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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number 0-24758
MICRO LINEAR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2910085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2092 Concourse Drive 95131
San Jose, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 433-5200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company, as of February 22, 1998, was
approximately $82,139,460. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
February 22, 1998 was 11,611,202.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders to be held May 28, 1998 are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS
Page
PART I.
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 17
Item 3. Legal Proceedings............................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 18
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 19
Item 6. Selected Financial Data...................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 21
Item 8. Financial Statements and Supplementary Data.................................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47
PART III.
Item 10. Directors and Executive Officers of the Registrant........................................... 48
Item 11. Executive Compensation....................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 48
Item 13. Certain Relationships and Related Transactions............................................... 48
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 49
SIGNATURES..................................................................................................... 52
PART I
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk related
factors set forth throughout Part I and elsewhere in this Form 10-K.
Item 1. Business
Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range of
applications within the communications, computer and industrial markets. The
Company's products provide highly integrated systems-level solutions for a
variety of applications, including local area networks, video,
telecommunications, power management, lamp ballast, motor control and data
conversion. The Company utilizes its proprietary design techniques and BiCMOS,
Bipolar and CMOS manufacturing processes to produce proprietary and application
specific products that enable systems designers to achieve increased levels of
systems integration and reduce system costs.
Background
Electronic circuits may be divided into two general categories: digital and
analog (or linear). Digital circuits, such as memories and microprocessors,
process information in the form of bits, or coded electrical signals which take
on only two states ("1" and "0" or "on" and "off"). Analog circuits process
information in the form of continuously varying voltages and currents that have
an infinite number of values or states. Naturally occurring physical phenomena
such as light intensity, position, pressure, force, sound level, temperature,
and velocity are inherently analog in nature. As a result, analog circuits find
wide application in electronic interfaces between digital information processing
systems and the analog "real world" of information storage and transmission
media, power distribution systems, actuators and physical transducers. Principal
applications for analog circuits include data acquisition and conversion, data
communications, industrial controls, instrumentation, magnetic data storage
systems, motor controls and power supply electronics, telecommunications, video
imaging and display systems. The increasing presence of highly integrated
digital electronic systems has increased the need for analog interface functions
in a wide variety of applications.
Analog-to-digital interface functions were originally implemented in
systems as a printed circuit board-level function composed of many off-the-shelf
standard ("building block") integrated circuits performing the various analog
and digital functions associated with the interface. Such interface functions
include filtering, amplification, comparing a voltage level to a reference,
voltage and current references, analog-to-digital ("A/D") conversion,
digital-to-analog ("D/A") conversion and digital data storage and buffering.
This implementation methodology is still in widespread use because it minimizes
design and manufacturing risk and reduces time to market. However, systems
manufacturers generally desire higher levels of performance, smaller form
factors, lower costs, greater reliability and more end product differentiation.
Accordingly, such manufacturers have sought integrated solutions in which these
building block circuits are replaced by a complete electronic system or
subsystem which combines both analog and digital functions on one or a few mixed
signal integrated circuits. Integrated solutions increase system reliability and
performance while decreasing size and cost. Combining analog and digital
functions, however, presents considerable technical obstacles. As compared with
digital circuits, the elements that comprise an analog circuit generally have
greater variety, are less repetitive and require more precise placement within
the circuit layout to assure satisfactory circuit performance. A semiconductor
process designed for analog can easily accommodate digital functions while a
digital process often cannot deliver the most basic of analog designs. Analog
design also requires a much higher level of circuit skills because the design is
implemented at the device level. These factors make it more difficult to achieve
the high levels of integration normally associated with digital circuits. As a
result of these and other factors, high performance analog circuit design is
extremely difficult. In addition, the Company believes that the number of
qualified analog designers is far more limited than digital designers and that
many customers are limited at the systems-level in applying analog design
skills. Furthermore, the complexity and variability of analog design has made it
difficult to develop automated design tools similar to those available for
digital circuit design. The traditional simulation and testing methodologies for
analog and digital design are also incompatible which further hampers the
problem of moving predictably from a design to a functional mixed signal
integrated circuit. The increasing complexity of electronic systems and the
difficulty of effectively integrating digital and analog functionality poses
significant technical hurdles for systems designers.
Strategy
Micro Linear's goal is to be a leading supplier of highly integrated analog
and mixed signal circuits for applications that require systems-level features.
To achieve this objective, the Company has adopted the following strategies:
Target High Growth Applications. Micro Linear targets high growth
applications that require substantial analog and mixed signal content and that
derive significant benefits from the use of the Company's systems-level
expertise. The Company focuses on innovative proprietary analog and mixed-signal
products which provide high performance and cost-effective solutions for a
variety of applications, including networking, mass storage, video, power
management, telecommunications and portable computing.
Develop Highly Integrated Circuits with Systems-Level Features. Micro
Linear uses its analog and mixed signal design expertise to integrate an entire
electronic subsystem or several analog building block circuits into a single
circuit or chipset. Micro Linear designs and develops highly integrated mixed
signal proprietary circuits that incorporate systems-level features, thereby
reducing the size and cost of the customer's electronic system, while providing
greater functionality, performance and reliability. The combination of highly
integrated circuits with sophisticated systems-level features results in
proprietary products for Micro Linear. The uniqueness and complexity of such
products, has enabled the Company to maintain its position as the sole source
supplier for a number of its products.
Offer a Broad Range of Products. Micro Linear offers a broad range of
innovative proprietary and application specific analog and mixed signal products
for a variety of applications within the communications, computer and industrial
markets. The Company provides customers the opportunity to identify the product
features that address the technical and time to market requirements of each
customer's specific application. By working closely with its customers to
identify desirable features and functionality, Micro Linear has expanded the
number of applications for its products.
Facilitate Rapid Time to Market. Micro Linear utilizes innovative Bipolar
and BiCMOS tile array design methodologies on some products to expedite the
development of cost-effective, high performance analog and mixed signal
circuits. These methodologies enable Micro Linear to reduce time to market for
those standard product designs and to modify such designs rapidly to satisfy
specific customer requirements. This tile array approach enables Micro Linear to
offer its customers many of the advantages of custom circuits with significantly
lower development cost, reduced technical risk and faster time to market.
Establish Multiple Sources of Wafer Supply. The Company has established
relationships with outside foundries for its wafer requirements in order to
avoid the substantial fixed costs and capital expenditures associated with
maintaining its own wafer fabrication facility. Micro Linear seeks to obtain at
least two sources of wafer supply for each of its manufacturing processes in an
effort to obtain competitive wafer pricing and reduce the risk of supply
shortages. This practice enables the Company to devote more of its resources to
the design, development and marketing of its products and to access diverse
manufacturing technologies. Micro Linear has chosen to use foundry specific
BiCMOS technologies for certain products. These proprietary technologies are
single sourced.
Markets, Applications and Products
The Company develops standard and semi-standard products for a variety of
applications within the communications, computer and industrial markets. The
Company has focused primarily on products for use with applications in local
area networks, video and power management. Within these markets the Company
supplies products to 10 different application segments with focus on local area
networks, bus products, video, power supply, battery management and motor
controllers. The Company intends to continue the expansion of its applications,
product offerings and customer base.
The Company's approach to new product development is driven primarily by
application specific requirements within its targeted markets. The Company
relies upon its engineering and marketing personnel to identify market
opportunities for new high performance products, to maintain close working
relationships with targeted customers, to determine product opportunities that
apply to a broad range of customers within the Company's target markets and to
define mixed signal products for specific applications.
The following table illustrates the three major markets and the various
applications and product categories served by the Company:
COMMUNICATIONS COMPUTER INDUSTRIAL
LOCAL AREA NETWORKS BUS PRODUCTS POWER MANAGEMENT
- ETHERNET - BUSSCSI TERMINATORS - SWITCHED-MODE POWER SUPPLY
- 10/100 ETHERNET - HIGH SPEED ANALOG - POWER FACTOR CONTROL
- FDDI BUFFERS - BATTERY MANAGEMENT
- TOKEN RING - CLOCK GENERATORS - FLUORESCENT LIGHT BALLAST
- ATM - LCD BACK LIGHT CONTROL
VIDEO PRODUCTS - INDUSTRIAL MOTOR CONTROL
TELECOMMUNICATIONS - FILTERS
- VOICE BAND NCTE - CLOCK GENERATION DATA CONVERSION
AND LOCKING - A/D CONVERTERS
- VIDEO A/D - D/A CONVERTERS
MASS STORAGE
- HARD DISK DRIVE
- MAGNETIC TAPE DRIVES
- SPINDLE MOTOR CONTROL
Communications Market -- Local Area Network Circuits
The local area network (LAN) market has experienced significant growth in
recent years due to the transition to distributed computing, with personal
computers and workstations replacing centralized mainframes and users requiring
immediate and continuous access to information throughout an organization. The
emergence of increasingly sophisticated software applications, such as imaging,
multimedia and remote communications requires innovative, high performance
networking technology which must provide for increased data throughput and
enhanced reliability.
The Company's local area network circuits are designed to allow for the
transmission of electronic signals over various media, such as twisted pair
copper wire and fiber optic cable. The Company's fiber optic quantizers respond
to very small, fast signals from fiber optic receiver ports and restore the
signal to larger amplitudes with a minimum of signal and timing distortion. In
1988, Micro Linear developed the first fiber optic quantizer and transceiver for
Ethernet fiber optic links between network hubs. In 1993, Micro Linear developed
the first twisted pair transceiver for the fiber distributed digital interface
(FDDI) that runs at 125 megabits per second. The Company is also a supplier of
circuits into 100Mb Ethernet applications which are gradually displacing the
10Mb Ethernet networks.
Communications Market -- Telecommunications Circuits
The Company's telecommunications products are designed to provide high
performance and low noise and have tended to have long product life cycles. The
addition of new lines and switching equipment to upgrade existing analog
telephone lines continues to drive the demand for the Company's analog line
conditioning equipment. These mixed signal telecommunications circuits include
programmable attenuators, equalizers, tone detectors and sinewave generators.
The Company's telecommunications circuits conform to the Network Communications
Terminating Equipment (NCTE) standard, which is predominantly a North American
specification for electronic telephone line conditioning equipment. Telephone
line characteristics vary with line length, which cause distortion of the analog
voice signals. NCTE lines are generally free of this distortion because they
utilize devices such as those manufactured by the Company. The Company designs
and sells various circuits which enable telephone service providers to
compensate the trunk lines from remote locations for uneven transmission of
different frequencies and other circuits which control the signal amplitude to
compensate for line length. The ability of the telephone transmission equipment
to compensate automatically for this potential distortion enhances the quality
and reliability of the voice transmission.
Computer Market -- Bus Circuits
The Company offers a family of bus products that provide performance
improvements to the digital interfacing of data, address buses and clocking by
utilizing analog circuit techniques to overcome the limitations of digital
design solutions. These devices such as high-speed buffers and bus terminators
are used in personal computers, workstations, file servers and embedded
applications of microprocessors.
Computer Market -- Video Circuits
In 1996, Micro Linear added a new line of products to its portfolio - video
circuits. This product line applies the Company's analog expertise to video
functions such as filters, clock synchronization and generation as well as
encoders and decoders. The resulting circuits can be used in video
teleconferencing, video editing, LCD projectors, set top and web television
applications. As an extension of PC applications, the Company believes that
applications for video teleconferencing, computer - television interface and
video editing will offer a growth opportunity over the next several years.
Computer Market -- Mass Storage Circuits
Micro Linear supplies analog circuits which are used in Winchester hard
disk drives ("HDDs"), magnetic tape drives and removable media drives. These
data storage devices are incorporated into personal computers, workstations and
other office automation products. Although Micro Linear has significant
experience in the area of high speed, signal level processing that has been used
in many of its products the Company is no longer doing any new product design in
this segment.
Industrial Market -- Power Management Circuits
Micro Linear has focused its power management product development efforts
in four areas: switched-mode power supply, power factor control, DC to DC
converters to manage battery power and fluorescent lamp ballast controllers. The
trend toward smaller, lighter weight and more power-efficient computer and other
portable electronic systems has created significant opportunities for advanced
power supply controllers and battery management devices. The Company's products
address the needs of systems designers for power management circuits that can
deliver the necessary power in a highly efficient manner, while extending
battery life and minimizing heat, size and weight.
Industrial Market -- Motor Control Industrial Market -- Motor Control
Micro Linear has used its extensive knowledge of brushless DC motors to
define and develop brushless DC and AC motor controllers for industrial
applications. The DC motor products incorporate a start-up algorithm that allows
the motor to start by turning on a power switch. The motor controller reduces
the cost of the system by eliminating the need for Hall-effect sensors. The AC
motor controllers allow lower cost AC motors to have continuous speed control,
for 1, 2 and 3 phase AC motors.
