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, 1996
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 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 23, 1997, was
approximately $146,029,177. 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 23, 1997 was 11,990,646.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting of
Stockholders to be held May 28, 1997 are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS
Page
PART I.
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Item 1. Business......................................................................................... 3
Item 2. Properties....................................................................................... 17
Item 3. Legal Proceedings................................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 18
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................... 18
Item 6. Selected Financial Data........................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................. 19
Item 8. Financial Statements and Supplementary Data....................................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 25
PART
III.
Item 10. Directors and Executive Officers of the Registrant................................................ 41
Item 11. Executive Compensation............................................................................ 41
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 41
Item 13. Certain Relationships and Related Transactions.................................................... 41
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 42
SIGNATURES.................................................................................................. 45
Exhibit 11.1 Statement Re Computation of Earnings Per Share................................................. 47
Exhibit 23.0 Consent of Ernst & Young LLP, Independent Auditors............................................. 48
Exhibit 27.0 Financial Data Schedule........................................................................ 49
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PART 1
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 below 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, mass storage, video,
telecommunications, power management, lamp ballast, motor control and data
conversion. The Company utilizes its proprietary design techniques and BiCMOS,
Bipolar and CMOS manufacturing processes to produce proprietary and application
specific products that enable systems designers to achieve increased levels of
systems integration and reduce system costs.
Background
Electronic circuits may be divided into two general categories: digital and
analog (or linear). Digital circuits, such as memories and microprocessors,
process information in the form of bits, or coded electrical signals which take
on only two states ("1" and "0" or "on" and "off"). Analog circuits process
information in the form of continuously varying voltages and currents that have
an infinite number of values or states. Naturally occurring physical phenomena
such as light intensity, position, pressure, force, sound level, temperature,
and velocity are inherently analog in nature. As a result, analog circuits find
wide application in electronic interfaces between digital information processing
systems and the analog "real world" of information storage and transmission
media, power distribution systems, actuators and physical transducers. Principal
applications for analog circuits include data acquisition and conversion, data
communications, industrial controls, instrumentation, magnetic data storage
systems, motor controls and power supply electronics, telecommunications, video
imaging and display systems. The increasing presence of highly integrated
digital electronic systems has increased the need for analog interface functions
in a wide variety of applications.
Analog-to-digital interface functions were originally implemented in systems
as a printed circuit board-level function composed of many off-the-shelf
standard ("building block") integrated circuits performing the various analog
and digital functions associated with the interface. Such interface functions
include filtering, amplification, comparing a voltage level to a reference,
voltage and current references, analog-to-digital ("A/D") conversion,
digital-to-analog ("D/A") conversion and digital data storage and buffering.
This implementation methodology is still in widespread use because it minimizes
design and manufacturing risk and reduces time to market. However, systems
manufacturers generally desire higher levels of performance, smaller form
factors, lower costs, greater reliability and more end product differentiation.
Accordingly, such manufacturers have sought integrated solutions in which these
building block circuits are replaced by a complete electronic system or
subsystem which combines both analog and digital functions on one or a few mixed
signal integrated circuits. Integrated solutions increase system reliability and
performance while decreasing size and cost. Combining analog and digital
functions, however, presents considerable technical obstacles. As compared with
digital circuits, the elements that comprise an analog circuit generally have
greater variety, are less repetitive and require more precise placement within
the circuit layout to assure satisfactory circuit performance. A semiconductor
process designed for analog can easily accommodate digital functions while a
digital process often cannot deliver the most basic of analog designs. Analog
design also requires a much higher level of circuit skills because the design is
implemented at the device level. These factors make it more difficult to achieve
the high levels of integration normally associated with digital circuits. As a
result of these and other factors, high performance analog circuit design is
extremely difficult. In addition, the Company believes that the number of
qualified analog designers is far more limited than digital designers and that
many customers are limited at the systems-level in applying analog design
skills. Furthermore, the complexity and variability of analog design has made it
difficult to develop automated design tools similar to those available for
digital circuit design. The traditional simulation and testing methodologies for
analog and digital design are also incompatible which further hampers the
problem of moving predictably from a design to a functional mixed signal
integrated circuit. The increasing complexity of electronic systems and the
difficulty of effectively integrating digital and analog functionality poses
significant technical hurdles for systems designers.
Strategy
Micro Linear's goal is to be a leading supplier of highly integrated analog
and mixed signal circuits for applications that require systems-level features.
To achieve this objective, the Company has adopted the following strategies:
Target High Growth Applications. Micro Linear targets high growth
applications that require substantial analog and mixed signal content and that
derive significant benefits from the use of the Company's systems-level
expertise. The Company focuses on innovative proprietary analog and mixed-signal
products which provide high performance and cost-effective solutions for a
variety of applications, including networking, mass storage, video, power
management, telecommunications and portable computing.
Develop Highly Integrated Circuits with Systems-Level Features. Micro Linear
uses its analog and mixed signal design expertise to integrate an entire
electronic subsystem or several analog building block circuits into a single
circuit or chipset. Micro Linear designs and develops highly integrated mixed
signal proprietary circuits that incorporate systems-level features, thereby
reducing the size and cost of the customer's electronic system, while providing
greater functionality, performance and reliability. The combination of highly
integrated circuits with sophisticated systems-level features results in
proprietary products for Micro Linear. The uniqueness and complexity of such
products, has enabled the Company to maintain its position as the sole source
supplier for a number of its products.
Offer a Broad Range of Products. Micro Linear offers a broad range of
innovative proprietary and application specific analog and mixed signal products
for a variety of applications within the communications, computer and industrial
markets. The Company provides customers the opportunity to identify the product
features that address the technical and time to market requirements of each
customer's specific application. By working closely with its customers to
identify desirable features and functionality, Micro Linear has expanded the
number of applications for its products.
Facilitate Rapid Time to Market. Micro Linear utilizes innovative Bipolar
and BiCMOS tile array design methodologies on many products to expedite the
development of cost-effective, high performance analog and mixed signal
circuits. These methodologies enable Micro Linear to reduce time to market for
those standard product designs and to modify such designs rapidly to satisfy
specific customer requirements. This tile array approach enables Micro Linear to
offer its customers many of the advantages of custom circuits with significantly
lower development cost, reduced technical risk and faster time to market.
Establish Multiple Sources of Wafer Supply. The Company has established
relationships with outside foundries for its wafer requirements in order to
avoid the substantial fixed costs and capital expenditures associated with
maintaining its own wafer fabrication facility. Micro Linear seeks to obtain at
least two sources of wafer supply for each of its manufacturing processes in an
effort to obtain competitive wafer pricing and reduce the risk of supply
shortages. This practice enables the Company to devote more of its resources to
the design, development and marketing of its products and to access diverse
manufacturing technologies.
Markets, Applications and Products
The Company develops standard and semi-standard products for a variety of
applications within the communications, computer and industrial markets. The
Company has focused primarily on products for use with applications in the local
area networks, video, power management and mass storage markets. Within these
markets the Company supplies products to 10 different application segments with
focus on local area networks, bus products, video, power supply, battery
management and motor controllers. The Company intends to continue the expansion
of its applications, product offerings and customer base.
The Company's approach to new product development is driven primarily by
application specific requirements within its targeted market categories. The
Company relies upon its engineering and marketing personnel to identify market
opportunities for new high performance products, to maintain close working
relationships with targeted customers, to determine product opportunities that
apply to a broad range of customers within the Company's target markets and to
define mixed signal products for specific applications.
The following table illustrates the three major markets and the various
applications and product categories served by the Company:
COMMUNICATIONS COMPUTER INDUSTRIAL
LOCAL AREA NETWORKS MASS STORAGE POWER MANAGEMENT
o ETHERNET o HARD DISK DRIVE o SWITCHED-MODE POWER SUPPLY
o 100 MEGABIT ETHERNET o MAGNETIC TAPE DRIVES o POWER FACTOR CONTROL
o FDDI o SPINDLE MOTOR CONTROL o BATTERY MANAGEMENT
o TOKEN RING o FLUORESCENT LIGHT BALLAST
o ATM o BACK LIGHT CONTROL
o INDUSTRIAL MOTOR CONTROL
TELECOMMUNICATIONS BUS PRODUCTS DATA CONVERSION
o VOICE BAND NCTE o SCSI TERMINATO o A/D CONVERTERS
o ANALOG BUFFERS o D/A CONVERTERS
o CLOCK GENERATORS
VIDEO PRODUCTS
o FILTERS
o CLOCK GENERATION AND LOCKING
o VIDEO A/D
Communications Market & Local Area Network Circuits
The local area network (LAN) market has experienced significant growth in
recent years due to the transition to distributed computing, with personal
computers and workstations replacing centralized mainframes and users requiring
immediate and continuous access to information throughout an organization. The
emergence of increasingly sophisticated software applications, such as imaging,
multimedia and remote communications requires innovative, high performance
networking technology which must provide for increased data throughput and
enhanced reliability.
The Company's local area network circuits are designed to allow for the
transmission of electronic signals over various media, such as twisted pair
copper wire and fiber optic cable. The Company's fiber optic quantizers respond
to very small, fast signals from fiber optic receiver ports and restore the
signal to larger amplitudes with a minimum of signal and timing distortion. In
1988, Micro Linear developed the first fiber optic quantizer and transceiver for
Ethernet fiber optic links between network hubs. Micro Linear also developed the
first twisted pair transceiver for the fiber distributed digital interface
(FDDI) that runs at 125 megabits per second. This function has also been
utilized in the physical interface products that are being sold into the 100
Megabit Ethernet applications as well as ATM physical interface products.
Communications Market & Telecommunications Circuits
The Company's telecommunications products are designed to provide high
performance and low noise and have tended to have long product life cycles. The
addition of new lines and switching equipment to upgrade existing analog
telephone lines continues to drive the demand for the Company's analog line
conditioning equipment. These mixed signal telecommunications circuits include
programmable attenuators, equalizers, tone detectors and sinewave generators.
The Company's telecommunications circuits conform to the Network Communications
Terminating Equipment (NCTE) standard, which is predominantly a North American
specification for electronic telephone line conditioning equipment. Telephone
line characteristics vary with line length, which cause distortion of the analog
voice signals. NCTE lines are generally free of this distortion because they
utilize devices such as those manufactured by the Company. The Company designs
and sells various circuits which enable telephone service providers to
compensate the trunk lines from remote locations for uneven transmission of
different frequencies and other circuits which control the signal amplitude to
compensate for line length. The ability of the telephone transmission equipment
to compensate automatically for this potential distortion enhances the quality
and reliability of the voice transmission.
