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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
________________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 1999
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)
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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 1999 was 11,029,966.
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Condensed Statements of Operations for the three and nine
months ended September 30, 1999 and 1998................................. 3
Consolidated Condensed Balance Sheets at September 30, 1999 and December 4
31, 1998................................................
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998.............................................. 5
Notes to Consolidated Condensed Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................... 18
SIGNATURES............................................................................. 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
<S> <C> <C> <C> <C>
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
Net revenues....................................................... $12,113 $11,758 $34,289 $35,742
Cost of revenues................................................... 5,829 5,919 17,096 18,171
Gross profit...................................................... 6,284 5,839 17,193 17,571
Operating expenses:
Research and development.......................................... 3,608 2,855 10,457 9,006
Selling, general and administrative............................... 2,569 2,876 8,149 8,067
Legal settlement and related costs................................ 1,408 -- 1,408 --
7,585 5,731 20,014 17,073
Income (loss) from operations..................................... (1,301) 108 (2,821) 498
Interest and other income.......................................... 371 372 1,142 1,100
Interest expense................................................... (62) (65) (187) (198)
Income (loss) before taxes........................................ (992) 415 (1,866) 1,400
Provision (benefit) for income taxes............................... (635) 150 (1,194) 504
Net income (loss)................................................. $ (357) $ 265 $(672) $896
Net Income (loss) Per Share:
Basic:
Net income (loss) per share....................................... $(0.03) $0.02 $(0.06) $0.08
Weighted average number of shares used in per share computation... 11,014 11,642 10,976 11,661
Diluted:
Net income (loss) per share....................................... $(0.03) $0.02 $(0.06) $0.07
Weighted average number of shares used in per share computation... 11,014 11,992 10,976 12,101
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
<S> <C> <C>
September 30, December 31,
1999 1998
Assets
Current assets:
Cash and cash equivalents........................................................... $ 4,792 $ 6,393
Short-term investments.............................................................. 23,361 22,937
Accounts receivable, net............................................................ 5,565 5,476
Inventories......................................................................... 5,991 7,260
Other current assets................................................................ 5,990 5,670
Total current assets.............................................................. 45,699 47,736
Property, plant and equipment, net .................................................... 20,300 21,140
Other assets........................................................................... 486 568
Total assets.................................................................... $66,485 $69,444
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................................... $4,192 $ 3,030
Deferred income on shipments to distributors........................................ 2,744 2,739
Other accrued liabilities........................................................... 1,441 4,075
Current portion of long-term debt................................................... 173 2,791
Total current liabilities......................................................... 8,550 12,635
Long-term debt......................................................................... 2,827 --
Commitments and contingencies
Stockholders' equity:
Preferred stock..................................................................... -- --
Common stock........................................................................ 14 14
Additional paid-in capital.......................................................... 54,610 54,125
Retained earnings................................................................... 20,717 21,389
Treasury stock...................................................................... (20,233 ) (18,719 )
Total stockholders' equity........................................................ 55,108 56,809
Total liabilities and stockholders' equity...................................... $66,485 $69,444
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
4
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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
<S> <C> <C>
September 30, September 30,
1999 1998
Cash provided by operating activities........................... $2,539 $8,129
Investing activities:
Capital expenditures......................................... (2,617 ) (2,432 )
Proceeds from sale of equipment.............................. 115 --
Purchases of short-term investments.......................... (32,826 ) (32,092 )
Sales of short-term investments.............................. 32,402 30,460
Net cash used in investing activities....................... (2,926 ) (4,064 )
Financing activities:
Principal payments of debt................................... (121 ) (151 )
Proceeds from issuance of common stock....................... 421 963
Acquisition of treasury stock................................ (1,514 ) (3,267 )
Net cash used in financing activities....................... (1,214 ) (2,455 )
Net increase (decrease) in cash and cash equivalents............ (1,601 ) 1,610
Cash and cash equivalents at beginning of period................ 6,393 5,210
Cash and cash equivalents at end of period...................... $ 4,792 $ 6,820
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
5
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MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1) Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range
of applications within the communications, computer and industrial markets
for sale primarily in North America, Asia and Europe. The Company operates
in a single industry segment.
