The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Years Ended
December 31,
---------------
2000 1999
------ ------
Net revenues 100.0% 100.0%
Cost of revenues 41.3 43.9
------ ------
Gross profit 58.7 56.1
------ ------
Operating expenses:
Research and development 11.1 13.5
Selling, general and administrative 13.0 14.4
Purchased in-process technology - 0.3
------ ------
Total operating expenses 24.1 28.2
------ ------
Income from operations 34.6 27.9
Other income, net 1.4 0.3
------ ------
Income before income taxes 36.0 28.2
Provision for income taxes 11.9 9.4
------ ------
Net income 24.1% 18.8%
====== ======
Net Revenues. Net revenues increased 65% to $322.5 million for the year
ended December 31, 2000 from $195.1 million in 1999 due primarily to higher
standard product revenues and, to a lesser extent, higher custom and foundry
revenues. Standard product revenues increased to $251.5 million, which
represented 78% of net revenues for the year ended December 31, 2000, compared
to $151.1 million and 77% of net revenues for 1999. Such increases resulted
from increased unit shipments combined with an increase in average selling
prices. Sales of standard products were led by the increased sales of low
dropout regulators, high bandwidth communications products and computer
peripheral products. Such products were sold to manufacturers in the high
bandwidth communications, telecommunications, and industrial markets. Custom
and foundry revenues increased to $71.0 million, which represented 22% of net
revenues for the year ended December 31, 2000, compared to $44.0 million and
23% of net revenues for 1999. Such increases were due primarily to increased
sales of custom high bandwidth communications products and to a lesser extent
increased foundry sales.
Increasing overall end customer demand during the second half of 1999 and
the first half of 2000 resulted in capacity constraints and increasing order
lead times for semiconductor suppliers. Longer lead times and concern about
availability of semiconductor components, resulted in increased order rates for
standard products during the first three quarters of 2000 compared to the same
periods in 1999, resulting in increased order backlog. Orders from OEM
customers and contract manufacturers serving the high speed communications
market were especially strong in the first nine months of 2000 as these
customers attempted to secure semiconductor components to meet their projected
end demand. However, the supply of semiconductors can quickly and unexpectedly
match or exceed demand because customer end demand can change very quickly and,
semiconductor suppliers can rapidly increase production output. This can lead
to a sudden oversupply situation and a subsequent reduction in order rates as
customers adjust their inventories to true demand rates. Customers continuously
adjust their inventories resulting in frequent changes in demand for the
Company's products. The volatility of customer demand limits the Company's
ability to predict future levels of sales and profitability.
The semiconductor industry experienced such a change in the supply and
demand situation during 2000. Shipments to mobile handset manufacturers
declined in the second and third quarters compared to the first quarter as
these customers attempted to align inventories with revised demand projections.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Shipments to customers serving the computer market increased in 2000 compared
to 1999 but did not exhibit typical seasonal increases in the second half of
2000 compared to the first half of the year. Despite the inventory corrections
in the wireless handset and computer end markets, the Company's revenues grew
sequentially in every quarter of 2000 due to the high demand from customers in
the high speed communications and industrial markets. However, in the fourth
quarter of 2000, customers in the high speed communications end market, and the
contract manufacturing firms that serve this market, began to adjust their
inventories to lower demand projections, resulting in cancellations and
rescheduling of previously placed orders. This activity, combined with the
overall slowing of economic growth in the North American economy, led to lower
order rates in the fourth quarter of 2000 compared with the same period in
1999, and a reduction in order backlog from the end of the third quarter.
For the year ended December 31, 1999, net revenues increased 39% to $195.1
million from $140.5 million in 1998 due to higher standard product revenues and
higher custom and foundry revenues. Standard product revenues increased to
$151.1 million, which represented 77% of net revenues for the year ended
December 31, 1999, compared to $99.9 million and 71% of net revenues for 1998.
Sales of standard products were led by the increased sales of high bandwidth
communication products, switching regulators, low dropout regulators and
computer peripheral devices. Such products were sold to manufacturers of
communications, portable computing, computing peripherals and industrial
products. The rapid build out of the internet infrastructure was the primary
driver for the increased revenue for standard high bandwidth products. Custom
and foundry revenues increased to $44.0 million, which represented 23% of net
revenues for the year ended December 31, 1999, compared to $40.6 million and
29% of net revenues for 1998. This decline as a percent of total revenues
reflects a reduced emphasis on custom and foundry products as compared to the
same periods in 1998, in which the Company increased its emphasis on custom and
foundry products as an interim response to the Asian financial crisis.
International sales represented 39%, 47%, and 45% of net revenues for the
years ended December 31, 2000, 1999 and 1998, respectively. On a dollar basis,
international sales increased 35% to $124.5 million for the year ended
December 31, 2000 from $92.3 million for the comparable period in 1999. The
dollar increase in international sales 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 a variety of factors including the
volume of product sales, product mix, manufacturing utilization, product yields
and average selling prices. The Company's gross margin increased to 59% for the
year ended December 31, 2000 from 56% for the year ended December 31, 1999.
The improvement in gross margin reflected higher average selling prices, an
increased mix of higher gross margin products and increases in manufacturing
efficiency due to greater capacity utilization.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 1999, the Company's gross margin increased
to 56% from 51% for the year ended December 31, 1998. The gross margin improved
from the prior year level, which was depressed by the write-off, in the fourth
quarter of 1998 of approximately $7.0 million in excess inventory in response
to a reduced sales forecast of Synergy products. Excluding the Synergy
inventory write-off, gross margin for 1998 was 55%. In addition, 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.
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 years ended December 31, 2000 and 1999. On a
dollar basis, research and development expenses increased $9.5 million or 36%
to $35.8 million for the year ended December 31, 2000 from $26.3 million 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.
For each of the years ended December 31, 1999 and 1998, research and
development expenses represented 14% of net revenues. On a dollar basis,
research and development expenses increased $7.4 million or 39% to $26.3
million for the year ended December 31, 1999 from $18.9 million in 1998. The
increase in research and development expenses for the year ended December 31,
1999 was primarily due to increased engineering staffing costs associated with
the acquisition of Synergy and the development of new standard products.
Selling, General and Administrative Expenses. As a percentage of net
revenues, selling, general and administrative expenses represented 13% and 14%
for the years ended December 31, 2000 and 1999, respectively. On a dollar basis,
selling, general and administrative expenses increased $13.8 million or 49% to
$41.9 million for the year ended December 31, 2000 from $28.2 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.
For the years ended December 31, 1999 and 1998, selling, general and
administrative expenses represented 14% and 15% of net revenues, respectively.
On a dollar basis, selling, general and administrative expenses increased
$6.5 million or 30% to $28.2 million for the year ended December 31, 1999 from
$21.7 million for the comparable period in 1998. The dollar increase was
principally attributable to higher wages and salaries, commissions, advertising
and other administrative expenses associated with the growth of the Company's
revenues.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Purchased In-Process Technology. On December 15, 1999, the Company acquired
all the outstanding capital stock of Altos Semiconductor for a cash purchase
price of $1.8 million. The transaction was accounted for as a purchase.
Approximately $1.7 million of the total purchase cost was allocated to
intangible assets. Of that amount, $603,000 was allocated to purchased in-
process technology, which has not reached technological feasibility and has no
alternative future use, for which the Company recorded charges in the year ended
December 31, 1999.
On November 9, 1998, the Company acquired all the outstanding capital stock
of Synergy Semiconductor for a cash purchase price of $9.9 million, transaction
fees of $1.3 million, direct merger costs of approximately $300,000, and the
assumption of liabilities of approximately $20.1 million. The transaction was
accounted for as a purchase. Approximately $12.9 million of the total purchase
cost was allocated to intangible assets. Of that amount, approximately $3.7
million was allocated to purchased in-process technology, which has not reached
technological feasibility and has no alternative future use, for which the
Company recorded charges in the year ended December 31, 1998. The purchased in-
process technology related to approximately 50 individual development projects
that had not reached technological feasibility and, therefore, the successful
completion of such projects was uncertain. Those development projects
correspond to three existing product lines: supercom, clockworks and logic.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities offset by interest
expense incurred on term notes. Other income, net increased by $3.7 million to
$4.3 million in 2000 from $610,000 in 1999. This increase were primarily due to
an increase in average cash and investment balances combined with increased
rate of returns on such balances. The Company expects to continue to utilize
term financing as appropriate to finance its capital equipment needs.
For the year ended December 31, 1999, other income, net decreased by
$482,000 to $610,000 from $1.1 million in 1998. Such decrease was due to an
increase in average long-term debt associated with the Synergy acquisition.
Provision for Income Taxes. For the year ended December 31, 2000 the
provision for taxes on income was 33% of income before taxes. For the year ended
December 31, 1999 the provision for taxes on income was 33% of income before
taxes excluding the $603,000 charge for purchased in-process technology, which
is a non-deductible charge for federal income tax purposes. The 2000 and 1999
income tax provisions differ from taxes computed at the federal statutory rate
due to the effect of state taxes and the non-deductible charges for purchased
in-process technology offset by the benefit from the foreign sales corporation,
federal and state research and development credits, and state manufacturing
credits.
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been its
cash from operations, bank borrowings and sales of common stock. Principal
sources of liquidity at December 31, 2000 consisted of cash and short-term
investments of $115 million and bank borrowing arrangements. Borrowing
agreements consisted of (i) $5 million under a revolving line of credit, of
which all was unused and available at December 31, 2000, and (ii) $40 million
under a non-revolving line of credit, of which $38 million was unused and
available at December 31, 2000. The two lines of credit are covered by the same
loan and security agreement. The revolving line of credit portion of the
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 non-revolving line of credit portion of the agreement expires on
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
April 30, 2001. Borrowings under the revolving line of credit bear interest
rates of, at the Company's election, the prime rate (9.50% at December 31,
2000), or the bank's revolving offshore rate, which approximates LIBOR (6.40% at
December 31, 2000) plus 2.0%. Borrowings under the non-revolving line of credit
bear interest rates of, at the Company's election, the prime rate (9.50% at
December 31, 2000), the bank's non-revolving offshore rate, which approximates
LIBOR (6.40% at December 31, 2000) plus 2.13%, a fixed rate based on the
four-year U.S. Treasury Bill rate (5.10% at December 31, 2000) plus 2.75% or an
annual adjustable rate based on the one-year U.S. Treasury Bill rate (5.37% at
December 31, 2000) plus 2.75%. The agreement contains certain restrictive
covenants that include a restriction on the declaration and payment of dividends
without the lender's consent. The Company was in compliance with all such
covenants at December 31, 2000.
