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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, 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 as of
June 30, 1998 was 11,828,448.
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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, 1998 and 1997............................................... 3
Consolidated Condensed Balance Sheets at June 30, 1998 and December 31, 1997 4
Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 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 4. Submission of Matters to a Vote of Security Holders......................... 15
Item 6. Exhibits and Reports on Form 8-K............................................ 15
SIGNATURES.............................................................................. 16
</TABLE>
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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,
1998 1997 1998 1997
----------- ----------- ----------- ------------
Net revenues........................................................... $11,745 $19,502 $23,984 $35,639
Cost of revenues....................................................... 6,641 9,439 12,252 16,394
----------- ----------- ----------- ------------
Gross profit........................................................ 5,104 10,063 11,732 19,245
Operating expenses:
Research and development............................................ 2,912 3,274 6,151 5,831
Selling, general and administrative................................. 2,396 3,169 5,191 6,607
----------- ----------- ----------- ------------
5,308 6,443 11,342 12,438
----------- ----------- ----------- ------------
Income (Loss) from operations....................................... (204) 3,620 390 6,807
Interest and other income.............................................. 365 335 728 663
Interest expense....................................................... (66) (70) (133) (141)
----------- ----------- ----------- ------------
Income before taxes................................................. 95 3,885 985 7,329
Provision for income taxes............................................. 34 1,399 354 2,638
----------- ----------- ----------- ------------
Net income.......................................................... $ 61 $ 2,486 $ 631 $ 4,691
=========== =========== =========== ============
Net Income Per Share:
Basic:
Net income per share................................................ $0.01 $0.21 $0.05 $0.39
===========
=========== =========== ============
Weighted average number of shares used in per share computation..... 11,692 11,829 11,671 11,912
=========== =========== =========== ============
Diluted:
Net income per $0.01 $0.19 $0.05 $0.35
share................................................
=========== =========== =========== ============
Weighted average number of shares used in per share computation..... 12,087 13,394 12,155 13,346
=========== =========== =========== ============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
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<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
<S> <C> <C>
June 30, December 31,
1998 1997
--------------------- ---------------------
Assets
Current assets:
Cash and cash equivalents........................................................ $8,257 $5,210
Short-term investments........................................................... 21,246 20,653
Accounts receivable, net......................................................... 6,387 10,367
Inventories...................................................................... 7,680 7,823
Other current assets............................................................. 5,353 5,768
--------------------- ---------------------
Total current assets........................................................... 48,923 49,821
--------------------- ---------------------
Property, plant and equipment....................................................... 21,086 21,523
Other assets........................................................................ 626 681
--------------------- ---------------------
Total assets................................................................. $70,635 $72,025
===================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................................. $ 2,848 $ 3,612
Deferred income on shipments to distributors..................................... 2,712 2,695
Other accrued liabilities........................................................ 2,480 3,592
--------------------- ---------------------
Total current liabilities...................................................... 8,040 9,899
--------------------- ---------------------
Long-term debt...................................................................... 2,701 2,805
--------------------- ---------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock.................................................................. -- --
Common stock..................................................................... 14 13
Additional paid-in capital....................................................... 53,842 52,890
Retained earnings................................................................ 21,076 20,445
Treasury stock................................................................... (15,038 ) (14,027 )
--------------------- ---------------------
Total stockholders' equity..................................................... 59,894 59,321
--------------------- ---------------------
Total liabilities and stockholders' equity................................... $70,635 $72,025
===================== =====================
<FN>
Note: The balance sheet at December 31, 1997 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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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
------------------------------------
<S> <C> <C>
June 30, June 30,
1998 1997
-------------- ---------------
Cash provided by operating activities......................................... $ 5,559 $ 6,878
Investing activities:
Capital expenditures....................................................... (1,751 ) (2,698 )
Purchases of short-term investments........................................ (17,024 ) (22,613 )
Sales of short-term investments............................................ 16,431 21,175
-------------- ---------------
Net cash used in investing activities.................................... (2,344 ) (4,136 )
Financing activities:
Principal payments under capital lease obligations and debt................ (104 ) (131 )
Proceeds from issuance of common stock..................................... 947 891
Acquisition of treasury stock.............................................. (1,011 ) (5,114 )
-------------- ---------------
Net cash used in financing activities.................................... (168 ) (4,354 )
-------------- ---------------
Net increase (decrease) in cash and cash equivalents.......................... 3,047 (1,612 )
Cash and cash equivalents at beginning of period.............................. 5,210 4,385
-------------- ---------------
Cash and cash equivalents at end of period.................................... $8,257 $2,773
============== ===============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1) Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range
of applications within the communications, computer and industrial markets
for sale primarily in North America, Asia and Europe.
