<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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 JUNE 30, 2000
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
PREFERRED SHARE PURCHASE RIGHTS
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 July
31, 2000 was 11,661,310.
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations for the three and six months
ended June 30, 2000 and 1999.................................................... 3
Consolidated Condensed Balance Sheets at June 30, 2000 and December 31, 1999.... 4
Consolidated Condensed Statements of Cash Flows for the six months ended June
30, 2000 and 1999............................................................... 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 ..................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............................. 13
Item 6. Exhibits and Reports on Form 8-K................................................ 14
SIGNATURES................................................................................ 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues .......................................................... $ 11,741 $ 11,270 $ 23,123 $ 22,176
Cost of revenues ...................................................... 5,593 5,616 10,960 11,267
-------- -------- -------- --------
Gross profit ....................................................... 6,148 5,654 12,163 10,909
Operating expenses:
Research and development ........................................... 3,184 3,349 6,460 6,849
Selling, general and administrative ................................ 2,716 2,696 5,296 5,580
Legal settlement and related costs ................................. 8,054 -- 8,080 --
-------- -------- -------- --------
13,954 6,045 19,836 12,429
-------- -------- -------- --------
Loss from operations ............................................... (7,806) (391) (7,673) (1,520)
Interest and other income, net ........................................ 508 392 894 771
Interest expense ...................................................... (173) (62) (229) (125)
-------- -------- -------- --------
Loss before taxes .................................................. (7,471) (61) (7,008) (874)
Provision (benefit) for income taxes .................................. (2,615) 197 (2,453) (559)
-------- -------- -------- --------
Net loss ........................................................... $ (4,856) $ (258) $ (4,555) $ (315)
======== ======== ======== ========
Net loss Per Share:
Basic:
Net loss per share ................................................. $ (0.42) $ (0.02) $ (0.40) $ (0.03)
======== ======== ======== ========
Weighted average number of shares used in per share computation .... 11,515 10,940 11,367 10,957
======== ======== ======== ========
Diluted:
Net loss per share ................................................. $ (0.42) $ (0.02) $ (0.40) $ (0.03)
======== ======== ======== ========
Weighted average number of shares used in per share computation .... 11,515 10,940 11,367 10,957
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 10,676 $ 7,381
Short-term investments ............................ 14,387 24,122
Accounts receivable, net .......................... 6,556 5,762
Inventories ....................................... 9,079 5,917
Income tax receivable ............................. 2,505 504
Other current assets .............................. 4,722 4,609
-------- --------
Total current assets ............................ 47,925 48,295
-------- --------
Note Receivable ...................................... 4,956 --
Property, plant and equipment, net ................... 13,127 19,686
Other assets ......................................... 403 458
-------- --------
Total assets .................................. $ 66,411 $ 68,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. 4,936 $ 4,099
Deferred income on shipments to distributors ...... 2,646 3,235
Other accrued liabilities ......................... 2,558 2,436
Current portion of long-term debt ................. 211 211
-------- --------
Total current liabilities ....................... 10,351 9,981
-------- --------
Long-term debt ....................................... 2,652 2,755
-------- --------
Stockholders' equity:
Preferred stock ................................... -- --
Common stock ...................................... 14 14
Deferred stock compensation ....................... (1,417) --
Additional paid-in capital ........................ 58,677 55,026
Retained earnings ................................. 16,390 20,945
Accumulated other comprehensive loss .............. (23) (49)
Treasury stock .................................... (20,233) (20,233)
-------- --------
Total stockholders' equity ...................... 53,408 55,703
-------- --------
Total liabilities and stockholders' equity .... $ 66,411 $ 68,439
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
2000 1999
------------- -----------
<S> <C> <C>
Cash provided (used) by operating activities .................................. $ (7,995) $ 1,838
Investing activities:
Capital expenditures ....................................................... (2,043) (752)
Cash proceeds from sale of equipment ....................................... 1,550 115
Purchases of short-term investments ........................................ (13,193) (18,062)
Sales and maturities of short-term investments ............................. 22,928 18,773
-------- --------
Net cash provided by (used in) investing activities ...................... 9,242 74
Financing activities:
Principal payments on debt ................................................. (103) (81)
Proceeds from issuance of common stock ..................................... 2,151 346
Acquisition of treasury stock .............................................. -- (1,514)
-------- --------
Net cash used in financing activities .................................... 2,048 (1,249)
-------- --------
Net increase in cash and cash equivalents ..................................... 3,295 663
Cash and cash equivalents at beginning of period .............................. 7,381 6,393
-------- --------
Cash and cash equivalents at end of period .................................... $ 10,676 $ 7,056
======== ========
Disclosure of non-cash transactions:
Notes receivable issued on sale of equipment .................................. $ 4,867 $ --
--------
Accounts payable transferred to a holder of the aforementioned notes receivable $ 235 $ --
--------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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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, 1999. 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 1999 ended on January 2, 2000.
