EXHIBIT 13.1
LINEAR TECHNOLOGY CORPORATION
QUARTERLY RESULTS AND STOCK MARKET DATA
(UNAUDITED)
In thousands, except per share amounts
=====================================================================================================================
Fiscal 1998
Quarter Ended June 28, 1998 March 29, 1998 Dec. 28, 1997 Sept. 28, 1997
- ---------------------------------------------------------------------------------------------------------------------
Net sales $132,011 $125,982 $117,004 $109,802
Gross profit 95,186 90,058 83,358 78,418
Net income 49,503 47,174 43,582 40,643
Diluted earnings per share 0.62 0.59 0.55 0.51
Cash dividends paid per share 0.06 0.06 0.06 0.06
Stock price range per share:
High 80.50 78.25 72.88 74.13
Low 58.75 51.94 52.69 51.75
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
Diluteds earnings 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
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share amounts are based on the weighted average common
shares and dilutive employee stock options outstanding during the quarter and
may not add to diluted earnings 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 28, 1998, there were approximately 1,200 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 28, 1998 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Income statement information
Net sales $484,799 $379,251 $377,771 $265,023 $200,538
Net income 180,902 134,371 133,964 84,696 56,827
Basic earnings per share 2.37 1.79 1.81 1.16 0.79
Diluted earnings per share 2.26 1.71 1.72 1.11 0.75
Weighted average shares outstanding - Basic 76,318 74,988 74,190 73,102 71,982
Weighted average shares outstanding - Diluted 79,969 78,545 77,888 76,328 75,352
Balance sheet information
Cash, cash equivalents and short-term
investments $637,893 $443,439 $322,472 $250,222 $176,801
Total assets 892,822 679,633 529,802 367,553 268,399
Long-term debt -- -- -- -- --
Cash dividends paid per share $0.24 $0.20 $0.16 $0.14 $0.12
- -----------------------------------------------------------------------------------------------------------------
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
------------------------------------------ -----------------------
1998 1997
June 28, June 29, June 30, over over
1998 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 28% -- %
Cost of sales 28.4 28.9 28.3 26 3
- ------------------------------------------------------------------------------------------------
Gross profit 71.6 71.1 71.7 29 (1)
- ------------------------------------------------------------------------------------------------
Expenses:
Research and development 9.5 9.3 8.2 30 14
Selling, general and administrative 11.0 12.1 13.0 17 (7)
- ------------------------------------------------------------------------------------------------
20.5 21.4 21.2 23 1
- ------------------------------------------------------------------------------------------------
Operating income 51.1 49.7 50.5 31 (1)
- ------------------------------------------------------------------------------------------------
Interest income 4.9 4.2 3.5 47 22
- ------------------------------------------------------------------------------------------------
Income before income taxes 56.0% 53.9% 54.0% 33 --
================================================================================================
Effective tax rates 33.3% 34.3% 34.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales were a record $484.8 million in fiscal 1998, an increase of 28% over
net sales of $379.3 million in fiscal 1997. The increase in net sales was
primarily due to an increase in unit shipments, while the average selling price
for the Company's products declined slightly during the year. The Company
experienced strong sales growth in each of its major end markets and
particularly in the communications area which represented 32% of net sales, up
from approximately 30% in fiscal 1997. Geographically, the Company experienced
broad sales growth with U.S. sales up 21% and international sales (export sales)
up 34% over fiscal 1997. International sales represented 52% of net sales, up
from 49% in fiscal 1997, and were lead by a strong European market where sales
increased 38% over the prior year. Sales to Japan and Rest of World, primarily
Pacific Rim countries, increased 24% and 37%, respectively, over fiscal 1997
despite the economic and financial difficulties experienced by Japan and other
countries in this region. However, as discussed more fully under Factors
Affecting Future Operating Results below, as fiscal 1998 concluded the Company's
incoming order rate began to slow as customers either experienced a softening in
end customer demand or took advantage of lower supplier lead times. The Company
currently anticipates that this will cause fiscal 1999 to start with lower sales
volume than the fourth quarter of fiscal 1998.
