EXHIBIT 13.1 - Certain information included in the Registrant's Annual Report to
Stockholders for the fiscal year ended June 30, 2002
LINEAR TECHNOLOGY CORPORATION
QUARTERLY RESULTS AND STOCK MARKET DATA
(UNAUDITED)
In thousands, except per share amounts
- ----------------------------------------------------------------------------------------------------------------------
Fiscal 2002
Quarter Ended June 30, 2002 March 31, 2002 Dec. 30, 2001 Sept. 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
Net sales $140,757 $130,155 $121,266 $120,104
Gross profit 103,936 95,637 85,133 82,857
Net income 55,034 51,480 45,965 45,150
Diluted earnings per share 0.17 0.16 0.14 0.14
Cash dividends per share 0.05 0.04 0.04 0.04
Stock price range per share:
High 45.87 46.72 44.52 48.08
Low 28.58 36.24 30.00 31.29
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Fiscal 2001
Quarter Ended July 1, 2001 April 1, 2001 Dec. 31, 2000 Oct. 1, 2000
- ----------------------------------------------------------------------------------------------------------------------
Net sales $200,013 $282,021 $258,450 $232,141
Gross profit 150,705 216,829 197,318 176,651
Net income 84,817 125,703 114,758 102,178
Diluted earnings per share 0.26 0.38 0.34 0.31
Cash dividends per share 0.04 0.03 0.03 0.03
Stock price range per share:
High 58.00 65.06 67.44 73.00
Low 33.94 39.63 46.00 50.44
- ----------------------------------------------------------------------------------------------------------------------
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.
Cash dividends of $0.17 per share totaling $54.0 million were paid by the
Company in fiscal 2002 as compared to $0.13 per share totaling $41.2 million in
fiscal 2001. In April 2002, the Company's Board of Directors announced that the
quarterly cash dividend was increased to $0.05 per share from $0.04 per share.
Future dividends will be based on quarterly financial performance.
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 June 30, 2002, there were approximately 1,838 stockholders of record.
25
EXHIBIT 13.1-2
LINEAR TECHNOLOGY CORPORATION
SELECTED FINANCIAL INFORMATION/FIVE-YEAR TREND
In thousands, except per share amounts
- -----------------------------------------------------------------------------------------------------------------
FIVE FISCAL YEARS ENDED JUNE 30, 2002 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Income statement information
Net sales $ 512,282 $ 972,625 $ 705,917 $ 506,669 $484,799
Net income 197,629 427,456 287,906 194,293 180,902
Basic earnings per share 0.62 1.35 0.93 0.64 0.59
Diluted earnings per share 0.60 1.29 0.88 0.61 0.57
Weighted average shares outstanding - Basic 317,215 316,924 310,953 304,040 305,272
Weighted average shares outstanding - Diluted 328,538 332,527 328,002 317,888 319,878
Balance sheet information
Cash, cash equivalents and short-term
investments $1,552,030 $1,549,002 $1,175,558 $786,707 $637,893
Total assets 1,988,433 2,017,074 1,507,256 1,046,914 892,822
Long-term debt -- -- -- -- --
Cash dividends per share $0.17 $0.13 $0.09 $0.0725 $0.06
- -----------------------------------------------------------------------------------------------------------------
All share and per share amounts reflect the Company's two-for-one stock split
effective in February 2000.
26
EXHIBIT 13.1-3
LINEAR TECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Critical Accounting Policies
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that significantly affect the reported amounts
of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. The Company regularly evaluates these
estimates, including those related to inventory valuation and revenue
recognition. These estimates are based on historical experience and on
assumptions that are believed by management to be reasonable under the
circumstances. Actual results may differ from these estimates, which may impact
the carrying values of assets and liabilities.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of consolidated
financial statements.
Inventory Valuation
We value our inventories at the lower of cost or market. We record charges to
write down inventories for unsalable, excess or obsolete raw materials,
work-in-process and finished goods. Newly introduced parts are generally not
valued until success in the market place has been determined by a consistent
pattern of sales and backlog among other factors. In addition to writedowns
based on newly introduced parts, statistical and judgmental assessments are
calculated for the remaining inventory based on salability and obsolescence.
