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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 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)
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 1998 was 11,404,388.
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<TABLE>
<CAPTION> TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Condensed Statements of Income for the three and nine months
ended September 30, 1998 and 1997.......................................... 3
Consolidated Condensed Balance Sheets at September 30, 1998 and December 4
31, 1997....................................................................
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 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 2. Changes in Securities....................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................ 14
SIGNATURES.............................................................................. 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net revenues...................................................... $11,758 $15,036 $35,742 $50,675
Cost of revenues.................................................. 5,919 8,405 18,171 24,799
------------- ------------- ------------- ------------
Gross profit.................................................... 5,839 6,631 17,571 25,876
------------- ------------- ------------- ------------
Operating expenses:
Research and development........................................ 2,855 2,893 9,006 8,725
Selling, general and administrative............................. 2,876 2,863 8,067 9,469
------------- ------------ -------------- ------------
5,731 5,756 17,073 18,194
------------- ------------ -------------- ------------
Income from operations.......................................... 108 875 498 7,682
Interest and other income......................................... 372 331 1,100 994
Interest expense.................................................. (65) (69) (198) (210)
------------- ------------ -------------- ------------
Income before taxes............................................. 415 1,137 1,400 8,466
Provision for income taxes........................................ 150 409 504 3,048
------------- ------------ -------------- ------------
Net income...................................................... $ 265 $ 728 $ 896 $ 5,418
============= ============ ============== ============
Net Income Per Share:
Basic:
Net income per share............................................ $0.02 $0.06 $0.08 $0.46
============= ============ ============== ============
Weighted average number of shares used in per share computation. 11,642 11,811 11,661 11,878
============= ============ ============== ============
Diluted:
Net income per share............................................ $0.02 $0.06 $0.07 $0.41
============= ============ ============== ============
Weighted average number of shares used in per share computation. 11,992 12,679 12,101 13,146
============= ============ ============== ============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<S> <C> <C>
September 30, December 31,
1998 1997
--------------------- ------------------
Assets
Current assets:
Cash and cash equivalents.................................................... $ 6,820 $ 5,210
Short-term investments....................................................... 22,285 20,653
Accounts receivable, net..................................................... 5,924 10,367
Inventories.................................................................. 7,608 7,823
Other current assets......................................................... 5,421 5,768
--------------------- ------------------
Total current assets....................................................... 48,058 49,821
--------------------- ------------------
Property, plant and equipment, net.............................................. 20,636 21,523
Other assets.................................................................... 596 681
===================== ==================
Total assets............................................................. $69,290 $72,025
===================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................. $ 3,229 $ 3,612
Deferred income on shipments to distributors................................. 2,520 2,695
Other accrued liabilities.................................................... 2,967 3,592
--------------------- ------------------
Total current liabilities.................................................. 8,716 9,899
--------------------- ------------------
Long-term debt.................................................................. 2,654 2,805
--------------------- ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value
Authorized shares 5,000,000;
None issued and outstanding ............................................ - -
Common stock, $.001 par value
Authorized shares 30,000,000;
Issued shares 13,487,988 and 13,168,003
Outstanding shares 11,404,388 and 11,656,003 ........................... 14 13
Additional paid-in capital................................................... 53,859 52,890
Retained earnings............................................................ 21,341 20,445
Treasury stock, 2,083,600 and 1,512,000 shares at cost....................... (17,294 ) (14,027 )
--------------------- ------------------
Total stockholders' equity................................................. 57,920 59,321
--------------------- ------------------
Total liabilities and stockholders' equity............................... $69,290 $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 unaudited consolidated condensed financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
-----------------------------------------
<S> <C> <C>
September 30, September 30,
1998 1997
----------------- ------------------
Cash provided by operating activities........................... $8,129 $10,855
----------------- ------------------
Investing activities:
Capital expenditures......................................... ( 2,432 ) (3,846 )
Purchases of short-term investments.......................... (32,092 ) (32,735 )
Sales of short-term investments.............................. 30,460 30,961
----------------- ------------------
Net cash used in investing activities...................... (4,064 ) (5,620 )
----------------- ------------------
Financing activities:
Principal payments under capital lease obligations and debt.. (151 ) (170 )
Proceeds from issuance of common stock....................... 963 1,334
Acquisition of treasury stock................................ (3,267 ) (6,903 )
----------------- ------------------
Net cash used in financing activities...................... (2,455 ) (5,739 )
----------------- ------------------
Net increase (decrease) in cash and cash equivalents............ 1,610 (504 )
Cash and cash equivalents at beginning of period................ 5,210 4,385
----------------- ------------------
Cash and cash equivalents at end of period...................... $6,820 $3,881
================= ==================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
MICRO LINEAR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1) Micro Linear Corporation (the "Company") designs, develops and markets high
performance analog and mixed signal integrated circuits for a broad range
of applications within the communications, computer and industrial markets
for sale primarily in North America, Asia and Europe.
