EXHIBIT 13.1 - Certain information included in the Registrant's Annual Report to
Shareholders for the fiscal year ended July 2, 2000
LINEAR TECHNOLOGY CORPORATION
QUARTERLY RESULTS AND STOCK MARKET DATA
(UNAUDITED)
In thousands, except per share amounts
- ------------------------------------------- ------------------ ------------------ ------------------ -----------------
Fiscal 2000
Quarter Ended July 2, 2000 April 2, 2000 Jan. 2, 2000 Sept. 26, 1999
- ------------------------------------------- ------------------ ------------------ ------------------ -----------------
Net sales $211,017 $185,075 $162,294 $147,531
Gross profit 159,010 137,640 120,756 109,562
Net income 88,631 75,867 64,951 58,457
Diluted earnings per share 0.27 0.23 0.20 0.18
Cash dividends per share 0.03 0.02 0.02 0.02
Stock price range per share:
High 72.31 58.06 40.88 37.88
Low 41.00 36.00 27.89 28.78
- ------------------------------------------- ------------------ ------------------ ------------------ -----------------
Fiscal 1999
Quarter Ended June 27, 1999 March 28, 1999 Dec. 27, 1998 Sept. 27, 1998
- ------------------------------------------- ------------------ ------------------ ----------------- ------------------
Net sales $140,524 $130,093 $120,020 $116,032
Gross profit 104,037 94,450 85,991 82,370
Net income 54,179 49,828 45,904 44,382
Diluted earnings per share 0.17 0.16 0.14 0.14
Cash dividends per share 0.02 0.0175 0.0175 0.0175
Stock price range per share:
High 32.85 26.19 21.05 19.00
Low 25.63 20.63 10.25 11.75
- ------------------------------------------- ------------------ ------------------ ----------------- ------------------
Diluted earnings per share amounts are based on the weighted average common
shares and dilutive stock options outstanding during the quarter and may not add
to diluted earnings per share for the year. All share and per share amounts
reflect the Company's two-for-one stock split effective in February 2000.
The stock activity in the above table is based on the high and low closing
prices. These prices represent quotations between dealers without adjustment for
retail markups, markdowns or commissions, and may not represent actual
transactions. The Company's common stock is traded on the NASDAQ National market
System under the symbol LLTC.
At July 2, 2000, there were approximately 1,448 shareholders of record.
LINEAR TECHNOLOGY CORPORATION
SELECTED FINANCIAL INFORMATION/FIVE-YEAR TREND
In thousands, except per share amounts
- ------------------------------------------------ ------------ ------------ ------------ ------------ -------------
FIVE FISCAL YEARS ENDED JULY 2, 2000 2000 1999 1998 1997 1996
- ------------------------------------------------ ------------ ------------ ------------ ------------ -------------
Income statement information
Net sales $ 705,917 $ 506,669 $484,799 $379,251 $377,771
Net income 287,906 194,293 180,902 134,371 133,964
Basic earnings per share 0.93 0.64 0.59 0.45 0.45
Diluted earnings per share 0.88 0.61 0.57 0.43 0.43
Weighted average shares outstanding - Basic 310,953 304,040 305,272 299,952 296,760
Weighted average shares outstanding - Diluted 328,002 317,888 319,878 314,180 311,552
Balance sheet information
Cash, cash equivalents and short-term
investments $1,175,558 $786,707 $637,893 $443,439 $322,472
Total assets 1,507,256 1,046,914 892,822 679,633 529,802
Long-term debt -- -- -- -- --
Cash dividends per share $0.09 $0.0725 $0.06 $0.05 $0.04
- ------------------------------------------------ ------------ ------------ ------------ ------------ -------------
All share and per share amounts reflect the Company's two-for-one stock split
effective in February 2000.
LINEAR TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
The table below states the income statement items as a percentage of net sales
and provides the percentage change of such items compared to the prior fiscal
year amount.
