LINEAR TECHNOLOGY CORPORATION
QUARTERLY RESULTS AND STOCK MARKET DATA
(UNAUDITED)
In thousands, except per share amounts
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
Quarter Ended June 29, 1997 March 30, 1997 Dec. 29, 1996 Sept. 29, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 104,075 $ 95,033 $ 90,080 $ 90,063
Gross profit 73,574 67,598 64,047 64,284
Net income 37,402 33,980 31,631 31,358
Net income per share 0.47 0.43 0.40 0.40
Cash dividend paid per share 0.05 0.05 0.05 0.05
Stock price range per share:
High 56.25 50.13 48.50 39.75
Low 44.25 42.25 32.25 23.25
Fiscal 1996
Quarter Ended June 30, 1996 March 31, 1996 Dec. 31, 1995 Oct. 1, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 90,039 $ 104,710 $ 96,017 $ 87,005
Gross profit 64,751 76,237 68,371 61,580
Net income 31,357 37,764 34,323 30,520
Net income per share 0.40 0.48 0.44 0.39
Cash dividend paid per share 0.04 0.04 0.04 0.04
Stock price range per share:
High 47.00 49.50 45.00 42.88
Low 27.00 31.75 36.00 32.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share amounts are based on the weighted average common and common
equivalent shares outstanding during the quarter and may not add to net income
per share for the year.
The stock activity in the above table is based on the high and low closing bid
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 29, 1997, there were approximately 1,119 shareholders of record.
Exhibit 13.1-1
LINEAR TECHNOLOGY CORPORATION
SELECTED FINANCIAL INFORMATION/FIVE-YEAR TREND
In thousands, except per share amounts
- ------------------------------------------------------------------------------------------------------------------------------------
FIVE FISCAL YEARS ENDED JUNE 29, 1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Income statement information
Net sales $379,251 $377,771 $265,023 $200,538 $150,867
Net income 134,371 133,964 84,696 56,827 36,435
Net income per share 1.71 1.72 1.11 0.75 0.49
Shares used in the calculation
of net income per share 78,545 77,888 76,328 75,352 73,814
Balance sheet information
Cash and short-term
investments $443,439 $322,472 $250,222 $176,801 $127,878
Total assets 679,633 529,802 367,553 268,399 196,492
Long-term debt and non-current
capital lease obligations -- -- -- -- 259
Cash dividends paid per share $ 0.20 $ 0.16 $ 0.14 $ 0.12 $ 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
During fiscal year 1993, the Company initiated a quarterly cash dividend
program. No cash dividends were declared or paid prior to fiscal year 1993.
Exhibit 13.1-2
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
--------------------------------------- ------------------
1997 1996
June 29, June 30, July 2, over over
1997 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% -- % 43%
Cost of sales 28.9 28.3 31.4 3 28
- --------------------------------------------------------------------------------------------------------------
Gross profit 71.1 71.7 68.6 (1) 49
- --------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 9.3 8.2 9.0 14 30
Selling, general and administrative 12.1 13.0 14.3 (7) 30
- --------------------------------------------------------------------------------------------------------------
21.4 21.2 23.3 1 30
- --------------------------------------------------------------------------------------------------------------
Operating income 49.7 50.5 45.3 (1) 59
- --------------------------------------------------------------------------------------------------------------
Interest income 4.2 3.5 3.2 22 55
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 53.9% 54.0% 48.5% -- 59%
- --------------------------------------------------------------------------------------------------------------
Effective tax rates 34.3% 34.3% 34.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales of $379.3 million in fiscal 1997 were generally flat as compared to
net sales of $377.8 million in fiscal 1996. Net sales in fiscal 1996 reflected a
period of significant sales growth as net sales increased 43% over net sales of
$265.0 million in fiscal 1995 due to higher unit sales and average selling
prices. This robust sales growth began to decelerate for the Company and much of
the semiconductor industry during the fourth quarter of fiscal 1996 and resulted
in excess inventory levels in end customer channels entering fiscal 1997. This
led to generally flat sequential sales for the first half of fiscal 1997 as
customers reduced or delayed orders to reduce their excess inventory levels.
