UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Fiscal Year Ended December 31, 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)
Registrant's telephone number, including area code: (408) 433-5200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company, as of February 27, 2000, was
approximately $81,549,929. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
February 27, 2000 was 11,248,266.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders to be held June 7, 2000 are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS
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PART I.
Item 1. Business............................................................... 3
Item 2. Properties............................................................. 13
Item 3. Legal Proceedings...................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
PART III.
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation................................................. 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43
SIGNATURES.................................................................................................. 46
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PART I
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk related
factors set forth throughout Part I and elsewhere in this Form 10-K.
Item 1. Business
Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range of
applications within the communications, computer and industrial markets. The
Company's products provide integrated systems-level solutions for a variety of
applications, including local area networks, video, telecommunications, power
management and motor control. The Company utilizes its proprietary design
techniques and BiCMOS, Bipolar and CMOS manufacturing processes to produce
proprietary and application specific products that enable systems designers to
achieve increased levels of systems integration and reduce system costs.
Strategy
Micro Linear's goal is to be a leading supplier of proprietary integrated
analog and mixed signal circuits for applications that require systems-level
features. To achieve this objective, the Company has adopted the following
strategies:
Target High Growth Applications. Micro Linear targets high growth
applications that require substantial analog and mixed signal content and that
derive significant benefits from the use of the Company's systems-level
expertise. The Company focuses on innovative proprietary analog and mixed-signal
products which provide high performance and cost-effective solutions for a
variety of applications, including data communications, video and power
management.
Develop Highly Integrated Circuits with Systems-Level Features. Micro
Linear uses its analog and mixed signal design expertise to integrate several
analog building block circuits into a single circuit or chipset. thereby
reducing the size and cost of the customer's electronic system, while providing
greater functionality, performance and reliability. The uniqueness and
complexity of such products, has enabled the Company to maintain its position as
the sole source supplier for a number of its products.
Offer a Broad Range of Products. Micro Linear offers a broad range of
innovative proprietary and application specific analog and mixed signal products
for a variety of applications within the communications, computer and industrial
markets. The Company provides customers the opportunity to identify the product
features that address the technical and time to market requirements of each
customer's specific application. By working closely with its customers to
identify desirable features and functionality,
Micro Linear has expanded the number of applications for its products.
Markets, Applications and Products
The Company develops standard products for a variety of applications within
the communications, computer and industrial markets. The Company has focused
primarily on products for use with applications in local area networks, video
and power management. Within these markets the Company has supplied products to
several different applications with focus on local and wide area networks,
video, power supply and battery management. The Company intends to increase its
focus on the development of products for the wireless networking segment
following the introduction of its initial products for this segment during 1999.
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The Company's approach to new product development is driven by application
specific requirements and accepted industry standards for communications within
its targeted markets. The Company relies upon its engineering and marketing
personnel to identify market opportunities for new high performance products, to
maintain close working relationships with targeted customers, to determine
product opportunities that apply to a broad range of customers within the
Company's target markets and to define mixed
signal products for specific applications.
The following table illustrates the three major applications and product
categories served by the Company:
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COMMUNICATION PRODUCTS VIDEO PRODUCTS POWER MANAGEMENT PRODUCTS
.10BASE-FL Physical Interface .Video Driver/Filters .Switch Mode Power Supply
.10/100 Physical Interface .Encoders .Power Factor Controllers
.2.4GHZ RF Transciever .Genlock .Battery Management
.900MHz RF Transceivers .Comb Filter .Motor Controllers
.Video A/D
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Communications Products
The local area network (LAN) market has experienced significant growth in
recent years. The emergence of increasingly sophisticated software applications,
such as imaging, multimedia and remote communications requires innovative, high
performance networking technology which must provide for increased data
throughput and enhanced reliability.
The Company's local area network circuits are designed to allow for the
transmission of electronic signals over various media, such as twisted pair
copper wire and fiber optic cable. The Company's fiber optic physical interface
circuits respond to very small, fast signals from fiber optic receiver ports and
restore the signal to larger amplitudes with a minimum of signal and timing
distortion. The Company is a supplier of transceiver circuits into 10BASE-T,
10BASE-FL, and 100BASE TX. The Company is also
developing new products for the emerging 10/100BASE-SX market segment.
The Company introduced the first of its products directed at the growing
wireless communication application segment in 1999. The Company's 900MHz RF
transceiver for digital cordless telephone applications represents a highly
integrated and cost effective solution for this application. The Company also
introduced a two-chip radio for application in 2.4GHz Wireless Local Area
Networks.
Video Products
The Company has utilized its analog and mixed signal expertise to develop
several products for video applications. These circuits consist of filters which
contain video amplifiers, clock synchronization, comb filters, encoders and
specialized video A/D converters. These circuits have been accepted for
applications in the high growth rate segment including set top boxes. The
Company believes that video applications offer opportunity for increased revenue
in fiscal year 2000.
Power Management Products
Micro Linear has focused its recent power management product development
efforts in: the areas of switched-mode power supply controllers including power
factor control, battery management and motor controllers. The trend toward
smaller, lighter weight and more power-efficient computer and other portable
electronic systems has created significant opportunities for advanced power
supply controllers and battery management devices.
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Sales and Distribution
Micro Linear targets high growth markets by designing its products into the
electronic systems of systems manufacturers within the communications, computer
and industrial markets. The Company seeks to achieve design wins by focusing its
sales efforts at prospective customers' technical design engineers and
management personnel who are responsible for new product design and component
selection. This effort is coordinated by the Company's direct sales managers who
support a worldwide network of independent sales representatives and
distributors. The sales representatives and distributors sell the Company's
products directly to customers and are assisted by the Company's field
applications engineers and applications engineering group. The Company has three
field sales offices in North America, one in Asia and one in Europe.
The Company currently sells its products in North America through 21
independent sales representative organizations and three distributors. In 1999,
1998 and 1997, sales to Insight Electronics, a domestic distributor, represented
23%, 20% and 15% of the Company's net revenues, respectively. In 1999 sales
through the Company's domestic distributors represented approximately 29% of net
revenues, compared to 22% in 1998. The Company defers recognition of revenue and
gross margin derived from sales to domestic distributors until such distributors
resell the Company's products to their customers. In addition, the Company
offers its domestic distributors product return privileges and, in the event the
Company lowers the prices of its products, price protection on unsold inventory,
which is typical in the semiconductor industry. To date, product returns under
this policy have not had a material effect on the Company's operating results.
Outside of the United States, the Company's products are sold direct to
international customers through 19 independent international sales
representatives and distributors, which accounted for approximately 42%, 42% and
53% of the Company's net revenues in 1999, 1998 and 1997, respectively. The
Company expects international sales to continue to represent a significant
portion of product sales. The Company defers revenue from shipments to
international distributors until such distributors notify the Company of product
sales to their customers. Due to the significance of its international sales,
the Company is subject to risks of conducting business internationally. These
risks include changes in regulatory requirements, legislation relating to the
import or export of products, delays resulting from difficulty in obtaining
export licenses for certain technology, trade barriers, tariff increases, quotas
and other barriers and restrictions, and the burdens of complying with a variety
of foreign laws. The Company is also subject to general geo-political risks,
such as political and economic instability and changes in diplomatic and trade
relationships and there can be no assurance that such factors will not adversely
affect the Company's operations in the future or require the Company to modify
its current business practices. Because sales of the Company's products are
denominated in United States dollars, fluctuations in the value of the dollar
could increase the prices of the Company's products in local currencies and make
the Company's products relatively more expensive than competitors' products that
are denominated in local currencies. Additionally, currency exchange
fluctuations could reduce the cost of products from the Company's foreign
competitors. Substantially all of the Company's international sales must be
licensed by the Office of Export Administration of the U.S. Department of
Commerce. The Company has not experienced any material difficulties in obtaining
export licenses; however, there can be no assurance that such export licenses
will be available in the future.
A relatively small number of customers have accounted for a significant
portion of the Company's net revenues in each of the past several years. During
1999, 1998 and 1997, the Company's top ten customers, excluding domestic
distributors, accounted for approximately 5148% 40% and 52% of net revenues,
respectively. During 1999 Insight Electronics, Lucent Technologies and Allied
Telesyn International each accounted for 10% or more of the Company's revenue.
During 1998 Insight Electronics and Maxisum, Ltd each accounted for 10% or more
of the Company's revenue. During 1997 Maxisum Ltd, Insight Electronics and
Xircom Operation's each accounted for 10% or more of the Company's revenue. The
Company anticipates that it will continue to be dependent on a limited number of
key customers for a significant portion of its net revenues. The reduction,
delay or cancellation of orders from one or more significant customers for any
reason could materially and adversely affect the Company's operating results. In
addition, since the Company's products are often sole sourced to its customers,
<PAGE>
the Company's operating results could be materially and adversely affected if
one or more of its major customers were to develop other sources of supply.
Furthermore, in view of the relatively short product life cycles in the computer
network equipment, set-top box, or digital cordless telephone markets, the
Company's operating results would be materially and adversely affected if one or
more of its significant customers were to select circuits manufactured by one of
the Company's competitors for inclusion in future product generations. The
Company also is entirely dependent upon sales representatives and distributors
for the sales of its products to systems manufacturers. There can be no
assurance that the Company's current customers will continue to place orders
with the Company, that orders by existing customers will continue at the levels
of previous periods or that the Company will be able to obtain orders from new
customers. Loss of one or more of the Company's current customers or a
disruption in the Company's sales and distribution channels could materially and
adversely affect the Company's business and operating results.
A substantial majority of the Company's net revenues are derived from sales
of products for the computer networking market. Sales of the Company's products
to network equipment manufacturers accounted for approximately 47%, 57% and 65%
of the Company's net revenues in 1999, 1998 and 1997, respectively. Sales of one
of the Company's computer products represented 13%, 10% and 4% of the Company's
net revenues during 1999, 1998 and 1997, respectively. The computer network
equipment market is characterized by intense competition, relatively short
product life cycles and rapid technological change. In addition, the computer
network equipment market has undergone a period of rapid growth and
consolidation in the last few years. The Company has attempted to expand its
product mix and customer base and, as a result, does not expect revenues from
the computer networking market to increase as a percentage of net revenues in
2000.
Backlog
At December 31, 1999, the Company's backlog was approximately $11.9
million, compared to approximately $11.4 million at December 31, 1998. Backlog
consists of released purchase orders scheduled for shipment within six months
following the order date. Although the Company's contract terms vary from
customer to customer, customers for standard products may generally cancel or
reschedule orders to purchase standard products without significant penalty to
the customer. As a result, the quantities of the Company's products to be
delivered and their delivery schedules are frequently revised by customers to
reflect changes in such customers' needs. Since backlog can be canceled or
rescheduled, the Company's backlog at any time is not necessarily indicative of
future revenue.
Technology
The Company's new products are incorporated into a customer's products or
systems at the design stage. However, design wins, which can often require
significant expenditures by the Company without any assurance of success, often
precede the generation of volume sales by a year or more. Moreover, the value of
any design win will largely depend upon the commercial success of the customer's
product and on the extent to which the design of the customer's electronic
system accommodates components manufactured by the Company's competitors. No
assurance can be given that the Company will achieve design wins or that any
design win, particularly with regard to application specific products, will
result in significant future revenues.
