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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended June 30, 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 June
30, 1997 was 11,902,730.
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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 six months
ended June 30, 1997 and 1996............................................... 3
Consolidated Condensed Balance Sheets at June 30, 1997 and December 31, 1996 4
Consolidated Condensed Statements of Cash Flows for the six months ended
June 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 4. Submission of Matters to a Vote of Security Holders......................... 15
Item 6. Exhibits and Reports on Form 8-K............................................ 15
SIGNATURES.............................................................................. 16
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<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 Six Months Ended
------------------------- --------------------------
<S> <C> <C> <C> <C>
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ----------- ------------ ------------
Net revenues........................................... $19,502 $13,631 $35,639 $28,958
Cost of revenues....................................... 9,439 4,684 16,394 9,781
----------- ----------- ------------ ------------
Gross profit........................................ 10,063 8,947 19,245 19,177
Operating expenses:
Research and development............................ 3,274 3,214 5,831 5,871
Selling, general and administrative................. 3,169 2,953 6,607 5,834
----------- ----------- ------------ ------------
6,443 6,167 12,438 11,705
----------- ----------- ------------ ------------
Income from operations.............................. 3,620 2,780 6,807 7,472
Interest and other income.............................. 335 358 663 717
Interest expense....................................... (70) (78) (141) (158)
----------- ----------- ------------ ------------
Income before taxes................................. 3,885 3,060 7,329 8,031
Provision for income taxes............................. 1,399 1,224 2,638 3,212
----------- ----------- ------------ ------------
Net income.......................................... $ 2,486 $ 1,836 $ 4,691 $ 4,819
=========== =========== ============ ============
Net income per share................................... $ 0.19 $ 0.14 $ 0.35 $ 0.36
=========== =========== ============ ============
Shares used in computing net income per share 13,394 13,495 13,363 13,518
=========== =========== ============ ============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
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3
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<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
<S> <C> <C>
June 30, December 31,
1997 1996
(Unaudited) (See note below)
Assets ------------------- ---------------------
Current assets:
Cash and cash equivalents........................................................... $2,773 $4,385
Short-term investments.............................................................. 22,236 20,798
Accounts receivable, net of allowance for doubtful accounts of $273 and $243........ 7,421 4,372
Inventories......................................................................... 9,997 10,456
Deferred tax assets................................................................. 3,930 4,499
Other current assets................................................................ 1,117 2,077
------------------- ---------------------
Total current assets.............................................................. 47,474 46,587
------------------- ---------------------
Property, plant and equipment.......................................................... 40,793 38,095
Less accumulated depreciation and amortization......................................... (18,635 ) (16,441 )
------------------- ---------------------
22,158 21,654
Other assets........................................................................... 736 791
------------------- ---------------------
Total assets.................................................................... $70,368 $69,032
=================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................................... $ 3,944 $ 2,732
Accrued liabilities................................................................. 3,047 3,580
Deferred income on shipments to distributors........................................ 1,587 1,270
Current portion of long-term debt................................................... 152 209
------------------- ---------------------
Total current liabilities......................................................... 8,730 7,791
------------------- ---------------------
Long-term debt......................................................................... 2,898 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 13,043,730 and 12,810,080; outstanding
shares 11,902,730 and 12,054,080 ............................................... 13 13
Additional paid-in capital.......................................................... 51,392 50,501
Retained earnings................................................................... 18,129 13,435
Treasury stock, 1,141,000 and 756,000 shares at cost................................ (10,794 ) (5,680)
------------------- ---------------------
Total stockholders' equity........................................................ 58,740 58,269
------------------- ---------------------
Total liabilities and stockholders' equity...................................... $70,368 $69,032
=================== =====================
<FN>
Note: The balance sheet at December 31, 1996 has been derived from the consolidated audited financial statements at that date.
See accompanying notes to consolidated condensed financial statements.