Industrial Market -- Data Conversion Circuits
Micro Linear currently offers a line of nineteen analog-to-digital
converters and six digital to analog converters. Micro Linear's 12 bit analog to
digital circuits utilize a proprietary, patented self- calibrating method for
conversion.
Sales and Distribution
Micro Linear targets high growth markets by designing its products into the
electronic systems of systems manufacturers within the communications, computer
and industrial markets. The Company seeks to achieve design wins by focusing its
sales efforts at prospective customers' technical design engineers and
management personnel who are responsible for new product design and component
selection. This effort is coordinated by the Company's direct sales managers who
support a worldwide network of independent sales representatives and
distributors. The sales representatives and distributors sell the Company's
products directly to customers and are assisted by the Company's Field
Applications Engineers (FAE's) and applications engineering group. The Company's
field sales offices are located in San Jose, Boston and Chicago.
The Company currently sells its products in North America through 16
independent sales representative organizations and two distributors. In 1997 and
1996, sales to Insight Electronics, a domestic distributor, represented 15% and
14% of the Company's net revenues, respectively. In 1995, sales to Amtron
International, a domestic distributor, and Insight Electronics represented 12%
and 13% of the Company's net revenues, respectively. In 1997, 1996 and 1995,
sales through the Company's domestic distributors represented approximately 17%
of net revenues for each year. The Company defers recognition of revenue and
gross margin derived from sales to domestic distributors until such distributors
resell the Company's products to their customers. In addition, the Company
offers its domestic distributors product return privileges and, in the event the
Company lowers the prices of its products, price protection on unsold inventory,
which the Company believes is typical in the semiconductor industry. To date,
product returns under this policy have not had a material effect on the
Company's operating results.
Outside of the United States, the Company's products are sold direct to
international customers and through 16 independent international sales
representatives and distributors, which accounted for approximately 53%, 38% and
31% of the Company's net revenues in 1997, 1996 and 1995, respectively. The
Company expects international sales to continue to represent a significant
portion of product sales. The Company defers the gross margins from shipments to
international distributors until such distributors notify the Company of product
sales to their customers. Due to the magnitude of its international sales, the
Company is subject to the risks of conducting business internationally. These
risks include unexpected changes in regulatory requirements, changes in
legislation or regulations relating to the import or export of products, delays
resulting from difficulty in obtaining export licenses for certain technology,
trade barriers, tariff increases, quotas and other barriers and restrictions,
and the burdens of complying with a variety of foreign laws. The Company is also
subject to general geo-political risks, such as political and economic
instability and changes in diplomatic and trade relationships. Through the end
of 1997, the Company had not experienced any negative impact as a result of the
financial and stock market dislocations that occurred in the Asian financial
markets. However, there can be no assurance that regulatory, geo-political and
other factors will not adversely affect the Company's operations in the future
or require the Company to modify its current business practices. Because sales
of the Company's products are denominated in United States dollars, fluctuations
in the value of the dollar could increase the prices of the Company's products
in local currencies and make the Company's products relatively more expensive
than competitors' products that are denominated in local currencies.
Additionally, currency exchange fluctuations could reduce the cost of products
from the Company's foreign competitors. Substantially all of the Company's
international sales must be licensed by the Office of Export Administration of
the U.S. Department of Commerce. The Company has not experienced any material
difficulties to date in obtaining export licenses; however, there can be no
assurance that such export licenses will be available in the future.
A relatively small number of customers have accounted for a significant
portion of the Company's net revenues in each of the past several years. During
1997, 1996 and 1995, the Company's top ten customers, excluding domestic
distributors, accounted for approximately 52%, 47% and 50% of net revenues,
respectively. The Company anticipates that it will continue to be dependent on a
limited number of key customers for a significant portion of its net revenues.
The reduction, delay or cancellation of orders from one or more significant
customers for any reason could materially and adversely affect the Company's
operating results. In addition, since the Company's products are often sole
sourced to its customers, the Company's operating results could be materially
and adversely affected if one or more of its major customers were to develop
other sources of supply. Furthermore, in view of the relatively short product
life cycles in the computer network equipment and mass storage markets, the
Company's operating results would be materially and adversely affected if one or
more of its significant customers were to select circuits manufactured by one of
the Company's competitors for inclusion in future product generations. The
Company also is entirely dependent upon sales representatives and distributors
for the sales of its products to systems manufacturers. There can be no
assurance that the Company's current customers will continue to place orders
with the Company, that orders by existing customers will continue at the levels
of previous periods or that the Company will be able to obtain orders from new
customers. Loss of one or more of the Company's current customers or a
disruption in the Company's sales and distribution channels could materially and
adversely affect the Company's business and operating results.
A substantial majority of the Company's net revenues are derived from sales
of products for the computer networking market. Sales of the Company's products
to network equipment manufacturers accounted for approximately 65%, 57% and 47%
of the Company's net revenues in 1997, 1996 and 1995, respectively. Sales of one
of the Company's computer networking products represented 4%, 10% and 12% of the
Company's net revenues during 1997, 1996 and 1995, respectively. The computer
network equipment market is characterized by intense competition, relatively
short product life cycles and rapid technological change. In addition, the
computer network equipment market has undergone a period of rapid growth and
consolidation in the last few years. The Company has attempted to expand its
product mix and customer base and, as a result, does not currently expect that
revenues from the computer networking market to increase significantly as a
percentage of net revenues in 1998. The Company's business and results of
operations would be materially and adversely affected in the event of a
significant slowdown in the computer network equipment market.
acklog
Backlog
At December 31, 1997, the Company's backlog was approximately $14.8
million, compared to approximately $14.9 million at December 31, 1996. Backlog
consists of released purchase orders scheduled for shipment within six months
following the order date. Although the Company's contract terms vary from
customer to customer, customers for standard products may generally cancel or
reschedule orders to purchase standard products without significant penalty to
the customer. As a result, the quantities of the Company's products to be
delivered and their delivery schedules are frequently revised by customers to
reflect changes in such customers' needs. Since backlog can be canceled or
rescheduled, the Company's backlog at any time is not necessarily indicative of
future revenue.
Technology
The Company's new products are incorporated into a customer's products or
systems at the design stage. However, design wins, which can often require
significant expenditures by the Company without any assurance of success, often
precede the generation of volume sales, if any, by a year or more. Moreover, the
value of any design win will largely depend upon the commercial success of the
customer's product and on the extent to which the design of the customer's
electronic system accommodates components manufactured by the Company's
competitors. No assurance can be given that the Company will achieve design wins
or that any design win, particularly with regard to application specific
products, will result in significant future revenues.
Design
Micro Linear's proprietary technology depends on the advanced analog and
mixed signal circuit design skills of its analog design engineers. The Company
utilizes analog and mixed signal circuits and cell simulation for digital and
analog circuit elements and extensive testing capabilities to assure
functionality and performance of final products. The Company has assembled a
team of highly skilled analog design engineers, with significant analog design
experience who are supported by a team of systems applications engineers,
product engineers and test engineers who perform various support functions and
allow the designers to focus on the core elements of the design. In addition,
Micro Linear has developed simulation models that facilitate timely and
predictable implementation of analog and mixed signal integrated circuits. As a
result of performance demands and the complexity of analog circuits, the mixed
signal design and development process is a multi-disciplinary effort, requiring
substantial systems-level expertise, including knowledge of particular formats,
standards and architectural constraints associated with a variety of targeted
end-user applications. The Company also utilizes standard electronic design
automation software to perform the schematic capture, simulation, design rule
checks and layout verification of its circuit.
Process
The Company seeks to employ the most appropriate process technology for a
given application. The Company's process technologies include Bipolar, CMOS and
BiCMOS processes.
Bipolar. The Company's Bipolar products generally utilize Micro Linear's
proprietary tile array design methodology which was developed to enhance time to
market for application specific standard and semi-standard products. The
Company's tile array circuits are arrays of component tiles of varying
complexity which are prefabricated for specific market applications. Tile array
designs, along with sophisticated computer-aided design (CAD) tools which
simulate expected performance, allow short prototyping schedules for the high
volume production of low cost, application specific products. The base-layers on
a tile array Bipolar wafer are processed by the subcontracted foundries,
producing a base tile array which contains a collection of transistors, diodes
and passive components, such as resistors and capacitors. The final steps in the
Company's Bipolar product manufacturing process are primarily performed in the
Company's back-end manufacturing facility. These final steps consist of defining
the two layers of metal interconnect and a protective layer of silicon dioxide.
The wafer is unique when the interconnecting layers are defined. The Company
inventories base wafers and determines the end product by defining the metal
interconnect in-house, thereby reducing the development time for new products,
as well as the response time for orders on Bipolar products which are in
production. Wafers for certain high volume products are fabricated completely by
subcontracted foundries.
The Company uses its Bipolar technology for networking, mass storage and
power management applications such as networking quantizer and transceivers,
mass storage servo and motor control circuits, switched-mode power management
circuits and DC to DC converters to manage battery power. Bipolar process
technology offers certain advantages for many circuit implementation techniques
compared to CMOS, such as lower noise, higher frequency, higher precision and
higher speed for given line widths.
CMOS. The Company's CMOS devices are based either on standard cells or full
custom circuits and are used in applications, such as telecommunications, data
communications and data conversion circuits, which require minimal power
consumption and increased density. CMOS technology permits the design of
circuits with lower power dissipation and a higher level of digital integration
than Bipolar circuits.
BiCMOS. The Company's BiCMOS processes combine the low power dissipation
capabilities of CMOS, and the high performance capabilities of Bipolar. As a
result, BiCMOS processes allow the design of circuits with lower power
dissipation than CMOS or Bipolar devices. The feature size of these processes
allows for significantly increased density of the logic functions that are
necessary for advanced levels of mixed signal integration. The Company believes
that these technologies represent the core of the Company's future product
offerings and are critical to its ability to continue to develop innovative,
highly complex, high performance mixed signal products that reduce the costs of
its customers' systems due to the increased functional density of the Company's
products.
In addition to the high volume 5 volt BiCMOS process, the Company is also
utilizing a 18 volt BiCMOS process primarily for power management products and
motor controllers. The Company's first products have been completed on a .8
micron BiCMOS process that will enable higher performance circuits with smaller
feature sizes. These products are now phasing into production. Initial modeling
efforts and designs have begun utilizing a .6 micron BiCMOS process. This
process will offer smaller feature size and higher performance than the .8
micron process. If the production of these products does not proceed in a timely
manner due to technical issues, manufacturing yield limitations or other
factors, the Company's business and results of operations could be materially
and adversely affected.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to new semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve manufacturing yields. Semiconductor design
and process methodologies are subject to rapid technological change, requiring
large expenditures for research and development. If the Company is unable to
develop or obtain access to advanced wafer processing technologies as they
become needed, or is unable to define, design, develop and introduce competitive
new products on a timely basis, its future operating results will be materially
and adversely affected. In addition, if the Company is unable to transfer and
install such new process technologies to one or more of its wafer foundries in a
timely manner, its business and results of operations could be materially and
adversely affected.
The Company believes the successful introduction of new products using
BiCMOS technology will be critical to its future success. There can be no
assurance that the Company will be able to obtain alternative or more advanced
process technologies in a timely manner. If such efforts prove unsuccessful, the
Company's business and operating results would be materially and adversely
affected.
The Company expects future BiCMOS circuit designs to be developed on both
application specific functional arrays and full custom layouts. The Company
currently uses its BiCMOS technology for its local area network transceivers,
wireless radio, video products, bus products, motor controllers, power supply
controllers and for battery management circuits. The inability of the Company to
select and design BiCMOS products that satisfy particular market requirements,
to succeed in having its BiCMOS products designed into its customers' electronic
systems or to establish the Company as a preferred supplier of BiCMOS solutions
within its targeted market areas would have a material adverse impact on the
Company's business and operating results.
The Company's success also depends upon its ability to develop new analog
and mixed signal circuits for existing and new markets, to introduce such
products in a timely manner and to have such products selected for design into
new product generations of leading systems manufacturers. The development of
these new circuits is highly complex and from time to time the Company has
experienced delays in completing the development of new products. Successful
product development and introduction depends on a number of factors, including
proper new product definition, timely completion and introduction of new product
designs, availability of foundry capacity, achieving acceptable manufacturing
yields and market acceptance of the Company's and its customers' products. There
can be no assurance that the Company will be able to adjust to changing market
conditions as quickly and cost-effectively as necessary to compete successfully.
