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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number 0-24758
MICRO LINEAR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2910085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2092 Concourse Drive 95131
San Jose, California (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (408) 433-5200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 1997 was 11,744,505.
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Condensed Statements of Income for the three and nine months
ended September 30, 1997 and 3
1996..........................................
Consolidated Condensed Balance Sheets at September 30, 1997 and December 4
31, 1996....................................................................
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996................................................. 5
Notes to Consolidated Condensed Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................ 14
SIGNATURES.............................................................................. 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
Net revenues....................................... $15,036 $11,713 $50,675 $40,671
Cost of revenues................................... 8,405 5,681 24,799 15,461
----------------- ----------------- ----------------- -----------------
Gross profit.................................... 6,631 6,032 25,876 25,210
Operating expenses:
Research and development........................ 2,893 2,648 8,725 8,519
Selling, general and administrative............. 2,863 2,745 9,469 8,580
----------------- ----------------- ----------------- -----------------
5,756 5,393 18,194 17,099
----------------- ----------------- ----------------- -----------------
Income from operations.......................... 875 639 7,682 8,111
Interest and other income.......................... 331 352 994 1,068
Interest expense................................... (69) (76) (210) (233)
----------------- ----------------- ----------------- -----------------
Income before taxes............................. 1,137 915 8,466 8,946
Provision for income taxes......................... 409 366 3,048 3,578
----------------- ----------------- ----------------- -----------------
Net income...................................... $ 728 $ 549 $ 5,418 $ 5,368
================= ================= ================= =================
Net income per share............................... $ 0.06 $ 0.04 $ 0.41 $ 0.40
================= ================= ================= =================
Shares used in computing net income per share...... 12,679 13,125 13,185 13,384
================= ================= ================= =================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
<S> <C> <C>
September 30, December 31,
1997 1996
(Unaudited) (See note below)
--------------------- -------------------
Assets
Current assets:
Cash and cash equivalents........................................................... $3,881 $4,385
Short-term investments.............................................................. 22,572 20,798
Accounts receivable, net of allowance for doubtful accounts of $288 and $243........ 7,681 4,372
Inventories......................................................................... 7,841 10,456
Deferred tax assets................................................................. 4,499 4,499
Other current assets................................................................ 1,178 2,077
--------------------- -------------------
Total current assets.............................................................. 47,652 46,587
--------------------- -------------------
Property, plant and equipment.......................................................... 41,941 38,095
Less accumulated depreciation and amortization......................................... (19,763 ) (16,441)
--------------------- -------------------
22,178 21,654
Other assets........................................................................... 709 791
--------------------- -------------------
Total assets.................................................................... $70,539 $69,032
===================== ===================
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable.................................................................... $ 3,726 $ 2,732
Accrued liabilities................................................................. 3,900 3,580
Deferred income on shipments to distributors........................................ 1,783 1,270
Current portion of long-term debt................................................... 152 209
--------------------- -------------------
Total current liabilities......................................................... 9,561 7,791
--------------------- -------------------
Long-term debt......................................................................... 2,859 2,972
--------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value
Authorized shares 5,000,000
None issued and outstanding....................................................... - -
Common stock, $.001 par value
Authorized shares 30,000,000; issued shares 13,080,505 and 12,810,080; outstanding
shares 11,744,505 and 12,054,080 ............................................... 13 13
Additional paid-in capital.......................................................... 51,835 50,501
Retained earnings................................................................... 18,854 13,435
Treasury stock, 1,336,000 and 756,000 shares at cost................................ (12,583 ) (5,680)
--------------------- -------------------
Total stockholders' equity........................................................ 58,119 58,269
--------------------- -------------------
Total liabilities and stockholders' equity...................................... $70,539 $69,032
===================== ===================
<FN>
Note: The balance sheet at December 31, 1996 has been derived from the consolidated audited financial
statements at that date.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
-----------------------------------------
<S> <C> <C>
September 30, September 30,
1997 1996
----------------- ------------------
Cash provided by operating activities........................... $10,855 $6,912
Investing activities:
Capital expenditures......................................... (3,846 ) (7,116 )
Purchases of short-term investments.......................... (32,735 ) (16,009 )
Sales of short-term investments.............................. 30,961 18,380
----------------- ------------------
Net cash used in investing activities...................... (5,620 ) (4,745 )
Financing activities:
Principal payments under capital lease obligations and debt.. (170 ) (414 )
Proceeds from issuance of common stock....................... 1,334 688
Acquisition of treasury stock................................ (6,903 ) (3,558 )
----------------- ------------------
Net cash used in financing activities...................... (5,739 ) (3,284 )
----------------- ------------------
Net decrease in cash and cash equivalents....................... (504 ) (1,117 )
Cash and cash equivalents at beginning of period................ 4,385 4,175
----------------- ------------------
Cash and cash equivalents at end of period...................... $3,881 $3,058
================= ==================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1) Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range
of applications within the communications, computer and industrial markets
for sale primarily in North America, Asia and Europe.