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 acquisition cost. Amounts borrowed under
this credit line are automatically converted to four-year installment notes. All
equipment notes are collateralized by substantially all of the Company's
manufacturing equipment.
As of December 31, 2000, the Company had $10.8 million outstanding under term
notes (see Note 5 of Notes to Consolidated Financial Statements contained in
Item 8).
The Company's working capital increased by $74.6 million to $158.3 million
as of December 31, 2000 from $83.7 million as of December 31, 1999. The
increase was primarily attributable to increases in cash, cash equivalents and
short-term investments of $63.1 million, accounts receivable of $19.3 million
and deferred income taxes of 9.1 million, which were partially offset by
increases in deferred income of $7.7 million. The Company's short-term
investments were principally invested in investment grade, interest-bearing
securities.
The Company's cash flows provided by operating activities increased to
$116.9 million for the year ended December 31, 2000 from $51.7 million for the
year ended December 31, 1999 primarily as a result of increased net income,
income taxes payable and deferred income. For the year ended December 31, 2000
the Company's cash flows provided by operating activities were primarily
attributable to net income of $95.7. million after adding back non-cash
activities, an increase in income taxes payable of $22.9 million (excluding
$23.4 million non-cash tax benefits from employee stock transactions) and an
increase in deferred income of $7.7 million which were partially offset by
increases in accounts receivable of $19.0 million which increased with higher
revenues.
The Company's investing activities during the year ended December 31, 2000
used cash of $62.4 million as compared to $52.5 million of cash used for
investing activities during the year ended December 31, 1999. Cash used for
investing activities during the year ended December 31, 2000 resulted primarily
from net purchases of $65.8 million of equipment and leasehold improvements
that were primarily for wafer fab and testing equipment to increase production
capacity, which was partially offset by net sales of short-term investments of
$3.4 million.
The Company's financing activities during the year ended December 31, 2000
provided cash of $12.0 million as compared to cash provided of $2.7 million
during the year ended December 31, 1999. Cash provided by financing activities
during the year ended December 31, 2000 was the result of $15.5 million in
proceeds from the issuance of common stock through the exercise of employee
stock options and purchases through the employee stock purchase plan, and
proceeds from long-term borrowings of $2.0 million, which was partially offset
by $5.5 million in repayments of long-term debt.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company currently intends to reduce its capital equipment purchases from
the year 2000 levels by 30% to 40% to approximately $40 million to $50.0
million during the next twelve months primarily for the purchase of additional
wafer and test manufacturing equipment and leasehold improvements. The Company
expects that its cash requirements through 2001 will be met by its cash from
operations, existing cash balances and short-term investments, and its credit
facilities.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include: statements regarding future products or product development;
statements regarding future research and development spending and the Company's
product development strategy; 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 in
Item 1. "Business", Item 3. "Legal Proceedings", Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
in the additional factors set forth below.
Our operating results may fluctuate because of a number of factors, many of
which are beyond our control.
If our operating results are below the expectations of public market analysts
or investors, then the market price of our common stock could decline. Some of
the factors that affect our quarterly and annual results, but which are
difficult to control or predict are:
- the volume and timing of orders received
- changes in the mix of products sold
- market acceptance of our products and our customers' products
- competitive pricing pressures
- our ability to timely acquire and install capital equipment to expand
manufacturing capacity to meet increasing demand
- availability of production capacity at assembly subcontractors
- our ability to introduce new products on a timely basis
- the timing of new product announcements and introductions by us or our
competitors
- the timing and extent of research and development expenses
- fluctuations in manufacturing yields
- cyclical semiconductor industry conditions
- our ability to hire and retain key technical and management personnel
- our access to advanced process technologies
- the timing and extent of process development costs
- the current California energy crisis
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Customer demand for our products is volatile and difficult to predict
Our customers continuously adjust their inventories resulting in frequent
changes in demand for our products. The volatility of customer demand limits our
ability to predict future levels of sales and profitability. The supply of
semiconductors can quickly and unexpectedly match or exceed demand because
customer end demand can change very quickly. Also, semiconductor suppliers can
rapidly increase production output. This can lead to a sudden oversupply
situation and a subsequent reduction in order rates and revenues as customers
adjust their inventories to true demand rates.
Sales of our products are highly dependent on certain select end markets.
We currently sell a significant portion of our products in the high speed
communications, computer and wireless handset markets. These markets are
characterized by short product life cycles, rapidly changing customer demand,
evolving and competing industry standards and seasonal demand trends.
Additionally, there can be no assurance that these markets will continue to
grow. If the markets for high speed communications, computers or wireless
handsets that we serve fail to grow, or grow more slowly than we currently
anticipate, or if we experience increased competition in these markets, our
business, results of operations and financial condition will be adversely
affected.
Our gross margin is dependent upon a number of factors, among them our level of
capacity utilization.
Semiconductor manufacturing is a capital intensive business resulting in high
fixed costs. If we are unable to utilize our installed wafer fabrication or
test capacity at a high level, the costs associated with these facilities and
equipment is not fully absorbed, resulting in higher average unit costs and
lower sales margins.
Our industry is highly competitive.
The semiconductor industry is highly competitive and subject to rapid
technological change, price-erosion and increased international competition.
Significant competitive factors include:
- product features
- performance
- price
- timing of product introductions
- emergence of new computer and communications standards
- quality and customer support
Because the standard products market for integrated circuits is diverse and
highly fragmented, we encounter different competitors in our various market
areas. Most of these competitors have substantially greater technical, financial
and marketing resources and greater name recognition than we do. Due to the
increasing demands for integrated circuits, we expect intensified competition
from existing integrated circuit suppliers and the entry of new competition.
Increased competition could adversely affect our financial condition or results
of operations. There can be no assurance that we 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
our financial condition, results of operations, or cash flows.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Our customers are concentrated, so the loss of one or more key customers could
significantly reduce our revenues and profits.
Historically, a relatively small number of customers has accounted for a
significant portion of our revenues in any particular period. However, we have
no long-term volume purchase commitments from any of our major customers. We
anticipate that sales of products to relatively few customers will continue to
account for a significant portion of our revenues. If a significant customer
overstocks our products, additional orders for our products could be harmed. A
reduction, delay or cancellation of orders from one or more significant
customers or the loss of one or more key customers could significantly reduce
our order rates, revenues and profits. There can be no assurance that our
current customers will continue to place orders with us, that orders by existing
customers will continue at current or historical levels or that we will be able
to obtain orders from new customers.
Our current and prospective competitors include many large companies that have
substantially greater marketing, financial, technical and manufacturing
resources than we have.
Competition in the markets that we serve is primarily based on the price,
performance and quality of products and the ability to deliver products in a
timely fashion. Product qualification is typically a lengthy process and some
prospective customers may be unwilling to invest the time or expense necessary
to qualify suppliers like us. Further, customers may also be concerned about
relying on a relatively small company for a critical sole-sourced component. To
the extent we fail to overcome these challenges, there could be material and
adverse effects on our business and financial results.
Our product offering is concentrated and a reduction in demand for one of our
significant products could reduce our revenues and results of operations.
We currently derive the majority of our product revenues from sales of
standard analog and mixed-signal integrated circuits and we expect these
products to continue to account for the majority of our revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for standard analog integrated and mixed-signal circuits, such as
competition, product performance or technological change, could have a material
adverse effect on our business and consolidated results of operations and
financial condition.
An important part of our strategy is to continue our focus on the market for
high-speed communications integrated circuits, or ICs. If we are unable to
penetrate this market further, our revenues could stop growing and may decline.
Our markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis. If
our products are unable to support the new features or performance levels
required by OEMs in these markets, we would likely lose business from existing
or potential customers and would not have the opportunity to compete for new
design wins until the next product transition. If we fail to develop products
with required features or performance standards, or if we experience even a
short delay in bringing a new product to market, or if our customers fail to
achieve market acceptance of their products, our revenues could be significantly
reduced for a substantial period of time.
A significant portion of our revenues in recent periods has been, and is
expected to continue to be, derived from sales of products based on SONET, SDH
and ATM transmission standards. If the communications market evolves to new
standards, we may not be able to successfully design and manufacture new
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
products that address the needs of our customers or gain substantial market
acceptance. Although we have developed products for the Gigabit Ethernet and
Fibre Channel communications standards, volume sales of these products are
modest, and we may not be successful in addressing other market opportunities
for products based on these standards.
If we do not successfully expand our manufacturing capacity on time, we may face
serious capacity constraints.
We currently manufacture a majority of our integrated circuit products at our
wafer fabrication facilities located in San Jose and Santa Clara, California,
and we are currently expanding these facilities. We believe that when the
expansion is completed we will be able to satisfy our production needs from
these fabrication facilities through fiscal 2001, although this date may vary
depending on, among other things, the strength of customer demand for our
products. We will be required to hire, train and manage additional production
personnel in order to increase production capacity as scheduled. In addition,
to further expand our capacity to fabricate wafers using various processes,
including advanced CMOS, we have entered into foundry agreements with third
party wafer fabrication providers. We will have to design our products
utilizing the fabrication processes at these foundries, qualify our products and
then ramp our production volumes at these foundry fabrication facilities. If we
cannot expand our capacity on a timely basis or successfully utilize our foundry
arrangements, we could experience significant capacity constraints that could
render us unable to meet customer demand or force us to spend more to meet
demand. In addition, the depreciation and other expenses that we will incur in
connection with the expansion of our manufacturing capacity may harm our gross
margin in any future fiscal period.