2) The accompanying interim financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles and contain all adjustments (consisting of normal recurring
adjustments) to fairly present the financial information included. While
the Company believes that the disclosures are adequate to make the
information not misleading, it is suggested that these financial statements
be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. The results of operations for the interim
periods shown in this report are not necessarily indicative of results to
be expected for the fiscal year.
3) For financial reporting purposes, the Company's fiscal year ends on the
Sunday closest to December 31. Fiscal year 1998 ended on January 3, 1999.
The Company's fiscal quarters are 13 weeks in length. The third quarter of
1999 ended on October 3, 1999. For presentation purposes, the accompanying
unaudited consolidated condensed financial statements refer to the
quarters' calendar month end for convenience.
The Company exclusively uses the U.S. dollar as its functional currency.
Foreign currency transaction gains and losses are included in income as
they occur. The effect of foreign currency exchange rate fluctuations was
not significant. The Company does not use derivative instruments.
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.
4) During the three months ended September 30, 1999, two customers accounted
for 23% and 13% of total sales, respectively. During the nine months ended
September 30, 1999, two customers accounted for 25% and 11% of total sales,
respectively.
5) Supplemental Financial Information:
Inventories consist of the following (in thousands):
September 30, December 31,
1999 1998
Raw materials............. $ 8 $ 314
Work-in-process........... 4,326 4,906
Finished goods............ 1,657 2,040
$5,991 $7,260
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
Land............................................ $ 2,850 $ 2,850
Buildings and improvements...................... 9,982 9,904
Machinery and equipment......................... 36,161 33,736
48,993 46,490
Accumulated depreciation and amortization....... 28,693 25,350
Net property, plant and equipment............... $20,300 $21,140
</TABLE>
6
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6) Cash payments for income taxes and interest expense totaled $261,000 and
$187,000, respectively, for the nine months ended September 30, 1999.
7) The Company's provision for taxes on income is based on estimates of the
levels of income and certain deductions expected for the year which may be
subject to change. The Company's effective tax rate for the nine-month
period of 1999 was a benefit of 64%, compared to a provision of 36% for the
same period in 1998, which differs from the statutory income tax rate
primarily due to state income taxes and federal research credits. The
reason for the higher effective tax rate in the first nine months of 1999
is the greater impact that the Federal R&D Tax Credit and California
Investment Tax Credit is expected to have on the 1999 tax provision.
8) From January 1996 through September 1999, the Company had repurchased
2,696,900 shares of its common stock for a total cost of $20.2 million. The
Company's common stock buy-back program was terminated at the end of the
first quarter of 1999.
9) The Company uses the net income per share calculation methodology
prescribed by Statement of Financial Accounting Standards No. 128 ("SFAS
128"). SFAS 128 requires presentation of basic and diluted net income per
share. Basic net income per share is computed by dividing net income
available to common stockholders (numerator) by the weighted average number
of common shares outstanding (denominator) during the period and excludes
the dilutive effect of stock options. Diluted net income per share gives
effect to all dilutive potential common stock outstanding during the
period. In computing diluted net income per share, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted income per share computations for the periods presented
below (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended September 30,
<S> <C> <C>
1999 1998
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income (Loss)
Per Share:
Net income (loss)
available $(357) 11,014 $(0.03) $265 11,642 $0.02
to common
stockholders
Effect of dilutive
securities: -- 350
Stock options
Diluted Income (Loss)
Per Share:
Net income (loss)
available to common
stockholders $(357) 11,014 $(0.03) $265 11,992 $0.02
Assuming dilution
</TABLE>
7
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
<S> <C> <C>
1999 1998
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income (Loss)
Per Share:
Net income (loss)
available $(672) 10,976 $(0.06) $896 11,661 $0.08
to common
stockholders
Effect of dilutive
securities: -- 440
Stock options
Diluted Income (Loss)
Per Share:
Net income (loss)
available
to common $(672) 10,976 $(0.06) $896 12,101 $0.07
stockholders
assuming dilution
</TABLE>
Options to purchase 274,792 shares of common stock were outstanding as of
September 30, 1999, but were not reflected in the computations of diluted
earnings per share because the Company recorded a net loss in the period
and to do so would have been anti-dilutive.