2) The accompanying interim financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles and contain all adjustments (consisting of normal recurring
adjustments) 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 June 30, 1998, two customers accounted for
17% and 9% of total sales, respectively. During the six months ended June
30, 1998, two customers accounted for 21% 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>
June 30, December 31,
1998 1997
------------- -----------------
Raw materials........................................... $ 567 $ 712
Work-in-process......................................... 4,719 5,100
Finished goods.......................................... 2,394 2,011
$7,680 $7,823
Property, plant and equipment consist of the following (in thousands):
June 30, December 31,
1998 1997
------------- -----------------
Land....................................................... $ 2,850 $ 2,850
Buildings and improvements................................. 9,353 9,353
Machinery and equipment.................................... 31,944 30,193
44,147 42,396
Accumulated depreciation and amortization.................. 23,061 20,873
Net property, plant and equipment.......................... $21,086 $21,523
</TABLE>
6) Cash payments for income taxes and interest expense totaled $954,000 and
$133,000, respectively for the six months ended June 30, 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 six month
period of 1998 and 19978 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 second quarter of 1998, the
Company's Board of Directors had approved the repurchase of an aggregate of
$17.5 million of the Company's Common Stock. Through July 31, 1998, the
Company had repurchased 1,642,000 shares for a total cost of $15.0 million.
As of July 31, 1998, the Company had authorization to repurchase up to an
additional $2.5 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 June 30,
-----------------------------------------------------------------------------
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 $61 11,692 $0.01 $2,486 11,829 $0.21
Effect of dilutive
securities: 395 1,565
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders
assuming $61 12,087 $0.01 $2,486 13,394 $0.19
dilution
Six Months Ended June 30,
-----------------------------------------------------------------------------
1998 1997
------------------------------------- --------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income Per
Share:
Net income available
to common
stockholders $631 11,671 $0.05 $4,691 11,912 $0.39
Effect of dilutive
securities: 484 1,434
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders
assuming $631 12,155 $0.05 $4,691 13,346 $0.35
dilution
</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 six months ended
June 30, 1998 and 1997, comprehensive income approximated net income.
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 June 30,
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.
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 $11.7 million for the second quarter of 1998, a 40%
decrease over net revenues of $19.5 million for the second quarter of 1997 and a
4% decrease over net revenues of $12.2 million for the first quarter of 1998.
Net revenues were $24.0 million for the first half of 1998, a 33% decrease over
net revenues of $35.6 million for the first half of 1997. The decline in net
revenues is the result of softness in business demand for the second quarter and
the first half of 1998.
The Company serves three principal market segments, computer,
communications and industrial. Net revenues for the second quarter of 1998
compared to the second quarter of 1997 decreased 51% in the computer market, 45%
in the communications market and 7% in the industrial market. Net revenues for
the second quarter of 1998 compared to the first quarter of 1998 increased 49%
in the computer market, 10% in the industrial market and decreased 14% in the
communications market. Net revenues for the first half of 1998 compared to the
first half of 1997 decreased 35% in the communications market and 56% in the
computer market and increased 5% in the industrial market.
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
for the second quarter of 1998 in the networking sub-market decreased 49% and
19% compared to the second quarter of 1997 and the first quarter of 1998,
respectively. The quarterly decline in networking product revenues is
principally attributable to lower shipments of ethernet parts. Sales of the
Company's networking products accounted for approximately 60% and 66% of net
revenues in the first half of 1998 and 1997 , 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 have in the past and would in the future be materially and
adversely affected in the event of a significant slowdown in the computer
networking equipment market.
International net revenues were $5.6 million, or 48% of net revenues, for
the second quarter of 1998, compared to $11.6 million, or 60% of net revenues,
for the second quarter of 1997 and $5.2 million, or 42% of net revenues, for the
first quarter of 1998. International revenues were $12.6 million, or 47% of net
revenues, for the first half of 1998, compared to $19.7 million, or 55% of net
revenues, for the first half of 1997. The decrease in international revenues for
the second quarter of 1998 compared to the second quarter of 1997 and also for
the first half of 1998 compared to the first half 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. The slight
increase in international revenues for the second quarter of 1998 compared to
the first quarter of 1998 was due to more Asia Pacific subcontract work for
domestic customers. Despite the lower product demand in Asia through the end of
the second quarter of 1998, the Company does not expect any disproportionate
direct negative impact as a result of future financial and stock market
dislocations that may occur in the Asian financial markets as the majority of
the Company's Asia Pacific business is subcontract work for domestic customers.
