Back to GetFilings.com
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number 0-24758
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 28, 1999, was
approximately $52,225,390. 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 28, 1999 was 11,104,352.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders to be held May 26, 1999 are incorporated by reference in Part III
of this Form 10-K.
================================================================================
1
TABLE OF CONTENTS
Page
PART I.
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 14
Item 3. Legal Proceedings............................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 17
Item 6. Selected Consolidated Financial Data......................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 27
Item 8. Financial Statements and Supplementary Data.................................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46
PART III.
Item 10. Directors and Executive Officers of the Registrant........................................... 47
Item 11. Executive Compensation....................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 47
Item 13. Certain Relationships and Related Transactions............................................... 47
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 48
SIGNATURES..................................................................................................... 51
2
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 conversion 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
3
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, 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.
Markets, Applications and Products
The Company develops 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
several different applications with focus on local and wide area networks,
video, power supply and battery management. 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.
4
The following table illustrates the three major applications and product
categories served by the Company:
NETWORK PRODUCTS VIDEO PRODUCTS POWER MANAGEMENT PRODUCTS
* 10BASE-FL Physical * Video Driver/Filters * Switch Mode Power Supply
Interface * Encoders * Power Factor Controllers
* 10/100 Physical Interface * Genlock * Battery Management
* FDDI Transceivers * Comb Filter * Motor Controllers
* ATM Transceivers * Video A/D * Lamp Ballast
Network Products
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 physical interface
circuits 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. The Company is a supplier of transceiver circuits into 100Mb
Ethernet, FDDI, and ATM applications.
Video Products
The Company has utilized its analog and mixed signal expertise to develop
several products for video applications. These circuits consist of filters with
contained video amplifiers, clock synchronization, comb filters, encoders and
specialized video A/D converters. These circuits are used in set top boxes,
video editing equipment, and security systems as well as many other
applications. The Company believes that video applications offer a significant
opportunity for growth in the future.
Power Management Products
Micro Linear has focused its power management product development efforts
in four areas: switched-mode power supply controllers, power factor control, DC
to DC converters to manage battery power, motor controllers 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.
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
has three field sales offices in North America, one in Asia and one in Europe.
5
The Company currently sells its products in North America through 21
independent sales representative organizations and three distributors. In 1998,
1997 and 1996, sales to Insight Electronics, a domestic distributor, represented
20%, 15% and 14% of the Company's net revenues, respectively. In 1998, sales
through the Company's domestic distributors represented approximately 22% of net
revenues, compared to 17% in 1997. 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 19 independent international sales
representatives and distributors, which accounted for approximately 42%, 53% and
38% of the Company's net revenues in 1998, 1997 and 1996, 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 1998, 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
1998, 1997 and 1996, the Company's top ten customers, excluding domestic
distributors, accounted for approximately 40%, 52% and 47% 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.
6
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 57%, 65% and 57%
of the Company's net revenues in 1998, 1997 and 1996, respectively. Sales of one
of the Company's computer networking products represented 10%, 4% and 10% of the
Company's net revenues during 1998, 1997 and 1996, 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 1999. 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.
Backlog
At December 31, 1998, the Company's backlog was approximately $11.4
million, compared to approximately $14.9 million at December 31, 1997. 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 engineers, 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.
7
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 Company uses its Bipolar technology for networking, and power
management applications such as transceivers, switched-mode power management
circuits and DC to DC converters to manage battery power.
CMOS. The Company's CMOS devices are 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.
During the last year, the Company has started to design power management
products in a new 40v CMOS technology, with 1 micron feature size.
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 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. New circuit
designs have begun utilizing a .6 micron BiCMOS process. This process offers
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
8
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 or
CMOS circuits in a timely manner, that its BiCMOS or CMOS 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 or CMOS
solutions within its targeted market applications. The Company's inability to
introduce BiCMOS or CMOS products in a timely manner or to obtain market
acceptance of such BiCMOS or CMOS 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 a foundry located in Japan. 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
9
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.
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 some
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. The high volume Bipolar wafers are inventoried and later
completed at a specific foundry. The Company also applies a tile array approach
to certain of its BiCMOS products. Such BiCMOS products are inventoried and
later completed at the foundries utilized for these processes. The Company
purchases completely finished CMOS, BiCMOS and 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. 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
10
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 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 six design groups
consisting of a total of approximately 30 research and development design
engineers, supported by approximately 46 additional technical professionals in
research, development and manufacturing engineering. In 1998, 1997 and 1996, the
Company spent approximately $11.9 million, $12.0 million and $11.2 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 market of the semiconductor industry is
also highly competitive, and many semiconductor companies presently compete or
could compete in one or more 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
11
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
12
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, 1998, the Company had 267 full-time employees, 136 of
whom were engaged in manufacturing (including test development, quality and
materials functions), 76 in research and development, 38 in marketing,
applications and sales, and 17 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. The Company is currently in
the process of recruiting a Vice President of Sales and a Vice President of
Marketing. Any failure to hire suitable candidates for such positions in a
timely manner could have a material adverse effect on the Company's business.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position
David L. Gellatly................ 55 Chairman of the Board, Chief Executive Officer and President
Carlos A. Laber.................. 47 Vice President, Engineering
Chris A. Ladas................... 53 Vice President, Operations
J. Philip Russell................ 59 Vice President, Finance and Administration and Chief Financial Officer
Mr. Gellatly joined the Company in January 1999 as Chief Executive Officer
and President. Since 1982 Mr. Gellatly has been the principal of New Technology
Marketing, a high technology marketing consulting company. Clients included
Lucent Technology, IBM, National Semiconductor ("NSC"), Cyrix, Intel, Apple
Corporation, and Siemens. Prior to 1982, Mr. Gellatly worked at Intel Cororation
for five years where he served in various marketing management positions in the
microprocessor operation. Mr. Gellatly has been a director of Micro Linear since
December 1997. Mr. Gellatly received his MSEE from the University of Minnesota.
