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, 2000.
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, 2000 there were 84,178,300 shares of common stock, no par
value, outstanding.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
- June 30, 2000 and December 31, 1999 3
Condensed Consolidated Income Statements
- Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, December 31,
2000 1999 (1)
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,577 $ 15,360
Short-term investments 52,974 36,337
Accounts receivable, net 49,656 39,472
Inventories 21,491 23,851
Other current assets 1,462 1,108
Deferred income taxes 13,205 11,388
---------- ----------
Total current assets 161,365 127,516
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 80,852 67,162
INTANGIBLE ASSETS, NET 6,858 7,933
OTHER ASSETS 386 483
---------- ----------
TOTAL $ 249,461 $ 203,094
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,059 $ 11,241
Income taxes payable 12,444 12,230
Deferred income on shipments to distributors 10,416 6,541
Other current liabilities 9,473 8,666
Current portion of long-term debt 5,207 5,132
---------- ----------
Total current liabilities 48,599 43,810
LONG-TERM DEBT 6,234 8,854
OTHER LONG-TERM OBLIGATIONS 1,629 1,761
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
- authorized: 5,000,000 shares;
issued and outstanding: none -- --
Common stock, no par value
- authorized: 250,000,000 shares;
issued and outstanding:
2000 - 84,130,900; 1999 - 82,835,152 63,784 51,954
Accumulated other comprehensive income -- 15
Retained earnings 129,215 96,700
---------- ----------
Total shareholders' equity 192,999 148,669
---------- ----------
TOTAL $ 249,461 $ 203,094
========== ==========
(1) Derived from the December 31, 1999 audited balance sheet included in the
1999 Annual Report on Form 10-K of Micrel, Incorporated
See notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 75,845 $ 44,178 $ 143,158 $ 84,749
COST OF REVENUES 31,988 19,439 61,133 37,384
--------- --------- --------- ---------
GROSS PROFIT 43,857 24,739 82,025 47,365
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 8,043 6,210 16,273 12,028
Selling, general and
administrative 10,233 6,430 19,539 12,251
--------- --------- --------- ---------
Total operating expenses 18,276 12,640 35,812 24,279
--------- --------- --------- ---------
INCOME FROM OPERATIONS 25,581 12,099 46,213 23,086
OTHER INCOME, NET 765 49 1,377 45
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 26,346 12,148 47,590 23,131
PROVISION FOR INCOME TAXES 8,697 4,009 15,707 7,633
--------- --------- --------- ---------
NET INCOME $ 17,649 $ 8,139 $ 31,883 $ 15,498
========= ========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.21 $ 0.10 $ 0.38 $ 0.19
========= ========= ========= =========
Diluted $ 0.19 $ 0.09 $ 0.34 $ 0.18
========= ========= ========= =========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 83,953 81,352 83,580 80,968
========= ========= ========= =========
Diluted 94,281 88,904 94,273 88,284
========= ========= ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 44,350 $ 18,307
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements, net (24,460) (11,642)
Purchases of short-term investments (63,907) (33,758)
Proceeds from sales and maturities of
short-term investments 47,281 23,090
--------- ---------
Net cash used in investing activities (41,086) (22,310)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (2,779) (2,969)
Proceeds from the issuance of common stock, net 6,732 3,897
--------- ---------
Net cash provided by financing activities 3,953 928
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,217 (3,075)
CASH AND CASH EQUIVALENTS - Beginning of period 15,360 13,415
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 22,577 $ 10,340
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 543 $ 758
========= =========
Cash paid for income taxes $ 12,643 $ 3,958
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of June 30, 2000 and for the
three and six months ended June 30, 2000 and 1999 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, 1999.
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. In June
2000, the Company declared a two-for-one stock split of its common stock in
the form of a 100% stock dividend payable June 27, 2000, on all shares of
common stock outstanding as of June 6, 2000. All share and per share
information in the accompanying condensed consolidated financial statements
has been adjusted to retroactively give effect to the stock split for all
periods presented.