We are exploring alternatives for the further expansion of our manufacturing
capacity which would likely occur after 2001, including entering into strategic
relationships to obtain additional capacity; building a new wafer fabrication
facility; or purchasing a wafer fabrication facility. Any of these alternatives
could require a significant investment by us. There can be no assurance that any
of the alternatives for expansion of our manufacturing capacity will be
available on a timely basis or that we will be able to manage our growth and
effectively integrate our expansion into our current operations. Additionally,
the cost of any investment we may have to make to expand our manufacturing
capacity is expected to be funded through a combination of available cash, cash
equivalents and short-term investments, cash from operations and additional
debt, and lease or equity financing. We may not be able to obtain the additional
financing necessary to fund the construction and completion of any new
manufacturing facility.
Expanding our current wafer fabrication facility, building a new wafer
fabrication facility or purchasing a wafer fabrication facility also entails
significant risks, including:
- shortages of materials and skilled labor
- unforeseen environmental or engineering problems
- work stoppages
- weather interference
- unanticipated cost increases
Any one of these risks could have a material adverse effect on the building,
equipping and production start-up of a new facility or the expansion of our
existing facilities. In addition, unexpected changes or concessions required by
local, state or federal regulatory agencies with respect to necessary licenses,
land use permits, site approvals and building permits could involve significant
additional costs and delay the scheduled opening of the expansion of our
facilities or a new facility and could reduce our anticipated revenues. Also,
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the timing of commencement of operation of our expanded facilities or a new
facility will depend upon the availability, timely delivery, successful
installation and testing of the necessary process equipment. As a result of the
foregoing and other factors, our expanded or new facility may not be completed
and in volume production within its current budget or within the period
currently scheduled. Furthermore, we may be unable to achieve adequate
manufacturing yields in our expanded facilities or a new facility in a timely
manner, and our revenues may not increase commensurate with the anticipated
increase in manufacturing capacity associated with these facilities. In
addition, in the future, we may be required for competitive reasons to make
additional capital investments in our existing wafer fabrication facilities or
to accelerate the timing of the construction of a new wafer fabrication facility
in order to expedite the manufacture of products based on more advanced
manufacturing processes.
We encounter risks associated with our international operations.
We have generated a substantial portion of our net revenues from export
sales. We believe that a substantial portion of our 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, we sell 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 our future revenues, financial condition, results of operations
or cash flows.
Historically, we have not experienced significant individual product gross
margin differences on export sales compared to domestic sales. However, as a
result of the international market risks discussed above or other factors, there
can be no assurance that we will not experience material gross margin
fluctuations in the future, which could materially and adversely affect our
business, financial condition, results of operations or cash flows.
Our international sales are primarily denominated in U.S. currency.
Consequently, changes in exchange rates that strengthen the U.S. dollar could
increase the price of our products in the local currencies of the foreign
markets we serve. This would result in making our products relatively more
expensive than our competitors' products that are denominated in local
currencies, leading to a reduction in sales or profitability in those foreign
markets. We have not taken any protective measures against exchange rate
fluctuations, such as purchasing hedging instruments.
Our operating results substantially depend on manufacturing output and yields,
which may not meet expectations.
We manufacture most of our semiconductors at our San Jose and Santa Clara,
California fabrication facilities. Manufacturing semiconductors requires
manufacturing tools which are unique to each product being produced. If one of
these unique manufacturing tools was damaged or destroyed, then our ability to
manufacture the related product would be impaired and our business would suffer
until the tool was repaired or replaced. Additionally, the fabrication of
integrated circuits is a highly complex and precise process. Small 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.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The ongoing expansion of the manufacturing capacity of our existing wafer
fabrication facilities could increase the risk of contaminants in the
facilities. In addition, many of these problems are difficult to diagnose, and
are time consuming and expensive to remedy and can result in lower output and
yields and shipment delays.
Because the majority of our costs of manufacturing are relatively fixed,
output and yield decreases can result in substantially higher unit costs and may
result in reduced gross profit and net income. In addition, output and yield
decreases could force us to allocate available product supply among customers,
which could potentially harm customer relationships.
Our dependence on third-party manufacturing and supply relationships increases
the risk that we will not have an adequate supply of products to meet demand or
that our cost of materials will be higher than expected.
We face many risks associated with our dependence upon third parties that
manufacture, assemble or package certain of our products. These risks include:
- reduced control over our delivery schedules and quality
- risks of inadequate manufacturing yields and excessive costs
- the potential lack of adequate capacity during periods of excess demand
- difficulties selecting and integrating new subcontractors
- limited warranties on wafers or products supplied to us
- potential increases in prices
- potential misappropriation of our intellectual property
Any of these risks may lead to increased costs or delay delivery of our
products, which would harm our profitability and customer relationships. We may
encounter similar risks if we hire subcontractors to test our products in the
future.
Additionally, wafer and product requirements typically represent a very small
portion of the total production of the third-party foundries and outside
assembly, testing and packaging contractors. As a result, we are subject to the
risk that a foundry will cease production on an older or lower volume process
that it uses to produce our parts. We cannot be certain our outside
manufacturers will continue to devote resources to the production of our
products or continue to advance the process design technologies on which the
manufacturing of our products are based. Each of these events could increase our
costs and harm our ability to deliver our products on time.
Our future success depends in part on the continued service of our key design
engineering, sales, marketing and executive personnel and our ability to
identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers, and we may not be able to continue to
attract and train engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future. Our anticipated growth is expected to
place increased demands on our resources and will likely require the addition of
new management personnel and the development of additional expertise by existing
management personnel. Loss of the services of, or failure to recruit, key design
engineers or other technical and management personnel could be significantly
detrimental to our product and process development programs.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Because our markets are subject to rapid technological change, our success
depends heavily on our ability to develop and introduce new products.
The markets for our products are characterized by:
- rapidly changing technologies
- evolving and competing industry standards
- short product life cycles
- changing customer needs
- emerging competition
- frequent new product introductions and enhancements
- increased integration with other functions
- rapid product obsolescence
To develop new products for the computer and communications markets, we must
develop, gain access to and use leading technologies in a cost-effective and
timely manner and continue to develop technical and design expertise. We must
maintain close working relationships with key customers in order to develop new
products that meet customers' changing needs. We also must respond to changing
industry standards, trends towards increased integration and other technological
changes on a timely and cost-effective basis. Further, if we fail to achieve
design wins with our key customers or potential customers our business will face
significant harm because once a customer designs a supplier's product into its
system, the customer typically is reluctant to change its supply source because
of the high costs associated with qualifying a new supplier.
Products for communications applications, as well as for computing
applications, are based on industry standards that are continually evolving. Our
ability to compete in the future will depend on our ability to identify and
ensure compliance with these evolving industry standards. The emergence of new
industry standards could render our products incompatible with products
developed by major systems manufacturers. As a result, we could be required to
invest significant time and effort and to incur significant expense to redesign
our products to ensure compliance with relevant standards. If our products are
not in compliance with prevailing industry standards for a significant period of
time, we could miss opportunities to achieve crucial design wins. In addition,
we may not be successful in developing or using new technologies or in
developing new products or product enhancements that achieve market acceptance.
Our pursuit of necessary technological advances may require substantial time and
expense.
We may not be able to protect our intellectual property adequately, or we could
be harmed by litigation involving our patents and proprietary rights.
Our future success depends in part upon our intellectual property, including
patents, trade secrets, know-how and continuing technology innovation. There can
be no assurance that the steps taken by us to protect our 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 us will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to us or that any of our
pending or future patent applications will be issued with the scope of the
claims sought by us, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to our
technology, duplicate our technology or design around the patents owned by us.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Additionally, the semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property rights. There can be
no assurance that existing claims or any other assertions or claims for
indemnity resulting from infringement claims will not adversely affect our
business, financial condition, results of operations, or cash flows.
We face risks associated with acquisitions we have completed and will face risks
associated with any future acquisitions.
We have made three strategic acquisitions in the past two years: Synergy
Semiconductor in November 1998, Altos Semiconductor Inc. in December 1999 and
Electronic Technology Corporation in April 2000. The risks involved with
acquisitions include:
- diversion of management's attention
- failure to retain key personnel
- amortization of acquired intangible assets
- customer dissatisfaction or performance problems with the acquired company
- the cost associated with acquisitions and the integration of acquired
operations
- assumption of unknown liabilities
Any of these risks could materially harm our business, financial condition
and results of operations. Additionally, there can be no assurance that any of
the companies that we acquired or any business that we may acquire in the future
will achieve anticipated revenues and operating results.
In addition, acquisitions accounted for using the pooling of interests
methods of accounting are subject to rules established by the Financial
Accounting Standards Board and the Securities and Exchange Commission. These
rules are complex and the interpretation of them is subject to change.
Additionally, the availability of pooling of interests accounting treatment for
a business combination depends in part upon circumstances and events occurring
after the acquisition. The failure of a past business combination or a future
potential business combination that has been accounted for under the pooling of
interests accounting method to qualify for this accounting treatment would
materially harm our reported and future earnings and likely, the price of our
common stock.
Periods of rapid growth and expansion could continue to place a significant
strain on our limited personnel and other resources.
To manage expanded operations effectively, we will be required to continue to
improve our operational, financial and management systems and to successfully
hire, train, motivate and manage our employees. In addition, the integration of
past and future potential acquisitions and the expansion of our manufacturing
capacity will require significant additional management, technical and
administrative resources. We cannot be certain that we will be able to manage
our growth or effectively integrate the expansion of our current wafer
fabrication facilities, or a new manufacturing facility, into our current
operations.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Our business could be adversely effected by electrical power or natural gas
supply interruptions.
The majority or our administrative, technical and manufacturing facilities
are located in Northern California and these facilities may be subject to
electrical power or natural gas supply interruptions. In recent months,
electrical power suppliers have experienced shortages in electrical power which
has resulted in brief electrical power interruptions. The weak financial
condition of California's Public Utilities may aggravate the situation and
shortages may develop for natural gas. Semiconductor manufacturing depends upon
a controlled environment which requires high usage of electrical power and
natural gas. Frequent or extended electrical power interruptions could have a
negative impact on production output, manufacturing yields, and manufacturing
efficiencies. The Company intends to implement plans to reduce the impact of
temporary power outages. These plans include the installation of emergency
electrical power generation equipment. There can be no assurance that these
plans will be successful. Frequent or extended electrical power or natural gas
interruptions could have a material adverse impact on our business, financial
condition and operating results.
Our ability to manufacture sufficient wafers to meet demand could be severely
hampered by natural disasters.
