5
------- -------
Income from operations 27.1 25.5
Other income (loss), net 0.0 1.0
------- -------
Income before income taxes 27.1 26.5
Provision for income taxes 9.0 9.0
------- -------
Net income 18.1% 17.5%
======= =======
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net Revenues. Net revenues increased 24% to $40.6 million for the quarter
ended March 31, 1999 from $32.7 million for the same period in 1998. Standard
products revenues increased 27% to $31.5 million representing 78% of net
revenues for the quarter ended March 31, 1999 from $24.7 million representing
76% for the quarter ended March 31, 1998. Sales of standard products by the
Company during the quarter were led by low dropout regulators, Synergy
communications products and universal serial bus products. Such products were
sold to manufacturers of telecommunications, portable computing, computing
peripherals and industrial products. Custom and foundry products revenues
increased 15% to $9.1 million or 22% of net revenues for the quarter ended
March 31, 1999 from $7.9 million or 24% of net revenues for the comparable
period in 1998. 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 to increase
revenue levels in the near future despite current economic conditions
worldwide.
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 first quarter of 1999, 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 and increasing inventory levels as a percentage of revenues.
International sales increased 22% or $3.4 million on a dollar basis to $19.0
million for the quarter ended March 31, 1999, but decreased as a percentage of
net revenues to 47% from 48% for the comparable period in the prior year. The
dollar basis increase in international sales resulted from shipments to
manufacturers of personal computers and communications products primarily in
Asia and Europe.
The Company's international sales are 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,
Canadian, and certain other international distributors until such distributors
resell the Company's products to their customers. Generally, sales to
international distributors are recognized upon shipment. The Company estimates
returns and provides an allowance as the revenue is recognized.
Gross Profit. 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 56% for the quarter ended March 31, 1999
from 55% for the comparable period in the prior year. The improvement in gross
margin reflected an increase in manufacturing efficiency due to greater
capacity utilization and reductions in contract assembly and test unit costs,
which were partially offset by declining average selling prices.
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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 $1.7 million or 41%
to $5.8 million for the quarter ended March 31, 1999 from $4.1 million for the
comparable period in 1998. As a percentage of net revenues, research and
development expenses represented 14% of net revenues for the quarter ended
March 31, 1999 as compared to 13% of net revenues for the quarter ended
March 31, 1998. The increase in research and development expenses was
primarily due to increased engineering staffing costs associated with the
acquisition of Synergy. 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 $5.8
million or 14% of net revenues for the quarter ended March 31, 1999 from $5.5
million or 17% of net revenues for the comparable period in 1998. The dollar
increase during the quarter ended March 31, 1999 was principally attributable
to higher commissions, advertising and other administrative expenses
associated with the growth of the Company's revenues. The Company expects that
selling, general and administrative expenses will increase on a dollar basis
in the future.
Other Income (Loss), Net. Other income (loss), 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
(loss), net decreased by $348,000 to a net loss of $4,000 for the quarter
ended March 31, 1999 from a net income of $344,000 for the comparable period
in 1998. The decrease was due to an increase in average long-term debt
associated with the Synergy acquisition. The Company expects to continue to
utilize term financing as appropriate to finance its capital equipment needs.
Provision for Income Taxes. For the quarters ended March 31, 1999 and 1998,
the provision for income taxes was 33% and 34%, respectively, of income before
taxes. The income tax provision for such interim periods reflects the
Company's estimated annual income tax rate. The estimated tax rate reduction
from the prior comparable period represents estimated increased utilization of
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 March 31, 1999 consisted of cash and short-term investments of
$32.2 million and bank borrowing arrangements. Borrowing agreements consisted
of (i) $5.0 million under a revolving line of credit, of which all was unused
and available at March 31, 1999, and (ii) $20.0 million under a non-revolving
line of credit of which there was $7.3 million outstanding at March 31, 1999.
The two lines of credit are covered by the same loan and security agreement.
This agreement expires on September 30, 1999, 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
March 31, 1999.
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 of such equipment. Amounts
borrowed under this credit line are converted to four-year installment notes.
All equipment notes are collateralized by the equipment purchased and bear
interest rates of, at the Company's election, a fixed rate based on the four-
year U.S. Treasury Bill rate (5.19% at March 31, 1999) plus 3.0% or an annual
adjustable rate based on the one-year U.S. Treasury Bill rate (4.71% at March
31, 1999) plus 3.0%.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
As of March 31, 1999, the Company had $18.0 million outstanding under term
notes that are collateralized by the equipment purchased.
The Company's working capital increased by $5.8 million to $56.7 million as of
March 31, 1999 from $50.9 million as of December 31, 1998. The increase was
primarily attributable to a $3.8 million increase in cash, cash equivalents
and short-term investments combined with increases in inventories of $2.8
million and accounts receivable of $1.5 million, which were partially offset
by a $1.8 million increase in accounts payable and a $1.2 million increase in
income taxes payable. The Company's short-term investments were principally
invested in investment grade, interest-bearing securities.