Design
Micro Linear's proprietary technology depends on the advanced analog and
mixed signal circuit design skills of its analog design engineers. The Company
utilizes analog, digital, and mixed signal circuits and cell simulation for
digital and analog circuit elements and extensive testing capabilities to assure
functionality and performance of final products. The Company has assembled a
team of highly skilled analog and mixed signal design engineers, with
significant design experience who are supported by a team of systems engineers,
applications engineers, product engineers and test engineers who perform various
support functions and allow the designers to focus on the core elements of the
design. In addition, Micro Linear has utilized simulation models that facilitate
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timely and predictable implementation of analog and mixed signal integrated
circuits. As a result of performance demands and the complexity of analog
circuits, the mixed signal design and development process is a
multi-disciplinary effort, requiring substantial systems-level expertise,
including knowledge of particular formats, standards and architectural
constraints associated with a variety of targeted end-user applications. The
Company also utilizes standard electronic design automation software to perform
the schematic capture, simulation, design rule checks and layout verification of
its circuit.
Process
The Company seeks to employ the most appropriate process technology for a
given application. The Company's process technologies include Bipolar, CMOS and
BiCMOS processes.
Bipolar. The Company used its Bipolar technology for networking, and power
management applications such as transceivers, switched-mode power management
circuits and DC to DC converters to manage offline power. While a portion
of the Company's production continues to utilize Bipolar processes, no new
product developments were undertaken during 1999 using this process.
CMOS. The Company's CMOS devices are full custom circuits and are used in
applications, such as telecommunications, data communications and data
conversion circuits, which require minimal power consumption and increased
density. CMOS technology permits the design of circuits with lower power
dissipation and a higher level of digital integration than Bipolar circuits.
During 1999, the Company started to design power management products in a
new 40v CMOS technology, with 1 micron feature size. The Company is working
closely with a major silicon foundry on the development of a mixed signal 0.18
micron CMOS technology to support new product applications in the networking and
wireless communications area.
BiCMOS. The Company's BiCMOS processes combine the low power dissipation
capabilities of CMOS, and the high performance capabilities of Bipolar. As a
result, BiCMOS processes allow the design of circuits with lower power
dissipation than Bipolar or CMOS devices for certain applications. The feature
size of these processes allows for significantly increased density of the logic
functions that are necessary for advanced levels of mixed signal integration.
The Company believes that these technologies represent the core of the Company's
product offerings and are critical to its ability to continue to develop
innovative, highly complex, high performance mixed signal products.
In addition to the high volume 5 volt BiCMOS process, the Company is also
utilizing an 18 volt BiCMOS process primarily for power management products and
motor controllers. The Company is now in volume production on a 0.8 micron
BiCMOS process primarily for video and wireless RF applications. The Company's
first products have been completed on a new 0.6 micron BiCMOS process and
production is expected to begin ramping in the first quarter of 2000. This
process offers smaller feature size and higher performance than the 0.8 micron
process. If the production of these products does not proceed in a timely manner
due to technical issues, manufacturing yield limitations or other factors, the
Company's business and results of operations would be materially and adversely
affected.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to new semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve manufacturing yields. Semiconductor design
and process methodologies are subject to rapid technological change, requiring
large expenditures for research and development. If the Company is unable to
obtain access to advanced wafer processing technologies as they become needed,
or is unable to define, design, develop and introduce competitive new products
on a timely basis, its future operating results will be materially and adversely
affected. In addition, if the Company is unable to transfer and install such new
process technologies to one or more of its wafer foundries in a timely manner,
its business and results of operations could be materially and adversely
affected.
<PAGE>
The Company believes the successful introduction of new products using
BiCMOS and advanced CMOS technologies will be critical to its future success.
There can be no assurance that the Company will be able to obtain alternative or
more advanced process technologies in a timely manner. If such efforts prove
unsuccessful, the Company's business and operating results would be materially
and adversely affected.
The Company expects future BiCMOS and advanced CMOS circuit designs to be
developed on both application specific functional arrays and full custom
layouts. The Company currently uses its BiCMOS technology for its local area
network transceivers, wireless radio, video products, bus products, motor
controllers, power supply controllers and for battery management circuits. The
inability of the Company to select and design BiCMOS and advanced CMOS products
that satisfy particular market requirements, to succeed in having its BiCMOS and
CMOS products designed into its customers' electronic systems or to establish
the Company as a preferred supplier of BiCMOS and CMOS solutions within its
targeted market areas would have a material adverse impact on the Company's
business and operating results.
The Company's success also depends upon its ability to develop new analog
and mixed signal circuits for existing and new markets, to introduce such
products in a timely manner and to have such products selected for design into
new product generations of leading systems manufacturers. The development of
these new circuits is highly complex and from time to time the Company has
experienced delays in completing the development of new products. Successful
product development and introduction depends on a number of factors, including
proper new product definition, timely completion and introduction of new product
designs, availability of foundry capacity, achieving acceptable manufacturing
yields and market acceptance of the Company's and its customers' products. There
can be no assurance that the Company will be able to adjust to changing market
conditions as quickly and cost-effectively as necessary to compete successfully.
Furthermore, there can be no assurance that the Company will be able to
introduce new products in a timely manner or that such products will achieve
market acceptance. In addition, there can be no assurance that the electronic
systems manufactured by the Company's customers will be introduced in a timely
manner or that such systems will achieve market acceptance. The Company's
failure to develop and introduce new products successfully would materially and
adversely affect its business and operating results. In particular, there can be
no assurance that the Company will succeed in developing innovative BiCMOS or
CMOS circuits in a timely manner, that its BiCMOS or CMOS circuits will be
designed into the electronic systems of current or prospective customers or that
the Company will be able to establish itself as a supplier of BiCMOS or CMOS
solutions within its targeted market applications. The Company's inability to
introduce BiCMOS or CMOS products in a timely manner or to obtain market
acceptance of such BiCMOS or CMOS products would materially and adversely affect
the Company's business and operating results.
Manufacturing
The Company utilizes outside foundries for all of its wafer requirements.
The Company believes that utilizing outside foundries enables the Company to
focus on its design strengths, minimize fixed costs and capital expenditures and
access diverse manufacturing technologies. The Company's Bipolar and a portion
of the BiCMOS wafers are manufactured by a foundry located in Japan. A
substantial portion of the Company's BiCMOS wafers are manufactured by one
foundry in Taiwan. There are certain significant risks associated with the
Company's reliance on outside foundries, including the lack of both assured
wafer supply and control over delivery schedules, the unavailability of or
delays in obtaining access to key process technologies and limited control over
manufacturing yields and production costs. In addition, the manufacture of
integrated circuits is a highly complex and technically demanding process.
Although the Company has undertaken to diversify its sources of wafer supply and
works closely with its foundries to minimize the likelihood of reduced
manufacturing yields, the Company's foundries have from time to time experienced
lower than anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start-up of new processes.
Such reduced yields have at times materially adversely affected the Company's
operating results. There can be no assurance that the Company's foundries will
not experience lower than expected manufacturing yields in the future, which
could materially and adversely affect the Company's business and operating
<PAGE>
results. In addition, dependence on foundries located outside of the United
States subjects the Company to numerous risks, including exchange rate
fluctuations, export and import restrictions, trade sanctions, political
instability and tariff increases. In particular, the Company's dependence on a
Taiwanese foundry for supply of BiCMOS wafers subjects the Company to risks
associated with political instability in that region.
All of the Company's foundries manufacture wafers utilizing the Company's
proprietary processes, except for three foundries which manufacture wafers for
the Company utilizing each foundry's proprietary BiCMOS process.
The Company purchases its wafers from outside foundries pursuant to
purchase orders and generally does not have a guaranteed level of wafer capacity
or wafer costs at such foundries. Therefore, the Company's wafer suppliers could
choose to prioritize capacity for other uses or reduce or eliminate deliveries
to Micro Linear on short notice. Accordingly, there is no assurance that the
Company's foundries will allocate sufficient wafer capacity to Micro Linear to
satisfy the Company's requirements. In addition, the Company has been, and
expects to be in the future, particularly dependent upon a limited number of its
foundries for its wafer requirements. Any sudden demand for an increased amount
of wafers or sudden reduction or elimination of any existing source or sources
of wafers could result in a material delay in the shipment of the Company's
products. There can be no assurance that material disruptions in supply, which
have occurred periodically in the past, will not occur in the future. Any such
disruption could have a material adverse effect on the Company's operating
results. In the event of any such disruption, if the Company were unable to
qualify alternative manufacturing sources for existing or new products in a
timely manner or if such sources were unable to produce wafers with acceptable
manufacturing yields, the Company's business and operating results would be
materially and adversely affected.
The Company has granted nontransferable, limited process licenses to some
of its foundries to utilize the Company's processes to manufacture and sell
wafers to other foundry customers. Although the Company seeks to protect its
proprietary technology, particularly its design methodology, there can be no
assurance that certain of the Company's foundries will not attempt to reverse
engineer the Company's products and manufacture and sell products which compete
with those manufactured and sold by the Company.
The Company has a production staff in place to support its outside
foundries in order to ensure design and process compatibility, product quality
and reliability. The high volume Bipolar wafers are inventoried and later
completed at a specific foundry. The Company also applies a tile array approach
to certain of its BiCMOS products. Such BiCMOS products are inventoried and
later completed at the foundries utilized for these processes. The Company
purchases completely finished CMOS, BiCMOS and Bipolar wafers to which it adds
no additional process steps, other than incoming wafer quality tests and
specific electrical product testing prior to assembly.
Each die on all of the Company's wafers is electrically tested for
performance compliance and the wafers are subsequently sent to subcontractors
for assembly. During the assembly process, the wafers are separated into
individual devices which are then placed in packages. Following assembly, the
packaged units are returned to the Company for final testing and final
inspection prior to shipment to customers. Extensive electrical testing is
individually performed on all circuits at the Company's facilities, using
advanced automated test equipment capable of high volume production to ensure
that the circuits satisfy specified performance levels. From time to time, the
Company has experienced difficulty in expeditiously completing testing of its
products. If such problems are encountered in the future, shipments to customers
could be delayed.
The Company also utilizes subcontractors for final testing of certain types
of products pursuant to purchase orders and generally does not have a guaranteed
level of test capacity at such subcontractors. Therefore, the Company's test
service suppliers could choose to prioritize capacity for other uses or reduce
or eliminate deliveries to Micro Linear on short notice. Accordingly, there is
no assurance that the Company's test subcontractors will allocate sufficient
test capacity to Micro Linear to satisfy the Company's requirements. Any sudden
demand for an increased amount of testing or sudden reduction or elimination of
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any existing source of test capacity could result in a material delay in the
shipment of the Company's products. There can be no assurance that material
disruptions in supply, which have occurred periodically in the past, will not
occur in the future. Any such disruption could have a material adverse effect on
the Company's operating results. In the event of any such disruption, if the
Company were unable to qualify alternative testing sources for existing or new
products in a timely manner the Company's business and operating results would
be materially and adversely affected.