Net sales of $379.3 million in fiscal 1997 were generally flat as compared to
net sales of $377.8 million in fiscal 1996. Average selling prices and unit
volumes for fiscal 1997 were generally unchanged as compared to fiscal 1996. Net
sales in fiscal 1996 reflected a period of significant sales growth that began
to decelerate for the Company and much of the semiconductor industry during the
fourth quarter of fiscal 1996. Excess inventory levels in end customer channels
entering fiscal 1997 lead to generally flat quarterly sequential sales growth
until the second half of the fiscal year when end customer channel inventory
levels declined.
International sales represented 49% and 52% of net sales in fiscal 1997 and
1996, 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.
Gross profit was $347.0 million or 71.6% of net sales in fiscal 1998. The slight
increase in gross profit as a percentage of sales as compared to 71.1% in fiscal
1997 was due primarily to the absorption of fixed costs over a larger sales
base, lower costs from favorable exchange rates and manufacturing efficiencies.
This was partially offset by slightly lower average selling prices, a change in
product mix and higher costs associated with the ramp-up of the Company's newer
fabrication facility in Camas, Washington. However, the negative gross margin
impact from the Camas facility peaked in the second quarter of fiscal 1998 and,
sequentially, the facility began to have a positive impact on gross margin in
the third quarter of fiscal 1998 due to higher production volumes.
Exhibit 13.1-3
Gross profit as a percentage of sales of 71.1% in fiscal 1997 fell slightly from
71.7% of net sales in fiscal 1996. This decrease was due primarily to start-up
costs for the Company's wafer fabrication plant in Camas, Washington. Production
commenced at the Camas facility during the fourth quarter of fiscal 1997.
Research and development ("R&D") expenses were $46.2 million, $35.4 million and
$31.1 in fiscal 1998, 1997 and 1996 or 9.5%, 9.3% and 8.2% of net sales,
respectively. The increase in R&D expenses in fiscal 1998 as compared to 1997
was due primarily to an increase in staffing, particularly design engineering
personnel, an increase in profit sharing costs and higher spending for
development mask sets and test wafers. The increase in R&D expenses in fiscal
1997 over 1996 was due to an increase in design and test engineering personnel,
an increase in spending for development mask sets and the addition of a new
design center in Colorado Springs, Colorado.
Selling, general and administrative ("SG&A") expenses were $53.3 million, $45.7
million and $49.1 million or 11.0%, 12.1% and 13.0% of net sales in fiscal 1998,
1997 and 1996, respectively. The increase in SG&A expenses in fiscal 1998 over
1997 was due primarily to an increase in staffing, particularly sales personnel,
an increase in commissions and profit sharing costs and higher legal costs. The
increase in legal costs is primarily due to intellectual property suits where
the Company is the plaintiff. As a percentage of net sales, SG&A continued to
decrease in fiscal 1998 as such costs increased at a lower rate than net sales
growth. The decline in SG&A expenses in fiscal 1997 as compared to 1996 was due
primarily to lower legal costs, sales commissions and profit sharing expenses
offset partially by higher advertising costs.
Interest income in fiscal 1998 increased 47% over 1997 to $23.7 million and
increased 22% in fiscal 1997 to $16.1 million from $13.1 million in fiscal 1996.
The year over year increases were due primarily to the significant increases in
cash, cash equivalents and short-term investments which grew $194.5 million and
$121.0 million in fiscal 1998 and 1997, respectively. In concert with overall
stable interest rates in the domestic financial markets, the Company's average
rate of return in fiscal 1998 was generally flat as compared to fiscal 1997. The
average rate of return in fiscal 1997 was slightly lower than fiscal 1996 due to
lower short-term interest rates.
The Company's effective tax rate was 33.3 % in fiscal 1998 and 34.3% in fiscal
1997 and 1996. The lower tax rate in fiscal 1998 is due to an increase in
business activity and assets employed outside of California where the Company
experiences lower state tax rates and an increase in tax-exempt interest income.
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, the timely introduction of new processes and products, general
conditions in the world economy, the market for the Company's goods and other
factors described below.