The Company's cash flows from operating activities increased to $10.2 million
for the three months ended March 31, 1999 from $9.9 million for the comparable
period in the prior year. The cash flows from operating activities generated
by the Company in the quarter ended March 31, 1999 were primarily attributable
to net income of $11.6 million after deducting non-cash activities combined
with increases in accounts payable of $1.8 million and income taxes payable of
$1.2 million, which were partially offset by increases in inventories of $2.8
million and accounts receivable of $1.5 million.
The Company's investing activities during the quarter ended March 31, 1999
used cash of approximately $5.6 million as compared to $8.9 million of cash
used for investing activities during the comparable period in the prior year.
Cash used for investing activities during the quarter ended March 31, 1999
resulted primarily from net purchases of $5.7 million of property, plant and
equipment principally associated with the Company's conversion to six-inch
wafer production and additional testing equipment.
The Company's financing activities during the quarter ended March 31, 1999
used cash of approximately $0.7 million as compared to cash provided of $0.3
million during the comparable period in the prior year. Cash used by financing
activities during the quarter ended March 31, 1999 was the result of $1.5
million repayments of long-term debt which was offset by $0.8 million in
proceeds from the issuance of common stock, through the exercise of stock
options.
The Company currently intends to spend up to approximately $34.0 million
during 1999 primarily for the purchase of additional wafer and test
manufacturing equipment and leasehold improvements. The Company expects that
its cash requirements through 1999 will be met by its existing cash balances
and short-term investments, cash from operations and its existing credit
facilities.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include: statements regarding future products or product development;
statements regarding future research and development spending and the
Company's product development strategy; statements regarding the levels of
international sales; statements regarding future expenditures; statements
regarding Year 2000 compliance costs; and statements regarding current or
future acquisitions. 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
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, results of operations, or cash flows.
In November 1998, the Company acquired Synergy Semiconductor, which is its
first major acquisition. It is not certain that the Company will be able to
successfully integrate into its operations Synergy's business, products,
technology or personnel. The Company's failure to do so could have a material
adverse effect on its financial condition, results of operations, or cash
flows.
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, results of operations, or cash flows.
The Company has generated a substantial portion of its net revenues from 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 could
materially and adversely affect the Company's financial condition, results of
operations, or cash flows.
The 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 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 integrated circuits, the Company
expects intensified competition from existing integrated circuit suppliers and
the entry of new competition. Increased competition could adversely affect the
Company's financial condition, results of operations, or cash flows. 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, results of operations, or cash flows.
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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, results of operations, or cash flows.
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.
Readiness Disclosure for Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The Year
2000 problem is pervasive and complex, as virtually every computer operation
will be affected by the rollover of the two digit year value to 00. The issue
is whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company has initiated a Year 2000 project designed to identify and assess the
risks associated with its information systems, products, operations and
infrastructure, suppliers and customers that are not Year 2000 compliant, and
to develop, implement and test remediation and contingency plans to mitigate
these risks. The Company is replacing or upgrading systems, equipment and
facilities that are known to be Year 2000 non-compliant. For the Year 2000
non-compliance issues identified to date, management believes the cost of
upgrade or remediation will not exceed $100,000, which is not expected to be
material to the Company's operating results. If implementation of replacement
systems is delayed, or if significant new non-compliance issues are
identified, the Company's financial condition, results of operations, or cash
flows could be materially adversely affected. As of March 31, 1999 there have
been no significant changes to the Company's Year 2000 compliance plan or the
implementation status of such plan from the detailed disclosure included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that these claims and lawsuits will
not have a material adverse effect on the Company's financial position, cash
flow or results of operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
Number Description
------ ---------------------------------------------------
10.1 Indemnification Agreement between the Registrant and
Mr. Thomas S. Wong, 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 March 31, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1998 Form 10-K have not
changed significantly through the quarter ended March 31, 1999.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICREL, INCORPORATED
----------------------
(Registrant)
Date: May 7, 1999 By /s/ ROBERT J. BARKER
---------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
15
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into, effective as of February 22, 1999 by and
between MICREL, INCORPORATED, a California corporation (the "Company"), and
Thomas S. Wong ("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
1
<PAGE>
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
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
2
<PAGE>
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
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
3
<PAGE>
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.
4
<PAGE>
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.
(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
5
<PAGE>
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).
(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
6
<PAGE>
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
7
<PAGE>
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 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
8
<PAGE>
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.
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:
9
<PAGE>
Micrel, Incorporated
1849 Fortune Drive
San Jose, California 95131
Attn: President
and to Indemnitee at:
Thomas S. Wong
927 Rock Canyon Circle
San Jose, California 95127
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/ Thomas S. Wong
---------------------------------
Thomas S. Wong
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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0
0
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</TABLE>