Mr. Laber has been Vice President, Engineering since December 1995. Prior
to this time, he served as Director of Engineering and Senior Staff Engineer of
13
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 in June 1978.
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. 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.
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 development
center buildings in Cambridge, England and Livingston, Scotland. 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.
14
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 court held a patent claim construction
hearing on November 9, 1998. The court subsequently issued a claim construction
opinion that is favorable to Micro Linear. The court also required additional
briefing from Pioneer which is currently in progress. The court has not set a
trial date or a discovery cutoff date.
On February 24, 1997, a former employee of the Company 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. As of December 25,
1998, no arbitration date had been scheduled. The Company denies all liability
and intends to vigorously defend its actions in the arbitration.
On September 4, 1998, NetVantage, Inc ("NetVantage") filed a complaint
relating to the Company's sale of part ML6692 to NetVantage through the
Company's distributor, Insight Electronics, against the Company and Insight
Electronics, in the Superior Court of California, County of Los Angeles,
alleging causes of action for: (1) breach of contract, (2) breach of express
warranty, (3) breach of implied warranty of merchantability, (4) breach of
implied warranty of fitness, (5) intentional misrepresentation, (6) negligent
misrepresentation, (7) negligence, and (8) breach of implied covenant of good
faith and fair dealing. NetVantage seeks compensatory damages of no less than $6
million, additional compensatory damages according to proof, attorneys' fees and
costs, plus interest. On February 12, 1999, NetVantage filed a first amended
complaint in which NetVantage withdrew its causes of action for intentional
misrepresentation and negligent misrepresentation but realleged the remaining
causes of action of the original complaint. On February 26, 1999, the Company
filed an answer to NetVantage's complaint denying the causes of action and
asserting numerous affirmative defenses. On the same day, Insight Electronics
filed its answer and also filed a cross-complaint against NetVantage, alleging
causes of action for: (1) breach of express contract, (2) breach of implied
contract, (3) open account, and (4) quantum valebant, seeking compensatory
damages in excess of $41,399.65, attorneys' fees and costs, plus interest. Since
the filing of the action no discovery has been taken or served. On March 8, 1999
the Superior Court of Los Angeles issued an order to show cause against
NetVantage for failure to prosecute the case, with a hearing set for April 22,
1999.
On December 16, 1998, Accton Technology Corporation ("Accton") filed a
complaint relating to the Company's sale of part ML6692 to Accton, against the
Company in the Superior Court of California, County of Santa Clara, alleging
causes of action for: (1) breach of contract, (2) breach of express warranty,
(3) breach of implied warranty of merchantability, (4) breach of implied
warranty of fitness for particular purpose, (5) fraud and deceit-concealment,
(6) negligent misrepresentation, (7) negligent interference with economic
advantage, and (8) declaratory relief to establish the right to implied
contractual indemnity. Accton seeks compensatory damages in excess of $7
million, exemplary damages according to proof, attorneys' fees and costs, and
prejudgment and postjudgment interest. On February 10, 1999, the Company filed a
demurrer attacking the legal sufficiency of Accton's first, fifth and sixth
causes of action and moving to strike certain paragraphs of the complaint. The
hearing on the motion is scheduled for April 20, 1999. Discovery has commenced
in the action. No trial date has been set by the Court.
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 affect the Company's financial condition or results of operations.
15
From time to time, the Company has received, and in the future it may
receive, correspondence from certain vendors, distributors, customers or
end-users of its products regarding disputes with respect to contract rights,
product performance or other matters that occur in the ordinary course of
business. There can be no assurance that any of such disputes will not
eventually result in litigation or other actions involving the Company or as to
the outcome of such disputes.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
16
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 January 25, 1999, there were approximately 403 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, 1998............................... $5 15/16 $2 11/16
Quarter ended September 30, 1998.............................. $3 7/16 $5 1/2
Quarter ended June 30, 1998................................... $6 15/16 $4
Quarter ended March 31, 1998.................................. $8 15/16 $6 3/16
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
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.
17
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the five-year period
ended December 31, 1998, 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,
1998 1997 1996 1995 1994
(In thousands, except per share data)
Statement of Operations Data:
Net revenues.......................... $47,801 $65,759 $54,057 $57,384 $41,721
Gross margin.......................... $23,781 $34,205 $32,152 $31,657 $20,742
Income from operations................ $187 $9,894 $9,390 $11,824 $3,208
Net income............................ $944 $7,010 $6,703 $10,536 $2,880
Net income per share..................
Basic $0.08 $0.59 $0.54 $0.87 $0.43
Diluted $0.08 $0.54 $0.51 $0.77 $0.25
Weighted average shares used in per share
computations
Basic 11,560 11,822 12,320 12,112 6,733
Diluted 11,970 12,979 13,241 13,644 11,715
December 31,
1998 1997 1996 1995 1994
(In thousands)
Balance Sheet Data:
Working capital....................... $35,101 $39,922 $38,796 $41,321 $31,765
Total assets.......................... $69,444 $72,025 $69,032 $67,971 $53,584
Long-term obligations, less current
portion............................ $0 $2,805 $2,972 $3,181 $3,738
Stockholders' equity.................. $56,809 $59,321 $58,269 $55,847 $42,412
Quarterly Financial Data
(Unaudited)
Three Months Ended
-------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
--------------- ---------------- ------------ ------------
(In thousands, except per share data)
Net revenues................... $12,059 $11,758 $11,745 $12,239
Gross margin................... $6,210 $5,839 $5,104 $6,628
Net income..................... $48 $265 $61 $570
Net income per share...........