The Company's fiscal quarters are 13 weeks in length. The second quarter of
2000 ended on July 2, 2000. For presentation purposes, the accompanying
unaudited consolidated condensed financial statements refer to the
quarters' calendar month end for convenience.
The Company uses the U.S. dollar as its functional currency. Foreign
currency transaction gains and losses are included in operating income or
loss 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 June 30, 2000, two customers accounted for
16% and 13% of total sales, respectively. During the three months ended
June 30, 1999, two customers accounted for 32% and 10% of total sales,
respectively.
5) Supplemental Financial Information:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------- -----------
<S> <C> <C>
Raw materials .......................... $ -- $ 39
Work-in-process ........................ 6,930 4,190
Finished goods ......................... 2,149 1,688
------ ------
$9,079 $5,917
====== ======
</TABLE>
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------- -----------
<S> <C> <C>
Land ............................................. $ 2,850 $ 2,850
Buildings and improvements ....................... 9,984 9,984
Machinery and equipment .......................... 17,245 36,762
------- -------
30,079 49,596
Accumulated depreciation and amortization ........ 16,952 29,910
------- -------
Net property, plant and equipment ................ $13,127 $19,686
======= =======
</TABLE>
6
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In April 2000, the Company signed an agreement with Artest Corporation to
sell certain test equipment with an aggregate net book value of
approximately $5.9 million, to lease certain office space for approximately
$22,000 per month, and to transfer approximately 60 employees to Artest.
The term of the agreement is three years and provides that the Company will
subcontract to Artest certain test functions, which were previously
performed internally. The Company incurred a loss associated with the sale
of this equipment of approximately $145,000.
6) Cash payments for income taxes and interest expense totaled $241,000 and
$93,000, respectively, for the six months ended June 30, 2000. Cash
payments for income taxes and interest expense totaled $250,000 and
$125,000, respectively, for the six months ended June 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 first half of
2000 was a benefit of 35%, compared to a benefit of 64% for the same period
in 1999. The higher effective tax benefit in the second quarter of 1999 was
due to the anticipated greater impact of the Federal R&D Tax Credit and
California Investment Tax Credit on the full year 1999 tax provision.
8) From January 1996 through June 1999, the Company had repurchased 2,696,900
shares of its common stock for a total cost of $20.2 million.
9) SFAS 128 requires presentation of basic and diluted net income per share.
Basic net income per share is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options. Diluted net income per share gives effect
to all dilutive potential common stock outstanding during the period. In
computing diluted net income per share, the average stock price for the
period is used in determining the number of shares assumed to be purchased
from exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations for the periods presented
below (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
Per- Per-
Loss Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic Loss Per Share:
Net loss available
to common
stockholders ............. $(4,856) 11,515 $(0.42) $(258) 10,940 $(0.02)
======= ====== ===== ======
Effect of dilutive
securities:
Stock options ............ -- --
Diluted Loss Per Share:
Net loss available
to common
stockholders assuming
dilution ................. $(4,856) 11,515 $(0.42) $(258) 10,940 $(0.02)
======= ====== ====== ===== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
Per- Per-
Loss Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic Loss Per Share:
Net loss available
to common
stockholders ............. $(4,555) 11,367 $(0.40) $(315) 10,957 $(0.03)
======= ====== ===== ======
Effect of dilutive
securities:
Stock options ............ -- --
Diluted Loss Per Share:
Net loss available
to common
stockholders assuming
dilution ................. $(4,555) 11,367 $(0.40) $(315) 10,957 $(0.03)
======= ====== ====== ===== ====== ======
</TABLE>
Options to purchase 3,222,118 shares of common stock were outstanding as of
June 30, 2000, but were not reflected in the computations of diluted
earnings per share because of an anti-dilutive impact.
