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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-24758
MICRO LINEAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2910085
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2092 CONCOURSE DRIVE, SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 433-5200
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 2000 was 11,797,717.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item Financial Statements
1.
Unaudited Consolidated Condensed Balance Sheets at September
30, 2000 and December 31, 1999.............................. 1
Unaudited Consolidated Condensed Income Statements for the
three and nine months ended September 30, 2000 and 1999..... 2
Unaudited Consolidated Condensed Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999....... 3
Notes to Unaudited Consolidated Condensed Financial
Statements.................................................. 4
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations................................... 8
Item Quantitative and Qualitative Disclosures about Market
3. Risk........................................................ 12
PART II. OTHER INFORMATION
Item Legal Proceedings........................................... 12
1.
Item Exhibits and Reports on Form 8-K............................ 13
6.
Signatures.......................................................... 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated condensed financial statements for the quarter
and the nine months ended September 30, 2000 of Micro Linear Corporation ("Micro
Linear" or the "Company") and the comparative unaudited consolidated condensed
financial information for the corresponding periods of the prior year, together
with the consolidated condensed balance sheet as of December 31, 1999, are
attached hereto and incorporated herein.
MICRO LINEAR CORPORATION
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
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SEPTEMBER 30, DECEMBER 31,
2000 1999
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Current assets:
Cash and cash equivalents................................. $ 22,911 $ 7,381
Short-term investments.................................... 12,206 24,122
Accounts receivable
Less allowance for doubtful accounts, $418 at September
30, 2000 and $540 at December 31, 1999................. 4,910 5,762
Inventories............................................... 478 5,917
Income tax receivable..................................... 504 504
Other current assets...................................... 7,138 4,609
-------- --------
Total current assets.............................. 48,147 48,295
-------- --------
Note Receivable............................................. 3,221 --
Property, plant and equipment, net.......................... 11,840 19,686
Other assets................................................ -- 458
-------- --------
Total assets...................................... $ 63,208 $ 68,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 4,272 $ 4,099
Deferred income........................................... 3,057 3,235
Other accrued liabilities................................. 1,954 2,436
Current portion of long-term debt......................... 211 211
-------- --------
Total current liabilities......................... 9,494 9,981
-------- --------
Long-term debt.............................................. 2,598 2,755
-------- --------
Stockholders' equity:
Preferred stock
$.001 par value; authorized 5,000,000 shares; none
issued and outstanding................................. -- --
Common stock
$.001 par value; authorized 30,000,000 shares; issued
11,797,717 shares at September 30, 2000 and 13,818,742
shares at December 31, 1999............................ 18 14
Deferred stock compensation............................... (1,191) --
Additional paid-in capital................................ 59,936 55,026
Retained earnings......................................... 12,580 20,945
Accumulated other comprehensive gain (loss)............... 6 (49)
Treasury stock............................................ (20,233) (20,233)
-------- --------
Total stockholders' equity........................ 51,116 55,703
-------- --------
Total liabilities and stockholders' equity........ $ 63,208 $ 68,439
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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MICRO LINEAR CORPORATION
UNAUDITED CONSOLIDATED CONDENSED INCOME STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
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THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
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Net revenues............................. $10,311 $12,113 $33,434 $34,289
Cost of revenues......................... 5,926 5,829 16,886 17,096
------- ------- ------- -------
Gross profit............................. 4,385 6,284 16,548 17,193
Operating expenses:
Research and development............... 3,677 3,608 10,137 10,457
Selling, general and administrative.... 2,479 2,569 7,775 8,149
Legal settlement and related costs..... -- 1,408 8,080 1,408
------- ------- ------- -------
6,156 7,585 25,992 20,014
------- ------- ------- -------
Loss from operations..................... (1,771) (1,301) (9,444) (2,821)
Interest and other income, net........... 468 371 1,244 1,142
Interest expense......................... (54) (62) (165) (187)
------- ------- ------- -------
Loss before taxes........................ (1,357) (992) (8,365) (1,866)
Provision (benefit) for income taxes..... 2,453 (635) -- (1,194)
------- ------- ------- -------
Net loss....................... $(3,810) $ (357) $(8,365) $ (672)
======= ======= ======= =======
Net loss Per Share:
Basic:
Net loss per share.................. $ (0.33) $ (0.03) $ (0.73) $ (0.06)
======= ======= ======= =======
Weighted average number of shares
