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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 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 94-29100
(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 net of
shares held in treasury as of April 25, 1997 was 11,749,688.
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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 months ended March 31, 1997 and 1996 3
Consolidated Condensed Balance Sheets at March 31, 1997, and at December 31, 1996............ 4
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 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............................................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................................. 13
SIGNATURES................................................................................................ 14
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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 March 31,
------------------------------------
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1997 1996
-------------- -----------------
Net revenues........................................................... $16,137 $15,327
Cost of revenues....................................................... 6,955 5,097
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Gross profit........................................................ 9,182 10,230
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Operating expenses:
Research and development............................................ 2,557 2,657
Selling, general and administrative................................. 3,438 2,881
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5,995 5,538
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Income from operations.............................................. 3,187 4,692
Interest and other income.............................................. 328 359
Interest expense....................................................... (71) (80)
-------------- -----------------
Income before taxes................................................. 3,444 4,971
Provision for income taxes............................................. 1,240 1,988
-------------- -----------------
Net income.......................................................... $ 2,204 $ 2,983
============== =================
Net income per share................................................... $ 0.17 $ 0.22
============== =================
Shares used in computing net income per share.......................... 13,298 13,532
============== =================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
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3
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MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
<S> <C> <C>
March 31, December 31,
1997 1996
(Unaudited) (See note below)
--------------------- -------------------
Assets
Current assets:
Cash and cash equivalents........................................................... $1,291 $4,385
Short-term investments.............................................................. 23,419 20,798
Accounts receivable, net of allowance for doubtful accounts of $258 and $243...... 6,258 4,372
Inventories......................................................................... 10,771 10,456
Deferred tax assets................................................................. 3,930 4,499
Other current assets................................................................ 2,079 2,077
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Total current assets.............................................................. 47,748 46,587
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Property, plant and equipment.......................................................... 39,221 38,095
Less accumulated depreciation and amortization......................................... 17,543 16,441
--------------------- -------------------
21,678 21,654
Other assets........................................................................... 764 791
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Total assets.................................................................... $70,190 $69,032
===================== ===================
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable.................................................................... $ 3,666 $ 2,732
Accrued compensation and benefits................................................... 1,862 1,402
Deferred income on shipments to distributors........................................ 1,432 1,270
Accrued commissions................................................................. 794 555
Other accrued liabilities........................................................... 1,685 1,623
Current portion of long-term debt................................................... 152 209
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Total current liabilities......................................................... 9,591 7,791
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Long-term debt......................................................................... 2,935 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 12,861,510 and 12,810,080;
outstanding shares 11,860,510 and 12,054,080.................................... 13 13
Additional paid-in capital.......................................................... 50,780 50,501
Retained earnings................................................................... 15,640 13,435
Treasury stock, 1,001,000 and 756,000 shares at cost. (8,769 ) (5,680)
--------------------- ------------------
Total stockholders' equity........................................................ 57,664 58,269
--------------------- -------------------
Total liabilities and stockholders' equity...................................... $70,190 $69,032
===================== ===================
<FN>
Note: The balance sheet at December 31, 1996 has been derived from the audited consolidated financial
statements at that date.
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
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5
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MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
------------------------------------
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March 31, March 31,
1997 1996
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Cash provided by operating activities......................................... $ 3,555 $ 2,429
Investing activities:
Capital expenditures....................................................... (1,126 ) (2,245 )
Purchases of short-term investments........................................ (11,648 ) (7,961 )
Sales of short-term investments............................................ 9,028 7,840
-------------- ---------------
Net cash used in investing activities.................................... (3,746 ) (2,366 )
Financing activities:
Principal payments under capital lease obligations and debt................ (94 ) (181 )
Proceeds from issuance of common stock..................................... 279 200
Acquisition of treasury stock.............................................. (3,088 ) (2,304 )
-------------- ---------------
Net cash used in financing activities.................................... (2,903 ) (2,285 )
-------------- ---------------
Net decrease in cash and cash equivalents.................................. (3,095 ) (2,222 )
Cash and cash equivalents at beginning of period........................... 4,385 4,175
-------------- ---------------
Cash and cash equivalents at end of period................................. $1,291 $1,953
============== ===============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
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<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) to fairly present the financial information included. Where
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.
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 March 31, 1997, three customers
accounted for 16%, 15% and 12% of total sales, respectively.
5) Inventories consist of the following (in thousands):
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<S> <C> <C>
March 31, December 31,
1997 1996
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Raw Materials........................ $ 1,546 $ 1,688
Work-in-process...................... 6,981 6,398
Finished Goods....................... 2,244 2,370
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$10,771 $10,456
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6) Cash used for the three months ending March 31, 1997 was $60,000 for
incomes taxes and $70,000 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 first quarter
of 1997 was 36% compared to 40% for the first quarter of 1996 and 13% for
the fourth quarter of 1996. The effective tax rate for the first quarter of
1997 and the first and fourth quarters of 1996 differs from the statutory
income tax rate primarily due to state income taxes, net of federal
research credits.