Furthermore, there can be no assurance that the Company will be able to
introduce new products in a timely manner or that such products will achieve
market acceptance. In addition, there can be no assurance that the electronic
systems manufactured by the Company's customers will be introduced in a timely
manner or that such systems will achieve market acceptance. The Company's
failure to develop and introduce new products successfully would materially and
adversely affect its business and operating results. In particular, there can be
no assurance that the Company will succeed in developing innovative BiCMOS
circuits in a timely manner, that its BiCMOS circuits will be designed into the
electronic systems of current or prospective customers or that the Company will
be able to establish itself as a supplier of BiCMOS solutions within its
targeted market applications. The Company's inability to introduce BiCMOS
products in a timely manner or to obtain market acceptance of such BiCMOS
products would materially and adversely affect the Company's business and
operating results.
Manufacturing
The Company believes that utilizing outside foundries to meet wafer supply
requirements enables the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and access diverse manufacturing
technologies. The Company currently intends to continue to utilize its outside
foundries for all of its wafer requirements. The Company's Bipolar wafers are
manufactured by four foundries located in Japan, Germany and California. A
substantial portion of the Company's Bipolar wafers are manufactured by one
foundry in Japan and a substantial portion of the Company's BiCMOS wafers are
manufactured by one foundry in Taiwan. There are certain significant risks
associated with the Company's reliance on outside foundries, including the lack
of both assured wafer supply and control over delivery schedules, the
unavailability of or delays in obtaining access to key process technologies and
limited control over manufacturing yields and production costs. In addition, the
manufacture of integrated circuits is a highly complex and technically demanding
process. Although the Company has undertaken to diversify its sources of wafer
supply and works closely with its foundries to minimize the likelihood of
reduced manufacturing yields, the Company's foundries have from time to time
experienced lower than anticipated manufacturing yields, particularly in
connection with the introduction of new products and the installation and
start-up of new processes. Such reduced yields have at times materially
adversely affected the Company's operating results. There can be no assurance
that the Company's foundries will not experience lower than expected
manufacturing yields in the future, which could materially and adversely affect
the Company's business and operating results. In addition, dependence on
foundries located outside of the United States subjects the Company to numerous
risks, including exchange rate fluctuations, export and import restrictions,
trade sanctions, political instability and tariff increases. In particular, the
Company's dependence on a Taiwanese foundry for supply of BiCMOS wafers subjects
the Company to risks associated with political instability in that region.
All of the Company's foundries manufacture wafers utilizing the Company's
proprietary processes, except for two foundries which manufacture wafers for the
Company utilizing each foundry's proprietary BiCMOS process. Although the
Company has implemented each of its own processes at more than one foundry in
order to obtain multiple sources of supply for some of its products, to date,
the Company has not developed multiple sources of wafer supply for all of its
products. Multiple foundry sources for most of its products increase the
Company's ability to supply its customers with those products and reduce the
Company's dependency on any single foundry and any single circuit or chipset. In
the event the Company is unable to implement each of its processes at more than
one foundry or in the event that the Company is utilizing a foundry specific
technology or in the event it is unable to manufacture one or more products at
multiple foundries, the Company may be more likely to experience a shortage of
wafer supply for certain products which could have a material adverse affect on
the Company's business and operating results.
The Company purchases its wafers from outside foundries pursuant to
purchase orders and generally does not have a guaranteed level of wafer capacity
at such foundries. Therefore, the Company's wafer suppliers could choose to
prioritize capacity for other uses or reduce or eliminate deliveries to Micro
Linear on short notice. Accordingly, there is no assurance that the Company's
foundries will allocate sufficient wafer capacity to Micro Linear to satisfy the
Company's requirements. In addition, the Company has been, and expects to be in
the future, particularly dependent upon a limited number of its foundries for
its wafer requirements. Any sudden demand for an increased amount of wafers or
sudden reduction or elimination of any existing source or sources of wafers
could result in a material delay in the shipment of the Company's products.
There can be no assurance that material disruptions in supply, which have
occurred periodically in the past, will not occur in the future. Any such
disruption could have a material adverse effect on the Company's operating
results. In the event of any such disruption, if the Company were unable to
qualify alternative manufacturing sources for existing or new products in a
timely manner or if such sources were unable to produce wafers with acceptable
manufacturing yields, the Company's business and operating results would be
materially and adversely affected.
The Company has granted nontransferable, limited process licenses to each
of its foundries to utilize the Company's processes to manufacture and sell
wafers to other foundry customers. Although the Company seeks to protect its
proprietary technology, particularly its design methodology, there can be no
assurance that certain of the Company's foundries will not attempt to reverse
engineer the Company's products and manufacture and sell products which compete
with those manufactured and sold by the Company.
The Company has a production staff in place to support its outside
foundries in order to ensure design and process compatibility, product quality
and reliability. Most of the Bipolar wafers purchased by the Company are
substantially completed, other than the addition of the final metal
interconnections which the Company completes at its San Jose, California
facility. This approach allows the Company to produce finished tile array-based
standard and semi-standard products rapidly from its inventory of partially
completed Bipolar base arrays. Some of the high volume Bipolar wafers are
completely processed at certain foundries. The Company also applies a tile array
approach to certain of its BiCMOS products. Such BiCMOS products are inventoried
and later completed at the foundry. The Company purchases completely finished
CMOS, BiCMOS and a limited number of Bipolar wafers to which it adds no
additional process steps, other than incoming wafer quality tests and specific
electrical product testing prior to assembly.
Each die on all of the Company's wafers is electrically tested for
performance compliance and the wafers are subsequently sent to subcontractors
for assembly. After acceptance tests are performed on substantially completed
Bipolar wafers, the Company adds the final metal interconnections. Subsequently,
each die on the Company's Bipolar wafers is then electrically tested for
performance compliance. The Company's CMOS and BiCMOS wafers are received fully
completed. After acceptance tests are performed on the completed wafers, each
die is electrically tested for performance compliance. During the assembly
process, the wafers are separated into individual devices which are then placed
in packages. Following assembly, the packaged units are returned to the Company
for final testing and final inspection prior to shipment to customers. Extensive
electrical testing is individually performed on all circuits at the Company's
facilities, using advanced automated test equipment capable of high volume
production to ensure that the circuits satisfy specified performance levels.
From time to time, the Company has experienced difficulty in expeditiously
completing testing of its products. If such problems are encountered in the
future, shipments to customers could be delayed.
The manufacture of integrated circuits is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment, defects
in the masks used to print circuits on a wafer, difficulties in the fabrication
process or other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer to be nonfunctional. In
addition, yields can be affected by minute impurities in the environment or
other problems that occur in the complex manufacturing process. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy. At
various times in the past, the Company has experienced lower than anticipated
yields that have adversely affected production and, consequently, operating
results. The manufacturing processes utilized by the Company are continuously
being improved in an effort to increase yield and product performance. Process
changes can result in interruptions in production or significantly reduced
yields. In particular, new process technologies or new products can be subject
to especially wide variations in manufacturing yields and efficiency. There can
be no assurance that the Company will not experience irregularities, adverse
yield fluctuations or other manufacturing problems in its manufacturing
processes, any of which could result in production interruption or delivery
delays and materially and adversely affect the Company's business and results of
operations. Although the Company currently operates a small back-end
manufacturing facility which performs limited wafer fabrication functions to
certain of the Company's Bipolar circuits, the Company currently intends to
continue to rely exclusively upon its outside foundries for its wafer
fabrication requirements.
Research and Development
Micro Linear believes that it is essential to define, design, develop and
introduce new products offering technological innovations in order to take
advantage of market opportunities and to compete successfully. The Company is
currently engaged in the development of new standard and semi-standard products
for a broad range of customer applications in the communications, computer and
industrial markets. The Company's product development strategy is focused on
highly integrated products providing increased levels of performance and
functionality offering higher frequency, high or low operating voltage,
depending upon the application, lower power and smaller size. The Company's
development efforts are focused on the design of products based on certain
foundry proprietary processes. To develop value-added mixed signal products for
specific market categories, the Company must continue to obtain and develop
extensive knowledge regarding its customers' systems. This "systems knowledge"
is acquired through technical interactions with the Company's customers and
potential customers in its targeted market categories. To this end, the Company
has assembled a team of experienced analog and mixed signal engineers in a
variety of disciplines, including design, systems, product, test, applications
and marketing. The Company's engineers work to upgrade the Company's design
methodology and process technologies, and to investigate and develop with its
foundry partners new technologies for new generations of products.
The Company's design engineers are organized into five design groups
consisting of a total of approximately 40 research and development design
engineers, supported by approximately 34 additional technical professionals in
research, development and manufacturing engineering. In 1997, 1996 and 1995, the
Company spent approximately $12.0 million, $11.2 million and $10.1 million,
respectively, on research and development. The Company expects that it will
continue to spend substantial funds on research and development activities.
Competition
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, short product life cycles, cyclical
market patterns and heightened international and domestic competition in many
markets. The analog and mixed signal segment of the semiconductor industry is
also highly competitive, and many semiconductor companies presently compete or
could compete in one or more segments of the Company's target markets. Most of
the Company's current and prospective competitors offer broader product lines
and have substantially greater financial, technical, manufacturing, marketing
and other resources than the Company. In addition, many of the Company's
competitors maintain their own wafer fabrication facilities, which the Company
considers to be a competitive advantage. The Company's competitors vary in each
product area. Its principal competitors in data communications are National
Semiconductor Corporation ("NSC") and Level One Corporation. In the mass storage
product area, the Company competes principally with Silicon Systems, Inc. (a
subsidiary of Texas Instruments Incorporated). In the power management products
area, its principal competitors are Linear Technology Corporation, Maxim
Integrated Products and Unitrode Semiconductor. The Company also competes with
manufacturers of discrete analog components, particularly for power management
applications within the industrial market. As the Company attempts to expand its
product line, it expects that competition will increase with these and other
domestic and foreign companies. Although foreign companies, particularly
Japanese companies, have not traditionally focused on the high performance
analog and mixed signal markets, they have the financial and technical resources
to participate effectively in these markets, and there can be no assurance that
they will not do so in the future. Because the Company does not currently
manufacture its own semiconductor wafers, it is also vulnerable to process
technology advances utilized by competitors to manufacture products offering
higher performance and lower cost. Accordingly, the Company believes it is
disadvantaged in comparison to larger companies with wafer manufacturing
facilities, broader product lines, greater technical and financial resources and
greater service and support capabilities. In addition, certain of the Company's
products are generally sole sourced to its customers, and the Company's
operating results could be adversely affected if its customers were to develop
other sources for the Company's products. There can be no assurance that the
Company will compete successfully with new or existing competitors in the
future.
The Company believes that its ability to compete successfully depends on a
number of factors, including breadth of product line, the ability to introduce
innovative products rapidly, access to advanced process technologies at
competitive prices, product functionality and performance, successful and timely
product development, price, adequate foundry capacity, manufacturing yields,
efficiency of production, delivery capability, customer support and protection
of the Company's intellectual property. The Company believes that product
innovation, quality, reliability, performance and the ability to introduce
products rapidly are more important competitive factors than price in its target
markets because the Company competes primarily at the stage that system
manufacturers design integrated circuits into their electronic systems. At the
design-in stage, there is less price competition, particularly where there is
only one source of an application specific product. The Company believes that,
by virtue of its analog and mixed signal expertise and rigorous design
methodology, it competes favorably in the areas of rapid introduction, product
innovation, quality, reliability and performance, but it may be at a
disadvantage in comparison to larger companies with broader product lines,
greater technical and financial resources and greater service and support
capabilities. As a result of the foregoing or other factors, there can be no
assurance that the Company will be able to compete successfully in the future.
Patents and Licenses
The Company's success depends in part on its ability to obtain patents and
licenses and to preserve other intellectual property rights covering its
products and development and testing tools. To that end, the Company has
obtained certain patents and intends to continue to seek patents on its
inventions when appropriate. Specifically, the U.S. Patent and Trademark Office
has issued eighteen patents and allowed ten more patents to the Company. The
Company's issued patents expire from January, 2007 to November, 2017. The
Company intends to continue to seek patents on its products, as appropriate, and
currently has submitted applications for seventeen more U.S. patents with an
additional nine patents in process. The Company believes that although these
patents may have value, given the rapidly changing nature of the semiconductor
industry, the Company depends primarily on the technical competence and
creativity of its technical work force.