2) The accompanying interim financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles and contain all adjustments (consisting of normal recurring
adjustments) to fairly present the financial information included. While
the Company believes that the disclosures are adequate to make the
information not misleading, it is suggested that these financial statements
be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 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 September 30, 1998, one customer accounted
for 21% of total sales. During the nine months ended September 30, 1998,
one customer accounted for 20% of total sales.
5) Supplemental Financial Information:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1998 1997
----------------- -----------------
Raw materials.............................................. $ 340 $ 712
Work-in-process............................................ 5,259 5,100
Finished goods............................................. 2,009 2,011
$ 7,608 $ 7,823
Property, plant and equipment consist of the following (in thousands):
September 30, December 31,
1998 1997
----------------- ----------------
Land....................................................... $ 2,850 $ 2,850
Buildings and improvements................................. 9,358 9,873
Machinery and equipment.................................... 32,620 29,673
44,828 42,396
Accumulated depreciation and amortization.................. 24,192 20,873
Net property, plant and equipment.......................... $20,636 $21,523
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6) Cash payments for income taxes and interest expense totaled $905,000 and
$198,000, respectively, for the nine months ended September 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 nine month
period 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 third 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 October 31, 1998, the
Company had repurchased 2,083,600 shares for a total cost of $17.3 million.
As of October 31, 1998, the Company had authorization to repurchase up to
an additional $3.0 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):
<TABLE>
<CAPTION>
Three Months Ended September 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 $265 11,642 $0.02 $728 11,811 $0.06
Effect of dilutive
securities: 350 868
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $265 11,992 $0.02 $728 12,679 $0.06
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Nine Months Ended September 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 $896 11,661 $0.08 $5,418 11,878 $0.46
Effect of dilutive
securities: 440 1,268
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $896 12,101 $0.07 $5,418 13,146 $0.41
</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 nine months
ended September 30, 1998 and 1997, comprehensive income approximated net
income.
11) A discussion of certain pending legal proceedings is included in Item 1 of
Part II of the Company's Form 10-Q for the fiscal quarter ended September
30, 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. 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 $11.8 million for the third quarter of 1998, a 22%
decrease over net revenues of $15.0 million for the third quarter of 1997 and a
slight increase over net revenues of $11.7 million for the second quarter of
1998. Net revenues were $35.7 million for the first three quarters of 1998, a
29% decrease over net revenues of $50.7 million for the first three quarters of
1997.
The Company serves three principal market segments, computer,
communications and industrial. Net revenues for the third quarter of 1998
compared to the third quarter of 1997 decreased 24% in the communications
market, 15% in the industrial market and 10% in the computer market. Net
revenues for the third quarter of 1998 compared to the second quarter of 1998
increased 11% in the industrial market and decreased 9% and 3% in the computer
and communications markets, respectively. Net revenues for the first three
quarters of 1998 compared to the first three quarters of 1997 decreased 32% in
the communications market, 47% in the computer market and 3% 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 third quarter of 1998 in the networking sub-market decreased 27%
compared to the third quarter of 1997, and were flat with the second quarter of
1998. Sales of the Company's networking products accounted for approximately 59%
and 64% of net revenues in the first three quarters 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 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 near future. The
Company's business and results of operations have in the past and will 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 $4.1 million, or 35% of net revenues, for
the third quarter of 1998, compared to $7.8 million, or 52% of net revenues, for
the third quarter of 1997 and $5.7 million, or 49% of net revenues, for the
second quarter of 1998. International revenues were $15.0 million, or 42% of net
revenues, for the first three quarters of 1998, compared to $27.5 million, or
54% of net revenues, for the first three quarters of 1997. The decrease in
international revenues for the third quarter of 1998 compared to the third
quarter of 1997 and the second quarter of 1998 and also for the first three
quarters of 1998 compared to the first three quarters of 1997 was due to the
combination of lower direct product demand for the Company's products in Asia
and decreased Asia Pacific subcontract work for domestic customers. Despite the
lower product demand in Asia through the end of the third 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 25% of net revenues for
the third quarter of 1998, 17% of net revenues for the third quarter of 1997 and
18% of net revenues for the second quarter of 1998. Domestic distributor
revenues were approximately 21% and 16% of net revenues for the first three
quarters of 1998 and first three quarters 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 increased to 50% in the third quarter of 1998
from 44% in the third quarter of 1997 and 43% in the second quarter of 1998. The
Company's gross margin decreased to 49% for the first three quarters of 1998
from 51% for the first three quarters of 1997. The Company's gross margin
improved in the third quarter of 1998 compared to the third quarter of 1997 and
the second quarter of 1998 primarily due to a favorable change in product mix.