This trend began to reverse in the second half of the fiscal year as the Company
returned to quarterly sequential sales growth in the third and fourth fiscal
quarters. During the second half of fiscal 1997, sales were particularly strong
in the communications area which now represents 30% of sales up from 18% in the
previous year. Average selling prices and unit volumes for fiscal 1997 were
generally unchanged as compared to fiscal 1996.
International sales represented 49%, 52% and 49% of net sales in fiscal 1997,
1996 and 1995, respectively. International sales declined slightly in fiscal
1997 due primarily to lower sales to the Japanese market after a period of
significant sales growth in Japan in fiscal 1996. This decline was partially
offset by an increase in sales to the European market.
NET SALES BY GEOGRAPHIC AREA
1997 1996 1995
---- ---- ----
NORTH AMERICA 51% NORTH AMERICA 48% NORTH AMERICA 51%
EUROPE 24% EUROPE 23% EUROPE 22%
JAPAN 12% JAPAN 16% JAPAN 10%
ASIA PACIFIC ASIA PACIFIC ASIA PACIFIC
AND OTHER 13% AND OTHER 13% AND OTHER 17%
$379,251,000 $377,771,000 $265,023,000
Gross profit was $269.5 million, or 71.1% of net sales in fiscal 1997 as
compared to $270.9 million, or 71.7% of net sales in fiscal 1996. The decrease
in gross profit as a percentage of net sales in fiscal 1997 was due to
additional start-up costs for the Company's new wafer fabrication plant in
Camas, Washington. Minor changes in period costs, product mix and average
selling prices generally offset one another during fiscal 1997. The
Exhibit 13.1-3
increase in gross profit as a percentage of net sales of 71.7% for fiscal 1996
from 68.6% in fiscal 1995 was primarily due to higher average selling prices and
a more favorable product mix offset partially by initial start-up costs for the
Camas wafer fabrication facility. Production commenced at this new facility
during the second half of fiscal 1997.
Research and development ("R&D") expenses were $35.4 million, $31.1 million and
$23.9 million in fiscal 1997, 1996 and 1995, respectively, or 9.3%, 8.2% and
9.0% of net sales. The increase in R&D expenses in fiscal 1997 and 1996 as
compared to the prior year periods was due to an increase in design and test
engineering personnel and an increase in spending for development mask sets.
Additionally, in fiscal 1997 the Company opened a new design center in Colorado
Springs, Colorado. The increase in R&D spending in fiscal 1996 as compared with
fiscal 1995 was also due to increases in staffing, primarily in the design area.
However, R&D spending grew 30% whereas net sales grew 43% resulting in a decline
in R&D spending as a percent of sales from 9.0% to 8.2%.
Selling, general and administrative ("SG&A") expenses declined in fiscal 1997 to
$45.7 million, or 12.1% of net sales, from $49.1 million, or 13.0% of net sales,
in fiscal 1996. The decline in SG&A expenses was due primarily to lower legal
costs, sales commissions and profit sharing expenses offset partially by higher
advertising costs. In fiscal 1996, SG&A expenses increased to $49.1 million from
$37.9 million in fiscal 1995 primarily due to higher labor charges including
profit sharing, legal expenses to protect intellectual property and advertising
costs. As a percentage of net sales, SG&A expenses decreased to 13.0% of net
sales in fiscal 1996 from 14.3% of net sales in fiscal 1995 as labor,
advertising, legal and other expenses increased at a much lower rate than the
net sales growth.
Interest income in fiscal 1997 increased 22% to $16.1 million from $13.1 million
in fiscal 1996 due primarily to an increase in invested cash, cash equivalents
and short-term investments while the average rate of return declined slightly
due to lower short-term interest rates. In fiscal 1996 interest income increased
to $13.1 million from $8.5 million in fiscal 1995 due to higher invested cash,
cash equivalents and short-term investments balances and in part due to an
increase in the average rate of return of the investment portfolio. The Company
had no debt and therefore had no interest expense during each of the three years
presented.
The Company's effective tax rate was 34.3% in fiscal 1997, consistent with
fiscal 1996. The effective tax rate in fiscal 1995 was 34.1%.
Factors Affecting Future Operating Results
Except for historical information contained herein, the matters set forth in the
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, and the timely introduction of new processes and products.