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) necessary 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, 1996. 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 or any subsequent, interim
period.
3) For financial reporting purposes, the Company's fiscal year ends on the
Sunday closest to December 31. Fiscal year 1996 ended on December 29, 1996.
The Company's fiscal quarters end on the Sunday closest to the end of each
calendar quarter. 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) During the three months ended September 30, 1997, three customers accounted
for 15%, 11% and 6% of total sales, respectively. During the nine months
ended September 30, 1997, three customers accounted for 14%, 14% and 11% of
total sales, respectively.
5) Inventories consist of the following (in thousands):
<TABLE>
<S> <C> <C>
September 30, December 31,
1997 1996
----------------- ---------------
Raw Materials.............. $ 702 $ 1,688
Work-in-process............ 5,521 6,398
Finished Goods............. 1,618 2,370
------- -------
$7,841 $10,456
====== =======
</TABLE>
6) Cash used for the nine months ended September 30, 1997 was $1,741,000 for
incomes taxes and $233,000 for interest.
7) The Company's provision for taxes on income is based on estimates of the
levels of income and certain deductions expected for the year which may be
subject to change. The Company's effective tax rate for the third quarter
of 1997 was 36% compared to 40% for the third quarter of 1996. The
effective tax rate for the third quarter of 1997 and the third quarter of
1996 differs from the federal statutory income tax rate primarily due to
state income taxes, net of federal research credits and, for 1997, the
benefit from a foreign sales corporation.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
8) From January 1996 through the end of the third quarter of 1997, the
Company's Board of Directors approved the repurchase of an aggregate of
$13.5 million of the Company's Common Stock in stock repurchase programs,
of which the Company had repurchased 1,336,000 shares at an aggregate cost
of $12.6 million through September 30, 1997. The Company repurchased
195,000 shares at a cost of $1.8 million during the third quarter of 1997
and 580,000 shares at a cost of $6.9 million during the first nine months
of 1997. Subsequent to the end of the third quarter of 1997, the Company's
Board of Directors approved an additional $1.5 million to be for the stock
repurchase program.
9) Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings
Per Share (EPS)", was issued in February 1997. Under FAS 128, the Company
will be required to disclose basic EPS and diluted EPS for all periods for
which an income statement is presented, which will replace disclosure
currently being made for primary EPS and fully-diluted EPS. FAS 128
requires adoption for fiscal periods ending after December 15, 1997. Pro
forma disclosure of basic EPS and diluted EPS for the current reporting and
comparable period in the prior year is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
<S> <C> <C>
September 30, September 30,
------------------------ -------------------------
Earnings Per Share: 1997 1996 1997 1996
--------- --------- --------- ---------
Basic..................... $ 0.06 $ 0.04 $ 0.46 $ 0.43
========= ========= ========= =========
Diluted................... $ 0.06 $ 0.04 $ 0.41 $ 0.40
========= ========= ========= =========
</TABLE>
10) In June 1997, 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 a 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. The disclosures
prescribed by FAS 130 must be made beginning with the first period of 1998.
11) A discussion of certain pending legal proceedings is included in Item 1 of
Part II of the Company's Form 10-Q for the fiscal quarter ended September
30, 1997. The Company continues to believe that the final outcome of such
matters discussed will not have a material adverse effect on the Company's
consolidated financial position or results of operations. No assurance can
be given, however, that these matters will be resolved without the Company
becoming obligated to make payments or to pay other costs to the opposing
party, with the potential for having an adverse effect on the Company's
financial position or its results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements contained herein
are subject to certain factors that could cause actual results to differ
materially from those projected in the forward-looking statements. Such factors
include, but are not limited to, the factors set forth below and elsewhere in
this Form 10-Q.