8) Since January 1996, the Company's Board of Directors has approved the
repurchase of an aggregate of $11.0 million of the Company's Common Stock,
of which the Company had repurchased $8.8 million through the first quarter
of 1997. Subsequent to the end of the first quarter of 1997, the Company
repurchased a total of 140,000 shares of its Common Stock for $2.0 million.
As of April 25, 1997, the Company had remaining authorization to repurchase
up to an additional $175,000 of the Company's Common Stock.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
9) Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings
Per Shares (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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Three Months Ended
March 31,
------------------------
<S> <C> <C>
Earnings Per Share: 1997 1996
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Basic..................... $ 0.18 $ 0.24
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Diluted................... $ 0.17 $ 0.22
========= =========
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10) A discussion of a certain pending legal proceeding is included in Item 1 of
Part II of the Company's Form 10-Q for the fiscal quarter ended March 31,
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 Results
of Operations
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth below and elsewhere in this Form 10-Q.
Results of Operations
Net Revenues
Net revenues were $16.1 million for the first quarter of 1997, a 5% increase
over net revenues of $15.3 million for the first quarter of 1996 and a 21%
increase over net revenues of $13.4 million for the fourth quarter of 1996. Net
revenues for the first quarter of 1997 compared to the first quarter of 1996
increased 8% in the communications market, increased 9% in the computer market
and decreased 10% in the industrial market. Net revenues for first quarter of
1997 compared to the fourth quarter of 1996 increased 37% in the communications
market, increased 6% in the computer market and decreased 16% in the industrial
market. The communications market includes the networking segment. Net revenues
in this segment in the first quarter of 1997 increased 12% and 42% in absolute
dollars in the first quarter of 1997 compared to the first quarter of 1996 and
fourth quarter of 1996, respectively. Networking segment net revenues were 67%
of total net revenues for the first quarter of 1997 compared to 63% and 57% of
total net revenues for the first and fourth quarter of 1996, respectively. The
computer market includes the hard disk drive ("HDD") segment. Net revenues in
this segment in the first quarter of 1997 decreased 4% and increased 100% in
absolute dollars in the first quarter of 1997 compared to the first quarter of
1996 and fourth quarter of 1996, respectively. HDD segment net revenues were 6%
of total net revenues for the first quarter of 1997 compared to 7% and 4% of
total net revenues for the first and fourth quarter of 1996, respectively. The
Company expects net revenue from HDD products to continue to represent less than
10% of future revenues. The Company's markets are characterized by intense
competition, relatively short product life cycles and rapid technological
changes. In addition, certain of 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.
During the three months ended March 31, 1997, three customers accounted for
16%, 15% and 12% of total sales, respectively.
International net revenues for the first quarter of 1997 totaled $8.1
million, or 50% of net revenues, as compared to $4.9 million, or 32% of net
revenues, for the first quarter of 1996 and $5.6 million, or 42% of net
revenues, for the fourth quarter of 1996. The increase in international revenues
in first quarter of 1997 compared to the first and fourth quarter 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.
Domestic distributor net revenues for the first quarter of 1997 were $2.8
million, or 17% of net revenues, compared to $2.4 million, or 16% of net
revenues for the first quarter of 1996 and $2.2 million, or 17% of net revenues
for the fourth quarter of 1996. The Company expects sales to domestic
distributors to increase in the future as a percentage of total net revenues due
to anticipated shifts in the sales channel mix. In this regard, several of the
Company's OEM (Original Equipment Manufacturer) customers have moved their
manufacturing operations to subcontractors and in turn are placing their orders
through distributors. 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
Gross margin is affected by the volume of product sales, price, product mix,
manufacturing utilization, product yields and the mix of sales to OEM's and to
distributors. Gross margin 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 was 57% in the first quarter of 1997, a decrease
of 10% and an increase of 5% when compared to 67% in the first quarter of 1996
and 52% in the fourth quarter of 1996, respectively. Gross margin was lower in
the first quarter of 1997 compared to the first quarter of 1996 primarily due to
higher per unit manufacturing costs resulting from lower manufacturing
utilization and product mix. The product mix in the first quarter of 1997
included a lower percentage of net revenues attributable to the relatively
higher-margin communications market segment compared to the first quarter of
1996, thereby contributing to a lower gross margin. Gross margin was higher in
the first quarter of 1997 compared to the fourth quarter of 1996 primarily due
to lower per unit manufacturing costs resulting from higher manufacturing
utilization and product mix. The product mix in the first quarter of 1997
contained a greater percentage of net revenues attributable to the
communications market segment compared to the fourth quarter of 1996, thereby
contributing to a higher 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 effect on gross margin in the future.
The Company currently purchases its wafers from ten 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.
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.
Research and Development Expenses
Research and development expenses include costs associated with the
definition, design and development of standard and semi-standard products, tile
arrays and standard cells. In addition, research and development expenses
include test development and prototype assembly costs associated with new
product development. The Company also expenses prototype wafers and new
production mask sets related to new products as research and development costs
until products based on new designs are fully characterized by the Company and
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $2.6 million for the first quarter of
1997, or 16% of net revenues, compared to $2.7 million, or 17% of net revenues
for the first quarter of 1996 and $2.6 million, or 20% of net revenues for the
fourth quarter of 1996. The decrease in research and development in absolute
dollars in the first quarter of 1997 compared to the first quarter of 1996 is
primarily attributable to lower prototype product costs associated with new
product development being offset by increased compensation costs for engineers.