Our existing wafer fabrication facilities are, and potential new wafer
fabrication facilities may be, located in Northern California and these
facilities may be subject to natural disasters such as earthquakes. A
significant natural disaster, such as an earthquake, could have a material
adverse impact on our business, financial condition and operating results.
We could incur substantial fines or litigation costs associated with our
storage, use and disposal of hazardous materials.
We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process. Any
failure to comply with present or future regulations could result in the
imposition of fines, the suspension of production, alteration of our
manufacturing processes or a cessation of operations. In addition, these
regulations could restrict our ability to expand our facilities at their present
locations or construct or operate a new wafer fabrication facility or could
require us to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. Our failure
to control the use of, disposal or storage of, or adequately restrict the
discharge of, hazardous substances could subject us to future liabilities and
could have a material adverse effect on our business.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, the Company held $32.9 million in short-term
investments consisting of corporate debt securities (commercial paper) with
maturities of less than one year. These available-for-sale securities are
subject to interest rate risk and will fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly
by 10 percent from levels at December 31, 2000, the fair value of the short-
term investments would decline by an immaterial amount. The Company generally
expects to have the ability to hold its fixed income investments until maturity
and therefore would not expect operating results or cash flows to be affected
to any significant degree by the effect of a sudden change in market interest
rates on short-term investments.
At December 31, 2000, the Company had fixed rate long-term debt of
approximately $5.9 million. A hypothetical 10 percent decrease in interest
rates would not have a material impact on the fair market value of this debt.
The Company does not hedge any interest rate exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth on pages 41 through 62,
which follow Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is included in the
Company's Proxy Statement to be filed in connection with the Company's 2001
annual meeting of shareholders under the caption "Election of Directors" and is
incorporated herein by reference. The information concerning the executive
officers of the Company required by this item is as follows:
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of December 31,
2000, are as follows:
Name Age Position
------------------------ ---- --- ------------------------------------------
Raymond D. Zinn 63 President, Chief Executive Officer and
Chairman of the Board
Robert Whelton 61 Executive Vice President of Operations
George T. Anderl 61 Vice President, Sales and Marketing
Robert J. Barker 54 Vice President, Corporate Business
Development, and Secretary
Richard D. Crowley, Jr. 44 Vice President, Finance and Chief
Financial Officer
Carlos Laber 49 Vice President, Design Engineering
Carlos Mejia 50 Vice President, Human Resources
Barry Small 52 Vice President, Wafer Fabrication Division
Scott Ward 46 Vice President, Test Engineering
Thomas Wong 45 Vice President, High Bandwidth Products
J. Vincent Tortolano 51 Vice President, General Counsel
Richard Zelenka 45 Vice President, Quality Assurance
Mr. Zinn is a co-founder of the Company and has been its President, Chief
Executive Officer and Chairman of its Board of Directors since its incorporation
in 1978. Prior to co-founding Micrel, Mr. Zinn held various management and
manufacturing executive positions in the semiconductor industry at Electromask
TRE, Electronic Arrays, Inc., Teledyne, Inc., Fairchild Semiconductor
Corporation and Nortek, Inc. He holds a B.S. in Industrial Management from
Brigham Young University and a M.S. in Business Administration from San Jose
State University.
Mr. Whelton joined the Company as Executive Vice President of Operations in
January 1998. From 1996 to 1997, Mr. Whelton was employed by Micro Linear
Corp., where he held the position of Executive Vice President in charge of
operations, design, sales and marketing. Prior to Micro Linear, Mr. Whelton was
employed by National Semiconductor Corp., from 1985 to 1996 where he held the
35
position of Vice President of the Analog Division. Mr. Whelton holds a B.S.E.E.
from U.C. Berkeley, and a M.S.E.E. from the University of Santa Clara.
Mr. Anderl joined the Company in June 1996 as its Vice President, Sales and
Marketing. From 1991 until he joined Micrel, Mr. Anderl was employed by Quality
Semiconductor, where his last position was Vice President, Worldwide Sales. His
prior employers include Austek Microsystems, Advanced Micro Devices, and
Monolithic Memories. Mr. Anderl holds a B.S.E.E. degree from Purdue University
and a M.S.E.E. from Santa Clara University.
Mr. Barker has served as Vice President, Corporate Business Development since
October 1999. Mr. Barker has also served as the Company's Secretary since May
2000. From April 1994 to September 1999 he held the position of Vice President,
Finance and Chief Financial Officer. From April 1984 until he joined Micrel, Mr.
Barker was employed by Waferscale Integration, Inc., where his last position was
Vice President of Finance and Secretary. Prior to 1984, Mr. Barker held various
accounting and financial positions at Monolithic Memories and Lockheed Missiles
and Space Co. He holds a B.S. in Electrical Engineering and a M.B.A. from
University of California at Los Angeles.
Mr. Crowley joined the Company as Vice President, Finance and Chief Financial
Officer in September 1999. From December 1998 until he joined Micrel, Mr.
Crowley was employed by Vantis Corporation as its Vice President, Chief
Financial Officer. From 1980 to 1998 Mr. Crowley was employed by National
Semiconductor Corporation, where his last position was Vice President, Corporate
Controller. He holds a B.B.A. in Finance from the University of Notre Dame and a
Masters in Management in Accounting and Finance from Northwestern University.
Mr. Laber joined the Company in March 2000 as its Vice President, Design
Engineering. Prior to joining the Company, Mr. Laber was employed by Micro
Linear Corporation from 1984 to 2000 where he held the positions of Vice
President of Design Engineering, Director of Engineering, and Principal
Engineer. Prior to 1984 Mr. Laber was employed by National Semiconductor and
Intel Corporation in various design engineering positions. He holds a M.S.E.E.
from the University of Minnesota.
Mr. Mejia joined the Company in June 1999 as Vice President, Human Resources.
From 1976 until he joined Micrel, Mr. Mejia was employed by Analog Devices, Inc.
where his last position was Director, Human Resources. Prior to Analog Devices,
Inc., Mr. Mejia held various human resource positions at ROHR Industries and
California Computer Products. He holds a B.S. in Industrial Technology and a
M.A.H.R. from the University of Redlands.
Mr. Small joined the Company in April 1998 as its Vice President, Wafer Fab.
Prior to joining the Company, Mr. Small was employed by IC Works from 1996 to
1998, where he was Vice President of Operations. From 1971 to 1995, Mr. Small
was employed by National Semiconductor Corp. where he held the position of Vice
President of Linear Standard Products. Mr. Small holds a B.A. in Physics from
U.C. Berkeley and an M.A. in Physics and an M.B.A. from University of California
at Los Angeles.
Mr. Ward joined the Company in August 1999 as Vice President, Test Division.
From 1997 until he joined Micrel, Mr. Ward was employed by QuickLogic
Corporation as Vice President of Engineering. From 1980 to 1997, Mr. Ward was
employed by National Semiconductor Corporation where he held various Product
Line Director positions in the Analog Division. Mr. Ward holds a B.S.E.T. degree
from California Polytechnic University at San Luis Obispo.
Mr. Wong joined the Company in November 1998 as its Vice President,
HighBandwith Products. Prior to joining the Company, Mr. Wong was a co-founder
of Synergy Semiconductor and held various management positions including Chief
Technical Officer, Vice President Engineering, Vice President Standard Products
36
and Vice President Product Development for Synergy Semiconductor from 1987 to
November 1998 at which time Synergy was acquired by the Company. From 1978 to
1986, Mr. Wong was employed by Advanced Micro Devices where his last position
was Design Engineering Manager. He holds a B.S.E.E. from the University of
California at Berkeley and a M.S.E.E. from San Jose State University.
Mr. Tortolano joined the Company in August 2000 as its Vice President,
General Counsel. From 1999 until he joined the Company, Mr. Tortolano was
employed by Lattice Semiconductor Corporation, where he held the position of
Vice President, Co-General Counsel. From 1983 to 1999, Mr. Tortolano was
employed by Advanced Micro Devices, Inc., where his last position was Vice
President, General Counsel of AMD's Vantis subsidiary. Mr. Tortolano holds a
B.S.E.E. from Santa Clara University and a Juris Doctor degree from University
of California at Davis.
Mr. Zelenka has served as Vice President, Quality Assurance since August
2000. From January 1998 to July 2000 he held the position of Director of Product
Assurance. Prior to joining the Company, Mr. Zelenka was employed by National
Semiconductor from 1987 to 1998 as a Senior Quality Manager. From 1983 to 1987
Mr. Zelenka was employed by Fairchild Semiconductor where he held the position
of Wafer Fab Quality Manager. He holds a B.S. in Chemical Engineering from the
University of Wyoming.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" and "Stock Option Grants and Exercise" in the
Company's Proxy Statement to be filed in connection with the Company's 2001
annual meeting of shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with the Company's 2001 annual meeting of
shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement to be filed in connection with
the Company's 2001 Annual meeting of shareholders and is incorporated herein
by reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following financial statements of the
Company and the Report of Deloitte & Touche LLP, Independent Auditors,
are included in this Report on the pages indicated:
Page
----
Independent Auditors' Report 41
Consolidated Balance Sheets as of December 31, 2000 and 1999 42
Consolidated Income Statements for the Years ended
December 31, 2000, 1999 and 1998 43
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years ended December 31, 2000, 1999 and 1998 44
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998 45
Notes to Consolidated Financial Statements 46
2. Financial Statement Schedules. The following financial statement
schedule of the Company for the years ended December 31, 2000, 1999
and 1998 is filed as part of this report on Form 10-K and should be
read in conjunction with the financial statements.
Schedule Title Page
-------- ----- ----
Independent Auditors' Report 61
II Valuation and Qualifying Accounts 62
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes
thereto.
3. Exhibits. See Exhibit Index on page 39 hereof for a list of
exhibits filed or incorporated by reference as a part of this report.
(b) Reports on Form 8-K. No report on Form 8-K was filed by the Company
in the quarter ended December 31, 2000.
