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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 March 31, 1998
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 net of
shares held in treasury as of April 26, 1998 was 11,683,710.
<PAGE>
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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, 1998 and 1997 3
Consolidated Condensed Balance Sheets at March 31, 1998, and at December 31, 1997............ 4
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 1998 and
1997,........................................................................................ 5
Notes to Consolidated Condensed Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 14
Item 6. Exhibits and Reports on Form 8-K............................................................. 14
SIGNATURES................................................................................................ 15
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3
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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 March 31,
------------------------------------
<S> <C> <C>
1998 1997
-------------- -----------------
Net revenues........................................................... $12,239 $16,137
Cost of revenues....................................................... 5,611 6,955
-------------- -----------------
Gross profit........................................................ 6,628 9,182
-------------- -----------------
Operating expenses:
Research and development............................................ 3,239 2,557
Selling, general and administrative................................. 2,795 3,438
-------------- -----------------
6,034 5,995
-------------- -----------------
Income from operations.............................................. 594 3,187
Interest and other income.............................................. 363 328
Interest expense....................................................... (67) (71)
-------------- -----------------
Income before taxes................................................. 890 3,444
Provision for income taxes............................................. 320 1,240
-------------- -----------------
Net income.......................................................... $ 570 $ 2,204
============== =================
Net Income Per Share:
Basic:
Net income per share................................................ $0.05 $0.18
============== =================
Weighted average number of shares used in per share computation..... 11,650 11,995
============== =================
Diluted:
Net income per share................................................ $0.05 $0.17
============== =================
Weighted average number of shares used in per share computation..... 12,224 13,298
============== =================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
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3
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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<S> <C> <C>
March 31, December 31,
1998 1997
--------------- -------------------
Assets
Current assets:
Cash and cash equivalents.............................................................. $7,390 $5,210
Short-term investments................................................................. 22,854 20,653
Accounts receivable, net............................................................... 5,722 10,367
Inventories............................................................................ 8,236 7,823
Other current assets................................................................... 5,695 5,768
--------------- -------------------
Total current assets................................................................ 49,897 49,821
Property, plant and equipment, net....................................................... 21,314 21,523
Other assets............................................................................. 654 681
=============== ===================
Total assets................................................................... $71,865 $72,025
=============== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................................................................... $3,828 $3,612
Deferred income on shipments to distributors........................................... 2,936 2,695
Other accrued liabilities.............................................................. 3,076 3,592
--------------- -------------------
Total current liabilities........................................................... 9,840 9,899
--------------- -------------------
Long-term debt........................................................................... 2,752 2,805
--------------- -------------------
Stockholders' equity:
Preferred stock........................................................................ -- --
Common stock........................................................................... 13 13
Additional paid-in capital............................................................. 53,283 52,890
Retained earnings...................................................................... 21,015 20,445
Treasury stock..................................................................... (15,038) (14,027)
--------------- -------------------
Total stockholders' equity.......................................................... 59,273 59,321
=============== ===================
Total liabilities and stockholders' equity..................................... $71,865 $72,025
=============== ===================
<FN>
Note: The balance sheet at December 31, 1997 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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4
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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
------------------------------------
<S> <C> <C>
March 31, March 31,
1998 1997
-------------- ---------------
Cash provided by operating activities......................................... $ 5,942 $ 3,555
Investing activities:
Capital expenditures....................................................... (885 ) (1,126 )
Purchases of short-term investments........................................ (12,798 ) (11,648 )
Sales of short-term investments............................................ 10,597 9,028
-------------- ---------------
Net cash used in investing activities.................................... (3,086 ) (3,746 )
Financing activities:
Principal payments on debt................................................. (53 ) (94 )
Proceeds from issuance of common stock..................................... 388 279
Acquisition of treasury stock.............................................. (1,011 ) (3,088 )
-------------- ---------------
Net cash used in financing activities.................................... (676 ) (2,903 )
-------------- ---------------
Net increase (decrease) in cash and cash equivalents....................... 2,180 (3,095 )
Cash and cash equivalents at beginning of period........................... 5,210 4,385
-------------- ---------------
Cash and cash equivalents at end of period................................. $7,390 $1,291
============== ===============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
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5
<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, 1997. 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 1997 ended on December 28, 1997.
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 Company exclusively uses the U.S. dollar as its functional currency.
Foreign currency transaction gains and losses are included in income as
they occur. The effect of foreign currency exchange rate fluctuations was
not significant. The Company does not use derivative instruments.
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, 1998, two customers accounted for
20% and 10% of total sales, respectively.