used in per share computation..... 11,705 11,014 11,483 10,976
======= ======= ======= =======
Diluted:
Net loss per share.................. $ (0.33) $ (0.03) $ (0.73) $ (0.06)
======= ======= ======= =======
Weighted average number of shares
used in per share computation..... 11,705 11,014 11,483 10,976
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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MICRO LINEAR CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
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NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
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Net cash (used in) provided by operating activities......... $(8,703) $ 2,539
Investing activities:
Capital expenditures...................................... (3,251) (2,617)
Sale of assets and equipment.............................. 12,325 115
Purchases of short-term investments....................... -- (32,826)
Sales and maturities of short-term investments............ 11,916 32,402
------- --------
Net cash provided by (used in) investing
activities...................................... 20,990 (2,926)
Financing activities:
Principal payments on debt................................ (157) (121)
Proceeds from issuance of common stock.................... 3,400 421
Acquisition of treasury stock............................. -- (1,514)
------- --------
Net cash provided by (used in) financing
activities...................................... 3,243 (1,214)
------- --------
Net increase in cash and cash equivalents................... 15,530 (1,601)
Cash and cash equivalents at beginning of period............ 7,381 6,393
------- --------
Cash and cash equivalents at end of period.................. $22,911 $ 4,792
======= ========
Disclosure of non-cash transactions:
Notes receivable issued on sale of equipment.............. $ 4,867 $ --
Accounts payable transferred to a holder of the
aforementioned notes receivable........................ $ 235 $ --
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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MICRO LINEAR CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Micro Linear Corporation, (the "Company") designs, using both BiCMOS
and CMOS technologies, develops and markets analog and mixed signal integrated
circuits for a broad range of wired and wireless communications markets that
require high integration, system level solutions. The Company sells its products
in North America, Asia, and Europe. The Company operates in a single industry
segment.
(2) The accompanying interim financial statements are unaudited and have
been prepared by the Company in accordance with generally accepted accounting
principles and contain all adjustments (consisting of normal recurring
adjustments) to fairly present the financial information included. While the
Company believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. The results of operations for the interim periods shown in
this report are not necessarily indicative of results to be expected for the
fiscal year.
(3) Fiscal years 2000 and 1999 were comprised of 52 weeks. The first 9
months of fiscal year 2000 and 1999 were comprised of 39 weeks. The third
quarter of fiscal years 2000 and 1999 were comprised of 13 weeks. The third
quarter of 2000 ended on October 1, 2000. For presentation purposes, the
accompanying unaudited consolidated condensed financial statements refer to the
quarters' calendar month end for convenience.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(4) Supplemental Financial Information:
Inventories consist of the following (in thousands):
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SEPTEMBER 30, DECEMBER 31,
2000 1999
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Raw materials...................................... $ -- $ 39
Work-in-process.................................... 182 4,190
Finished goods..................................... 296 1,688
---- ------
$478 $5,917
==== ======
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Property, plant and equipment consist of the following (in thousands):
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SEPTEMBER 30, DECEMBER 31,
2000 1999
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Land............................................... $ 2,850 $ 2,850
Buildings and improvements......................... 9,984 9,984
Machinery and equipment............................ 15,338 36,762
------- -------
28,172 49,596
Accumulated depreciation and amortization.......... 16,332 29,910
------- -------
Net property, plant and equipment.................. $11,840 $19,686
======= =======
</TABLE>
On September 8, 2000 the Company completed the sale of certain assets,
primarily related to its power management, bus interface, and video product
lines to Fairchild Semiconductor Corporation, for $11 million in cash. After
recording the expenses of the transaction, the Company recognized a pre-tax gain
of approximately $225,000. Approximately 30 of the Company's employees were
hired by Fairchild in connection with this sale. The net book value of the
inventory and other assets related to the business sold to Fairchild totaled
approximately $10.3 million. The Company's ongoing product lines consist of its
networking and wireless products.
4
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MICRO LINEAR CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
In April 2000 the Company sold certain test equipment with an aggregate net
book value of approximately $5.9 million to Artest Corporation and incurred a
loss associated with the sale of approximately $145,000. The Company and Artest
also signed a three year agreement with the Company providing a lease of certain
office space to Artest for $22,000 per month, and subcontracting to Artest
certain test functions that were previously performed by the Company. Artest
also hired approximately 60 of the Company's employees.