During the second half of fiscal 1997, initial manufacturing commenced with
relatively low volume production in the Company's new wafer fabrication plant in
Camas, Washington. The Company intends to increase the production volume of this
facility throughout fiscal 1998. Certain fixed and variable costs associated
with the ramp-up of production of the Camas facility are not expected to be
fully absorbed until higher production volumes are achieved. As a result, gross
profit margins during the first half of fiscal 1998 may be negatively impacted
until higher production volumes are attained. These higher volumes are currently
expected to occur during the second half of fiscal 1998.
During the fourth quarter of fiscal 1997, the Company received an extension of
its tax holiday for its Singapore operations for an additional three years
through September 1999. An expected increase in business activity in foreign
jurisdictions and an increase in business activity and assets employed outside
of California is expected to lower the Company's effective tax rate in fiscal
1998. The Company expects that its overall fiscal 1998 effective tax rate will
be in the 33% to 33.5% range.
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, occasional shortages of materials, capacity constraints, variation in
manufacturing efficiencies and significant expenditures for capital equipment
and product development. 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.
Exhibit 13.1-4
CASH FLOW SUMMARY
FISCAL YEAR ENDED JUNE 29, 1997
(IN MILLIONS)
SOURCES OF CASH USES OF CASH
NET INCOME $134.4 INCREASE IN CASH AND
DEPRECIATION AND AMORTIZATION $ 12.4 SHORT-TERM INVESTMENTS $120.9
EMPLOYEE COMMON STOCK CAPITAL EXPENDITURES $ 21.8
TRANSACTIONS $ 40.7 PURCHASE OF COMMON STOCK $ 11.6
NET CHANGE IN OPERATING
ASSETS AND LIABILITIES $ 18.2
PAYMENT OF CASH DIVIDENDS $ 15.0
Liquidity and Capital Resources
The Company's operating results for fiscal 1997 provided the resources for the
Company to expand its manufacturing operations, increase its dividends to
shareholders, repurchase common stock and increase cash, cash equivalents and
short-term investments by $121.0 million during the fiscal year. At the end of
fiscal 1997, working capital was $470.3 million and the Company had no long-term
debt.
The issuance of common stock under stock option plans provided $40.8 million in
proceeds and tax benefits in fiscal 1997 as compared to $32.7 million in fiscal
1996. The proceeds from stock issuances increased by $5.7 million in fiscal 1997
as compared to fiscal 1996 due primarily to higher overall exercise prices. The
tax benefit from stock option transactions increased by $2.3 million from fiscal
1996 to 1997 due mainly to shares being exercised during a period of higher
market prices. Generally, the gain the employee receives upon exercise of a
nonqualified stock option is a tax deduction to the company and is recorded as
an increase in common stock.
The Company spent $21.9 million for capital assets in fiscal 1997, including
approximately $12.5 million for plant construction and equipment for its new
wafer fabrication facility in Camas, Washington. The Camas facility was
completed and placed in service in the second half of fiscal 1997 at a total
capitalized cost of approximately $60 million. The Company expects that fiscal
1998 expenditures for capital assets will increase significantly as compared to
fiscal 1997 capital expenditures as the Company plans to expand its
manufacturing operations in Camas and Malaysia.
Cash dividends of $15 million, or $0.20 per share, were paid by the Company in
fiscal 1997 as compared to $11.9 million, or $0.16 per share in fiscal 1996. In
July 1997, the Company's Board of Directors announced that the quarterly cash
dividend was increased to $0.06 per share. Future dividends will be based on
quarterly financial performance.
As of June 29, 1997, the Company's cash, cash equivalents and short-term
investments totaled $443.4 million. These 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 29, 1997, a
1% (100 basis points) increase in short-term interest rates would result in an
unrealized loss in market value of the Company's investments totaling
approximately $3.5 million. However, because the Company's debt securities are
carried 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.
Historically, the Company has satisfied its liquidity needs through cash
generated from operations, the placement of equity securities, and the
utilization of lease financing for capital equipment and facilities. Given its
strong financial condition and performance, the Company's near-term plan is to
primarily finance its capital needs internally.