The decrease in research and development in absolute dollars in the first
quarter of 1997 compared to the fourth quarter of 1996 is primarily attributable
to lower prototype product costs associated with new product development being
offset by increased mask and compensation costs. In the fourth quarter of 1996,
the Company announced its intention to establish a design center in Cambridge,
England. The first managing director for the Cambridge location was hired in
December 1996 and 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.
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses were $3.4 million for the first
quarter of 1997, or 21% of net revenues, compared to $2.9 million, or 19% of net
revenues, in the first quarter of 1996 and $3.0 million, or 23% of net revenues,
in the fourth quarter of 1996. The increase in absolute dollars in the first
quarter of 1997 compared to the first quarter of 1996 is generally attributable
to an increase in staffing levels, increased commissions due to higher revenues,
business conferences and higher legal fees associated with a litigation matter
being partially offset by decreased advertising and databook expenses. The
increases in absolute dollars in the first quarter of 1997 compared to the
fourth quarter of 1996 is generally attributable to an increase in sales
commissions due to higher net revenues, higher staffing levels and business
conferences being partially offset by decreased databook and legal 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 first quarter of 1997, $0.4
million for the first quarter of 1996 and $0.3 million for the fourth quarter of
1996. The decrease in the first quarter of 1997 compared to the first and fourth
quarters of 1996 is attributable primarily to lower cash balances.
Provision for Income Taxes
The Company's effective tax rate for the first quarter of 1997 was 36%
compared to 40% for the first quarter of 1996 and 13% for the fourth quarter of
1996. The effective tax rate for the first quarter of 1997 and the first and
fourth quarters of 1996 differs from the statutory income tax rate primarily due
to state income taxes, net of federal research credits.
Liquidity and Capital Resources
Since 1992, the Company has financed its operations and capital requirements
principally through cash flow from operations and the proceeds from its initial
public offering in October 1994. Operations provided $3.4 million of net cash
during the first quarter of 1997, an increase of $1.0 million over the first
quarter of 1996. The increase in the first quarter of 1997 compared to the first
quarter of 1996 is primarily attributable to lower accrued liabilities and
inventory partially offset by lower net income and higher payables .
Cash used in investing activities for the first quarter of 1997 is
attributable to capital expenditures of $1.1 million and the net purchase of
short-term investments of $2.6 million.
Financing activities for the first quarter of 1997 consist primarily of the
repurchase of the Company's Common Stock for $3.1 million. Since January 1996,
the Company's Board of Directors has approved the repurchase of an aggregate of
$11.0 million of the Company's Common Stock, of which the Company had
repurchased $8.8 million of Common Stock through the first quarter of 1997.
Subsequent to the end of the first quarter of 1997, the Company repurchased a
total of 140,000 shares of its Common Stock for $2.0 million. As of April 25,
1997, the Company had remaining authorization to repurchase up to an additional
$175,000 of the Company's Common Stock.
Working capital amounted to $38.2 million as of March 31, 1997, compare to
$38.8 million as of December 31, 1996 and includes cash and cash equivalents of
$1.3 million and short-term investments of $23.4 million.
The Company's liquidity is affected by many factors, including, among others,
the extent to which the Company pursues additional wafer fabrication capacity
from existing foundry suppliers or new suppliers, capital expenditures, and the
level of the Company's product development efforts, and other factors related to
the uncertainties of the industry and global economies. 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 semiconductor industry conditions. A majority of the
Company's net revenues are derived from sales of a limited number of products.
Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. Although the Company has not
generally experienced material decreases in its average selling prices over
time, there can be no assurance that the average selling prices of the Company's
products will not be subject to significant pricing pressures in the future. 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.
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.
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 70% of
the Company's net revenues in the first three months of 1997 and accounted for 7
of the 10 top selling products for the first three months of 1997. These 7
products contributed 50% of 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
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 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.
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 has filed a motion for reconsideration of the denial of
summary judgment or , in the alternative, for leave to appeal such denial.
Although the Company believes that the resolution of this action will not
have a material adverse effect on the Company's finanical condition or results
of operations, there can be no assurance that such actio 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.
(b) Reports on Form 8-K
Changes in Registrant's Certifying Accountant Dated March 28, 1997
<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: May 15, 1997 By: /s/ J. PHILIP RUSSELL
---------------------
J. Philip Russell
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
Micro Linear Corporation
Statement Re Computation of Earnings Per Share
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
-----------------------------
<S> <C> <C>
1997 1996
------------ -------------
Net income............................................. $2,204 $2,983
============ =============
PRIMARY:
Weighted average common shares outstanding............. 11,995 12,428
Common equivalents attributable to options and warrants: 1,302 1,104
Total weighted average common and common
equivalent shares outstanding..................... 13,297 13,532
============ =============
Net income per share................................... $ 0.17 $ 0.22
============ =============
</TABLE>
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<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 875359
<NAME> Micro Linear Corp
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