The Company attempts to protect its trade secrets and other proprietary
rights through formal agreements with employees, customers, suppliers and
consultants. Although the Company intends to protect its intellectual property
rights vigorously, there can be no assurance that these and other security
arrangements will be successful. The process of seeking patent protection can be
long and expensive and there can be no assurance that patents, or any new
patents that may be issued, will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to the Company. The Company
may be subject to or may initiate interference proceedings in the patent office,
which can demand significant financial and management resources. As is typical
in the semiconductor industry, the Company has from time to time received, and
may in the future receive, communications from third parties asserting patents,
mask-work rights, or copyrights on certain of the Company's products and
technologies. The Company is presently involved in litigation with a party that
has claimed infringement of their patent. The financial impact of this
litigation is not expected to have a material impact on the financial results of
the Company. However, in the future, a third party could make a valid claim and
if a license were not available on commercially reasonable terms, the Company's
operating results could be materially and adversely affected. Litigation, which
could result in substantial cost to and diversion of resources of the Company,
may also be necessary to enforce patents or other intellectual property rights
of the Company or to defend the Company against claimed infringement of the
rights of others. The failure to obtain necessary licenses or the occurrence of
litigation relating to patent infringement or other intellectual property
matters could have a material adverse affect on the Company's business and
operating results.
The Company currently does not have any third parties that have been
granted license rights to manufacture and sell any of its products. The Company
has no current plans to grant product licenses with respect to any products;
however, the Company may find it necessary to enter into product licenses in the
future in order, among other things, to secure foundry capacity. The Company has
granted nontransferable, limited process licenses to each of its foundries to
utilize the Company's proprietary processes to manufacture and sell wafers to
other foundries.
Employees
As of December 31, 1997, the Company had 252 full-time employees, 125 of
whom were engaged in manufacturing (including test development, quality and
materials functions), 74 in research and development, 37 in marketing,
applications and sales, and 16 in finance and administration. The Company's
employees are not represented by any collective bargaining agreements and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
The Company's success depends to a significant extent upon the continued
service of its executive officers and other key management and technical
personnel, and on its ability to continue to attract, retain and motivate
qualified personnel, particularly experienced mixed signal circuit designers and
systems application engineers. The competition for such employees is very
intense. The Company has from time to time lost key analog designers, executive
officers and other personnel to start-up or to established companies. The loss
of the services of one of the Company's design engineers, executive officers or
other key personnel, or the Company's inability to recruit replacements for such
personnel or to otherwise attract, retain and motivate qualified personnel,
could have a material adverse affect on the Company.
Executive Officers
The executive officers the Company are as follows:
Name Age Position
Arthur B. Stabenow............... 59 Chairman of the Board, Chief Executive Officer and President
Carlos A. Laber.................. 46 Vice President, Engineering
Chris A. Ladas................... 52 Vice President, Operations
Ray A. Reed...................... 53 Vice President, Business Development
J. Philip Russell................ 58 Vice President, Finance and Administration and Chief Financial Officer
John K. Stahl.................... 51 Vice President, Sales
Paul E. Standish................. 55 Vice President, Marketing and Applications
Mr. Stabenow has served as the Chief Executive Officer and a director of
the Company since April 1986, and has served as Chairman of the Board since
August 1989. Mr. Stabenow also served as President of the Company from April
1986 to January 1996 and since April 1996. Mr. Stabenow has over 30 years of
experience in the semiconductor industry. From January 1979 to March 1986, Mr.
Stabenow was employed as a Vice President and General Manager at NSC. Mr.
Stabenow received his M.B.A. degree at the University of New Haven. Mr. Stabenow
also serves as a member of the board of directors of Zoran Corporation and
Applied Micro Circuits Corporation, both semiconductor manufacturers.
Mr. Laber was promoted to Vice President, Engineering in December 1995 and
prior to this time, he served as Director of Engineering and Senior Staff Design
Engineer of the Company since January 1984. Prior to joining the Company, Mr.
Laber was employed at NSC for 3 years as a Senior Staff Design Engineer, and at
Intel Corporation for 3 years as a Design Engineer. Mr. Laber received his MSEE
from the University of Minnesota.
Mr. Ladas joined the Company in January 1996 as Vice President, Operations.
From January 1987 to December 1995, Mr. Ladas held several executive positions
with NSC including Managing Director of Operations in Greenock, Scotland. From
March 1983 to December 1986, Mr. Ladas worked at Fairchild Semiconductor as
Research and Development Manager. Mr. Ladas received his B.S. degree in
Chemistry from Arizona State University.
Mr. Reed joined the Company in January 1996 as Vice President, Business
Development. From November 1993 to December 1995, Mr. Reed was a technical
consultant to the semiconductor industry, accepting strategic assignments
regarding product positioning and technical product content. From June 1979 to
July 1993, Mr. Reed worked at NSC as Director of Telecommunications Products.
Mr. Reed received his M.S.E.E. from the University of Michigan and his B.S.E.E.
from the University of Arizona.
Mr. Russell joined the Company in May 1992 as Vice President, Finance and
Administration, Chief Financial Officer and Treasurer. Mr. Russell was an
independent financial consultant from November 1990 to May 1992. From 1980 to
1990, Mr. Russell was employed at NSC, most recently as Vice President and
Controller. Mr. Russell has also been employed by Fairchild Camera and
Instrument, a semiconductor company, and KPMG Peat Marwick. Mr. Russell is a
Certified Public Accountant and holds a B.S. degree in accounting from San Jose
State University.
Mr. Stahl joined the Company in March 1998 as Vice President, Sales. From
1994 to February 1998, Mr. Stahl was Vice President of Sales for Raytheon
Semiconductor and was responsible for worldwide sales. From 1990 to 1994, Mr.
Stahl was Director of Worldwide Sales for T.R.W. LSI Products, a semiconductor
manufacturer. Prior to 1990, Mr. Stahl held sales positions with Texas
Instruments, Signetics and N.E.C. Mr. Stahl received his B.S. degree in
Mathematics from the University of Kentucky and his M.B.A. from Florida Atlantic
University.
Mr. Standish joined the Company in 1990 and has served as Vice President,
Marketing and Applications since October 1991. Prior to joining the Company, Mr.
Standish was employed at NSC for 17 years in various marketing and applications
positions, including Director of Analog Product Marketing and Director of
Automotive Marketing. Mr. Standish holds a B.S.E.E. degree from the University
of Michigan.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
Item 2. Properties
The Company's executive offices and manufacturing facilities, located in
San Jose, California, consist of two buildings comprising approximately 93,000
square feet. This property was acquired by the Company in October 1990 at a cost
of $7.5 million and is used for manufacturing, product design and development,
marketing, sales and administration. The acquisition of the property was
financed by a $5.3 million note, secured by the property. This obligation was
refinanced in October 1994 with a $3.4 million note payable over five years with
principal amortized on a fourteen year basis. The Company leases sales offices
in the metropolitan areas of Boston and Chicago. Micro Linear believes that its
existing facilities are adequate to meet its current requirements.
Certain of the Company's wafer suppliers and assembly contractors are
subject to a variety of U.S. and foreign government regulations related to the
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in their manufacturing process. The failure by the Company's suppliers or
subcontractors to comply with present or future environmental regulations could
result in fines, suspension of production or cessation of operations. Such
regulations could also require the Company's suppliers or subcontractors to
acquire equipment or to incur other substantial expenses to comply with
environmental regulations. If substantial additional expenses were incurred by
the Company's suppliers or subcontractors, product costs could significantly
increase, thus materially and adversely affecting the Company's results of
operations. Additionally, the Company is subject to a variety of governmental
regulations relating to its operations, such as environmental, labor and export
control regulations. While the Company believes it has obtained all permits
necessary to conduct its business, the failure to comply with present and future
regulations could result in fines being imposed on the Company or suspension or
cessation of operations. Any failure by the Company or its suppliers or
subcontractors to control the use of, or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities, and could
have a material adverse effect on the Company's business and operating results.
Item 3. Legal Proceedings
In December 1995, Pioneer Magnetics, Inc. ("Pioneer") filed a complaint in
the Federal District Court for the Central District of California alleging that
certain of the Company's integrated circuits violate a Pioneer patent. Pioneer
is seeking monetary damages and an injunction against such alleged patent
violation. The Company has denied any infringement and filed a counter-claim
seeking invalidity of the patent. The Company's motion for summary judgment was
denied. The Company is now responding to the Plaintiff's offer for a settlement.
On February 24, 1997, a former employee of Micro Linear filed a complaint
in the Superior Court of California, County of Santa Clara, alleging breach of
contract and employment discrimination. On June 5, 1997, the case was dismissed
and the parties agreed to submit the dispute to arbitration. The Company denies
all liability and intends to vigorously defend its actions in the arbitration.
Although the Company believes that the resolution of these actions will not
have a material adverse effect on the Company's financial condition or results
of operations, there can be no assurance that such actions will be resolved in
the Company's favor or that an unfavorable resolution would not materially
adversely effect the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The following table sets forth the high and low prices of the Company's
Common Stock as quoted in the NASDAQ National Market for the periods indicated.
As of February 22, 1998, there were approximately 414 holders of record of the
Company's Common Stock. The Company's Common Stock is listed for quotation in
the NASDAQ National Market under the Symbol "MLIN."
Common Stock Prices
High Low
Quarter ended December 31, 1997...................... $ 9 1/8 $ 7
Quarter ended September 30, 1997..................... $14 3/8 $ 8 5/16
Quarter ended June 30, 1997.......................... $20 1/4 $10 1/4
Quarter ended March 31, 1997......................... $13 3/4 $ 8 1/4
Quarter ended December 31, 1996...................... $ 8 1/4 $ 6 1/8
Quarter ended September 30, 1996..................... $ 9 3/4 $ 5 5/8
Quarter ended June 30, 1996.......................... $12 5/8 $ 7 1/2
Quarter ended March 31, 1996......................... $11 7/16 $ 7 5/16
Quarter ended December 31, 1995..................... $16 1/8 $ 9 1/8
Quarter ended September 30, 1995.................... $18 5/8 $15
Quarter ended June 30, 1995......................... $16 3/4 $ 9 1/8
Quarter ended March 31, 1995........................ $11 7/8 $ 7 7/8
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the five-year period
ended December 31, 1997, should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
7 of this report.
December 31,
1997 1996 1995 1994 1993
(In thousands, except per share data)
Statement of Operations Data:
Net revenues.......................... $65,759 $54,057 $57,384 $41,721 $33,558
Gross margin.......................... $34,205 $32,152 $31,657 $20,742 $14,962
Income from operations................ $9,894 $9,390 $11,824 $3,208 $545
Net income............................ $7,010 $6,703 $10,536 $2,880 $43
Net income per share..................
Basic $0.59 $0.54 $0.87 $0.43 $0.01
Diluted $0.54 $0.51 $0.77 $0.25 $0.00
Weighted average shares used in per share
computations
Basic 11,822 12,320 12,112 6,733 3,850
Diluted 12,979 13,241 13,644 11,715 10,698
December 31,
1997 1996 1995 1994 1993
(In thousands)
Balance Sheet Data:
Working capital....................... $39,922 $38,796 $41,321 $31,765 $14,489
Total assets.......................... $72,025 $69,032 $67,971 $53,584 $41,631
Long-term obligations, less current
portion............................ $2,805 $2,972 $3,181 $3,738 $1,645
Stockholders' equity.................. $59,321 $58,269 $55,847 $42,412 $28,950
Quarterly Financial Data
(Unaudited)
Three Months Ended
-------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
---------------- ---------------- ------------ -----------
(In thousands, except per share data)
Net revenues................... $15,084 $15,036 $19,502 $16,137
Gross margin................... $ 8,329 $ 6,631 $10,063 $ 9,182
Net income..................... $ 1,592 $ 728 $ 2,486 $ 2,204
Net income per share...........
Basic....................... $ 0.14 $ 0.06 $ 0.21 $ 0.18
Diluted..................... $ 0.13 $ 0.06 $ 0.19 $ 0.17
December 31, September 30, June 30, March 31,
1996 1996 1996 1996
---------------- ---------------- ------------ -----------
(In thousands, except per share data)
Net revenues................... $13,386 $11,713 $13,631 $15,327
Gross margin................... $ 6,943 $ 6,032 $ 8,947 $10,230
Net income..................... $ 1,335 $ 549 $ 1,836 $ 2,983
Net income per share...........
Basic....................... $ 0.11 $ 0.04 $ 0.15 $ 0.24
Diluted..................... $ 0.11 $ 0.04 $ 0.14 $ 0.22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report on Form 10-K contains 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. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth below and elsewhere in this Form 10-K.
Results of Operations
Overview
Micro Linear Corporation was founded in 1983. From its formation through
1990, the Company focused initially on application specific integrated circuits
for particular customers and, subsequently, on application specific standard
products, principally for the hard disk drive (HDD) industry. Commencing in
1991, the Company implemented a fundamental change in its business strategy to
expand the markets and applications for its products and to lessen its
dependence on the HDD industry. As a result of its diversification efforts, the
Company substantially reduced its dependence on the HDD industry and HDD product
sales accounted for less than 5% of net revenues for 1997. Micro Linear
currently serves the communications, industrial and computer markets with a
broad range of standard products for a variety of applications, including local
area networks, mass storage, video, telecommunications, power management,
battery management, motor control and data conversion. The Company utilizes
three principal manufacturing process technologies, Bipolar, CMOS and BiCMOS,
and has released approximately 130 new products over the last three years.