Percentage
Fiscal Year Ended Change
------------------------------------------- -----------------------
2000 1999
July 2, June 27, June 28, Over Over
2000 1999 1998 1999 1998
- --------------------------------------------- ---------------- ----------------- ---------------- ----------------- ----------------
Net sales 100.0% 100.0% 100.0% 39% 5%
Cost of sales 25.4 27.6 28.4 28 1
- --------------------------------------------- ---------------- ----------------- ----------------
Gross profit 74.6 72.4 71.6 44 6
- --------------------------------------------- ---------------- ----------------- ----------------
Expenses:
Research and development 11.1 10.8 9.5 43 18
Selling, general and administrative 10.5 10.7 11.0 37 2
- --------------------------------------------- ---------------- ----------------- ----------------
21.6 21.5 20.5 40 9
- --------------------------------------------- ---------------- ----------------- ----------------
Operating income 53.0 50.9 51.1 45 4
- --------------------------------------------- ---------------- ----------------- ----------------
Interest income 6.1 5.5 4.9 54 17
- --------------------------------------------- ---------------- ----------------- ----------------
Income before income taxes 59.1% 56.4% 56.0% 46 5
- --------------------------------------------- ---------------- ----------------- ----------------
Effective tax rates 31.0% 32.0% 33.3%
- --------------------------------------------- ---------------- ----------------- ---------------- ----------------- ----------------
Net sales were a record $705.9 million in fiscal 2000, an increase of 39% over
net sales of $506.7 million in fiscal 1999. The increase in net sales was
primarily due to an increase in unit shipments, while the average selling price
for the Company's products declined slightly during the year. Geographically,
international sales represented 54% of net sales, the same percentage as in
fiscal 1999. International sales to Europe, Japan and the Rest of the World,
primarily Asia, represented 20%, 12% and 22% of net sales, respectively. In
absolute dollars, sales increased 39% year over year in the United States,
increased by 19% in Europe, increased by 37% in Japan, and increased
significantly by 69% in the Rest of the World. The increase in the Rest of the
World was due both to business generated in the United States but manufactured
in Asia and to the improved overall economic environment in Asia. The Company's
major end-markets are communications, computer and industrial. Sales into all
major end-markets were strong with communications leading computer and
industrial. Within communications the major end-markets are networking, cellular
phone handsets and telephone infrastructure, primarily cellular base stations.
Sales in the networking area were fueled by growth in internet infrastructure
products.
Net sales were $506.7 million in fiscal 1999, an increase of 5% over net sales
of $484.8 million in fiscal 1998. The increase in net sales was primarily due to
an increase in unit shipments, while the average selling price for the Company's
products declined slightly during the year. The Company experienced sales growth
in the communications end-market, with flat sales year over year recorded by the
computer and industrial end-markets. International sales represented 54% and 52%
of net sales in fiscal 1999 and 1998, respectively. The increase in
international sales was due primarily to strong sales in the Rest of the World,
where sales increased 39% over the prior year. Sales to Japan, increased 2%,
while sales in Europe, year over year declined 5%.
Gross profit was $526.9 million or 74.6% of net sales in fiscal 2000. The
increase in gross profit as a percentage of sales as compared to 72.4% in fiscal
1999 was due primarily to the favorable effect of fixed costs allocated across a
higher sales base and better manufacturing efficiencies and yields achieved at
the Company's fabrication, assembly and test facilities. These improvements were
partially offset by a modest reduction in average selling price.
Gross profit was $366.8 million or 72.4% of net sales in fiscal 1999 compared to
$347.0 million or 71.6% of net sales in fiscal 1998. The increase in gross
profit as a percentage of sales was due primarily to the favorable effect of
fixed costs allocated across a higher sales base and slightly better
manufacturing efficiencies and yields achieved at the Company's fabrication,
assembly and test facilities. These improvements were partially offset by a
modest reduction in average selling price.
In addition to the specific functional spending fluctuations mentioned below,
the operating expenses of the Corporation were also impacted by one additional
week of expenses included in fiscal 2000 because the Company operates on a 52/53
week year ending on the Sunday nearest June 30. Fiscal 2000 consisted of 53
weeks, while the two prior fiscal years used for comparative purposes each had
52 weeks. The additional week occurred in the Company's second fiscal quarter.
Research and development ("R&D") expenses were $78.3 million, $54.7 million and
$46.2 million in fiscal 2000, 1999 and 1998, respectively, or 11.1%, 10.8% and
9.5% of net sales, respectively. The increase in R&D expenses in fiscal 2000 as
compared to 1999 was due primarily to an increase in compensation costs from
increased staffing, particularly design and test engineering personnel and
higher profit sharing. In addition, development costs in new product areas, the
addition of a new design center and an increase in patent related expenses
contributed to the increase in R&D expenses. The increase in R&D expenses in
fiscal 1999 as compared to 1998 was due primarily to an increase in staffing,
particularly design engineering personnel, an increase in spending for
development mask sets and the addition of a new design center.
Selling, general and administrative ("SG&A") expenses were $74.3 million, $54.3
million and $53.3 million in fiscal 2000, 1999 and 1998, respectively, or 10.5%,
10.7% and 11.0% of net sales, respectively. The significant increase in SG&A
expenses in fiscal 2000 as compared to 1999 resulted from an increase in
staffing, particularly sales personnel, as the Company continued to grow its
internal sales force. The magnitude of the sales increase and the growth of the
direct sales force resulted in an increase in both internal and external
commissions. Also accounting for the increased SG&A costs were higher profit
sharing and external communication charges, primarily advertising.