Revenue Recognition
Revenue from product sales made directly to customers is recognized upon the
transfer of title. Revenue from the Company's sales to domestic distributors is
recognized under agreements which provide for certain sales price rebates and
limited product return privileges. As a result, the Company defers recognition
of such sales until the domestic distributors sell the merchandise. The Company
relieves inventory and records a receivable on the initial sale to the
distributor as title has passed to the distributor and payment is collected on
the receivable within normal trade terms. The income to be derived from
distributor sales is recorded under current liabilities on the balance sheet as
"Deferred income on shipments to distributors" until such time as the
distributor confirms a final sale to its end customer.
The Company's sales to international distributors are made under agreements
which permit limited stock return privileges but not sales price rebates.
Revenue on these sales is recognized upon shipment at which time title passes.
The Company estimates international distributor returns based on historical data
and current business expectations and defers a portion of international
distributor sales and profits based on these estimated returns. Such amounts are
classified in "Deferred income on shipments to distributors" on the accompanying
balance sheet.
27
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.
Fiscal Year Ended Percentage Change
----------------------------------------- ------------------------------
June 30, July 1, July 2, 2002 Over 2001 Over
2002 2001 2000 2001 2000
----------- -------- ------------ ------------- ------------
Net sales 100.0% 100.0% 100.0% (47%) 38%
Cost of sales 28.2 23.8 25.4 (37) 29
---- ---- ---- ---- ----
Gross profit 71.8 76.2 74.6 (50) 41
---- ---- ---- ---- ----
Expenses:
Research & development 15.6 10.5 11.1 (22) 31
Selling, general &
administrative 12.2 9.5 10.5 (32) 25
---- ---- ---- ---- ----
27.8 20.0 21.6 (27) 28
---- ---- ---- ---- ----
Operating income 44.0 56.2 53.0 (59) 46
Interest income 10.3 6.6 6.1 (17) 50
---- ---- ---- ---- ----
Income before income taxes 54.3% 62.8% 59.1% (54) 46
==== ==== ==== ==== ====
Effective tax rates 29.0% 30.0% 31.0%
==== ==== ====
Net sales for the year ended June 30, 2002 were $512.3 million, a decrease of
$460.3 million or 47% from net sales of $972.6 million in fiscal 2001. The
decrease in net sales was primarily due to a decrease in unit shipments, and
marginally due to a decrease in the average selling price. Geographically,
international sales represented 64% of net sales, 10% higher than fiscal 2001.
International sales to Europe, Japan and the Rest of the World (primarily Asia
excluding Japan,) represented 20%, 12% and 32% of net sales, respectively. In
absolute dollars, sales decreased 58% year over year in the United States,
decreased by 49% in Europe, decreased by 56% in Japan, and decreased 13% in the
Rest of the World. The Company's major end-markets are communications, computer,
industrial, auto and military. Sales fell in all major end-markets except
military. Leading the decline in sales was communications; in absolute dollars
sales in the communication end-market fell approximately 60% from fiscal 2001.
Net sales were a record $972.6 million in fiscal 2001, an increase of 38% over
net sales of $705.9 million in fiscal 2000. The increase in net sales was
primarily due to an increase in unit shipments, while the average selling price
for the Company's products increased slightly during the year. Geographically,
international sales represented 54% of net sales, the same percentage as in
fiscal 2000. International sales to Europe, Japan and the Rest of the World
(primarily Asia excluding Japan), represented 21%, 14% and 19% of net sales,
respectively. In absolute dollars, sales increased 38% year over year in the
United States, increased by 41% in Europe, increased by 70% in Japan, and
increased 19% in the Rest of the World. The Company's major end-markets are
communications, computer, industrial, auto and military. Sales into all major
end-markets were strong with communications leading computer, industrial, auto
and military. Within communications the major end-markets were networking and
telephone infrastructure, primarily cellular base stations and cellular phone
handsets. After three quarters of strong sales growth, sales in the fourth
quarter decreased by 29% from the previous quarter. This trend was prevalent in
all major end markets, particularly in communications.
To partially offset the impact of reduced sales on net profits during fiscal
2002 the Company reduced its variable expenses primarily in the area of
compensation. This was achieved by lower profit sharing, plant shutdowns of
approximately one week per month for the first three-quarters of fiscal 2002,
and limited shutdowns in Q4 2002. The related savings in compensation were
approximately $74.0 million, of which $60.0 million is related to profit
sharing, for the fiscal year ended June 30, 2002. Additionally, in January 2002
the Company discontinued production in its oldest 4-inch wafer fabrication
plant. The related ongoing labor savings from the closure of the 4-inch plant
were approximately $3.0 million per quarter. The associated severance costs and
equipment and inventory write-downs had been previously provided for in past
financial statements and, therefore, no special one-time charges were required.