Exhibit 13.1-5
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
- --------------------------------------------------------------------------------
THREE YEARS ENDED JUNE 29, 1997 1997 1996 1995
- --------------------------------------------------------------------------------
Net sales $379,251 $377,771 $265,023
Cost of sales 109,748 106,832 83,263
- --------------------------------------------------------------------------------
Gross profit 269,503 270,939 181,760
- --------------------------------------------------------------------------------
Expenses:
Research and development 35,401 31,058 23,931
Selling, general and administrative 45,670 49,127 37,867
- --------------------------------------------------------------------------------
81,071 80,185 61,798
- --------------------------------------------------------------------------------
Operating income 188,432 190,754 119,962
- --------------------------------------------------------------------------------
Interest income 16,090 13,148 8,488
- --------------------------------------------------------------------------------
Income before income taxes 204,522 203,902 128,450
- --------------------------------------------------------------------------------
Provision for income taxes 70,151 69,938 43,754
- --------------------------------------------------------------------------------
Net income $134,371 $133,964 $ 84,696
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net income per share $ 1.71 $ 1.72 $ 1.11
- --------------------------------------------------------------------------------
Shares used in the calculation of
net income per share 78,545 77,888 76,328
See accompanying notes.
Exhibit 13.1-6
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
In thousands
- -------------------------------------------------------------------------------
JUNE 29, 1997 AND JUNE 30, 1996 1997 1996
- -------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 50,114 $ 54,393
Short-term investments 393,325 268,079
Accounts receivable, net of allowance for
doubtful accounts of $803 ($776 in 1996) 64,836 48,395
Inventories
Raw materials 4,001 3,003
Work-in-process 4,820 5,479
Finished goods 3,364 4,448
- -------------------------------------------------------------------------------
Total inventories 12,185 12,930
Deferred tax assets 30,698 27,200
Prepaid expenses and other current assets 8,128 7,883
- -------------------------------------------------------------------------------
Total current assets 559,286 418,880
- -------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land, buildings and improvements 53,312 50,964
Manufacturing and test equipment 130,175 111,174
Office furniture and equipment 2,707 2,667
- -------------------------------------------------------------------------------
186,194 164,805
- -------------------------------------------------------------------------------
Accumulated depreciation and amortization (65,847) (53,883)
- -------------------------------------------------------------------------------
Net property, plant and equipment 120,347 110,922
- -------------------------------------------------------------------------------
Total assets $ 679,633 $ 529,802
================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 7,872 $ 18,075
Accrued payroll and related benefits 21,423 21,319
Deferred income on shipments to distributors 29,986 24,928
Income taxes payable 16,124 8,395
Other accrued liabilities 13,581 13,681
- -------------------------------------------------------------------------------
Total current liabilities 88,986 86,398
- -------------------------------------------------------------------------------
Deferred tax liabilities 1,596 2,917
Commitments
Shareholders' equity:
Preferred stock, no par value, 2,000 shares
authorized, none issued or outstanding -- --
Common stock, no par value, 120,000 shares
authorized; 75,956 shares issued and
autstanding (74,662 shares in 1996) 172,403 132,482
Retained earnings 416,648 308,005
- -------------------------------------------------------------------------------
Total shareholders' equity 589,051 440,487
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 679,633 $ 529,802
================================================================================
See accompanying notes.
Exhibit 13.1-7
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
In thousands
THREE YEARS ENDED JUNE 29, 1997 1997 1996 1995
Cash flow from operating activities:
Net income $ 134,371 $ 133,964 $ 84,696
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,425 10,263 8,563
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (16,441) (18,625) (3,253)
Decrease (increase) in inventories 745 (3,211) 297
Decrease (increase) in deferred tax assets (3,498) (6,592) (5,917)
Decrease (increase) in prepaid expenses
and other current assets (245) (1,451) (3,331)
Increase (decrease) in accounts payable,
payroll and other accrued liabilities (10,199) 24,652 5,694
Increase (decrease) in deferred income
on shipments to distributors 5,058 7,701 5,062
Tax benefit from stock option transactions 22,272 19,989 8,734
Increase (decrease) in income taxes payable 7,729 (1,783) 2,151
Increase (decrease) in deferred tax liabilities (1,321) (278) 1,192
Cash provided by operating activities 150,896 164,629 103,888
Cash flow from investing activities:
Purchase of short-term investments (301,746) (224,717) (146,832)
Proceeds from sales and maturities of short-term
investments 176,500 158,714 81,607
Purchase of property, plant and equipment (21,850) (70,383) (22,092)
Cash used in investing activities (147,096) (136,386) (87,317)
Cash flow from financing activities:
Issuance of common shares under employee stock plans 18,481 12,736 7,600
Purchase of common stock (11,598) (22,871) (6,139)
Payment of cash dividends (14,962) (11,861) (9,836)
Cash used in financing activities (8,079) (21,996) (8,375)
Increase (decrease) in cash and cash equivalents (4,279) 6,247 8,196
Cash and cash equivalents, beginning of period 54,393 48,146 39,950
Cash and cash equivalents, end of period $ 50,114 $ 54,393 $ 48,146
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for income taxes $ 44,844 $ 58,602 $ 37,594
<FN>
See accompanying notes.