Interest income increased 54% in fiscal 2000 to $42.9 million and increased 17%
in fiscal 1999 to $27.8 million from $23.7 million in fiscal 1998. The year over
year increases were due primarily to the significant increases in cash, cash
equivalents and short-term investments which grew $388.9 million and $148.8
million in fiscal 2000 and 1999, respectively. This increase was primarily due
to the increase in cash generated from operations; secondarily cash increased as
a result of the exercise of stock options and the tax benefit derived therefrom.
In 1999 the Company purchased back $108.7 million of its common stock. In fiscal
2000, nominally higher interest rates and one additional week of interest income
due to the 53 week fiscal year contributed to the higher interest income in
conjunction with the higher cash balance.
The Company's effective tax rate was 31.0%, 32.0% and 33.3% in fiscal 2000, 1999
and 1998, respectively. The lower tax rates in fiscal 2000 and 1999 were due to
higher business activity in foreign jurisdictions, an increase in assets
employed outside of California where the Company experiences lower state tax
rates, and an increase in tax-exempt income.
Factors Affecting Future Operating Results
Except for historical information contained herein, the matters set forth in
this Annual Report, including the statements in the following paragraphs, are
forward-looking statements that are dependent on certain risks and uncertainties
including such factors, among others, as the timing, volume and pricing of new
orders received and shipped during the quarter, timely ramp-up of new
facilities, the timely introduction of new processes and products, general
conditions in the world economy, the market for the Company's goods and other
factors as described below.
The Company's tax holiday in Singapore expired in September 1999. The Company is
finalizing a modified tax holiday that would be effective through September
2004. The Company is also currently applying for an extension of its Malaysia
tax holiday, which expired in June 2000, and believes that an extension will be
granted. An increase in business activity and assets employed outside of
California and an increase in tax-exempt interest income resulted in a lower
effective tax rate in fiscal 2000 as compared to fiscal 1999.
The Company plans to finish building a new wafer fabrication facility in
California in fiscal 2001. As a result, total capital expenditures are expected
to increase significantly over fiscal 2000 levels, particularly towards the
beginning of fiscal 2001. The new facility is planned to be in production in the
second half of fiscal 2001, at which time depreciation will commence.
Past performance of the Company may not be a good indicator of future
performance due to factors affecting the Company, its competitors, the
semiconductor industry and the overall economy. The semiconductor industry is
characterized by rapid technological change, price erosion, cyclical market
patterns, periodic oversupply conditions, occasional shortages of materials,
capacity constraints, variation in manufacturing efficiencies and significant
expenditures for capital equipment and product development. The Company's
headquarters and a portion of its manufacturing facilities and research and
development activities and certain other critical business operations are
located near major earthquake fault lines. Consequently the Company could be
adversely affected in the event of a major earthquake. Furthermore, new product
introductions and patent protection of existing products are critical factors
for future sales growth and sustained profitability.
Although the Company believes that it has the product lines, manufacturing
facilities and technical and financial resources for its current operations,
sales and profitability can be significantly affected by the above and other
factors. Additionally, the Company's common stock could be subject to
significant price volatility should sales and/or earnings fail to meet
expectations of the investment community. Furthermore, stocks of high technology
companies are subject to extreme price and volume fluctuations that are often
unrelated or disproportionate to the operating performance of these companies.
Liquidity and Capital Resources
At July 2, 2000, cash, cash equivalents and short-term investments totaled
$1,175.6 million, an increase of $388.9 million or 49% over cash, cash
equivalents and short-term investments of $786.7 million at the end of fiscal
1999.
The issuance of common stock under stock option plans provided $155.4 million in
proceeds and tax benefits in fiscal 2000 as compared to $87.4 million in fiscal
1999. The proceeds from stock issuances increased by $16.4 million in fiscal
2000 due to increases in the number of options exercised and the average
exercise price. The tax benefit from stock option transactions increased by
$51.6 million in fiscal 2000 due to
increases in the number of options exercised and the taxable gains on exercises
resulting from higher market prices for the Company's stock. Generally, the
Company receives a tax deduction for the gain the employee recognizes on the
exercise of a nonqualified stock option and records this tax benefit as an
increase in common stock and a reduction in current income taxes payable.
The Company's capital expenditures in fiscal 2000 totaled $80.3 million covering
land and buildings in the United States, buildings in Asia and machinery and
equipment for the Company's fabrication, test and assembly facilities.
Cash dividends of $0.09 per share totaling $27.9 million were paid by the
Company in fiscal 2000 as compared to $0.0725 per share totaling $22.1 million
in fiscal 1999. In April 2000, the Company's Board of Directors announced that
the quarterly cash dividend was increased to $0.03 per share from $0.02 per
share. Future dividends will be based on quarterly financial performance.