5) Supplemental Financial Information
Inventories consist of the following (in thousands):
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<CAPTION>
<S> <C> <C>
March 31, December 31,
1998 1997
------------- -----------------
Raw Materials.............................................. $ 623 $ 712
Work-in-process............................................ 4,911 5,100
Finished Goods............................................. 2,702 2,011
$8,236 $7,823
Property, plant and equipment consist of the following (in thousands):
March 31, December 31,
1998 1997
------------- -----------------
Land....................................................... $ 2,850 $ 2,850
Buildings and improvements................................. 9,353 9,353
Machinery and equipment.................................... 31,078 30,193
43,281 42,396
Accumulated depreciation and amortization.................. 21,967 20,873
Net property, plant and equipment.......................... $21,314 $21,523
</TABLE>
<PAGE>
6) Cash payments for income taxes and interest expense totaled $954,000 and
$67,000, respectively for the three months ended March 31, 1998.
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 1998 and 1997 was 36%, which differs from the statutory income tax rate
primarily due to state income taxes and federal research credits.
8) From January 1996 through the end of the first quarter of 1998, the
Company's Board of Directors had approved the repurchase of an aggregate of
$16.5 million of the Company's Common Stock. Through March 29, 1998, the
Company had repurchased 1,642,000 shares for a total cost of $15.0 million.
As of April 24, 1998, the Company had authorization to repurchase up to an
additional $1.5 million of the Company's Common Stock.
9) In the fourth quarter of 1997, the Company adopted the net income per share
calculation methodology prescribed by Statement of Financial Accounting
Standards No. 128 ("SFAS 128"). SFAS 128 requires presentation of basic and
diluted net income per share. Basic net income per share is computed by
dividing net income available to common stockholders (numerator) by the
weighted average number of common shares outstanding (denominator) during
the period and excludes the dilutive effect of stock options. Diluted net
income per share gives effect to all dilutive potential common stock
outstanding during the period. In computing diluted net income per share,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options. All prior
year net income per share amounts in this Form 10-Q have been restated in
accordance with SFAS 128.
Following is a reconciliation of the numerators and denominators of the
basic and diluted income per share computations for the periods presented
below (in thousands except per share data):
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<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------------
1998 1997
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income Per
Share:
Net income available
to common
stockholders $570 11,650 $0.05 $2,204 11,995 $0.18
Effect of dilutive
securities:
Stock options 574 1,303
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $570 12,224 $0.05 $2,204 13,298 $0.17
</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. For the three months
ended March 31, 1998 and 1997, comprehensive income approximated net
income.
<PAGE>
11) 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,
1998. The Company believes 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 $12.2 million for the first quarter of 1998, a 24%
decrease over net revenues of $16.1 million for the first quarter of 1997 and a
19% decrease over net revenues of $15.1 million for the fourth quarter of 1997.
The decline in net revenues is the result of softness in business demand which
resulted in lower than expected turns orders thus negatively impacting overall
revenue levels for the first quarter.
The Company serves three principal market segments, computer,
communications and industrial. Net revenues for the first quarter of 1998
compared to the first quarter of 1997 decreased 24% in the communications
market, decreased 63% in the computer market and increased 23% in the industrial
market. Net revenues for first quarter of 1998 compared to the fourth quarter of
1997 decreased 22%, 15% and 6% in the communications market, computer market and
industrial market, respectively.
The communications market includes the computer networking equipment
("networking") sub-market. Sales of products to the networking market
constitutes a substantial majority of the Company's net revenues. Net revenues
in the networking sub-market, in absolute dollars decreased 26% and 24% in the
first quarter of 1998 compared to the first quarter of 1997 and fourth quarter
of 1997, respectively. Networking segment net revenues were 65% of total net
revenues for the first quarter of 1998 compared to 67% and 70% of total net
revenues for the first and fourth quarter of 1997, respectively. The quarterly
decline in networking product revenues is principally attributable to lower
shipments of ethernet parts. The networking submarket is characterized by
intense competition, relatively short product life cycles and rapid
technological change. In addition, the networking sub-market has undergone a
period of rapid growth, price erosion and consolidation in recent years.
Although the Company has expanded its product mix and customer base, the Company
expects its dependency on sales to network equipment manufacturers to continue
for the immediate 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.
International net revenues for the first quarter of 1998 totaled $5.2
million, or 42% of net revenues, compared to $8.1 million, or 50% of net
revenues, for the first quarter of 1997 and $7.0 million, or 46% of net
revenues, for the fourth quarter of 1997. The decrease in international revenues
in first quarter of 1998, compared to the first and fourth quarters of 1997, was
due to the combination of lower direct product demand for the Company's products
in Asia and less Asia Pacific subcontract work for domestic customers. Despite
the lower product demand noted in Asia through the end of the first quarter of
1998, the Company had not experienced any direct negative impact as a result of
the financial and stock market dislocations that occurred in the Asian financial
markets in 1997 and 1998.