The manufacture of integrated circuits is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment, defects
in the masks used to print circuits on a wafer, difficulties in the fabrication
process or other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer to be nonfunctional. In
addition, yields can be affected by minute impurities in the environment or
other problems that occur in the complex manufacturing process. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy. At
various times in the past, the Company has experienced lower than anticipated
yields that have adversely affected production and, consequently, operating
results. The manufacturing processes utilized by the Company are continuously
being improved in an effort to increase yield and product performance. Process
changes can result in interruptions in production or significantly reduced
yields. In particular, new process technologies or new products can be subject
to especially wide variations in manufacturing yields and efficiency. There can
be no assurance that the Company will not experience irregularities, adverse
yield fluctuations or other manufacturing problems in its manufacturing
processes, any of which could result in production interruption or delivery
delays and materially and adversely affect the Company's business and results of
operations The Company currently intends to continue to rely exclusively upon
its outside foundries for its wafer fabrication requirements.
The Company has signed a letter of intent to sell certain test equipment,
lease certain office, and transfer certain employees to a third party, which
will perform certain manufacturing work for the Company. Should this letter of
intent result in an agreement on terms acceptable to the Company, this
transaction is expected to have a favorable effect on the Company's results of
operations.
Research and Development
Micro Linear believes that it is essential to define, design, develop and
introduce new products offering technological innovations in order to take
advantage of market opportunities and to compete successfully. The Company is
currently engaged in the development of new products for a broad range of
customer applications in the communications and computer markets. The Company's
product development strategy is focused on highly integrated products providing
increased levels of performance and functionality offering higher frequency,
high or low operating voltage, depending upon the application, lower power and
smaller size. The Company's development efforts are focused on the design of
products based on certain foundry proprietary processes. To develop value-added
mixed signal products for specific market categories, the Company must continue
to obtain and develop extensive knowledge regarding its customers' systems. This
"systems knowledge" is acquired through technical interactions with the
Company's customers and potential customers in its targeted market categories.
To this end, the Company has assembled a team of experienced analog and mixed
signal engineers in a variety of disciplines, including design, systems,
product, test, applications and marketing. The Company's engineer work to
upgrade the Company's design methodology and process technologies, and to
investigate and develop with its foundry partners new technologies for new
generations of products.
The Company's design engineers are organized into six design groups
consisting of a total of approximately 30 research and development design
engineers, supported by approximately 40 additional technical professionals in
test development and manufacturing engineering. Inability to attract and retain
a sufficient staff of qualified engineers could pose a significant threat to the
Company's ability to design and deliver new products. In 1999, 1998 and 1997,
the Company spent approximately $13.8 million, $11.9 million and $12.0 million,
respectively, on research and development. The Company expects that it will
continue to spend substantial funds on research and development activities.
<PAGE>
Competition
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, short product life cycles, cyclical
market patterns and heightened international and domestic competition. The
analog and mixed signal market of the semiconductor industry is also highly
competitive, and many semiconductor companies presently compete or could compete
in one or more of the Company's target markets. Most of the Company's current
and prospective competitors offer broader product lines and have substantially
greater financial, technical, manufacturing, marketing and other resources than
the Company. In addition, many of the Company's competitors maintain their own
wafer fabrication facilities, which provides them with a competitive advantage.
The Company's competitors vary in each product area. Its principal competitors
in data communications are National Semiconductor Corporation ("NSC"), Conexant,
Broadcom Corporation, and Level One (a subsidiary of Intel Corporation). In the
power management products area, its principal competitors are Linear Technology
Corporation, Maxim Integrated Products and Unitrode Semiconductor (a subsidiary
of Texas Instruments). The Company also competes with manufacturers of discrete
analog components, particularly for power management applications within the
industrial market. As the Company attempts to expand its product line, it
expects that competition will increase with these and other domestic and foreign
companies. Although foreign companies, particularly Japanese companies, have not
traditionally focused on the high performance analog and mixed signal markets,
they have the financial and technical resources to participate effectively in
these markets, and there can be no assurance that they will not do so in the
future. Because the Company does not currently manufacture its own semiconductor
wafers, it is also vulnerable to process technology advances utilized by
competitors to manufacture products offering higher performance and lower cost.
Accordingly, the Company believes it is disadvantaged in comparison to larger
companies with wafer manufacturing facilities, broader product lines, greater
technical and financial resources and greater service and support capabilities.
In addition, certain of the Company's products are generally sole sourced to its
customers, and the Company's operating results could be adversely affected if
its customers were to develop other sources for the Company's products. There
can be no assurance that the Company will compete successfully with new or
existing competitors in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including breadth of product line, the ability to introduce
innovative products rapidly, access to advanced process technologies at
competitive prices, product functionality and performance, successful and timely
product development, price, adequate foundry capacity, manufacturing yields,
efficiency of production, delivery capability, customer support and protection
of the Company's intellectual property. The Company believes that product
innovation, quality, reliability, performance and the ability to introduce
products rapidly are more important competitive factors. The Company believes
that, by virtue of its analog and mixed signal expertise and rigorous design
methodology, it competes favorably in the areas of rapid introduction, product
innovation, quality, reliability and performance, but it may be at a
disadvantage in comparison to larger companies with broader product lines,
greater technical and financial resources and greater service and support
capabilities. As a result of the foregoing or other factors, there can be no
assurance that the Company will be able to compete successfully in the future.
Patents and Licenses
The Company's success depends on its ability to obtain patents and licenses
and to preserve other intellectual property rights covering its products and
development and testing tools. To that end, the Company has obtained certain
patents and intends to continue to seek patents on its inventions when
appropriate. Specifically, the U.S. Patent and Trademark Office has issued 18
patents and allowed 10 more patents to the Company. The Company's issued patents
expire from January 2007 to November 2017. The Company intends to continue to
seek patents on its products, as appropriate, and currently has submitted
applications for more U.S. patents with an additional nine patents in process.
The Company believes that although these patents may have value, given the
rapidly changing nature of the semiconductor industry, the Company depends
primarily on the technical competence and creativity of its technical work
force.
<PAGE>
The Company attempts to protect its trade secrets and other proprietary
rights through formal agreements with employees, customers, suppliers and
consultants. Although the Company intends to protect its intellectual property
rights vigorously, there can be no assurance that these and other security
arrangements will be successful. The process of seeking patent protection can be
long and expensive and there can be no assurance that existing patents, or any
new patents that may be issued, will be of sufficient scope or strength to
provide meaningful protection or any commercial advantage to the Company. The
Company may be subject to or may initiate interference proceedings in the patent
office, which can demand significant financial and management resources. As is
typical in the semiconductor industry, the Company has from time to time
received, and may in the future receive, communications from third parties
asserting patents, mask-work rights, or copyrights on certain of the Company's
products and technologies. The Company is presently involved in litigation with
a party that has claimed infringement of their patent. The financial impact of
this litigation is not expected to have a material impact on the financial
results of the Company, however, a third party could make a valid claim and if a
license were not available on commercially reasonable terms, the Company's
operating results could be materially and adversely affected. Litigation, which
could result in substantial costs and diversion of Company resources, could be
necessary to enforce patents or other intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. The failure to obtain necessary licenses or the occurrence of litigation
relating to patent infringement or other intellectual property matters could
have a material adverse affect on the Company's business and operating results.
The Company currently does not have any third parties that have been
granted license rights to manufacture and sell any of its products. The Company
has no current plans to grant product licenses with respect to any products;
however, the Company may find it necessary to enter into product licenses in the
future in order, among other things, to secure foundry capacity. The Company has
granted nontransferable, limited process licenses to each of its foundries to
utilize the Company's proprietary processes to manufacture and sell wafers to
other foundries.
Employees
As of December 31, 1999, the Company had 233 full-time employees, 125 of
whom were engaged in manufacturing (including test development, quality and
materials functions), 68 in research and development, 26 in marketing,
applications and sales, and 14 in finance and administration. The Company's
employees are not represented by any collective bargaining agreements and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
The Company's success depends to a significant extent upon the continued
service of its executive officers and other key management and technical
personnel, and on its ability to continue to attract, retain and motivate
qualified personnel, particularly experienced mixed signal circuit designers and
systems application engineers. The competition for such employees is very
intense. The Company has from time to time lost key analog designers, executive
officers and other personnel to start-up or to established companies. The loss
of the services of one of the Company's design engineers, executive officers or
other key personnel, or the Company's inability to recruit replacements for such
personnel or to otherwise attract, retain and motivate qualified personnel,
could have a material adverse affect on the Company. The Company is currently
recruiting for Vice President of Marketing and a Chief Financial Officer. Any
failure to hire suitable candidates for such positions in a timely manner could
have a material adverse effect on the Company's business.
Executive Officers
The executive officers of the Company are and their ages as of December 31,
1999 as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
David L. Gellatly 56 Chairman of the Board, Chief Executive Officer and President
Ronald Bell 57 Vice President, Engineering
Chris A. Ladas 54 Vice President, Operations
David Neubauer 57 Vice President, Sales
</TABLE>
Mr. Gellatly joined the Company in January 1999 as Chief Executive Officer
and President. From 1982 to January 1999 he had been the principal of New
Technology Marketing, a high technology marketing consulting company. Clients
included Lucent Technology, IBM, National Semiconductor ("NSC"), Cyrix, Intel,
Apple Corporation, and Siemens. Prior to 1982, Mr. Gellatly worked at Intel
Corporation for five years where he served in various marketing management
positions in the microprocessor operation. Mr. Gellatly has been a director of
Micro Linear since December 1998. Mr. Gellatly received his MSEE from the
University of Minnesota.
Mr. Bell joined the Company in April 1999 as Vice President, Communication
Products. He brought to the Company more than twenty-five years of R&D
management experience in computer architecture, communications, and
semiconductor development. Prior positions include CEO of Equator Technologies,
Vice-President and General Manager of LSI Logic, and Vice-President and Chief
Technology Officer for the Computer Systems Group of the Unisys Corporation. Mr.
Bell received his BSEE and MSCS from University of Utah.
Mr. Ladas joined the Company in January 1996 as Vice President, Operations.
From January 1987 to December 1995, Mr. Ladas held several executive positions
with NSC including Managing Director of Operations in Greenock, Scotland. From
March 1983 to December 1986, Mr. Ladas worked at Fairchild Semiconductor as
Research and Development Manager. Mr. Ladas received his B.S. degree in
Chemistry from Arizona State University.
Mr. Neubauer joined the Company in May 1999 as Vice President of Sales. Mr.
Neubauer previously served as Director of Worlwide Sales Development at Sun
Microsystems, Inc. where he had worked for the past six years. Prior to that he
was Director of Asia-Pacific Sales at Integrated Device Technology. Mr. Neubauer
also spent fifteen years at Intel Corporation serving as Strategic Accounts
Manager and other sales management positions. Mr. Neubauer received his B.A.
degree in Physics from the University of Texas, Austin.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
Item 2. Properties
The Company's executive offices and manufacturing facilities, located in
San Jose, California, consist of two buildings comprising approximately 93,000
square feet. This property was acquired by the Company in October 1990 at a cost
of $7.5 million and is used for manufacturing, product design and development,
marketing, sales and administration. The acquisition of the property was
financed by a $5.3 million note, secured by the property. This obligation was
refinanced in September1999 with a $3.0 million note payable over five years
with principal amortized on a ten year basis. The Company leases development
center buildings in Cambridge, England and Livingston, Scotland. Micro Linear
believes that its existing facilities are adequate to meet its current
requirements.