The Company's cash equivalents and short-term investments are subject to market
risk, primarily interest-rate and credit risk. The Company's investments are
managed by outside professional managers within investment guidelines set by the
Company. Such guidelines include security type, credit quality and maturity and
are intended to limit market risk by restricting the Company's investments to
high quality debt instruments with relatively short-term maturities. Based upon
the weighted average duration of the Company's investments at July 2, 2000, a
hypothetical 100 basis point increase in short-term interest rates would result
in an unrealized loss in market value of the Company's investments totaling
approximately $8.4 million. However, because the Company's debt securities are
classified as available-for-sale, no gains or losses are recognized by the
Company due to changes in interest rates unless such securities are sold prior
to maturity. The Company generally holds securities until maturity and carries
the securities at amortized cost, which approximates fair market value.
At the end of fiscal 2000, working capital was $1,141.4 million and the Company
had no long-term debt. For the past several years the Company has generally
satisfied its liquidity needs through cash generated from operations and its
existing cash and investment balances. Given its strong financial condition and
performance, the Company plans to continue to finance its capital needs through
these internal sources for the foreseeable future.
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
- ---------------------------------------------- --------------- ---------------- -----------------
THREE YEARS ENDED JULY 2, 2000 2000 1999 1998
- ---------------------------------------------- --------------- ---------------- -----------------
Net sales $705,917 $506,669 $484,799
Cost of sales 178,949 139,821 137,779
- ---------------------------------------------- --------------- ---------------- -----------------
Gross profit 526,968 366,848 347,020
- ---------------------------------------------- --------------- ---------------- -----------------
Expenses:
Research and development 78,299 54,662 46,198
Selling, general and administrative 74,273 54,260 53,275
- ---------------------------------------------- --------------- ---------------- -----------------
152,572 108,922 99,473
- ---------------------------------------------- --------------- ---------------- -----------------
Operating income 374,396 257,926 247,547
- ---------------------------------------------- --------------- ---------------- -----------------
Interest income 42,858 27,801 23,710
- ---------------------------------------------- --------------- ---------------- -----------------
Income before income taxes 417,254 285,727 271,257
- ---------------------------------------------- --------------- ---------------- -----------------
Provision for income taxes 129,348 91,434 90,355
- ---------------------------------------------- --------------- ---------------- -----------------
Net income $287,906 $194,293 $180,902
- ---------------------------------------------- --------------- ---------------- -----------------
- ---------------------------------------------- --------------- ---------------- -----------------
Earnings per share:
- ---------------------------------------------- --------------- ---------------- -----------------
Basic $0.93 $0.64 $0.59
- ---------------------------------------------- --------------- ---------------- -----------------
Diluted $0.88 $0.61 $0.58
- ---------------------------------------------- --------------- ---------------- -----------------
Weighted average shares outstanding:
Basic 310,953 304,040 305,272
Diluted 328,002 317,888 319,878
Cash dividends per share $0.09 $0.0725 $0.06
- ---------------------------------------------- --------------- ---------------- -----------------
<FN>
See accompanying notes.
</FN>
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------ ----------------------- -----------------------
In thousands
- ------------------------------------------------ ----------------------- -----------------------
JULY 2, 2000 AND JUNE 27, 1999 2000 1999
Assets
Current assets:
Cash and cash equivalents $ 230,455 $ 154,220
Short-term investments 945,103 632,487
Accounts receivable, net of allowance for
doubtful accounts of $803 ($803 in 1999) 69,326 62,188
Inventories
Raw materials 5,201 2,705
Work-in-process 8,880 8,178
Finished goods 7,831 4,641
----------- -----------
Total inventories 21,912 15,524
Deferred tax assets 32,246 28,116
Prepaid expenses and other current assets 11,061 12,577
----------- -----------
Total current assets 1,310,103 905,112
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 91,670 78,555
Manufacturing and test equipment 234,042 166,863
Office furniture and equipment 3,249 3,234
----------- -----------
328,961 248,652
Accumulated depreciation and amortization (131,808) (106,850)
----------- -----------
Net property, plant and equipment 197,153 141,802
----------- -----------
Total assets $ 1,507,256 $ 1,046,914
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 16,829 $ 7,873
Accrued payroll and related benefits 57,710 33,653
Deferred income on shipments to distributors 34,488 35,464
Income taxes payable 31,916 27,404
Other accrued liabilities 27,734 20,881
----------- -----------
Total current liabilities 168,677 125,275
----------- -----------
Deferred tax liabilities 16,382 14,845
Commitments
Shareholders' equity:
Preferred stock, no par value, 2,000 shares
authorized, none issued or outstanding -- --
Common stock, no par value, 480,000 shares
authorized; 315,167 shares issued and
outstanding (307,462 shares in 1999) 467,474 312,027
Retained earnings 854,723 594,767
----------- -----------
Total shareholders' equity 1,322,197 906,794
----------- -----------
Total liabilities and shareholders' equity $ 1,507,256 $ 1,046,914
=========== ===========
- ------------------------------------------------ ----------------------- -----------------------
<FN>
See accompanying notes.