The Company achieved record sales and earnings in fiscal 1998 and the fourth
quarter of fiscal 1998. However, during the fourth quarter demand weakened for
the Company's products resulting in a decrease in the Company's order backlog as
compared with the third quarter of fiscal 1998. The lower order activity appears
to be industry-wide and has resulted from several factors including prolonged
weakness in the Asian markets, slowdown in the computer industry and, in
response, a delay in orders as customers took advantage of lower supplier lead
times. As a result, during the first quarter of fiscal 1999, the Company expects
quarterly revenues and earnings to decline 10% to 15% sequentially from the
fourth quarter of fiscal 1998.
During fiscal 1997, the Company received an extension of its tax holiday for its
Singapore operations through September 1999. An increase in business activity
and assets employed outside of California and an increase in tax-exempt interest
income resulted in a lower effective tax rate in fiscal 1998 as compared to
fiscal 1997. The Company expects this trend to continue resulting in a further
decline in its effective tax rate to the 32% to 32.5% range for fiscal 1999.
The Company plans to build another fabrication facility in California and expand
existing manufacturing facilities during fiscal 1999. As a result, total capital
expenditures for fiscal 1999 are expected to increase significantly over fiscal
1998. The new fabrication facility is not expected to be completed until fiscal
2000.
Past performance of the Company may not be a good indicator of future
performance due to factors affecting the Company, its competitors, the
semiconductor industry and the overall economy. The semiconductor industry is
characterized by rapid technological change, price erosion, cyclical market
patterns, periodic oversupply conditions, occasional shortages of materials,
capacity constraints, variation in manufacturing efficiencies and significant
expenditures for capital equipment and product development. 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
Liquidity and Capital Resources
At June 28, 1998, cash, cash equivalents and short-term investments totaled
$637.9 million, an increase of $194.5 million or 43.9% over cash, cash
equivalents and short-term investments of $443.4 million at the end of fiscal
1997.
The issuance of common stock under stock option plans provided $60.7 million in
proceeds and tax benefits in fiscal 1998 as compared to $40.8 million in fiscal
1997. The proceeds from stock issuances increased by $8.1 million in fiscal 1998
due to increases in the number of shares exercised and average exercise price.
The tax benefit from stock option transactions increased by $11.8 million in
fiscal 1998 due to increases in shares exercised and taxable gains on sale
resulting from higher market prices for the Company's stock. Generally, the
Company receives a tax deduction for the gain the employee recognizes on the
exercise of a nonqualified stock option and records this tax benefit as an
increase in common stock and a reduction in current income taxes payable. During
fiscal 1998, the Company purchased 1,002,500 shares of its common stock on the
open market for $56.4 million.
The Company's capital expenditures in fiscal 1998 totaled $24.4 million
primarily for the purchase of machinery and equipment for the Company's
fabrication, test and assembly facilities. The Company expects that fiscal 1999
expenditures for capital assets will increase significantly as the Company plans
to build another fabrication facility in California and expand certain of its
manufacturing facilities.
Cash dividends of $0.24 per share totaling $18.3 million were paid by the
Company in fiscal 1998 as compared to $0.20 per share totaling $15.0 million
fiscal 1997. In July 1998, the Company's Board of Directors announced that the
quarterly cash dividend was increased to $0.07 per share from $0.06 per share.
Future dividends will be based on quarterly financial performance.
The Company's cash equivalents and short-term investments are subject to market
risk, primarily interest-rate and credit risk. The Company's investments are
managed by outside professional managers within investment guidelines set by the
Company. Such guidelines include security type, credit quality and maturity and
are intended to limit market risk by restricting the Company's investments to
high quality debt instruments with relatively short-term maturities. Based upon
the weighted average duration of the Company's investments at June 28, 1998, 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 $5.5 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.
At the end of fiscal 1998, working capital was $645.2 million and the Company
had no long-term debt. For the past several years the Company has generally
satisfied its liquidity needs through cash generated from operations and its
existing cash and investment balances. Given its strong financial condition and
performance, the Company plans to continue to finance its capital needs through
these internal sources for the foreseeable future.