Certain of the Company's wafer suppliers and assembly contractors are
subject to a variety of U.S. and foreign government regulations related to the
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in their manufacturing process. The failure by the Company's suppliers or
subcontractors to comply with present or future environmental regulations could
result in fines, suspension of production or cessation of operations. Such
<PAGE>
regulations could also require the Company's suppliers or subcontractors to
acquire equipment or to incur other substantial expenses to comply with
environmental regulations. If substantial additional expenses were incurred by
the Company's suppliers or subcontractors, product costs could significantly
increase, thus materially and adversely affecting the Company's results of
operations. Additionally, the Company is subject to a variety of governmental
regulations relating to its operations, such as environmental, labor and export
control regulations. While the Company believes it has obtained all permits
necessary to conduct its business, the failure to comply with present and future
regulations could result in fines being imposed on the Company or suspension or
cessation of operations. Any failure by the Company or its suppliers or
subcontractors to control the use of, or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities, and could
have a material adverse effect on the Company's business and operating results.
Item 3. Legal Proceedings
In December 1995, Pioneer Magnetics, Inc. ("Pioneer") filed a complaint in
the Federal District Court for the Central District of California alleging that
certain of the Company's integrated circuits violate a Pioneer patent. Pioneer
is seeking monetary damages and an injunction against such alleged patent
violation. The Company has denied any infringement and filed a counter-claim
seeking invalidity of the patent. The 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 issued a claim construction order favorable to Micro
Linear. The parties filed a stipulated judgment of Non-Infringement, which
resulted in a termination of the district court action against Micro Linear.
Pioneer has appealed. No hearing date on the appeal has been set.
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 March 13,
2000, 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. 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 $1.24 million charge reflecting
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. 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 its answer to Accton's Amended Complaint on July 27, 1999.
Discovery was commenced in May, 1999. Both Parties have propounded and responded
to extensive written discovery requests. Hewlett-Packard Company, Accton's
customer, has also produced documents in response to the Company's deposition
subpoena. Accton has taken the depositions of a number of the Company's
employees. In turn, the Company has noticed the depositions of Accton personnel,
several of which have been commenced. The depositions of Hewlett-Packard
<PAGE>
personnel are scheduled to commence in early April, 2000. The action is
scheduled to commence trial on June 5, 2000. On January 7, 2000 in response to
discovery motions brought by both parities and the Company's request, the Court
ordered the parties to stipulate to appointment of a discovery referee. The
parties have agreed to have David Meadows, Esq. Serve as the discovery referee.
The first discovery took place on February 23, 2000 and additional hearings will
take place in March and April, 2000. At the initial status conference held on
July 13, 1999, the court ordered the parties to mediation. An initial mediation
session was held on December 16, 1999 before Hon. William T. Betineli (Ret.). A
second session will take place on March 14, 2000.
The Company intends to contest this complaint vigorously, however, 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The following table sets forth the high and low prices of the Company's
Common Stock as quoted in the Nasdaq National Market for the periods indicated.
As of February 27, 2000, there were approximately 285 holders of record of the
Company's Common Stock. The Company's Common Stock is listed for quotation in
the Nasdaq National Market under the Symbol "MLIN."
Common Stock Prices
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Quarter ended December 31, 1999 $9 $4 3/16
Quarter ended September 30, 1999 $5 1/2 $3 5/8
Quarter ended June 30, 1999 $4 1/16 $2 13/16
Quarter ended March 31, 1999 $5 15/16 $3 13/16
Quarter ended December 31, 1998 $5 15/16 $2 11/16
Quarter ended September 30, 1998 $3 7/16 $5 1/2
Quarter ended June 30, 1998 $6 15/16 $4
Quarter ended March 31, 1998 $8 15/16 $6 3/16
Quarter ended December 31, 1997 $9 1/8 $7
Quarter ended September 30, 1997 $14 3/8 $8 5/16
Quarter ended June 30, 1997 $20 1/4 $10 1/4
Quarter ended March 31, 1997 $13 3/4 $8 1/4
</TABLE>
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future.
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the five-year period
ended December 31, 1999, should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
7 of this report.
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $46,645 $47,801 $65,759 $54,057 $57,384
Gross margin.......................... $23,615 $23,781 $34,205 $32,152 $31,657
Income from operations $(2,502) $187 $9,894 $9,390 $11,824
Net income............................ $(444) $944 $7,010 $6,703 $10,536
Net income per share..................
Basic $(0.04) $0.08 $0.59 $0.54 $0.87
Diluted $(0.04) $0.08 $0.54 $0.51 $0.77
Weighted average shares used in per share computations
Basic 10,999 11,560 11,822 12,320 12,112
Diluted 10,999 11,970 12,979 13,241 13,644
December 31,
1999 1998 1997 1996 1995
(In thousands)
Balance Sheet Data:
Working capital....................... $39,006 $35,216 $39,922 $38,796 $41,321
Total assets.......................... $69,131 $69,559 $72,025 $69,032 $67,971
Long-term obligations, less current
portion............................ $ 2,755 $0 $2,805 $2,972 $3,181
Stockholders' equity.................. $55,703 $56,809 $59,321 $58,269 $55,847
</TABLE>
<TABLE>
<CAPTION>
Quarterly Financial Data
(Unaudited)
Three Months Ended
December 31, September 30, June 30, March 31,
1999 1999 1999 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues................... $12,356 $12,113 $11,270 $10,906
Gross margin................... $6,422 $6,284 $5,654 $5,255
Net income..................... $228 $(357) $(258) $(57)
Net income per share
Basic....................... $0.02 $(0.03) $(0.02) $(0.01)
Diluted..................... $0.02 $(0.03) $(0.02) $(0.01)
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
(In thousands, except per share data)
Net revenues................... $12,059 $11,758 $11,745 $12,239
Gross margin................... $6,210 $5,839 $5,104 $6,628
Net income..................... $48 $265 $61 $570
Net income per share
Basic....................... $0.00 $0.02 $0.01 $0.05
Diluted..................... $0.00 $0.02 $0.01 $0.05
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Resultsof Operations
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth below and elsewhere in this Form 10-K.
Results of Operations
Overview
Micro Linear Corporation was founded in 1983. Micro Linear currently serves
the communications, industrial and computer markets with a broad range of
standard products for a variety of applications, including local area networks,
video, telecommunications, power management, battery management, motor control.
The Company utilizes three principal manufacturing process technologies,
Bipolar, CMOS and BiCMOS.
In recent years, sales of communications products, including networking and
telecom, have constituted a majority of the Company's revenues. Specifically,
such products represented approximately 53%, 64% and 69% of net revenues for
1999, 1998, and 1997, respectively. The communications market is characterized
by intense competition, relatively short product life cycles and rapid
technological change. In addition, the communications market has undergone rapid
growth and consolidation in the last few years. The Company's net revenues and
results of operations would be materially and adversely affected in the event of
a slowdown in this market. The Company is attempting to reduce its dependency on
the communications industry through various means, such as expanding its product
mix and customer base.
The Company's communications market includes networking applications. A
substantial portion of the Company's net revenues are derived from sales of
products for computer networking applications. Sales of the Company's products
to network equipment manufacturers accounted for approximately 47% of the
Company's net revenues in 1999 and accounted for 6 of the Company's 10 top
selling products for 1999. These 6 products constituted approximately 39% of the
Company's revenues for the same period. The computer networking equipment market
is characterized by intense competition, relatively short product life cycles
and rapid technological change. In addition, the computer network equipment
market has undergone a period of rapid growth and experienced consolidation
among the competitors in the market in recent years. Although the Company has
expanded its product mix and customer base, the Company expects its dependency
on sales to network equipment manufacturers to continue into 2000. The Company's
business and results of operations would be materially and adversely affected in
the event of a significant slowdown in the computer networking equipment market.
In addition, as a result of competitive pricing pressures, the Company has
experienced lower margins in certain of its existing products for computer
networking applications. There can be no assurance as to when or if such pricing
pressure will lessen. Such pricing pressures will have an adverse affect on the
Company's results of operations unless they can be offset by higher margins on
other products or reduced operating expenses.
The Company's operating results are subject to quarterly and other
fluctuations which may result from the timing and extent of process development
costs, changes in the mix of products sold, the timing and extent of research
and development expenses, the availability and cost of wafers from outside
foundries, fluctuations in manufacturing yields, and competitive pricing
pressures. Other factors which may result in operating fluctuations are the
Company's ability to access advanced process technologies, the ability to
introduce new products on a timely basis, market acceptance of the Company's and
its customers' products, the timing of new product announcements and cyclical
semiconductor industry conditions. Moreover, the Company's business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. As a result of the foregoing or other factors, the Company expects to
continue to experience material fluctuations in its future operating results on
a quarterly or annual basis.
<PAGE>
Annual Results of Operations
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 49.4 50.2 48.0
Gross margin.............................................. 50.6 49.8 52.0
Operating expenses:
Research and development.................................. 29.7 24.9 18.2
Selling, general and administrative 22.3 24.5 18.8
Legal settlement and related cost 4.0 0.0 0.0
Total operating expenses 56.0 49.4 37.0
Income (loss) from operations.............................. (5.4) 0.4 15.0
Interest income , net....................................... 2.7 2.7 1.7
Income (loss) before provision for taxes (2.7) 3.1 16.7
Provision (benefits) for taxes.............................. (1.7) 1.1 6.0
Net income (loss)........................................... (1.0)% 2.0% 10.7%
</TABLE>
Net Revenues
Net revenues were $46.6 million for 1999, $47.8 million for 1998 and $65.8
million for 1997. Net revenues in 1999 decreased 3% from net revenues in 1998,
and 1998 net revenues decreased 27% from 1997. The Company serves three
principal markets, computer, communications and industrial. Net revenues for
1999 compared to 1998 increased 21% in the computer market and 29% in the
industrial market and decreased 19% in the communications market. Net revenues
for 1998 compared to 1997 increased 3% in the industrial market and decreased
33% and 37% in the communications market and computer market respectively.
The communications market includes the computer networking equipment
("networking") sub-market. Revenues in the networking sub-market for 1999 were
$22.1 million, or 47% of net revenues, compared to $27.5 million, or 57% of net
revenues for 1998 and $42.9 million, or 65% of net revenues for 1997. The
networking sub-market is characterized by intense competition, relatively short
product life cycles and rapid technological change. In addition, the networking
sub-market has undergone a period of rapid growth, price erosion and
consolidation in recent years. Although the Company has expanded its product mix
and customer base, the Company expects its dependency on sales to network
equipment manufacturers to continue. The Company's business and results of
operations have been and will be adversely affected by a significant slowdown in
the computer networking equipment sub-market.
International revenues for 1999 totaled $19.5 million or 42% of net
revenues compared to $20.2 million or 42% of net revenues for 1998 and $34.6
million or 53% of net revenues for 1997. The moderate decrease in international
revenues in 1999 compared to 1998 and decrease in 1998 compared to 1997 was due
to a combination of lower demand for the Company's products in Asia and
decreased Asia Pacific subcontract work for domestic customers.