Domestic distributor revenues were approximately 18% of net revenues for
the second quarter of 1998, 13% of net revenues for the second quarter of 1997
and 21% for the first quarter of 1998. Domestic distributor revenues were
approximately 20% and 15% of net revenues for the first half of 1998 and first
half of 1997, respectively. Effective in July 1998, the Company added a second
national domestic distributor. The Company expects sales from both domestic and
international distributors to increase in the future as a percentage of total
net revenues. 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.
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 43% in the second quarter of 1998
from 52% in the second quarter of 1997 and 54% in the first quarter of 1998 .
The Company's gross margin decreased to 49% for the first half of 1998 from 54%
for the first half of 1997. The Company's gross margin declined in the second
quarter of 1998 compared to the second quarter of 1997 and the first quarter of
1998 and in the first half of 1998 compared to the first half of 1997, primarily
due to the combination of an unfavorable change in product mix and lower
production output levels. Communications products represented 63% of the
Company's total shipments in the second quarter of 1998, down from 69% in the
second quarter of 1997 and 71% in the first quarter of 1998. Communication
products represented 67% of the Company's total shipments in the first half of
1998, down from 69% in the first half of 1997. It has been the Compan'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. 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 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 the Company's future
success.
Research and development expenses were $2.9 million, or 25% of net
revenues, for the second quarter of 1998, compared to $3.3 million, or 17% of
net revenues, for the second quarter of 1997 and $3.2 million, or 27% of net
revenues, for the first quarter of 1998. Research and development expenses were
$6.2 million, or 26% of net revenues, for the first half of 1998, compared to
$5.8 million, or 16% of net revenues, in the first half of 1997. The decrease in
research and development expenses in absolute dollars in the second quarter of
1998 compared to the second quarter of 1997 is primarily attributable to a
decrease in mask expenses and staffing levels offset by higher prototype product
costs associated with new product development. The decrease in research and
development expenses in absolute dollars in the second quarter of 1998 compared
to the first quarter of 1998 is primarily attributable to a decrease in
prototype product costs associated with new product development and mask
expenses offset by increased foundry charges for expedited processing. The
slight increase in research and development expenses in absolute dollars in the
first half of 1998 compared to the first half of 1997 is primarily attributable
to an increase in prototype product costs associated with new product
development and staffing levels being offset by decreased mask expenses and
bonus compensation costs. The Company expects its third quarter research and
development costs, in absolute dollars, to be higher than the second quarter
levels as new product tape-outs are expected to increase. The Company
established a design center in Cambridge, England during 1997. Through the end
of the second quarter of 1998, the Company has added a managing design director
and a staff of seven employees, of which four are design engineers. Further
selective headcount additions are expected during 1998.
Selling, General and Administrative
Selling, general and administrative expenses were $2.4 million, or 20% of
net revenues, for the second quarter of 1998, compared to $3.2 million, or 16%
of net revenues, for the second quarter of 1997 and $2.8 million, or 23% of net
revenues, for the first quarter of 1998. Selling, general and administrative
expenses were $5.2 million, or 22% of net revenues, for the first half of 1998
compared to $6.6 million, or 19% of net revenues, for the first half of 1997.
The decreases in absolute dollars in the second quarter of 1998 and the first
half of 1998 compared to the second quarter of 1997 and the first half of 1997,
respectively, is primarily attributable to a decrease in commissions due to
lower revenues, decreased business conference expenses and lower bonus
compensation costs being partially offset by higher legal fees. The Company
expects selling, general and administrative expenses to generally fluctuate with
revenue in the future.
Interest and Other Income and Interest Expense
Interest and other income was $0.4 million for the first and second
quarters of 1998 and $0.3 million for the second quarter of 1997. The increase
in the second quarter of 1998 compared to the second quarter of 1997 is
attributable primarily to higher cash balances. Interest expense was
insignificant for the first and second quarters of 1998 and the second quarter
of 1997.