Results of Operations
Net Revenues
Net revenues were $15.0 million for the third quarter of 1997, a 28%
increase over net revenues of $11.7 million for the third quarter of 1996 and a
23% decrease over net revenues of $19.5 million for the second quarter of 1997.
Net revenues were $50.7 million for the first nine months of 1997, a 25%
increase over net revenues of $40.7 million for the first nine months of 1996.
Net revenues for the third quarter of 1997 compared to the third quarter of 1996
increased 36% in the communications market, 123% in the industrial market and
decreased 49% in the computer market. Net revenues for the third quarter of 1997
compared to the second quarter of 1997 increased 21% in the industrial market
and decreased 29% and 50% in the communications and computer markets,
respectively. Net revenues for the first nine months of 1997 compared to the
first nine months of 1996 increased 32% in the communications market, 39% in the
industrial market and decreased 9% in the computer market.
The Company's markets are characterized by intense competition, relatively
short product life cycles and rapid technological changes. In addition, these
markets have undergone rapid growth and consolidation in the last few years. The
Company's net revenues and results of operations would be materially and
adversely affected in the event of a market slowdown, especially in the
networking segment of the communications market.
Sales of networking products have constituted a substantial majority of the
Company's net revenues since the second half of 1995. Net revenues in the
networking segment were $8.9 million for the third quarter of 1997, a 47%
increase over net revenues of $6.1 million in the networking segment for the
third quarter of 1996 and a 30% decrease over net revenues of $12.7 million in
the networking segment for the second quarter of 1997. Sales of the Company's
networking products accounted for approximately 64% and 57% of net revenues in
the nine months of 1997 and 1996. The networking segment is characterized by
intense competition, relatively short product life cycles and rapid
technological change. In addition, the networking segment 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 for the near
future. 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 segment.
International net revenues were $7.8 million, or 52% of net revenues, for the
third quarter of 1997, compared to $3.6 million, or 31% of net revenues, for the
third quarter of 1996 and $11.6 million, or 60% of net revenues, for the second
quarter of 1997. International revenues were $27.5 million, or 54% of net
revenues, for the first nine months of 1997, compared to $14.7 million, or 36%
of net revenues, for the first nine months of 1996. The increase in
international revenues for the third quarter of 1997 compared to the third
quarter of 1996 and the first nine months of 1997 compared to the first nine
months of 1996 was due to the combination of stronger demand for the Company's
products in Asia and Europe and more Asia Pacific subcontract work for domestic
customers. The decrease in international revenues for the third quarter of 1997
compared to the second quarter of 1997 was due to reduced subcontract work from
domestic customers.
Domestic distributor revenues were approximately 17% of net revenues for
each of the third quarters of 1997 and 1996 and 13% of net revenues for the
second quarter of 1997. Domestic distributor revenues were approximately 16% of
net revenues for both the first nine months of 1997 and first nine months of
1996, respectively. The Company currently expects net revenues to domestic
distributors as a percentage of total net revenues to remain at approximately
the same level as the third quarter of 1997. The Company defers recognition of
revenue derived from sales to domestic distributors until such distributors
resell the products to their customers; however, revenue is recognized by the
Company upon shipment to international representatives.
During the three months ended September 30, 1997, three customers accounted
for 15%, 11% and 6% of total sales, respectively. During the nine months ended
September 30, 1997, three customers accounted for 14%, 14% and 11% of total
sales, respectively.
The Company's bookings rate was $13.4 million for the third quarter of 1997,
a 16% decrease compared to net bookings of $16.0 million for the second quarter
of 1997. The bookings in the third quarter of 1997 in the communications market
segment decreased approximately 14% compared to the second quarter of 1997
primarily due to lower orders for both domestic and Taiwan networking customers.
The bookings in the third quarter of 1997 in the computer market segment
decreased approximately 34% compared to the second quarter of 1997 mainly due to
lower orders for bus and octal transceiver products. The bookings in the third
quarter of 1997 in the industrial market segment decreased approximately 9%
compared to the second quarter of 1997 primarily due to lower orders in battery
management products. The Company's revenues and results of operations will be
materially and adversely affected in the fourth quarter of 1997 due to these
reduced bookings and would be materially adversely affected in future periods if
reduced bookings continue.
Gross Margin
The Company's gross margin decreased to 44% in the third quarter of 1997
from 52% in the third quarter of 1996 and decreased to 51% for the first nine
months of 1997 from 62% for the first nine months of 1996 primarily due to a
change in product mix, higher inventory charges and higher per unit costs
resulting from lower manufacturing utilization. The Company's newer
communications products, which generally carry a higher gross margin than other
products, have also experienced pricing pressures resulting in a negative impact
to gross margin.