Domestic distributor revenues were approximately 29% of net revenues for
1999, compared to 22% for 1998 and 17% for 1997. The Company defers recognition
of revenue derived from sales to distributors until such distributors resell the
products to their customers.
<PAGE>
Gross Margin
The Company's gross margin is affected by the volume of product sales,
price, product mix, manufacturing utilization, product yields and the mix of
sales to OEM's and to distributors. Gross margin is periodically affected by
costs incurred in connection with start-up and installation of new process
technologies at outside manufacturing foundries.
Gross margin increased slightly to 51% in 1999 from 50% in 1998 due
primarily to lower costs and better production yields. Gross margin declined
from 52% in 1997, primarily due to a shift of product mix to lower margin
products, lower levels of production and lower average selling prices related to
competitive pricing pressures.
The Company's gross margin is affected by costs associated with installing
new processes at its foundries. The Company has been able to mitigate the effect
on gross margin associated with new wafer manufacturing process costs by relying
upon process technologies existing at its outside wafer foundries. The costs of
new processes installed in 1998 and 1999 related to the closure of an internal
Bipolar fabrication facility are discussed below. The cost of additional new
processes installed in 1999, unrelated to the closure of the Bipolar fabrication
facility, were approximately $0.5 million.
The Company currently purchases its wafers from six wafer suppliers. A
substantial majority of the Company's wafer supply is obtained from three wafer
suppliers. The Company's products are assembled and packaged by four vendors.
Supply interruptions due to such factors as inadequate capacity or raw material
shortages at the Company's wafer suppliers or assembly vendors could materially
and adversely affect product shipments. The Company purchases most of its BiCMOS
wafers from one wafer foundry in Taiwan. Accordingly, the Company's BiCMOS wafer
supply could be materially and adversely affected if this foundry is unable to
meet the Company's supply requirements.
The Company closed its owned Bipolar fabrication facility in the fourth
quarter of 1998. Production related to this fabrication facility has been moved
to an outside foundry resulting in lower wafer costs. The cost of closing the
operation, including asset disposal, inventory write-off, facility clean-up and
new foundry qualification totaled $1.5 million. Of this amount approximately
$1.0 million was expensed in 1998. The amount expensed in 1998 included new
foundry qualification costs and installation costs of new process technologies
of $0.6 million and an inventory write-off of approximately $0.4 million.
Additional foundry qualification costsand installation costs of new process
technologies of approximately $0.4 million were incurred and expensed in 1999.
The net book value of fixed assets disposed totaled $103,000. In 1999 these
assets were sold for approximately $114,000.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of standard and semi-standard products, tile
arrays and standard cells. In addition, research and development expenses
include test development and prototype assembly costs associated with new
product development. The Company also expenses prototype wafers and new
production mask sets related to new products as research and development costs
until products based on new designs are fully characterized by the Company and
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $13.8 million for 1999 or 30% of net
revenues compared to $11.9 million or 25% of net revenues in 1998 and $11.2
million or 21% of net revenues in 1997. Research and development expenses in
1999 increased 16% over 1998. The increase in is primarily attributable to the
addition of personnel associated with the Company's development center in
Cambridge, England and the addition of a new design center in Livingston,
Scotland.
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses were $10.4 million for 1999 or
22% of net revenues compared to $11.7 million or 25% of net revenues in 1998 and
$12.3 million or 19% of net revenues in 1997. The decrease in 1999 compared to
1998 is primarily attributable to lower staffing, patent and advertising costs.
The decrease in 1998 compared to 1997 is primarily attributable to a decrease in
sales commissions resulting from lower net revenues and decreased business
conference costs.
Legal Settlement and Related Costs
The financial results in fiscal 1999 include a pre-tax charge of $1.9
million associated with the settlement of a legal claim. Of the total $1.9
million, $1.2 million was for the legal settlement and the remaining $0.7
million was for legal services related to the case.
Interest and Other Income and Interest Expense
Interest and other income was $1.5 million for 1999, $1.6 million for 1998
and $1.3 million for 1997. Interest income is affected by changes in the
Company's cash balances as well as prevailing interest rates. Interest expense
was $0.2 million in 1999 and $0.3 million in 1998 and 1997.
Provision for Income Taxes
The Company's effective tax rate was negative 64% for 1999 and 36% for 1998
and 1997. The effective tax rates differ from the statutory income tax rate
primarily due to state income taxes and federal research credits.
Liquidity and Capital Resources
The Company has in recent years financed its operations and capital
requirements principally through cash flow from operations. Operations provided
$6.0 million of net cash during 1999, a decrease of $5.4 million from 1998. The
decrease in 1999 is primarily attributable to lower net income and decreased
accrued liabilities partially offset by lower inventory and higher ccounts
payable at the end of 1999.
Cash used in investing activities for 1999 is attributable to capital
expenditures of $3.2 million and the net purchase of short-term investments of
$1.2 million. Financing activities for 1999 consist primarily of the repurchase
of 283,400 shares of the Company's common stock for $1.5 million. From January
1996 through the end of 1999, the Company repurchased 2,696,900 shares of its
common stock at an aggregate cost of $20.2 million. The Company terminated the
share repurchase program at the end of the first quarter of 1999. The Company
received $0.7 million from the sale of common stock issued under the employee
stock option and employee stock purchase plans.
Working capital was $39.0 million at December 31, 1999 which includes cash
and cash equivalents of $7.4 million and short-term investments of $24.1
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.
<PAGE>
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. Historically, average
selling prices in the semiconductor industry have decreased over the life of any
particular product. Competitive pricing pressures are expected to continue in
the future, especially in the communications market, and may have a material
adverse effect on the Company's gross margin. The Company's business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. Due to the absence of substantial noncancellable backlog, the Company
typically plans its production and inventory levels based on internal forecasts
of customer demand, which are highly unpredictable and can fluctuate
substantially. In addition, the Company is limited in its ability to reduce
costs quickly in response to any revenue shortfalls. As a result of the
foregoing or other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis which would materially and adversely affect the Company's business,
financial condition and results of operations.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to advanced semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve yields. Semiconductor design and process
methodologies are subject to rapid technological change, requiring large
expenditures for research and development. If the Company is unable to develop
or obtain access to advanced wafer processing technologies as they become
needed, or is unable to define, design, develop and introduce competitive new
products on a timely basis, its future operating results will be materially and
adversely affected. In addition, if the Company is unable to transfer and
install such new process technologies to one or more of its foundries in a
timely manner, its business and results of operations could be materially and
adversely affected.
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. The
Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions or other
factors.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of December 31, 1999, the Company's investment portfolio consisted of
U.S. government obligations and commercial paper of $25.1 million, typically
with maturities of less than 12 months (see Note 1 of Notes to the Consolidated
Financial Statements). These securities, like all U.S. government obligations
and commercial paper, are subject to interest rate risk and will decline in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels as of December 31, 1999,
the decline in the fair value of the portfolio would not be material.
Additionally, the Company has the ability to hold its fixed income investments
until maturity and, therefore, the Company would not expect to recognize such an
adverse impact in income or cash flows.
Foreign Currency Exchange Risk
The Company's inventory purchase and product sales transactions are almost
all denominated in US dollars. The Company has international sales and research
and development facilities and is, therefore, subject to foreign currency rate
exposure. The Company's foreign currency risks are mitigated principally by
maintaining only minimal foreign currency balances. To date, the exposure to the
Company related to exchange rate volatility has not been significant. If the
foreign currency rates fluctuate by 10% from rates at December 31, 1999, the
effect on the Company's financial position and results of operations would not
be material. However, there can be no assurance that there will not be a
material impact in the future.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
<TABLE>
<CAPTION> Page
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants 25
Consolidated Balance Sheets as of December 31, 1999 and 1998............................................... 26
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 27
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 28
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 29
Notes to Consolidated Financial Statements................................................................. 30
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Micro Linear Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
listed in the index appearing under Item 14(a)(1) and (2) on page 43 present
fairly, in all material respects, the financial position of Micro Linear
Corporation and its subsidiaries at January 2, 2000 and January 3, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
January 20, 2000, except to Note 10, which was as of April 3, 2000
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
1999 1998
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................... $7,381 $6,393
Short-term investments...................................................... 24,122 22,937
Accounts receivable, net of allowance for doubtful accounts of $589 and
$540 at December 31, 1999 and 1998, respectively 5,762 5,476
Inventories................................................................. 5,917 7,260
Deferred tax assets......................................................... 4,222 4,848
Other current assets........................................................ 1,583 937
Total current assets..................................................... 48,987 47,851
Property, plant and equipment, net............................................ 19,686 21,140
Other assets.................................................................. 458 568
Total assets........................................................ $69,131 $69,559
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................ $4,099 $3,030
Accrued compensation and benefits........................................... 1,743 2,211
Deferred income on shipments to distributors 3,235 2,739
Accrued commissions......................................................... 673 634
Other accrued liabilities................................................... 20 1,230
Current portion of long-term debt........................................... 211 2,791
Total current liabilities................................................ 9,981 12,635
Long-term debt................................................................ 2,755 --
Deferred tax liabilities...................................................... 692 115
Total liabilities................................................... 13,428 12,750
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value
Authorized shares 5,000,000;
None issued............................................................ -- --
Common stock, $.001 par value
Authorized shares 30,000,000;
Issued shares 13,818,742 and 13,517,780 at December 31, 1999 and 1998,
respectively; Outstanding shares 11,121,842 and 11,104,280 at December
31, 1999 and 1998, respec14vely 14 14
Additional paid-in capital.................................................. 55,026 54,125
Retained earnings........................................................... 20,945 21,389
Accumulated other comprehensive loss........................................ (49) --
Treasury stock, at cost, 2,696,900 and 2,413,500 shares at December 31, (20,233) (18,719)
1999 and 1998 respectively
Total stockholders' equity............................................... 55,703 56,809
Total liabilities and stockholders' equity $69,131 $69,559
</TABLE>
See accompanying notes to the consolidated financial statements.