38
Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
------- -----------
2.1 Merger Agreement dated October 21, 1998, by and between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.2 Letter agreement dated November 9, 1998, between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.3 Escrow Agreement dated November 9, 1998, between Micrel,
Incorporated, John F. Stockton, as representative of the former
Synergy shareholders, and Bank of the West. (1)
2.4 Agreement and Plan of Merger and Reorganization among Micrel,
Incorporated, Electronic Technology Corporation and ETC Acquisition
Sub, Inc., dated as of April 4, 2000 (10)
3.1 Amended and Restated Articles of Incorporation of the Registrant. (2)
3.2 Certificate of Amendment of Articles of Incorporation of the
Registrant. (3)
3.3 Amended and Restated Bylaws of the Registrant. (3)
3.4 Certificate of Amendment of Articles of Incorporation of the
Registrant. (9)
4.1 Certificate for Shares of Registrant's Common Stock. (4)
10.1 Indemnification Agreement between the Registrant and each of its
officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (2) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (2) *
10.4 1994 Stock Purchase Plan. (4)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and GOCO
Realty Fund I, as amended August 6, 1992 and February 5, 1993. (2)
10.8 Form of Domestic Distribution Agreement. (3)
10.9 Form of International Distributor Agreement. (3)
10.10 Second Amendment dated February 20, 1995 between the Registrant and
TR Brell Cal Corporation to Lease Agreement dated June 24, 1992
between the Registrant and GOCO Realty Fund I, as amended
August 6, 1992 and February 5, 1993. (4)
10.11 Amended and Restated 1994 Employee Stock Purchase Plan, as amended
January 1, 1996. (5)
10.12 Commercial Lease between Harris Corporation and Synergy Semiconductor
Corporation dated February 29, 1996. (6)
10.13 Standard Industrial/Commercial Single-Tenant Lease Agreement Dated
March 3, 2000 between the Registrant and Rose Ventures II (7)
10.14 Loan and Security Agreement Dated March 8, 2000 between the
Registrant and Bank of the West (8)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
* Management contract or compensatory plan or agreement.
(1) Incorporated herein by reference to the Company's Current Report
on Form 8-K dated November 9, 1998 filed with the Commission on
November 23, 1998 in which this exhibit bears the same number,
unless otherwise indicated.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 ("Registration Statement"), File No. 33-
85694, in which this exhibit bears the same number, unless
otherwise indicated.
(3) Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless
otherwise indicated.
39
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, in which this exhibit
bears the same number, unless otherwise indicated.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, in which this exhibit bears the
number 10.14.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, in which this exhibit bears the
number 10.14.
(7) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 2000.
(8) Incorporated by reference to exhibit 10.2 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 2000.
(9) Incorporated by reference to exhibit 3.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30,
2000.
(10) Incorporated by reference to exhibit 10.1 filed with the
Company's registration statement on Form S-3 filed with the S.E.C.
on May 25, 2000.
(d) Financial Statement Schedules. The financial statement schedule
required by this Item is listed under Item 14(a)(2) above.
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the accompanying consolidated balance sheets of Micrel,
Incorporated and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
San Jose, California
January 23, 2001
41
MICREL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(In thousands, except share amounts)
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 81,902 $ 15,360
Short-term investments 32,858 36,337
Accounts receivable, less allowances:
2000, $4,309; 1999, $2,547 58,751 39,472
Inventories 20,703 23,851
Prepaid expenses and other 1,494 1,108
Deferred income taxes 20,485 11,388
--------- ---------
Total current assets 216,193 127,516
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 110,576 67,162
INTANGIBLE ASSETS, NET 5,775 7,933
OTHER ASSETS 350 483
--------- ---------
TOTAL $ 332,894 $ 203,094
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,515 $ 11,241
Accrued compensation 8,171 5,272
Accrued commissions 2,219 1,952
Income taxes payable 11,720 12,230
Other accrued liabilities 1,623 1,442
Deferred income on shipments to distributors 14,224 6,541
Current portion of long-term debt 5,429 5,132
--------- ---------
Total current liabilities 57,901 43,810
--------- ---------
LONG-TERM DEBT 5,327 8,854
DEFERRED RENT 943 624
DEFERRED INCOME TAXES 2,898 1,137
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
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 - 85,374,400; 1999 - 82,835,152 90,854 51,954
Accumulated other comprehensive income (loss) (32) 15
Retained earnings 175,003 96,700
--------- ---------
Total shareholders' equity 265,825 148,669
--------- ---------
TOTAL $ 332,894 $ 203,094
========= =========
See notes to consolidated financial statements.
42
MICREL, INCORPORATED
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except per share amounts)
2000 1999 1998
--------- --------- ---------
NET REVENUES $ 322,475 $ 195,122 $ 140,508
COST OF REVENUES 133,129 85,629 69,324
--------- --------- ---------
GROSS PROFIT 189,346 109,493 71,184
--------- --------- ---------
OPERATING EXPENSES:
Research and development 35,789 26,328 18,931
Selling, general and administrative 41,943 28,157 21,658
Purchased in-process technology - 603 3,737
--------- --------- ---------
Total operating expenses 77,732 55,088 44,326
--------- --------- ---------
INCOME FROM OPERATIONS 111,614 54,405 26,858
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 5,428 2,049 1,507
Interest expense (976) (1,468) (416)
Other income(loss), net (134) 29 1
--------- --------- ---------
Total other income, net 4,318 610 1,092
--------- --------- ---------
INCOME BEFORE INCOME TAXES 115,932 55,015 27,950
PROVISION FOR INCOME TAXES 38,261 18,356 10,774
--------- --------- ---------
NET INCOME $ 77,671 $ 36,659 $ 17,176
========= ========= =========
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except share amounts)
________________________________________________________________________________________________________________
Accumulated
Common Stock Other Total
--------------------- Comprehensive Retained Shareholders' Comprehensive
Shares Amount Income (Loss) Earnings Equity Income
---------- --------- ------------- --------- ------------- -------------
Balances, December 31, 1997 77,933,276 $ 27,703 - $ 42,865 $ 70,568
Net income - - - 17,176 17,176 $ 17,176
Other comprehensive income,
net of tax - Change in net
unrealized gains from
short-term investments - - 10 - 10 10
---------
Comprehensive income $ 17,186
=========
Employee stock transactions 2,431,508 4,088 - - 4,088
Tax benefit of employee stock
transactions - 3,869 - - 3,869
---------- --------- --------- --------- ---------
Balances, December 31, 1998 80,364,784 35,660 10 60,041 95,711
Net income - - - 36,659 36,659 $ 36,659
Other comprehensive income,
net of tax - Change in net
unrealized gains from
short-term investments - - 5 - 5 5
---------
Comprehensive income $ 36,664
=========
Employee stock transactions 2,470,368 8,301 - - 8,301
Tax benefit of employee stock
transactions - 7,993 - - 7,993
---------- --------- --------- --------- ---------
Balances, December 31, 1999 82,835,152 51,954 15 96,700 148,669
Net income - - - 77,671 77,671 $ 77,671
Other comprehensive income,
net of tax - Change in net
unrealized gains from
short-term investments - - (47) - (47) (47)
---------
Comprehensive income $ 77,624
=========
Acquisition of ETC 152,234 32 - 632 664
Employee stock transactions 2,387,014 15,457 - - 15,457
Tax benefit of employee stock
transactions - 23,411 - - 23,411
---------- --------- --------- --------- ---------
Balances, December 31, 2000 85,374,400 $ 90,854 $ (32) $ 175,003 $ 265,825
========== ========= ========= ========= =========
See notes to consolidated financial statements.
44
MICREL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)
_______________________________________________________________________________
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,671 $ 36,659 $ 17,176
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,062 19,267 12,332
Purchased in-process technology - 603 3,737
Gain on disposal of assets (40) (31) (3)
Deferred rent 319 (166) (126)
Deferred income taxes (7,336) (2,848) (3,642)
Changes in operating assets and
liabilities, net of effects of
acquisition:
Accounts receivable (19,003) (15,393) (4,896)
Inventories 3,463 (7,782) 4,553
Prepaid expenses and other assets (239) (415) (149)
Accounts payable 3,214 3,249 2,893
Accrued compensation 2,853 1,373 364
Accrued commissions 245 442 299
Income taxes payable 22,901 15,908 7,033
Other accrued liabilities 151 (1,282) 61
Deferred income on shipments to
distributors 7,663 2,127 997
--------- --------- ---------
Net cash provided by operating
activities 116,924 51,711 40,629
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements (65,833) (29,364) (30,880)
Purchases of short-term investments (145,285) (65,321) (38,754)
Proceeds from sales and maturities of
short-term investments 148,743 44,018 41,300
Purchase of company, net of cash acquired - (1,800) (10,271)
--------- --------- ---------
Net cash used in investing activities (62,375) (52,467) (38,605)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings - - (3,132)
Proceeds from long-term borrowings 2,000 2,100 12,000
Repayments of long-term debt (5,464) (7,700) (4,146)
Proceeds from the issuance of common stock 15,457 8,301 4,088
--------- --------- ---------
Net cash provided by financing
activities 11,993 2,701 8,810
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 66,542 1,945 10,834
CASH AND CASH EQUIVALENTS - Beginning of year 15,360 13,415 2,581
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of year $ 81,902 $ 15,360 $ 13,415
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 976 $ 1,468 $ 291
========= ========= =========
Income taxes $ 22,705 $ 5,293 $ 7,384
========= ========= =========
See notes to consolidated financial statements.
45
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Micrel, Incorporated and its wholly-owned subsidiaries
(the "Company") develops, manufactures and markets analog and mixed-signal
semiconductor devices. The Company also provides custom and foundry services
which include silicon wafer fabrication, integrated circuit assembly and
testing. The Company's standard integrated circuits are sold principally in
North America, Asia, and Europe for use in a variety of products, including
those in the computer, communication, and industrial markets. The Company's
custom circuits and wafer foundry services are provided to a wide range of
customers that produce electronic systems for communications, consumer,
automotive and military applications. The Company produces the majority of
its wafers at the Company's wafer fabrication facilities located in San Jose
and Santa Clara, California. After wafer fabrication, the completed wafers
are then separated into individual circuits and packaged at independent
assembly and final test contract facilities primarily located in Malaysia.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Micrel, Incorporated and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Use of Estimates - In accordance with accounting principles generally
accepted in the United States of America, management utilizes certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The primary estimates
underlying the Company's financial statements include allowance for doubtful
accounts receivable, reserves for product returns, reserves for obsolete and
slow moving inventory, income taxes and accrual for other liabilities.