Domestic distributor net revenues for the first quarter of 1998 were $2.6
million, or 21% of net revenues, compared to $2.8 million, or 17% of net
revenues, for the first quarter of 1997 and $3.0 million, or 20% of net
revenues, for the fourth quarter of 1997. 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. Revenue is recognized by the Company upon shipment to
international representatives, but the gross margin on these shipments is
deferred until international distributors notify the Company of product sales to
end users.
<PAGE>
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 54% in the first quarter of 1998, compared
to 57% in the first quarter of 1997 and 55% in the fourth quarter of 1997. Gross
margin was lower in the first quarter of 1998 compared to the first quarter of
1997 primarily due to slightly lower production output levels and higher
manufacturing cost. Gross margin was essentially flat in the first quarter of
1998 compared to the fourth quarter of 1997. It has been the Company's
experience that communication products have higher average selling prices and
more favorable margins than computer and industrial products. However, the
Company has recently seen increased competition and pricing pressure on its
newer products in the communications segment. Communications products
represented at least 70% of the Company's total shipments in both the first
quarter of 1998 and the fourth quarter of 1997. Future gross margin levels will
continue to be a function of product mix and levels of manufacturing.
The Company's gross margin is 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 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.
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 expect to be significantly impacted by this pricing agreement and as a
result does not enter into foreign currency hedging arrangements. 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 swings in
currency 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 payroll and other costs
associated with the definition, design and development of standard and
semi-standard products, tile arrays and standard cells. In addition, research
and development expenses include test development and prototype assembly costs
associated with new product development. The Company also expenses the cost of
prototype wafers and new production mask sets related to new products as
research and development costs until products based on new designs are fully
characterized by the Company and are demonstrated to support published data
sheets and satisfy reliability tests. Research and development expenses such as
mask and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process. The Company believes that the development and introduction of new
products is critical to its future success.
Research and development expenses were $3.2 million for the first quarter
of 1998, or 26% of net revenues, compared to $2.6 million, or 16% of net
revenues for the first quarter of 1997 and $3.2 million, or 21% of net revenues,
for the fourth quarter of 1997. The increase in research and development in
absolute dollars in the first quarter of 1998 compared to the first quarter of
1997 is primarily attributable to higher prototype product costs, new product
mask costs and the addition of personnel associated with the Company's new
design center in Cambridge, England. Research and development expenses in
absolute dollars remained flat for the first quarter of 1998 compared to the
<PAGE>
fourth quarter of 1997 with increases in prototype product costs associated with
new product development being offset by decreased mask and compensation costs.
The Company expects the second quarter research & development cost, in absolute
dollars, to be flat with first quarter levels as new product tape-outs are
expected to remain at a high level. The Company established a design center in
Cambridge, England during 1997. Through the end of the first quarter of 1998 the
company has added a managing design director and a staff of five, of which three
are design engineers. Further selective headcount additions are expected during
1998. The Company believes that the timely development and introduction of new
products is critical to its future success.
Selling, General and Administrative
Selling, general and administrative expenses were $2.8 million for the
first quarter of 1998, or 23% of net revenues, compared to $3.4 million, or 21%
of net revenues, in the first quarter of 1997 and $2.9 million, or 19% of net
revenues, in the fourth quarter of 1997. The decrease in absolute dollars in the
first quarter of 1998 compared to the first quarter of 1997 is generally
attributable to decreases in sales commissions due to lower net revenues and
decreases in payroll and business conference expenses being partially offsetting
by increased professional fees. The slight decrease in absolute dollars in the
first quarter of 1998 compared to the fourth quarter of 1997 is generally
attributable to a decrease in sales commissions due to lower net revenues being
partially offset by increased payroll and legal expenses. The Company expects
selling, general and administrative expense to generally fluctuate with revenue
in the future.
Interest and Other Income and Interest Expense
Interest and other income was $0.4 million for first quarter of 1998 and
$0.3 million for the first and fourth quarters of 1997. The increase in the
first quarter of 1998 compared to the first and fourth quarters of 1997 is
attributable primarily to higher cash balances. Interest expense was
insignificant for the first quarter of 1998 and the first and fourth quarters of
1997.
Provision for Income Taxes
The Company's effective tax rate for the first quarter of 1998 and the
first and fourth quarters of 1997 was 36% which differs from the statutory
income tax rate primarily due to state income taxes and 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 $5.9 million of
net cash during the first quarter of 1998, an increase of $2.4 million over the
first quarter of 1997. The increase in the first quarter of 1998 compared to the
first quarter of 1997 is primarily attributable to lower accounts receivable.
Cash used in investing activities for the first quarter of 1998 is
attributable to capital expenditures of $0.9 million and the net purchase of
short-term investments of $2.2 million.