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net revenues..................................................... $46,645 $47,801 $65,759
Cost of revenues................................................. 23,030 24,020 31,554
Gross margin................................................... 23,615 23,781 34,205
Operating expenses:
Research and development....................................... 13,832 11,922 11,962
Selling, general and administrative 10,401 11,672 12,349
Legal settlement and related cost.............................. 1,884 -- --
26,117 23,594 24,311
Income (loss) from operations................................. (2,502) 187 9,894
Interest and other income........................................ 1,512 1,550 1,337
Interest expense................................................. (243) (262) (278)
Income (loss) before provision for taxes (1,233) 1,475 10,953
Provision (benefits) for taxes................................... (789) 531 3,943
Net income (loss).............................................. ($444) $944 $7,010
Net Income (Loss) Per Share:
Basic:
Net income (loss) per share..................................... ($0.04) $0.08 $0.59
Weighted average number of shares used in per share computation 10,999 11,560 11,822
Diluted:
Net income (loss) per share..................................... ($0.04) $0.08 $0.54
Weighted average number of shares used in per share computation 10,999 11,970 12,979
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Additional Total
Common Stock Paid-in Accumulated Other Retained Treasury Stockholders
Shares Amount Capital Comprehensive loss Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,054,080 13 50,501 -- 13,435 (5,680) 58,269
Exercise of stock options 238,767 -- 882 -- -- -- 882
Shares purchased under employee
stock purchase plan 119,156 -- 770 -- -- -- 770
Tax benefit of options exercise -- -- 686 -- -- -- 686
Amortization of deferred
compensation............ -- -- 51 -- -- -- 51
Purchase of treasury stock (756,000) -- -- -- -- (8,347) (8,347)
Net income.............. -- -- -- -- 7,010 -- 7,010
Balance at December 31, 1997 11,656,003 13 52,890 -- 20,445 (14,027) 59,321
Exercise of stock options 217,847 1 574 -- -- -- 575
Shares purchased under employee
stock purchase plan 131,930 -- 474 -- -- -- 474
Amortization of deferred
compensation............ -- -- 187 -- -- -- 187
Purchase of treasury stock (901,500) -- -- -- -- (4,692) (4,692)
Net income.............. -- -- -- -- 944 -- 944
Balance at December 31, 1998 11,104,280 14 54,125 21,389 (18,719) 56,809
Exercise of stock options 245,582 -- 484 -- -- -- 484
Shares purchased under employee
stock purchase plan 55,380 -- 181 -- -- -- 181
Tax benefit of options exercise -- -- 149 -- -- -- 149
Amortization of deferred
compensation............ -- -- 87 -- -- -- 87
Purchase of treasury stock (283,400) -- -- -- -- (1,514) (1,514)
Net loss................ -- -- -- -- (444) -- (444)
Unrealized loss on short-term
investments -- -- -- (49) -- -- (49)
Balance at December 31, 1999 11,121,842 $14 $55,026 ($49) $20,945 ($20,233) $55,703
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1999 1998 1997
Operating activities:
<S> <C> <C> <C>
Operating activities:
Net income (loss) ................................................. $(444) $944 $7,010
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.................................... 4,570 4,477 4,542
Gain on disposal of fixed assets................................. (11)
Tax effect from employee stock plans............................. 149 -- 686
Deferred income tax (benefit) provision, net..................... 1,203 (272) 38
Amortization of deferred compensation............................ 87 187 51
Changes in assets and liabilities:
Accounts receivable.............................................. (286) 4,891 (5,995)
Inventories...................................................... 1,343 563 2,633
Other current assets and other assets (536) 483 770
Accounts payable................................................. 1,069 (582) 880
Accrued compensation, accrued commissions and other liabilities (1,639) 650 824
Deferred income on shipments to distributors 496 44 446
Net cash provided by operating activities 6,001 11,385 11,885
Investing activities:
Capital expenditures............................................... (3,219) (4,094) (4,301)
Proceeds from sale of equipment.................................... 114 -- --
Purchases of short-term investments................................ (35,362) (41,584) (35,897)
Sales and maturities of short-term investments 34,128 39,300 36,042
Net cash used in investing activities (4,339) (6,378) (4,156)
Financing activities:
Principal payments under capital lease obligations and debt (2,825) (181) (209)
Proceeds from debt refinancing..................................... 3,000 -- --
Proceeds from issuance of common stock............................. 665 1,049 1,652
Purchase of treasury stock of the Company (1,514) (4,692) (8,347)
Net cash used in financing activities. (674) (3,824) (6,904)
Net increase in cash and cash equivalents 988 1,183 825
Cash and cash equivalents at beginning of period. 6,393 5,210 4,385
Cash and cash equivalents at end of period. $7,381 $6,393 $5,210
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $243 $285 $280
Income taxes..................................................... $261 $1,409 $1,856
</TABLE>
See accompanying notes to consolidated financial statements.
MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
MicroLinear 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 is headquartered
in San Jose, California and has two research centers in the United Kingdom. The
Company operates in a single industry segment.
Basis of Presentation
The Company operates on a 52- or 53 -week fiscal year, ending on the Sunday
closest to December 31. Fiscal years 1999, 1998 and 1997 ended on January 2,
2000, January 3, 1999 and December 28, 1997, respectively. Fiscal 1999 and 1997
were comprised of 52 weeks, and fiscal 1998 was comprised of 53 weeks. The
Company's fiscal quarters end on the Sunday closest to the end of each calendar
quarter. For presentation purposes, the accompanying financial statements refer
to the calendar year end of each respective year for convenience. There were
certain changes made to the consolidated financial statements of prior years to
conform with current year's presentation.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition and Deferred Income
Revenue from product sales to customers other than sales to domestic
distributors are recorded when products are shipped. Sales made to distributors,
under agreements allowing price protection and right of return on merchandise
unsold by the distributors, are deferred until the merchandise is sold by the
distributors. Gross margin from shipments to international distributors is
deferred until those distributors notify the Company of product sales to end
users. There is not a significant difference to the Company's financial
statements from the deferral methods used for domestic and international
distributors.
In fiscal 1999, three customers accounted for 23%, 12% and 10% of net
revenues, respectively. In fiscal 1998, two customers accounted for 20% and 11%
of net revenues, respectively. In fiscal 1997, three customers accounted for
15%, 15% and 10% of net revenues, respectively.
Cash Equivalents
Cash equivalents consist of investments with original maturities at the
date of acquisition of ninety days or less that have insignificant interest rate
risk.
<PAGE>
Short-Term Investments
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities."
The Company has classified investments in debt securities as
available-for-sale. All available-for-sale securities mature in one year or
less. Available-for-sale securities are carried at fair value, with unrealized
gains and losses, net of tax, reported as other comprehensive income (loss). The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest and other income. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in interest and other income or interest expense, as appropriate. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest and other income.
The following is a summary of available-for-sale securities at December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
U.S. government obligations............................. $7,211 $4,673
Commercial paper........................................ 17,873 19,341
$25,084 $24,014
Amounts included in short-term investments $24,171 $22,937
Amounts included in cash and cash equivalents 913 1,077
$25,084 $24,014
Short-term investments, at cost $24,171 $22,937
Unrealized loss (49) --
Estimated fair value $24,122 $22,937
</TABLE>
Fair Value of Financial Instruments
The Company records its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses, the carrying amounts
approximate fair value due to their short maturates. The amounts shown for
long-term debt also approximate fair value because current interest rates
offered to the Company for debt of similar
maturities are substantially the same.
Inventory
Inventory is stated at the lower of cost (on a first-in, first-out basis)
or market (estimated net realizable value).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization for financial reporting purposes are provided on the straight-line
basis over the estimated useful lives of the assets. The Company depreciates
machinery and equipment over 5 years, buildings over 40 years, building
improvements over 10 and 20 years, equipment purchased on lease termination and
personal computers over 2 years. Assets under capitalized leases are recorded at
the present value of the lease obligations and amortized on a straight-line
basis over the shorter of the assets useful lives or the lease term.
<PAGE>
Net Income (Loss) Per Share
In the fourth quarter of fiscal 1997, the Company adopted the net income
per share calculation methodology prescribed by Statement of Financial
Accounting Standards No. 128 ("SFAS 128"). SFAS 128 requires presentation of
basic and diluted net income per share. Basic net income (loss) 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
(loss) per share gives effect to all dilutive potential common stock outstanding
during the period. In computing diluted net income (loss) per share, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from exercise of stock options. All prior year net income per
share amounts in this Form 10-K have been restated in accordance with SFAS 128.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's stock on the
grant date. The Company has provided additional pro forma disclosures as
required under Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock Based Compensation - See Note 5.
Concentrations of Credit Risk
The Company's sales and purchase transactions are denominated US dollars.
The Company primarily sells its products to original equipment manufacturers and
distributors. The Company believes the concentrations of credit risk in its
trade receivables with its customer base are mitigated by the Company's credit
evaluation process, relatively short collection terms, and the geographical
dispersion of sales. The Company generally does not require collateral. Bad debt
write-offs have been insignificant. The Company also has short-term cash
investment policies that limit the amount of credit exposure to any one
financial institution and restrict placement of these investments to financial
institutions evaluated as highly credit worthy.
The Company's accounts receivable balances with customers based in Asia at
December 31, 1999 and 1998 comprise 26% and 36% of accounts receivable,
respectively. At December 31, 1999, two customers comprise 20% and 10% of
accounts receivable, respectively. At December 31, 1998, two customers comprise
22% and 17% of accounts receivable, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Under FAS 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Comprehensive Income
In June 1998, the FASB issued Statement No. 130 ("FAS 130") "Reporting
Comprehensive Income". FAS 130 establishes standards for reporting and display
of comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. An example of an item to be included in comprehensive
income which is excluded in net income would be unrealized gains and losses on
available for sale securities.
Segment Reporting
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted SFAS 131 in fiscal
1998, however no additional disclosure is considered necessary since the Company
operates in one segment as defined by SFAS 131.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," (SAB 101) which clarifies the SEC's views on revenue recognition.
The Company is required to adopt SAB 101 in the second quarter of fiscal 2000.
The Company is currently studying the impact of SAB 101, but does not currently
expect it to have a financial statements.
2. Supplemental Financial Information
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Raw materials..................................... $39 $314
Work-in-process................................... 4,190 4,906
Finished goods.................................... 1,688 2,040
$5,917 $7,260
Property, plant and equipment consist of the following (in thousands):
December 31,
1999 1998
Land.............................................. $2,850 $2,850
Buildings and improvements........................ 9,984 9,904
Machinery and equipment........................... 15,695 33,736
Assets held for sale.............................. 21,067 --
49,596 46,490
Accumulated depreciation and amortization 29,910 25,350
Net property, plant and equipment $19,686 $21,140
</TABLE>
The Company plans to dispose of certain testing equipment through sales to
a third party. Such testing equipment had an aggregate net book value of $6.7
million at December 31, 1999. The Company does not expect to incur a significant
losse on the disposal.
3. Long-term Debt
Prior to September 1999, the Company had a note for $3.4 million 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 December 31, 1999 and 1998,
$2,966,000 and $2,791,000 were outstanding under the loans. The unpaid principal
has been reclassified to current portion of long-term debt in accordance with
the maturity date of the promissory note.
4. Net Income (Loss) Per Share
Following is a reconciliation of the numerators and denominators of the
basic and diluted income (loss) per share computations for the periods presented
below (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
Per- Per- Per-
Loss Shares Share Income Shares Share Amount Income Shares Share Amount
(Numerator) (Denominator) Amount (Numerator) (Denominator) (Numerator) (Denominator)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Income (Loss) Per Share:
Net income
(loss) available
to common
stockholders $(444) 10,999 $(0.04) $944 11,560 $0.08 $7,010 11,822 $0.59
Effect of dilutive securities:
Stock options 410 1,157
Diluted Income (Loss) Per Share:
Net income (loss) available
to common stockholders
assuming dilution $(444) 10,999 $(0.04) $944 11,970 $0.08 $7,010 12,979 $0.54
</TABLE>
Options to purchase 3,347,566, 3,823,992 and 413,780 shares of common stock
at weighted average exercise prices of $5.10, $7.55 and $12.53 per share were
outstanding during 1999, 1998 and 1997, respectively, but were not included in
the respective computation of diluted income (loss) per share because such
options were anti-dilutive. The options, which expire periodically from 2006
through 2009, were still outstanding at the end of each respective year.