</FN>
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
In thousands
THREE YEARS ENDED JULY 2, 2000 2000 1999 1998
Cash flow from operating activities:
Net income $ 287,906 $ 194,293 $ 180,902
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 24,958 21,972 20,122
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (7,137) 6,351 (3,703)
Decrease (increase) in inventories (6,388) 596 (3,935)
Decrease (increase) in deferred tax assets (4,130) 7,701 (5,119)
Decrease (increase) in prepaid expenses
and other current assets 1,515 (2,770) (1,679)
Increase (decrease) in accounts payable, accrued
payroll and other accrued liabilities 39,866 5,507 14,024
Increase (decrease) in deferred income
on shipments to distributors (976) 2,087 3,391
Tax benefit from stock option transactions 100,664 49,077 34,125
Increase (decrease) in income taxes payable 4,512 (5,345) 16,625
Increase (decrease) in deferred tax liabilities 1,537 962 12,287
--------- --------- ---------
Cash provided by operating activities 442,327 280,431 267,040
--------- --------- ---------
Cash flow from investing activities:
Purchase of short-term investments (793,631) (529,740) (444,051)
Proceeds from sales and maturities of short-term
investments 481,015 406,413 328,216
Purchase of property, plant and equipment (80,309) (39,128) (24,421)
--------- --------- ---------
Cash used in investing activities (392,925) (162,455) (140,256)
--------- --------- ---------
Cash flow from financing activities:
Issuance of common shares under employee stock plans 54,783 38,332 26,596
Purchase of common stock -- (108,736) (56,445)
Payment of cash dividends (27,950) (22,085) (18,316)
--------- --------- ---------
Cash provided by (used in) financing activities 26,833 (92,489) (48,165)
--------- --------- ---------
Increase in cash and cash equivalents 76,235 25,487 78,619
Cash and cash equivalents, beginning of period 154,220 128,733 50,114
--------- --------- ---------
Cash and cash equivalents, end of period $ 230,455 $ 154,220 $ 128,733
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for income taxes $ 26,486 $ 36,856 $ 31,742
--------- --------- ---------
<FN>
See accompanying notes.
</FN>
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands
THREE YEARS ENDED JULY 2, 2000
Total
Common Stock Retained Shareholders'
Shares Amount Earnings Equity
Balance at June 29, 1997 303,824 $ 172,403 $ 416,648 $ 589,051
Issuance of common stock for cash under employee
stock option and stock purchase plans 7,476 26,596 -- 26,596
Tax benefit from stock option transactions -- 34,125 -- 34,125
Purchase and retirement of common stock (4,008) (2,469) (53,976) (56,445)
Net income -- -- 180,902 180,902
Cash dividends - $0.06 per share -- -- (18,316) (18,316)
----------- ----------- ----------- -----------
Balance at June 28, 1998 307,292 230,655 525,258 755,913
Issuance of common stock for cash under employee
stock option and stock purchase plans 8,200 38,332 -- 38,332
Tax benefit from stock option transactions -- 49,077 -- 49,077
Purchase and retirement of common stock (8,030) (6,037) (102,699) (108,736)
Net income -- -- 194,293 194,293
Cash dividends - $0.0725 per share -- -- (22,085) (22,085)
----------- ----------- ----------- -----------
Balance at June 27, 1999 307,462 312,027 594,767 906,794
Issuance of common stock for cash under employee
stock option and stock purchase plans 7,705 54,783 -- 54,783
Tax benefit from stock option transactions -- 100,664 -- 100,664
Purchase and retirement of common stock -- -- -- --
Net income -- -- 287,906 287,906
Cash dividends - $0.09 per share -- -- (27,950) (27,950)
----------- ----------- ----------- -----------
Balance at July 2, 2000 315,167 $ 467,474 $ 854,723 $ 1,322,197
=========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
LINEAR TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business and significant accounting policies
Description of business and export sales
Linear Technology Corporation ("the Company") designs, manufactures and markets
high performance linear integrated circuits. Applications for the Company's
products include: telecommunications, cellular telephones, networking products
and satellite systems, notebook and desktop computers, computer peripherals,
video/multimedia, industrial instrumentation, automotive electronics, factory
automation, process control and military and space systems.