Provision for Income Taxes
The Company's effective tax rate for the first half of 1998 and the first
half 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
During the last several years, the Company has financed its operations and
capital requirements principally through cash flow from operations. Operations
provided $5.6 million of net cash during the first half of 1998, a decrease of
$1.3 million over the first half of 1997. The decrease in the first half of 1998
compared to the first half of 1997 is primarily attributable to lower net income
and accrued liabilities offset by lower accounts receivable.
Cash used in investing activities for the first half of 1998 is
attributable to capital expenditures of $1.8 million and net purchase of
short-term investments of $0.6 million.
Financing activities for the first half of 1998 consisted primarily of the
repurchase of the Company's Common Stock for an aggregate of $1.0 million. From
January 1996 through the second quarter of 1998, the Board of Directors approved
the repurchase of an aggregate of $17.5 million of the Company's Common Stock in
stock repurchase programs. Through July 28, 1998, the Company had repurchased
1,642,000 shares at an aggregate cost of $15.0 million. As of July 31, 1998, the
Company had remaining authorization to repurchase additional shares of the
Company's Common Stock costing up to $2.5 million.
Working capital was $41.0 million as of June 30, 1998, compared to $40.0
million as of December 31, 1997. Working capital at June 30, 1998included cash
and cash equivalents of $8.3 million and short-term investments of $21.2 million
as of June 30, 1998.
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
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 60% of
the Company's net revenues in the first half of 1998 and accounted for 7 of the
Company's 10 top selling products for the first half of 1998. These 7 products
constituted approximately 37% 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 dependence 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 are likely to 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 demand is 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 any new employees into
its overall operations, to continue to improve its operational, financial and
management systems and to attract, train, motivate and manage its employees
successfully. If the Company's management is unable to manage growth
effectively, the Company's business and results of operations could be
materially and adversely affected.
The semiconductor industry is characterized by rapid technological change,
cyclical market patterns, significant price erosion, periods of over-capacity
and production shortages, variations in manufacturing costs and yields and
significant expenditures for capital equipment and product development. The
industry has from time to time experienced depressed business conditions. The
Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions or other
factors.
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 has developed 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 July
26, 1998 the Company has not identified any loss contingencies related to the
year 2000 issues for products it has sold.
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 parties have a patent claim construction
hearing currently scheduled for August 31, 1998. The court has not set a trial
date or a discovery cutoff date.
On February 24, 1997, a former employee of the Company 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 June 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 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 June 3, 1998:
(a) The following Directors were elected:
<TABLE>
<CAPTION>
Directors Votes For % of Outstanding Shares
- ------------------------------------------- -------------- ----------------------------------
<S> <C> <C>
Arthur B. Stabenow 11,801,222 92.9
Roger A. Smullen 11,821,584 93.0
Jeffrey D. West 11,821,584 93.0
Joseph D. Rizzi 11,821,584 93.0
David L. Gellatly 11,821,584 93.0
(b) The stockholders approved the following proposals:
<S> <C> <C> <C> <C>
Number of Common Shares Voted
% of Outstanding
Proposal For Shares Against Abstain
------------------------------------- --------------- ------------------- ------------ ----------
1) Amendment to increase the
authorized number of shares of
the Company's Common Stock
reserved for issuance under the 9,593,123 82.5 1,479,364 18,473
Company's Director Stock Option
Plan to 180,000 shares.
2) Ratification of the appointment
of Price Waterhouse LLP as the
Company's independent
accountants for fiscal year 1998. 10,925,953 93.9 135,167 28,840
</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
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 11, 1998 By: /s/ J. PHILIP RUSSELL
J. Philip Russell
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE>
<CAPTION>
Micro Linear Corporation
Statement Re Computation of Earnings Per Share
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30,
-----------------------------------------------------------------------------
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 $61 11,692 $0.01 $2,486 11,829 $0.21
Effect of dilutive
securities: 395 1,565
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders
assuming $61 12,087 $0.01 $2,486 13,394 $0.19
dilution
Six Months Ended June 30,
-----------------------------------------------------------------------------
1998 1997
------------------------------------- --------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic Income Per
Share:
Net income available
to common
stockholders $631 11,671 $0.05 $4,691 11,912 $0.39
Effect of dilutive
securities: 484 1,434
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders
assuming $631 12,155 $0.05 $4,691 13,346 $0.35
dilution
</TABLE>
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<CIK> 0000875359
<NAME> Micro Linear Corp
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