Gross profit for the year ended June 30, 2002 was $367.6 million, a decrease of
$373.9 million or 50.4% from gross profit of $741.5 million in the corresponding
period in fiscal 2001. Gross profit was 71.8% of net sales in fiscal 2002 as
compared to 76.2% in fiscal 2001. The decrease in gross profit as a percentage
of sales was due primarily to the unfavorable effect of fixed costs
28
allocated across a lower sales base. This effect was partially offset by the
reduction in compensation costs referenced above and secondarily to the closure
of the Company's 4-inch wafer fabrication plant.
Gross profit was $741.5 million or 76.2% of net sales in fiscal 2001. The
increase in gross profit as a percentage of sales compared to 74.6% in fiscal
2000 was due primarily to the favorable effect of fixed costs allocated across a
higher sales base and improved manufacturing efficiencies and yields achieved at
the Company's fabrication, assembly and test facilities, partially offset by
costs associated with the start-up of the new wafer fabrication plant in
Milpitas.
Research and development ("R&D") expenses were $79.8 million, $102.5 million,
and $78.3 million in fiscal 2002, 2001, and 2000, respectively, or 15.6%, 10.5%,
and 11.1% of net sales, respectively. The dollar decrease in R&D expenses in
fiscal 2002 as compared to fiscal 2001 was due to a decrease in compensation
costs caused by lower profit sharing and by plant shutdowns of one week per
month for the first three-quarters in fiscal 2002. The impact of lower
compensation costs as explained above was offset by increases in staffing levels
of design engineering personnel. The increase in R&D expenses in fiscal 2001 as
compared to 2000 was due to increases in staffing levels of engineering
personnel, which resulted in higher compensation costs, increased profit sharing
costs driven by increases in sales and profitability, and development costs in
new products.
Selling, general and administrative ("SG&A") expenses were $62.6 million, $92.7
million, and $74.3 million in fiscal 2002, 2001, and 2000, respectively, or
12.2%, 9.5%, and 10.5% of net sales, respectively. The dollar decrease in SG&A
expenses from fiscal 2002 to fiscal 2001 was due to a decrease in compensation
costs caused by lower profit sharing and by plant shutdowns of one week per
month for the first three-quarters in fiscal 2002. Additionally the Company had
lower legal expenses and lower commissions caused by the decrease in sales
levels. The increase in SG&A expenses in fiscal 2001 as compared to fiscal 2000
was due to an increase in staffing levels to support the increased sales
volumes, higher profit sharing, higher commissions resulting from the increase
in sales, and higher legal costs related to patent protection and infringement.
Interest income decreased 17.3% in fiscal 2002 to $53.3 million and increased
50% in fiscal 2001 to $64.4 million from $42.9 million in fiscal 2000. The
Company's cash, cash equivalent and short-term investment balance increased $3.0
million during fiscal 2002 after spending $221.6 million on repurchasing 6.4
million shares of the Company's common stock. However, the declining average
interest rates earned on the Company's cash equivalent and short-term investment
balance caused interest income to fall 17.3%. The year over year increases in
fiscal 2001 and 2000 were due to the significant increases in cash, cash
equivalents and short-term investments that grew $373.4 million and $388.9
million respectively.
The Company's effective tax rate was 29.0%, 30.0%, and 31.0% in fiscal 2002,
2001, and 2000, respectively. The lower tax rates in fiscal 2002 and 2001 were
primarily due to increased business activity in foreign jurisdictions with lower
tax rates and an increase in tax-exempt interest income as a percentage of total
interest 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 and financial markets and other factors
described below.
Although we have seen improvements across end-markets in the last two quarters,
our backlog of $46.1 million as compared to $71.5 million at the end of the
previous fiscal year, while improving within fiscal 2002, is still low. General
business conditions continue to be tenuous and visibility remains low as
customers order only to supply immediate demand. Therefore, confidently and
accurately forecasting future financial results remains difficult. We are well
positioned in some new programs with customers, which could ramp up late in the
September quarter and in the following quarter. The summer, or September
quarter, is historically our slowest and in the current business environment, we
expect that to be true this year also. Consequently, we estimate that sales and
profits in the September quarter will remain similar to the June quarter with
growth resuming in the December quarter.