Export sales by geographic area were as follows:
In thousands
2000 1999 1998
Europe $143,204 $120,793 $126,726
Japan 80,637 58,656 57,400
Rest of the World 158,520 93,738 67,299
--------- --------- ---------
Total export sales $382,361 $273,187 $251,425
======== ========= =========
Basis of presentation
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal 2000 was a
53 week period, while fiscal years 1999 and 1998 were 52 week periods. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of all significant
inter-company accounts and transactions. Accounts denominated in foreign
currencies have been translated using the U.S. dollar as the functional
currency.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock split
In February 2000, the Company had a two-for-one stock split. All share and per
share information has been adjusted for the effect of this stock split.
Cash equivalents and short-term investments
Cash equivalents are highly liquid investments with original maturities of three
months or less. Investments with maturities over three months at the time of
purchase are classified as short-term investments.
At July 2, 2000 and June 27, 1999, all of the Company's investments in debt
securities were classified as available-for-sale, which means that, although the
Company principally holds securities until maturity, they may be sold under
certain circumstances. The debt securities are carried at amortized cost, which
approximates fair market value, determined using quoted market prices for these
securities. Realized and unrealized gains and losses from short-term investments
were not material at any time during fiscal 2000, 1999 and 1998. At July 2, 2000
and June 27, 1999, the Company held no equity securities.
Concentrations of Credit Risk and Off Balance Sheet Risk
The Company's investment policy restricts investments to high credit quality
investments with a maturity of three years or less and limits the amount
invested with any one issuer. Concentrations of credit risk with respect to
accounts receivable are generally not significant due to the diversity of the
Company's customers and geographic sales areas. The Company performs ongoing
credit evaluations of its customers' financial condition and requires
collateral, primarily letters of credit, as deemed necessary.
The Company's two largest domestic distributors together accounted for 25%, 24%
and 25% of net sales for fiscal 2000, 1999 and 1998, respectively. Distributors
are not end customers, but rather serve as a channel of sale to many end users
of the Company's products. No other distributor or customer accounted for 10% or
more of net sales for fiscal 2000, 1999 and 1998.
The Company's assets, liabilities and cash flows are predominately U.S. dollar
denominated, including those of its foreign operations. However, the Company's
foreign subsidiaries have certain assets, liabilities and cash flows that are
subject to foreign currency risk. The Company considers this risk to be minor
and, for the three years ended July 2, 2000, had not utilized derivative
instruments to hedge foreign currency risk or for any other purpose. Gains and
losses resulting from foreign currency fluctuations are recognized in income
currently and were not material for all periods presented.
Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost determined on a first-in, first-out basis, or market.
Property, plant and equipment
Net property, plant and equipment at July 2, 2000 was geographically distributed
as follows: United States - $152,612,000, Malaysia - $28,265,000, Singapore -
$16,212,000, and other - $64,000. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives of the assets
(3-7 years for equipment and 10-30 years for buildings and building
improvements). Leasehold improvements are amortized over the shorter of the
asset's useful life or the expected term of the lease.
Deferred income on shipments to distributors
The Company sells to domestic distributors under agreements allowing price
protection and right of return on certain merchandise unsold by the
distributors. Because of the uncertainty associated with pricing concessions and
future returns, the Company defers recognition of such sales and profit in its
financial statements until the merchandise is sold by the domestic distributors.
The Company estimates international distributor returns and defers a portion of
international distributor sales and profits based on these estimated returns.
Stock Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method and discloses in Note 4 the proforma effects of accounting for such
awards under the fair value method.
Earnings Per Share
Basic earnings per share is calculated using the weighted average shares of
common stock outstanding during the period. Diluted earnings per share is
calculated using the weighted average shares of common stock outstanding, plus
the dilutive effect of stock options, calculated using the treasury stock
method. The dilutive effect of stock options was 17,049,000, 13,848,000 and
14,606,000 shares for fiscal 2000, 1999 and 1998 respectively.
Comprehensive Income
The Company adopted FAS 130, "Reporting Comprehensive Income", in fiscal 1999.
FAS 130 requires certain items, including unrealized gains and losses on the
Company's available-for-sale securities, to be included in other comprehensive
income. The adoption of FAS 130 had no impact on the Company's financial
position or results of operations, and there were no material differences
between comprehensive income and net income for fiscal 2000, 1999 and 1998.