Since the second half of 1995, sales of communication products have
constituted a substantial majority of the Company's revenues. Specifically, such
products represented approximately 69%, 63% and 53% of net revenues for 1997,
1996, and 1995, respectively. The communications market is characterized by
intense competition, relatively short product life cycles and rapid
technological change. In addition, the communications market has undergone rapid
growth and consolidation in the last few years. The Company's net revenues and
results of operations would be materially and adversely affected in the event of
a slowdown in this market segment. The Company is attempting to reduce its
dependency on the communications industry through various means, such as
expanding its product mix and customer base.
The Company's operating results are subject to quarterly and other
fluctuations which may result from the timing and extent of process development
costs, changes in the mix of products sold, the timing and extent of research
and development expenses, the availability and cost of wafers from outside
foundries, fluctuations in manufacturing yields, and competitive pricing
pressures. Other factors which may result in operating fluctuations are the
Company's ability to access advanced process technologies, the ability to
introduce new products on a timely basis, market acceptance of the Company's and
its customers' products, the timing of new product announcements and cyclical
semiconductor industry conditions. Moreover, the Company's business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. As a result of the foregoing or other factors, the Company expects to
continue to experience material fluctuations in its future operating results on
a quarterly or annual basis.
Annual Results of Operations
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
Year Ended December 31,
1997 1996 1995
Net revenues................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................... 48.0 40.5 44.8
Gross margin................................................. 52.0 59.5 55.2
Operating expenses:
Research and development..................................... 18.2 20.6 17.6
Selling, general and administrative.......................... 18.8 21.5 17.0
Total operating expenses............................. 37.0 42.1 34.6
Income from operations......................................... 15.0 17.4 20.6
Interest income (expense), net................................. 1.7 2.0 2.1
Income before provision for taxes.............................. 16.7 19.4 22.7
Provision for taxes on income.................................. 6.0 7.0 4.3
Net income..................................................... 10.7% 12.4% 18.4%
Net Revenues
Net revenues were $65.8 million for 1997, $54.1 million for 1996 and $57.4
million for 1995. Net revenues in 1997 increased 22% over net revenues in 1996
and 1996 net revenues decreased 6% over 1995. The Company serves three principal
market segments, computer, communications and industrial. Net revenues for 1997
compared to 1996 increased 33% in the communications market, 31% in the
industrial market and decreased 20% in the computer market. Net revenues for
1996 compared to 1995 increased 12% in the communications market and decreased
22% in the industrial market and 32% in the computer market. The Company expects
to report for its first fiscal quarter ending March 31, 1998 a decline in net
revenues of approximately 15% to 20% from the $15.1 million of revenue recorded
in the quarter ended December 31, 1997. The anticipated revenue decline is the
result of softness in business demand which has resulted in lower than expected
turns orders thus negatively impacting overall revenue levels for the first
quarter. The Company also expects first quarter 1998 earnings to be below the
$0.13 per share reported in the fourth quarter of 1997.
The communications market includes the computer networking equipment
("networking") sub-market. Sales of products to the networking market
constitutes a substantial majority of the Company's net revenues. Revenues in
the networking sub-market for 1997 were $42.9 million, or 65% of net revenues,
compared to $30.7 million, or 57% of net revenues, for 1996 and $26.9 million,
or 47% of net revenues, for 1995. Networking net revenues in absolute terms
increased in 1997 compared to 1996 and 1996 compared to 1995 due primarily to
new product introductions, new customers and overall market growth in the
networking segment. The networking sub-market is characterized by intense
competition, relatively short product life cycles and rapid technological
change. In addition, the networking sub-market has undergone a period of rapid
growth, price erosion and consolidation in recent years. Although the Company
has expanded its product mix and customer base, the Company expects its
dependency on sales to network equipment manufacturers to continue for the
immediate future. The Company's business and results of operations would be
materially and adversely affected in the event of a significant slowdown in the
computer networking equipment market.
International revenues for 1997 totaled $34.6 million, or 53% of net
revenues, compared to $20.3 million, or 38% of net revenues, for 1996 and $18.0
million, or 31% of net revenues, for 1995. The increase in international
revenues in 1997 compared to 1996 and 1995 was due to stronger demand for the
Company's products in Asia and Europe. International revenues in 1995 exclude
shipments to Amtron. A significant portion of Amtron's purchases were sold to
Samsung Electronics and other Korean customers. There were no Samsung sales to
Amtron in 1997 and 1996, compared to 12% of net revenues in 1995. Through the
end of 1997, the Company had not experienced any negative impact as a result of
the financial and stock market dislocations that occurred in the Asian financial
markets.
Domestic distributor revenues were approximately 17% of total net revenues
for each of 1997, 1996 and 1995. The Company expects sales to domestic
distributors to increase in the future as a percentage of total net revenues due
to anticipated shifts in the sales channel mix. In this regard, several of the
Company's OEM (Original Equipment Manufacturer) customers have moved their
manufacturing operations to subcontractors and in turn are placing their orders
through distributors. The Company defers recognition of revenue derived from
sales to domestic distributors until such distributors resell the products to
their customers. Revenue is recognized by the Company upon shipment to
international representatives, but the gross margin on these shipments is
deferred until international distributors notify the Company of product sales to
end users.
Gross Margin
The Company's gross margin is affected by the volume of product sales,
price, product mix, manufacturing utilization, product yields and the mix of
sales to OEM's and to distributors. Gross margin has been and will continue to
be periodically affected by expenses incurred in connection with start-up and
installation of new process technologies at outside manufacturing foundries.
The Company's gross margin declined to 52% in 1997 from 60% in 1996,
primarily due to lower average selling prices related to competitive pricing
pressures, especially in the communications market which represents a
substantial majority of the Company's net revenues. Gross margins increased to
60% in 1996 from 55% in 1995, primarily due to lower per unit manufacturing
costs as a result of higher manufacturing utilization, and a shift in product
mix to higher margin products.
The Company's gross margin is adversely impacted by the costs associated
with installing new processes at its foundries. Although the Company has
recently been able to mitigate the adverse impact on gross margin associated
with new wafer manufacturing process costs by relying upon process technologies
existing at its outside wafer foundries, there can be no assurance that the
Company will not be required to incur significant expenses in the future to
develop, or obtain access to, advanced process technologies and to transfer and
install such technologies at one or more of its foundries, which could have a
material adverse effect on gross margin in the future.
The Company currently purchases its wafers from six wafer suppliers. A
substantial majority of the Company's wafer supply is obtained from three wafer
suppliers. The Company's products are assembled and packaged by four vendors.
Any delays or interruptions due to such factors as inadequate capacity or
unavailable raw materials in the Company's wafer suppliers or assembly vendors
could materially and adversely affect product shipments. The Company purchases
nearly all of its BiCMOS wafers from two wafer foundries, the majority of which
are supplied by one wafer foundry in Taiwan. Although both wafer foundries are
qualified to supply the Company with BiCMOS wafers, the Company's short-term
BiCMOS wafer supply could be materially and adversely affected if the wafer
foundry in Taiwan is unable to meet the Company's wafer supply requirements.
Approximately one-third of the Company's bipolar wafers are purchased from a
wafer foundry in Japan and have pricing contracts that are tied to currency
fluctuations of the yen. Wafer pricing for this foundry is adjusted every 6
months, either up or down, depending on the movement of the yen. The Company
does not expect to be significantly impacted by this pricing agreement and as a
result does not enter into foreign currency hedging arrangements. However, due
to the uncertainty of the currency markets and the recent fluctuations of the
yen versus the U.S. dollar, there can be no assurance that significant swings in
currency will not have a material adverse effect on gross margin in the future
due to the impact of such fluctuations on this contract or other contracts the
Company has with foundries in Japan.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of standard and semi-standard products, tile
arrays and standard cells. In addition, research and development expenses
include test development and prototype assembly costs associated with new
product development. The Company also expenses prototype wafers and new
production mask sets related to new products as research and development costs
until products based on new designs are fully characterized by the Company and
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $12.0 million for 1997, or 18% of
net revenues, compared to $11.2 million, or 21% of net revenues, in 1996 and
$10.1 million, or 18% of net revenues, in 1995. The increase in research and
development in absolute dollars in 1997 compared to 1996 is primarily
attributable to the addition of personnel associated with the Company's new
design center in Cambridge, England. The increase in research and development in
absolute dollars in 1996 compared to 1995 is primarily attributable to higher
prototype product costs associated with new product development. The Company
expects to add additional design engineers in Cambridge throughout the remainder
of 1998. 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 in the future in absolute dollars.
Selling, General and Administrative
Selling, general and administrative expenses were $12.3 million for 1997,
or 19% of net revenues, compared to $11.6 million, or 22% of net revenues, in
1996 and $9.7 million, or 17% of net revenues, in 1995. The increase in absolute
dollars in 1997 compared to 1996 is primarily attributable to higher staffing
levels, an increase in sales commissions due to higher net revenues, increased
business conference costs, and increased professional fees. The increase in
absolute dollars in 1996 compared to 1995 is primarily attributable to an
increase in staffing levels, increased travel costs and legal fees associated
with a litigation matter. The Company expects additional spending increases in
absolute dollars in selling, general and administrative expenses in the future.
Interest and Other Income and Interest Expense
Interest and other income was $1.3 million for 1997, $1.4 million for 1996
and $1.6 million for 1995. The decrease in 1997 over 1996 and 1996 over 1995
were due to lower average cash balances and lower interest rates. Interest
income is affected by changes in the Company's cash balance as well as
prevailing interest rates. Interest expense was $0.3 million for each of 1997
and 1996 and $0.4 million for 1995.
Provision for Income Taxes
The Company's effective tax rates for 1997 and 1996 were 36% compared to
19% for 1995. The higher effective tax rate in 1996 compared to 1995 was due
principally to the full utilization of all remaining federal net operating loss
and tax credit carryforwards in fiscal 1995. The effective tax rates for 1997
and 1996 differ from the statutory income tax rate primarily due to state income
taxes, net of federal research credits. The effective tax rate for 1995 differs
from the statutory income tax rate primarily as a result of utilization of net
operating loss and tax credit carryforwards and adjustments of the valuation
allowance for deferred tax assets.
Liquidity and Capital Resources
Since 1992, the Company has financed its operations and capital
requirements principally through cash flow from operations and the proceeds from
its initial public offering in October 1994. Operations provided $11.9 million
of net cash during 1997, an increase of $3.9 million over 1996. The increase in
1997 cash from operations is primarily attributable to decreased inventory
levels and deferred tax assets and higher accounts payable partially offset by
higher accounts receivable balances at the end of 1997.
Cash used in investing activities for 1997 is attributable to capital
expenditures of $4.3 million and the net purchase of short-term investments of
$0.1 million. The Company currently expects capital expenditures to be
approximately $4.0 million in 1998 and as of December 31, 1997 had capital
commitments for 1998 of approximately $.8 million.
Financing activities for 1997 consist primarily of the repurchase of the
Company's common stock for $8.3 million. From January 1996 through the end of
1997, the Board of Directors approved the repurchase of an aggregate of $15.0
million of the Company's Common Stock in stock repurchase programs. Through
December 31, 1997, the Company has repurchased 1,512,000 shares at an aggregate
cost of $14.0 million through the end of 1997. Subsequent to year end, the
Company had repurchased a total of 130,000 shares of its Common Stock for $1.0
million as of February 22, 1998 and the Board of Directors approved an
additional $1.5 million in January 1998 to be used for the stock repurchase
program. The Company also generated $1.7 million of proceeds from common stock
issued under employee stock option and purchase plans.
Working capital amounted to $39.9 million as of December 31, 1997 and
includes cash and cash equivalents of $5.2 million and short-term investments of
$20.7 million.
The Company's liquidity is affected by many factors, including, among
others, the extent to which the Company pursues additional wafer fabrication
capacity from existing foundry suppliers or new suppliers, capital expenditures,
and the level of the Company's product development efforts, and other factors
related to the uncertainties of the industry and global economies. Although the
Company's cash requirements will fluctuate based on the timing and extent of
these factors, the Company anticipates that its existing cash resources and cash
generated from operations will fund necessary purchases of capital equipment and
provide adequate working capital for at least the next twelve months. However,
there can be no assurance that events in the future will not require the Company
to seek additional capital sooner or, if so required, that such capital will be
available on terms acceptable to the Company.