10) Prior to September 1999, the Company had a note that bore interest at
9.125% per annum and was secured by a deed of trust on the Company's
principal facilities. The note required 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. In September
1999, the Company refinanced this note with a new note of $3,000,000. The
new note bears interest at 7.59% 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
2004, with a balloon payment of approximately $1,780,000 due November 1,
2004. As of September 30, 1999, $3,000,000 was outstanding under the loan.
11) In April 1998, the Accounting Standards Executive Committee released
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
Activities. SOP No. 98-5 is effective for fiscal years beginning after
December 15, 1998 and requires companies to expense all costs incurred or
unamortized in connection with start-up activities. The adoption of this
SOP did not have any effect on the Company's results of operations as the
Company has expensed such start-up costs in prior years.
In March 1998, the Accounting Standard Executive Committee released
Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP No.98-1 is
effective for financial statements for periods beginning after December 15,
1998. Direct external costs, directly related internal payroll and
payroll-related cost and interest expenses associated with the application
development stage are capitalizable. Upgrades and enhancements are
capitalized if they meet certain criteria. Training, maintenance, and
data-conversion costs are expensed. The adoption of this SOP did not have
any significant effect on the Company's results of operations.
12) In September 1999, the Company issued a press release announcing a
settlement of a lawsuit. The terms of settlement in this matter are
confidential, however, the Company took a $1.4 million charge reflecting
settlement and associated litigation costs in the third quarter. A
discussion of certain pending legal proceedings is included in Item 1 of
Part II of the Company's Form 10-Q for the fiscal quarter ended September
30, 1999. The Company believes that the final outcome of such matters
discussed will not have a material adverse effect on the Company's
consolidated financial position or results of operations. No assurance can
be given, however, that these matters will be resolved without the Company
becoming obligated to make payments or to pay other costs to the opposing
party, with the potential for having an adverse effect on the Company's
financial position or its results of operations.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report on Form 10-Q 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. The forward-looking statements contained herein
are subject to certain factors that could cause actual results to differ
materially from those projected in the forward-looking statements. Such factors
include, but are not limited to, the factors set forth below and elsewhere in
this Form 10-Q.
Results of Operations
Net Revenues
Net revenues were $12.1 million for the third quarter of 1999, a 3%
increase over net revenues of $11.8 million for the third quarter of 1998 and a
7% increase over net revenues of $11.3 million for the second quarter of 1999.
The increase in net revenues over the third quarter of 1998 and the second
quarter of 1999 is primarily attributable to higher turns demand and continued
strong domestic distribution resales. Net revenues were $34.2 million for the
first nine months of 1999, a 4% decrease over net revenues of $35.7 million for
the first nine months of 1998. The decline in net revenues in the first nine
months of 1999 compared to the first nine months of 1998 was primarily due to
lower demand for mature networking products in the communications market.
The Company serves three principal markets, computer, communications and
industrial. Net revenues for the third quarter of 1999 compared to the third
quarter of 1998 increased 36% and 27% in the computer and industrial market,
respectively, and decreased 13% in the communications market. Net revenues for
the third quarter of 1999 compared to the second quarter of 1999 increased 19%
in the computer and industrial market and decreased 1% in the communications
market. Net revenues for the first nine months of 1999 compared to the first
nine months of 1998 increased 31% and 26% in the computer and industrial market,
respectively, and decreased 21% in the communications market.
The communications market includes the computer networking equipment
("networking") sub-market. Sales of products to the networking market
constitutes a substantial portion of the Company's net revenues. Net revenues
for the third quarter of 1999 in the networking sub-market decreased 14% and 2%
compared to the third quarter of 1998 and second quarter of 1999, respectively.
Sales of the Company's networking products accounted for approximately 48% and
59% of net revenues in the first nine months of 1999 and 1998, respectively. The
networking sub-market is characterized by intense competition, relatively short
product life cycles and rapid technological change. In addition, the networking
sub-market has undergone a period of rapid growth, price erosion and
consolidation in recent years. The Company expects its dependency on sales to
network equipment manufacturers to continue for the near future. The Company's
business and results of operations have in the past and would in the future be
materially and adversely affected in the event of a significant slowdown in the
computer networking equipment market.