Computer Market -- Mass Storage Circuits
Micro Linear supplies analog circuits which are used in Winchester hard disk
drives ("HDDs"), magnetic tape drives and removable media drives. These data
storage devices are incorporated into personal computers, workstations and other
office automation products. Micro Linear has significant experience in the area
of high speed, signal level processing that has been used in many of the
products. The evolving market for personal computers has created a demand for
larger data capacity storage devices and increased backup capability in case of
disk failure.
Computer Market -- Bus Circuits
The Company offers a family of bus products that provide performance
improvements to the digital interfacing of data, address buses and clocking by
utilizing analog circuit techniques to overcome the limitations of digital
design solutions. These devices are used in personal computers, workstations,
file servers and embedded applications of microprocessors.
Computer Market -- Video Circuits
Micro Linear has added a new line of products to its portfolio - video
circuits. This product line applies the Company's analog expertise to video
functions such as filters, clock synchronization and generation as well as
encoders and decoders. The resulting circuits can be used in video
teleconferencing, video editing, LCD projectors, set top and web television
applications. As an extension of PC applications, the Company believes that
applications for video teleconferencing, computer - television interface and
video editing will experience significant growth over the next several years.
Industrial Market & Power Management Circuits
Micro Linear has focused its power management product development efforts in
four areas: switched-mode power supply, power factor control, DC to DC
converters to manage battery power and fluorescent lamp ballast controllers. The
trend toward smaller, lighter weight and more power-efficient computer and other
portable electronic systems has created significant opportunities for advanced
power supply controllers and battery management devices. The Company's products
address the needs of systems designers for power management circuits that can
deliver the necessary power in a highly efficient manner, while extending
battery life and minimizing heat, size and weight.
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Industrial Market -- Motor Control
Micro Linear has used its extensive knowledge of brushless DC motors to
define and develop brushless DC and AC motor controllers for industrial
applications. The DC motor products incorporate a start-up algorithm that allows
the motor to start by turning on a power switch. The motor controller reduces
the cost of the system by eliminating the need for Hall-effect sensors. The AC
motor controllers allow lower cost AC motors to have continuous speed control,
for 1, 2 and 3 phase AC motors.
Industrial Market & Data Conversion Circuits
Micro Linear currently offers a comprehensive line of nineteen
analog-to-digital converters and six digital to analog converters. Micro
Linear's 12 bit analog to digital circuits utilize a proprietary, patented self-
calibrating method for conversion.
Sales and Distribution
Micro Linear targets high growth markets by designing its products into the
electronic systems of systems manufacturers within the communications, computer
and industrial markets. The Company seeks to achieve design wins by focusing its
sales efforts at prospective customers' technical design engineers and
management personnel who are responsible for new product design and component
selection. This effort is coordinated by the Company's direct sales managers who
support a worldwide network of independent sales representatives and
distributors. The sales representatives and distributors sell the Company's
products directly to customers and are assisted by the Company's Field
Applications Engineers (FAE's) and applications engineering group. To support
and encourage the design in of the Company's circuits in its customer's
electronic systems, Micro Linear is increasing the number of its applications
engineering support personnel. The Company's field sales offices are located in
San Jose, Boston, and Chicago.
The Company currently sells its products in North America through 20
independent sales representative organizations and two distributors. In 1996,
sales to Amtron International ("Amtron"), a domestic sales representative, and
Insight Electronics, a domestic distributor, represented 1% and 14% of the
Company's net revenues, respectively. In 1995, sales to Amtron International
("Amtron"), a domestic sales representative, and Insight Electronics, a domestic
distributor, represented 12% and 13% of the Company's net revenues,
respectively. In 1994, sales to Amtron and Insight Electronics represented 16%
and 13% of the Company's net revenues, respectively. A substantial majority of
Amtron's purchases consist of HDD products that are ultimately sold to Samsung
Electronics, a Korean electronics manufacturer. Sales to Amtron declined to 1%
of net revenues in 1996 because of the Company's Samsung HDD products reaching
the end of their product lives in the fourth fiscal quarter of 1995. The Company
does not expect any future shipments of these Samsung HDD products. Although the
Company received orders in 1996 for certain new HDD products, the net revenue
from the sale of such products did not offset the decline in net revenues
attributed to the Samsung HDD products. In 1996, 1995 and 1994, sales through
the Company's domestic distributors represented approximately 17% for each year.
The Company defers recognition of revenue 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 to direct
international customers and 15 independent international sales representatives,
which accounted for approximately 38%, 31% and 24% of the Company's net revenues
in 1996, 1995 and 1994, respectively. International sales exclude shipments to
Amtron. The Company expects international sales to continue to represent a
significant portion of product sales. 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. 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
1996, 1995 and 1994, the Company's top ten customers, excluding domestic
distributors, accounted for approximately 47%, 50% and 57% of net revenues,
respectively. During 1996, 1995 and 1994, most of the Company's sales of HDD
products were attributable to sales to two different key customers each year.
The Company anticipates that it will continue to be dependent on a limited
number of key customers for a significant portion of its net revenues. The
reduction, delay or cancellation of orders from one or more significant
customers for any reason could materially and adversely affect the Company's
operating results. In addition, since the Company's products are often sole
sourced to its customers, the Company's operating results could be materially
and adversely affected if one or more of its major customers were to develop
other sources of supply. Furthermore, in view of the relatively short product
life cycles in the computer network equipment and mass storage markets, the
Company's operating results would be materially and adversely affected if one or
more of its significant customers were to select circuits manufactured by one of
the Company's competitors for inclusion in future product generations. The
Company also is entirely dependent upon sales representatives and distributors
for the sales of its products to systems manufacturers. There can be no
assurance that the Company's current customers will continue to place orders
with the Company, that orders by existing customers will continue at the levels
of previous periods or that the Company will be able to obtain orders from new
customers. Loss of one or more of the Company's current customers or a
disruption in the Company's sales and distribution channels could materially and
adversely affect the Company's business and operating results.
A substantial majority of the Company's net revenues are derived from sales
of products for computer networking and mass storage applications. Sales of the
Company's products to network equipment manufacturers accounted for
approximately 57%, 47% and 41% of the Company's net revenues in 1996, 1995 and
1994, respectively. Sales of one of the Company's computer networking products
represented 10%, 12% and 10% of the Company's net revenues during 1996, 1995 and
1994, 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.
Although the Company has expanded its product mix and customer base, the Company
expects to increase its dependency on sales to network equipment manufacturers
in 1997. 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.
Prior to 1993, a substantial majority of the Company's net revenues were from
sales of HDD products. Sales of the Company's HDD products accounted for
approximately 6%, 15%, 19%, 27%, 55% and 60% of net revenues in 1996, 1995,
1994, 1993, 1992 and 1991, respectively. In addition, a substantial majority of
the Company's HDD product sales are derived from the sale of a limited number of
products.
Backlog
At December 31, 1996, the Company's backlog was approximately $14.9 million,
compared to approximately $19.5 million at December 31, 1995. Backlog consists
of released purchase orders scheduled for shipment within six months following
the order date. Although the Company's contract terms vary from customer to
customer, customers for standard products may generally cancel or reschedule
orders to purchase standard products without significant penalty to the
customer. As a result, the quantities of the Company's products to be delivered
and their delivery schedules are frequently revised by customers to reflect
changes in such customers' needs. Since backlog can be canceled or rescheduled,
the Company's backlog at any time is not necessarily indicative of future
revenue.
Technology
The Company's new products are incorporated into a customer's products or
systems at the design stage. However, design wins, which can often require
significant expenditures by the Company without any assurance of success, often
precede the generation of volume sales, if any, by a year or more. Moreover, the
value of any design win will largely depend upon the commercial success of the
customer's product and on the extent to which the design of the customer's
electronic system accommodates components manufactured by the Company's
competitors. No assurance can be given that the Company will achieve design wins
or that any design win, particularly with regard to application specific
products, will result in significant future revenues.
Design
Micro Linear's proprietary technology depends on the advanced analog and
mixed signal circuit design skills of its analog design engineers. The Company
utilizes analog and mixed signal circuits and cell simulation for digital and
analog circuit elements and extensive testing capabilities to assure
functionality and performance of final products. The Company has assembled a
team of highly skilled analog design engineers, with significant analog design
experience who are supported by a team of systems applications engineers,
product engineers and test engineers who perform various support functions and
allow the designers to focus on the core elements of the design. In addition,
Micro Linear has developed simulation models that facilitate timely and
predictable implementation of analog and mixed signal integrated circuits. As a
result of performance demands and the complexity of analog circuits, the mixed
signal design and development process is a multi-disciplinary effort, requiring
substantial systems-level expertise, including knowledge of particular formats,
standards and architectural constraints associated with a variety of targeted
end-user applications. The Company also utilizes standard electronic design
automation software to perform the schematic capture, simulation, design rule
checks and layout verification of its circuit.
Process
The Company seeks to employ the most appropriate process technology for a
given application. The Company's process technologies include Bipolar, CMOS and
BiCMOS processes.
Bipolar. The Company's Bipolar products generally utilize Micro Linear's
proprietary tile array design methodology which was developed to enhance time to
market for application specific standard and semi-standard products. The
Company's tile array circuits are arrays of component tiles of varying
complexity which are prefabricated for specific market applications. Tile array
designs, along with sophisticated computer-aided design (CAD) tools which
simulate expected performance, allow short prototyping schedules for the high
volume production of low cost, application specific products. The base-layers on
a tile array Bipolar wafer are processed by the subcontracted foundries,
producing a base tile array which contains a collection of transistors, diodes
and passive components, such as resistors and capacitors. The final steps in the
Company's Bipolar product manufacturing process are primarily performed in the
Company's back-end manufacturing facility. These final steps consist of defining
the two layers of metal interconnect and a protective layer of silicon dioxide.
When the interconnecting layers are defined the wafer is unique to an end
product. The Company inventories base wafers and determines the end product by
defining the metal interconnect in-house, thereby substantially reducing the
development time for new products, as well as the response time for orders on
Bipolar products which are in production. Wafers for certain high volume
products are fabricated completely by subcontracted foundries.
The Company uses its Bipolar technology for networking, mass storage and
power management applications such as networking quantizer and transceivers,
mass storage servo and motor control circuits, switched-mode power management
circuits and DC to DC converters to manage battery power. Bipolar process
technology offers certain advantages for many circuit implementation techniques
as compared to CMOS, such as lower noise, higher frequency, higher precision and
higher speed for given line widths.
CMOS. The Company's CMOS devices are based either on standard cells or full
custom circuits and are used in applications, such as telecommunications, data
communications and data conversion circuits, which require minimal power
consumption and increased density. CMOS technology permits the design of
circuits with lower power dissipation and a higher level of digital integration
than Bipolar circuits.