</FN>
Exhibit 13.1-8
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands
THREE YEARS ENDED JUNE 29, 1997
Total
Common Stock Retained Shareholders'
Shares Amount Earnings Equity
Balance at July 3, 1994 72,617 $ 84,979 $ 138,496 $ 223,475
Issuance of common stock for cash under employee
stock option and stock purchase plans 1,289 7,600 -- 7,600
Tax benefit from stock option transactions -- 8,734 -- 8,734
Purchase and retirement of common stock (320) (374) (5,765) (6,139)
Net income -- -- 84,696 84,696
Cash dividends - $0.12 per share -- -- (9,836) (9,836)
Balance at July 2, 1995 73,586 100,939 207,591 308,530
Issuance of common stock for cash under employee
stock option and stock purchase plans 1,806 12,736 -- 12,736
Tax benefit from stock option transactions -- 19,989 -- 19,989
Purchase and retirement of common stock (730) (1,182) (21,689) (22,871)
Net income -- -- 133,964 133,964
Cash dividends - $0.16 per share -- -- (11,861) (11,861)
Balance at June 30, 1996 74,662 132,482 308,005 440,487
Issuance of common stock for cash under employee
stock option and stock purchase plans 1,764 18,481 -- 18,481
Tax benefit from stock option transactions -- 22,272 -- 22,272
Purchase and retirement of common stock (470) (832) (10,766) (11,598)
Net income -- -- 134,371 134,371
Cash dividends - $0.20 per share -- -- (14,962) (14,962)
Balance at June 29, 1997 75,956 $ 172,403 $ 416,648 $ 589,051
<FN>
See accompanying notes.
</FN>
Exhibit 13.1-9
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, factory automation, process
control and military and space systems.
Export sales by geographic area were as follows:
In thousands
1997 1996 1995
Europe $ 91,927 $ 87,920 $ 58,243
Japan 46,332 57,954 26,371
Asia Pacific and other 49,340 49,718 44,870
-------- -------- --------
Total export sales $187,599 $195,592 $129,484
======== ======== ========
Basis of Presentation
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal 1997, 1996
and 1995 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.
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with original maturities of three
months or less. Investments with a maturity of over three months at the time of
purchase are classified as short-term investments.
At June 29, 1997 and June 30, 1996, 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. At June 29, 1997 and June 30, 1996, 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 accounted for 26%, 20% and 23%
of net sales for fiscal 1997, 1996 and 1995, 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 1997, 1996 and 1995.
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 29, 1997, 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.
Exhibit 13.1-10
Property, Plant and Equipment
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 term of the lease.
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of the statement did not have a material
impact on the Company's financial statements.
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.
Employee Stock Plans
As described in Note 4, the Company has elected to account for its employee
stock plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and to furnish the pro-forma disclosures required under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
Net income per share
Net income per share is based upon the weighted average number of shares of
common stock outstanding and common equivalent shares, if dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("FAS 128"), which is required to be adopted by the
Company in its fiscal quarter ending December 28, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate prior periods. Under the requirements of FAS 128, basic
earnings per share will replace primary earnings per share and the dilutive
effect of stock options will be excluded in its calculation. Upon adoption of
FAS 128, the Company's basic earnings per share for the fiscal years ended June
29, 1997, June 30, 1996 and July 2, 1995 is expected to be $1.79, $1.80 and
$1.16, respectively. Under FAS 128, diluted earnings per share, which will
include the dilutive effect of stock options, is expected to remain at $1.71,
$1.72 and $1.11, respectively.
2. Cash Equivalents and Short-term Investments
The estimated fair values of cash equivalents and short-term investments are
based on market prices.