(5) The Company's provision for tax on income is based on estimates of the
levels of income and certain deductions expected for the year, which may be
subject to change. The Company's effective tax rate for the third quarter is a
provision of 181%, compared to a benefit of (64%) for the same period in 1999.
The higher effective rate in the third quarter of 2000 is due to the recording
of a valuation allowance related to recent changes in the business, increases in
expected future development expenses and the Company's inability to carryback
the current losses against taxable income from 1997 and 1998.
The Company's provision for taxes on income is based on estimates of the
levels of income and certain deductions expected for the year, which may be
subject to change. The Company's effective tax provision (benefit) was 181% for
the third quarter of 2000 and 0% for the nine months ended September 30, 2000
compared to (64%) and (64%) for the same periods of 1999, respectively. The
effective tax rate is impacted by the Company's ability to project its
profitability levels in future years.
(6) From January 1996 through March 31, 1999 when the program was
terminated, the Company had repurchased 2,696,900 shares of its common stock for
a total cost of $20.2 million.
(7) Basic earnings per share have been computed based upon the weighted
average number of common shares outstanding during the respective periods.
Diluted earnings per share have been computed, when the result is dilutive,
using the treasury stock method for stock options outstanding and giving effect
of issuable shares upon conversion of debt during the respective periods.
Following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations for the periods presented below
(in thousands except per share data):
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THREE MONTHS ENDED SEPTEMBER 30,
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2000 1999
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PER- PER-
LOSS SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
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Basic Loss Per Share:
Net loss available to common
stockholders................. $(3,810) 11,705 $(0.33) $(357) 11,014 $(0.03)
======= ====== ===== ======
Effect of dilutive securities:
Stock options................ -- --
Diluted Loss Per Share:
Net loss available to common
stockholders assuming
dilution..................... $(3,810) 11,705 $(0.33) $(357) 11,014 $(0.03)
======= ====== ====== ===== ====== ======
</TABLE>
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MICRO LINEAR CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
PER- PER-
LOSS SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
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Basic Loss Per Share:
Net loss available to common
stockholders................... $(8,365) 11,483 $(0.73) $(672) 10,976 $(0.06)
======= ====== ===== ======
Effect of dilutive securities:
Stock options................ -- --
Diluted Loss Per Share:
Net loss available to common
stockholders assuming
dilution..................... $(8,365) 11,483 $(0.73) $(672) 10,976 $(0.06)
======= ====== ====== ===== ====== ======
</TABLE>
Options to purchase 2,749,080 shares of common stock were outstanding as of
September 30, 2000, but were not reflected in the computations of diluted
earnings per share because of an anti-dilutive impact.
(8) During the three month period ending June 30, 2000, stock options were
granted with an exercise price of $2.06 per share which was below the fair
market value of the common stock at the date of grant. Deferred compensation of
approximately $1.5 million was recorded in accordance with APB no. 25 and is
being amortized over the related vesting period. Compensation expense of
$187,500 was recorded for the three months ended September 30, 2000.
(9) In December 1999, the Securities and Exchange Commission (the "Staff")
released Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and provides the Staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The Staff
believes that revenue is generally realizable and earned when all the following
criteria are met: (1) Persuasive evidence of an arrangement exists; (2) Delivery
has occurred or services have been rendered; (3) The seller's price to the buyer
is fixed or determinable and; (4) Collectibility is reasonably assured. SAB 101,
among many other areas, emphasizes that registrants should carefully analyze all
factors, including trends in historical data, which may affect the registrant's
ability to make reasonable and reliable estimates of product returns. The
Company will be required to implement SAB 101 in the first quarter of fiscal
2001. The Company does not expect the adoption of SAB 101 to have a material
impact on its reported consolidated condensed financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). This interpretation clarifies (a) the definition of an
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination." This project does not address issues relating
to the accounting for stock based compensation under SFAS No. 123, "Accounting
for Stock Based Compensation." FIN 44 is effective July 1, 2000; however,
certain transactions (i.e., repricing of stock options) that occurred after
December 15, 1998 are subject to this interpretation. To the extent that this
interpretation covers events occurring during the period after December 15,
1998, but before the effective date of July 1, 2000, the effects of applying
this interpretation are recognized on a prospective basis from July 1, 2000. The
Company does not expect the adoption of SAB 101 to have a material impact on its
reported consolidated condensed financial condition or results of operations.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
6
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MICRO LINEAR CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. FAS 133 was updated by the issuance of
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferred of the Effective Date of FAS No.