Basic....................... $0.00 $0.02 $0.01 $0.05
Diluted..................... $0.00 $0.02 $0.01 $0.05
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
18
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. 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.
In recent years, Sales of communications products have constituted a
majority of the Company's revenues. Specifically, such products represented
approximately 64%, 69% and 63% of net revenues for 1998, 1997, and 1996,
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. 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 communications market includes networking applications. 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 57% of the
Company's net revenues in 1998 and accounted for 6 of the Company's 10 top
selling products for 1998. These 6 products constituted approximately 37% 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 1999. 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 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
19
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,
1998 1997 1996
Net revenues................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................... 50.2 48.0 40.5
Gross margin................................................. 49.8 52.0 59.5
Operating expenses:
Research and development..................................... 24.9 18.2 20.6
Selling, general and administrative.......................... 24.5 18.8 21.5
Total operating expenses............................. 49.4 37.0 42.1
Income from operations......................................... 0.4 15.0 17.4
Interest income (expense), net................................. 2.7 1.7 2.0
Income before provision for taxes.............................. 3.1 16.7 19.4
Provision for taxes on income.................................. 1.1 6.0 7.0
Net income..................................................... 2.0% 10.7% 12.4%
Net Revenues
Net revenues were $47.8 million for 1998, $65.8 million for 1997 and $54.1
million for 1996. Net revenues in 1998 decreased 27% over net revenues in 1997
and 1997 net revenues increased 22% over 1996. The Company serves three
principal markets, computer, communications and industrial. Net revenues for
1998 compared to 1997 increased 3% in the industrial market and decreased 33% in
the communications market and 37% in the computer market. 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.
The communications market includes the computer networking equipment
("networking") sub-market. Sales of products to the networking market constitute
a majority of the Companys net revenues. Revenues in the networking sub-market
for 1998 were $27.5 million, or 57% of net revenues, compared to $42.9 million,
or 65% of net revenues, for 1997 and $30.7 million, or 57% of net revenues, for
1996. 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 have in the past and
will in the future be materially and adversely affected in the event of a
significant slowdown in the computer networking equipment market.
International revenues for 1998 totaled $20.2 million, or 42% of net
revenues, compared to $34.6 million, or 53% of net revenues, for 1997 and $20.3
million, or 38% of net revenues, for 1996. The decrease in international
revenues in absolute dollars in 1998 compared to 1997 was due to the combination
of lower direct product demand for the Company's products in Asia and decreased
Asia Pacific subcontract work for domestic customers. The increase in
international revenues in absolute dollars in 1997 compared to 1996 was due to
stronger demand for the Company's products in Asia and Europe. Despite the lower
product demand in Asia through the end of 1998, the Company does not expect any
disproportionate direct negative impact as a result of future financial and
stock market dislocations that have occurred in the Asian financial markets, as
the majority of the Company's Asia Pacific business is subcontract work for
domestic customers.
20
Domestic distributor revenues were approximately 22% of net revenues for
1998, compared to 17% for each of 1997 and 1996. In July 1998, the Company added
a third national domestic distributor. 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 50% in 1998 from 52% in 1997 and 60%
in 1996, primarily due to a shift of product mix to lower margin products, lower
levels of production and lower average selling prices related to competitive
pricing pressures, especially in the communications market.
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.
The Company closed its internal Bipolar fabrication facility in the fourth
quarter of 1998. Production related to this fabrication facility has been moved
to an outside foundry and will result in lower wafer costs. The total cost of
the closing on the Company's internal Bipolar fabrication facility, including
clean-up and qualification of the new fabrication facility was approximately
$2.0 million and was expensed as incurred.
21
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 $11.9 million for 1998, or 25% of
net revenues, compared to $12.0 million, or 18% of net revenues, in 1997 and
$11.2 million, or 21% of net revenues, in 1996. Research and development
expenses in absolute dollars in 1998 were flat with 1997. The increase in
research and development expenses in absolute dollars in 1997 compared to 1996
is primarily attributable to the addition of personnel associated with the
Company's development center in Cambridge, England. In the first quarter of
1999, the Company announced its intention to establish a development center in
Livingston, Scotland. The first managing director for the Livingston location
was hired in January 1999 and the Company expects to add additional development
engineers in Cambridge and Livingston throughout the remainder of 1999. 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. Such expenses
fluctuated as a percentage of net revenues primarily due to changes in revenue.
Selling, General and Administrative
Selling, general and administrative expenses were $11.7 million for 1998,
or 25% of net revenues, compared to $12.3 million, or 19% of net revenues, in
1997 and $11.6 million, or 22% of net revenues, in 1996. The decrease in
absolute dollars in 1998 compared to 1997 is primarily attributable to a
decrease in sales commissions due to lower net revenues and decreased business
conference costs. 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 Company expects additional spending increases
in absolute dollars in selling, general and administrative expenses in the
future. Such expenses fluctuated as a percentage of net revenues primarily due
to changes in revenue.
In fiscal 1998, the Company recorded an approximately $670,000 severance
charge for the former Chief Executive Officer; $133,000 of this amount was
related to modifications of option terms.
Interest and Other Income and Interest Expense
Interest and other income was $1.6 million for 1998, $1.3 million for 1997
and $1.4 million for 1996. Interest income is affected by changes in the
Company's cash balances as well as prevailing interest rates. Interest expense
was $0.3 million for each of 1998, 1997 and 1996.