BiCMOS. The Company's BiCMOS processes combine the low power dissipation
capabilities of CMOS, and the high performance capabilities of Bipolar. As a
result, BiCMOS processes allow the design of circuits with lower power
dissipation than CMOS or Bipolar devices. The feature size of these processes
allows for significantly increased density of the logic functions that are
necessary for advanced levels of mixed signal integration. The Company believes
that these technologies represent the core of the Company's future product
offerings and are critical to its ability to continue to develop innovative,
highly complex, high performance mixed signal products that reduce the costs of
its customers' systems due to the increased functional density of the Company's
products.
In addition to the high volume 5 volt BiCMOS process, the Company is also
utilizing a 15 volt BiCMOS process primarily for power management products and
motor controllers. Initial designs have been completed on a .8 micron BiCMOS
process that will enable higher performance circuits with smaller feature sizes.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to new semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve manufacturing yields. Semiconductor design
and process methodologies are subject to rapid technological change, requiring
large expenditures for research and development. If the Company is unable to
develop or obtain access to advanced wafer processing technologies as they
become needed, or is unable to define, design, develop and introduce competitive
new products on a timely basis, its future operating results will be materially
and adversely affected. In addition, if the Company is unable to transfer and
install such new process technologies to one or more of its wafer foundries in a
timely manner, its business and results of operations could be materially and
adversely affected.
The Company believes the successful introduction of new products using BiCMOS
technology will be critical to its future success. There can be no assurance
that the Company will be able to obtain alternative or more advanced process
technologies in a timely manner. If such efforts prove unsuccessful, the
Company's business and operating results would be materially and adversely
affected.
The Company expects future BiCMOS circuit designs to be developed on both
application specific tile arrays and full custom layouts. The Company currently
uses its BiCMOS technology for its local area network transceivers, video
products, bus products, motor controllers, power supply controllers and for
battery management circuits, although the Company's experience in selecting and
designing BiCMOS circuits is recent. The ability 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 is expected to have a material impact on the Company's
operating results.
The Company's success also depends upon its ability to develop new analog and
mixed signal circuits for existing and new markets, to introduce such products
in a timely manner and to have such products selected for design into new
product generations of leading systems manufacturers. The development of these
new circuits is highly complex and from time to time the Company has experienced
delays in completing the development of new products. Successful product
development and introduction depends on a number of factors, including proper
new product definition, timely completion and introduction of new product
designs, availability of foundry capacity, achieving acceptable manufacturing
yields and market acceptance of the Company's and its customers' products. There
can be no assurance that the Company will be able to adjust to changing market
conditions as quickly and cost-effectively as necessary to compete successfully.
Furthermore, there can be no assurance that the Company will be able to
introduce new products in a timely manner or that such products will achieve
market acceptance. In addition, there can be no assurance that the electronic
systems manufactured by the Company's customers will be introduced in a timely
manner or that such systems will achieve market acceptance. The Company's
failure to develop and introduce new products successfully would materially and
adversely affect its business and operating results. In particular, there can be
no assurance that the Company will succeed in developing innovative BiCMOS
circuits in a timely manner, that its BiCMOS circuits will be designed into the
electronic systems of current or prospective customers or that Micro Linear will
be able to firmly establish itself as a supplier of BiCMOS solutions within its
targeted market applications. Micro Linear's inability to introduce BiCMOS
products in a timely manner or to obtain market acceptance of such BiCMOS
products would materially and adversely affect the Company's business and
operating results.
Manufacturing
The Company believes that utilizing outside foundries to meet wafer supply
requirements enables the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and access diverse manufacturing
technologies. The Company currently intends to continue to utilize its outside
foundries for all of its wafer requirements. In particular, a substantial
portion of the Company's Bipolar wafers are manufactured by one foundry in Japan
and a substantial portion of the Company's BiCMOS wafers are manufactured by one
foundry in Taiwan. There are certain significant risks associated with the
Company's reliance on outside foundries, including the lack of both assured
wafer supply and control over delivery schedules, the unavailability of or
delays in obtaining access to key process technologies and limited control over
manufacturing yields and production costs. In addition, the manufacture of
integrated circuits is a highly complex and technically demanding process.
Although the Company has undertaken to diversify its sources of wafer supply and
works closely with its foundries to minimize the likelihood of reduced
manufacturing yields, the Company's foundries have from time to time experienced
lower than anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start-up of new processes.
Such reduced yields have at times adversely affected the Company's operating
results. There can be no assurance that the Company's foundries will not
experience lower than expected manufacturing yields in the future, which could
materially and adversely affect the Company's business and operating results. In
addition, dependence on foundries located outside of the United States subjects
the Company to numerous risks, including exchange rate fluctuations, export and
import restrictions, trade sanctions, political instability and tariff
increases. In particular, the Company's dependence on a Taiwanese foundry for
supply of BiCMOS wafers subjects the Company to risks associated with political
instability in that region.
All of the Company's foundries manufacture wafers utilizing the Company's
proprietary processes, except for two foundries which manufacture wafers for the
Company utilizing each foundry's proprietary high voltage BiCMOS process.
Although the Company is in the process of implementing each of its processes at
more than one foundry in order to obtain multiple sources of supply for each of
its products, to date, the Company has not developed multiple sources of wafer
supply for all of its products. Multiple foundry sources for most of its
products increase the Company's ability to supply its customers with those
products and reduce the Company's dependency on any single foundry and any
single circuit or chipset. In the event the Company is unable to implement each
of its processes at more than one foundry or in the event it is unable to
manufacture one or more products at multiple foundries, the Company may be more
likely to experience a shortage of wafer supply for certain products which could
have a material adverse affect on the Company's operating results.
The Company purchases its wafers from outside foundries pursuant to purchase
orders and generally does not have a guaranteed level of wafer capacity at such
foundries. Therefore, the Company's wafer suppliers could choose to prioritize
capacity for other uses or reduce or eliminate deliveries to Micro Linear on
short notice. Accordingly, there is no assurance that the Company's foundries
will allocate sufficient wafer capacity to Micro Linear to satisfy the Company's
requirements. In addition, the Company has been, and expects to be in the
future, particularly dependent upon a limited number of its foundries for its
wafer requirements. Any sudden demand for an increased amount of wafers or
sudden reduction or elimination of any existing source or sources of wafers
could result in a material delay in the shipment of the Company's products.
There can be no assurance that material disruptions in supply, which have
occurred periodically in the past, will not occur in the future. Any such
disruption could have a material adverse effect on the Company's operating
results. In the event of any such disruption, if the Company were unable to
qualify alternative manufacturing sources for existing or new products in a
timely manner or if such sources were unable to produce wafers with acceptable
manufacturing yields, the Company's business and operating results would be
materially and adversely affected.
The Company has granted nontransferable, limited process licenses to each of
its foundries to utilize the Company's processes to manufacture and sell wafers
to other foundry customers. Although the Company seeks to protect its
proprietary technology, particularly its design methodology, there can be no
assurance that certain of the Company's foundries will not attempt to reverse
engineer the Company's products and manufacture and sell products which compete
with those manufactured and sold by the Company.
The Company has a production staff in place to support its outside foundries
in order to ensure design and process compatibility, product quality and
reliability. Most of the Bipolar wafers purchased by the Company are
substantially completed, other than the addition of the final metal
interconnections which the Company completes at its San Jose, California
facility. This approach allows the Company to produce finished tile array-based
standard and semi-standard products rapidly from its inventory of partially
completed Bipolar base arrays. Some of the high volume Bipolar wafers are
completely processed at certain foundries. The Company also applies a tile array
approach to certain of its BiCMOS products. Such BiCMOS products are inventoried
and later completed at the foundry. The Company purchases completely finished
CMOS, BiCMOS and a limited number of Bipolar wafers to which it adds no
additional process steps, other than incoming wafer quality tests and specific
electrical product testing prior to assembly.
Each die on all of the Company's wafers is electrically tested for
performance compliance and the wafers are subsequently sent to subcontractors
for assembly. After acceptance tests are performed on substantially completed
Bipolar wafers, the Company adds the final metal interconnections. Subsequently,
each die on the Company's Bipolar wafers is then electrically tested for
performance compliance. During the assembly process, the wafers are separated
into individual devices which are then placed in packages. Following assembly,
the packaged units are returned to the Company for final testing and final
inspection prior to shipment to customers. Extensive electrical testing is
individually performed on all circuits at the Company's facilities, using
advanced automated test equipment capable of high volume production to ensure
that the circuits satisfy specified performance levels. From time to time, the
Company has experienced difficulty in expeditiously completing testing of its
products. If such problems are encountered in the future, shipments to customers
could be delayed.
The manufacture of integrated circuits is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment, defects
in the masks used to print circuits on a wafer, difficulties in the fabrication
process or other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer to be nonfunctional. In
addition, yields can be affected by minute impurities in the environment or
other problems that occur in the complex manufacturing process. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy. At
various times in the past, the Company has experienced lower than anticipated
yields that have adversely affected production and, consequently, operating
results. The manufacturing processes utilized by the Company are continuously
being improved in an effort to increase yield and product performance. Process
changes can result in interruptions in production or significantly reduced
yields. In particular, new process technologies or new products can be subject
to especially wide variations in manufacturing yields and efficiency. There can
be no assurance that the Company will not experience irregularities, adverse
yield fluctuations or other manufacturing problems in its manufacturing
processes, any of which could result in production interruption or delivery
delays and materially and adversely affect the Company's business and results of
operations. Although the Company currently operates a small back-end
manufacturing facility which performs limited wafer fabrication functions to
certain of the Company's Bipolar circuits, the Company currently intends to
continue to rely exclusively upon its outside foundries for its wafer
fabrication requirements.
Research and Development
Micro Linear believes that it is essential to define, design, develop and
introduce new products offering technological innovations in order to take
advantage of market opportunities and to compete successfully. The Company is
currently engaged in the development of new standard and semi-standard products
for a broad range of customer applications in the communications, computer and
industrial markets. The Company's product development strategy is focused on
highly integrated products providing increased levels of performance and
functionality offering higher frequency, higher or lower voltage, lower power
and smaller size. The Company's development efforts are focused on the design of
products based on its own manufacturing and 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 engineers in a variety of disciplines, including design,
systems, product, test, applications and marketing. The Company's engineers are
continually working to upgrade the Company's design methodology and process
technologies, and to investigate and develop with its foundry partners new
technologies for new generations of products.