Estimates of future performance are uncertain, and 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,
variations in manufacturing efficiencies and significant expenditures for
capital equipment and product development. Furthermore, new product
introductions and patent protection of existing products, as well as exposure
related to patent infringement suits brought against the Company are critical
factors influencing future sales growth and sustained profitability. The
Company's headquarters and a portion of its manufacturing
29
facilities and research and development activities and certain other critical
business operations are located near major earthquake fault lines in California.
Consequently, the Company could be adversely affected in the event of a major
earthquake.
Although the Company believes that it has the product lines, manufacturing
facilities and technical and financial resources for its current operations,
sales and profitability could 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 June 30, 2002, cash, cash equivalents and short-term investments totaled $1.6
billion, and working capital was $1.6 billion. During fiscal 2002 the Company
generated additional cash and short-term investments of $224.6 million before
the repurchase of common stock. The Company repurchased 6,439,100 shares of its
common stock for $221.6 million during fiscal 2002.
During fiscal 2002, the Company generated $257.1 million of cash from operating
activities. Additionally, the Company generated $39.3 million in proceeds from
common stock issued under employee stock option and stock purchase plans.
During fiscal 2002, significant cash expenditures included net purchases of
short-term investments of $112.4 million and $17.9 million for the purchase of
capital assets, primarily manufacturing equipment for the Company's fabrication,
assembly and test facilities. The Company also paid $221.6 million to repurchase
6.4 million shares of its common stock. The Company paid $54.0 million for cash
dividends to stockholders representing $0.17 per share per year compared to
$0.13 per share in fiscal 2001. In April 2002, the Company's Board of Directors
declared an increase in the quarterly cash dividend to $0.05 per share. The
payment of 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 June 30, 2002, 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 $19.4 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.
The Company has no debt and has historically satisfied its liquidity needs
through cash generated from operations and the placement of equity securities.
Given its strong financial condition and performance, the Company believes that
current capital resources and cash generated from operating activities will be
sufficient to meet its liquidity and capital expenditures requirements for the
foreseeable future.
As of June 30, 2002, the Company had no off-balance sheet financing arrangements
or activities other than minimal levels of operating leases for facilities and
equipment.
30
EXHIBIT 13.1-7
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
- -------------------------------------------------------------------------------------------
THREE YEARS ENDED JUNE 30, 2002 2002 2001 2000
- -------------------------------------------------------------------------------------------
Net sales $512,282 $972,625 $705,917
Cost of sales 144,719 231,122 178,949
- -------------------------------------------------------------------------------------------
Gross profit 367,563 741,503 526,968
- -------------------------------------------------------------------------------------------
Expenses:
Research and development 79,839 102,487 78,299
Selling, general and administrative 62,625 92,731 74,273
- -------------------------------------------------------------------------------------------
142,464 195,218 152,572
- -------------------------------------------------------------------------------------------
Operating income 225,099 546,285 374,396
- -------------------------------------------------------------------------------------------
Interest income 53,251 64,366 42,858
- -------------------------------------------------------------------------------------------
Income before income taxes 278,350 610,651 417,254
- -------------------------------------------------------------------------------------------
Provision for income taxes 80,721 183,195 129,348
- -------------------------------------------------------------------------------------------
Net income $197,629 $427,456 $287,906
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Earnings per share:
- -------------------------------------------------------------------------------------------
Basic $0.62 $1.35 $0.93
- -------------------------------------------------------------------------------------------
Diluted $0.60 $1.29 $0.88
- -------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 317,215 316,924 310,953
Diluted 328,538 332,527 328,002
Cash dividends per share $0.17 $0.13 $0.09
- -------------------------------------------------------------------------------------------
See accompanying notes.