Investments as of June 29, 1997 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
Cash equivalents:
Money market funds and floating
rate notes $ 24,777 $ -- $ -- 24,777
Municipal bonds 2,500 -- -- 2,500
-------- -------- -------- --------
27,277 -- -- 27,277
Short-term investments:
Municipal bonds 270,585 454 222 270,817
U.S. Treasury securities and
obligations of U.S. government
agencies 99,008 134 105 99,037
Other debt securities 23,732 5 33 23,704
-------- -------- -------- --------
393,325 593 360 393,558
-------- -------- -------- --------
Total cash equivalents and
short-term investments $420,602 $ 593 $ 360 $420,835
======== ======== ======== ========
Exhibit 13.1-11
Investments as of June 30, 1996 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
Cash equivalents:
Money market funds and floating
rate notes $ 25,138 $ -- $ -- $ 25,138
Municipal bonds 18,100 -- 4 18,096
-------- -------- -------- --------
43,238 -- 4 43,234
Short-term investments:
Municipal bonds 169,344 245 238 169,351
U.S. Treasury securities and
obligations of U.S. government
agencies 82,207 83 562 81,728
Other debt securities 16,528 -- 18 16,510
-------- -------- -------- --------
268,079 328 818 267,589
-------- -------- -------- --------
Total cash equivalents and
short-term investments $311,317 $ 328 $ 822 $310,823
======== ======== ======== ========
The amortized cost and estimated fair value of investments in debt securities at
June 29, 1997, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because the issuers of the securities may
have the right to repay obligations without prepayment penalties.
Amortized Estimated
In thousands Cost Fair Value
Due in 1 year or less $247,272 $247,345
Due in 1-3 years 173,330 173,490
-------- --------
Total cash equivalents and
short-term investments $420,602 $420,835
======== ========
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 29, 1997, the future minimum lease payments under noncancelable
operating leases having an initial term in excess of one year were approximately
as follows: fiscal 1998: $1,591,000; fiscal 1999: $1,544,000; fiscal 2000:
$1,329,000; fiscal 2001: $957,000; fiscal 2002: $976,000; and thereafter:
$12,387,000.
Total rent expense under operating leases was approximately $2,379,000,
$2,015,000 and $1,928,000 in fiscal 1997, 1996 and 1995, 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 29, 1997, the
total authorized number of shares under all plans was 34,500,000. Options become
exercisable over a five-year period (generally 10% every six months). All
options expire ten years after the date of the grant.
In July 1996, the Board of Directors approved the re-pricing of stock option
grants totaling 2,510,600 shares granted during fiscal 1996. In exchange for
these new options, all vesting under the canceled options was lost and a new
five year vesting period was started.
Exhibit 13.1-12
Option transactions during fiscal 1995, 1996 and 1997 are summarized as follows:
Stock Weighted-
Options Average
Outstanding Exercise Price
Outstanding options, July 3, 1994 9,078,712 $ 8.62
Granted 1,926,000 25.20
Forfeited (236,300) 17.53
Exercised (1,211,606) 5.29
---------- --------
Outstanding options, July 2, 1995 9,556,806 $12.17
Granted 2,744,500 34.80
Forfeited (209,080) 23.94
Exercised (1,734,278) 6.62
---------- --------
Outstanding options, June 30, 1996 10,357,948 $18.84
Granted 4,057,600 29.17
Re-priced options canceled (2,510,600) 34.80
Forfeited (324,000) 26.75
Exercised (1,701,702) 9.49
---------- ---------
Outstanding options, June 29, 1997 9,879,246 $20.38
========== =========
The following table sets forth certain information with respect to employee
stock options outstanding and exercisable at June 29, 1997:
Weighted Weighted Weighted
Stock Average Average Stock Average
Options Exercise Remaining Options Exercise
Range of Exercise Prices Outstanding Price Contractual Exercisable Price
Life
(Years)
$ 1.84 - $16.25 3,987,646 $ 9.66 4.6 3,345,746 $ 8.63
17.38 - 24.75 4,267,000 23.80 8.5 810,293 22.44
28.88 - 49.00 1,624,600 37.74 8.7 323,150 30.52
-------------------------------------- ---------------------
$ 1.84 - $49.00 9,879,246 $20.38 6.9 4,479,189 $12.71
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 the end of each six month
offering period. The offering periods commence on approximately May 1 and
November 1 of each year. At June 30, 1997, the shares reserved for issuance
under this plan totaled 1,600,000 and 1,567,392 shares had been issued under
this plan. During fiscal 1997, 81,079 shares were issued at a weighted-average
price of $29.20 per share pursuant to this plan.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees"and related Interpretations
("APB 25"). In accordance with APB 25, the Company does not recognize
compensation expense for stock options and other stock based awards issued to
employees. However, the dilutive effect of employee stock options is included in
the calculation of earnings per share.