Provision for Income Taxes
The Company's effective tax rates for 1998, 1997 and 1996 were 36% which
differs from the statutory income tax rate primarily due to state income taxes,
net of federal research credits.
22
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 $11.4 million
of net cash during 1998, a decrease of $0.5 million over 1997. The decrease in
1998 cash from operations is primarily attributable to lower net income,
increased deferred tax assets and decreased accounts payable partially offset by
lower accounts receivable, inventory and accrued liabilities balances at the end
of 1998.
Cash used in investing activities for 1998 is attributable to capital
expenditures of $4.1 million and the net purchase of short-term investments of
$2.3 million. The Company currently expects capital expenditures to be
approximately $4.0 million in 1999 and as of December 31, 1998 had capital
commitments for 1999 of approximately $0.3 million.
Financing activities for 1998 consist primarily of the repurchase of the
Company's common stock for $4.7 million. From January 1996 through the end of
1998, the Board of Directors approved the repurchase of an aggregate of $21.0
million of the Company's Common Stock in stock repurchase programs. Through
January 25, 1999, the Company has repurchased 2,413,000 shares at an aggregate
cost of $18.7 million. Subsequent to year end, the Company had repurchased a
total of 283,000 shares of its Common Stock for $1.5 million as of January 25,
1999. The Company also generated $1.0 million of proceeds from common stock
issued under employee stock option and purchase plans.
Working capital amounted to $35.1 million as of December 31, 1998 and
includes cash and cash equivalents of $6.4 million and short-term investments of
$22.9 million.
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. 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. Accordingly, 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, 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
23
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.
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.
Year 2000 Readiness Disclosure
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 has
also commenced on a Year 2000 date conversion project to address machinery,
equipment and other items used in the operations of the Company.
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, and suppliers that are not Year 2000 compliant, and to
develop, implement, and test remediation and contingency plans to mitigate these
risks. The project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing. In addition, the Company provides its customers
with information on the Year 2000 project and the progress made towards Year
2000 compliance.
INFORMATION SYSTEMS. The company's current enterprise information system
has been remediated and was fully tested in May 1998 and determined to be Year
2000 compliant.
The required changes to the Company's information systems and items used in
the operations of the Company are expected to be completed by the end of June
1999.
24
Based on the current status of the assessments and remediation plans made
to date, the Company expects total Year 2000 related external costs pertaining
to its information systems to be between $20,000 and $30,000. Of such amount,
approximately $10,000 has been spent to date. None of the Company's other
information technology projects have been deferred as a result of the Company's
Year 2000 compliance efforts.
PRODUCTS. The Company has assessed the capabilities of all of its products
sold to customers. Based on the assessments made to date none of the Company's
products are affected by Year 2000 issues.
OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used
in the operations and facilities of the Company have been inventoried and are
currently being assessed for Year 2000 compliance. The assessment to date has
not yielded any major areas of concern. The assessment process was completed in
September 1998. In June 1998, the Company started to develop remediation plans.
Based on the assessments and remediation plans made to date, the Company expects
Year 2000 related external costs pertaining to its operations and infrastructure
to range between $20,000 and $30,000.
SUPPLIERS. The Company continues to evaluate its supplier base to determine
whether Year 2000 issues affecting suppliers will adversely impact the company's
operations. The Company has recently completed an assessment of its key
suppliers. Although the Company does not anticipate any business disruptions
based on the assurances made by these suppliers, the Company will continue to
assess and monitor key suppliers through the year 2000 transition period.
CUSTOMERS. The Company established a Global Year 2000 Desk at its
headquarters in California to handle all customer requests for compliance and
survey information, and for other general information related to the company's
Year 2000 programs.
GENERAL AND RISK FACTORS. Although the Company expects that the Year 2000
project will be completed in a timely manner to prevent any significant
disruptions of business, unforeseen risks and delays may cause disruption in
manufacturing, order processing and distribution services or lead to additional
costs. The Company believes that its greatest potential risks for Year 2000
issues are associated with its information systems and systems embedded in its
operations and infrastructure, for which the Company is continuing to review and
evaluate the need of contingency planning that may be required.
Internal costs incurred for the Year 2000 project are being tracked; they
principally consist of payroll and related costs. The Company does not currently
expect the total costs to be material, and it expects to be able to fund the
total costs through operating cash flows. However, the Company has not yet
completed all of its assessments, developed remediation or contingency plans for
all problems, or completely implemented or tested its remediation plans.
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems; may not be able to develop, implement, or test remediation
or contingency plans; or may find that the costs of these activities exceed
current expectations and become material. In many cases, the Company is relying
on assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test certain
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed by the supplier in a
timely and satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the company. If
the Company fails to satisfactorily resolve Year 2000 issues in a timely manner,
it could be exposed to claims by third parties.
25
The Company is evaluating the various types of contingency plans such as
procedures for dealing with disruptions of internal business systems, plans for
factory shutdowns and identification of alternative material vendors in the
event of Year 2000 related disruption in supply. Contingency evaluation and
planning will continue through 1999, and will depend heavily on the results of
the remediation and testing of critical systems. The Company cannot assure that
any contingency plans in effect at the time of a system failure will adequately
address the immediate or long term effects of a failure, or that such a failure
would not have a material adverse impact on our operations or financial results
in spite of prudent planning.
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 continuing to evaluate Year
2000-related risks and corrective actions. At this time, the Year 2000
compliance expense and related potential effect of the Company's earnings are
estimated to be insignificant. However, the risks associated with the Year 2000
problem are pervasive and complex, can be difficult to identify and to address,
and can result in material adverse consequences to the Company. Even if the
Company, in a timely manner, completes all of its assessments, identifies and
tests remediation plans believed to be adequate, and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the Company.