</FN>
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4
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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
------------------------------------
<S> <C> <C>
June 30, June 30,
1997 1996
-------------- ---------------
Cash provided by operating activities......................................... $ 6,878 $ 2,475
Investing activities:
Capital expenditures....................................................... (2,698 ) (2,907 )
Purchases of short-term investments........................................ (22,613 ) (13,938 )
Sales of short-term investments............................................ 21,175 16,194
-------------- ---------------
Net cash used in investing activities.................................... (4,136 ) (651 )
Financing activities:
Principal payments under capital lease obligations and debt................ (131 ) (297 )
Proceeds from issuance of common stock..................................... 891 694
Acquisition of treasury stock.............................................. (5,114 ) (2,691 )
-------------- ---------------
Net cash used in financing activities.................................... (4,354 ) (2,294 )
-------------- ---------------
Net decrease in cash and cash equivalents..................................... (1,612 ) (470 )
Cash and cash equivalents at beginning of period.............................. 4,385 4,175
-------------- ---------------
Cash and cash equivalents at end of period.................................... $2,773 $3,705
============== ===============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
5
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MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1) Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range
of applications within the communications, computer and industrial markets
for sale primarily in North America, Asia and Europe.
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, 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 June 30, 1997, three customers accounted for
16%, 14% and 12% of total sales, respectively. During the six months ended
June 30, 1997, three customers accounted for 16%, 13% and 10% of total
sales, respectively.
5) Inventories consist of the following (in thousands):
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<S> <C> <C>
June 30, December 31,
1997 1996
------------- -----------------
Raw Materials........................ $ 879 $ 1,688
Work-in-process...................... 7,181 6,398
Finished Goods....................... 1,937 2,370
------- -------
$9,997 $10,456
====== =======
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6) Cash used for the six months ended June 30, 1997 was $1,713,000 for
incomes taxes and $140,000 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 second quarter
of 1997 was 36% compared to 40% for the second quarter of 1996. The
effective tax rate for the second quarter of 1997 and the second 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.
6
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
8) From January 1996 through the end of the second quarter of 1997, the
Company's Board of Directors has approved the repurchase of an aggregate of
$11.0 million of the Company's Common Stock in stock repurchase
programs, of which the Company had repurchased 1,141,000 shares at an
aggregate cost of $10.8 million through June 30, 1997. The Company
repurchased 245,000 shares at a cost of $3.1 million during the first
quarter of 1997 and 140,000 shares at a cost of $2.0 million during the
second quarter of 1997. On July 22, 1997, the Company's Board of Directors
authorized an additional $2.5 million to be used for an additional 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:
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<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
<S> <C> <C> <C> <C>
Earnings Per Share: 1997 1996 1997 1996
--------- --------- --------- ---------
Basic..................... $ 0.21 $ 0.15 $ 0.39 $ 0.39
========= ========= ========= =========
Diluted................... $ 0.19 $ 0.14 $ 0.35 $ 0.36
========= ========= ========= =========
</TABLE>
In June 1997, FASB issued statement No.130 (FAS 130) "Reporting
Comprehensive Income". FAS 130 established standards for reporting and
display of comprehensive income and its components in a financial statemen
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.
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 June 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.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements contained herein
are subject to certain factors that could cause actual results to differ
materially from those projected in the forward-looking statements. Such factors
include, but are not limited to, the factors set forth below and elsewhere in
this Form 10-Q.
Results of Operations
Net Revenues
Net revenues were $19.5 million for the second quarter of 1997, a 43%
increase over net revenues of $13.6 million for the second quarter of 1996 and a
21% increase over net revenues of $16.1 million for the first quarter of 1997.