Actual results could differ from those estimates.
Cash Equivalents - The Company considers all liquid debt instruments
purchased with remaining maturities of three months or less to be cash
equivalents.
Short-term Investments - Short-term investments consist primarily of liquid
debt instruments purchased with remaining maturity dates of greater than
three months. Short-term investments are classified as available-for-sale
securities and are stated at market value with unrealized gains and losses
included in shareholders' equity, net of income taxes. At December 31, 2000
and 1999, short-term investments consisted of corporate debt securities
(commercial paper) with maturities of less than one year.
Short-term investments include the following available-for-sale securities
at December 31, 2000 and 1999 (in thousands):
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
Certain Significant Risks and Uncertainties - Financial instruments that
potentially subject the Company to concentrations of credit risk consist of
cash and cash equivalents, short-term investments, and accounts receivable.
Risks associated with cash are mitigated by banking with creditworthy
institutions. Cash equivalents and short-term investments consist primarily
of commercial paper and bank certificates of deposit and are regularly
monitored by management. Credit risk with respect to the trade receivables
is spread over geographically diverse customers. At December 31, 2000, no
customer accounted for 10% or more of total accounts receivable. At
December 31, 1999, two customers accounted for 10% or more of total accounts
receivable.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse
effect on the Company's future financial position, results of operations, or
cash flows: changes in the overall demand for products offered by the
Company; competitive pressures in the form of new products or price
reductions on current products; advances and trends in new technologies and
industry standards; changes in product mix; changes in third-party
manufacturers; changes in key suppliers; changes in certain strategic
relationships or customer relationships; litigation or claims against the
Company based on intellectual property, patents (Note 11), product,
regulatory or other factors; risk associated with the ability to obtain
necessary components; risks associated with the Company's ability to attract
and retain employees necessary to support its growth.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Equipment and Leasehold Improvements - Equipment and leasehold improvements
are stated at cost. Depreciation on equipment is computed using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized over the shorter of the lease term or
the useful lives of the improvements.
Intangible Assets - Intangible assets (net of accumulated amortization of
$4.4 million in 2000; $2.3 million in 1999) at December 31, consist of the
following (in thousands):
Impairment of Long-Lived Assets - Long-lived assets and certain intangibles
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. An impairment loss would be recognized when the sum of
the undiscounted future net cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying value.
47
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
Revenue Recognition - Revenue from products sold directly to customers is
recognized upon shipment. A portion of the Company's sales are made to
United States of America, Canadian and certain other international
distributors under agreements allowing certain rights of return and price
protection on merchandise unsold by these distributors. Accordingly, the
Company defers recognition of such revenues until the merchandise is sold by
the distributors to their customers. The Company records a provision for
estimated returns, allowances and warranty costs at the time revenue is
recognized. Warranty costs have not been material in any period presented.
Research and Development Expenses - Research and development expenses
include costs associated with the development of new wafer fabrication
processes and the definition, design and development of standard products.
The Company also expenses prototype wafers and new production mask sets
related to new products as research and development costs until products
based on new designs are fully characterized by the Company and are
demonstrated to support published data sheets and satisfy reliability tests.
Income Taxes - Income taxes are provided at current rates. Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes.
Stock-based Awards - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Stock Split - 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 consolidated financial
statements has been adjusted to retroactively give effect to the stock split
for all periods presented.
Net Income per Share - Basic earnings per share ("EPS") is computed by
dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding stock
options, using the treasury stock method.
Reconciliation of weighted average shares used in computing earnings per
share is as follows (in thousands):
Years Ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
Weighted average common shares outstanding 84,234 81,660 79,220
Dilutive effect of stock options outstanding,
using the treasury stock method 10,453 8,132 5,592
------- ------- -------
Shares used in computing diluted earnings
per share 94,687 89,792 84,812
======= ======= =======
48
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
Fair Value of Financial Instruments - Financial instruments included in the
Company's consolidated balance sheets at December 31, 2000 and 1999 consist
of cash, cash equivalents, short-term investments and long-term debt. For
cash, the carrying amount is a reasonable estimate of the fair value. The
carrying amount for cash equivalents and short-term investments approximates
fair value because of the short maturity of those investments. The fair
value of long-term debt approximates the carrying amount. The fair value of
long-term debt is based on the discounted value of the contractual cash
flows. The discount rate is estimated using the rates currently offered for
debt with similar remaining maturities.
Comprehensive Income - Comprehensive income represents the change in net
assets during the period from nonowner sources. Consolidated statements of
comprehensive income for the years ended December 31, 2000, 1999, and 1998
have been included within the consolidated statements of shareholders'
equity and comprehensive income.
Segment Information - The Company reports segment data pursuant to 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 in two reportable segments, standard products and custom and
foundry products (Note 12).
New Accounting Standards - Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal years beginning after June 15,
2000. SFAS 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS 133,
certain contracts that were not formerly considered derivatives may now meet
the definition of a derivative. The Company will adopt SFAS 133 effective
January 1, 2001. Management has concluded that the adoption of SFAS 133
will not have a material effect on the financial position, results of
operations, or cash flows of the Company.
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. Management has completed its evaluation of SAB 101 and
has determined that the Company is in compliance with SAB 101 and no
adjustments are required.
2. ACQUISITIONS
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 152,234 shares of common stock 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.
49
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
On December 15, 1999, the Company acquired the outstanding capital stock of
Altos Semiconductor for a cash purchase price of $1.8 million. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Altos from the date of acquisition forward have been included
in the Company's consolidated financial statements. Approximately $1.7
million of the total purchase cost was allocated to intangible assets. Of
that amount, $603,000 was allocated to purchased in-process technology,
which has not reached technological feasibility and has no alternative
future use, for which the Company recorded charges in the year ended
December 31, 1999. The remaining intangible assets of $1.1 million,
consisting of existing technology, assembled workforce, and patents, are
included in intangible assets in the accompanying balance sheets and are
being amortized over their useful lives of five years.
On November 9, 1998, the Company acquired all outstanding shares of Synergy
Semiconductor ("Synergy") common stock for a cash purchase price of $9.9
million plus $1.6 million of transaction fees and direct merger costs.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Synergy from the date of acquisition forward have
been included in the Company's consolidated financial statements. In
connection with the acquisition, intangible assets of $12.9 million were
acquired, of which $3.7 million was reflected as a one-time charge to
operations for the write-off of purchased in-process technology that had not
reached technological feasibility and, in management's opinion, had no
probable alternative future use. The $3.7 million one-time charge for
purchased in-process technology has been reflected in the Company's fiscal
1998 consolidated income statement within operating expenses. The remaining
intangible assets of $9.2 million, consisting of existing technology,
assembled workforce, tradename and patents, and customer relationships, are
included in intangible assets in the accompanying balance sheets and are
being amortized over their useful lives of three to five years.
In connection with the Synergy acquisition, net assets acquired were as
follows (in thousands):
Current assets $ 13,564
Equipment and other, net 5,074
Intangible assets, including purchased
in-process technology 12,945
Liabilities assumed (20,110)
---------
Net assets acquired $ 11,473
=========
The following unaudited pro forma information shows the results of
operations for the year ended December 31, 1998, as if the Synergy
acquisition had occurred at the beginning of 1998 (in thousands, except per
share amounts):
Net revenues $ 163,819
Net income $ 11,295
Net income per share, basic $ 0.57
Net income per share, diluted $ 0.53
The pro forma results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of 1998 or
of future operations of the combined companies
50
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
3. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
2000 1999
--------- ---------
Finished goods $ 6,661 $ 5,958
Work in process 12,027 16,125
Raw materials 2,014 1,768
--------- ---------
$ 20,703 $ 23,851
========= =========
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31 consist of the following
(in thousands):
5. BORROWING ARRANGEMENTS
Borrowing agreements consisted of (i) $5 million under a revolving line of
credit, of which all was unused and available at December 31, 2000, and (ii)
$40 million under a non-revolving line of credit, of which $38 million was
unused and available at December 31, 2000. The two lines of credit are
covered by the same loan and security agreement. The revolving line of
credit portion of the 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 non-revolving line of credit portion
of the agreement expires on April 30, 2001. Borrowings under the revolving
line of credit bear interest rates of, at the Company's election, the prime
rate (9.5% at December 31, 2000), or the bank's revolving offshore rate,
which approximates LIBOR (6.4% at December 31, 2000) plus 2.0%. Borrowings
under the non-revolving line of credit bear interest rates of, at the
Company's election, the prime rate (9.50% at December 31, 2000), the bank's
non-revolving offshore rate, which approximates LIBOR (6.40% at December 31,
2000) plus 2.13%, a fixed rate based on the four-year U.S. Treasury Bill
rate (5.10% at December 31, 2000) plus 2.75% or an annual adjustable rate
based on the one-year U.S. Treasury Bill rate (5.37% at December 31, 2000)
plus 2.75%. The agreement contains certain restrictive covenants that
include a restriction on the declaration and payment of dividends without
the lender's consent. The Company was in compliance with all such covenants
at December 31, 2000.
51
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
The non-revolving bank line of credit that is covered by the loan agreement
described above, can be used to fund purchases of capital equipment whereby
the Company may borrow up to 100% of the acquisition cost. Amounts borrowed
under this credit line are automatically converted to four-year term notes.
All equipment notes are collateralized by substantially all of the Company's
manufacturing equipment.
As of December 31, 2000, the Company had $10.8 million outstanding under
term notes.
Long-term debt at December 31, collateralized by equipment, consists of the
following (in thousands):
2000 1999
--------- ---------
Notes payable bearing interest at prime, payable
in monthly installments through September 2002 $ 1,604 $ 2,639
Notes payable bearing a fixed interest rate of
7.5%, payable in monthly installments through
November 2002 3,805 5,833
Notes payable bearing interest at annual
adjustable rate based on the one-year U.S.