International net revenues were $5.4 million, or 45% of net revenues, for
the third quarter of 1999, compared to $4.1 million, or 35% of net revenues, for
the third quarter of 1998 and $4.3 million, or 38% of net revenues, for the
second quarter of 1999. International revenues were $14.5 million, or 42% of net
revenues, for the first nine months of 1999, compared to $15.0 million, or 42%
of net revenues, for the first nine months of 1998. The increase in
international revenues for the third quarter of 1999 compared to the third
quarter of 1998 and the second quarter of 1999 was due to the combination of
higher direct product demand for the Company's products in Asia and Europe and
increased Asia Pacific subcontract work for domestic customers.
Domestic distributor revenues were approximately 30% of net revenues for
the third quarter of 1999, 25% of net revenues for the third quarter of 1998 and
37% of net revenues for the second quarter of 1999. Domestic distributor
revenues were approximately 31% and 21% of net revenues for the first nine
months of 1999 and first nine months of 1998, respectively. During 1998, the
Company added a second national domestic distributor. The Company expects sales
from both domestic and international distributors to increase in the future. In
this regard, several of the Company's OEM (Original Equipment Manufacturer)
customers have moved their manufacturing operations to subcontractors and, in
turn, are placing their orders through distributors. The Company defers
recognition of revenue derived from sales to domestic distributors until such
distributors resell the products to their customers. Revenue is recognized by
the Company upon shipment to international representatives, but the gross margin
on these shipments is deferred until international distributors notify the
Company of product sales to end users.
9
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Gross Margin
The Company's gross margin is affected by the volume of product sales,
price, product mix, manufacturing utilization, product yields, inventory
obsolescence and the mix of sales to OEM's and to distributors. The Company's
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 increased to 52% in the third quarter of 1999
from 50% in the third quarter of 1998 and second quarter of 1999. The Company's
gross margin increased to 50% for the first nine months of 1999 from 49% for the
first nine months of 1998. The Company's gross margin improved in the third
quarter of 1999 compared to the third quarter of 1998 and the second quarter of
1999 primarily due to a favorable change in product mix.
The Company's gross margin is adversely impacted by the costs associated
with installing new processes at its foundries. Although the Company has
recently been able to mitigate the adverse impact on gross margin associated
with new wafer manufacturing process costs by relying upon process technologies
existing at its outside wafer foundries, there can be no assurance that the
Company will not be required to incur significant expenses in the future to
develop, or obtain access to, advanced process technologies and to transfer and
install such technologies at one or more of its foundries, which could have a
material adverse effect on gross margin in the future.
The Company currently purchases its wafers from three wafer suppliers. A
substantial majority of the Company's wafer supply is obtained from two wafer
suppliers. The Company's products are assembled and packaged by four vendors.
Any delays or interruptions due to such factors as inadequate capacity or
unavailable raw materials in the Company's wafer suppliers or assembly vendors
could materially and adversely affect product shipments. The Company purchases
nearly all of its BiCMOS wafers from two wafer foundries, the majority of which
are supplied by one wafer foundry in Taiwan. Although both wafer foundries are
qualified to supply the Company with BiCMOS wafers, the Company's short-term
BiCMOS wafer supply could be materially and adversely affected if the wafer
foundry in Taiwan is unable to meet the Company's wafer supply. The Company did
not experience any disruption in wafer supply due to the recent earthquakes in
Taiwan.
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. The Company 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 $3.6 million, or 30% of net
revenues, for the third quarter of 1999, compared to $2.9 million, or 24% of net
revenues, for the third quarter of 1998 and $3.3 million, or 30% of net
revenues, for the second quarter of 1999. Research and development expenses were
$10.4 million, or 30% of net revenues, for the first nine months of 1999,
compared to $9.0 million, or 25% of net revenues, in the first nine months of
1998. The increase in research and development expenses in absolute dollars in
the third quarter of 1999 compared to the third quarter of 1998 is primarily
attributable to increased prototype product costs associated with new product
and the addition of personnel associated with the Company's new design center in
Scotland. The increase in research and development expenses in absolute dollars
in the third quarter of 1999 compared to the second quarter of 1999 is primarily
attributable to new contract research and development costs and increased
prototype product costs associated with new product development offset by
decreased payroll expenses. The increase in research and development expenses in
absolute dollars in the first nine months of 1999 compared to the first nine
months of 1998 is primarily attributable to the addition of personnel associated
with the Company's new design center in Scotland. During the first quarter of
1999, the Company announced the establishment of a new development center in
Scotland. Staffing at this site consists of seven designers. Staffing at the
Company's development center in England totals nine. The Company believes that
the timely development and introduction of new products is critical to its
future success.