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,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 83,953 81,352 83,580 80,968
Dilutive effect of stock options
outstanding using the treasury
stock method 10,328 7,552 10,693 7,316
--------- --------- --------- ---------
Shares used in computing diluted
net income per share 94,281 88,904 94,273 88,284
========= ========= ========= =========
</TABLE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Finished goods $ 6,293 $ 5,958
Work in process 13,640 16,125
Raw materials 1,558 1,768
---------- ----------
$ 21,491 $ 23,851
========== ==========
</TABLE>
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SIGNIFICANT CUSTOMERS
During the six months ended June 30, 2000, three customers accounted for
$18.1 million (12.6%), $17.2 million (12.0%) and $15.4 million (10.8%) of net
revenues, respectively. During the six months ended June 30, 1999, no single
customer accounted for 10% or more of net revenues.
4. COMPREHENSIVE INCOME
Comprehensive income, which was comprised of the Company's net income for the
periods and changes in unrealized gains or losses on investments, was $17.6
million and $31.9 million for the three and six months ended June 30, 2000,
respectively, and $8.1 million and $15.5 million for the three and six months
ended 1999, 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Revenues:
Standard Products $ 54,245 $ 33,817 $ 102,946 $ 65,278
Custom and Foundry Products 21,600 10,361 40,212 19,471
--------- --------- --------- ---------
Total net revenues $ 75,845 $ 44,178 $ 143,158 $ 84,749
========= ========= ========= =========
As a Percentage of Total
Net Revenues:
Standard Products 72% 77% 72% 77%
Custom and Foundry Products 28% 23% 28% 23%
--------- --------- --------- ---------
Total net revenues 100% 100% 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 materially impact the Company's consolidated financial position,
results of operations or cash flows. The Company is required to adopt this
statement in the first quarter of fiscal year 2001, with early adoption
permitted.
7
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin (SAB) no. 101, "Revenue Recognition in Financial
Statements," which provides the SEC staff's views on selected revenue
recognition issues. The guidance in SAB 101 must be adopted during the
Company's fourth quarter of 2000 and the effects, if any, are required to be
recorded through a retroactive, cumulative-effect adjustment as of the
beginning of the year, with a restatement of all prior interim quarters in
the year. Management has completed its preliminary review of SAB 101, but has
not completed its final evaluation of the effects, if any, that SAB 101 may have
on the Company's income statement presentation, operating results or financial
position. The Company believes further clarifications of this SAB will be
issued by the SEC before adoption is required. The Company intends to complete
its final evaluation of SAB 101 during the fourth quarter of 2000.
7. ACQUISITION
On April 13, 2000, the Company completed the acquisition of Electronic
Technology Corporation ("ETC"), a privately held provider of power management
and mixed signal products for the portable computing, communications and
automotive markets. Under the terms of the merger agreement, the Company
issued 76,120 shares of common stock (on a pre-split basis, prior to the June
2000 two-for-one stock split) in exchange for the outstanding shares of
capital stock of ETC. The transaction is accounted for as a pooling of
interests. Prior period financial statements presented have not been
restated to include the ETC results as the impact was not material.
8
<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, high-speed mixed-signal and digital integrated
circuits. These circuits are used in a wide variety of electronics products,
including those in the telecommunications, computer, industrial, and high
bandwidth communications 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. Standard products sales represented 72% of net revenues for the
three and six months ended June 30, 2000 as compared to 78% for the similar
periods 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, the successful development of new
products, and the Company's ability to ramp up manufacturing capacity 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,
results of operations or cash flows.