31
EXHIBIT 13.1-8
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
In thousands
- -----------------------------------------------------------------------------------------------
JUNE 30, 2002 AND JULY 1, 2001 2002 2001
Assets
Current assets:
Cash and cash equivalents $211,706 $321,106
Short-term investments 1,340,324 1,227,896
Accounts receivable, net of allowance for
doubtful accounts of $1,302 ($803 in 81,447 89,836
2001)
Inventories:
Raw materials 2,997 6,990
Work-in-process 22,941 14,090
Finished goods 3,004 4,512
----- -----
Total inventories 28,942 25,592
Deferred tax assets 43,754 43,482
Prepaid expenses and other current assets 21,408 19,936
------ ------
Total current assets 1,727,581 1,727,848
--------- ---------
Property, plant and equipment, at cost:
Land, buildings and improvements 140,468 136,978
Manufacturing and test equipment 326,388 316,501
Office furniture and equipment 3,384 3,343
----- -----
470,240 456,822
Accumulated depreciation and amortization (209,388) (167,596)
--------- ---------
Net property, plant and equipment 260,852 289,226
------- -------
Total assets $1,988,433 $2,017,074
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,098 $ 10,615
Accrued payroll and related benefits 36,517 65,930
Deferred income on shipments to distributors 46,168 44,481
Income taxes payable 63,354 51,335
Other accrued liabilities 17,860 29,863
------ ------
Total current liabilities 168,997 202,224
------- -------
Deferred tax liabilities 37,982 32,893
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000 shares -- --
authorized, none issued or outstanding
Common stock, $0.001 par value, 2,000,000
shares authorized; 316,150 shares issued
and outstanding at June 30, 2002 (318,908
shares at July 1, 2001) 316 319
Additional paid-in capital 672,600 607,883
Retained earnings 1,108,538 1,173,755
--------- ---------
Total stockholders' equity 1,781,454 1,781,957
--------- ---------
Total liabilities and stockholders' equity $1,988,433 $2,017,074
========== ==========
- -----------------------------------------------------------------------------------------------
See accompanying notes.
32
EXHIBIT 13.1-9
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
In thousands
THREE YEARS ENDED JUNE 30, 2002 2002 2001 2000
----------- ----------- -----------
Cash flow from operating activities:
Net income $ 197,629 $ 427,456 $ 287,906
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 46,261 35,788 24,958
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 8,389 (20,511) (7,137)
Decrease (increase) in inventories (3,350) (3,680) (6,388)
Decrease (increase) in deferred tax assets (272) (11,236) (4,130)
Decrease (increase) in prepaid expenses
and other current assets (1,472) (8,874) 1,515
Increase (decrease) in accounts payable,
accrued payroll and other accrued liabilities (46,933) 4,135 39,866
Increase (decrease) in deferred income
on shipments to distributors 1,687 9,993 (976)
Tax benefit from stock option transactions 38,091 90,563 100,664
Increase (decrease) in income taxes payable 12,019 19,419 4,512
Increase (decrease) in deferred tax liabilities 5,089 16,511 1,537
----------- ----------- -----------
Cash provided by operating activities 257,138 559,564 442,327
----------- ----------- -----------
Cash flow from investing activities:
Purchase of short-term investments (961,041) (1,722,358) (793,631)
Proceeds from sales and maturities of short-term
investments 848,613 1,439,565 481,015
Purchase of property, plant and equipment (17,887) (127,861) (80,309)
----------- ----------- -----------
Cash used in investing activities (130,315) (410,654) (392,925)
----------- ----------- -----------
Cash flow from financing activities:
Issuance of common shares under employee stock plans 39,333 52,704 54,783
Purchase of common stock (221,551) (69,799) --
Payment of cash dividends (54,005) (41,164) (27,950)
----------- ----------- -----------
Cash (used in) provided by financing activities (236,223) (58,259) 26,833
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (109,400) 90,651 76,235
Cash and cash equivalents, beginning of period 321,106 230,455 154,220
----------- ----------- -----------
Cash and cash equivalents, end of period $ 211,706 $ 321,106 $ 230,455
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for income taxes $ 25,483 $ 67,656 $ 26,486
----------- ----------- -----------
See accompanying notes.