10
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses were $2.6 million, or 21% of
net revenues, for the third quarter of 1999 (excluding the settlement charge
related to a lawsuit), compared to $2.9 million, or 24% of net revenues, for the
third quarter of 1998 and $2.7 million, or 24% of net revenues, for the second
quarter of 1999. Selling, general and administrative expenses were $8.1 million,
or 24% of net revenues, for the first nine months of 1999 (excluding the
settlement charge related to a lawsuit), compared to $8.1 million, or 23% of net
revenues, for the first nine months of 1998. The one-time legal settlement
charge of $1.4 million in the third quarter of 1999 includes both settlement and
associated litigation costs.
The decrease in absolute dollars in the third quarter of 1999 compared to
the third quarter of 1998 is primarily attributable to decrease in sales
commissions and reduced staffing. The decrease in absolute dollars in the third
quarter of 1999 compared to the second quarter of 1999 is primarily attributable
to decreased staffing levels and lower data book costs. The first nine months of
1999 expenses compared to those for the first nine months of 1998 remained
relatively flat, with increased payroll expenses offset by lower data book costs
and business conference expenses. The Company expects selling, general and
administrative expenses will remain relatively constant as a percentage of
revenues.
Interest and Other Income and Interest Expense
Interest and other income was $0.4 million for each of the first three
quarters of 1999 and the third quarter of 1998. Interest expense was
insignificant for the first nine months of 1999 and the first nine months of
1998.
Provision for Income Taxes
The Company's provision for taxes on income is based on estimates of the
levels of income and certain deductions expected for the year, which may be
subject to change. The Company's effective tax rate for the first nine months of
1999 was a benefit of 64%, compared to a provision of 36% for the same period in
1998, which differs from the statutory income tax rate primarily due to state
income taxes and federal research credits. The reason for the higher effective
tax rate in the first quarters of 1999 is the greater impact that the Federal
R&D Tax Credit and California Investment Tax Credit is expected to have on the
1999 tax provision.
Liquidity and Capital Resources
During the last several years, the Company has financed its operations and
capital requirements principally through cash flows from operations. Operations
provided $2.5 million of net cash during the first nine month of 1999, a
decrease of $5.6 million over the first nine month of 1998. The decrease in the
first nine months of 1999 compared to the first nine month of 1998 is primarily
attributable to lower net income (loss) and accrued liabilities partially offset
by lower inventories.
Cash used in investing activities for the first nine months of 1999 is
attributable to capital expenditures of $2.6 million and net purchases of
short-term investments of $0.4 million. The Company currently expects capital
expenditures for the year of 1999 to be approximately $3.5 million.
Financing activities for the first nine months of 1999 consisted primarily
of the repurchase of the Company's Common Stock for $1.5 million. From January
1996 through September 30, 1999, the Company had repurchased 2,696,900 shares of
its common stock at an aggregate cost of $20.2 million. The Company's common
stock buy-back program was terminated at the end of the first quarter of 1999.
Working capital was $37.1 million as of September 30, 1999, compared to
$35.1 million as of December 31, 1998 and includes cash and cash equivalents of
$4.8 million and short-term investments of $23.4 million as of September 30,
1999.
The Company anticipates that its existing cash resources and cash generated
from operations will fund necessary purchases of capital equipment and provide
adequate working capital for at least the next twelve months. The Company's
liquidity is affected by many factors, including, among others, the extent to
which the Company pursues additional wafer fabrication capacity from existing
foundry suppliers or new suppliers, capital expenditures, and the level of the
Company's product development efforts, and other factors related to the
uncertainties of the industry and global economies. Accordingly, there can be no
11
<PAGE>
assurance that events in the future will not require the Company to seek
additional capital sooner or, if so required, that such capital will be
available on terms acceptable to the Company.