Year 2000
The Company has identified its internal computer hardware devices and software
applications that require modification to become year 2000 compliant. Such
devices and applications are primarily third party products with minimal
customization. The Company is currently working with these vendors and other
consultants to ascertain and resolve the potential problems associated with the
processing of date sensitive information. Based on preliminary information, the
Company believes that its internal computer systems will be year 2000 compliant
and that the risk of major disruption from these systems due to year 2000 issues
is minimal. However, the Company could be negatively affected to the extent its
major suppliers, vendors and customers have not successfully addressed year 2000
issues and intends to contact critical third parties to assess this exposure.
There can be no assurance that such parties will be year 2000 compliant or, in
any event, that the Company will not be negatively affected from year 2000
issues. The Company does not expect the cost of implementation for its internal
computer systems to have a material impact on the Company's financial position
or results of operations.
Exhibit 13.1-5
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
================================================================================================
THREE YEARS ENDED JUNE 28, 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Net sales $484,799 $379,251 $377,771
Cost of sales 137,779 109,748 106,832
- ------------------------------------------------------------------------------------------------
Gross profit 347,020 269,503 270,939
- ------------------------------------------------------------------------------------------------
Expenses:
Research and development 46,198 35,401 31,058
Selling, general and administrative 53,275 45,670 49,127
- ------------------------------------------------------------------------------------------------
99,473 81,071 80,185
- ------------------------------------------------------------------------------------------------
Operating income 247,547 188,432 190,754
- ------------------------------------------------------------------------------------------------
Interest income 23,710 16,090 13,148
- ------------------------------------------------------------------------------------------------
Income before income taxes 271,257 204,522 203,902
- ------------------------------------------------------------------------------------------------
Provision for income taxes 90,355 70,151 69,938
- ------------------------------------------------------------------------------------------------
Net income $180,902 $134,371 $133,964
================================================================================================
- ------------------------------------------------------------------------------------------------
Earnings per share:
- ------------------------------------------------------------------------------------------------
Basic $2.37 $1.79 $1.81
- ------------------------------------------------------------------------------------------------
Diluted $2.26 $1.71 $1.72
- ------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 76,318 74,988 74,190
Diluted 79,969 78,545 77,888
Cash dividends declared per share $0.24 $0.20 $0.16
- ------------------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</FN>
Exhibit 13.1-6
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
===============================================================================================
In thousands
- -----------------------------------------------------------------------------------------------
JUNE 28, 1998 AND JUNE 29, 1997 1998 1997
Assets
Current assets:
Cash and cash equivalents $128,733 $ 50,114
Short-term investments 509,160 393,325
Accounts receivable, net of allowance for
doubtful accounts of $803 ($803 in 1997) 68,539 64,836
Inventories
Raw materials 4,726 4,001
Work-in-process 6,502 4,820
Finished goods 4,892 3,364
- -----------------------------------------------------------------------------------------------
Total inventories 16,120 12,185
Deferred tax assets 35,817 30,698
Prepaid expenses and other current assets 9,807 8,128
- -----------------------------------------------------------------------------------------------
Total current assets 768,176 559,286
- -----------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land, buildings and improvements 54,893 53,312
Manufacturing and test equipment 151,484 130,175
Office furniture and equipment 3,147 2,707
- -----------------------------------------------------------------------------------------------
209,524 186,194
- -----------------------------------------------------------------------------------------------
Accumulated depreciation and amortization (84,878) (65,847)
- -----------------------------------------------------------------------------------------------
Net property, plant and equipment 124,646 120,347
- -----------------------------------------------------------------------------------------------
Total assets $892,822 $679,633
===============================================================================================
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable $ 8,241 $ 7,872
Accrued payroll and related benefits 32,130 21,423
Deferred income on shipments to distributors 33,377 29,986
Income taxes payable 32,749 16,124
Other accrued liabilities 16,529 13,581
- -----------------------------------------------------------------------------------------------
Total current liabilities 123,026 88,986
- -----------------------------------------------------------------------------------------------
Deferred tax liabilities 13,883 1,596
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; 76,823 shares issued and
outstanding (75,956 shares in 1997) 230,655 172,403
Retained earnings 525,258 416,648
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 755,913 589,051
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $892,822 $679,633
===============================================================================================
<FN>
See accompanying notes.