33
EXHIBIT 13.1-10
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands
THREE YEARS ENDED JUNE 30, 2002
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------- -------- -------- -------- --------
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
------- -------- -------- -------- --------
Issuance of common stock for cash under employee
stock option and stock purchase plans 5,291 52,704 --- --- 52,704
Tax benefit from stock option transactions --- 90,563 --- --- 90,563
Purchase and retirement of common stock (1,550) (2,539) --- (67,260) (69,799)
Reincorporation in Delaware --- (607,883) 607,883 ---
Net income --- --- --- 427,456 427,456
Cash dividends - $0.13 per share --- --- --- (41,164) (41,164)
------- -------- -------- -------- --------
Balance at July 1, 2001 318,908 319 607,883 1,173,755 1,781,957
------- -------- -------- -------- --------
Issuance of common stock for cash under employee
stock option and stock purchase plans 3,681 3 39,330 --- 39,333
Tax benefit from stock option transactions --- --- 38,091 --- 38,091
Purchase and retirement of common stock (6,439) (6) (12,704) (208,841) (221,551)
Net income --- --- --- 197,629 197,629
Cash dividends - $0.17 per share --- --- --- (54,005) (54,005)
------- -------- -------- -------- --------
Balance at June 30, 2002 316,150 $316 $672,600 $1,108,538 $1,781,454
======= ======== ======== ========== ===========
See accompanying notes.
34
EXHIBIT 13.1-11
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, consumer, networking
products, satellite systems, notebook and desktop computers, computer
peripherals, video/multimedia, industrial instrumentation, automotive
electronics, factory automation, process control and military space systems.
Export sales by geographic area were as follows:
In thousands
2002 2001 2000
---- ---- ----
Europe $102,413 $202,193 $143,204
Japan 60,759 137,352 80,637
Rest of the World 163,019 188,129 158,520
-------- -------- --------
Total export sales $326,191 $527,674 $382,361
======== ======== ========
Basis of presentation
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal 2002 was a
52 week period, fiscal year 2001 was a 52 week period, and fiscal year 2000 was
a 53 week period. 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.
In fiscal 2001 the Company changed its state of incorporation from California to
Delaware. As a consequence of this change stockholders' equity has been expanded
to include both common stock and additional paid-in capital in conformance with
Delaware reporting requirements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
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 June 30, 2002 and July 1, 2001, 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 2002, 2001 and 2000. At June 30,
2002 and July 1, 2001, the Company held no equity securities.
Concentrations of Credit Risk, Off Balance Sheet Risk and Contingencies
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.
No single end customer has accounted for 10% or more of the Company's net sales.
However, in given years, one or more distributors may account for 10% or more of
the Company's net sales. One domestic distributor accounted for 16% of net sales
35
and 17% of accounts receivable during fiscal 2002, one domestic distributor
accounted for 12% of net sales and 13% of accounts recievable during fiscal
2001, and two distributors accounted for approximately 14% and 11% of net sales
during fiscal 2000. 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 2002,
2001 and 2000.
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 June 30, 2002, 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.
The Company is subject to contingencies, including legal proceedings arising out
of a wide range of matters, including, among, others patent suits and employment
claims. While it is impossible to ascertain the ultimate legal and financial
liability with respect to these lawsuits, the Company believes that the
aggregate amount of such liabilities, if any, will not have a material adverse
effect on the consolidated financial position or results of operation of the
Company.
Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost determined on a first-in, first-out basis, or market. Write-downs to reduce
the carrying value of obsolete, slow moving and non-usable inventory to net
realizable value are charged to cost of sales.
Property, plant and equipment
Net property, plant and equipment at June 30, 2002 was geographically
distributed as follows: United States - $210,925,000 Malaysia - $28,149,000
Singapore - $21,752,000 and other - $26,000. 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.
Revenue Recognition
Revenue from product sales made directly to customers is recognized upon the
transfer of title. Revenue from the Company's sales to domestic distributors is
recognized under agreements which provide for certain sales price rebates and
limited product return privileges. As a result, the Company defers recognition
of such sales until the domestic distributors sell the merchandise. The Company
relieves inventory and records a receivable on the initial sale to the
distributor as title has passed to the distributor and payment is collected on
the receivable within normal trade terms. The income to be derived from
distributor sales is recorded under current liabilities on the balance sheet as
"Deferred income on shipments to distributors" until such time as the
distributor confirms a final sale to its end customer.
The Company's sales to international distributors are made under agreements
which permit limited stock return privileges but not sales price rebates.
Revenue on these sales is recognized upon shipment at which time title passes.
The Company estimates international distributor returns based on historical data
and current business expectations and defers a portion of international
distributor sales and profits based on these estimated returns. Such amounts are
classified in "Deferred income on shipments to distributors" on the accompanying
balance sheet.
The Company's warranty policy provides for replacement of defective parts.