The Company's gross margin is affected by the volume of product sales,
price, product mix, manufacturing utilization, product yields, inventory
obsolescence and the mix of sales to OEM's and to distributors. The Company's
gross margin has been and will continue to be periodically affected by expenses
incurred in connection with start-up and installation of new process
technologies at outside manufacturing foundries.
The Company's gross margins are adversely impacted by the costs associated
with installing new processes at its foundries. Although the Company has
recently been able to mitigate the adverse impact on gross margin associated
with new wafer manufacturing process costs by relying upon process technologies
existing at its outside wafer foundries, there can be no assurance that the
Company will not be required to incur significant expenses in the future to
develop, or obtain access to, advanced process technologies and to transfer and
install such technologies at one or more of its foundries, which could have a
material adverse affect on the Company's gross margin in the future. Any delays
or interruptions due to such factors as inadequate capacity or unavailable raw
materials in the Company's wafer suppliers or assembly vendors could materially
and adversely affect product shipments and operating results. 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. The majority of
the Company's products are assembled and packaged by one vendor. Any delays or
interruptions due to such factors as inadequate capacity or unavailable raw
materials in the Company's wafer suppliers or assembly vendors could materially
and adversely affect product shipments. The Company purchases nearly all of its
BiCMOS wafers from two wafer foundries, the majority of which are supplied by
one wafer foundry in Taiwan. Although both wafer foundries are qualified to
supply the Company with BiCMOS wafers, the Company's short-term BiCMOS wafer
supply could be materially and adversely affected if the wafer foundry in Taiwan
is unable to meet the Company's wafer supply requirements. Approximately
one-third of the Company's bipolar wafers are purchased from a wafer foundry in
Japan and have pricing contracts that are tied to currency fluctuations of the
yen. Wafer pricing for this foundry is adjusted every 6 months, either up or
down, depending on the movement of the yen. The Company does not anticipate that
this pricing agreement will have a material effect on the Company's results of
operations; however, due to the uncertainty of the currency markets and the
recent fluctuations of the yen versus the U.S. dollar, there can be no assurance
that significant fluctuations in currency values will not have a material
adverse effect on gross margin in the future due to the impact of such
fluctuations on this contract or other contracts the Company has with foundries
in Japan. See "Other Factors Affecting Operating Results".
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of standard and semi-standard products, tile
arrays and standard cells. The Company expenses prototype wafers and new
production mask sets related to new products as research and development costs
until products based on new designs are fully characterized by the Company and
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $2.9 million, or 19% of net revenues,
for the third quarter of 1997, compared to $2.6 million, or 23% of net revenues,
for the third quarter of 1996 and $3.3 million, or 17% of net revenues, for the
second quarter of 1997. Research and development expenses were $8.7 million, or
17% of net revenues, for the first nine months of 1997, compared to $8.5
million, or 21% of net revenues, in the first nine months of 1996. The slight
increase in research and development expenses in absolute dollars in the third
quarter of 1997 compared to the third quarter of 1996 is primarily attributable
to an increase in staffing levels and mask expenses offset by fewer purchases of
expensed inventory. The slight increase in research and development expenses in
absolute dollars in the first nine months of 1997 compared to the first nine
months of 1996 is primarily attributable to an increase in staffing levels
offset by fewer purchases of expensed inventory. The decrease in absolute
dollars in the third quarter of 1997 compared to the second quarter of 1997 is
primarily attributable to a decrease in staffing, mask and travel costs. In the
fourth quarter of 1996, the Company announced the establishment of a design
center in Cambridge, England. Since December 1996, the Company has hired a
managing director and three design engineers. The Company expects to add
additional design engineers in Cambridge throughout the remainder of 1997 and
1998. The Company believes that the development and introduction of new products
is critical to its future success and expects that research and development
expenses will increase in the future in absolute dollars.