The Company's design engineers are organized into five design groups consisting
of a total of approximately 35 research and development design engineers,
supported by approximately 31 additional technical professionals in research,
development and manufacturing engineering. In 1996, 1995 and 1994, the Company
spent approximately $11.2 million, $10.1 million and $9.2 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 segment of the semiconductor industry is
also highly competitive, and many major semiconductor companies presently
compete or could compete in one or more segments of the Company's target
markets. Most of the Company's current and prospective competitors offer broader
product lines and have substantially greater financial, technical,
manufacturing, marketing and other resources than the Company. In addition, many
of the Company's competitors maintain their own wafer fabrication facilities,
which the Company considers to be a competitive advantage. The Company's
competitors vary in each product area. Its principal competitors in data
communications are National Semiconductor Corporation ("NSC") and Level One
Corporation. In the mass storage product area, the Company competes principally
with SGS and Silicon Systems, Inc. (a subsidiary of Texas Instruments
Incorporated). In the power management products area, the principal competitors
are Linear Technology Corporation, Maxim Integrated Products and Unitrode
Semiconductor. The Company also competes with manufacturers of discrete analog
components, particularly for power management applications within the industrial
market. As the Company attempts to expand its product line, it expects that
competition will increase with these and other domestic and foreign companies.
Although foreign companies, particularly Japanese companies, have not
traditionally focused on the high performance analog and mixed signal markets,
they have the financial and technical resources to participate effectively in
these markets, and there can be no assurance that they will not do so in the
future. Because the Company does not currently manufacture its own semiconductor
wafers, it is also vulnerable to process technology advances utilized by
competitors to manufacture products offering higher performance and lower cost.
Accordingly, the Company believes it is disadvantaged in comparison to larger
companies with wafer manufacturing facilities, broader product lines, greater
technical and financial resources and greater service and support capabilities.
In addition, 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 the Company expands its product lines, it expects competition
to increase. 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 fourteen patents to the Company. The Company intends to continue to
seek patents on its products, as appropriate, and currently has submitted
applications for twenty five more U.S. patents with an additional four 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,
maskwork 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. Although the Company is presently involved in litigation that
should not have an impact, a third party could make a valid claim and if a
license were not available on commercially reasonable terms, the Company's
operating results could be materially and adversely affected. Litigation, which
could result in substantial cost to and diversion of resources of the Company,
may also be necessary to enforce patents or other intellectual property rights
of the Company or to defend the Company against claimed infringement of the
rights of others. The failure to obtain necessary licenses or the occurrence of
litigation relating to patent infringement or other intellectual property
matters could have a material adverse affect on the Company's business and
operating results.
The Company has not granted license rights to third parties to manufacture
and sell any of its products, except a limited right to one foundry with respect
to two second source products. Royalties under this license have been
immaterial. The Company has no current plans to grant product licenses with
respect to any other 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, 1996, the Company had 251 full-time employees, 125 of whom
were engaged in manufacturing (including test development, quality and materials
functions), 66 in research and development, 42 in marketing, applications and
sales, and 18 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.
<TABLE>
<CAPTION>
Executive Officers
The executive officers the Company are as follows:
Name Age Position
<S> <C> <C>
Arthur B. Stabenow..............58 Chairman of the Board, Chief Executive Officer and President
Robert Whelton..................57 Executive Vice President
Carlos A. Laber.................45 Vice President, Engineering
Chris A. Ladas..................51 Vice President, Operations
Martin Levy.....................44 Vice President, Sales
Ray A. Reed.....................52 Vice President, Business Development
J. Philip Russell...............57 Vice President, Finance and Administration and Chief Financial Officer
Paul E. Standish................54 Vice President, Marketing and Applications
</TABLE>
Mr. Stabenow has served as the Chief Executive Officer and a director of
the Company since April 1986, and has served as Chairman of the Board since
August 1989. Mr. Stabenow also served as President of the Company from April
1986 to January 1996 and since April 1996. Mr. Stabenow has over 30 years of
experience in the semiconductor industry. From January 1979 to March 1986, Mr.
Stabenow was employed as a Vice President and General Manager at NSC. Mr.
Stabenow received his M.B.A. degree at the University of New Haven.
Mr. Whelton joined the Company in October 1996 as Executive Vice President.
From 1985 to September 1996, Mr. Whelton held several executive positions with
NSC including Vice President and General Manager of their Analog Products
Division in Sunnyvale, California. From 1980 to 1985, Mr. Whelton worked at
Intel Corporation in several key management positions. Mr. Whelton received his
M.S. degree in Electrical Engineering from Santa Clara University and his B.S.
in Electrical Engineering from UC Berkeley.
Mr. Laber was promoted to Vice President, Engineering in December 1995 and
prior to this time, he has served as Director of Engineering of the Company
since January 1984. Prior to joining the Company, Mr. Laber was employed at NSC
for 3 years as a Senior Staff Design Engineer, and at Intel Corporation for 3
years as a Design Engineer. Mr. Laber received his MSEE from the University of
Minnesota.
Mr. Ladas joined the Company in January 1996 as Vice President, Operations.
From January 1987 to December 1995, Mr. Ladas held several executive positions
with NSC including Managing Director of Operations in Greenock, Scotland. From
March 1983 to December 1986, Mr. Ladas worked at Fairchild Semiconductor as
Research and Development Manager. Mr. Ladas received his B.S. degree in
Chemistry from Arizona State University.
Mr. Levy joined the Company in February 1994 as Vice President, Sales. From
June 1993, until joining the Company, Mr. Levy was employed at Lattice
Semiconductor Corporation as area sales manager. From July 1992 until June 1993,
Mr. Levy was employed at Novell Multimedia Inc. (formerly Fluent Incorporated),
a multimedia software company, as director of western operations. From February
1990 to July 1992, he was employed at Weitek, an integrated circuits company, as
area sales manager, and from December 1988 to February 1990, Mr. Levy was
employed at Phoenix Technologies, an operating systems software company, as a
district sales manager. Mr. Levy received his B.A. degree in Communications from
Brooklyn College and holds an M.B.A. degree from the University of Phoenix.
Mr. Reed joined the Company in January 1996 as Vice President, Business
Development. From November 1993 to December 1995, Mr. Reed was a technical
consultant to the semiconductor industry, accepting strategic assignments
regarding product positioning and technical product content. From June 1979 to
July 1993, Mr. Reed worked at NSC as Director of Telecommunications Products.
Mr. Reed received his M.S.E.E. from the University of Michigan and his B.S.E.E.
for the University of Arizona.
Mr. Russell joined the Company in May 1992 as Vice President, Finance and
Administration, Chief Financial Officer and Treasurer. Mr. Russell was an
independent financial consultant from November 1990 to May 1992. From 1980 to
1990, Mr. Russell was employed at NSC, most recently as Vice President and
Controller. Mr. Russell has also been employed by Fairchild Camera and
Instrument, a semiconductor company, and KPMG Peat Marwick. Mr. Russell is a
Certified Public Accountant and holds a B.S. degree in accounting from San Jose
State University.
Mr. Standish joined the Company in 1990 and has served as Vice President,
Marketing and Applications since October 1991. Prior to joining the Company, Mr.
Standish was employed at NSC for 17 years in various marketing and applications
positions, including Director of Analog Product Marketing. Mr. Standish holds a
B.S.E.E. degree from the University of Michigan.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
Item 2. Properties
The Company's executive offices and manufacturing facilities, located in San
Jose, California, consist of two buildings comprising approximately 93,000
square feet. This property was acquired by the Company in October 1990 at a cost
of $7.5 million and is used for manufacturing, product design and development,
marketing, sales and administration. The acquisition of the property was
financed by a $5.3 million note, secured by the property. This obligation was
refinanced in October 1994 with a $3.4 million note payable over five years with
principal amortized on a fourteen year basis. The Company leases sales offices
in the metropolitan areas of Boston and Chicago. Micro Linear believes that its
existing facilities are adequate to meet its facilities requirements during the
near term.
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.
<PAGE>
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company effected the initial public offering of its Common Stock on
October 13, 1994, at a price to the public of $8.50 per share. The following
table sets forth the high and low prices of the Company's Common Stock as quoted
in the NASDAQ National Market for the periods indicated. As of February 23,
1997, there were approximately 565 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, 1996........................... $8 1/4 $6 1/8
Quarter ended September 29, 1996.......................... $9 3/4 $5 5/8
Quarter ended June 30, 1996............................... $12 5/8 $7 1/2
Quarter ended March 31, 1996.............................. $11 7/16 $7 5/16
Quarter ended December 31, 1995........................... $16 1/8 $9 1/8
Quarter ended October 1, 1995............................. $18 5/8 $15
Quarter ended July 2, 1995................................ $16 3/4 $ 9 1/8
Quarter ended April 2, 1995............................... $11 7/8 $ 7 7/8
Quarter ended December 31, 1994 (from October 13, 1994)... $9 5/16 $6 7/8
The Company has not paid any cash dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. Accordingly, the
Company does not anticipate that any cash dividends will be declared or paid on
the Common Stock in the foreseeable future.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
The following selected financial data for the five-year period ended December
31, 1996, should be read in conjunction with the Company's 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,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- --------- --------- -------- -------
(In thousands, except per share data)
Statement of Operations Data:
Net revenues.......................... $54,057 $57,384 $41,721 $33,558 $37,398
Gross margin.......................... $32,152 $31,657 $20,742 $14,962 $17,004
Income from operations................ $9,390 $11,824 $3,208 $545 $3,773
Net income............................ $6,703 $10,536 $2,880 $43 $3,246
Net income per share.................. $0.51 $0.77 $0.25 $- $0.26
Shares used in per share calculations... 13,241 13,644 11,660 11,294 12,548
December 31,
1996 1995 1994 1993 1992
--------- --------- --------- -------- -------
(In thousands)
Balance Sheet Data:
Working capital....................... $38,796 $41,321 $31,765 $14,489 $23,724
Total assets.......................... $69,032 $67,971 $53,584 $41,631 $48,433
Long-term obligations, less current
portion............................ $2,972 $3,181 $3,738 $1,645 $8,474
Stockholders' equity.................. $58,269 $55,847 $42,412 $28,950 $33,615
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth below and elsewhere in this Form 10-K.
Results of Operations
Overview
Micro Linear Corporation was founded in 1983. From its formation through
1990, the Company focused initially on application specific integrated circuits
for particular customers and, subsequently, on application specific standard
products, principally for the hard disk drive (HDD) industry. Commencing in
1991, the Company implemented a fundamental change in its business strategy to
expand the markets and applications for its products and to lessen its
dependence on the HDD industry. This strategy included an extensive new product
design and development program, and substantial changes to its sales and
distribution channels in addition to the hiring of factory applications
engineers and additional sales and support personnel. As a result of its
diversification efforts, the Company substantially reduced its dependence on the
HDD industry, with HDD product sales accounting for approximately 6% of net
revenues for 1996 compared to 81% of net revenues for 1990. The Company
currently expects net revenue from HDD products to represent less than 10% of
future revenues. 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 process technologies, Bipolar,
CMOS and BiCMOS, and has released approximately 100 new products since January
1, 1992.