Warranty expense historically has been negligible.
Stock Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method and discloses in Note 4 the pro-forma 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 11,323,000, 15,603,000, and
17,049,000 shares for fiscal 2002, 2001, and 2000 respectively. The weighted
average diluted common shares outstanding for fiscal 2002, 2001, and 2000
excludes the dilutive effect of approximately 16,433,000, 19,842,000, and
23,817,000 options, respectively, since such options have an exercise price in
excess of the average market value of the Company's common stock during the
fiscal year.
36
Comprehensive Income
Comprehensive income approximated net income for fiscal 2002, 2001, and 2000.
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 2001, the FASB issued SFAS 141 "Business Combination" and SFAS 142
"Goodwill and Other Intangible Assets." SFAS 141 eliminates the
pooling-of-interest method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Statement 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001 (i.e., the acquisition date is July 1, 2001 or after.) Under
SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
Company will adopt SFAS 142 for its fiscal year beginning July 1, 2002. The
Company does not expect the adoption of SFAS 142 to have a significant effect on
its financial positions or results of operations.
In October 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of retirement
obligations be recognized as a liability when they are incurred and that the
associated retirement costs be capitalized as a long-term asset and expensed
over its useful life. The provisions of SFAS No. 143 will be effective for
fiscal years beginning after June 15, 2002. The Company does not expect that the
adoption of SFAS No. 143 will have a significant effect on its financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," addressing financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement is effective for the fiscal year
beginning July 1, 2002. The Company does not expect that the adoption of the
Statement will have a significant impact on the Company's financial position and
results of operations. The shutdown of the Company's 4-inch wafer fabrication
facility in January 2002 did not result in any impairment charges as the charges
had been previously anticipated and provided for in the financial statements.
2. Short-term Investments
Short-term investments as of June 30, 2002 and July 1, 2001 were as follows:
In thousands 2002 2001
---- ----
Municipal bonds $727,884 $690,288
U.S. Treasury securities and
obligations of U.S. government
agencies 409,116 396,861
Corporate debt securities and other 203,324 140,747
--------- ---------
$1,340,324 $1,227,896
The contractual maturities of short-term investments at June 30, 2002 were as
follows: one year or less - $290,017, one year to three years - $1,050,307.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to repay obligations without prepayment
penalties.
37
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 June 30, 2002, future minimum lease payments under non-cancelable operating
leases having an initial term in excess of one year were as follows: fiscal
2003: $2,911,000; fiscal 2004: $2,595,000; fiscal 2005: $2,344,000; fiscal 2006:
$2,065,000; fiscal 2007: $1,436,000; and thereafter: $3,139,000.
Total rent expense was $3,418,000, $2,252,064, and $2,045,000 in fiscal 2002,
2001 and 2000, 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 June 30, 2002, the
total authorized number of shares under all plans was 169,000,000. 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 June 30, 2002 are
summarized as follows:
Stock Weighted-
Options Average
Outstanding Exercise Price
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
----------
Granted 7,835,650 46.61
Forfeited (764,780) 22.55
Exercised (5,164,470) 9.14
----------
Outstanding options, July 1, 2001 41,795,320 $21.21
----------
Granted 1,838,000 38.96
Forfeited (1,220,650) 33.19
Exercised (3,519,710) 9.69
----------
Outstanding options, June 30, 2002 38,892,960 $22.72
==========
38
The following table sets forth certain information with respect to employee
stock options outstanding and exercisable at June 30, 2002:
Weighted
Average
Weighted Remaining Weighted
Stock Options Average Contractual Stock Average
Range of Exercise Prices Outstanding Exercise Life Options Exercise
Price (Years) Exercisable Price
$ 2.80 - $ 8.53 9,305,880 $5.94 3.22 9,305,880 $5.94
$ 8.54 - $ 17.00 12,445,440 13.51 5.46 10,033,380 13.43
$ 17.01 - $ 40.90 11,350,290 32.35 7.76 4,403,640 29.49
$ 40.91 - $ 55.88 5,791,350 50.56 8.09 1,904,775 50.13
---------- ----------
$ 2.80 - $55.88 38,892,960 $22.72 5.99 25,647,675 $16.19
========== ==========
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 June 30, 2002, the shares reserved for issuance under this plan
totaled 8,400,000 and 7,278,676 shares had been issued under this plan. During
fiscal 2002, 161,130 shares were issued at a weighted-average price of $33.09
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):
2002 2001 2000
---- ---- ----
Pro forma net income $131,936 $366,063 $247,009
Pro forma earnings per
share:
Basic $0.42 $1.16 $0.79
Diluted $0.40 $1.10 $0.75
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):
2002 2001 2000
---- ---- ----
Expected lives 6.1 6.5 6.5
Expected volatility 69.0% 65.8% 59.1%
Dividend yields 0.5% 0.2% 0.3%
Risk free interest
rates 4.4% 5.0% 5.9%
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.