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,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 42.2 44.0 42.7 44.1
--------- --------- --------- ---------
Gross profit 57.8 56.0 57.3 55.9
--------- --------- --------- ---------
Operating expenses:
Research and development 10.6 14.1 11.4 14.2
Selling, general and
administrative 13.5 14.5 13.6 14.5
--------- --------- --------- ---------
Total operating expenses 24.1 28.6 25.0 28.7
--------- --------- --------- ---------
Income from operations 33.7 27.4 32.3 27.2
Other income, net 1.0 0.1 1.0 0.1
--------- --------- --------- ---------
Income before income taxes 34.7 27.5 33.2 27.3
Provision for income taxes 11.4 9.1 11.0 9.0
--------- --------- --------- ---------
Net income 23.3% 18.4% 22.3% 18.3%
========= ========= ========= =========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Revenues. Net revenues increased 72% to $75.8 million for the three
months ended June 30, 2000 from $44.2 million for the same period in 1999.
For the six months ended June 30, 2000, net revenues increased 69% to $143.2
million from $84.7 million for the same period in 1999. The Company derives
a substantial portion of its net revenues from standard products. Standard
products sales represented 72% of net revenues for the three and six months
ended June 30, 2000 as compared to 78% for the similar periods in the prior
year. On a dollar basis, standard products revenues increased 60% to $54.2
million for the three months ended June 30, 2000 from $33.8 million for same
period in 1999. For the six months ended June 30, 2000, standard products
revenues increased 58% to $102.9 million from $65.3 million for same period
in 1999. Such increases resulted from increased unit shipments combined with
an increase in average selling prices. Sales of standard products by the
Company during the three and six months ended June 30, 2000 were led by low
dropout regulators, high bandwidth communications products and computer
peripheral products. Such products were sold to manufacturers in the
telecommunications, high bandwidth communications, computer, and industrial
markets. Custom and foundry products revenues increased 108% to $21.6
million representing 28% of net revenues for the three months ended June 30,
2000 from $10.4 million or 23% of net revenues for the comparable period in
1999. For the six months ended June 30, 2000, custom and foundry products
revenues increased 107% to $40.2 million representing 28% of net revenues
from $19.5 million or 23% of net revenues for the comparable period in 1999.
Such increases were due primarily to increased sales of custom high bandwidth
communications products and to a lesser extent increased foundry sales.
The Company believes that pricing pressures that were prevalent during the
first half of 1999 have lessened as customers have become more concerned
about product availability. Increasing end customer demand during the second
half of 1999 and the first half of 2000 has resulted in capacity constraints
and increasing order lead times for semiconductor suppliers in general.
During the first and second quarters of 2000, standard product customer lead
times and customer order rates increased compared to the same periods in
1999, resulting in increased order backlog. Despite increased forward
visibility, customer demand remains volatile limiting the Company's ability
to predict future sales levels and profitability.
International sales represented 39% and 43% of net revenues for the three
months ended June 30, 2000 and 1999, respectively. On a dollar basis,
international sales increased 58% to $29.8 million for the three months ended
June 30, 2000 from $18.8 million for the comparable period in 1999. For the
six months ended June 30, 2000 and 1999, international sales represented 41%
and 43% of net revenues, respectively. On a dollar basis, international sales
increased 54% to $58.2 million for the six months ended June 30, 2000 from
$37.8 million for the comparable period in 1999. The dollar basis increases
in international sales for the three and six months ended June 30, 2000
resulted from increased unit 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. Sales to
stocking representatives and O.E.M. customers are recognized upon shipment.
The Company estimates returns and warranty costs and provides an allowance as
revenue is recognized.
Gross Profit. Gross profit 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 58% for the three months
ended June 30, 2000 from 56% for the comparable period in the prior year.
For the six months ended June 30, 2000, gross margin increased to 57% from
56% for the comparable period in the prior year. The improvement in gross
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
margin reflected increases in manufacturing efficiency due to greater
capacity utilization and higher 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.
Research and Development Expenses. Research and development expenses include
costs associated with the development of new processes and the definition,
design and development of new 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.