5. Stockholders' Equity
Preferred Stock
The Board of Directors has the authority, without any further vote or
action by the stockholders, to provide for the issuance of up to 5,000,000
shares of preferred stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors may
determine, including the consideration received therefore, the number of shares
compromising each series, dividend rates, redemption provisions, liquidation
preferences, sinking fund provisions, conversion rights and voting rights. In
August 1998, the Company designated 30,000 shares of Preferred Stock as Series A
Participating Preferred Stock in connection with the adoption of a shareholders
rights program. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. No such preferred
stock was issued or outstanding anytime during fiscal years 1999, 1998 and 1997.
Shareholder Rights Plan
In August 1998, the Company implemented a plan to protect shareholders'
rights in the event of a proposed takeover of the Company. Under the plan, each
share of the Company's outstanding common stock carries one right to purchase
one-thousandth of a share of the Company's Series A Participating Preferred
Stock (the "Right") at an exercise price of $30.00 per share. The Right enables
the holder to purchase common stock of the Company or the acquiring company ten
days after a person or group publicly announces it has acquired or has tendered
an offer for 15% or more of the Company's outstanding common stock. The Rights
are redeemable by the Company at $0.01 per Right at any time on or before the
tenth day following acquisition by a person or group of 15% or more of the
Company's common stock. If prior to redemption of the Rights, a person or group
acquires 15% or more of the Company's common stock, each Right not owned by a
holder of 15% or more of the common stock (or an affiliate of such holder) will
entitle the holder to purchase, at the Right's then current exercise price, that
number of shares of common stock of the Company having a market value at the
time of twice the Right's exercise price. The Rights expire in August 2008.
Common Stock
Holders of common stock are entitled to receive dividends as declared by
the Board of Directors out of legally available funds. No dividends have been
declared or paid.
The following summarizes all shares of common stock reserved for issuance as of
December 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
Issuable upon:
<S> <C>
Exercise of stock options, including options available for grant 5,935,125
Purchase under Employee Stock Purchase Plan 144,620
6,079,745
</TABLE>
From January 1996 through the end of 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.
Stock Option Plans
The Company adopted the 1983 Incentive Stock Option Plan ("1983 Plan"),
under which employees and consultants had been granted incentive stock options
to purchase shares of the Company's common stock at not less than the fair value
at the date of grant or nonstatutory stock options to purchase the Company's
common stock at not less than 85% of the fair value at the date of grant, as
determined by the Board of Directors. No stock options were granted with an
exercise price at less than fair value on the date of grant. The 1983 Plan
expired in March 1994. The Company has not issued common stock options to
consultants during 1999, 1998 and 1997.
In August 1992, the Company adopted the 1991 Stock Option Plan ("1991
Plan"), under which employees and consultants may be granted incentive stock
options to purchase shares of the Company's common stock at not less than the
fair value on the date of grant or nonstatutory stock options to purchase the
Company's common stock at not less than 85% of the fair value on the date of
grant, as determined by the Board of Directors. To date, no stock options have
been granted with an exercise price at less than the fair value on the date of
grant.
In September 1998, the Company adopted the 1998 Nonstatutory Option Plan
("1998 Plan"), under which employees and consultants may be granted nonstatutory
stock options to purchase shares of the Company's common stock at not less than
the fair market value on the date of grant. Executive officers may only receive
options under the plan as an inducement essential to his or her initial
employment with the Company. An aggregate of 1,000,000 shares are reserved for
options granted under the Plan.
Under the 1983, 1991 and 1998 plans, options are exercisable as determined
by the Board of Directors on the date of grant. The Company's standard stock
option agreements under the 1983, 1991 and 1998 plans provide that 25% of the
stock subject to the option will vest upon each of the first and second
anniversaries from the vesting commencement date, and the remainder of the
shares subject to the option will vest monthly over the next two years.
Generally, the terms of this plan provide that options expire up to a maximum of
ten years from the date of grant.
Information with respect to the employee 1983, 1991 and 1998 plans is
summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
Available Number Weighted Average
For Grant of Shares Exercise Price
<S> <C> <C> <C>
Balance at December 31, 1996 444,619 2,575,803 $5.42
Options authorized 834,000 -- --
Options granted (647,281) 647,281 $10.59
Options exercised -- (221,167) $3.87
Options canceled 328,598 (328,598) $7.73
Options expired (806) -- $1.38
Balance at December 31, 1997 959,130 2,673,319 $6.52
Options authorized 1,175,885 -- --
Options granted (3,522,280) 3,522,280 $5.86
Options exercised -- (217,847) $2.60
Options canceled 2,445,844 (2,445,844) $8.03
Balance at December 31, 1998 1,058,579 3,531,908 $5.06
Options authorized 988,720 -- --
Options granted (1,060,150) 1,060,150 $4.17
Options exercised -- (245,582) $2.04
Options canceled 1,111,710 (1,111,710) $5.00
Options expired (80,100) -- $1.38
Balance at December 31, 1999 2,018,759 3,234,766 $5.01
</TABLE>
In 1997, the Board of Directors and stockholders approved an amendment to
the Company's 1991 Plan to provide for an annual increase in the number of
shares of common stock reserved for issuance thereunder equal to 4% of the
Company's fully diluted shares for a two year period commencing on January 1,
1998. The number of shares so reserved increased by 588,720 in 1999.
In January 1998, the Board of Directors approved the repricing of all
incentive stock options granted above $7.50 per share. The repricing did not
include incentive stock options granted to any member of the Company's Board of
Directors or the Chief Executive Officer. Prior options granted totaled
1,433,730 shares at prices ranging between $7.50 and $19.00. Employees had the
choice of exchanging any stock options granted for new options on a one-for-one
basis such that the new options would have an exercise price of $7.375. All of
the new options retained the original vesting structure but restarted the
vesting period as of January 27, 1998.
In July 1998, the Board of Directors approved the repricing of stock
options granted above $4.75 per share. The repricing did not include stock
options granted to any member of the Company's Board of Directors. Prior options
granted totaled 2,928,370 shares at prices ranging between $4.75 and $14.06.
Employees had the choice of exchanging any stock options granted for new options
on a one-for- one basis such that the new options would have an exercise price
of $4.75. All of the new options retained the original vesting structure but
restarted the vesting period as of July 28, 1998.
Director Stock Option Plan
Prior to the adoption of its Director Stock Option Plan (see below), the
Company offered to its non-employee directors the right to purchase 4,800 shares
of common stock per year at the fair value on the date of the offer, as
determined by the Board of Directors. Such offers vested at a rate of
one-twelfth of the shares subject to the offer for each full month following the
vesting commencement date, as determined by the Board of Directors, provided
that the purchaser remained a member of the Board of Directors. As of December
31, 1999, options to purchase 9,600 shares were outstanding and exercisable at a
price of $2.50 per share.
The Director Stock Option Plan ("the Director Plan") was adopted in October
1994 and amended in March 1997. Under the Director Plan the Company is
authorized to issue non-qualified stock options to purchase up to 80,000 shares
of the Company's common stock at an exercise price equal to the fair market
value of the common stock on the date of grant. The Director Plan provides that
each person who was an outside director on October 13, 1994, and each outside
director who subsequently becomes a member of the Board of Directors shall be
automatically granted an option to purchase 10,000 shares on the date on which
such person first becomes an outside director, whether through election by the
stockholders of the Company or appointment by the Board of Directors to fill a
vacancy. In addition, each outside director automatically receives a
nonstatutory option to purchase 7,000 shares of common stock upon such
director's annual re-election to the Board, provided the director has been a
member of the Board of Directors for at least 6 months upon the date of
re-election.
The 10,000 share grant vests at the rate of 25% of the option shares upon
the first and second anniversaries of the date of grant and 1/48th of the option
shares per month thereafter and the 7,000 share grant vests monthly over a
twelve-month period, in each case unless terminated sooner upon termination of
the optionee's status as a director or otherwise pursuant to the Director Plan.
Option activity of the Directors' stock options is as follows:
<TABLE>
<CAPTION>
Options Outstanding
Available For Grant Number of Shares Weighted Average
Exercise Price
<S> <C> <C> <C>
Balance at December 31, 1996 36,400 62,800 $11.42
Granted (31,000) 31,000 $14.72
Exercised - (17,600) $6.73
Canceled 8,400 (8,400) $12.41
Balance at December 31, 1997 13,800 67,800 $11.41
Authorized 100,000 --
Granted (14,000) 14,000 $4.44
Balance at December 31, 1998 99,800 81,800 $10.22
Granted (31,000) 31,000 $3.44
Balance at December 31, 1999 68,800 112,800 $7.49
</TABLE>
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan ("1994 Purchase Plan")
in October 1994. An aggregate of 455,000 shares of the Company's common stock
have been reserved for issuance under the 1994 Purchase Plan. The 1994 Purchase
Plan provides that all employees may purchase stock at 85% of its fair market
value on specified dates via payroll deductions. Sales under the 1994 Purchase
Plan in 1998 and 1997 were 131,930 and 119,156 shares of common stock with a
total purchase price of approximately $475,000 and $770,000, respectively. There
were no sales under the 1994 Purchase Plan in 1999. As of December 31, 1999,
there were no shares available to purchase under the 1994 Purchase Plan.
The Company adopted a new Employee Stock Purchase Plan ("1999 Purchase
Plan") in September 1999. An aggregate of 200,000 shares of the Company's common
stock have been reserved for issuance under the 1999 Purchase Plan. The 1999
Purchase Plan provides that all employees may purchase stock at 85% of its fair
market value on specified dates via payroll deductions. Sales under the 1999
Purchase Plan in 1999 were 55,380 shares of common stock with a total purchase
price of approximately $181,000. Shares available for purchase may be
replenished each year. As of December 31, 1999, there were 144,620 shares
available to purchase under the 1999 Purchase Plan.
Pro Forma Net Income (Loss) Per Share
Disclosure of pro forma net income (loss) is required by SFAS 123, and has
been determined as if the Company had accounted for its employer stock purchase
plan, employee stock options and director stock options subsequent to December
31, 1994 under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model and the multiple option approach with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Employee Stock
Purchase Plan Stock Option Plans
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998 1997
Expected Life (in years) 0.5 0.5 0.5 3.1 3.4 3.2
Risk-free interest rate 5.91% 4.70% 5.27% 6.7% 5.1% 5.6%
Volatility .79 1.28 .86 .96 .99 .85
Dividend yield - - - - - -
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of publicly traded options that have no vesting
restrictions and are fully transferable, which significantly differ from the
Company's stock option awards. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility and the time to exercise, which greatly affect the calculated grant
date fair value. The weighted average estimated fair values of shares issued
under the Employee Stock Purchase Plan granted during 1999, 1998 and 1997 were
$1.50, $2.13 and $3.42, respectively. The weighted average estimated fair value
of options granted under the employee and directors stock option plans during
1999, 1998 and 1997 were $2.59, $4.01 and $5.79, respectively.