Segment Reporting
The Company adopted FAS 131, "Disclosures About Segments of an Enterprise and
Related Information", in fiscal 1999. FAS 131 established new reporting
requirements for public companies based on the management approach to segment
reporting. The Company competes in a single operating segment, and as a result,
no segment information has been disclosed. Disclosures about products and
services, geographical areas, and major customers are included above in Note 1
to the consolidated financial statements.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133,
"Accounting for Derivative Investments and Hedging Activities." This statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. In July 1999, the FASB issued
FAS 137, which defers the effective date of FAS 133 for one year. Accordingly,
the Company will now be required to adopt FAS 133 during fiscal 2001. The
Company does not expect the adoption of FAS 133 to have a significant effect on
the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the Staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its current
revenue recognition principles comply with SAB 101.
2. Short-term Investments
Short-term investments as of July 2, 2000 and June 27, 1999 were as follows:
In thousands July 2, 2000 June 27, 1999
Municipal bonds $631,009 $468,115
U.S. Treasury securities and
obligations of U.S. government
agencies 239,919 127,612
Corporate debt securities and other 74,175 36,760
-------- --------
$945,103 $632,487
The contractual maturities of short-term investments at July 2, 2000 were as
follows: one year or less - $287,707,000, one year to three years -
$657,396,000. Expected maturities may differ from contractual maturities because
the issuers of the securities may have the right to repay obligations without
prepayment penalties.
3. Lease commitments
The Company leases certain of its facilities under operating leases, some of
which have options to extend the lease period. In addition, the Company has
entered into long-term land leases for the sites of its Singapore and Malaysia
manufacturing facilities.
At July 2, 2000, future minimum lease payments under non-cancelable operating
leases having an initial term in excess of one year were as follows: fiscal
2001: $1,091,000; fiscal 2002: $912,000; fiscal 2003: $813,000; fiscal 2004:
$786,000; fiscal 2005: $814,000; and thereafter: $6,390,000.
Total rent expense was $2,045,000, $2,261,000 and $2,528,000 in fiscal 2000,
1999 and 1998, respectively.
4. Employee benefit plans
Stock option plans
The Company has stock option plans under which options to purchase shares of the
Company's common stock may be granted to employees and directors at a price no
less than the fair market value on the date of the grant. At July 2, 2000, the
total authorized number of shares under all plans was 154,000,000. Options
become exercisable over a five-year period (generally 10% every six months). All
options expire ten years after the date of the grant.
Stock option transactions during the three years ended July 2, 2000 are
summarized as follows:
Stock Weighted-
Options Average
Outstanding Exercise Price
Outstanding options, June 29, 1997 39,516,984 $5.09
----------
Granted 11,502,300 14.04
Forfeited (910,736) 8.42
Exercised (7,210,564) 3.29
----------
Outstanding options, June 28, 1998 42,897,984 $7.73
----------
Granted 9,952,000 21.13
Forfeited (765,400) 11.46
Exercised (7,914,194) 4.41
----------
Outstanding options, June 27, 1999 44,170,390 $11.28
----------
Granted 3,812,200 37.62
Forfeited (558,070) 17.57
Exercised (7,535,600) 6.73
----------
Outstanding options, July 2, 2000 39,888,920 $14.70
==========
The following table sets forth certain information with respect to employee
stock options outstanding and exercisable at July 2, 2000:
Weighted Weighted Weighted
Stock Average Average Stock Average
Options Exercise Remaining Options Exercise
Range of Exercise Prices Outstanding Price Contractual Exercisable Price
Life (Years)
$ 1.44- $ 7.22 14,488,750 $5.51 4.9 11,268,630 $5.32
8.53 - 15.06 14,272,820 13.10 7.4 5,765,640 12.82
15.92 - 47.25 11,127,350 28.69 8.8 1,917,270 24.21
---------- -----------
$ 1.44 - $47.25 39,888,920 $14.70 6.9 18,951,540 $9.51
=========== ===========
Stock purchase plan
The Company's stock purchase plan ("ESPP") permits eligible employees to
purchase common stock through payroll deductions at the lower of 85% of the fair
market value of common stock at the beginning or end of each six month offering
period. The offering periods commence on approximately May 1 and November 1 of
each year. At July 2, 2000, the shares reserved for issuance under this plan
totaled 8,400,000 and 6,990,450 shares had been issued under this plan. During
fiscal 2000, 169,876 shares were issued at a weighted-average price of $26.04
per share pursuant to this plan.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The following table summarizes pro forma net income and pro forma earnings per
share, as if the Company had elected to recognize compensation expense for its
employee stock plans under the fair value method instead of the intrinsic value
method (in thousands, except per share amounts):
2000 1999 1998
---- ---- ----
Pro forma net income $247,009 $166,847 $163,511
Pro forma earnings per share:
Basic $0.79 $0.55 $0.54
Diluted $0.75 $0.53 $0.52
For purposes of the pro forma information, the fair value of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model and the following weighted average assumptions (the fair value of shares
issued under the Company's ESPP was not significant for all periods presented):
2000 1999 1998
---- ---- ----
Expected lives 6.5 6.5 6.0
Expected volatility 59.1% 54.0% 51.0%
Dividend yields 0.3% 0.3% 0.4%
Risk free interest 5.9% 5.6% 5.7%
rates
The Black-Scholes option valuation model was developed for use in estimating the
fair value of publicly traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of publicly traded options, and because changes in these
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its stock options.