Treasury Bill rate plus 3.0%, payable in
monthly installments through June 2003 1,258 1,838
Notes payable bearing interest at quarterly
adjustable rate based on LIBOR plus 2.75%,
payable in monthly installments through
December 2004 2,000 -
Notes payable assumed from Synergy Semiconductor
bearing fixed rates ranging from 8.9% to 9.4%,
payable in monthly installments through
January 2003 2,089 3,676
--------- ---------
Total debt 10,756 13,986
Current portion (5,429) (5,132)
--------- ---------
Long-term debt $ 5,327 $ 8,854
========= =========
Maturities of long-term debt subsequent to December 31, 2000 are as follows
(in thousands): $5,429 in 2001, $4,075 in 2002, $752 in 2003, and $500 in
2004.
6. SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, no par
value, of which none were issued or outstanding at December 31, 2000. The
preferred stock may be issued from time to time in one or more series. The
Board of Directors is authorized to determine or alter the rights,
preferences, privileges and restrictions of such preferred stock.
Stock Option Plans
Under the Company's 2000 Non-Exempt Option Plan and 1994 and 1989 Stock
Option Plans (the "Option Plans"), 35,958,672 shares of common stock are
authorized for issuance to key employees. The Option Plans provide that the
option price will be determined by the Board of Directors at a price not
less than the fair value at the date of grant. Certain
shareholder/employees of the Company are granted options at 110% of the
current fair market value. Options granted under the 2000 Non-Exempt Option
52
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
Plan are exercisable in 20% increments with the initial 20% vesting
occurring on the date of grant and then in annual increments of 20% per year
from the date of grant. Under the 1994 and 1989 Stock Option Plans options
granted become exercisable in not less than cumulative annual increments of
20% per year from the date of grant. At December 31, 2000, 19,594,523 total
shares were reserved for future issuance, of which 5,240,419 shares were
available for future grants under the Option Plans.
Option activity under the Option Plans is as follows:
Weighted
Average
Number Exercise
of Shares Price
---------- --------
Outstanding, December 31, 1997 (1,810,632
exercisable at a weighted average price of $0.92
per share) 10,223,232 $ 3.11
Granted 5,726,400 8.26
Exercised (2,285,400) 1.37
Canceled (398,400) 3.33
---------- ------
Outstanding, December 31, 1998 (1,909,632
exercisable at a weighted average price of $2.81
per share) 13,265,832 5.63
Granted 4,125,500 15.51
Exercised (2,368,868) 2.88
Canceled (827,200) 7.84
---------- ------
Outstanding, December 31, 1999 (2,738,364
exercisable at a weighted average price of $5.02
per share) 14,195,264 8.88
Granted 3,070,041 39.09
Exercised (2,286,625) 5.58
Canceled (624,576) 12.67
---------- ------
Outstanding, December 31, 2000 14,354,104 $15.70
========== ======
Additional information regarding options outstanding as of December 31, 2000
is as follows:
Stock Options Outstanding Options Exercisable
------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
---------------- ----------- --------- ------- ----------- --------
$ 0.16 to $ 6.38 2,934,541 5.0 $ 3.50 1,603,081 $ 3.18
$ 6.39 to $12.76 5,424,002 7.4 $ 8.74 1,544,401 $ 8.50
$12.77 to $19.14 2,096,586 8.3 $15.58 365,986 $15.56
$19.15 to $25.53 1,058,600 8.8 $20.85 208,200 $20.86
$25.54 to $31.91 609,350 9.4 $29.93 12,920 $31.81
$31.92 to $38.29 684,400 9.2 $34.80 40 $33.44
$38.30 to $44.67 737,500 9.4 $42.53 - -
$44.68 to $51.05 780,625 9.6 $48.44 - -
$51.06 to $57.43 4,500 9.6 $56.18 - -
$57.44 to $63.81 24,000 9.7 $61.56 - -
----------- -----------
$ 0.16 to $63.81 14,354,104 7.5 $15.70 3,734,628 $ 7.68
=========== ===========
53
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees are permitted to have salary withholdings to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of each six-month offer period, subject to an
annual limitation. Shares of common stock issued under the Purchase Plan
were 100,389, 101,500, and 146,108, in 2000, 1999, and 1998, respectively,
at weighted average prices of $26.47 $14.75 and $6.63, respectively. At
December 31, 2000, there were 1,196,953 shares of common stock issued under
the Purchase Plan and 1,203,047 shares are reserved for future issuance
under the Purchase Plan.
Additional Stock - Based Award Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 60 months; stock
volatility, 80.1% in 2000, 70.7% in 1999 and 74.1% in 1998; risk free
interest rates, 5.33% in 2000, 5.46% in 1999, and 5.36% in 1998; and no
dividends during the expected term. The Company's calculations are based on
a multiple option valuation approach and forfeitures are recognized as they
occur. The weighted average fair value of options granted under the stock
option plans during 2000, 1999, and 1998 was $27.17, $11.01, and $5.58 per
share. If the computed fair values of the 2000, 1999 and 1998 awards under
both the Option Plans and the Purchase Plan had been amortized to expense
over the vesting period of the awards, pro forma net income and net income
per share would have been as follows (in thousands, except per share
amounts):
Years Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
Pro forma net income $ 48,605 $ 21,854 $ 9,194
Pro forma net income per share:
Basic $ 0.55 $ 0.25 $ 0.12
Diluted $ 0.54 $ 0.24 $ 0.11
The amounts used above are based on calculated tax effected values for
option awards in 2000, 1999 and 1998 aggregating $51.9 million. The impact
of outstanding stock options granted prior to 1995 has been excluded from
54
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
the pro forma calculation; accordingly, the pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation will
apply to all applicable stock options.
7. INCOME TAXES
The provision for income taxes for the years ended December 31 consists of
the following (in thousands):
2000 1999 1998
-------- -------- --------
Currently payable:
Federal $ 40,518 $ 19,873 $ 13,147
State 5,079 1,331 1,269
-------- -------- --------
Total currently payable 45,597 21,204 14,416
-------- -------- --------
Deferred income taxes:
Federal (3,111) 556 (2,987)
State (4,225) (3,404) (655)
-------- -------- --------
Total deferred (7,336) (2,848) (3,642)
-------- -------- --------
Total provision $ 38,261 $ 18,356 $ 10,774
======== ======== ========
A reconciliation of the statutory federal income tax rate to the effective
tax rate for the years ended December 31 is as follows:
2000 1999 1998
-------- -------- --------
Statutory federal income tax rate 35% 35% 35%
State income taxes (net of federal income
tax benefit) 1 2 1
Federal research and experimentation
tax credits (2) (2) (2)
Export sales tax credit (1) (1) (2)
Non-deductible purchased in-process
technology - - 5
Other - (1) 2
---- ---- ----
Effective tax rate 33% 33% 39%
==== ==== ====
55
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
Temporary differences that give rise to deferred tax assets and liabilities
at December 31 are as follows (in thousands):
2000 1999
--------- ---------
Deferred tax assets:
Accruals and reserves not currently deductible $ 10,294 $ 6,133
Deferred income 5,901 2,747
Tax net operating loss and credit carryforwards 9,158 6,691
Capitalized research and development 2,272 2,604
Valuation allowance - -
--------- ---------
Total deferred tax asset 27,625 18,175
--------- ---------
Deferred tax liabilities:
Depreciation (5,420) (3,246)
State income taxes (2,679) (1,387)
Intangible assets (1,939) (3,291)
--------- ---------
Total deferred tax liability (10,038) (7,924)
--------- ---------
Net deferred tax asset $ 17,587 $ 10,251
========= =========
Due to the Company's acquisition of Synergy, the Company has available pre-
ownership change federal and state net operating loss carryforwards of
approximately $6.0 million and $400,000, respectively, which expire
beginning in 2006 and 2000. These pre-ownership change net operating loss
carryforwards are subject under Section 382 of the Internal Revenue Code to
an annual limitation estimated to be approximately $500,000. In addition,
the Company has available federal research and state credit carryforwards of
approximately $570,000 and $6.5 million, respectively. Regarding the state
credit carryforwards, approximately $1.9 million represents pre-ownership
change carryforwards subject to the Section 382 annual limitation.
8. OPERATING LEASES
The Company leases its facilities under operating lease agreements that
expire in 2005, 2006, and 2011. The lease agreements provide for escalating
rental payments over the lease periods. Rent expense is recognized on a
straight-line basis over the term of the lease. Deferred rent represents
the difference between rental payments and rent expense recognized on a
straight-line basis. Future minimum payments under these agreements are as
follows (in thousands):
Rent expense under operating leases was (in thousands): $3,479, $2,604, and
$1,346 for the years ended December 31, 2000, 1999, and 1998, respectively.
56
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
9. PROFIT-SHARING 401(k) PLAN
The Company has a profit-sharing plan and deferred compensation plan (the
"Plan"). All employees completing one month of service are eligible to
participate in the Plan. Participants may contribute 1% to 15% of their
annual compensation on a before tax basis, subject to Internal Revenue
Service limitations. Profit-sharing contributions by the Company are
determined at the discretion of the Board of Directors. The Company accrued
$1.8 million in 2000, $830,000 in 1999, and $870,000 in 1998. Participants
vest in Company contributions ratably over six years of service.
10. SIGNIFICANT CUSTOMERS
In 2000 one customer, a distributor, accounted for $32.2 million (10.0%)
of net revenues. In 1999 and 1998, no single customer accounted for
ten percent or more of net revenues
11. LITIGATION
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent that
the Company becomes involved in such intellectual property litigation, it
could result in substantial costs and diversion of resources to the Company
and could have a material adverse effect on the Company's financial
condition or results of operations.
On 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, and treble damages as well as permanent injunctive relief
against further infringement of the National patents at issue. The Company
intends to continue defending itself against these claims. The litigation is
currently in the discovery phase. A trial date has not yet been set by the
Court.
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 eighty-
eight 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. The Company intends to defend itself against these claims. . The case
is currently in the discovery phase and no trial date has been set.
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
57
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
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. On August 20, 1999, the United States District Court in San Jose
adjudicated in favor of the Company in this patent infringement suit brought
by the plaintiff. 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. The United States District Court in San Jose dismissed the
plaintiff's complaint on the merits of the case and awarded the Company its
legal costs. A notice of appeal of the Judgment was filed by Linear on
September 17, 1999. Linear filed its appeal brief with the United States
Court of Appeal for the Federal Circuit ("CAFC") in October, 2000. The
Company filed its responsive brief with the CAFC in January, 2001.