133" and is effective for the Company in fiscal 2001. The Company does not
expect the adoption of FAS 133 to have a material impact on its reported
consolidated condensed financial condition or results of operations.
(10) A discussion of certain pending legal proceedings is included in Item
1 of Part II of the Company's Form 10-Q for the fiscal quarter ended September
30, 2000. No assurance can be given that these matters will be resolved without
the Company becoming obligated to make payments or to pay other costs to the
opposing party, with the potential for having a material adverse effect on the
Company's financial position or its results of operations.
On December 16, 1998, Accton Technology Corporation ("Accton") filed a
complaint relating to the Company's sale of part ML6692 to Accton, against the
Company in the Superior Court of California, County of Santa Clara, alleging
causes of action for: (1) breach of contract, (2) breach of express warranty,
(3) breach of implied warranty of merchantability, (4) breach of implied
warranty of fitness for particular purpose, (5) fraud and deceit-concealment,
(6) negligent misrepresentation, (7) negligent interference with economic
advantage, and (8) declaratory relief to establish the right to implied
contractual indemnity. An out of court settlement of this action was reached in
June, 2000. The terms of this settlement are confidential, however, the Company
took a $7 million charge related to this settlement and the action has been
dismissed.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth below and elsewhere in this Form 10-Q.
OVERVIEW
Micro Linear designs and markets analog and mixed signal integrated
circuits for a broad range of wired and wireless communications markets that
require high-integration, system-level solutions. Products for wired networks
include physical interface (PHY) devices and controllers providing 10Mbps and
100Mbps signal conversion between twisted pair copper and fiber optic Ethernet
technologies targeted at both residential and corporate enterprise applications.
In late 1999, the Company introduced its first two RF Transceiver chip sets
including a 900MHz Low IF single-chip transceiver and a two-chip 2.4GHZ
IEEE802.11 compliant transceiver. The Company's wireless products are designed
into digital cordless telephones and other wireless consumer products, as well
as wireless local area networks for residential, small office/home office, and
corporate enterprise applications. The Company plans to continue to expand its
development efforts in the area of total silicon solutions including
Transceivers and Baseband Controllers for broadband wireless local area network
applications. Both BiCMOS and CMOS process technologies are currently utilized
in designs of the Company's communications products.
Sales of communications products, including local area networking and
telecommunications, constitute a majority of the Company's revenues. This line
of business is characterized by established and intense competition, rapidly
decreasing selling prices, and rapid technological change.
Since 1997, the Company had operated with excess in-house manufacturing
capacity and a need for new and additional test platforms to support recently
introduced products. In an attempt to achieve more competitive product test
costs, on April 28, 2000 the Company sold to Artest Corporation its entire
internal test operation, including certain test equipment with an aggregate net
book value of approximately $5.9 million. In connection with that sale, Artest
hired approximately 60 employees, and the Company signed an agreement to lease
to Artest certain office space for approximately $22,000 per month. Also in
connection with that sale, the Company and Artest entered into a three-year
agreement that provides that the Company will subcontract to Artest certain test
functions which were previously performed internally. The Company incurred a
loss associated with the sale of this equipment of approximately $145,000. The
Company is obligated to pay retention bonuses to Artest for the benefit of
transferred employees based on the length of their employment with Artest up to
a period of twelve months. The Company believes that these agreements with
Artest Corporation will result in a gradual lowering of manufacturing costs over
the term of the operating agreement.
During the June 2000 quarter the Company reorganized its product
development organization. The Company's small design activity in Livingston,
Scotland was closed, and UK design activities were consolidated in the Company's
Cambridge, England design center. Additionally, in order to expand product
development capabilities beyond RF transceiver design to complete silicon
solutions, the Company opened and staffed a new design center in Salt Lake City,
Utah to focus on the development of wireless network system architecture and
baseband processor design. By the end of the third quarter of 2000 the Salt Lake
City design center staff had increased to 18 employees.
In September 2000, the Company sold its power management, bus interface,
and video product lines to Fairchild Semiconductor Corporation, for $11 million
in cash. The Company's ongoing product lines consist of its networking and
wireless products. Approximately 30 of the Company's employees were hired by
Fairchild in connection with this sale. The net book value of the inventory and
other assets related to the business sold to Fairchild, totaled approximately
$10.3 million. After recording the expenses of the transaction, the Company
recognized a pre-tax gain of approximately $225,000.