In 1995, The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation" effective for the Company's 1997 fiscal year. FAS 123 attempts to
quantify and measure currently the potential future value of employee stock
options and other stock-based awards to employees. The valuation techniques it
recommends are highly subjective and these methods could result in amounts that
differ significantly from those amounts to be actually incurred. Consequently,
FAS 123 gives companies the choice of implementing the
Exhibit 13.1-13
pronouncement in the primary financial statements or disclosing the pro-forma
effects of FAS 123 in the financial statement footnotes. The Company has elected
to continue to apply APB 25 in accounting for stock-based awards to employees
and to disclose the pro-forma effects of FAS 123. Had compensation cost for the
Company's stock-based awards to employees been determined consistent with FAS
123, the Company's net income and earnings per share would have been reduced to
the pro-forma amounts indicated below (in thousands, except per share amounts):
1997 1996
----- ----
Pro-forma net income $125,347 $128,986
Pro-forma earnings per share $1.62 $1.67
For purposes of the pro-forma information, the fair value of each stock option
and ESPP grant is estimated on the date of grant using the Black-Scholes option
pricing model and the following weighted average assumptions:
Employee
Stock Options ESPP Shares
------------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Expected lives 6.5 6.5 0.5 0.5
Expected volatility 51.0% 51.0% 40.0% 40.0%
Dividend yield 0.5% 0.5% 0.5% 0.5%
Risk-free interest rates 6.6% 6.5% 5.4% 5.4%
Using the Black-Scholes option pricing model, the weighted average estimated
fair value of employee stock options granted in fiscal 1997 and 1996 was $20.07
and $19.85, respectively. The weighted average estimated fair value of ESPP
shares granted in fiscal 1997 and 1996 was $10.14 and $9.95, respectively. For
the purposes of the pro-forma information, the estimated fair values of the
employee stock options and ESPP shares are amortized to expense using the
straight-line method over the vesting or offering periods, which is generally
five years for employee stock options and six months for ESPP shares. The
pro-forma information is not representative of the pro-forma effect of the fair
value provisions of FAS 123 on the Company's income in future years because
pro-forma compensation expense related to grants made prior to fiscal 1996 have
not been taken into consideration, in compliance with FAS 123. Accordingly, the
pro-forma effect of FAS 123 will not be fully reflected until fiscal 2000.
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 $5,038,000, $4,864,000 and $3,003,000 in fiscal 1997, 1996 and
1995, respectively.
5. Income Taxes
The components of income before income taxes are as follows:
In thousands 1997 1996 1995
United States operations $181,258 $189,275 $116,905
Foreign operations 23,264 14,627 11,545
-------- -------- --------
$204,522 $203,902 $128,450
======== ======== ========
The provision for income taxes consists of the following:
In thousands 1997 1996 1995
United States federal:
Current $ 64,694 $ 67,498 $ 39,924
Deferred (4,589) (6,725) (4,222)
-------- -------- --------
60,105 60,773 35,702
-------- -------- --------
State:
Current 9,526 8,897 8,132
Deferred (230) (145) (503)
-------- -------- --------
9,296 8,752 7,629
-------- -------- --------
Foreign-Current 750 413 423
-------- -------- --------
$ 70,151 $ 69,938 $ 43,754
======== ======== ========
Exhibit 13.1-14
Actual current tax liabilities are lower than the amounts reflected above by the
tax benefit from stock option activity of approximately $22,272,000,
$19,989,000, $8,734,000 for fiscal 1997, 1996 and 1995, 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 1997 1996 1995
Tax at U.S. statutory rate $ 71,583 $ 71,366 $ 44,958
State income taxes, net of federal benefit 6,042 5,689 4,959
Earnings of foreign subsidiaries subject to
lower rates (6,060) (4,699) (3,853)
Other (1,414) (2,418) (2,310)
-------- -------- --------
$ 70,151 $ 69,938 $ 43,754
======== ======== ========
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 29, 1997 and June 30, 1996 are as follows:
In thousands 1997 1996
Deferred tax assets:
Inventory valuation $ 8,423 $ 8,113
Deferred income on shipments to distributors 11,395 9,971
State income taxes 7,675 5,595
Other 3,205 3,521
------- -------
Total deferred assets 30,698 27,200
------- -------
Deferred tax liabilities:
Depreciation and amortization 1,596 2,917
------- -------
Net deferred tax assets $29,102 $24,283
======= =======
The Company's Singapore subsidiary has been granted a ten year tax holiday,
which is scheduled to expire in September 1999. Also, the Company's Malaysia
subsidiary has been granted a five-year tax holiday. To date, no tax has been
provided for either Singapore or Malaysia income from operations.