As a percentage of net revenues, research and development expenses
represented 11% and 14% for the three months ended June 30, 2000 and 1999,
respectively. On a dollar basis, research and development expenses increased
$1.8 million or 30% to $8.0 million for the three months ended June 30, 2000
from $6.2 million for the comparable period in 1999. For the six months
ended June 30, 2000 and 1999, research and development expenses represented
11% and 14% of net revenues, respectively. On a dollar basis, research and
development expenses increased $4.2 million or 35% to $16.3 million for the
six months ended June 30, 2000 from $12.0 million for the comparable period
in 1999. The dollar increases were primarily due to increased engineering
staffing costs and increased prototype material costs. The Company believes
that the development and introduction of new 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. As a percentage of net
revenues, selling, general and administrative expenses represented 14% and
15% for the three months ended June 30, 2000 and 1999, respectively. On a
dollar basis, selling, general and administrative expenses increased $3.8
million or 59% to $10.2 million for the three months ended June 30, 2000 from
$6.4 million for the comparable period in 1999. For the six months ended
June 30, 2000 and 1999, selling, general and administrative expenses
represented 14% and 15% of net revenues, respectively. On a dollar basis,
selling, general and administrative expenses increased $7.3 million or 59% to
$19.5 million for the six months ended June 30, 2000 from $12.3 million for
the comparable period in 1999. The dollar increases were principally
attributable to increased commissions and staffing costs associated with the
growth of the Company's revenues, increased legal costs, and increased profit
sharing accruals to promote personnel retention. The Company expects that
selling, general and administrative expenses will increase on a dollar basis
in the future.
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 $716,000 to $765,000 for the three months ended June 30, 2000
from $49,000 for the comparable period in 1999. For the six months ended
June 30, 2000, other income, net increased $1.3 million to $1.4 million from
$45,000 for the comparable period in 1999. These increases were primarily
due to an increase in average cash and investment balances combined with
increased rate of returns on such balances..
Provision for Income Taxes. For the three and six months ended June 30,
2000 and 1999, the provision for income taxes was 33% of income before taxes.
The income tax provision for such interim periods reflects the Company's
estimated annual income tax rate.
Acquisition of Electronic Technology Corporation. On April 13, 2000, the
Company completed the acquisition of Electronic Technology Corporation
("ETC"), a privately held provider of power management and mixed signal
products for the portable computing, communications and automotive markets.
Under the terms of the merger agreement, the Company issued 76,120 shares of
common stock (on a pre-split basis, prior to the June 2000 two-for-one stock
split) in exchange for the outstanding shares of capital stock of ETC. The
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
transaction is accounted for as a pooling of interests. Prior period
financial statements presented have not been restated to include the ETC
results as the impact was not material.
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, 2000 consisted of cash and short-term
investments of $75.6 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 June 30, 2000, and (ii) $40.0 million
under a non-revolving line of credit, of which all was unused and available
at June 30, 2000. The two lines of credit are covered by the same loan and
security agreement. This agreement expires on April 30, 2001 subject to
automatic renewal on a month-to-month basis thereafter unless terminated by
either party upon 30 days notice. 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, 2000.
As of June 30, 2000, the Company had $11.4 million outstanding under term
notes that are collateralized by the equipment purchased.
The Company's working capital increased by $29.1 million to $112.8 million as
of June 30, 2000 from $83.7 million as of December 31, 1999. The increase was
primarily attributable to a $23.9 million increase in cash, cash equivalents
and short-term investments and a $10.2 million increase in accounts
receivable, which were partially offset by a $3.9 million increase in
deferred income on shipments to distributors and a $2.4 million decrease in
inventory.
The Company's cash flows from operating activities increased to $44.4 million
for the six months ended June 30, 2000 from $18.3 million for the comparable
period in the prior year. The cash flows from operating activities generated
by the Company in the six months ended June 30, 2000 were primarily
attributable to net income of $42.2 million after adding back non-cash
activities combined with an increase in income taxes payable of $5.3 million
(excluding the impact of tax benefits from employee stock transactions), an
increase in deferred income on shipments to distributors of $3.9 million, and
a decrease in inventories of $2.4 million, which were partially offset by an
increase in accounts receivable of $10.2 million.