Net revenues were $35.6 million for the first six months of 1997, a 23% increase
over net revenues of $29.0 million for the first six month of 1996. Net revenues
for the second quarter of 1997 compared to the second quarter of 1996 increased
59% in the communications market, 28% in the industrial market and 19% in the
computer market. Net revenues for the second quarter of 1997 compared to the
first quarter of 1997 increased 18% in the communications market, 46% in the
industrial market and 12% in the computer market. Net revenues for the first six
months of 1997 compared to the first six months of 1996 increased 31% in the
communications market, 14% in the industrial market and 10% in the computer
market. The communications market includes the computer networking equipment
("networking") sub-market. Net revenues in the networking sub-market were $12.7
million for the second quarter of 1997, a 71% increase over net revenues of $7.4
million in the networking sub-market for the second quarter of 1996 and a 18%
increase over net revenues of $10.8 million for the first quarter of 1997. Sales
of networking products constitutes a substantial majority of the Company's net
revenues. Sales of the Company's networking products accounted for
approximately 66%, 57% and 47% of net revenues in the first half of 1997, 1996
and 1995, respectively. The networking sub-market is characterized by intense
competition, relatively short product life cycles and rapid technological
change. In addition, the network sub-market has undergone a period of rapid
growth, price erosion and consolidation in recent years. Although the Company
has expanded its product mix and customer base, the Company expects its
dependency on sales to network equipment manufacturers to continue 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.
The Company's bookings rate decreased by $6.6 million, or 29% of net
bookings, in the second quarter of 1997 compared to net bookings of $22.6
million for the first quarter of 1997. The bookings in the second quarter of
1997 in the communications market segment decreased approximately 41% compared
to the first quarter of 1997. The decrease in communications market segment
orders were for both domestic and Taiwan customers. The bookings in the second
quarter of 1997 in the computer market segment decreased approximately 48%
compared to the first quarter of 1997. The decrease in the computer market
segment was mainly due to lower orders for hard disk drive parts, primarily from
a single Japanese customer. The Company currently expects the reduced booking
rates to continue through at least the third quarter of 1997. These reduced
bookings will have a material adverse effect on the Company's revenues and
results of operations in the second half of fiscal 1997.
During the three months ended June 30, 1997, three customers accounted for
16%, 14% and 12% of total sales, respectively. During the six months ended June
30, 1997, three customers accounted for 16%, 13% and 10% of total sales,
respectively.
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.
International net revenues were $11.6 million, or 60% of net revenues, for
the second quarter of 1997, compared to $6.1 million, or 45% of net revenues,
for the second quarter of 1996 and $8.1 million, or 50% of net revenues, for the
first quarter of 1997. International revenues were $19.7 million, or 55% of net
revenues, for the first six months of 1997, compared to $11.1 million, or 38% of
net revenues, for the first six months of 1996. The increase in international
revenues for the second quarter of 1997 compared to the second quarter of 1996
and first quarter of 1997 and also the first half of 1997 compared to the first
half 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.
8
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Domestic distributor revenues were approximately 13% of net revenues for the
second quarter of 1997, 17% of net revenues for the second quarter of 1996 and
17% for the first quarter of 1997. Domestic distributor revenues were
approximately 15% and 16% of net revenues for the first six months of 1997 and
first six months of 1996, respectively. Domestic distributor revenues as a
percent of net revenues for the second quarter of 1997 were lower than those for
the second quarter of 1996 and the first quarter of 1997 primarily due to OEM
net revenues increasing more than domestic distributor net revenues and a short
term adjustment in inventory profiles of some of the larger domestic distributor
customers. 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 first 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.
Gross Margin
The Company's gross margin is affected by the volume of product sales,
price, product mix, manufacturing utilization, product yields, inventory
obsolescence and the mix of sales to OEM's and to distributors. The Company's
gross margin has been and will continue to be periodically affected by expenses
incurred in connection with start-up and installation of new process
technologies at outside manufacturing foundries.
The Company's gross margin decreased to 52% in the second quarter of 1997
from 66% in the second quarter of 1996 primarily due to a change in product mix.
The Company's gross margin decreased to 54% for the first six months of 1997
from 66% for the first six months of 1996. The Company's gross margin decreased
to 52% in the second quarter of 1997 from 57% in the second quarter of 1996. The
Company's products in the communications market generally have higher margins
than the Company's other products, however shipments in the second quarter of
1997 included a larger portion of lower margin communications products. In
addition, a recent increase in pricing pressure, particularly in the
communication market has had negative impact on gross margin.