10. During the three month period ending June 30, 2000, stock options were
granted with an exercise price of $2.06 per share which was below the fair
market value of the common stock at the date of grant. Deferred
compensation of approximately $1.5 million was recorded in accordance with
APB no. 25 and will be amortized over the related vesting period.
Compensation expense of $83,000 was recorded during the three month period
ended June 30, 2000.
11. 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 June 30,
2000. No assurance can be given 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 a material adverse effect
on the Company's financial position or its results of operations.
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. An out of court
settlement of this action was reached in June, 2000. The terms of this
settlement are confidential, however, the Company took a $7 million charge
related to this settlement and the action has been dismissed.
8
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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. 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-Q.
OVERVIEW
Micro Linear provides high performance analog and mixed signal integrated
circuits for a variety of applications in the computer, communications,
consumer, and industrial market segments. The Company's products enable low
cost, efficient power management for computer systems; provide video signal
conditioning in set top box applications; provide battery management in personal
digital assistants; and integrate the physical interface functions for both
wired and wireless communications. Both BiCMOS and CMOS process technologies are
currently utilized in new designs.
In recent years, sales of communications products, including local area
networking and telecommunications, have constituted a majority of the Company's
revenues. This line of business is characterized by established and intense
competition, rapidly decreasing selling prices, and rapid technological change.
Growing market acceptance of the Company's power management and video products
continues to reduce the Company's dependence on its older communications
products. However, product margins for power management and video products
continue to be lower than the Company's networking product line and frequent
price reductions will be required to stay competitive in this consumer product
area. In late 1999 the Company introduced its first two RF transceiver chip
sets, one for the 900MHz Digital Cordless Telephone market and the other for the
2.4GHZ Wireless Local Area Network market typified by the IEEE802.11 standard.
The Company plans to continue to expand its development efforts in the area of
total silicon solutions for broadband wireless local area network applications.
The Company's analog and mixed signal products continue to encounter
competitive and alternative discrete solutions for new design opportunities,
resulting in continuing downward price pressures. Since 1997, the Company has
operated with excess in-house manufacturing capacity and a need for new and
additional test platforms to support recently introduced products. In an attempt
to achieve more competitive product test costs, in April 2000 the Company sold
to Artest Corporation its entire internal test operation, including certain test
equipment with an aggregate net book value of approximately $5.9 million at
April 30, 2000. In connection with that sale, the Company transferred
approximately 60 employees to Artest and signed an agreement to lease to Artest
certain office space for approximately $22,000 per month. Also in connection
with that sale, the Company and Artest entered into a three-year agreement that
provides that the Company will subcontract to Artest certain test functions
which were previously performed internally. The Company incurred a loss
associated with the sale of this equipment of approximately $145,000. The
Company is obligated to pay retention bonuses to Artest for the benefit of
transferred employees based on the length of their employment with Artest up to
a period of twelve months. The Company believes that these agreements with
Artest Corporation will result in a gradual lowering of manufacturing costs over
the term of the operating agreement.
During the June 2000 quarter the Company reorganized its product development
organization. The Company's small design activity in Livingston, Scotland was
closed, and wireless RF transceiver design activities were consolidated in the
Company's Cambridge, England design center, which will be adding staff.
Additionally, in order to expand product development capabilities beyond RF
transceiver design to complete silicon solutions, the Company opened and staffed
a new design center in Salt Lake City, Utah to focus on the development of
wireless network system architecture and baseband processor design.