26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of December 31, 1998, the Company's investment portfolio consisted of
U.S. government obligations and commercial paper of $24.0 million, typically
with maturities of less than 12 months (see Note 1 of Notes to the Consolidated
Financial Statements). These securities, like all U.S. government obligations
and commercial paper, are subject to interest rate risk and will decline in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels as of December 31, 1998,
the decline in the fair value of the portfolio would not be material.
Additionally, the Company has the ability to hold its fixed income investments
until maturity and, therefore, the Company would not expect to recognize such an
adverse impact in income or cash flows.
Foreign Currency Exchange Risk
The Company has international sales and research and development facilities
and is, therefore, subject to foreign currency rate exposure. The Company's
foreign currency risks are mitigated principally by maintaining only minimal
foreign currency balances. To date, the exposure to the Company related to
exchange rate volatility has not been significant. If the foreign currency rates
fluctuate by 10% from rates at December 31, 1998, the effect on the company's
financial position and results of operations would not be material. However,
there can be no assurance that there will not be a material impact in the
future.
27
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Report of PricewaterhouseCoopers LLP, Independent Accountants............................................. 29
Report of Ernst and Young LLP, Independent Auditors....................................................... 30
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................................. 31
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.................... 32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996...... 33
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................ 34
Notes to Consolidated Financial Statements................................................................ 35
28
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 page 47 present fairly, in all material
respects, the financial position of Micro Linear Corporation and its
subsidiaries at January 3, 1999 and December 28, 1997, and the results of their
operations and their cash flows for the years then ended, 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.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Micro Linear Corporation
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Micro Linear Corporation for the year
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 results of operations and cash
flows of Micro Linear Corporation for the year 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
30
MICRO LINEAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
1998 1997
Assets
Current assets:
Cash and cash equivalents................................................... $6,393 $5,210
Short-term investments...................................................... 22,937 20,653
Accounts receivable, net of allowance for doubtful accounts of $540 and
$530 at December 31, 1998 and 1997, respectively......................... 5,476 10,367
Inventories................................................................. 7,260 7,823
Deferred tax assets......................................................... 4,733 4,461
Other current assets........................................................ 937 1,307
Total current assets..................................................... 47,736 49,821
Property, plant and equipment, net............................................ 21,140 21,523
Other assets.................................................................. 568 681
Total assets........................................................ $69,444 $72,025
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................ $3,030 $3,612
Accrued compensation and benefits........................................... 2,211 1,688
Deferred income on shipments to distributors................................ 2,739 2,695
Accrued commissions......................................................... 634 848
Other accrued liabilities................................................... 1,230 889
Current portion of long-term debt........................................... 2,791 167
Total current liabilities................................................ 12,635 9,899
Long-term debt................................................................ 2,805
--
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 13,517,780 and 13,168,003 at December 31, 1998 and 1997,
respectively
Outstanding shares 11,104,280 and 11,656,003 at December 31, 1998 and 1997, 14 13
respectively..................................................................
Additional paid-in capital.................................................. 54,125 52,890
Retained earnings........................................................... 21,389 20,445
Treasury stock, at cost, 2,413,500 and 1,512,000 shares at December 31, 1998 and (18,719) (14,027)
1997, respectively
Total stockholders' equity............................................... 56,809 59,321
Total liabilities and stockholders' equity.......................... $69,444 $72,025
See accompanying notes to the consolidated financial statements.
31
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
1998 1997 1996
Net revenues..................................................... $47,801 $65,759 $54,057
Cost of revenues................................................. 24,020 31,554 21,905
Gross margin................................................... 23,781 34,205 32,152
Operating expenses:
Research and development....................................... 11,922 11,962 11,157
Selling, general and administrative............................ 11,672 12,349 11,605
23,594 24,311 22,762
Income from operations......................................... 187 9,894 9,390
Interest and other income........................................ 1,550 1,337 1,392
Interest expense................................................. (262) (278) (308)
Income before provision for taxes.............................. 1,475 10,953 10,474
Provision for taxes.............................................. 531 3,943 3,771
Net income..................................................... $944 $7,010 $6,703
Net Income Per Share:
Basic:
Net income per share........................................... $0.08 $0.59 $0.54
Weighted average number of shares used in per share computation 11,560 11,822 12,320
Diluted:
Net income per share........................................... $0.08 $0.54 $0.51
Weighted average number of shares used in per share computation 11,970 12,979 13,241
See accompanying notes to consolidated financial statements.
32
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Additional Total
Common Stock Paid-in Retained Treasury Stockholders
Shares Amount Capital Earnings Stock Equity
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 -- -- 274 -- -- 274
exercised
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 -- -- 686 -- -- 686
exercised
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
Exercise of stock options 217,847 1 574 -- -- 575
Shares purchased under
employee
stock purchase plan... 131,930 -- 474 -- -- 474
Amortization of deferred
compensation.......... -- -- 187 -- -- 187
Purchase of treasury stock (901,500) -- -- (4,692) (4,692)
Net income.............. -- -- 944 -- 944
Balance at December 31, 1998 11,104,280 $14 $54,125 $21,389 ($18,719) $56,809
See accompanying notes to consolidated financial statements.