The Company's investing activities during the six months ended June 30, 2000
used cash of $41.1 million as compared to $22.3 million of cash used for
investing activities during the comparable period in the prior year. Cash
used for investing activities during the six months ended June 30, 2000
resulted from net purchases of equipment and leasehold improvements of $24.5
million that were primarily for wafer fab and testing equipment to increase
production capacity and net purchases of short-term investments of $16.6
million.
The Company's financing activities during the six months ended June 30, 2000
provided cash of $4.0 million as compared to $928,000 during the comparable
period in the prior year. Cash provided by financing activities during the
six months ended June 30, 2000 was the result of $6.7 million in proceeds
from the issuance of common stock through the exercise of employee stock
options and purchases through the employee stock purchase plan, which were
partially offset by $1.5 million in repayments of long-term debt.
The Company currently intends to spend up to approximately $80.0 million
during 2000 primarily for the purchase of additional wafer and test
manufacturing equipment and leasehold improvements. The Company expects that
its cash requirements through 2000 will be met by cash from operations, its
existing cash balances and short-term investments and its existing credit
facilities.
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<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 expansion or utilization of
manufacturing capacity; statements regarding future expenditures; 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. Additional factors that may affect
operating results are contained within the Company's Form 10-K for the Year
ended December 31, 1999 and within the Company's registration statement on
Form S-3 as filed with the Securities and Exchange Commission on May 25,
2000.
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 timely acquire,
install and utilize capital equipment to expand manufacturing capacity to
meet increasing demand, availability of production capacity at assembly
subcontractors, 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 ability to hire and retain key technical
and management personnel, the Company's access to advanced process
technologies and the timing and extent of process development costs. As a
result of the foregoing or other factors, there can be no assurance that the
Company will not experience material fluctuations in future operating results
on a quarterly or annual basis, which would materially and adversely affect
the Company's business, financial condition, results of operations or cash
flows.
The Company believes that a substantial portion of its net revenues in the
future will continue to depend upon standard products sales. As compared with
the custom and foundry products business, the standard products business is
characterized by shorter product lifecycles, greater pricing pressures,
larger competitors and more rapid technological change. Generally, the
standard products market is a rapidly changing market in which the Company
faces the risk that, as the market changes, its product offerings will become
obsolete. The Company competes in the standard products market with
established companies, most of which have substantially greater financial,
engineering, manufacturing and marketing resources than the Company. No
assurance can be given that the Company will be able to compete successfully
in the standard products market or that it will be able to successfully
introduce new standard products in the future. The failure of the Company to
compete successfully in the standard products business would materially and
adversely affect the Company's financial condition, results of operations, or
cash flows.
The semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors 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 demand 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 or results of operations. There can be no assurance that
the Company will be able to compete successfully in either the standard
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. The Company is currently
involved in several lawsuits regarding claims of patent infringement. See
"Legal Proceedings" in Item 1 of Part II of this Form 10-Q. There can be no
assurance that these existing lawsuits or any other potential future
litigation (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.
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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in its Form 10-K for the year
ended December 31, 1999 have not changed significantly during the three and
six months ended June 30, 2000.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. To the extent that the Company
becomes involved in such intellectual property litigation, it could result in
substantial costs and diversion of resources to the Company and could have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
On July 2, 1999, National Semiconductor Corporation ("National"), a
competitor of the Company, filed a complaint against the Company, entitled
National Semiconductor Corporation v. Micrel Semiconductor, Inc. in the
United States District Court, Northern District of California, in San Jose,
California, alleging that the Company infringes five National Semiconductor
patents. The complaint in the lawsuit seeks unspecified compensatory damages
for infringement, treble damages as well as permanent injunctive relief
against further infringement of the National patents at issue.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation
(the "Lemelson Partnership") filed a complaint which was served on the
Company on June 15, 1999, entitled Lemelson Medical, Education & Research
Foundation, Limited Partnership v. Lucent Technologies Inc., et al. in the
United States District Court in Phoenix, Arizona, against 88 defendants,
including the Company, alleging infringement of Lemelson Foundation patents.
The complaint in the lawsuit seeks unspecified compensatory damages, treble
damages and attorneys' fees, as well as injunctive relief against further
infringement of the Lemelson patents at issue.