The Company's gross margin declined in the first three quarters of 1998 compared
to the first three quarters of 1997 primarily due to the combination of an
unfavorable change in product mix and lower production output levels.
Communications products represented 61% of the Company's total shipments in
the third quarter of 1998, down from 64% in the third quarter of 1997 and 63% in
the second quarter of 1998. The mix of products in the communications segment in
the third quarter of 1998 had higher gross margins than the mix of products in
such segment in the third quarter of 1997 or second quarter of
1998.Communication products represented 65% of the Company's total shipments in
the first three quarters of 1998, down from 68% in the first three quarters 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. 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. The Company expenses prototype wafers and new
production mask sets related to new products as research and development costs
until products based on new designs are fully characterized by the Company and
are demonstrated to support published data sheets and satisfy reliability tests.
The Company believes that the development and introduction of new products is
critical to its future success. Research and development expenses such as mask
and silicon costs that are related to the development of new products can
fluctuate from quarter to quarter due to the timing of the product design
process.
Research and development expenses were $2.9 million, or 24% of net
revenues, for the third quarter of 1998, compared to $2.9 million, or 19% of net
revenues, for the third quarter of 1997 and $2.9 million, or 25% of net
revenues, for the second quarter of 1998. Research and development expenses were
$9.0 million, or 25% of net revenues, for the first three quarters of 1998,
compared to $8.7 million, or 17% of net revenues, in the first three quarters of
1997. Research and development expenses in absolute dollars in the third quarter
of 1998 were flat with the second quarter of 1998 and the third quarter of 1997.
The slight increase in research and development expenses in absolute dollars in
the first three quarters of 1998 compared to the first three quarters of 1997 is
primarily attributable to an increase in prototype product costs associated with
new product development offset by a decline in mask, payroll, and travel costs.
The Company established a design center in Cambridge, England during 1997, and
through the end of the third quarter of 1998 the Company had added a managing
design vice president and a staff of seven employees, of which four are design
engineers. Further selective headcount additions are expected during the fourth
quarter of 1998.
Selling, General and Administrative
Selling, general and administrative expenses were $2.9 million, or 24% of
net revenues, for the third quarter of 1998, compared to $2.9 million, or 19% of
net revenues, for the third quarter of 1997 and $2.4 million, or 20% of net
revenues, for the second quarter of 1998. Selling, general and administrative
expenses were $8.1 million, or 23% of net revenues, for the first three quarters
of 1998 compared to $9.5 million, or 19% of net revenues, for the first three
quarters of 1997. The expenses in absolute dollars in the third quarter of 1998
were flat with the third quarter of 1997. The decrease in absolute dollars in
the first three quarters of 1998 compared to the first three quarters of 1997 is
primarily attributable to decreased commissions due to lower revenues and a
decrease in staffing and business conference costs. The increase in absolute
dollars in the third quarter of 1998 compared to the second quarter of 1998 is
primarily attributable to an increase in sales commission and business
conference costs. The Company expects selling, general and administrative
spending to remain relatively constant as a percentage of sales revenues from
quarter to quarter.
Interest and Other Income and Interest Expense
Interest and other income was $0.4 million for each of the first three
quarters of 1998 and $0.3 million for the third quarter of 1997. Interest
expense was insignificant for the first three quarters of 1998 and the first
three quarters of 1997.
Provision for Income Taxes
The Company's effective tax rate for the first three quarters of 1998 and
the first three 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
During the last several years, the Company has financed its operations and
capital requirements principally through cash flow from operations. Operations
provided $8.1 million of net cash during the first three quarters of 1998, a
decrease of $2.7 million over the first three quarters of 1997. The decrease in
the first three quarters of 1998 compared to the first three quarters 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 three quarters of 1998 is
attributable to capital expenditures of $2.4 million and net purchases of
short-term investments of $1.6 million. As of September 30, 1998 the company had
capital commitments for the remainder of 1998 of approximately $1.4 million.
Financing activities for the first three quarters of 1998 consisted
primarily of the repurchase of the Company's Common Stock for an aggregate of
$3.3 million. 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 October 31, 1998, the
Company had repurchased 2,083,600 shares for a total cost of $17.3 million. As
of October 31, 1998, the Company had authorization to repurchase up to an
additional $3.0 million of the Company's Common Stock.