8
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RESULTS OF OPERATIONS
Net Revenues
Net revenues for the third quarter of 2000 were $10.3 million compared to
net revenues of $11.7 million reported for the second quarter of 2000, and $12.1
million in net revenue for the comparable third quarter of 1999. The decline in
net revenue from last quarter and from the comparable third quarter of 1999 was
due to the sale of the power management, bus interface, and video product lines
to Fairchild Semiconductor during the quarter. Net revenues for the nine months
ended September of 2000 were $33.4 million, compared to net revenues of $34.3
million for the first nine months of 1999. The decrease in net revenue compared
to the first nine months of 1999 was again due to the sale of product lines to
Fairchild Semiconductor. Revenues and cost of goods sold for sales to
distributors are deferred by the Company until the Company is notified of
product sales to end-users.
Gross Margin
Gross margin is affected by the volume of product sales, price, product
mix, manufacturing utilization, product yields and the mix of sales to OEMs and
to distributors.
The Company's gross margin was $4.4 million or 42.5% of net revenue in the
third quarter of 2000, down from a $6.1 million gross margin or 52.4% of net
revenue, in the second quarter of 2000, and a gross margin of $6.3 million or
51.9% of net revenue in the third quarter of 1999. The gross margin was lower in
the third quarter of 2000 compared to both the prior quarter and the comparable
quarter of 1999 due to the lower revenue volume resulting from the sale of
product lines to Fairchild, margin pressure on the product lines that were sold,
and fixed elements of manufacturing overhead. For the nine months ending
September 2000, the company's gross margin was $16.5 million or 49.5% of net
revenue, compared to $17.2 million or 50.1% of net revenue in the nine months
ending September of 1999.
The Company currently purchases its wafers from four wafer suppliers. A
substantial majority of the Company's wafer supply is obtained from three wafer
suppliers. The Company's products are tested, assembled and packaged by four
vendors. Any delays or interruptions due to such factors as inadequate capacity
or unavailable raw materials in the Company's wafer suppliers, or lack of
capacity at its test subcontractors or assembly vendors could materially and
adversely affect product shipments. The Company purchases nearly all of its
BiCMOS wafers from two wafer foundries, the majority of which are supplied by
one wafer foundry in Taiwan. Although both wafer foundries are qualified to
supply the Company with BiCMOS wafers, the Company's short-term BiCMOS wafer
supply could be materially and adversely affected if the wafer foundry in Taiwan
is unable to meet the Company's wafer supply requirements.
Research and Development Expenses
Research and development expenses include payroll and other costs
associated with the definition, design and development of standard and
semi-standard products, tile arrays and standard cells. In addition, research
and development expenses include test development and prototype assembly costs
associated with new product development. The Company also expenses the cost of
prototype wafers and new production mask sets related to new products as
research and development costs until products based on new designs are fully
characterized by the Company and are demonstrated to support published data
sheets and satisfy reliability tests. Research and development expenses such as
mask and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process. The Company believes that the development and introduction of new
products is critical to its future success.
Research and development expenses were $3.7 million for the third quarter
of 2000 or 35.7% of net revenues, compared to $3.2 million or 27.1% of net
revenues for the second quarter of 2000 and $3.6 million, or 29.8% of net
revenues, for the third quarter of 1999. The increase in research and
development expenses from the prior quarter is primarily attributable to
increased engineering headcount due to the staffing of the Company's design
facility in Salt Lake City. Research and development expenses were $10.1 million
for the
9
<PAGE> 12
first nine months of 2000 or 30.3% of net revenues, compared to $10.5 million or
30.5% of net revenues for first nine months of 1999.
During the three month period ending June 30, 2000, stock options were
granted with an exercise price of $2.06 per share which was below the fair
market value of the common stock at the date of grant. Deferred compensation of
approximately $1.5 million was recorded in accordance with APB No. 25 and is
being amortized over the related vesting period. Compensation expense of
$187,500 was included in research and development expense during the three month
period ended September 30, 2000.
Selling, General and Administrative
Selling, general and administrative expenses were $2.5 million for the
third quarter of 2000 or 24% of net revenues, slightly below the $2.7 million,
or 23.1% of net revenues, in the second quarter of 2000, and also below the $2.6
million or 21.2% of net revenues in the comparable third quarter of 1999.