Other Factors Affecting Future Operating Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including the Company's access to advanced process technologies,
the timing and extent of process development costs, the Company's ability to
introduce new products on a timely basis, the volume and timing of orders
received, market acceptance of the Company's and its customers' products, the
timing of new product announcements and introductions by the Company or its
competitors, changes in the mix of products sold, the timing and extent of
research and development expenses, the availability and cost of wafers from
outside foundries, fluctuations in manufacturing yields, competitive pricing
pressures and cyclical semiconductor industry conditions. A majority of the
Company's net revenues are derived from sales of a limited number of products.
Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. Competitive pricing pressures
are expected to continue in the future, especially in the communications market,
which includes the networking sub-market, and may have a material adverse effect
on the Company's gross margin. The Company's business is characterized by
short-term orders and shipment schedules, and customer orders typically can be
canceled or rescheduled without significant penalty to the customer. Due to the
absence of substantial noncancellable backlog, the Company typically plans its
production and inventory levels based on internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially. In addition, the
Company is limited in its ability to reduce costs quickly in response to any
revenue shortfalls. As a result of the foregoing or other factors, there can be
no assurance that the Company will not experience material fluctuations in
future operating results on a quarterly or annual basis which would materially
and adversely affect the Company's business, financial condition and results of
operations.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to advanced semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve yields. Semiconductor design and process
methodologies are subject to rapid technological change, requiring large
expenditures for research and development. If the Company is unable to develop
or obtain access to advanced wafer processing technologies as they become
needed, or is unable to define, design, develop and introduce competitive new
products on a timely basis, its future operating results will be materially and
adversely affected. In addition, if the Company is unable to transfer and
install such new process technologies to one or more of its foundries in a
timely manner, its business and results of operations could be materially and
adversely affected.
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. The
Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions or other
factors.
Year 2000 Readiness Disclosure
The "Year 2000 issue" arises because most computer systems and programs
were designed to handle only a two-digit year, not a four-digit year. When the
Year 2000 begins, these computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly. The Company has implemented, for all of its information systems, a
year 2000 date conversion project to address all necessary code changes, testing
and implementation and accordingly does not anticipate any internal Year 2000
issues from its own information systems, databases or programs. The Company has
also implemented a Year 2000 date conversion project to address machinery,
equipment and other items used in the operations of the Company.
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, and suppliers that are not Year 2000 compliant, and to
develop, implement, and test remediation and contingency plans to mitigate these
risks. The project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing. In addition, the Company provides its customers
with information on the Year 2000 project and the progress made towards Year
2000 compliance.
12
<PAGE>
INFORMATION SYSTEMS. The Company's current enterprise information system
has been remediated and was fully tested in May 1998 and determined to be Year
2000 compliant.
The required changes to the Company's information systems and items used in
the operations of the Company were completed in September 1999. Total Year 2000
related external costs pertaining to its information systems were $64,000. None
of the Company's other information technology projects have been deferred as a
result of the Company's Year 2000 compliance efforts.
PRODUCTS. The Company has assessed the capabilities of all of its products
sold to customers. Based on the assessments made to date, none of the Company's
products are affected by Year 2000 issues.
OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used
in the operations and facilities of the Company have been inventoried and
assessed for Year 2000 compliance. The assessment to date has not yielded any
major areas of concern. The assessment process was completed in September 1998.
SUPPLIERS. The Company has evaluated its supplier base to determine whether
Year 2000 issues affecting suppliers will adversely impact the Company's
operations. Although the Company does not anticipate any business disruptions
based on the assurances made by these suppliers, the Company will continue to
assess and monitor key suppliers through the year 2000 transition period.
CUSTOMERS. The Company established a Global Year 2000 Desk at its
headquarters in California to handle all customer requests for compliance and
survey information, and for other general information related to the Company's
Year 2000 programs.
GENERAL AND RISK FACTORS. Although the Company has completed its Year 2000
project, unforeseen risks and delays may cause disruption in manufacturing,
order processing and distribution services or lead to additional costs. The
Company believes that its greatest potential risks for Year 2000 issues are
associated with its information systems and systems embedded in its operations
and infrastructure, for which the Company has developed a contingency plan.