On June 16, 1999, Paul Boon ("Boon" or "plaintiff"), an ex-employee of the
Company, filed a complaint in the Superior Court of California entitled Paul
Boon v. Micrel Incorporated, dba Micrel Semiconductor, alleging breach of
employment contract, discrimination based upon age, and wrongful termination
in violation of public policy. On October 12, 2000, Boon filed an amended
complaint alleging breach of an implied covenant of good faith and fair
dealing, and breach of written agreement, in addition to the original causes
of action. On February 23, 2001, a jury decided that the Company had
breached an employment contract with plaintiff and awarded plaintiff $1.267
million. The Company intends to continue to vigorously defend itself
against these claims, up to and including an appeal to the California Court
of Appeals and to the Supreme Court for the State of California, if
necessary.
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.
Certain additional 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
condition, results of operation 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.
58
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
12. SEGMENT REPORTING
SFAS No.131 requires disclosures regarding products and services, geographic
areas, and major customers. The Company operates in two reportable
segments: standard products and custom and foundry products. For the year
ended December 31, 2000, the Company recorded revenue from customers
throughout the United States; France, the U.K., Finland, Germany, Italy,
Switzerland, Israel, Spain, Ireland, Sweden, and The Netherlands
(collectively referred to as "Europe"); Korea; Japan; Taiwan; Singapore,
Hong Kong, China, and Malaysia (collectively referred to as "Other Asian
Countries"); and Canada.
Net Revenues by Segment (in thousands):
Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Net Revenues:
Standard Products $ 251,446 $ 151,085 $ 99,902
Custom and Foundry Products 71,029 44,037 40,606
---------- ---------- ----------
Total net revenues $ 322,475 $ 195,122 $ 140,508
========== ========== ==========
Geographic Information (in thousands):
2000 1999 1998
------------------ ------------------ --------
Long- Long-
Total Lived Total Lived Total
Revenues Assets Revenues Assets Revenues*
-------- -------- -------- -------- --------
United States of America $153,109 $109,219 $ 80,695 $ 70,210 $ 76,731
Korea 30,305 34 30,037 13 15,441
Japan 19,304 83 14,147 - 12,887
Taiwan 26,187 23 19,112 14 12,444
Other Asian Countries 14,511 6,100 7,593 5,295 7,108
Europe 34,153 1,242 21,364 46 15,550
Canada 44,906 - 22,174 - 347
-------- -------- -------- -------- --------
Total $322,475 $116,701 $195,122 $ 75,578 $140,508
======== ======== ======== ======== ========
* Total revenues are attributed to countries based on "ship to" location
of customer.
59
MICREL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2000, 1999 and 1998
13. QUARTERLY RESULTS - UNAUDITED
(in thousands, except per share
amounts)
Three Months Ended
Mar. 31, June 30, Sep. 30, Dec. 31,
2000 2000 2000 2000
-------- -------- -------- --------
Net revenues $ 67,313 $ 75,845 $ 86,549 $ 92,768
Gross profit $ 38,168 $ 43,857 $ 51,676 $ 55,645
Net income $ 14,234 $ 17,649 $ 21,959 $ 23,829
Net income per share:
Basic $ 0.17 $ 0.21 $ 0.26 $ 0.28
Diluted $ 0.15 $ 0.19 $ 0.23 $ 0.25
Shares used in computing
per share amounts:
Basic 83,206 83,953 84,564 85,211
Diluted 94,264 94,281 95,779 94,422
Three Months Ended
Mar. 31, June 30, Sep. 30, Dec. 31,
1999 1999 1999 1999
-------- -------- -------- --------
Net revenues $ 40,571 $ 44,178 $ 50,091 $ 60,282
Gross profit $ 22,626 $ 24,739 $ 28,128 $ 34,000
Net income $ 7,359 $ 8,139 $ 9,368 $ 11,793 (1)
Net income per share:
Basic $ 0.09 $ 0.10 $ 0.11 $ 0.14 (1)
Diluted $ 0.08 $ 0.09 $ 0.10 $ 0.13 (1)
Shares used in computing
per share amounts:
Basic 80,580 81,352 82,128 82,576
Diluted 87,660 88,904 90,704 91,898
Note (1): Consolidated financial results for the fourth quarter ended
December 31, 1999 reflect a charge of $603,000 related to purchased
in-process technology associated with the acquisition of Altos
Semiconductor.
60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Micrel, Incorporated:
We have audited the consolidated financial statements of Micrel, Incorporated as
of December 31, 2000 and 1999, and for each of the three years in the period
ended December 31, 2000, and have issued our report thereon dated January 23,
2001. Our audits also included the financial statement schedule of Micrel,
Incorporated, listed in Item 14 (a) (2). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 23, 2001
61
SCHEDULE II
MICREL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 1999, and 1998
(Amounts in thousands)
Balance at Additions
Beginning and Charges Bad Debt Balance at
Description of Year to Expenses Write-offs End of Year
---------------------------- ---------- ----------- ---------- -----------
Year Ended December 31, 2000
Accounts receivable allowance $ 2,547 $ 1,795 $ ( 33) $ 4,309
Year Ended December 31, 1999
Accounts receivable allowance $ 1,613 $ 941 $ ( 7) $ 2,547
Year Ended December 31, 1998
Accounts receivable allowance $ 2,015 $ - $ ( 402) $ 1,613
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 29th day of March, 2001.
MICREL, INCORPORATED
By /S/ RAYMOND D. ZINN
---------------------
Raymond D. Zinn
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Raymond D. Zinn and Richard D. Crowley, Jr., and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
---------------------------- ------------------------------ --------------
/S/ RAYMOND D. ZINN President, Chief Executive March 29, 2001
---------------------------- Officer and Chairman of the
Raymond D. Zinn Board of Directors
(Principal Executive Officer)
/S/ RICHARD D. CROWLEY, JR. Vice President, Finance and March 29, 2001
---------------------------- Chief Financial Officer
Richard D. Crowley, Jr. (Principal Financial and
Accounting Officer)
/S/ WARREN H. MULLER Director March 29, 2001
----------------------------
Warren H. Muller
/S/ GEORGE KELLY Director March 29, 2001
----------------------------
George Kelly
/S/ DALE L. PETERSON Director March 29, 2001
----------------------------
Dale L. Peterson
/S/ LARRY L. HANSEN Director March 29, 2001
----------------------------
Larry L. Hansen
63
Micrel, Incorporated
Exhibits Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
------- -----------
2.1 Merger Agreement dated October 21, 1998, by and between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.2 Letter agreement dated November 9, 1998, between Micrel,
Incorporated, MISYN Acquisition Corp. and Synergy Semiconductor
Corporation. (1)
2.3 Escrow Agreement dated November 9, 1998, between Micrel,
Incorporated, John F. Stockton, as representative of the former
Synergy shareholders, and Bank of the West. (1)
2.4 Agreement and Plan of Merger and Reorganization among Micrel,
Incorporated, Electronic Technology Corporation and ETC Acquisition
Sub, Inc., dated as of April 4, 2000 (10)
3.1 Amended and Restated Articles of Incorporation of the Registrant. (2)
3.2 Certificate of Amendment of Articles of Incorporation of the
Registrant. (3)
3.3 Amended and Restated Bylaws of the Registrant. (3)
3.4 Certificate of Amendment of Articles of Incorporation of the
Registrant. (9)
4.1 Certificate for Shares of Registrant's Common Stock. (4)
10.1 Indemnification Agreement between the Registrant and each of its
officers and directors. (3)
10.2 1989 Stock Option Plan and form of Stock Option Agreement. (2) *
10.3 1994 Stock Option Plan and form of Stock Option Agreement. (2) *
10.4 1994 Stock Purchase Plan. (4)
10.6 Lease Agreement dated June 24, 1992 between the Registrant and GOCO
Realty Fund I, as amended August 6, 1992 and February 5, 1993. (2)
10.8 Form of Domestic Distribution Agreement. (3)
10.9 Form of International Distributor Agreement. (3)
10.10 Second Amendment dated February 20, 1995 between the Registrant and
TR Brell Cal Corporation to Lease Agreement dated June 24, 1992
between the Registrant and GOCO Realty Fund I, as amended
August 6, 1992 and February 5, 1993. (4)
10.11 Amended and Restated 1994 Employee Stock Purchase Plan, as amended
January 1, 1996. (5)
10.12 Commercial Lease between Harris Corporation and Synergy Semiconductor
Corporation dated February 29, 1996. (6)
10.13 Standard Industrial/Commercial Single-Tenant Lease Agreement Dated
March 3, 2000 between the Registrant and Rose Ventures II (7)
10.14 Loan and Security Agreement Dated March 8, 2000 between the
Registrant and Bank of the West (8)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. (See Signature Page.)
* Management contract or compensatory plan or agreement.
(1) Incorporated herein by reference to the Company's Current Report
on Form 8-K dated November 9, 1998 filed with the Commission on
November 23, 1998 in which this exhibit bears the same number,
unless otherwise indicated.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 ("Registration Statement"), File No. 33-
85694, in which this exhibit bears the same number, unless
otherwise indicated.
(3) Incorporated by reference to Amendment No. 1 to the Registration
Statement, in which this exhibit bears the same number, unless
otherwise indicated.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, in which this exhibit
bears the same number, unless otherwise indicated.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, in which this exhibit bears the
number 10.14.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, in which this exhibit bears the
number 10.14.
(7) Incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 2000.
(8) Incorporated by reference to exhibit 10.2 filed with the Company's
quarterly report on Form 10-Q for the period ended March 31, 2000.
(9) Incorporated by reference to exhibit 3.1 filed with the Company's
quarterly report on Form 10-Q for the period ended September 30,
2000.
(10) Incorporated by reference to exhibit 10.1 filed with the
Company's registration statement on Form S-3 filed with the S.E.C.
on May 25, 2000.
INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statement No.
333-37808 of Micrel, Incorporated on Form S-3 and in Registration
Statements Nos. 33-87222, 33-90396, 333-10167, 333-89223, 333-52136 and
333-37832 of Micrel, Incorporated on Form S-8 of our reports dated January
23, 2001, appearing in this Annual Report on Form 10-K of Micrel,
Incorporated for the year ended December 31, 2000.
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