Selling, general and administrative expenses were $7.8 million for the first
nine months of 2000 or 23.3% of net revenues, compared to $8.1 million or 23.8%
of net revenues for first nine months of 1999.
Legal Settlement and Related Costs
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 merchantability, (4) breach of implied warranty
of fitness for particular purpose, (5) fraud and deceit-concealment, (6)
negligent misrepresentation, (7) negligent interference with economic advantage,
and (8) declaratory relief to establish the right to implied contractual
indemnity. An out of court settlement of this action was reached in June, 2000.
The Company incurred $8.1 million in legal settlement and related costs during
the second quarter of 2000, primarily in connection with the settlement of the
Accton Technology Corporation complaint.
Interest and Other Income and Interest Expense
Interest and other income and interest expense was $0.4 million for the
third quarter of 2000, including $0.2 million in gain on sale of product lines
to Fairchild. During the prior second quarter, and the comparable third quarter
of 1999, interest and other income and interest expense was $0.3 million.
Provision for Income Taxes
The Company's provision for tax on income is based on estimates of the
levels of income and certain deductions expected for the year, which may be
subject to change. The Company's effective tax rate for the third quarter is a
provision of 181%, compared to a benefit of (64%) for the same period in 1999.
The higher effective rate in the third quarter of 2000 is due to the recording
of a valuation allowance related due to recent changes in the business,
increases in expected future development expenses and the Company's inability to
carryback the current losses against taxable income from 1997 and 1998.
The Company's provision for taxes on income is based on estimates of the
levels of income and certain deductions expected for the year, which may be
subject to change. The Company's effective tax provision (benefit) was 181% for
the third quarter of 2000 and 0% for the nine months ended September 30, 2000
compared to (64%) and (64%) for the same periods of 1999, respectively. The
effective tax rate is impacted by the Company's ability to project its
profitability levels in future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and cash needs largely through income
from operations, borrowings, proceeds from its initial public stock offering in
October 1994, and the sale of certain assets and test equipment.
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Net cash used in operating activities was $8.7 million in the first nine
months of 2000 as compared to cash provided by operating activities of $2.5
million in the first nine months of 1999. The decrease in cash provided by
operating activities was primarily attributable to a legal settlement and costs
of $8.1 and an increase in inventory levels of $3.2 million.
Net cash provided by investing activities was $21.0 million in the first
nine months of 2000 as compared to cash used in investing activities of $2.9
million in the first nine months of 1999. The net cash provided by investing
activities in the first nine months resulted primarily from the sale of certain
assets and test equipment to Artest Corporation and Fairchild Semiconductor
Corporation in two separate transactions, which provided cash proceeds of
approximately $12.3 million, and the sale of short-term investments of $11.9
million, offset by capital expenditures during the related period.
Net cash provided by financing activities was $3.2 million in the first
nine months of 2000 as compared to cash used in financing activities of $1.2
million in the first nine months of 1999. Net cash provided by financing
activities in the first nine months of 2000 was primarily due proceeds from the
issuance of common stock, offset by the net decrease in borrowings.
The Company anticipates that its existing cash resources will fund
necessary purchases of capital equipment and provide adequate working capital
for at least the next twelve months. The Company's liquidity is affected by many
factors, including, among others, the extent to which the Company pursues
additional wafer fabrication capacity from existing foundry suppliers or new
suppliers, capital expenditures, and the level of the Company's product
development efforts, and other factors related to the uncertainties of the
industry and global economies. Accordingly, there can be no assurance that
events in the future will not require the Company to seek additional capital
sooner or, if so required, that such capital will be available on terms
acceptable to the Company.
OTHER FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including the Company's access to advanced process technologies,
the timing and extent of process development costs, the Company's ability to
introduce new products on a timely basis, the volume and timing of orders
received, market acceptance of the Company's and its customers' products, the
timing of new product announcements and introductions by the Company or its
competitors, changes in the mix of products sold, the timing and extent of
research and development expenses, the availability and cost of wafers from
outside foundries, fluctuations in manufacturing yields, competitive pricing
pressures and cyclical semiconductor industry conditions. A majority of the
Company's net revenues are derived from sales of a limited number of products.
Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. Competitive pricing pressures
are expected to continue in the future, 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 non-cancelable 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
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will be materially and adversely affected. In addition, if the Company is unable
to transfer and install such new process technologies to one or more of its
foundries in a timely manner, its business and results of operations could be
materially and adversely affected.
The Company's product development activities have placed, and could
continue to place, a significant strain on the Company's limited personnel and
other resources. The Company's ability to manage any future growth effectively
will require it to integrate its new employees into its overall operations, to
continue to improve its operational, financial and management systems and to
attract, train, motivate and manage its employees successfully. If the Company's
management is unable to manage growth effectively, the Company's business and
results of operations could be materially and adversely affected.
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. The
Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions or other
factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's investment portfolio consisted of U.S. government obligations
and commercial paper typically with maturities of less than 18 months. These
securities are subject to interest rate risk and will decline in value if market
interest rates increase. The Company has the ability to hold its fixed income
investments until maturity and, therefore, the Company would not expect to
recognize such an adverse impact in income or cash flows.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company has international sales and research and development facilities
and is, therefore, subject to foreign currency rate exposure. The Company's
foreign currency risks are mitigated principally by maintaining only minimal
foreign currency balances. To date, the exposure to the Company related to
exchange rate volatility has not been significant. However, there can be no
assurance that there will not be a material impact in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1995, Pioneer Magnetics, Inc. ("Pioneer") filed a complaint in
the Federal District Court for the Central District of California alleging that
certain of the Company's integrated circuits violate a Pioneer patent. Pioneer
is seeking monetary damages and an injunction against such alleged patent
violation. The Company has denied any infringement and filed a counter-claim
seeking invalidity of the patent. The court held a patent claim construction
hearing on November 9, 1998. The court subsequently issued a claim construction
opinion that is favorable to Micro Linear. The court also required additional
briefing from Pioneer. The final claim construction hearing took place on July
19, 1999. The court issued a claim construction order favorable to Micro Linear.
The parties filed a stipulated judgement of non-infringement, which has resulted
in a termination of the district court action against Micro Linear. Pioneer
appealed, disputing the Court's claim construction. The appeal was heard on
October 5, 2000, however the Appellate Court's decision may not be issued for
several months. There can be no assurance that this matter will be resolved in
the Company's favor or that an unfavorable resolution would not materially
adversely effect the Company's financial condition or results of operations.
On February 24, 1997, a former employee of Micro Linear filed a complaint
in the Superior Court of California, County of Santa Clara, alleging breach of
contract and employment discrimination. On June 5,
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1997, the case was dismissed and the parties agreed to submit the dispute to
arbitration. To date no arbitration date has been scheduled. The Company denies
all liability and intends to vigorously defend its actions in the arbitration.
On September 4, 1998, NetVantage, Inc. ("NetVantage") filed a complaint
relating to the Company's sale of part ML6692 to NetVantage through the
Company's distributor, Insight Electronics, in the Superior Court of California,
County of Los Angeles. On October 1, 1999 the parties reached an out of court
settlement of this action. The terms of this settlement are confidential,
however, the Company took a $1.24 million charge related to this settlement in
1999 and the action has been dismissed.
On December 16, 1998, Accton Technology Corporation ("Accton") filed a
complaint relating to the Company's sale of part ML6692 to Accton, against the
Company in the Superior Court of California, County of Santa Clara, alleging
causes of action for: (1) breach of contract, (2) breach of express warranty,
(3) breach of implied warranty of merchantability, (4) breach of implied
warranty of fitness for particular purpose, (5) fraud and deceit-concealment,
(6) negligent misrepresentation, (7) negligent interference with economic
advantage, and (8) declaratory relief to establish the right to implied
contractual indemnity. An out of court settlement of this action was reached in
June, 2000. The terms of this settlement are confidential, however, the Company
took a $7 million charge related to this settlement and the action has been
dismissed.
From time to time, the Company has received, and in the future it may
receive, correspondence from certain vendors, distributors, customers or
end-users of its products regarding disputes with respect to contract rights,
product performance or other matters that occur in the ordinary course of
business. There can be no assurance that any of such disputes will not
eventually result in litigation or other actions involving the Company or as to
the outcome of such disputes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K filed September 20, 2000 describing the sale of
the Company's power management, bus interface, and video product lines to
Fairchild Semiconductor Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICRO LINEAR CORPORATION
By: /s/ MICHAEL SCHRADLE
------------------------------------
Michael Schradle
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: November 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