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the second quarter of 2000 were $11.7 million compared to
net revenues of $11.4 million reported for the first quarter of 2000, and $11.3
million in net revenue for the comparable second quarter of 1999. Computer
networking product revenue declined during the second quarter of 2000 from the
first quarter, but this decline was more than offset by higher revenue from the
sale of video and battery management products. Net revenues for the six months
ended June of 2000 were $23.1 million, compared to net revenues of $22.2 million
for the six months ended June of 1999. The increase in net revenue compared to
the first half of 1999 was again primarily due to higher sales of video
products, which offset the downward trend in sales of computer networking
products. Revenues and cost of goods sold for sales to distributors are deferred
by the Company until the Company is notified of product sales to end-users.
9
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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 OEMs and to
distributors.
The Company's gross margin was $6.1 million or 52.4% of net revenue in the
second quarter of 2000, approximately the same as the $6.0 million gross margin,
or 52.8% of net revenue, in the first quarter of 2000, and a gross margin of
$5.7 million or 50.2% of net revenue in the second quarter of 1999. Gross margin
was slightly higher in the second quarter of 2000 compared to the second quarter
of 1999 primarily due to higher production output levels and lower manufacturing
costs. For the six months ending June 2000, the company's gross margin was $12.2
million or 52.6% of net revenue, compared to $10.9 million or 49% of net revenue
in the six months ending June of 1999.
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 requirements.
Research and Development Expenses
Research and development expenses include payroll and other 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 the cost of 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. 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. The Company believes that the
development and introduction of new products is critical to its future success.
Research and development expenses were $3.2 million for the second quarter
of 2000 or 27% of net revenues, compared to $3.3 million or 30% of net revenues
for the second quarter of 1999 and $3.3 million, or 29% of net revenues, for the
first quarter of 2000. The decrease in research and development in the second
quarter of 2000 compared to the both first quarter of 2000 and second quarter of
1999 is primarily attributable to a reduction in headcount. Research and
development expenses were $6.5 million for the first half of 2000 or 28% of net
revenues, compared to $6.8 million or 31% of net revenues for first six months
of 1999.
During the quarter ended June 30, 2000 the Company recognized $83,000 in
expenses relating to stock options granted to certain employees at below fair
market value. Deferred stock compensation at June 30, 2000 of $1.4 million is to
be amortized over the 3-year vesting term of such options, subject to
adjustments that would be made in the event of termination of related employees.
Selling, General and Administrative
Selling, general and administrative expenses were $2.7 million for the second
quarter of 2000 or 23% of net revenues, relatively flat compared to both $2.6
million or 23% of net revenues in the first quarter of 2000, and $2.7 million or
24% of net revenues in the comparable second quarter of 1999. Selling, general
and administrative expenses were $5.3 million for the first half of 2000 or 23%
of net revenues, compared to $5.6 million or 25% of net revenues for first six
months of 1999.
Legal Settlement and Related Costs
The Company incurred $8.1 million in legal settlement and related costs in
the second quarter of 2000, primarily in connection with the settlement of the
Accton Technology Corporation complaint (See Part II Other Information, Item 1
Legal Proceedings).
Interest and Other Income and Interest Expense
10
<PAGE> 11
Interest and other income and interest expense was $0.3 million for the
second quarter of 2000, the first quarter of 2000, and second quarter of 1999.
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 provision (benefit) was (35%) for
the second quarter of 2000 and the six months ended June 30, 2000 compared to
323% and (64%) for the same periods of 1999, respectively. The effective tax
rate is impacted by the Company's ability to project its taxable income or loss
for the related years.
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 used $8.0 million of net cash during
the first six months of 2000, and provided $1.8 million during the first six
months of 1999. The main uses of cash for operations during the first six months
of 2000 were an increase in inventories, income tax receivable increase, and
legal settlement and related costs.
Cash provided by investing activities for the six months ending June 2000 is
attributable to the net sale or maturity of short-term investments of $9.7
million, and proceeds of $1.5 million from the sale of equipment. Of this $1.5
million in sale of equipment, $1.0 million was received in connection with the
sale in the second quarter of the Company's internal test operations to Artest
Corporation.