Other Factors Affecting Future Operating Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including the Company's access to advanced process technologies,
the timing and extent of process development costs, the Company's ability to
introduce new products on a timely basis, the volume and timing of orders
received, market acceptance of the Company's and its customers' products, the
timing of new product announcements and introductions by the Company or its
competitors, changes in the mix of products sold, the timing and extent of
research and development expenses, the availability and cost of wafers from
outside foundries, fluctuations in manufacturing yields, fluctuations in the
relative exchange rate of the yen and the U.S. dollar, competitive pricing
pressures and cyclical semiconductor industry conditions. A majority of the
Company's net revenues are derived from sales of a limited number of products.
Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. Competitive pricing pressures
are expected to continue in the future, especially in the communications market,
and may have a material adverse effect on the Company's gross margin. The
Company's business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without significant
penalty to the customer. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. In addition, the Company is limited in its ability to
reduce costs quickly in response to any revenue shortfalls. As a result of the
foregoing or other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis which would materially and adversely affect the Company's business,
financial condition and results of operations.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to advanced semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve yields. Semiconductor design and process
methodologies are subject to rapid technological change, requiring large
expenditures for research and development. If the Company is unable to develop
or obtain access to advanced wafer processing technologies as they become
needed, or is unable to define, design, develop and introduce competitive new
products on a timely basis, its future operating results will be materially and
adversely affected. In addition, if the Company is unable to transfer and
install such new process technologies to one or more of its foundries in a
timely manner, its business and results of operations could be materially and
adversely affected.
A substantial portion of the Company's net revenues are derived from sales
of products for computer networking applications. Sales of the Company's
products to network equipment manufacturers accounted for approximately 65% of
the Company's net revenues in 1997 and accounted for 8 of the Company's 10 top
selling products for 1997. These 8 products constituted approximately 43% of the
Company's revenues for the same period. The Computer networking equipment market
is characterized by intense competition relatively short product life cycles and
rapid technological change. In addition, the computer network equipment market
has undergone a period of rapid growth and experienced consolidation among the
competitors in the market-place in recent years. Although the Company has
expanded its product mix and customer base, the Company expects its dependency
on sales to network equipment manufacturers to continue into 1998. The Company's
business and results of operations would be materially and adversely affected in
the event of a significant slowdown in the computer networking equipment market.
In addition, as a result of competitive pricing pressures, the Company has
experienced lower margins in certain of its existing and recently introduced
products for computer networking applications. There can be no assurance as to
when or if such pricing pressure will lessen. Such pricing pressures will have
an adverse affect on the Company's results of operations unless they can be
offset by higher margins on other products or reduced operating expenses.
The Company's market diversification and product development activities
have placed, and could continue to place, a significant strain on the Company's
limited personnel and other resources. The Company's ability to manage any
future growth effectively will require it to integrate its new employees into
its overall operations, to continue to improve its operational, financial and
management systems and to attract, train, motivate and manage its employees
successfully. If the Company's management is unable to manage growth
effectively, the Company's business and results of operations could be
materially and adversely affected.
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. The
Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions or other
factors.
In June 1997, the FASB issued Statement No. 130 ("FAS 130") "Reporting
Comprehensive Income". FAS 130 establishes standards for reporting and display
of comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. An example of an item to be included in comprehensive
income which is excluded in net income would be unrealized gains and losses on
available for sale securities. The Company currently estimates that the impact
of adopting SFAS 130 will be insignificant. The disclosures prescribed by FAS
130 are effective for fiscal 1998.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and
Related Information". SFAS 131 establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company currently believes that it
operates in one segment as defined by SFAS 131 and therefore believes that the
impact of SFAS 131 on the Company's financial statement disclosures will be
insignificant. The disclosures prescribed by SFAS 131 are effective for fiscal
1998.
Year 2000
The "Year 2000 issue" arises because most computer systems and programs
were designed to handle only a two-digit year, not a four-digit year. When the
Year 2000 begins, these computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly. The Company has commenced, for all of its information systems, a
year 2000 date conversion project to address all necessary code changes, testing
and implementation and accordingly does not anticipate any internal Year 2000
issues from its own information systems, databases or programs. The Company
could be adversely impacted by Year 2000 issues faced by major distributors,
suppliers, customers, vendors and financial service organizations with which the
Company interacts. The Company is in the process of developing a plan to
determine the impact that third parties who are not Year 2000 compliant may have
on the operations of the Company. At this time, the Year 2000 compliance expense
and related potential effect of the Company's earnings are estimated to be
insignificant. As of March 26, 1998 the Company has not identified any loss
contingencies related to the year 2000 issues for products it has sold.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Report of Price Waterhouse LLP, Independent Accountants................................................... 29
Report of Ernst and Young LLP, Independent Auditors....................................................... 30
Consolidated Balance Sheets as of December 31, 1997 and 1996.............................................. 31
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995.................... 32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995...... 33
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................ 34
Notes to Consolidated Financial Statements................................................................ 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Micro Linear Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) and (2) on pages 48 present fairly, in all
material respects, the financial position of Micro Linear Corporation and its
subsidiaries at December 28, 1997, and the results of their operations and their
cash flows for the year ended December 28, 1997, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 21, 1998
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Micro Linear Corporation
We have audited the accompanying consolidated balance sheet of Micro Linear
Corporation as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Micro Linear Corporation at December 31, 1996, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also in our opinion, the related 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.
ERNST & YOUNG LLP
San Jose, California
January 20, 1997
MICRO LINEAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
1997 1996
Assets
Current assets:
Cash and cash equivalents................................................... $5,210 $4,385
Short-term investments...................................................... 20,653 20,798
Accounts receivable, net of allowance for doubtful accounts of $530 and
$243 at December 31, 1997 and 1996, respectively......................... 10,367 4,372
Inventories................................................................. 7,823 10,456
Deferred tax assets......................................................... 4,461 4,499
Other current assets........................................................ 1,307 2,077
Total current assets..................................................... 49,821 46,587
Property, plant and equipment, net............................................ 21,523 21,654
Other assets.................................................................. 681 791
Total assets........................................................ $72,025 $69,032
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................ $3,612 $2,732
Accrued compensation and benefits........................................... 1,688 1,402
Deferred income on shipments to distributors................................ 2,695 2,249
Accrued commissions......................................................... 848 555
Other accrued liabilities................................................... 889 644
Current portion of long-term debt........................................... 167 209
Total current liabilities................................................ 9,899 7,791
Long-term debt................................................................ 2,805 2,972
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.001 par value
Authorized shares 5,000,000
None issued............................................................ -- --
Common stock, $.001 par value
Authorized shares 30,000,000
Issued shares 13,168,003 and 12,810,080 at December 31, 1997 and 1996,
respectively
Outstanding shares 11,656,003 and 12,054,080 at December 31, 1997 and 1996, 13 13
respectively..................................................................
Additional paid-in capital.................................................. 52,890 50,501
Retained earnings........................................................... 20,445 13,435
Treasury stock, at cost, 1,512,000 and 756,000 shares at December 31, 1997 and (14,027) (5,680)
1996, respectively
Total stockholders' equity............................................... 59,321 58,269
Total liabilities and stockholders' equity.......................... $72,025 $69,032
See accompanying notes to the consolidated financial statements.
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
1997 1996 1995
Net revenues..................................................... $65,759 $54,057 $57,384
Cost of revenues................................................. 31,554 21,905 25,727
Gross margin................................................... 34,205 32,152 31,657
Operating expenses:
Research and development....................................... 11,962 11,157 10,119
Selling, general and administrative............................ 12,349 11,605 9,714
24,311 22,762 19,833
Income from operations......................................... 9,894 9,390 11,824
Interest and other income........................................ 1,337 1,392 1,609
Interest expense................................................. (278) (308) (426)
Income before provision for taxes.............................. 10,953 10,474 13,007
Provision for taxes.............................................. 3,943 3,771 2,471
Net income..................................................... $7,010 $6,703 $10,536
Net Income Per Share:
Basic:
Net income per share........................................... $0.59 $0.54 $0.87
Weighted average number of shares used in per share computation 11,822 12,320 12,112
Diluted:
Net income per share........................................... $0.54 $0.51 $0.77
Weighted average number of shares used in per share computation 12,979 13,241 13,644
See accompanying notes to consolidated financial statements.
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Retained
Additional Earnings Total
Common Stock Paid-in (Accumulated Treasury Stockholders'
Shares Amount Capital Deficit) Stock Equity
Balance at December 31, 11,951,577 $12 $46,204 $(3,804) -- $42,412
1994.............................
Exercise of stock options
and warrants................... 401,764 -- 563 -- -- 563
Shares purchased under
employee stock purchase plan... 102,178 -- 805 -- -- 805
Tax benefit of options exercised -- -- 1,450 -- -- 1,450
Amortization of deferred
compensation................... -- -- 81 -- -- 81
Net income...................... -- -- -- 10,536 -- 10,536
Balance at December 31, 1995..... 12,455,519 12 49,103 6,732 -- $55,847
Exercise of stock options
and warrants................... 253,505 1 384 -- -- 385
Shares purchased under employee
stock purchase plan............ 101,056 -- 659 -- -- 659
Tax benefit of options exercised -- -- 274 -- -- 274
Amortization of deferred
compensation................... -- -- 81 -- -- 81
Purchase of treasury stock ..... (756,000) -- -- -- (5,680) (5,680)
Net income...................... -- -- 6,703 6,703
Balance at December 31, 1996..... 12,054,080 13 50,501 13,435 (5,680) 58,269
Exercise of stock options....... 238,767 -- 882 -- -- 882
Shares purchased under employee
stock purchase plan............ 119,156 -- 770 -- -- 770
Tax benefit of options exercised -- -- 686 -- -- 686
Amortization of deferred
compensation................... -- -- 51 -- -- 51
Purchase of treasury stock...... (756,000) -- -- -- (8,347) (8,347)
Net income...................... -- -- 7,010 7,010
Balance at December 31, 1997..... 11,656,003 $13 $52,890 $20,445 ($14,027) $59,321
See accompanying notes to consolidated financial statements.
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------
1997 1996 1995
Operating activities:
Net income......................................................... $7,010 $6,703 $10,536
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 4,542 3,316 3,331
Tax effect from employee stock plans............................ 686 274 1,450
Deferred income tax (benefit) provision 38 (1,047) (2,437)
Amortization of deferred compensation............................ 51 81 81
Changes in assets and liabilities:
Accounts receivable.............................................. (5,995) 2,199 (1,574)
Inventories...................................................... 2,633 (1,470) (2,709)
Other current assets and other assets............................ 770 (1,185) (342)
Accounts payable................................................. 880 (844) 860
Accrued compensation, accrued commissions and other liabilities.. 824 103 95
Deferred income on shipments to distributors..................... 446 (85) 1195
Net cash provided by operating activities...................... 11,885 8,045 10,486
Investing activities:
Capital expenditures............................................... (4,301) (8,164) (6,785)
Purchases of short-term investments................................ (35,897) (25,836) (39,023)
Sales and maturities of short-term investments..................... 36,042 31,337 16,111
Net cash provided by (used in) investing activities............ (4,156) (2,663) (29,697)
Financing activities:
Principal payments under capital lease obligations and debt........ (209) (535) (1,198)
Proceeds from issuance of common stock............................. 1,652 1,043 1,368
Purchase of treasury stock of the Company.......................... (8,347) (5,680) --
Net cash provided by (used in) financing activities............ (6,904) (5,172) 170
Net increase (decrease) in cash and cash equivalents............... 825 210 (19,041)
Cash and cash equivalents at beginning of period................... 4,385 4,175 23,216
Cash and cash equivalents at end of period......................... $5,210 $4,385 $4,175
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 280 $ 310 $ 387
Income taxes..................................................... $1,856 $6,161 $3,810
See accompanying notes to consolidated financial statements.
MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Micro Linear Corporation (the "Company") designs, develops, and markets
high performance analog and mixed signal integrated circuits for a broad range
of applications within the communications, computer, and industrial markets for
sale primarily in North America, Asia and Europe. The Company operates in a
single industry segment.
Basis of Presentation
The Company operates on a 52- or 53 -week fiscal year, ending on the Sunday
closest to December 31. Fiscal years 1997, 1996 and 1995 ended on December 28,
1997, December 29, 1996 and December 31, 1995, respectively and each was
comprised of 52 weeks. The Company's fiscal quarters end on the Sunday closest
to the end of each calendar quarter. For presentation purposes, the accompanying
financial statements refer to the calendar year end of each respective year for
convenience.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition and Deferred Income
Revenue from product sales to customers other than sales to domestic
distributors are recorded when products are shipped. Sales made to domestic
distributors, under agreements allowing price protection and right of return on
merchandise unsold by the distributors, are deferred until the merchandise is
sold by the distributors. Gross margin from shipments to international
distributors is deferred until those distributors notify the Company of product
sales to end users.
Export revenues, primarily to the Far East, represented 53%, 38% and 31%
for the years ended December 31, 1997, 1996 and 1995, respectively.