33
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------
1998 1997 1996
Operating activities:
Net income......................................................... $944 $7,010 $6,703
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 4,477 4,542 3,316
Tax effect from employee stock plans............................ -- 686 274
Deferred income tax (benefit) provision.......................... (272) 38 (1,047)
Amortization of deferred compensation............................ 187 51 81
Changes in assets and liabilities:
Accounts receivable.............................................. 4,891 (5,995) 2,199
Inventories...................................................... 563 2,633 (1,470)
Other current assets and other assets............................ 483 770 (1,185)
Accounts payable................................................. (582) 880 (844)
Accrued compensation, accrued commissions and other liabilities.. 650 824 103
Deferred income on shipments to distributors..................... 44 446 (85)
Net cash provided by operating activities...................... 11,385 11,885 8,045
Investing activities:
Capital expenditures, net of dispositions.......................... (4,094) (4,301) (8,164)
Purchases of short-term investments................................ (41,584) (35,897) (25,836)
Sales and maturities of short-term investments..................... 39,300 36,042 31,337
Net cash used in investing activities.......................... (6,378) (4,156) (2,663)
Financing activities:
Principal payments under capital lease obligations and debt........ (181) (209) (535)
Proceeds from issuance of common stock............................. 1,049 1,652 1,043
Purchase of treasury stock of the Company.......................... (4,692) (8,347) (5,680)
Net cash used in financing activities.......................... (3,824) (6,904) (5,172)
Net increase in cash and cash equivalents.......................... 1,183 825 210
Cash and cash equivalents at beginning of period................... 5,210 4,385 4,175
Cash and cash equivalents at end of period......................... $6,393 $5,210 $4,385
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $285 $280 $310
Income taxes..................................................... $1,409 $1,856 $6,161
See accompanying notes to consolidated financial statements.
34
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 1998, 1997 and 1996 ended on January 3,
1999, December 28, 1997 and December 29, 1996, respectively, and fiscal 1997 and
1996 were comprised of 52 weeks and fiscal 1998 was comprised of 53 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 33%, 53% and 38% of
net revenues for the years ended December 31, 1998, 1997 and 1996, respectively.
In fiscal 1998, two customers accounted for 20% and 11% of net revenues,
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.
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.
35
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 investments in 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 interest and other income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest and other 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 interest and other income.
The following is a summary of available-for-sale securities at December 31,
1998 and 1997 (in thousands):
1998 1997
Cost Cost
U.S. government obligations................................... $ 4,673 $6,054
Commercial paper.............................................. 19,341 16,744
$24,014 $22,798
Amounts included in short-term investments.................... $22,937 $20,653
Amounts included in cash and cash equivalents................. 1,077 2,145
$24,014 $22,798
At December 31, 1998 and 1997, 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, 1998, 1997 and 1996.
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.
36
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, 1998 and 1997 comprise 36% and 40% of accounts receivable,
respectively. At December 31, 1998, two customers comprise 22% and 17% of
accounts receivable, respectively. At December 31, 1997, two customers comprise
22% and 16% 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.
Comprehensive Income
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. For the years ended December 31, 1998 and 1997,
the differences between net income and comprehensive income were insignificant.
37
Segment Reporting
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 adopted SFAS 131 in fiscal
1998, however no additional disclosure is considered necessary since the Company
operates in one segment as defined by SFAS 131.
Recent Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee released
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
Activities." SOP No. 98-5 is effective for fiscal years beginning after December
15, 1998 and requires companies to expense all costs incurred or unamortized in
connection with start-up activities. The adoption of this SOP will not have any
significant effect on the Company's results of operations as the Company has
expensed such start-up costs in prior years.
Under the SOP 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" effective for financial statements for periods
beginning after December 15, 1998, direct external costs, directly related
internal payroll and payroll-related cost and interest expenses associated with
the application development stage are capitalizable. Upgrades and enhancements
are capitalized if they meet certain criteria. Training, maintenance, and
data-conversion costs are expensed. The adoption of this SOP will not have any
significant effect on the Company's results of operations.
2. Supplemental Financial Information
Inventories consist of the following (in thousands):
December 31,
1998 1997
Raw materials.............................................. $314 $712
Work-in-process............................................ 4,906 5,100
Finished goods............................................. 2,040 2,011
$7,260 $7,823
Property, plant and equipment consist of the following (in thousands):
December 31,
1998 1997
Land....................................................... $2,850 $2,850
Buildings and improvements................................. 9,904 9,873
Machinery and equipment.................................... 33,736 29,673
46,490 42,396
Accumulated depreciation and amortization.................. 25,350 20,873
Net property, plant and equipment.......................... $21,140 $21,523
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 $2,791,000 and
$2,972,000 were outstanding under the loan as of December 31, 1998 and December
31, 1997, respectively. The unpaid principal has been reclassified to current
portion of long term debt in accordance with the maturity date of the promissory
note.
38
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,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- ---------------------------------- ------------------------------------
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 $944 11,560 $0.08 $7,010 11,822 $0.59 $6,703 12,320 $0.54
Effect of dilutive
securities: 410 1,157 921
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $944 11,970 $0.08 $7,010 12,979 $0.54 $6,703 13,241 $0.51
Options to purchase 3,823,992, 413,780 and 1,086,130 shares of common stock
at weighted average prices of $7.55, $12.53 and $11.35 per share were
outstanding during 1998, 1997 and 1996, 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 2008, 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. In
August 1998, the Company designated 30,000 shares of Preferred Stock as Series A
Participating Preferred Stock in connection with the adoption of a shareholders
rights program. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. No such preferred
stock was issued or outstanding anytime during fiscal years 1998, 1997 and 1996.