The following table summarizes information about all stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
<S> <C> <C> <C> <C> <C>
Weighted-Average
Number Remaining Weighted-Average Number
Range of Outstanding Contractual Life (YearExercise Price Exercisable Weighted-Average
Exercise Prices at December 31, 1999 at December 31, 1999 Exercise Price
$0.88 - $3.13 341,060 5.5 $2.17 221,184 $1.66
$3.31 - $4.25 322,800 9.3 $3.71 19,662 $3.63
$4.38 - $4.38 513,167 9.0 $4.38 128,867 $4.38
$4.44 - $4.75 1,071,846 9.0 $4.71 269,070 $4.71
$5.00 - $7.31 769,311 7.5 $6.49 498,348 $6.78
$7.32 - $11.25 305,782 6.9 $8.01 161,964 $8.38
$13.38 - $18.38 23,600 5.4 $16.35 23,600 $16.35
3,347,566 7.9 $5.10 1,322,695 $5.59
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income (loss) over the options' vesting
period. The Company's pro forma information follows (in thousands, except for
net income (loss) per share information):
<TABLE>
<CAPTION>
Years ended
December 31,
<S> <C> <C> <C>
1999 1998 1997
Net Income (loss):
As reported ($444) $944 $7,010
Pro Forma ($1,784) ($1,824) $4,948
Net Income (loss) Per Share:
Basic as reported ($0.04) $0.08 $0.59
Diluted as reported ($0.04) $0.08 $0.54
Pro Forma Basic ($0.16) ($0.16) $0.42
Pro Forma Diluted ($0.16) ($0.16) $0.38
</TABLE>
6. 401(k) Tax Deferred Savings Plan
The Company has a 401(k) Tax Deferred Savings Plan (the 401(k) Plan) that
allows eligible employees to contribute from 1% to 15% of their pre-tax salary
up to a maximum of $10,000 during 1999. Effective October 27, 1997, the 401(k)
Plan was amended to provide that the Company would begin making a discretionary
matching contribution up to $80 per pay period to all employees who are
contributing to the 401(k) Plan. Prior to October 27, 1997, the Company was
making a discretionary matching contribution up to $40 per pay period to all
employees who were contributing to the 401(k) Plan. The Company's contribution
to the 401(k) Plan was approximately $412,000, $419,000 and $260,000 for 1999,
1998 and 1997, respectively.
7. Income Taxes
The provisions for income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Current:
Federal.................................. $(2,062) $778 $3,692
State.................................... -- (306) 257
Foreign.................................. 70 -- --
(1,992) 472 3,949
Deferred:
Federal.................................. 852 25 213
State.................................... 351 34 (219)
1,203 59 (6)
Provision for taxes on income $(789) $531 $3,943
</TABLE>
The tax benefits resulting from disqualifying dispositions by employees who
acquired shares under the Company's incentive stock option plan and from the
exercise of nonqualified stock options, reduced taxes currently payable or
increased taxes receivable as shown above by $149,000 and $686,000 in 1999 and
1997. Such benefits were immaterial in 1998 and were credited to additional
paid-in capital in 1999 and 1997.
The difference between the provision for taxes and the amount computed by
applying the federal statutory income tax rate to income (loss) before provision
for taxes is explained below (in thousands):
<TABLE>
<CAPTION>
December 31,
<S> <C> <C> <C>
1999 1998 1997
Tax at federal statutory rate................................. $(419) $516 $3,833
State tax, net of federal benefit............................. (36) 135 352
Research credits.............................................. (277) (150) (408)
Foreign sales corporation..................................... -- (114) (221)
Other......................................................... (57) 144 387
Provision for taxes........................................... $(789) $531 $3,943
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
Deferred tax assets:
<S> <C> <C>
Inventory valuation.................................................... $2,337 $3,010
Deferred revenue....................................................... 1,250 1,116
Other accruals and reserves not yet deductible for tax purposes 564 655
Other.................................................................. 71 67
Total deferred tax assets................................................ 4,222 4,848
Deferred tax liabilities:
Other.................................................................. 692 115
Total deferred tax liabilities........................................... $692 $115
</TABLE>
8. Operations by Geographic Regions
The following is a summary of operations by geographical regions (in
thousands):
<TABLE>
<CAPTION>
Years end December 31,
1999 1998 1997
External net sales to customers in:
<S> <C> <C> <C>
U.S................................................... $ 27,100 $ 27,545 $ 31,250
Asia Pacific.......................................... 13,865 15,561 29,213
Europe................................................ 4,466 3,853 4,450
Rest of World......................................... 1,214 842 846
Consolidated $ 46,645 $ 47,801 $ 65,759
</TABLE>
<TABLE>
<CAPTION>
Years end December 31,
1999 1998 1997
Operating income (loss):
<S> <C> <C> <C>
U.S................................................... $ 1,796 $ 2,128 $ 7,795
Europe................................................ (2,240) (1,184) (785)
Consolidated $ (444) $ 944 $ 7,010
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999 1998
Identifiable assets:
<S> <C> <C>
U.S................................................... $ 67,717 $ 68,929
Europe................................................ 722 515
Consolidated $ 68,439 $ 69,444
</TABLE>
9. Commitments and Contingencies
Legal Proceedings
A discussion of certain pending legal proceedings is included in Item 3 of
Part I of the Company's form 10-K for the fiscal year ended December 31, 1999.
The Company intends to contest these actions vigorously, however, there can be
no assurance that these matters will be resolved in the Company's favor or that
there will not be an adverse effect on the Company's financial position or its
results of operations.
Lease Commitment
The Company has various equipment operating leases. The Company's rental
expenses under operating leases in the years ended December 31, 1999, 1998 and
1997 totaled approximately $146,000, $147,000 and $157,000, respectively. Future
minimum lease payments for all leases are as follows (in thousands):
Fiscal Year
2000 $17
2001................................................. 16
2001................................................. 7
Total minimum lease payments......................... $40
Purchase Commitments
The Company's manufacturing relationships with foundries allow for the
cancellation of all outstanding purchase orders, but require repayment of all
expenses to date. As of December 31, 1999, foundries had incurred approximately
$1,182,000 of manufacturing expenses on the Company's outstanding purchase
orders.
10. Subsequent Events
In March 2000, the Company signed a letter on intent (LOI) with a third
party, whereby the company will sell certain test equipment (See Note 2 for
assets held for sales), with an aggregate net book value of approximately $6.7
million, lease to this thrid party certain office space for approximately
$22,200 per month, and transfer certain employees to the third party. The term
of the LOI is three years. The Company intends to subcontract to this party
certain test functions, which are currently performed internally. The Company
does not anticipate a significant gain or loss associated with the sale of
equipment. However, the Company may incur certain costs to transfer its
employees to the third party as the Company will pay retention bonuses to such
employees based on the length of their employment at the third-party company. In
addition, all payments due to such employees to be hired by the third-party
company as a result of the termination of their employment from the Company are
the sole responsibility of the Company. Under the terms of the LOI, the Company
will be required to pay approximately $380,000 per year for three years to
access the sold equipment for certain engineering purposes.
In February 2000, the Board of Directors approved an amendment to increase
the number of shares of common stock reserved for issuance under the 1998 NSO
Plan by 500,000 shares to an aggregate of 1,500,000 shares.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on May 26, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers -- See the section entitled "Executive Officers" in Part
I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
sections entitled "Record Date and Principal Share Ownership" and "Security
Ownership of Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. List of Financial Statements and Financial Statement Schedules
The following financial statements of Micro Linear Corporation are included
in Item 8 hereof:
Report of PricewaterhouseCoopers LLP, Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Supplement Schedules
The following financial statement schedule of Micro Linear Corporation is
included in Item 14(2):
Schedule II Valuation and Qualifying Accounts
Other schedules have not been filed because they are not applicable or
the required information has been included in the consolidated
financial statements.
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Charged
<S> <C> <C> <C> <C>
Balance at to Costs Balance at
Beginning and Deduction End of
Descriptions of Period Expenses (1) Period
Year Ended December 31, 1997
Allowance for Doubtful Accounts $243 $287 $0 $530
Year Ended December 31, 1998
Allowance for Doubtful Accounts $530 $10 $0 $540
Year Ended December 31, 1999
Allowance for Doubtful Accounts $540 $49 $0 $589
(1) Charges for uncollectable accounts, net of recoveries
</TABLE>
<TABLE>
<CAPTION>
3. Exhibits
Exhibit
Number Description of Document
<S> <C>
2.1(1) Form of Agreement and Plan of Merger by and between the Registrant and Micro
Linear Corporation, a California corporation.
3.1(2) Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1991 Stock Option Plan and form of Stock Option Agreement.
10.3(1)* 1994 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4(1)* 1983 Incentive Stock Option Plan and form of Stock Option Agreement.
10.5(1)* 1994 Director Stock Option Plan and form of Stock Option Agreement.
10.6(1)** License and Manufacturing Agreement between New Japan Radio Co., Ltd. and
Registrant dated October 1, 1993.
10.7(1)** Foundry Services Agreement between Philips Semiconductor and Registrant
effective January 27, 1993.
10.8(1)** License and Manufacturing Agreement between Taiwan Semiconductor Manufacturing
Co. and Registrant dated April 24, 1992, as amended.
10.9(2) Deed of Trust and Trust Deed Note of registrant in principal amount of $3.4
million dated October 1994.
10.10(3)** Nonstatutory Stock Option Plan.
10.11(4)* 1998 Employee Stock Purchase Plan and Form of Subscription Agreement.
10.12(1)** License and Manufacturing Agreement between Think-O Electric Company and
Registrant dated as of April 1, 1994.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.0 Financial Data Schedule
</TABLE>
* Management contract or compensation plan or arrangement required to
be filed as an exhibit to this report on Form 10-K pursuant to Item 14(c)
of this report.
** Confidential treatment granted as to certain portions of this
exhibit.
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (file no. 33-83546), as amended, filed on September 1,
1994.
(2) Incorporated by reference from the Registrant's Registration Annual
Report Form 10-K for the fiscal year ended December 31, 1995.
(3) Incorporated by reference from the Registrant's Statement on Form S-8
(file no. 333-67769) filed on November 23, 1998.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See (a) above.
(d) Financial Statement Schedules.
See (a) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Jose, State of California, on the 3rd day of
April, 2000.
MICRO LINEAR CORPORATION
By /s/ DAVID L. GELLATLY
David L. Gellatly
Chairman, Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David L. Gellatly , as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorney to
any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and
on the dates indicated:
Signature Title Date
/s/ DAVID L. GELLATLY Chairman, Chief Executive Officer April 3, 2000
David L. Gellatly and President (Principal Executive
Officer), Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/ JOSEPH D. RIZZI Director April 3, 2000
Joseph D. Rizzi
/s/ WILLIAM B. POHLMAN Director April 3, 2000
William B. Pohlman
/s/ TIMOTHY A. RICHARDSON Director April 3, 2000
Timothy A. Richardson
<PAGE>
INDEX TO EXHIBITS
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 333-78753) pertaining to the 1991
Stock Option Plan and the 1998 Nonstatutory Stock Option Plan of Micro
Linear Corporation of our report dated January 20, 2000 appearing on page
25 in this Form 10-K.
/s/PricewaterhouseCoopers LLP
San Jose, California
April 3, 2000
<TABLE> <S> <C>
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<NAME> Micro Linear Corp
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