</FN>
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 28, 1998 1998 1997 1996
Cash flow from operating activities:
Net income $180,902 $134,371 $133,964
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 20,122 12,425 10,263
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (3,703) (16,441) (18,625)
Decrease (increase) in inventories (3,935) 745 (3,211)
Decrease (increase) in deferred tax assets (5,119) (3,498) (6,592)
Decrease (increase) in prepaid expenses
and other current assets (1,679) (245) (1,451)
Increase (decrease) in accounts payable,
payroll and other accrued liabilities 14,024 (10,199) 24,652
Increase (decrease) in deferred income
on shipments to distributors 3,391 5,058 7,701
Tax benefit from stock option transactions 34,125 22,272 19,989
Increase (decrease) in income taxes payable 16,625 7,729 (1,783)
Increase (decrease) in deferred tax liabilities 12,287 (1,321) (278)
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 267,040 150,896 164,629
- ---------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of short-term investments (444,051) (301,746) (224,717)
Proceeds from sales and maturities of short-term
investments 328,216 176,500 158,714
Purchase of property, plant and equipment (24,421) (21,850) (70,383)
- ---------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (140,256) (147,096) (136,386)
- ---------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Issuance of common shares under employee stock plans 26,596 18,481 12,736
Purchase of common stock (56,445) (11,598) (22,871)
Payment of cash dividends (18,316) (14,962) (11,861)
- ---------------------------------------------------------------------------------------------------------------------
Cash used in financing activities (48,165) (8,079) (21,996)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 78,619 (4,279) 6,247
Cash and cash equivalents, beginning of period 50,114 54,393 48,146
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $128,733 $50,114 $54,393
=====================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for income taxes $31,742 $44,844 $58,602
=====================================================================================================================
<FN>
See accompanying notes.
</FN>
Exhibit 13.1-8
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands
THREE YEARS ENDED JUNE 28, 1998
Total
Common Stock Retained Shareholders'
Shares Amount Earnings Equity
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
Issuance of common stock for cash under employee
stock option and stock purchase plans 1,869 26,596 --- 26,596
Tax benefit from stock option transactions --- 34,125 --- 34,125
Purchase and retirement of common stock (1,002) (2,469) (53,976) (56,445)
Net income --- --- 180,902 180,902
Cash dividends - $0.24 per share --- --- (18,316) (18,316)
- ---------------------------------------------------------------------------------------------------------
Balance at June 28, 1998 76,823 $230,655 $525,258 $755,913
=========================================================================================================
<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
1998 1997 1996
Europe $ 126,726 $ 91,927 $ 87,920
Japan 57,400 46,332 57,954
Asia Pacific and other 67,299 49,340 49,718
--------- --------- ---------
Total export sales $ 251,425 $ 187,599 $ 195,592
========= ========= =========
Basis of Presentation
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal 1998, 1997
and 1996 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 maturities over three months at the time of
purchase are classified as short-term investments.
At June 28, 1998 and June 29, 1997, 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 28, 1998 and June 29, 1997, 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 25%, 26% and 20%
of net sales for fiscal 1998, 1997 and 1996, 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 1998, 1997 and 1996.
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 28, 1998, 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 likely term of the
lease.
Deferred Income on Shipments to Distributors
The Company sells to domestic distributors under agreements allowing price
protection and right of return on certain merchandise unsold by the
distributors. Because of the uncertainty associated with pricing concessions and
future returns, the Company defers recognition of such sales and profit in its
financial statements until the merchandise is sold by the domestic distributors.
The Company estimates international distributor returns and defers a portion of
international distributor sales and profits based on these estimated returns.
Employee Stock Plans
The Company accounts for its employee stock plans in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees". The pro-forma disclosures
required under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" are included in Note 4 to the financial
statements.