In fiscal 1997, three customers accounted for 15%, 15% and 10% of net
revenues, respectively. In fiscal 1996, two customers accounted for 15% and 14%
of net revenues, respectively. In fiscal 1995, three customers accounted for
13%, 12% and 11% of net revenues, respectively.
Cash Equivalents
Cash equivalents consist of investments with original maturities at the
date of acquisition of ninety days or less that have insignificant interest rate
risk.
Short-Term Investments
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities."
The Company has classified debt securities as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net of tax, reported in a separate component of stockholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income (loss). The cost of securities sold
is based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
The following is a summary of available-for-sale securities at December 31,
1997 and 1996 (in thousands):
1997 1996
Cost Cost
U.S. government obligations................................... $ 6,054 $12,423
Commercial paper.............................................. 16,744 10,734
$22,798 $23,157
Amounts included in short-term investments.................... $20,653 $20,798
Amounts included in cash and cash equivalents................. 2,145 2,359
$22,798 $23,157
At December 31, 1997 and 1996, the estimated fair value approximated cost,
and the amount of gross unrealized gains and gross unrealized losses were not
significant. All available-for-sale securities mature in one year or less. There
were no significant gross realized gains or losses for the years ended December
31, 1997, 1996 and 1995.
Fair Value of Financial Instruments
The Company records its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses, the carrying amounts
approximate fair value due to their short maturates. The amounts shown for
long-term debt also approximate fair value because current interest rates
offered to the Company for debt of similar maturities are substantially the
same.
Inventory
Inventory is stated at the lower of cost (on a first-in, first-out basis)
or market (estimated net realizable value).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization for financial reporting purposes are provided on the straight-line
basis over the estimated useful lives of the assets. The Company depreciates
machinery and equipment over 5 years, buildings over 40 years, building
improvements over 10 and 20 years, equipment purchased on lease termination and
personal computers over 2 years. Assets under capitalized leases are recorded at
the present value of the lease obligations and amortized on a straight-line
basis over the shorter of the assets useful lives or the lease term.
Net Income Per Share
In the fourth quarter of fiscal 1997, the Company adopted the net income
per share calculation methodology prescribed by Statement of Financial
Accounting Standards No. 128 ("SFAS 128"). SFAS 128 requires presentation of
basic and diluted net income per share. Basic net income per share is computed
by dividing net income available to common stockholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period and excludes the dilutive effect of stock options. Diluted net income per
share gives effect to all dilutive potential common stock outstanding during the
period. In computing diluted net income per share, the average stock price for
the period is used in determining the number of shares assumed to be purchased
from exercise of stock options. All prior year net income per share amounts in
this Form 10-K have been restated in accordance with SFAS 128.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's stock on the
grant date. The Company has provided additional pro forma disclosures as
required under Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation" - See Note 5.
Concentrations of Credit Risk
The Company primarily sells its products to original equipment
manufacturers and distributors. The Company believes the concentrations of
credit risk in its trade receivables with its customer base are mitigated by the
Company's credit evaluation process, relatively short collection terms, and the
geographical dispersion of sales. The Company generally does not require
collateral. Bad debt write-offs have been insignificant. The Company also has
short-term cash investment policies that limit the amount of credit exposure to
any one financial institution and restrict placement of these investments to
financial institutions evaluated as highly credit worthy. The Company's accounts
receivable balances with customers based in Asia at December 31, 1997 and 1996
comprise 40% and 23% of accounts receivable, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Under FAS 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130 ("FAS 130") "Reporting
Comprehensive Income". FAS 130 establishes standards for reporting and display
of comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. An example of an item to be included in comprehensive
income which is excluded in net income would be unrealized gains and losses on
available for sale securities. The Company currently estimates that the impact
of adopting SFAS 130 will be insignificant. The disclosures prescribed by FAS
130 are effective for fiscal 1998.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and
Related Information". SFAS 131 establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company currently believes that it
operates in one segment as defined by SFAS 131 and therefore believes that the
impact of SFAS 131 on the Company's financial statement disclosures will be
insignificant. The disclosures prescribed by SFAS 131 are effective for fiscal
1998.
Financial Presentation
Certain prior-year amounts have been reclassified to conform with the 1997
financial statement presentation.
2. Supplemental Financial Information
Inventories consist of the following (in thousands):
December 31,
1997 1996
Raw materials.............................................. $ 712 $ 1,688
Work-in-process............................................ 5,100 6,398
Finished goods............................................. 2,011 2,370
$7,823 $ 10,456
Property, plant and equipment consist of the following (in thousands):
December 31,
1997 1996
Land....................................................... $ 2,850 $ 2,850
Buildings and improvements................................. 9,873 9,345
Machinery and equipment.................................... 29,673 25,900
42,396 38,095
Accumulated depreciation and amortization.................. 20,873 16,441
Net property, plant and equipment.......................... $21,523 $21,654
3. Long-term Debt
In October 1994, the Company entered into a $3,400,000 promissory note. The
note bears interest at 9.125% per annum and is secured by a deed of trust on the
Company's principal facilities. The note requires monthly principal and interest
payments of approximately $36,000 through October 1999, with a balloon payment
of approximately $2,639,000 due October 31, 1999. Approximately $2,972,000 and
$3,124,000 were outstanding under the loan as of December 31, 1997 and December
31, 1996, respectively.
In February 1997, the Company paid off a promissory note that bore interest
at 7.25% per annum and was secured by equipment purchased with proceeds from a
previous loan.
Maturities of long-term debt are as follows (in thousands):
As of
December 31,
1997
1998.................................................... $ 167
1999.................................................... 2,805
4. Net Income Per Share
Following is a reconciliation of the numerators and denominators of the
basic and diluted income per share computations for the periods presented below
(in thousands except per share data):
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ---------------------------------- ------------------------------------
Per- Per- Per-
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income Per
Share:
Net income available
to common
stockholders $7,010 11,822 $0.59 $6,703 12,320 $0.54 $10,536 12,112 $0.87
Effect of dilutive
securities:
Stock options 1,157 921 1,532
Diluted Income Per
Share:
Net income available
to common assuming
stockholders
dilution $7,010 12,979 $0.54 $6,703 13,241 $0.51 $10,536 13,644 $0.77
Options to purchase 413,780, 1,086,130 and 317,210 shares of common stock
at weighted average prices of $12.53, $11.35 and $14.99 per share were
outstanding during 1997, 1996 and 1995 respectively but were not included in the
respective computation of diluted income per share because the exercise prices
of such options were greater than the average market price of the common shares.
The options, which expire periodically from 2005 through 2007, were still
outstanding at the end of each respective year.
5. Stockholders' Equity
Preferred Stock
The Board of Directors has the authority, without any further vote or
action by the stockholders, to provide for the issuance of up to 5,000,000
shares of preferred stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors may
determine, including the consideration received therefore, the number of shares
compromising each series, dividend rates, redemption provisions, liquidation
preferences, sinking fund provisions, conversion rights and voting rights, all
without approval by the holders of common stock. No such preferred stock was
issued or outstanding anytime during fiscal years 1997, 1996 and 1995.
Common Stock
Holders of common stock are entitled to receive dividends as declared by
the Board of Directors out of legally available funds. No dividends have been
declared or paid.
The following summarizes all shares of common stock reserved for issuance
as of December 31, 1997:
Number of
Shares
-----------
Issuable upon:
Exercise of stock options, including options available for grant 3,714,049
Purchase under Employee Stock Purchase Plan 132,610
------------
3,846,659
============
From January 1996 through the end of 1997, the Company's Board of Directors
approved the repurchase of an aggregate of $15.0 million of the Company's common
stock in stock repurchase programs. Through December 28, 1997, the Company had
repurchased 1,512,000 shares at an aggregate cost of $14.0 million. During each
of fiscal 1997 and 1996, the Company repurchased 756,000 shares at a cost of
$8.3 million and $5.7 million, respectively. Subsequent to year end, the Company
had repurchased a total of 130,000 shares of its common stock for $1.0 million
as of March 26, 1998 and the Board of Directors approved an additional $1.5
million in January 1998 to be used for the stock repurchase program.
Stock Option Plans
The Company adopted the 1983 Incentive Stock Option Plan (1983 Plan), under
which employees and consultants had been granted incentive stock options to
purchase shares of the Company's common stock at not less than the fair value at
the date of grant or nonstatutory stock options to purchase the Company's common
stock at not less than 85% of the fair value at the date of grant, as determined
by the Board of Directors. No stock options were granted with an exercise price
at less than fair value on the date of grant. The 1983 Plan expired in March
1994.
In August 1992, the Company adopted the 1991 Stock Option Plan (1991 Plan),
under which employees and consultants may be granted incentive stock options to
purchase shares of the Company's common stock at not less than the fair value on
the date of grant or nonstatutory stock options to purchase the Company's common
stock at not less than 85% of the fair value on the date of grant, as determined
by the Board of Directors. To date, no stock options have been granted with an
exercise price at less than the fair value on the date of grant.
Under both the 1983 and 1991 plans, options are exercisable as determined
by the Board of Directors on the date of grant. The Company's standard stock
option agreements under the 1983 and 1991 plans provide that 25% of the stock
subject to the option will vest upon each of the first and second anniversaries
from the vesting commencement date, and the remainder of the shares subject to
the option will vest monthly over the next two years. Generally, the terms of
this plan provide that options expire up to a maximum of ten years from the date
of grant.
Information with respect to the employee 1983 and 1991 plans is summarized
as follows:
Outstanding Options
Available Number Weighted Average
For Grant of Shares Exercise Price
Balance at December 31, 1994......................... 274,724 1,956,653 $1.97
Options authorized................................. 940,000 -- --
Options granted.................................... (1,280,730) 1,280,730 $11.16
Options exercised.................................. -- (387,846) $1.38
Options canceled................................... 342,194 (342,194) $6.04
Options expired.................................... (11,428) -- --
Balance at December 31, 1995......................... 264,760 2,507,343 $6.20
Optiona authorized................................. 510,000 -- --
Options granted.................................... (1,925,290) 1,925,290 $7.08
Options exercised.................................. -- (253,505) $1.50
Options canceled................................... 1,603,325 (1,603,325) $9.25
Options expired.................................... (8,176) -- --
Balance at December 31, 1996......................... 444,619 2,575,803 $5.42
Options authorized................................. 834,000 -- --
Options granted.................................... (647,281) 647,281 $10.59
Options exercised.................................. -- (221,167) $3.87
Options canceled................................... 328,598 (328,598) $7.73
Options expired.................................... (806) -- $1.38
Balance at December 31, 1997......................... 959,130 2,673,319 $6.52
Options exercisable at:
December 31, 1997 1,001,206 $4.03
December 31, 1996 702,461 $2.46
December 31, 1995 607,387 $1.67
During 1997, the Company's Board of Directors and Stockholders approved an
amendment to the Company's 1991 Plan to increase the number of shares reserved
for issuance thereunder by 834,000. Additionally, the Board of Directors and
Stockholders approved an amendment to the Company's 1991 Plan to provide for an
annual increase in the number of shares of common stock reserved for issuance
thereunder of 4% of the Company's fully diluted shares for a two year period
commencing on January 1, 1998.
In January 1998, the Board of Directors approved the repricing of all
incentive stock options granted above $7.50 per share. The repricing does not
include incentive stock options granted to any member of the Company's Board of
Directors or the CEO. Prior options granted totaled 1,433,730 shares at prices
ranging between $7.50 and $19.00. Employees had the choice of exchanging any
stock options granted for new options that would have a new exercise price of
$7.375. All of the new options will retain the original vesting structure but
restart the vesting period with the vesting commencement date to be January 27,
1998.
Director Stock Option Plan
Prior to the adoption of its Director Stock Option Plan (see below) the
Company offered to its non-employee directors the right to purchase 4,800 shares
of common stock per year at the fair value on the date of the offer, as
determined by the Board of Directors. Such offers vested at a rate of
one-twelfth of the shares subject to the offer for each full month following the
vesting commencement date, as determined by the Board of Directors, provided
that the purchaser remained a member of the Board of Directors. As of December
31, 1997, offers to purchase 9,600 shares were outstanding and exercisable at a
price of $2.50 per share.