The Company's operating results are subject to quarterly and other
fluctuations which may result from the timing and extent of process development
costs, changes in the mix of products sold, the timing and extent of research
and development expenses, the availability and cost of wafers from outside
foundries, fluctuations in manufacturing yields, and competitive pricing
pressures. Other factors which may result in operating fluctuations are the
Company's ability to access advanced process technologies, the ability to
introduce new products on a timely basis, market acceptance of the Company's and
its customers' products, the timing of new product announcements and cyclical
semiconductor industry conditions. Moreover, the Company's business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. As a result of the foregoing or other factors, there can be no
assurance that the Company will not experience material fluctuations in future
operating results on a quarterly or annual basis.
Annual Results of Operations
<TABLE>
<CAPTION>
The following table sets forth certain operating data as a percentage of net
revenues for the periods indicated:
Year Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Net revenues................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................... 40.5 44.8 50.3
------ ------ ------
Gross margin................................................. 59.5 55.2 49.7
Operating expenses:
Research and development..................................... 20.6 17.6 22.0
Selling, general and administrative.......................... 21.5 17.0 20.0
------ ------ ------
Total operating expenses............................. 42.1 34.6 42.0
------ ------ ------
Income from operations......................................... 17.4 20.6 7.7
Interest income (expense), net................................. 2.0 2.1 (0.3)
------ ------ ------
Income before provision for taxes.............................. 19.4 22.7 7.4
Provision for taxes on income.................................. 7.0 4.3 0.5
------ ------ ------
Net income..................................................... 12.4% 18.4% 6.9%
====== ====== ======
</TABLE>
Net Revenues
Net revenues were $54.1 million for 1996, $57.4 million for 1995 and $41.7
million for 1994. Net revenues in 1996 decreased 6% over net revenues in 1995
and 1995 net revenues increased 38% over 1994. The decline in net revenues in
1996 compared to 1995 was due primarily to soft market conditions, particularly
in the communications market. Also many of the Company's customers in the
communications market in 1996 adjusted their inventories thereby temporarily
reducing demand for the Company's networking products. Net revenues for 1996
compared to 1995 increased 12% in the communications market and decreased 22% in
the industrial market and 32% in the computer market. Net revenues for 1995
compared to 1994 increased 41% in the communications market, 43% in the
industrial market and 31% in the computer market. The computer market includes
the HDD segment. Net revenues in this segment decreased 61% in absolute dollars
in 1996 compared to 1995 and decreased to 6% of 1996 net revenues from 15% of
net revenues in 1995 because certain of the Company's HDD applications reached
the end of their product lives in December 1995. Although the Company received
orders in 1996 for other HDD products, the net revenue from the sale of these
products did not offset the decline in net revenues attributed to the HDD
products that reached the end of their product lives in December 1995. The
Company currently expects net revenue from HDD products to represent less than
10% of future revenues. The Company's markets are characterized by intense
competition, relatively short product life cycles and rapid technological
changes. In addition, these markets have 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 market
slowdown.
International revenues for 1996 totaled $20.3 million, or 38% of net
revenues, as compared to $18.0 million, or 31% of net revenues, for 1995 and
$9.8 million, or 24% of net revenues, for 1994. The increase in international
revenues in 1996 compared to 1995 was due to the combination of stronger demand
for the Company's products in Asia and Europe. International revenues in 1995
and 1994 exclude shipments to Amtron. A significant portion of Amtron's
purchases were sold to Samsung Electronics and other Korean customers. There
were no Samsung sales to Amtron in 1996, compared to 12% of net revenues in 1995
and 16% of net revenues in 1994. A majority of the shipments to Amtron are
secured by irrevocable letters of credit.
Domestic distributor revenues were approximately 17% for 1996, 1995 and 1994.
The Company expects sales to domestic distributors to increase in the future as
a percentage of total net revenues due to anticipated shifts in the sales
channel mix. In this regard, several of the Company's OEM (Original Equipment
Manufacturer) customers have moved their manufacturing operations to
subcontractors and in turn are placing their orders through distributors. The
Company defers recognition of revenue derived from sales to domestic
distributors until such distributors resell the products to their customers;
however, revenue is recognized by the Company upon shipment to international
representatives.
Gross Margin
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 improved to 60% in 1996 from 55% in 1995 and 50%
in 1994, primarily due to lower per unit manufacturing costs resulting from
higher manufacturing utilization and a shift in product mix to higher margin
products. The product mix in 1996 contained a greater percentage of sales to the
relatively higher margin communications market segment compared to 1995 thereby
contributing to a higher gross margin. The lower gross margin in 1994 was also
in part due to lower levels of production.
The Company's gross margins are 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 nine wafer suppliers, one of
which was added in the first quarter of 1996. 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 Bi CMOS wafers
from two wafer foundries, the majority of which are supplied by one wafer
foundry in Taiwan. Although both wafer foundries are qualified to supply the
Company with BiCMOS wafers, the Company's short-term BiCMOS wafer supply could
be materially and adversely affected if the wafer foundry in Taiwan is unable to
meet the Company's wafer supply requirements. Approximately one-third of the
Company's bipolar wafers are purchased from a wafer foundry in Japan and have
pricing contracts that are tied to currency fluctuations of the yen. Wafer
pricing for this foundry is adjusted every 6 months, either up or down,
depending on the movement of the yen. The Company does not expect to be
significantly impacted by this pricing agreement, however, due to the
uncertainty of the currency markets and the recent fluctuations of the yen
versus the U.S. dollar, there can be no assurance that significant swings in
currency will not have a material adverse effect on gross margin in the future
due to the impact of such fluctuations on this contract or other contracts the
Company has with foundries in Japan.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of standard and semi-standard products, tile
arrays and standard cells. In addition, research and development expenses
include test development and prototype assembly costs associated with new
product development. The Company also expenses prototype wafers and new
production mask sets related to new products as research and development costs
until products based on new designs are fully characterized by the Company and
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $11.2 million for 1996, or 21% of net
revenues, compared to $10.1 million, or 18% of net revenues, in 1995 and $9.2
million, or 22% of net revenues, in 1994. The increase in research and
development in absolute dollars in 1996 compared to 1995 is primarily
attributable to higher prototype product costs associated with new product
development. The increase in research and development in absolute dollars over
the last three years is attributable primarily to increased staffing, higher
compensation and benefits to existing engineering personnel, increased prototype
and mask costs and depreciation. Research and development costs in 1994 included
approximately $500,000 of costs associated with new product mask sets based upon
the Company's newly installed BiCMOS process. In the fourth quarter of 1996, the
Company announced its intention to establish a design center in Cambridge,
England. The first managing director for the Cambridge location was hired in
December 1996 and the Company expects to add additional design engineers in
Cambridge throughout 1997. The Company believes that the development and
introduction of new products is critical to its future success and expects that
research and development expenses will increase in the future in absolute
dollars.
Selling, General and Administrative
Selling, general and administrative expenses were $11.6 million for 1996, or
22% of net revenues, compared to $9.7 million, or 17% of net revenues, in 1995
and $8.3 million, or 20% of net revenues, in 1994. The increase in absolute
dollars in 1996 compared to 1995 is generally attributable to an increase in
higher staffing levels, travel costs and higher legal fees associated with a
litigation matter. The increases in absolute dollars in 1995 compared to 1994 is
generally attributable to an increase in sales commissions due to higher net
revenues, higher staffing levels, increased travel for sales personnel,
increased advertising and increased director's and officer's liability insurance
costs. The Company expects additional spending increases in absolute dollars in
selling, general and administrative expenses in the future.
Interest and Other Income and Interest Expense
Interest and other income was $1.4 million for 1996, $1.6 million for 1995
and $.7 million for 1994. The decrease in 1996 over 1995 can be attributed to
lower cash balances and lower interest rates. The increases in 1995 over 1994
and 1994 over 1993 were due to higher average cash balances and higher interest
rates. Interest income is affected by changes in the Company's cash balance as
well as the prevailing interest rates. Interest expense was $.3 million for
1996, $.4 million for 1995 and $.8 million for 1994. The interest expense
decreases are principally due to an overall reduction in outstanding
indebtedness and the refinancing of outstanding obligations at lower interest
rates.
Provision for Income Taxes
The Company's effective tax rate for 1996 was 36% compared to 19% for 1995
and 7% for 1994. The effective tax rate for 1996 differs from the statutory
income tax rate primarily due to state income taxes, net of federal research
credits. The effective tax rates for 1995 and 1994 differ from the statutory
income tax rate primarily as a result of utilization of net operating loss and
tax credit carryforwards and adjustments of the valuation allowance for deferred
tax assets. The higher effective tax rate in 1996 was due principally to a
higher federal tax rate as a result of the full utilization of all remaining net
operating loss and tax credit carryforwards in fiscal 1995.
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 $8.0 million of net cash
during 1996, an decrease of $2.4 million over 1995. The decrease in 1996 is
primarily attributable to lower net income. Lower trade receivables were offset
by increased inventory levels and deferred tax assets.
Cash used in investing activities for 1996 is attributable to capital
expenditures of $8.2 million and the net purchase of short-term investments of
$5.5 million.
Financing activities for 1996 consist primarily of the repurchase of the
Company's common stock for $5.7 million. In January 1996, the Board of Directors
approved a stock repurchase program in which up to $3 million of the Company's
Common Stock would be purchased by the Company on the open market from time to
time, depending upon market conditions, share price and other factors. In July
1996, the Board of Directors approved an additional $2.7 million to be used for
the stock repurchase program. In December 1996, the Board of Directors approved
an additional $2.6 million to be used for the stock repurchase program. As of
December 31, 1996, the Company had repurchased a total of 756,000 shares of its
Common Stock for $5.7 million. Subsequent to year end, the Company repurchased a
total of 100,000 shares of its Common Stock for $1.2 million as of February 23,
1997. The Company also generated $1.0 million of proceeds from common stock
issued under employee stock option and purchase plans.
Working capital amounted to $38.8 million as of December 31, 1996 and
includes cash and cash equivalents of $4.4 million and short-term investments of
$20.8 million.