Capital expenditures during the six months ending June 2000 were $2.0
million, primarily for engineering software and equipment. The Company expects
to spend approximately an additional $1.7 million over the balance of 2000 on
capital items.
Financing activities for the first six months of 2000 consist primarily of
proceeds of $2.2 million from the exercise of options to purchase the common
stock of the Company.
Working capital amounted to $37.6 million as of June 30, 2000 compared to
$38.3 million as of December 31, 1999. Working capital at June 30, 2000 includes
cash and cash equivalents of $10.7 million and short-term investments of $14.4
million.
The Company anticipates that its existing cash resources and cash generated
from operations will fund necessary purchases of capital equipment and provide
adequate working capital for at least the next twelve months. The Company's
liquidity is affected by many factors, including, among others, the extent to
which the Company pursues additional wafer fabrication capacity from existing
foundry suppliers or new suppliers, capital expenditures, and the level of the
Company's product development efforts, and other factors related to the
uncertainties of the industry and global economies. Accordingly, there can be no
assurance that events in the future will not require the Company to seek
additional capital sooner or, if so required, that such capital will be
available on terms acceptable to the Company.
OTHER FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including the Company's access to advanced process technologies,
the timing and extent of process development costs, the Company's ability to
introduce new products on a timely basis, the volume and timing of orders
received, market acceptance of the Company's and its customers' products, the
timing of new product announcements and introductions by the Company or its
competitors, changes in the mix of products sold, the timing and extent of
research and development expenses, the availability and cost of wafers from
outside foundries, fluctuations in manufacturing yields, competitive pricing
pressures and cyclical semiconductor industry conditions. A majority of the
Company's net revenues are derived from sales of a limited number of products.
Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. Competitive pricing pressures
are expected to continue in the future, especially in the communications market,
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
11
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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 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.
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 18 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.
12
<PAGE> 13
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 also required additional
briefing from Pioneer. The final claim construction hearing took place on July
19, 1999. The court issued a claim construction order favorable to Micro Linear.
The parties filed a stipulated judgement of non-infringement, which has resulted
in a termination of the district court action against Micro Linear. Pioneer has
appealed. No hearing date on the appeal has been set. The Company intends to
contest this action vigorously, however, there can be no assurance that such
action 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.
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. To date no
arbitration date has 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. On October 1, 1999 the parties reached an out of court
settlement of this action. The terms of this settlement are confidential,
however, the Company took a $1.24 million charge related to this settlement in
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. An out of court settlement of this action was reached in
June, 2000. The terms of this settlement are confidential, however, the Company
took a $7 million charge related to this settlement and the action has been
dismissed.
From time to time, the Company has received, and in the future it may
receive, correspondence from certain vendors, distributors, customers or
end-users of its products regarding disputes with respect to contract rights,
product performance or other matters that occur in the ordinary course of
business. There can be no assurance that any of such disputes will not
eventually result in litigation or other actions involving the Company or as to
the outcome of such disputes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were approved at the Company's Annual Meeting of
Stockholders held on June 7, 2000:
(a) The following Directors were elected:
<TABLE>
<CAPTION>
DIRECTORS VOTES FOR % OF OUTSTANDING SHARES
------------------------------------- ---------------- -------------------------
<S> <C> <C>
David L. Gellatly 10,518,887 91.8
James J. Harrison 10,521,287 91.8
William B. Pohlman 10,521,287 91.8
Timothy R. Richardson 10,521,287 91.8
Joseph D. Rizzi 10,521,287 91.8
</TABLE>
13
<PAGE> 14
(b) The stockholders approved the following proposals:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES VOTED
% OF
OUTSTANDING
PROPOSAL FOR SHARES AGAINST ABSTAIN
---------------------------------------- -------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Approval of amendment to 1994 Director
Option Plan 9,262,404 80.8 1,552,356 16,330
Ratification of the appointment of
PricewaterhouseCoopers LLP as the
Company's independent accountants for
fiscal year 2000. 10,674,055 93.1 121,631 35,404
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
14
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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: August 16, 2000 By: /s/ Michael Schradle
-------------------------------------
Michael Schradle
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