Selling, General and Administrative
Selling, general and administrative expenses were $2.9 million, or 19% of
net revenues, for the third quarter of 1997, compared to $2.7 million, or 23% of
net revenues, for the third quarter of 1996 and $3.3 million, or 16% of net
revenues, for the second quarter of 1997. Selling, general and administrative
expenses were $9.5 million, or 19% of net revenues, for the first nine months of
1997 compared to $8.6 million, or 21% of net revenues, for the first nine months
of 1996. The increase in absolute dollars in the third quarter of 1997 compared
to the third quarter of 1996 is primarily attributable to an increase in
commissions due to higher revenues, as well as increased bonus and staffing
costs partially offset by a decrease in travel costs. The increase in absolute
dollars in the first nine months of 1997 compared to the first nine months of
1996 is primarily attributable to an increase in staffing levels and increased
commissions due to higher revenues. The decrease in absolute dollars in the
third quarter of 1997 compared to the second quarter of 1997 is primarily
attributable to a decrease in staffing and travel costs. The Company expects
selling, general and administrative spending to remain relatively constant as a
percentage of sales revenues from quarter to quarter.
Interest and Other Income and Interest Expense
Interest and other income was $0.3 million for each of the first three
quarters of 1997 and the third quarter of 1996. Interest expense was
insignificant for the first three quarters of 1997 and the third quarter of
1996.
New Accounting Pronouncements
In February 1997, the FASB issued statement No. 128 (FAS 128) "Earnings Per
Share". In June 1997, the FASB issued statement No. 130 (FAS 130) "Reporting
Comprehensive Income". For a description of these statements see notes 9 and 10
of the notes to the unaudited Consolidated Condensed Financial Statements. FAS
128 requires adoption for fiscal periods ending after December 15, 1997. The
disclosures prescribed by FAS 130 must be made beginning with the first quarter
of 1998.
Provision for Income Taxes
The Company's provision for taxes on income is based on estimates of the
levels of income and certain deductions expected for the year which may be
subject to change. The Company's effective tax rate for third quarter of 1997
was 36% compared to 40% for the third quarter of 1996. The effective tax rate
for the third quarter of 1997 and the third quarter of 1996 differs from the
federal statutory income tax rate primarily due to state income taxes, net of
federal research credits and, for 1997, the benefit from a foreign sales
corporation.
<PAGE>
Liquidity and Capital Resources
During the last several years, the Company has financed its operations and
capital requirements principally through cash flow from operations. Operations
provided $10.9 million of net cash during the first nine months of 1997, an
increase of $3.9 million over the first nine months of 1996. In the first nine
months of 1997, additional net income, lower inventories and higher current
liabilities were partially offset by increased accounts receivables causing a
net increase in operating cash flow.
Cash used in investing activities for the first nine months of 1997 is
attributable to capital expenditures of $3.8 million and net purchases of
short-term investments of $1.8 million.
Financing activities for the first nine months of 1997 consisted primarily
of the repurchase of the Company's Common Stock for an aggregate of $6.9
million. From January 1996 through the end of the third quarter of 1997, the
Company's Board of Directors approved the repurchase of an aggregate of $13.5
million of the Company's Common Stock in stock repurchase programs, of which the
Company had repurchased 1,336,000 shares at an aggregate cost of $12.6 million
through September 30, 1997. The Company repurchased 195,000 shares at a cost of
$1.8 million during the third quarter of 1997 and 580,000 shares at a cost of
$6.9 million during the first nine months of 1997. Subsequent to the end of the
third quarter of 1997, the Company's Board of Directors approved an additional
$1.5 million to be for the stock repurchase program.
Working capital was $38.1 million as of September 30, 1997, compared to
$38.9 million as of December 31, 1996 and includes cash and cash equivalents of
$3.9 million and short-term investments of $22.6 million as of June 30, 1997.
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, and the level of the
Company's product development efforts, and other factors related to the
uncertainties of the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these factors, the
Company anticipates that its existing cash resources and cash generated from
operations will fund necessary purchases of capital equipment and provide
adequate working capital for at least the next twelve months. However, there can
be no assurance that events in the future will not require the Company to seek
additional capital sooner or, if so required, that such capital will be
available on terms acceptable to the Company.