Internal costs incurred for the Year 2000 project are being tracked; they
principally consist of payroll and related costs. The Company's total costs are
immaterial.
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems; may not be able to develop, implement, or test remediation
or contingency plans; or may find that the costs of these activities exceed
current expectations and become material. In many cases, the Company is relying
on assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test certain
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed by the supplier in a
timely and satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company. If
the Company fails to satisfactorily resolve Year 2000 issues in a timely manner,
it could be exposed to claims by third parties.
The Company has evaluated the various types of contingency plans such as
procedures for dealing with disruptions of internal business systems, plans for
factory shutdowns and identification of alternative material vendors in the
event of Year 2000 related disruption in supply. Contingency evaluation and
planning will continue through 1999. The Company cannot assure that any
contingency plans in effect at the time of a system failure will adequately
address the immediate or long term effects of a failure, or that such a failure
would not have a material adverse impact on our operations or financial results
in spite of prudent planning.
13
<PAGE>
The Company could be adversely impacted by Year 2000 issues faced by major
distributors, suppliers, customers, vendors and financial service organizations
with which the Company interacts. The Company is continuing to evaluate Year
2000-related risks and corrective actions. At this time, the Year 2000
compliance expense and related potential effect of the Company's earnings are
estimated to be insignificant. However, the risks associated with the Year 2000
problem are pervasive and complex, can be difficult to identify and to address,
and can result in material adverse consequences to the Company. Even if the
Company, in a timely manner, completes all of its assessments, identifies and
tests remediation plans believed to be adequate, and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the Company.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company's investment portfolio consisted of U.S. government obligations
and commercial paper typically with maturities of less than 12 months. These
securities are subject to interest rate risk and will decline in value if market
interest rates increase. The Company has the ability to hold its fixed income
investments until maturity and, therefore, the Company would not expect to
recognize such an adverse impact in income or cash flows.
Foreign Currency Exchange Rate Risk
The Company has international sales and research and development facilities
and is, therefore, subject to foreign currency rate exposure. The Company's
foreign currency risks are mitigated principally by maintaining only minimal
foreign currency balances. To date, the exposure to the Company related to
exchange rate volatility has not been significant. However, there can be no
assurance that there will not be a material impact in the future.
For further discussion of risk factors, refer to the Company's filing on
Form 10-K with the Securities and Exchange Commission.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1995, Pioneer Magnetics, Inc. ("Pioneer") filed a complaint in
the Federal District Court for the Central District of California alleging that
certain of the Company's integrated circuits violate a Pioneer patent. Pioneer
is seeking monetary damages and an injunction against such alleged patent
violation. The Company has denied any infringement and filed a counter-claim
seeking invalidity of the patent. The court held a patent claim construction
hearing on November 9, 1998. The court subsequently issued a claim construction
opinion that is favorable to Micro Linear. The court ordered Pioneer to brief
additional claim elements. The final claim construction hearing took place on
July 19, 1999. The court has issued a tentative order also favorable to Micro
Linear. The parties anticipate filing a stipulated judgment of Non-Infringement,
which would result in a termination of the district court action against Micro
Linear. Pioneer may appeal such judgment. The court has not set a trial date or
a discovery cutoff date.
On February 24, 1997, a former employee of Micro Linear filed a complaint
in the Superior Court of California, County of Santa Clara, alleging breach of
contract and employment discrimination. On June 5, 1997, the case was dismissed
and the parties agreed to submit the dispute to arbitration. As of October 27,
1999, no arbitration date had been scheduled. The Company denies all liability
and intends to vigorously defend its actions in the arbitration.