Shareholder Rights Plan
In August 1998, the Company implemented a plan to protect shareholders'
rights in the event of a proposed takeover of the Company. Under the plan, each
share of the Company's outstanding common stock carries one right to purchase
one-thousandth of a share of the Company's Series A Participating Preferred
Stock (the "Right") at an exercise price of $30.00 per share. The Right enables
the holder to purchase common stock of the Company or the acquiring company ten
39
days after a person or group publicly announces it has acquired or has tendered
an offer for 15% or more of the Company's outstanding common stock. The Rights
are redeemable by the Company at $0.01 per Right at any time on or before the
tenth day following acquisition by a person or group of 15% or more of the
Company's common stock. If prior to redemption of the Rights, a person or group
acquires 15% or more of the Company's common stock, each Right not owned by a
holder of 15% or more of the common stock (or an affiliate of such holder) will
entitle the holder to purchase, at the Right's then current exercise price, that
number of shares of common stock of the Company having a market value at the
time of twice the Right's exercise price. The Rights expire in August 2008.
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, 1998:
Number of
Shares
-----------
Issuable upon:
Exercise of stock options, including options available for grant 4,772,087
Purchase under Employee Stock Purchase Plan 200,680
-----------
4,972,767
===========
From January 1996 through the end of 1998, the Company's Board of Directors
approved the repurchase of an aggregate of $20.0 million of the Company's common
stock in stock repurchase programs. Through January 25, 1999, the Company had
repurchased 2,413,000 shares at an aggregate cost of $18.7 million. During each
of fiscal 1998, 1997 and 1996, the Company repurchased 901,500, 756,000 and
756,000 shares, respectively, at a cost of $4.7 million, $8.3 million and $5.7
million, respectively. Subsequent to year end, the Company did not repurchase
any of its common stock through January 25, 1999.
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.
In September 1998 the Company adopted the 1998 Nonstatutory Option Plan
(1998 NSO Plan), under which employees and consultants may be granted
nonstatutory stock options to purchase shares of the Company's common stock at
not less than the fair market value on the date of grant. Executive officers may
only receive options under the plan as an inducement essential to his or her
initial employment with the Company. An aggregate of 600,000 shares are reserved
for options granted under the Plan.
40
Under the 1983, 1991 and 1998 NSO 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, 1991 and 1998 NSO 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, 1991 and 1998 NSO plans is
summarized as follows:
Outstanding Options
Available Number Weighted Average
For Grant of Shares Exercise Price
Balance at December 31, 1995......................... 264,760 2,507,343 $6.20
Options 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 authorized................................. 1,175,885 -- --
Options granted.................................... (3,522,280) 3,522,280 $5.86
Options exercised.................................. -- (217,847) $2.60
Options canceled................................... 2,445,844 (2,445,844) $8.03
Balance at December 31, 1998......................... 1,058,579 3,531,908 $5.06
Options exercisable at:
December 31, 1998 1,028,714 $4.52
December 31, 1997 1,001,206 $4.03
December 31, 1996 702,461 $2.46
In 1997, 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 equal to 4% of the
Company's fully diluted shares for a two year period commencing on January 1,
1998. The number of shares so reserved increased by 575,885 in 1998.
In January 1998, the Board of Directors approved the repricing of all
incentive stock options granted above $7.50 per share. The repricing did not
include incentive stock options granted to any member of the Company's Board of
Directors or the Chief Executive Officer. 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 on a one-for-one
basis such that the new options would have an exercise price of $7.375. All of
the new options retained the original vesting structure but restarted the
vesting period as of January 27, 1998.
In July 1998, the Board of Directors approved the repricing of stock
options granted above $4.75 per share. The repricing did not include incentive
stock options granted to any member of the Company's Board of Directors. Prior
options granted totaled 2,928,370 shares at prices ranging between $4.75 and
$14.06. Employees had the choice of exchanging any stock options granted for new
options on a one-for- one basis such that the new options would have an exercise
price of $4.75. All of the new options retained the original vesting structure
but restarted the vesting period as of July 28, 1998.
41
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, 1998, options 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
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. 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 Director Plan.
Option activity of the Directors' stock options is as follows:
Options Outstanding
--------------------------------------
Available Number of Weighted Average
For Grant Shares Exercise Price
------------ ------------- ---------------------
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
Authorized 100,000 --
Granted (14,000) 14,000 $4.44
------------ -------------
Balance at December 31, 1998 99,800 81,800 $10.22
============ =============
Options exercisable at:
December 31, 1998 61,549 $10.04
December 31, 1997 36,800 $8.63
December 31, 1996 48,800 $5.92
42
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
1998, 1997 and 1996 were 131,930, 119,156 and 101,056 shares of common stock
with a total purchase price of approximately $475,000, $770,000 and $659,000,
respectively. As of December 31, 1998, there were 680 shares available to
purchase.
The Company adopted a new Employee Stock Purchase Plan (1998 Purchase Plan)
in September 1998. An aggregate of 200,000 shares of the Company's common stock
have been reserved for issuance under the 1998 Purchase Plan. The 1998 Purchase
Plan provides that all employees may purchase stock at 85% of its fair market
value on specified dates via payroll deductions. Shares available for purchase
may be replenished each year. There were no sales under the 1998 Purchase Plan
in 1998.
Pro Forma Net Income Per Share
Disclosure of 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 the Black-Scholes option pricing model
and the multiple option approach with the following weighted-average
assumptions:
Employee Stock
Purchase Plan Stock Option Plans
---------------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- -------- ------- ------- --------
Expected Life (in years) 0.5 0.5 0.5 3.4 3.2 2.9
Risk-free interest rate 4.70% 5.27% 5.25% 5.1% 5.6% 6.2%
Volatility 1.28 .86 .83 .99 .85 .76
Dividend yield - - - - - -
The Black-Scholes option valuation model was developed for use in
estimating the fair value of publicly 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 1998, 1997 and 1996 was
$2.13, $3.42 and $3.30, respectively. The weighted average estimated fair value
of options granted under the employee and directors stock option plans during
1998, 1997 and 1996 was $4.01, $5.79 and $2.39, respectively.