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
9
<PAGE>
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $3.3 million, or 17% of net revenues,
for the second quarter of 1997, compared to $3.2 million, or 24% of net
revenues, for the second quarter of 1996 and $2.6 million, or 16% of net
revenues, for the first quarter of 1997. Research and development expenses were
$5.8 million, or 16% of net revenues, for the first six months of 1997, compared
to $5.9 million, or 20% of net revenues, in the first six months of 1996. The
slight increase in research and development expenses in absolute dollars in the
second quarter of 1997 compared to the second quarter of 1996 is primarily
attributable to an increase in staffing levels, and mask expenses offset by
fewer purchases of expensed inventory and foundry charges for expedited
processing. The slight decrease in research and development expenses in absolute
dollars in the first half of 1997 compared to the first half of 1996 is
primarily attributable to lower prototype product costs associated with new
product development, mask, fabrication and foundry charges for expedited
processing being offset by increased compensation costs. In the fourth
quarter of 1996, the Company announced the establishment of a design center
in Cambridge, England. The first managing director for the Cambridge location
was hired in December 1996 and two design engineers were hired in the first
half of 1997. The Company expects to add additional design engineers in
Cambridge throughout 1997. 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 $3.3 million, or 16% of
net revenues, for the second quarter of 1997, compared to $3.2 million, or 24%
of net revenues, for the second quarter of 1996 and $3.4 million, or 21% of net
revenues, for the first quarter of 1997. Selling, general and administrative
expenses were $6.6 million, or 19% of net revenues, for the first six months of
1997 compared to $5.9 million, or 20% of net revenues, for the first six months
of 1996. The increase in absolute dollars in the second quarter of 1997 compared
to the second quarter of 1996 is primarily attributable to an increase in
staffing levels. The increases in absolute dollars in the first half of 1997
compared to the first half of 1996 is primarily attributable to an increase in
staffing levels, increased commissions due to higher revenues, business
conference expenses, and legal fees being offset by lower advertising, and
databook expenses. The Company expects additional spending increases in absolute
dollars in selling, general and administrative expenses in the future.
Interest and Other Income and Interest Expense
Interest and other income was $ 0.3 million for the second quarter of 1997,
the second quarter of 1996 and the first quarter of 1997. Interest expense was
insignificant for the second quarter of 1997, the second quarter of 1996 and the
first quarter of 1997.
New Accounting Pronouncements
In February 1997, the FASB issued statement No. 128 (FAS 128) "Earning Per
Share". In June 1997, the FASB issued statement No. 130 (FAS 130) "Reporting
Comprehensive Income". For a description of the statements see note 9 in the
notes to Consolidated 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 the second quarter of
1997 was 36% compared to 40% for the second quarter of 1996. The effective tax
rate for the second quarter of 1997 and the second 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.
10
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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 $6.9 million of net cash during the first half of 1997, an increase of
$4.4 million over the first half of 1996. The increase in the first half of 1997
compared to the first half of 1996 is primarily attributable to lower
inventories and prepaid expenses offset by higher accounts receivable and
accrued liabilities.
Cash used in investing activities for the first half of 1997 is
attributable to capital expenditures of $2.7 million and net purchase of
short-term investments of $1.4 million.
Financing activities for the first half of 1997 consisted primarily of the
repurchase of the Company's Common Stock for an aggregate of $5.1 million. From
January 1996 through the end of the second quarter of 1997, the Company's Board
of Directors has approved the repurchase of an aggregate of $11.0 million of the
Company's Common Stock in several stock repurchase programs, of which the
Company had repurchased 1,141,000 shares at an aggregate cost of $10.8 million
through June 30, 1997. The Company repurchased 245,000 shares at a cost of $3.1
million during the first quarter of 1997 and 140,000 shares at a cost of $2.0
million during the second quarter of 1997. On July 22, 1997, the Company's Board
of Directors authorized an additional $2.5 million to be used for an additional
stock repurchase program.