Financing activities for the first quarter of 1998 consist primarily of the
repurchase of the Company's Common Stock for $1.0 million. From January 1996
through the first quarter of 1998, the Board of Directors approved the
repurchase of an aggregate of $16.5 million of the Company's Common Stock in
stock repurchase programs. Through March 28, 1998, the Company has repurchased
1,642,000 shares at an aggregate cost of $15.0 million. As of April 24, 1998,
the Company had remaining authorization to repurchase additional shares of the
Company's Common Stock costing up to $1.5 million.
Working capital amounted to $40.0 million as of March 31, 1998, compared to
$39.9 million as of December 31, 1997. Working capital at March 31, 1998
includes cash and cash equivalents of $7.4 million and short-term investments of
$22.9 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
<PAGE>
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
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 65% of
the Company's net revenues in the first quarter of 1998 and accounted for 7 of
the Company's 10 top selling products for the first quarter of 1998. These 7
products constituted approximately 40% 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 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 pressure will lessen. Such pricing pressures will have
an adverse affect on the Company's results of operations unless they can be
offset by higher margins on other products or reduced operating expenses.
The Company's 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. Competitive pricing pressures
are expected to continue in the future, especially in the communications market,
and may have a material adverse effect on the Company's gross margin. The
Company's business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without significant
penalty to the customer. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. In addition, the Company is limited in its ability to
reduce costs quickly in response to any revenue shortfalls. As a result of the
foregoing or other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis which would materially and adversely affect the Company's business,
financial condition and results of operations.
The markets for the Company's products are characterized by rapid
technological change and frequent new product introductions. To remain
competitive, the Company must develop or obtain access to advanced semiconductor
process technologies in order to reduce die size, increase die performance and
functional complexity, and improve yields. Semiconductor design and process
methodologies are subject to rapid technological change, requiring large
expenditures for research and development. If the Company is unable to develop
or obtain access to advanced wafer processing technologies as they become
needed, or is unable to define, design, develop and introduce competitive new
products on a timely basis, its future operating results will be materially and
adversely affected. In addition, if the Company is unable to transfer and
install such new process technologies to one or more of its foundries in a
timely manner, its business and results of operations could be materially and
adversely affected.
The 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.
<PAGE>
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. The
Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions or other
factors.
Year 2000 Disclosure
The "Year 2000 issue" arises because most computer systems and programs
were designed to handle only a two-digit year, not a four-digit year. When the
Year 2000 begins, these computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly. The Company has commenced, for all of its information systems, a
year 2000 date conversion project to address all necessary code changes, testing
and implementation and accordingly does not anticipate any internal Year 2000
issues from its own information systems, databases or programs. The Company
could be adversely impacted by Year 2000 issues faced by major distributors,
suppliers, customers, vendors and financial service organizations with which the
Company interacts. The Company is in the process of developing a plan to
determine the impact that third parties who are not Year 2000 compliant may have
on the operations of the Company. At this time, the Year 2000 compliance expense
and related potential effect of the Company's earnings are estimated to be
insignificant. As of April 26, 1998 the Company has not identified any loss
contingencies related to the year 2000 issues for products it has sold.
<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.
On February 24, 1997, a former employee of Micro Linear filed a complaint
in the Superior Court of California, County of Santa Clara, alleging breach of
contract and employment discrimination. On June 5, 1997, the case was dismissed
and the parties agreed to submit the dispute to arbitration. As of April 26,
1998, no arbitration date had been scheduled. 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.
From time to time, the Company has received, and in the future it may
receive, correspondence from certain vendors, distributors, customers or
end-users of its products regarding disputes with respect to contract rights,
product performance or other matters that occur in the ordinary course of
business. There can be no assurance that any of such disputes will not
eventually result in litigation or other actions involving the Company or as to
the outcome of such disputes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: May 12, 1998 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 Ended March 31,
-----------------------------------------------------------------------------
1998 1997
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income Per
Share:
Net income available
to common
stockholders $570 11,650 $0.05 $2,204 11,995 $0.18
Effect of dilutive
securities:
Stock options 574 1,303
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $570 12,224 $0.05 $2,204 13,298 $0.17
</TABLE>
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<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000875359
<NAME> Micro Linear Corp
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 7390
<SECURITIES> 22854
<RECEIVABLES> 6532
<ALLOWANCES> 810
<INVENTORY> 8236
<CURRENT-ASSETS> 49897
<PP&E> 43281
<DEPRECIATION> 21967
<TOTAL-ASSETS> 71865
<CURRENT-LIABILITIES> 9840
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 59260
<TOTAL-LIABILITY-AND-EQUITY> 71865
<SALES> 12239
<TOTAL-REVENUES> 12239
<CGS> 5611
<TOTAL-COSTS> 0
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<INCOME-TAX> 320
<INCOME-CONTINUING> 570
<DISCONTINUED> 0
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