The Company's liquidity is affected by many factors, including, among others,
the extent to which the Company pursues additional wafer fabrication capacity
from existing foundry suppliers or new suppliers, capital expenditures, and the
level of the Company's product development efforts, and other factors related to
the uncertainties of the industry and global economies. Although the Company's
cash requirements will fluctuate based on the timing and extent of these
factors, the Company anticipates that its existing cash resources and cash
generated from operations will fund necessary purchases of capital equipment and
provide adequate working capital for at least the next twelve months. However,
there can be no assurance that events in the future will not require the Company
to seek additional capital sooner or, if so required, that such capital will be
available on terms acceptable to the Company.
Other Factors Affecting Future Operating Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including the Company's access to advanced process technologies,
the timing and extent of process development costs, the Company's ability to
introduce new products on a timely basis, the volume and timing of orders
received, market acceptance of the Company's and its customers' products, the
timing of new product announcements and introductions by the Company or its
competitors, changes in the mix of products sold, the timing and extent of
research and development expenses, the availability and cost of wafers from
outside foundries, fluctuations in manufacturing yields, fluctuations in the
relative exchange rate of the yen and the U.S. dollar, competitive pricing
pressures and cyclical semiconductor industry conditions. A majority of the
Company's net revenues are derived from sales of a limited number of products.
Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. Although the Company has not
generally experienced material decreases in its average selling prices over
time, there can be no assurance that the average selling prices of the Company's
products will not be subject to significant pricing pressures in the future. The
Company's business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without significant
penalty to the customer. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. In addition, the Company is limited in its ability to
reduce costs quickly in response to any revenue shortfalls. As a result of the
foregoing or other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis which would materially and adversely affect the Company's business.
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.
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Index to Financial Statements
Page
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................................................... 26
Consolidated Balance Sheets as of December 31, 1996 and 1995.............................................. 27
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994.................... 28
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994...... 29
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994................ 30
Notes to Consolidated Financial Statements................................................................ 31
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Micro Linear Corporation
We have audited the accompanying consolidated balance sheets of Micro Linear
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Micro Linear Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 20, 1997
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
<S> <C> <C>
1996 1995
Assets
Current assets:
Cash and cash equivalents................................................... $4,385 $4,175
Short-term investments...................................................... 20,798 26,299
Accounts receivable, net of allowance for doubtful accounts of $243 and
$240 at December 31, 1996 and 1995, respectively......................... 4,372 6,571
Inventories................................................................. 10,456 8,986
Deferred tax assets......................................................... 4,499 3,452
Other current assets........................................................ 2,077 781
------- -------
Total current assets..................................................... 46,587 50,264
Property, plant and equipment................................................. 38,095 36,276
Less accumulated depreciation and amortization................................ 16,441 19,470
------- -------
Net property, plant and equipment............................................. 21,654 16,806
Other assets.................................................................. 791 901
------- -------
Total assets........................................................ $69,032 $67,971
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................ $2,732 $3,576
Accrued compensation and benefits........................................... 1,402 1,382
Deferred income on shipments to distributors................................ 1,270 1,517
Accrued commissions......................................................... 555 570
Other accrued liabilities................................................... 1,623 1,363
Current obligations under capital leases.................................... - 68
Current portion of long-term debt........................................... 209 467
------- -------
Total current liabilities................................................ 7,791 8,943
Long-term debt................................................................ 2,972 3,181
Commitments
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 12,810,080 and 12,455,519 at
December 31, 1996 and 1995, respectively
Outstanding shares 12,054,080 and 12,455,519 at
December 31, 1996 and 1995, respectively............................. 13 12
Additional paid-in capital.................................................. 50,501 49,103
Retained earnings........................................................... 13,435 6,732
Treasury stock, 756,000 shares at cost at December 31, 1996................. (5,680) -
------- -------
Total stockholders' equity............................................... 58,269 55,847
------- -------
Total liabilities and stockholders' equity.......................... $69,032 $67,971
======= =======
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Net revenues..................................................... $54,057 $57,384 $41,721
Cost of revenues................................................. 21,905 25,727 20,979
------ ------ ------
Gross margin................................................... 32,152 31,657 20,742
Operating expenses:
Research and development....................................... 11,157 10,119 9,207
Selling, general and administrative............................ 11,605 9,714 8,327
------ ------ ------
22,762 19,833 17,534
------ ------ ------
Income from operations......................................... 9,390 11,824 3,208
Interest and other income........................................ 1,392 1,609 699
Interest expense................................................. (308) (426) (810)
------- ------- -------
Income before provision for taxes.............................. 10,474 13,007 3,097
Provision for taxes.............................................. 3,771 2,471 217
------ ------- ------
Net income..................................................... $6,703 $10,536 $2,880
====== ======= ======
Income per share:
Net income..................................................... $0.51 $0.77 $0.25
====== ====== ======
Shares used in computing per share amounts....................... 13,241 13,644 11,660
====== ====== ======
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Retained
Additional Earnings Stockholders' Total
Preferred Stock Common Stock Paid-in (Accumulated Note Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit) Receivable Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 277,920 $-- 5,131,919 $5 $36,479 $(6,684) $(850) $28,950
1993......................
Redemption of preferred (28,684) -- -- -- (2,868) -- -- -- (2,868)
stock
Exercise of stock
options
and warrants.......... -- -- 279,809 -- 264 -- -- 264
Sale of common stock to
directors -- -- 14,400 -- 20 -- -- -- 20
Conversion of preferred
stock to
common stock.......... (249,236) -- 4,875,449 5 (5) -- -- -- --
Issuance of common
stock, net of
issuance costs........ -- -- 1,650,000 2 12,262 -- -- -- 12,264
Conversion of accrued
interest on
stockholders' notes -- -- -- -- -- -- (41) -- (41)
to principal
Repayment of
stockholders' notes
receivable............ -- -- -- -- -- -- 891 -- 891
Amortization of deferred
compensation............ -- -- -- -- 52 -- -- -- 52
Net income.............. -- -- -- -- -- 2,880 -- -- 2,880
--- --- ---------- --- ------ ------- --- --- ------
Balance at December 31, -- -- 11,951,577 12 46,204 (3,804) -- -- 42,412
1994......................
Exercise of stock
options
and warrants.......... -- -- 401,764 -- 563 -- -- -- 563
Shares purchased under
employee
stock purchase plan... -- -- 102,178 -- 805 -- -- -- 805
Tax benefit of options -- -- -- -- 1,450 -- -- -- 1,450
exercised
Amortization of deferred
compensation.......... -- -- -- -- 81 -- -- -- 81
Net income.............. -- -- -- -- -- 10,536 -- -- 10,536
--- --- ---------- --- ------ ------ --- ------- -------
Balance at December 31, -- -- 12,455,519 12 49,103 6,732 -- -- $55,847
1995......................
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 -- -- (756,000) -- -- -- -- (5,680) (5,680)
stock.....................
Net income.............. -- -- -- -- -- 6,703 -- -- 6,703
--- --- ---------- --- ------- ------- --- -------- -------
Balance at December 31, -- $-- 12,054,080 $13 $50,501 $13,435 $-- ($5,680) $58,269
=== === ========== === ======= ======= === ======== =======
1996......................
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------
<S> <C> <C> <C>
1996 1995 1994
------- ------- -------
Cash flow from operating activities:
Net income......................................................... $6,703 $10,536 $2,880
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 3,316 3,331 3,532
Tax effect from employee stock plans............................. 274 1,450 --
Gain on sale or retirement of fixed assets....................... - - (28)
Amortization of deferred compensation............................ 81 81 52
Changes in assets and liabilities:
Accounts receivable.............................................. 2,199 (1,574) 467
Inventories...................................................... (1,470) (2,709) 9
Other current assets and other assets............................ (2,233) (2,779) (287)
Accounts payable................................................. (844) 860 998
Accrued payroll, accrued commissions and other liabilities....... 265 745 640
Deferred income on shipment to distributors...................... (247) 545 476
------- -------- -------
Total adjustments. ............................................ 1,341 (50) 5,859
------- ------- -------
Net cash provided by operating activities...................... 8,044 10,486 8,739
Investing activities:
Capital expenditures............................................... (8,164) (6,785) (1,828)
Purchases of short-term investments................................ (25,836) (39,023) (6,822)
Sales and maturities of short-term investments..................... 31,337 16,111 7,370
------- ------- -------
Net cash provided by (used in) investing activities............ (2,663) (29,697) (1,280)
Financing activities:
Principal payments under capital lease obligations and debt........ (535) (1,198) (7,023)
Proceeds from debt refinancing..................................... -- -- 3,400
Proceeds from issuance of common stock, net of repurchases......... 1,044 1,368 12,548
Redemption of preferred stock...................................... -- -- (2,868)
Repayment of stockholders' notes................................... -- -- 891
Purchase of treasury stock of the Company.......................... (5,680) -- --
-------- ------- -------
Net cash provided by (used in) financing activities............ (5,171) 170 6,948
------- ------- -------
Net increase (decrease) in cash and cash equivalents............... 210 (19,041) 14,407
Cash and cash equivalents at beginning of period................... 4,175 23,216 8,809
------- ------- -------
Cash and cash equivalents at end of period......................... $4,385 $4,175 $23,216
======= ======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest......................................................... $ 310 $ 387 $742
Income taxes..................................................... $6,161 $3,810 $141
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Micro Linear Corporation (the "Company") was incorporated in California on
January 17, 1983. The Board of Directors approved the reincorporation of the
Company in Delaware, which was completed on October 6, 1994.
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.
Basis of Presentation
The Company's fiscal year ends on the Sunday closest to December 31. Fiscal
years 1996, 1995 and 1994 ended on December 29, 1996, December 31, 1995 and
January 1, 1995, respectively. The Company's fiscal quarters end on the Sunday
closest to the end of each calendar quarter. For ease of presentation, the
accompanying financial statements have been shown as ending on December 31 of
each respective year.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit with banks and
investments with original maturities at the date of acquisition of ninety days
or less that have insignificant interest rate risk.
Short-Term Investments
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities."
The Company has classified all marketable equity securities and debt
securities as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income (loss). The cost
of securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
investment income.
<PAGE>
<TABLE>
<CAPTION>
The following is a summary of available-for-sale securities at December 31, 1996 and 1995 (in
thousands):
1996 1995
Cost Cost
<S> <C> <C>
U.S. government obligations................................... $12,423 $18,959
Commercial paper.............................................. 10,734 7,795
------- -------
$23,157 $26,754
======= =======
Amounts included in short-term investments.................... $20,798 $26,299
Amounts included in cash and cash equivalents................. 2,359 455
------- -------
$23,157 $26,754
======= =======
</TABLE>
At December 31, 1996 and 1995, 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 gross realized gains or losses for the years ended December 31, 1996 and
1995. Sales and maturities of short-term investments classified as
available-for-sale securities for the year ended December 31, 1996 totaled
$12,903,000 and $18,434,000, respectively. Sales and maturities of short-term
investments classified as available-for-sale securities for the year ended
December 31, 1995 totaled $1,945,000 and $14,166,000, respectively.