The Director Stock Option Plan (the Director Plan) was adopted in October
1994 and amended in March 1997. Under the Director Plan the Company is
authorized to issue non-qualified stock options to purchase up to 80,000 shares
of the Company's common stock at an exercise price equal to the fair market
value of the common stock on the date of grant. The Director Plan provides that
each person who was an outside director on October 13, 1994, and each outside
director who subsequently becomes a member of the Board of Directors shall be
automatically granted an option to purchase 10,000 shares on the date on which
the later of the following events occur: (a) October 13, 1994, or (b) the date
on which such person first becomes an outside director, whether through election
by the stockholders of the Company or appointment by the Board of Directors to
fill a vacancy. All outside directors who had rights to receive options issuable
on October 13, 1994 pursuant to the Director Plan have waived such rights and no
options were issued as of such date. In addition, each outside director
automatically receives a nonstatutory option to purchase 7,000 shares of common
stock upon such director's annual re-election to the Board, provided the
director has been a member of the Board of Directors for at least 6 months upon
the date of re-election.
The 10,000 share grant vests at the rate of 25% of the option shares upon
the first and second anniversaries of the date of grant and 1/48th of the option
shares per month thereafter and the 7,000 share grant vests monthly over a
twelve-month period, in each case unless terminated sooner upon termination of
the optionee's status as a director or otherwise pursuant to the Directors Plan.
Option activity of the Director's stock options is as follows:
Options Outstanding
--------------------------------------
Available Number of Weighted Average
For Grant Shares Exercise Price
------------ ------------- ---------------------
Balance at December 31, 1994 80,000 28,800 $ 2.13
Granted (19,200) 19,200 $13.38
Exercised - (9,600) $ 1.94
------------ -------------
Balance at December 31, 1995 60,800 38,400 $ 7.80
Granted (27,200) 27,200 $10.00
Canceled 2,800 (2,800) $11.13
------------ -------------
Balance at December 31, 1996 36,400 62,800 $11.42
Granted (31,000) 31,000 $14.72
Exercised - (17,600) $ 6.73
Canceled 8,400 (8,400) $12.41
------------ -------------
Balance at December 31, 1997 13,800 67,800 $11.41
============ =============
Options exercisable at:
December 31, 1997 36,800 $ 8.63
December 31, 1996 48,800 $ 5.92
December 31, 1995 35,200 $ 5.65
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (1994 Purchase Plan) in
October 1994. An aggregate of 455,000 shares of the Company's common stock have
been reserved for issuance under the 1994 Purchase Plan. The 1994 Purchase Plan
provides that all employees may purchase stock at 85% of its fair market value
on specified dates via payroll deductions. Sales under the Purchase Plan in
1997, 1996 and 1995 were 119,156, 101,056 and 102,178 shares of common stock at
an average price of $770,000, $659,000 and $805,000, respectively. During 1997,
the Company's Board of Directors and stockholders approved an amendment to the
Company's Purchase Plan to increase the number of shares reserved for issuance
by 175,000 shares.
Pro Forma Net Income Per Share
Pro forma net income is required by SFAS 123, and has been determined as if
the Company had accounted for its employer stock purchase plan, employee stock
options and director stock options subsequent to December 31, 1994 under the
fair value method of SFAS 123. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model using the multiple
option approach with the following weighted-average assumptions:
Employee Stock
Purchase Plan Stock Option Plans
---------------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
-------- --------- --------- -------- ------- -------
Expected Life (in years) 0.5 0.5 0.5 3.16 2.9 2.9
Risk-free interest rate 5.27% 5.25% 6.04% 5.6% 6.2% 6.2%
Volatility .86 .83 .68 .85 .76 .76
Dividend yield - - - - - -
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable, which significantly differ from the Company's stock
option awards. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and the
time to exercise, which greatly affect the calculated grant date fair value. The
weighted average estimated fair value of shares issued under the Employee Stock
Purchase Plan granted during 1997, 1996 and 1995 was $3.42, $3.30 and $5.04,
respectively. The weighted average estimated fair value of options granted under
the employee and director stock option plans during 1997, 1996 and 1995 was
$5.79, $2.39 and $5.93, respectively
The following table summarizes information about all stock options at
December 31, 1997
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------------
Weighted-Average
Number Remaining Weighted-Average Number
Range of Outstanding Contractual Life Exercise Price Exercisable Weighted-Average
Exercise at December 31, (Years) at December 31, Exercise Price
Prices 1997 1997
--------------- -------------------- ------------------ --------------- -------------------- ------------------
$0.38 3,580 1.5 $0.38 3,580 $0.38
$0.62 - 614,201 5.0 $1.36 528,644 $1.36
$1.38
$2.50 - 552,095 8.4 $5.76 189,815 $5.08
$7.03
$7.13 - $11.13 1,220,138 8.3 $8.00 287,047 $8.33
$11.25 - 351,105 9.1 $12.60 12,925 $12.96
$18.38
--------------------
====================
2,741,119 7.7 $6.64 1,022,011 $4.15
==================== ====================
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options vesting period.
The Company's pro forma information follows (in thousands, except for net income
per share information):
Years ended
December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net Income:
As reported.................. $7,010 $6,703 $10,536
Pro Forma.................... $4,948 $4,798 $ 9,597
Net Income Per Share:
Basic as reported............ $ 0.59 $ 0.54 $ 0.87
Diluted as reported.......... $ 0.54 $ 0.51 $ 0.77
Pro Forma Basic.............. $ 0.42 $ 0.39 $ 0.79
Pro Forma Diluted............ $ 0.38 $ 0.36 $ 0.70
6. 401(k) Tax Deferred Savings Plan
The Company has a 401(k) Tax Deferred Savings Plan (the 401(k) Plan) that
allows eligible employees to contribute from 1% to 15% of their pre-tax salary
up to a maximum of $9,500 during 1997. Subsequent to year end, the 401(k) annual
maximum contribution has been increased to $10,000. Effective October 27, 1997,
the 401(k) Plan was amended to provide that the Company would begin making a
discretionary matching contribution up to $80 per pay period to all employees
who are contributing to the 401(k) Plan. Prior to October 27, 1997, the Company
was making a discretionary matching contribution up to $40 per pay period to all
employees who were contributing to the 401(k) Plan. The Company's contribution
to the 401(k) Plan was approximately $260,000, $205,000 and $148,000 for 1997,
1996 and 1995, respectively.
7. Income Taxes
The provisions for taxes consist of the following (in thousands):
December 31,
1997 1996 1995
Federal:
Current........................................... $3,692 $4,342 $4,352
Deferred.......................................... $257 (1,102) (2,350)
3,949 3,240 2,002
State:
Current........................................... 213 598 634
Deferred.......................................... (219) (67) (165)
(6) 531 469
Provision for taxes on income....................... $3,943 $3,771 $2,471
The tax benefits resulting from disqualifying dispositions by employees who
acquired shares under the Company's incentive stock option plan and from the
exercise of nonqualified stock options reduced taxes currently payable as shown
above by $686,000 in 1997, $345,000 in 1996 and $1,450,000 in 1995. Such
benefits were credited to additional paid-in capital.
The difference between the provision for taxes and the amount computed by
applying the federal statutory income tax rate to income before provision for
taxes is explained below (in thousands):
December 31,
1997 1996 1995
Tax at federal statutory rate.................................. $3,833 $3,666 $4,552
State tax, net of federal benefit.............................. 352 345 305
Adjustment of valuation allowance.............................. -- -- (2,197)
Research credits............................................... (408) (204) --
Foreign sales corporation...................................... (221) -- --
Other.......................................................... 387 (36) (189)
Provision for taxes............................................ $3,943 $3,771 $2,471
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 31,
1997 1996
Deferred tax assets:
Inventory valuation..................................................... $2,514 $2,939
Deferred revenue........................................................ 1,125 904
Other accruals and reserves not yet deductible for tax purposes......... 879 720
Other................................................................... 212 316
Total deferred tax assets................................................. 4,730 4,879
Deferred tax liabilities:
Other................................................................... 269 380
Total deferred tax liabilities............................................ 269 380
Total net deferred tax assets............................................. $4,461 $4,499
8. Commitments and Contingencies
Legal Proceedings
A discussion of certain pending legal proceeding is included in Item 3 of
Part I of the Company's Form 10-K for the fiscal year ended December 31, 1997.
The Company continues to believe that the final outcome of such matters
discussed will not have a material adverse effect on the Company's consolidated
financial position or results of operations. No assurance can be given, however,
that these matters will be resolved without the Company becoming obligated to
make payments or to pay other costs to the opposing party, with the potential
for having an adverse effect on the Company's financial position or its results
of operations.
Lease Commitment
The Company has various equipment operating leases. The Company's rental
expenses under operating leases in the years ended December 31, 1997, 1996 and
1995 totaled approximately $157,000, $122,000 and $61,000, respectively. Future
minimum lease payments for all leases are as follows (in thousands):
Fiscal Year
1998................................................. 33
1999................................................. 22
2000................................................. 7
2001................................................. 6
Total minimum lease payments......................... $68
Purchase Commitments
The Companys's manufacturing relationships with foundries allow for the
cancellation of all outstanding purchase orders, but requires repayment of all
expenses to date. As of December, 31, 1997, foundries had incurred approximately
$1.6 million of manufacturing expenses on the Company's outstanding purchase
orders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on May 28, 1998, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
sections entitled "Record Date and Principal Share Ownership" and "Security
Ownership of Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. List of Financial Statements and Financial Statement Schedules
The following financial statements of Micro Linear Corporation are included
in Item 8 hereof:
Report of Price Waterhouse LLP, Independent Accountants
Report of Ernst and Young LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Supplement Schedules
The following financial statement schedule of Micro Linear Corporation
is included in Item 14(2):
Schedule II Valuation and Qualifying Accounts
Other schedules have not been filed because they are not applicable or
the required information has been included in the consolidated
financial statements.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Charged
Balance at to Costs Balance at
Beginning and Deduction End of
Descriptions of Period Expenses (1) Period
Year Ended December 31, 1995
Allowance for Doubtful Accounts.................. $242 $60 $62 $240
Year Ended December 31, 1996
Allowance for Doubtful Accounts.................. $240 $60 $57 $243
Year Ended December 31, 1997
Allowance for Doubtful Accounts.................. $243 $287 $0 $530
__________
(1) Charges for uncollectable accounts, net of recoveries
3. Exhibits
Exhibit
Number Description of Document
2.1(1) Form of Agreement and Plan of Merger by and between the Registrant
and Micro Linear Corporation, a California corporation.
3.1(2) Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1991 Stock Option Plan and form of Stock Option Agreement.
10.3(1)* 1994 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4(1)* 1983 Incentive Stock Option Plan and form of Stock Option
Agreement.
10.5(1)* 1994 Director Stock Option Plan and form of Stock Option
Agreement.
10.6(1)** License and Manufacturing Agreement between New Japan Radio Co.,
Ltd. and Registrant dated October 1, 1993.
10.7(1)** Foundry Services Agreement between Philips Semiconductor and
Registrant effective January 27, 1993.
10.8(1)** License and Manufacturing Agreement between Taiwan Semiconductor
Manufacturing Co. and Registrant dated April 24, 1992, as
amended.
10.9(2) Deed of Trust and Trust Deed Note of registrant in principal amount
of $3.4 million dated October 1994.
10.10(1)* Executive Bonus Agreement between Arthur B. Stabenow and
Registrant dated as of March 14, 1994.
10.12(1)** License and Manufacturing Agreement between Think-O Electric
Company and Registrant dated as of April 1, 1994.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants
23.2 Consent of Ernst and Young LLP, Independent Auditors.
27.0 Financial Data Schedule
* Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report on Form 10-K pursuant to Item 14(c) of
this report.
** Confidential treatment granted as to certain portions of this exhibit.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (file no.33-83546), as amended, filed on September 1, 1994.
(2) Incorporated by reference from the Registrant's Annual Report Form 10-K for
the fiscal year ended December 31, 1995.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See (a) above.
(d) Financial Statement Schedules.
See (a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 27th day of March, 1998.
MICRO LINEAR CORPORATION
By /s/ ARTHUR B. STABENOW
Arthur B. Stabenow
Chairman , Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Arthur B. Stabenow and J. Philip Russell,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
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 our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ARTHUR B. STABENOW Chairman, Chief Executive Officer and March 27, 1998
President
Arthur B. Stabenow (Principal Executive Officer)
/s/ J. PHILIP RUSSELL Chief Financial Officer (Principal March 27, 1998
J. Philip Russell Financial and Accounting Officer)
/s/ DAVID L. GELLATLY Director March 27, 1998
Dave L. Gellatly
/s/ JOSEPH D. RIZZI Director March 27, 1998
Joseph D. Rizzi
/s/ ROGER A. SMULLEN Director March 27, 1998
Roger A. Smullen
/s/ JEFFREY D. WEST Director March 27, 1998
Jeffrey D. West
INDEX TO EXHIBITS
Page
Exhibit 11.1 Statement Re Computation of Earnings Per Share.................... 54
Exhibit 23.1 Consent of Price Waterhouse LLP, Independent Accountants.......... 55
Exhibit 23.2 Consent of Ernst and Young, Independent Auditors.................. 56