Other Factors Affecting Future Operating Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including the Company's access to advanced process technologies,
the timing and extent of process development costs, the Company's ability to
introduce new products on a timely basis, the volume and timing of orders
received, market acceptance of the Company's and its customers' products, the
timing of new product announcements and introductions by the Company or its
competitors, changes in the mix of products sold, the timing and extent of
research and development expenses, the availability and cost of wafers from
outside foundries, fluctuations in manufacturing yields, fluctuations in the
relative exchange rate of the yen and the U.S. dollar, competitive pricing
pressures and cyclical market conditions in the overall semiconductor industry
and in the communications, industrial and computer segments of such industry in
which the Company sells its products. A majority of the Company's net revenues
are derived from sales of a limited number of products. Historically, average
selling prices in the semiconductor industry have decreased over the life of any
particular product. Although the Company has not generally experienced material
decreases in its average selling prices over time, the Company's products,
especially those in the computer networking equipment market, have encountered
significant pricing pressures that have adversely affected the Company's gross
margins in recent quarters. 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 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.
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 64% of
the Company's net revenues in the first nine months of 1997 and accounted for 8
of the 10 top selling products for the first nine months of 1997. These 8
products constituted 46% 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-place
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 for the remainder of 1997 and into 1998. 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 and recently introduced
products for computer networking applications. There can be no assurance as to
when or if such pricing pressures 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 does not own or operate a full wafer fabrication facility, and
all of the Company's wafer requirements are currently supplied by outside
foundries. In particular, a substantial portion of the Company's bipolar wafers
are manufactured by one foundry in Japan and a substantial portion of the
Company's BiCMOS wafers are manufactured by one foundry in Taiwan. There are
certain significant risks associated with the Company's reliance on outside
foundries, including the lack of 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.
Although the Company has undertaken measures 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 process technologies. Such reduced yields have at times
materially and adversely affected the Company's operating results. In addition,
the Company's reliance upon offshore foundries subjects the Company to risks of
exchange rate fluctuations, export and import restrictions, trade sanctions,
tariff increases and political instability.
The Company purchases wafers from its outside foundries pursuant to purchase
orders and does not have a guaranteed level of wafer capacity at any of its
foundries. Therefore, the Company's wafer suppliers could choose to prioritize
capacity for other uses or reduce or eliminate deliveries to the Company on
short notice. Accordingly, there is no assurance that the Company's foundries
will allocate sufficient wafer capacity to satisfy the Company's 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 materially
and adversely affect 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's market diversification and product development activities have
placed, and could continue to place, a significant strain on the Company's
limited personnel and other resources. The Company's ability to manage any
future growth effectively will require it to integrate its new employees into
its overall operations, to continue to improve its operational, financial and
management systems and to attract, train, motivate and manage its employees
successfully. If the Company's management is unable to manage growth
effectively, the Company's business and results of operations could be
materially and adversely affected.
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. In
this regard, since early 1996, the industry has experienced significant softness
in demand for many types of products. The Company expects to continue to
experience substantial period-to-period fluctuations in future operating results
due to general semiconductor industry conditions, variations in product mix, or
other factors.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1995, Pioneer Magnetics, Inc. ("Pioneer") filed a complaint in the
Federal District Court for the Central District of California alleging that
certain of the Company's integrated circuits violate a Pioneer patent. Pioneer
is seeking monetary damages and an injunction against such alleged patent
violation. The Company has denied any infringement and filed a counter-claim
seeking invalidity of the patent. The Company's motion for summary judgment was
denied. The Company is now responding to the Plaintiff's offer for a settlement.
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. The Company denies
all liability and intends to vigorously defend its actions in the arbitration.
Although the Company believes that the resolution of these actions will not
have a material adverse effect on the Company's financial condition or results
of operations, there can be no assurance that such actions will be resolved in
the Company's favor or that an unfavorable resolution would not materially
adversely effect the Company's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Earnings Per Share.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICRO LINEAR CORPORATION
Date: November 7, 1997 By: /s/ J. PHILIP RUSSELL
---------------------
J. Philip Russell
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
<TABLE>
Exhibit 11.1
Micro Linear Corporation
Statement Re Computation of Earnings Per Share
(Unaudited)
(In thousands, except per share data)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------------ -----------------------------
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ -------------- ------------ -------------
Net income...................................... $ 728 $549 $ 5,418 $5,368
============ ============== ============ =============
PRIMARY:
Weighted average common shares outstanding...... 11,811 12,430 11,878 12,401
Common equivalents attributable to:
Convertible preferred shares............... - - - -
Options and warrants....................... 868 695 1,307 983
------------ -------------- ------------ -------------
Total weighted average common and common
equivalent shares outstanding.............. 12,679 13,125 13,185 13,384
============ ============== ============ =============
Net income per share............................ $0.06 $0.04 $0.41 $0.40
============ ============== ============ =============
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> Micro Linear Corp
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