Fair Value of Financial Instruments
Fair value of cash and cash equivalents and short-term investments are
approximated by purchase price due to the short period of time to maturity. Fair
value of debt is based on pricing models or securities with similar terms and
approximates fair value. Estimated fair value of financial instruments as of
year end are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents.............................. $4,385 $4,385 $4,175 $4,175
Short-term investments................................. $20,798 $20,798 $26,299 $26,299
Long-term debt......................................... $2,972 $2,972 $3,716 $3,716
</TABLE>
<PAGE>
Inventory
Inventory is stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market (estimated net realizable value).
<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):
December 31,
1996 1995
-------- ------
<S> <C> <C>
Raw Materials.............................................. $ 1,688 $1,434
Work-in-process............................................ 6,398 3,926
Finished Goods............................................. 2,370 3,626
------- ------
$10,456 $8,986
</TABLE>
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 lease term.
<TABLE>
<CAPTION>
Property, plant and equipment consist of the following (in thousands):
December 31,
1996 1995
--------- -------
<S> <C> <C>
Land....................................................... $2,850 $2,850
Buildings and improvements................................. 9,345 9,012
Machinery and equipment.................................... 25,900 24,414
------ -------
$38,095 $36,276
</TABLE>
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Live Assets to
be Disposed of," for its fiscal year ending December 31, 1996. The impact of the
adoption did not have a material impact on the Company's financial statements.
Net Income Per Share
Net income per share is computed using the weighted average number of shares
of common stock and dilutive common equivalent shares from convertible preferred
stock (using the if-converted method) and from stock options and warrants (using
the treasury stock method).
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.
<PAGE>
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.
2. Obligations Under Capital Leases
The Company leased certain equipment under various capital lease agreements.
All leases have been fully paid as of December 31, 1996.
3. Long-term Debt
In October 1994, the Company refinanced their existing note payable of
$5,136,000 with a new note of $3,400,000 and paid the remaining indebtedness of
$1,700,000 out of existing cash balances. The new 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 $3,124,000 and
$3,263,000 were outstanding under the loan as of December 31, 1996 and December
31, 1995, respectively.
The Company borrowed money pursuant to a promissory note that bears interest
at 7.25% per annum and is secured by equipment purchased with proceeds from a
previous loan. Monthly payments of approximately $29,000, including interest,
are due through February 1997. As of December 31, 1996 and 1995, approximately
$57,000 and $385,000, respectively, were outstanding under the loan.
<TABLE>
<CAPTION>
Maturities of long-term debt are as follows (in thousands):
As of
December 31, 1996
<S> <C> <C>
1997............................................................... $209
1998............................................................... 168
1999............................................................... 2,804
</TABLE>
4. Commitments and Contingencies
Legal Proceedings
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated. In
the opinion of management, settlement of these actions when ultimately concluded
will not have a material adverse effect on trends in results of operations or
the financial condition of the Company. This conclusion is based upon current
facts and circumstances, however, and it is possible that a change in the facts
and circumstances relating to such legal proceedings and claims could result in
a development that would have a material adverse effect on the results of
operations or financial condition of the Company.
<PAGE>
The Company has various equipment operating leases. The Company's rental
expenses under operating leases in the years ended December 31, 1996, 1995 and
1994 totaled approximately $122,000, $61,000 and $76,000, respectively. Future
minimum lease payments for all leases are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
<S> <C> <C>
1997................................................. $107
1998................................................. 90
1999................................................. 72
2000................................................. 63
2001................................................. 6
----
Total minimum lease payments $338
====
</TABLE>
5. Stockholders' Equity
Initial Public Offering
In October 1994, the Company sold a total of 1,650,000 shares of common stock
at $8.50 per share through its initial public offering. The net proceeds (after
underwriters' commissions and fees and other costs associated with the offering)
totaled approximately $12,264,000. All preferred stock outstanding at the time
of the initial public offering was converted to 4,875,449 shares of common
stock.
Stock Repurchase
In January 1996, the Board of Directors approved a stock repurchase program
in which up to $3 million of the Company's Common Stock would be purchased by
the Company on the open market from time to time, depending upon market
conditions, share price and other factors. In July 1996, the Board of Directors
approved an additional $2.7 million to be used for the stock purchase program.
In December 1996, the Board of Directors approved an additional $2.6 million to
be used for the stock purchase program. As of December 31, 1996, the Company had
repurchased a total of 756,000 shares of its Common Stock for $5.7 million.
Subsequent to year end, the Company repurchased a total of 100,000 shares of its
Common Stock for $1.2 million as of February 23, 1997.
Preferred Stock
The Board of Directors has the authority, without any further vote or action
by the stockholders, to provide for the issuance of up to 5,000,000 shares of
preferred stock from time to time in one or more series with such designations,
rights, preferences and limitations as the Board of Directors may determine,
including the consideration received therefore, the number of shares
compromising each series, dividend rates, redemption provisions, liquidation
preferences, sinking fund provisions, conversion rights and voting rights, all
without approval by the holders of common stock.
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.
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, 1996, offers to purchase 19,200 shares were outstanding and exercisable at
prices ranging from $1.375 to $2.50 per share.
Stock Option Plans
The Company adopted the 1983 Incentive Stock Option Plan (the 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. As of December 31, 1996, the Company has a total of
342,153 shares of common stock reserved for future issuance upon the exercise of
stock options under the 1983 Plan.
In August 1992, the Company adopted the 1991 Stock Option Plan (the 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. As of December 31, 1996, the Company has a total of 2,677,807 shares of
common stock reserved for future issuance under the 1991 Plan.
Under both the 1983 and 1991 plans, options are exercisable as determined by
the Board of Directors on the date of grant. The Company's standard stock option
agreements under the 1983 and 1991 plans provide that 25% of the stock subject
to the option will vest upon each of the first and second anniversaries from the
vesting commencement date, and the remainder of the shares subject to the option
will vest monthly over the next two years. Generally, the terms of this plan
provide that options expire up to a maximum of ten years from the date of grant.
Information with respect to the employee 1983 and 1991 plans is summarized
as follows:
Outstanding Options
Available Number Price Per
For Grant of Shares Share
Balance at December 31, 1993. 670,414 1,641,404 $0.25-$1.38
Options authorized......... 300,000 -- --
Options granted............ (878,560) 878,560 $1.38-$8.56
Options exercised.............. -- (275,786) $1.38-$8.69
Options canceled............... 287,525 (287,525) $0.25-$4.38
Options expired.............. (104,655) -- --
---------- ---------- -------------
Balance at December 31, 1994. 274,724 1,956,653 $0.25-$8.69
Options authorized......... 940,000 -- --
Options granted............ (1,280,730) 1,280,730 $8.50-$16.00
Options exercised.......... - (387,846) $0.38-$8.56
Options canceled........... 342,194 (342,194) $0.88-$16.00
Options expired............. (11,428) -- --
---------- ---------- -------------
Balance at December 31, 1995.. 264,760 2,507,343 $0.38-$16.00
Options authorized.......... 510,000
Options granted.............. (1,925,290) 1,925,290 $5.63-$11.75
Options exercised....... -- (253,505) $0.38-$9.38
Options canceled......... 1,603,325 (1,603,325) $0.38-$11.75
Options expired.......... (8,176) -- --
---------- ---------- -------------
Balance at December 31, 1996. 444,619 2,575,803 $0.38-$11.75
========== ========== =============
Under the 1983 and 1991 plans, options to purchase 702,460 and 607,387
shares were exercisable at December 31, 1996 and 1995, respectively. At the
annual meeting held in May 1996 the shareholders approved a 510,000 share
increase to the 1991 plan.
In January 1996, the Board of Directors approved the repricing of all
incentive stock options granted during the period January 1, 1995 through
January 8, 1996. The repricing does not include incentive stock options granted
to any member of the Company's Board of Directors. During this period, 1,305,930
options were granted at prices ranging between $8.50 and $16.00. Employees had
the choice of exchanging any stock options granted during this period for new
options that would have a new exercise price of $7.313. The exchange of such
options is included in grants and cacellations.
Director Stock Option Plan
The Director Stock Option Plan (the Director Plan) was adopted in October,
1994. 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 8,000 shares on the date on which the later of the following events
occurs: (a) October 13, 1994, or (b) the date on which such person first becomes
an outside director, whether through election by the stockholders of the Company
or appointment by the Board of Directors to fill a vacancy. All outside
directors who had rights to receive options issuable on October 13, 1994
pursuant to the Director Plan have waived such rights and no options were issued
as of such date. In addition, each non-employee director automatically receives
a nonstatutory option to purchase 4,800 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. In 1996, 27,200 options were granted under the Directors Plan. At
December 31, 1996, 29,600 options were excercisable and 36,400 shares of common
stock were reserved for future issuance under the Director Plan.
The 8,000 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 4,800 share grant vests monthly over a
twelve-month period, in each case unless terminated sooner upon termination of
the optionee's status as a director or otherwise pursuant to the Directors Plan.
Employee Stock Purchase Plan
Upon closing of the Company's initial public offering, the Company adopted
the 1994 Employee Stock Purchase Plan (the 1994 Purchase Plan). An aggregate of
280,000 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.
During 1996, 101,056 shares were issued for proceeds of $659,000.
Deferred Compensation
The Company has determined that certain stock options granted during the
first six months of 1994 were granted at below the deemed fair value. The
difference between the deemed fair value of the options and the exercise prices
on the date of grant of approximately $296,000 is being charged to operations
over a period beginning on the grant date of the options and ending on the
expiration of the vesting period. For the year ended December 31, 1996, a total
of $81,000 had been charged to operations and additional paid-in capital.
Pro Forma Information
As of December 31, 1996, the Company has four stock-based compensation plans,
which are described above. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees (APB
25) and related interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-based Compensation" (SFAS
123) requires use of option valuation models that were not developed for use in
valuing employee stock options, employee stock purchase and director stock
option plans. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
Pro forma information regarding net income and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employer stock purchase plan, employee stock options and director stock options
subsequent to December 31, 1994 under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model using the multiple option approach with the
following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rate of between 5.8% and 6.4% for both years; volatility
factor of the expected market price of the Company's Common Stock of .76 for
both years; a weighted-average expected life of the option of .4 years from the
vest date for both years and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options, directors stock options and
employee stock purchase plans have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company's employee stock options, director's stock option and
employee stock purchase plans.