39
Using the Black-Scholes option pricing model, the weighted average estimated
fair value of employee stock options granted in fiscal 2002, 2001 and 2000 was
$25.59, $31.64 and $24.26 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 $8,873,000, $11,857,000 and $9,818,000 in fiscal 2002, 2001 and
2000, respectively.
40
5. Income taxes
The components of income before income taxes are as follows:
In thousands 2002 2001 2000
United States operations $245,830 $541,112 $361,834
Foreign operations 32,520 69,539 55,420
-------- -------- --------
$278,350 $610,651 $417,254
======== ======== ========
The provision for income taxes consists of the following:
In thousands 2002 2001 2000
United States federal:
Current $66,465 $155,390 $118,917
Deferred 4,751 4,747 (2,219)
------- -------- --------
71,216 160,137 116,698
------- -------- --------
State:
Current 5,923 14,229 8,575
Deferred 66 528 (374)
------- -------- --------
5,989 14,757 8,201
------- -------- --------
Foreign-Current 3,516 8,301 4,449
------- -------- --------
$80,721 $183,195 $129,348
======= ======== ========
Actual current federal and state tax liabilities are lower than the amounts
reflected above by the tax benefit from stock option activity of approximately
$38,091,000, $90,563,000, and $100,664,000, for fiscal 2002, 2001, and 2000,
respectively. The tax benefit from stock option activity is recorded as a
reduction in current income taxes payable and an increase in additional paid-in
capital.
The provision for income taxes reconciles to the amount computed by applying the
statutory U.S. Federal rate of 35% to income before income taxes as follows:
In thousands 2002 2001 2000
Tax at U.S. statutory rate $97,423 $213,728 $146,039
State income taxes, net of federal benefit 3,894 9,592 5,331
Earnings of foreign subsidiaries subject to lower rates (5,069) (10,230) (10,400)
Tax-exempt interest income (10,850) (11,908) (8,934)
FSC benefits - (13,224) (4,042)
Other (4,677) (4,763) 1,354
------- -------------- ------------
$80,721 $183,195 $129,348
========= ========== =========
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 June 30, 2002 and July 1, 2001 are as follows:
41
In thousands 2002 2001
Deferred tax assets:
Inventory valuation $17,680 $12,410
Deferred income on shipments to distributors 17,236 16,606
State income taxes 2,098 5,165
Non-deductible accrued benefits 1,954 2,523
Other 4,786 6,778
------- -------
Total deferred tax assets 43,754 43,482
------- -------
Deferred tax liabilities:
Depreciation and amortization 11,642 10,234
Unremitted earnings of subsidiaries 26,340 22,659
------- -------
Total deferred tax liabilities 37,982 32,893
------- -------
Net deferred tax assets $5,772 $10,589
======= =======
The Company has a tax holiday in Singapore which is effective through September
2004. The Company's Malaysia tax holiday is effective through July 2005.
The impact of the Singapore and Malaysia tax holidays was to increase net income
by approximately $4,328,000 ($0.01 per diluted share) in fiscal 2002,
$11,669,000 ($0.04 per diluted share) in fiscal 2001, and $9,320,000 ($0.03 per
diluted share) in fiscal 2000. 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 $191,814,000.
The Company is currently under audit by the Internal Revenue Service for periods
beginning July 1, 1996 and June 30, 1997. Management believes that an adequate
amount of taxes and related interest and penalty, if any, have been provided for
any adjustment that may result from these years.
42
EXHIBIT 13.1-19
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders of Linear Technology Corporation
We have audited the accompanying consolidated balance sheets of Linear
Technology Corporation as of June 30, 2002 and July 1, 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 2002. 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 June 30, 2002 and July 1, 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
San Jose, California
July 19, 2002