43
The following table summarizes information about all stock options at
December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------------
Weighted-Average
Number Remaining Weighted-Average Number
Range of Outstanding Contractual Life Exercise Price Exercisable Weighted-Average
Exercise Prices at December 31, (Years) at December 31, Exercise Price
1998 1998
----------------- -------------------- ------------------ --------------- -------------------- ------------------
$0.38 - $1.38 440,582 3.8 $1.36 425,342 $1.36
$2.50 - $3.88 139,490 7.8 $3.05 61,040 $2.50
$4.00 - $4.75 1,787,864 9.6 $4.72 19,553 $4.51
$5.00 - $9.25 1,197,359 7.6 $7.08 545,176 $7.13
$10.75 - $18.38 48,413 7.6 $13.96 39,152 $14.33
--------------------
====================
3,613,708 8.1 $5.15 1,090,263 $4.83
==================== ====================
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,
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
Net Income (loss):
As reported.................. $ 944 $7,010 $6,703
Pro Forma.................... ($1,824) $4,948 $4,798
Net Income (loss) Per Share:
Basic as reported............ $ 0.08 $ 0.59 $0.54
Diluted as reported.......... $ 0.08 $ 0.54 $0.51
Pro Forma Basic.............. ($ 0.16) $ 0.42 $0.39
Pro Forma Diluted............ ($ 0.16) $ 0.38 $0.36
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 $10,000 during 1998. 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 $419,000, $260,000 and $205,000 for 1998,
1997 and 1996, respectively.
44
7. Income Taxes
The provisions for taxes consist of the following (in thousands):
December 31,
1998 1997 1996
Federal:
Current........................................... $778 $3,692 $4,342
Deferred.......................................... (306) 257 (1,102)
472 3,949 3,240
State:
Current........................................... 25 213 598
Deferred.......................................... 34 (219) (67)
59 (6) 531
Provision for taxes on income....................... $531 $3,943 $3,771
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 and $345,000 in 1996. Such benefits were immaterial in
1998 and were credited to additional paid-in capital in 1997 and 1996.
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,
1998 1997 1996
Tax at federal statutory rate.................................. $516 $3,833 $3,666
State tax, net of federal benefit.............................. 135 352 345
Research credits............................................... (150) (408) (204)
Foreign sales corporation...................................... (114) (221) --
Other.......................................................... 144 387 (36)
Provision for taxes............................................ $531 $3,943 $3,771
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 31,
1998 1997
Deferred tax assets:
Inventory valuation..................................................... $3,010 $2,514
Deferred revenue........................................................ 1,116 1,125
Other accruals and reserves not yet deductible for tax purposes......... 655 879
Other................................................................... 67 212
Total deferred tax assets................................................. 4,848 4,730
Deferred tax liabilities:
Other................................................................... 115 269
Total deferred tax liabilities............................................ 115 269
Total net deferred tax assets............................................. $4,733 $4,461
8. Commitments and Contingencies
Legal Proceedings
A discussion of certain pending legal proceedings is included in Item 3 of
Part I of the Company's Form 10-K for the fiscal year ended December 31, 1998.
The Company believes 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
45
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, 1998, 1997 and
1996 totaled approximately $147,000, $157,000 and $122,000, respectively. Future
minimum lease payments for all leases are as follows (in thousands):
Fiscal Year
1999................................................. $28
2000................................................. 17
2001................................................. 7
Total minimum lease payments......................... $52
Purchase Commitments
The Companys's manufacturing relationships with foundries allow for the
cancellation of all outstanding purchase orders, but require repayment of all
expenses to date. As of December 31, 1998, foundries had incurred approximately
$690,000 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.
46
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 26, 1999, 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.
47
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 PricewaterhouseCoopers LLP, Independent Accountants
Report of Ernst and Young LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
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.
48
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, 1996
Allowance for Doubtful Accounts.................. $240 $60 $57 $243
Year Ended December 31, 1997
Allowance for Doubtful Accounts.................. $243 $287 $0 $530
Year Ended December 31, 1998
Allowance for Doubtful Accounts.................. $530 $10 $0 $540
__________
(1) Charges for uncollectable accounts, net of recoveries
49
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(3)* Nonstatutory Stock Option Plan.
10.11(4)* 1998 Employee Stock Purchase Plan and Form of Subscription
Agreement.
10.12(1)** License and Manufacturing Agreement between Think-O Electric
Company and Registrant dated as of April 1, 1994.
23.1 Consent of PricewaterhouseCoopers 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 Registration Annual
Report Form 10-K for the fiscal year ended December 31, 1995.
(3)Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (file no. 333-53003) filed on May 19, 1998.
(4)Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (file no. 333-67769) filed on November 23, 1998.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See (a) above.
(d) Financial Statement Schedules.
See (a) above.
50
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 2nd day of April, 1999.
MICRO LINEAR CORPORATION
By /s/ DAVID L. GELLATLY
David L. Gellatly
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 David L. Gellatly 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
Report has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
/s/ DAVID L. GELLATLY Chairman, Chief Executive Officer April 2, 1999
and President
David L. Gellatly (Principal Executive Officer)
/s/ J. PHILIP RUSSELL Chief Financial Officer (Principal April 2, 1999
J. Philip Russell Financial and Accounting Officer)
/s/ JOSEPH D. RIZZI Director April 2, 1999
Joseph D. Rizzi
/s/ ROGER A. SMULLEN Director April 2, 1999
Roger A. Smullen
/s/ JEFFREY D. WEST Director April 2, 1999
Jeffrey D. West
51
INDEX TO EXHIBITS
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
Exhibit 23.2 Consent of Ernst and Young LLP, Independent Auditors