On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company, entitled
Linear Technology Corporation v. Micrel, Incorporated, in the United States
District Court in San Jose, California, alleging patent and copyright
infringement and unfair competition. All claims, except the patent
infringement claim, have been settled or dismissed. In this lawsuit, Linear
claimed that two of the Company's products infringed one of Linear's patents.
The complaint in the lawsuit sought unspecified compensatory damages, treble
damages and attorneys' fees as well as preliminary and permanent injunctive
relief against infringement of the Linear patent at issue. The plaintiff
alleged in the suit that the Company had infringed upon U.S. Patent No.
4,755,741 which covers design techniques used to increase the efficiency of
switching regulators. The United States District Court in San Jose found the
patent to be invalid under the "on sale bar" defense as the plaintiff had
placed integrated circuits containing the alleged invention on sale more than
a year before filing its patent application. On August 20, 1999 the United
States District Court in San Jose, adjudicated in favor of the Company,
dismissed the plaintiff's complaint on the merits of the case and awarded the
Company its legal costs. An appeal of the judgment was filed by Linear on
September 17, 1999.
The Company believes that the ultimate outcome of the legal actions discussed
above will not result in a material adverse effect on the Company's financial
condition, results of operation or cash flows. However, litigation is subject
to inherent uncertainties, and no assurance can be given that the Company
will prevail in these lawsuits. Accordingly, the pending lawsuits as well as
potential future litigation with other companies, could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
In the event of an adverse ruling in any intellectual property litigation
that now exists or might arise in the future, the Company might be required
to discontinue the use of certain processes, cease the manufacture, use and
sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses to the infringing technology. There
can be no assurance, however, that under such circumstances, a license would
be available under reasonable terms or at all. In the event of a successful
claim against the Company and the Company's failure to develop or license
substitute technology on commercially reasonable terms, the Company's
financial condition, results of operations, or cash flows could be adversely
affected.
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<PAGE>
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
In April 2000, the Company issued 76,120 shares of its common stock (on a
pre-split basis, prior to the June 2000 two-for-on stock split) in exchange
for all outstanding shares of common stock of Electronic Technology
Corporation, a then privately held corporation, in connection with the
acquisition of that corporation. The shares of common stock issued as
acquisition consideration were issued in a transaction exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
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 25, 2000 at 12:00 p.m. local time, at its 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) approval
of an amendment to the Company's Restated Articles of Incorporation, as
amended, to increase the number of authorized shares of common stock from
100,000,000 to 250,000,000 shares, (c) ratifying and approving the
appointment of Deloitte and Touche LLP as the Company's independent auditors
for the fiscal year ending December 31, 2000 and (d) transacting such other
business as may properly come before the Annual Meeting. Three matters below
were voted upon and approved:
Proposal 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:
<TABLE>
NOMINATION FOR ABSTAINED
---------- --- ---------
<S> <C> <C>
Raymond D. Zinn 37,423,484 66,273
Warren H. Muller 37,421,372 68,385
Larry L. Hansen 37,419,918 69,839
George Kelly 37,423,132 66,625
Dale L. Peterson 37,421,112 68,645
</TABLE>
Proposal No. 2 - approval of an amendment to the Company's Restated Articles
of Incorporation, as amended.
<TABLE>
FOR AGAINST ABSTAINED
--- ------ ---------
<S><C> <C> <C>
32,146,423 4,974,591 368,743
</TABLE>
Proposal No. 3 - Ratification of the Appointment of Deloitte & Touche LLP as
the Company's Independent Auditors for the Fiscal Year Ending December 31,
2000:
<TABLE>
NOMINATION FOR AGAINST ABSTAINED
---------- --- ------- ---------
<S> <C> <C> <C>
Deloitte & Touche LLP 37,478,092 4,907 6,758
</TABLE>
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
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, 2000.
17
<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: August 11, 2000 By /s/ Richard D. Crowley, Jr.
----------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
18
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