The impact of the Singapore and Malaysia tax holidays was to increase net income
by approximately $5,002,000 ($0.06 per share) in fiscal 1997, $3,731,000 ($0.05
per share) in fiscal 1996 and $3,624,000 ($0.05 per share) in fiscal 1995. The
Company does not provide a residual U.S. tax on the undistributed earnings of
its Singapore and Malaysia subsidiaries, as it is the Company's intention to
permanently invest the earnings overseas. Should these earnings be remitted to
the U.S. parent, additional U.S. taxable income would be approximately
$51,022,000.
Exhibit 13.1-15
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 June 29, 1997 and June 30, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 29, 1997. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Linear
Technology Corporation at June 29, 1997 and June 30, 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 29, 1997, in conformity with generally accepted accounting
principles.
San Jose, California /s/ Ernst & Young LLP
July 18, 1997
Exhibit 13.1-16
COMPANY PROFILE
Linear Technology Corporation
designs, manufactures and markets
a broad line of standard high
performance linear integrated circuits
utilizing bipolar and silicon gate
CMOS and BiCMOS process technologies.
BOARD OF DIRECTORS
Thomas S. Volpe
Managing Partner
Volpe, Brown, Whelen & Co. LLC
Investment Banking Firm
David S. Lee
Chairman of the Board
Cortelco Systems Holding Corp.
Manufacturer, Telecommunication
Systems and Products
Leo T. McCarthy
President
The Daniel Group
International Consulting Firm
Former Lieutenant Governor
State of California
Richard M. Moley
Senior Vice President
Cisco Systems, Inc.
Manufacturer, Telecommunication
Systems and Products
Robert H. Swanson, Jr.
President and Chief Executive Officer
Linear Technology Corporation
OFFICERS
Robert H. Swanson, Jr.
President and Chief Executive Officer
Paul Chantalat
Vice President, Quality and Reliability
Paul Coghlan
Vice President, Finance and Chief Financial Officer
Timothy D. Cox
Vice President, North American Sales
Clive B. Davies, Ph.D.
Vice President and Chief Operating Officer
Robert C. Dobkin
Vice President, Engineering
Exhibit 13.1-17
Sean T. Hurley
Vice President, Operations
Louis Di Nardo
Vice President, Marketing
Hans J. Zapf
Vice President, International Sales
Arthur F. Schneiderman
Secretary
Attorney, Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation
Legal Counsel
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
Boston, Massachusetts
INDEPENDENT AUDITORS
Ernst & Young LLP
San Jose, California
CORPORATE AND INVESTOR INFORMATION
Please direct inquiries to:
Paul Coghlan
Vice President, Finance and CFO,
Linear Technology Corporation, 1630 McCarthy
Blvd., Milpitas, California, 95035-7417
SEC FORM 10-K
If you would like a copy of our Annual Report on Form 10-K for the fiscal year
ended June 29, 1997, as filed with the Securities and Exchange Commission, you
may obtain it without charge. Direct your request to: Paul Coghlan, Vice
President, Finance and CFO Linear Technology Corporation, 1630 McCarthy Blvd.
Milpitas, California, 95035-7417
Hot Swap is a trademark of Linear Technology Corporation. LTC and LT are
registered trademarks of Linear Technology Corporation.
Exhibit 13.1-18