On September 4, 1998, NetVantage, Inc. ("NetVantage") filed a complaint
relating to the Company's sale of part ML6692 to NetVantage through the
Company's distributor, Insight Electronics, in the Superior Court of California,
County of Los Angeles, alleging causes of action for: (1) breach of contract,
(2) breach of express warranty, (3) breach of implied warranty of
merchantability, (4) breach of implied warranty of fitness, (5) intentional
misrepresentation, (6) negligent misrepresentation, (7) negligence, and (8)
breach of implied covenant of good faith and fair dealing. NetVantage sought
compensatory damages of no less than $6.0 million, additional compensatory
damages according to proof, attorneys' fees and costs, plus interest. On
February 12, 1999, NetVantage filed a first amended complaint in which
NetVantage withdrew its causes of action for intentional misrepresentation and
negligent misrepresentation but realleging the remaining causes of action of the
original complaint. On February 26, 1999, the Company filed an answer to
NetVantage's complaint denying the causes of action and asserting numerous
affirmative defenses. On the same day, Insight Electronics filed its answer and
also filed a cross-complaint against NetVantage, alleging causes of action for:
(1) breach of express contract, (2) breach of implied contract, (3) open
account, and (4) quantum valebant, seeking compensatory damages in excess of
$41,400, attorneys' fee and costs, plus interest. On October 1, 1999 the parties
reached an out of court settlement of this action. The terms of settlement in
this matter are confidential, however, the Company took a $1.4 million charge
reflecting settlement and associated litigation costs in the third quarter of
1999 and the action has been dismissed .
On December 16, 1998, Accton Technology Corporation ("Accton") filed a
complaint relating to the Company's sale of part ML6692 to Accton, against the
Company in the Superior Court of California, County of Santa Clara, alleging
causes of action for: (1) breach of contract, (2) breach of express warranty,
(3) breach of implied warranty of merchantability, (4) breach of implied
warranty of fitness for particular purpose, (5) fraud and deceit-concealment,
(6) negligent misrepresentation, (7) negligent interference with economic
advantage, and (8) declaratory relief to establish the right to implied
contractual indemnity. Accton seeks compensatory damages in excess of $7.0
million, exemplary damages according to proof, attorneys' fees and costs, and
prejudgment and postjudgment interest. On February 10, 1999, the Company filed a
demurrer and motion to strike attacking the legal sufficiency of Accton's
complaint. On April 20, 1999, the same day scheduled for the hearing on the
demurrer, Accton filed its Amended Complaint, which rendered the demurrer moot.
Accton's Amended Complaint alleges essentially the same claims as its original
Complaint, but pleads the breach of contract and fraud and deceit claims with
somewhat more specificity, as well as alleging additional factual information.
The Company filed a demurrer to Accton's Amended Complaint which was overruled
on July 8, 1999. The Company filed its answer to Accton's Amended Complaint on
July 27, 1999. A discovery hearing was set for May 7, 1999 on the Company's
motion for protective order and Accton's motion to compel and for sanctions. The
Company's motion for protection order was granted by the Court, as was Accton's
motion to compel. Accton's request for sanctions was denied. On May 7th, the
Company produced documents responsive to Accton's document request. Depositions
have been ongoing since late May and are expected to continue for several
months. The Company served Accton with initial discovery in early May and has
received responses and documents from Accton. The Company has subsequently
served Accton with additional discovery, and expects to receive these responses
from Accton in Late November. Further, Hewlett-Packard Company, Accton's
customer, has also produced documents in response to the Company's desposition
subpoena. Numerous Accton personnel have been noticed for deposition, but have
16
<PAGE>
not yet been deposed by the Company. At the initial status conference on July
13, 1999, the court ordered the parties to mediation, and set a mediation status
conference for October, 14, 1999. Due to scheduling conflicts with the
NetVantage matter, both parties later agreed to set the mediation for December
16, 1999 before Hon. William T. Betineli (Ret.). At the subsequent October 14,
1999 mediation status conference, the court set a trial setting conference for
December 7, 1999, at which time a trial date will likely be scheduled.
Although the Company believes that the resolution of these actions will not
have a material adverse effect on the Company's financial condition or results
of operations, there can be no assurance that such actions will be resolved in
the Company's favor or that an unfavorable resolution would not materially
adversely effect the Company's financial condition or results of operations.
From time to time, the Company has received, and in the future it may
receive, correspondence from certain vendors, distributors, customers or
end-users of its products regarding disputes with respect to contract rights,
product performance or other matters that occur in the ordinary course of
business. There can be no assurance that any of such disputes will not
eventually result in litigation or other actions involving the Company or as to
the outcome of such disputes.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICRO LINEAR CORPORATION
Date: November 16, 1999 By: /s/ J. PHILIP RUSSELL
J. Philip Russell
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
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