Working capital was $38.7 million as of June 30, 1997, compared to $38.8
million as of December 31, 1996 and includes cash and cash equivalents of $2.8
million and short-term investments of $22.2 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 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.
11
<PAGE>
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 66% of
the Company's net revenues in the first six months of 1997 and accounted for 8
of the 10 top selling products for the first six months of 1997. These 8
products constituted 54% 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 such or if such pricing pressures will lessen. Such pricing pressures will
have an adverse affect in the Company's results of operations unless they can be
offset by higher margins on other products or reduced operation 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.
12
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.
13
<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 has filed a motion for
reconsideration of the denial of summary judgment or , in the alternative, for
leave to appeal such denial.
On February 24, 1997, a former employee of Micro Linear filed a complaint
in 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.
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were approved at the Company's Annual Meeting of
Stockholders held on May 28, 1997:
<TABLE>
<CAPTION>
(a) The following Directors were elected:
Directors Votes For %
- ------------------------------------------- -------------- -------------
<S> <C> <C>
Arthur B. Stabenow 11,002,456 95.4
Roger A. Smullen 11,006,891 95.5
Jeffrey D. West 10,995,770 95.3
Joseph D. Rizzi 10,999,905 95.4
</TABLE>
<TABLE>
<CAPTION>
(b) The stockholders approved the following proposals:
Number of Common Shares Voted
<S> <C> <C> <C> <C>
Proposal For % Against Abstain
----------------------------------- ------------- ---------- ------------- -----------
1) Amendment to increase the
number of shares of the
Company's Common stock
reserved for future issuance 4,280,035 59.4 2,913,132 15,337
under the Company's 1991 Stock
Option Plan by 834,000 shares
2) Amendment of the Company's
1991 Stock Option Plan for an
annual increase in the number 3,892,849 53.8 3,320,817 20,837
of shares available for
issuance thereunder.
3) Amendment to increase the
number of shares of the
Company's Common Stock
reserved for future issuance 6,847,767 91.5 615,638 17,237
under the Company's 1994 Stock
Option Plan by 175,000 shares.
4) Ratification of the
appointment of Price
Waterhouse LLP as the
Company's independent 11,407,504 98.9 111,916 11,507
accountants.
</TABLE>
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
15
<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: August 12, 1997 By: /s/ J. PHILIP RUSSELL
---------------------
J. Philip Russell
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<TABLE>
<CAPTION>
Exhibit 11.1
Micro Linear Corporation
Statement Re Computation of Earnings Per Share
(Unaudited)
(In thousands, except per share data)
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ -------------- ------------ -------------
Net income...................................... $2,487 $1,836 $4,691 $4,819
============ ============== ============ =============
PRIMARY:
Weighted average common shares outstanding...... 11,829 12,343 11,912 12,385
Common equivalents attributable to:
Convertible preferred shares............... - - - -
Options and warrants....................... 1,565 1,152 1,451 1,132
------------ -------------- ------------ -------------
Total weighted average common and common
equivalent shares outstanding.............. 13,394 13,495 13,363 13,518
============ ============== ============ =============
Net income per share............................ $ 0.19 $ 0.14 $ 0.35 $ 0.36
============ ============== ============ =============
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 875359
<NAME> Micro Linear Corp
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 2773
<SECURITIES> 22236
<RECEIVABLES> 7694
<ALLOWANCES> 273
<INVENTORY> 9997
<CURRENT-ASSETS> 47474
<PP&E> 40793
<DEPRECIATION> 18635
<TOTAL-ASSETS> 70368
<CURRENT-LIABILITIES> 8730
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 58727
<TOTAL-LIABILITY-AND-EQUITY> 70368
<SALES> 19502
<TOTAL-REVENUES> 19502
<CGS> 9439
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 3885
<INCOME-TAX> 1399
<INCOME-CONTINUING> 2486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2486
<EPS-PRIMARY> 0.19
</TABLE>