Using the Black-Scholes option pricing model, the weighted average estimated
fair value of employee stock options granted in fiscal 2000, 1999 and 1998 was
$24.26, $12.55 and $7.77 per share, respectively. For the purposes of the pro
forma information, the estimated fair values of the employee stock options are
amortized to expense using the straight-line method over the vesting period.
Retirement Plan
The Company has established a 401(k) retirement plan for its qualified U.S.
employees. Profit sharing contributions made by the Company to this plan were
approximately $9,818,000, $7,577,000 and $6,126,000 in fiscal 2000, 1999 and
1998, respectively.
5. Income taxes
The components of income before income taxes are as follows:
In thousands 2000 1999 1998
United States operations $361,834 $246,190 $240,072
Foreign operations 55,420 39,537 31,185
-------- -------- --------
$417,254 $285,727 $271,257
======== ======== ========
The provision for income taxes consists of the following:
In thousands 2000 1999 1998
United States federal:
Current $118,917 $71,433 $72,363
Deferred (2,219) 8,442 6,772
-------- -------- --------
116,698 79,875 79,135
-------- -------- --------
State:
Current 8,575 9,119 9,744
Deferred (374) 222 396
-------- -------- --------
8,201 9,341 10,140
-------- -------- --------
Foreign-Current 4,449 2,218 1,080
-------- -------- --------
$129,348 $91,434 $90,355
======== ======= =======
Actual current federal and state tax liabilities are lower than the amounts
reflected above by the tax benefit from stock option activity of approximately
$100,664,000, $49,077,000 and $34,125,000 for fiscal 2000, 1999 and 1998,
respectively. The tax benefit from stock option activity is recorded as a
reduction in current income taxes payable and an increase in common stock.
The provision for income taxes reconciles to the amount computed by applying the
statutory U.S. Federal rate at 35% to income before income taxes as follows:
In thousands 2000 1999 1998
Tax at U.S. statutory rate $146,039 $100,005 $94,940
State income taxes, net of federal benefit 5,331 6,072 6,591
Earnings of foreign subsidiaries subject to lower rates (10,400) (8,043) (6,735)
Tax-exempt interest income (8,934) (5,922) (4,857)
Other (2,688) (678) 416
-------- -------- --------
$129,348 $91,434 $90,355
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities recorded in the balance sheet
as of July 2, 2000 and June 27, 1999 are as follows:
In thousands 2000 1999
Deferred tax assets:
Inventory valuation $10,000 $10,764
Deferred income on shipments to distributors 12,828 13,215
State income taxes 2,869 2,475
Non-deductible accrued benefits 2,278 1,830
Other 4,271 (168)
-------- --------
Total deferred tax assets 32,246 28,116
-------- --------
Deferred tax liabilities:
Depreciation and amortization 1,898 6,892
Unremitted earnings of subsidiaries 14,484 7,953
-------- --------
Total deferred tax liabilities 16,382 14,845
-------- --------
Net deferred tax assets $15,864 $13,271
======== ========
EXHIBIT 13.1-15
The Company's tax holiday in Singapore expired in September 1999. The Company is
finalizing a modified tax holiday, which would be effective through September
2004. The Company's Malaysia tax holiday expired in June 2000. The Company is
currently applying for an extension of its Malaysia tax holiday and believes
that an extension will be granted.
The impact of the Singapore and Malaysia tax holidays was to increase net income
by approximately $9,320,000 ($0.03 per diluted share) in fiscal 2000, $6,086,000
($0.04 per diluted share) in fiscal 1999 and $5,135,000 ($0.03 per diluted
share) in fiscal 1998. The Company does not provide a residual U.S. tax on a
portion of the undistributed earnings of its Singapore and Malaysia
subsidiaries, as it is the Company's intention to permanently invest these
earnings overseas. Should these earnings be remitted to the U.S. parent,
additional U.S. taxable income would be approximately $128,901,000.
EXHIBIT 13.1-16
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders of Linear Technology Corporation
We have audited the accompanying consolidated balance sheets of Linear
Technology Corporation as of July 2, 2000 and June 27, 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended July 2, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Linear Technology
Corporation at July 2, 2000 and June 27, 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended July 2, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
San Jose, California
July 24, 2000