<TABLE>
<CAPTION>
A summary of the status of the Company's employee 1983, 1991, and directors
stock option plans as of December 31, 1996 and 1995 and changes during the years
ending on those dates is presented below:
1996 1995
------------------------------------ -----------------------------------
Shares Weighted-Average Shares Weighted-Average
Fixed Options (000) Exercise Price (000) Exercise Price
- ------------- ------------- --------------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,539,643 $6.22 1,985,453 $1.98
Granted 1,952,490 $7.12 1,293,930 $11.20
Exercised (253,505) $1.50 (397,446) $1.40
Forfeited (1,600,126) $9.25 (342,294) $6.05
Outstanding at end of year 2,638,502 $5.50 2,539,643 $6.22
Options exercisable at year-end 751,261 637,787
Weighted-average fair value of options
granted during the year $2.39 $5.93
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes information about fixed stock options at
December 31, 1996
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------------- --------------- ----------------------- ---------------------- ---------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.38 - $0.38 5,750 2.45 $0.38 5,750 $0.38
$0.63 - $1.38 758,257 6.00 $1.35 546,488 $1.35
$2.50 - $2.50 66,140 7.32 $2.50 64,913 $2.50
$4.38 - $6.38 464,551 9.51 $5.93 8,566 $4.59
$6.88 - $9.38 1,227,404 9.01 $7.51 80,644 $8.24
$10.75 - $13.38 116,400 8.66 $11.54 44,900 $12.09
--------------- ----------------------- ---------------------- ---------------- ----------------------------
$0.38 - $13.38 2,638,502 8.16 $5.50 751,261 $2.86
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options vesting period. The
Company's historical and pro forma information follows (in thousands, except for
net loss per share information):
<TABLE>
<CAPTION>
Years ended
December 31,
-----------------------
<S> <C> <C>
1996 1995
------- -------
Net income
Historical.................. $6,703 $10,536
Pro Forma................... $4,980 $9,712
Net income per share...........
Historical.................. $.51 $.77
Pro Forma................... $.38 $.71
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully realized until 1997.
6. Income Taxes
<TABLE>
<CAPTION>
The provisions for taxes consist of the following (in thousands):
December 31,
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Federal:
Current........................................... $4,342 $4,352 $320
Deferred.......................................... (1,102) (2,350) (320)
------ ------ ------
3,240 2,002 --
State:
Current........................................... 598 634 312
Deferred.......................................... (67) (165) (95)
------ ------ ------
531 469 217
------ ------ ------
Provision for taxes on income....................... $3,771 $2,471 $217
====== ====== ======
</TABLE>
The tax benefits resulting from disqualifying dispositions of shares acquired
under the Company's incentive stock option plan and from the exercise of
nonqualified stock options reduced taxes currently payable as shown above by
$345,000 in 1996. Such benefits were credited to additional paid-in capital.
<TABLE>
<CAPTION>
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,
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Tax at federal statutory rate.................................. $3,666 $4,552 $1,084
State tax, net of federal benefit.............................. 345 305 141
Adjustment of valuation allowance.............................. -- (2,197) (415)
Research credits............................................... (204) -- --
Benefit of net operating loss carryforward..................... -- -- (600)
Other.......................................................... (36) (189) 7
------ ------ ------
Provision for taxes............................................ $3,771 $2,471 $217
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 31,
<S> <C> <C>
1996 1995
------ -------
Deferred tax assets:
Inventory valuation..................................................... 2,939 1,435
Deferred revenue........................................................ 904 944
Other accruals and reserves not yet deductible for tax purposes......... 720 600
Other................................................................... 316 473
------ ------
Total deferred tax assets................................................. 4,879 3,452
Deferred tax liabilities:
Other................................................................... 380 122
------ ------
Total deferred tax liabilities............................................ 380 122
------ ------
Total net deferred tax assets............................................. $4,499 $3,330
====== ======
</TABLE>
7. Significant Customers
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its independent
sales organizations and through distributors. Export revenues, primarily to the
Far East, represented 38%, 31% and 24% for the years ended December 31, 1996,
1995 and 1994, respectively.
In fiscal 1996, net revenues to two customers were 15% and 14%, respectively.
In fiscal 1995, sales to three customers were 13%, 12% and 11% of net revenues,
respectively. In fiscal 1994, sales to one customer was 16% of net revenues.
8. 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 percent to 15 percent of their
pre-tax salary up to a maximum of $9,500 during 1996. Effective May 2, 1995, the
401(k) Plan was amended to provide that the Company would begin making a
discretionary matching contribution up to $40 per pay period to all employees
who are contributing to the 401(k) Plan. The Company's contribution to the
401(k) Plan was approximately $205,000 for 1996.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file its definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on May 28, 1997, 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) Reporting Delinquencies" 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.
<PAGE>
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 Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to 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 financial statements.
<PAGE>
<TABLE>
<CAPTION>
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, 1994
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts.................. $145 $115 $18 $242
Year Ended December 31, 1995
Allowance for Doubtful Accounts.................. $242 $60 $62 $240
Year Ended December 31, 1996
Allowance for Doubtful Accounts.................. $240 $60 $57 $243
- ----------
<FN>
(1) Charges for uncollectable accounts, net of recoveries
</FN>
</TABLE>
<PAGE>
3. Exhibits
Exhibit
Number Description of Document
2.1(1) Form of Agreement and Plan of Merger by and between the
Registrant and Micro Linear Corporation, a California
corporation.
3.1(2) Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1991 Stock Option Plan and form of Stock Option Agreement.
10.3(1)* 1994 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4(1)* 1983 Incentive Stock Option Plan and form of Stock Option
Agreement.
10.5(1)* 1994 Director Stock Option Plan and form of Stock Option
Agreement.
10.6(1)** License and Manufacturing Agreement between New Japan Radio
Co., Ltd. and
Registrant dated October 1, 1993.
10.7(1)** Foundry Services Agreement between Philips Semiconductor and
Registrant
effective January 27, 1993.
10.8(1)** License and Manufacturing Agreement between Taiwan
Semiconductor Manufacturing
Co. and Registrant dated April 24, 1992, as amended.
10.9(2) Deed of Trust and Trust Deed Note of registrant in principal
amount of $3.4
million dated October 1994.
10.10(1)* Executive Bonus Agreement between Arthur B. Stabenow and
Registrant dated as
of March 14, 1994.
10.12(1)** License and Manufacturing Agreement between Think-O Electric
Company and Registrant dated as of April 1, 1994.
11.1 Statement Regarding Computation of Earnings Per Share.
23.0 Consent of Ernst & Young LLP, Independent Auditors.
* Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report on Form 10-K pursuant to Item 14(c)
of this report.
** Confidential treatment granted as to certain portions of this exhibit.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (file no. 33-83546), as amended, filed on September 1, 1994.
(2) Incorporated by reference from the Registrant's Annual Report Form 10-K for
the fiscal year ended December 31, 1995 and incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See (a) above.
(d) Financial Statement Schedules.
See (a) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 27th day of March, 1997.
MICRO LINEAR CORPORATION
By /s/ ARTHUR B. STABENOW
-------------------------
Arthur B. Stabenow
Chairman , Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Arthur B. Stabenow and J. Philip Russell,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ ARTHUR B. STABENOW Chairman, Chief Executive Officer and March 27, 1997
- ----------------------- President
Arthur B. Stabenow (Principal Executive Officer)
/s/ J. PHILIP RUSSELL Chief Financial Officer (Principal March 27, 1997
- ----------------------- Financial and Accounting Officer)
J. Philip Russell
Director March 27, 1997
- -----------------------
Joseph D. Rizzi
/s/ ROGER A. SMULLEN Director March 27, 1997
- -----------------------
Roger A. Smullen
/s/ JEFFREY D. WEST Director March 27, 1997
- ------------------------
Jeffrey D. West
<PAGE>
Index to Exhibits
Page
Exhibit 11.1 Statement Re Computation of Earnings Per Share................47
Exhibit 23.0 Consent of Ernst & Young LLP, Independent Auditors............48
Exhibit 27.0 Financial Data Schedule.......................................49
<TABLE>
<CAPTION>
Exhibit 11.1
Micro Linear Corporation
Statement Re Computation of Earnings Per Share
(In thousands, except per share data)
Fiscal Years Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
------- ------- -------
Net Income....................................................................... $6,703 $10,536 $ 2,880
====== ======= =======
PRIMARY
Weighted average common shares outstanding....................................... 12,320 12,112 6,733
Common equivalents attributable to:
Convertible preferred warrants.............................................. - - 3,858
Options and warrants........................................................ 921 1,532 953
Shares related to SAB No. 55, 64, and 84......................................... - - 116
------ ------- -------
Total weighted average common and common equivalent shares
outstanding................................................................. 13,241 13,644 11,660
====== ======= =======
Net income per share............................................................. $ .51 $ .77 $ .25
====== ======= =======
FULLY DILUTED
Weighted average common shares outstanding....................................... 12,320 12,112 6,733
Common equivalents attributable to:
Convertible preferred warrants.............................................. - - 3,858
Options and warrants........................................................ 922 1,575 1,125
Shares related to SAB No. 55, 64, and 84......................................... - - 116
------ ------- -------
Total weighted average common and common equivalent shares
outstanding................................................................. 13,242 13,687 11,832
====== ======= =======
Net income per share............................................................. $ .51 $ .77 $ .24
====== ======= =======
</TABLE>
Exhibit 23.0
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-88942) pertaining to the Micro Linear 1983 Incentive Stock Option
Plan, 1991 Stock Option Plan, 1994 Director Stock Option Plan, 1994 Employee
Stock Purchase Plan and Options Granted to Directors of Micro Linear Corporation
of our report dated January 20, 1997, with respect to the financial statements
and schedule of Micro Linear Corporation included in the Annual Report (Form
10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
San Jose, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000875359
<NAME> Micro Linear Corp
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 4385
<SECURITIES> 20798
<RECEIVABLES> 4372
<ALLOWANCES> 243
<INVENTORY> 10456
<CURRENT-ASSETS> 46587
<PP&E> 38095
<DEPRECIATION> 16441
<TOTAL-ASSETS> 69032
<CURRENT-LIABILITIES> 7791
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 58256
<TOTAL-LIABILITY-AND-EQUITY> 69032
<SALES> 54057
<TOTAL-REVENUES> 57057
<CGS> 21905
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308
<INCOME-PRETAX> 10474
<INCOME-TAX> 3771
<INCOME-CONTINUING> 6703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6703
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