Working capital was $39.4 million as of September 30, 1998, compared to
$40.0 million as of December 31, 1997 and includes cash and cash equivalents of
$6.8 million and short-term investments of $22.3 million as of September 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 networking equipment manufacturers accounted for approximately 59%
of the Company's net revenues in the first three quarters of 1998 and accounted
for 7 of the Company's 10 top selling products for the first three quarters 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 dependence
on sales to networking equipment manufacturers to continue for the next several
quarters. 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. In
particular, during the last several quarters, the semiconductor industry has
experienced a significant slow down in growth. These soft market conditions have
adversely impacted the Company's business and operating results. The Company
expects these soft market conditions to continue at least through the fourth
quarter of 1998. The Company expects to experience 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 has
also commenced on a Year 2000 date conversion project to address machinery,
equipment and other items used in the operations of the Company.
The required changes to the Company's information systems and items used in
the operations of the Company are expected to be completed by the end of June
1999. The financial impact of these changes is expected to be approximately
$100,000, which constitutes approximately 4 percent of the Company's information
technology budget during such period. Of such amount, approximately $10,000 has
been spent to date. None of the Company's other information technology projects
have been deferred as a result of the Company's Year 2000 compliance efforts.
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. As part of this plan, the Company
contacted each of its critical vendors in September 1998 to determine whether
they were Year 2000 compliant. Many of such vendors have not yet responded to
the Company's inquiries and the Company is continuing to evaluate Year
2000-related risks and corrective actions that may be associated with these
critical vendors. Of the critical vendors that have responded none have
indicated any problems or non-compliance with Year 2000. At this time, the Year
2000 compliance expense and related potential effect of the Company's earnings
are estimated to be insignificant. As of March 26, 1998 the Company has not
identified any loss contingencies related to the year 2000 issues for products
it has sold.
The company is continuing to evaluate Year 2000-related risks and
corrective actions. However, the risks associated with the Year 2000 problem are
pervasive and complex, can be difficult to identify and to address, and can
result in material adverse consequences to the company. Even if the company, in
a timely manner, completes all of its assessments, identifies and tests
remediation plans believed to be adequate, and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the company.
<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 November 9, 1998, hearing in this matter
was held and the judge is expected to issue a ruling in the near future.
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 September 25,
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 2. Changes in Securities
In August 1998, the Company adopted a Preferred Shares Rights Plan (the
"Plan"). The Plan entails a dividend of one right for each outstanding share of
the Company's common stock. The rights are represented by and traded with the
Company's common stock. There are no separate certificates or market for the
rights.The rights do not become exercisable or trade separately from the common
stock unless 15% or more of the common stock of the Company has been acquired,
or after a tender or exchange offer is made for 15% or greater ownership of the
Company's common stock. Should the rights become exercisable, each right will
entitle the holder thereof to buy 1/1,000th of a share of the Company's Series A
Preferred Stock at an exercise price of $30. Each 1/1,000th of a share of the
new Series A preferred Stock will essentially be the economic equivalent of one
share of common stock.
Under certain circumstances, the rights "flip-in" and become rights to buy
the Company's common stock at a 50% discount. Under certain other circumstances,
the rights "flip-over" and become rights to buy an acquirer's common stock at a
50% discount.
The rights may be redeemed by the Company for $0.01 per right at any time
on or prior to the tenth day (or a later date as determined by the Board of
Directors) following the first public announcement by the Company of the
acquisition of beneficial ownership of 15% of the Company's common stock.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICRO LINEAR CORPORATION
Date: November 12, 1998 By: /s/ J. PHILIP RUSSELL
J. Philip Russell
Chief Financial Officer
(Principal Financial and Accounting Officer)
<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 September 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 $265 11,642 $0.02 $728 11,811 $0.06
Effect of dilutive
securities: 350 868
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $265 11,992 $0.02 $728 12,679 $0.06
Nine Months Ended September 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 $896 11,661 $0.08 $5,418 11,878 $0.46
Effect of dilutive
securities: 440 1,268
Stock options
Diluted Income Per
Share:
Net income available
to common
stockholders assuming
dilution $896 12,101 $0.07 $5,418 13,146 $0.41
</TABLE>
<TABLE> <S> <C>
<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> JUL-01-1998
<PERIOD-END> SEP-30-1998
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<SECURITIES> 22285
<RECEIVABLES> 6830
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<PP&E> 44828
<DEPRECIATION> 24192
<TOTAL-ASSETS> 69290
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0
0
<COMMON> 14
<OTHER-SE> 57906
<TOTAL-LIABILITY-AND-EQUITY> 69290
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