Net Income Per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share ("FAS 128"). As required by FAS 128, basic earnings
per share and diluted earnings per share have replaced primary earnings per
share previously reported by the Company. Basic earnings per share is based upon
the weighted average number of shares of common shares outstanding during the
period. Diluted earnings per share includes the dilutive effect of employee
stock options and is comparable to primary earnings per share previously
reported by the Company. All earnings per share amounts for the periods
presented have been restated to conform to the requirements of FAS 128. The
following table sets forth the reconciliation of weighted average common shares
outstanding used in the computation of basic and diluted earnings per share:
1998 1997 1996
--------------------------
Denominator for basic
earnings per share - weighted
average shares outstanding 76,318 74,988 74,190
Effect of dilutive securities -
employee stock options 3,651 3,557 3,698
------ ------ ------
Denominator for diluted
earnings per share 79,969 78,545 77,888
====== ====== ======
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"). This statement establishes new rules for the reporting and display
of comprehensive income and its components. Components of comprehensive income
include net income and certain transactions that have generally been reported in
the consolidated statement of shareholders' equity. FAS 130 requires that these
transactions be included with net income and presented separately as
comprehensive income in the financial statements. The Company is required to
adopt FAS 130 during fiscal 1999. At the time of adoption, the Company expects
that comprehensive income will not be materially different from net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information". This
statement changes the way public companies report segment information. The
statement is effective for fiscal years beginning after December 15, 1997 and
will be adopted by the Company for the fiscal year ending June 27, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Investments and Hedging Activities" ("FAS 133").
The statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
is required to adopt FAS 133 during fiscal 2000 and does not expect the
statement to have a significant effect on the Company's operating results.
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 28, 1998 were as follows:
Exhibit 13.1-11
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
Cash equivalents:
Money market funds and floating
rate notes $ 34,064 $ - $ - $ 34,064
Municipal bonds 67,716 - 13 67,703
Other debt securities 12,223 - 3 12,220
------- ----- ------ -------
114,003 - 16 113,987
------- ----- ------ -------
Short-term investments:
Municipal bonds 336,824 1,043 100 337,767
U.S. Treasury securities and
obligations of U.S. government
agencies 130,416 208 114 130,510
Corporate debt securities and other 41,920 1 26 41,895
------- ----- ------ -------
509,160 1,252 240 510,172
------- ----- ------ -------
Total cash equivalents and
short-term investments $623,163 $1,252 $256 $624,159
======= ===== ====== =======
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
======= ===== ====== =======
The amortized cost and estimated fair value of investments in debt securities at
June 28, 1998, 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 $244,394 $244,423
Due in 1-3 years 378,769 379,736
-------- --------
Total cash equivalents and
short-term investments $623,163 $624,159
======== ========
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.
Exhibit 13.1-12
At June 28, 1998, the future minimum lease payments under non-cancelable
operating leases having an initial term in excess of one year were approximately
as follows: fiscal 1999: $1,582,000; fiscal 2000: $1,404,000; fiscal 2001:
$916,000; fiscal 2002: $876,000; fiscal 2003: $792,000; and thereafter:
$7,373,000.
Total rent expense was approximately $2,528,000, $2,379,000 and $2,015,000 in
fiscal 1998, 1997 and 1996, 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 28, 1998, 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 fiscal 1997, the Board of Directors approved the repricing 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.
Option transactions during fiscal 1996, 1997 and 1998 are summarized as follows:
Stock Weighted-
Options Average
Outstanding Exercise Price
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
---------- ------
Granted 2,875,575 56.13
Forfeited (227,684) 33.67
Exercised (1,802,641) 13.14
---------- ------
Outstanding options, June 28, 1998 10,724,496 $30.91
========== ======
The following table sets forth certain information with respect to employee
stock options outstanding and exercisable at June 28, 1998:
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 - $24.13 3,715,631 $13.36 4.5 3,160,031 $12.11
24.75 - 45.88 3,883,990 27.99 7.9 1,150,570 28.07
49.00 - 68.00 3,124,875 55.39 9.4 167,550 56.30
------------- ----------- ------------ ------------ ------------
$ 1.84 - $68.00 10,724,496 $30.91 7.2 4,478,151 $17.86
============= =========== ============ ============ ============
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
Exhibit 13.1-13
period. The offering periods commence on approximately May 1 and November 1 of
each year. At June 28, 1998, the shares reserved for issuance under this plan
totaled 2,100,000 and 1,633,676 shares had been issued under this plan. During
fiscal 1998, 66,284 shares were issued at a weighted-average price of $43.63 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 diluted earnings per share.
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). 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 allows companies to implement the pronouncement in the primary financial
statements or to disclose the pro-forma effects of FAS 123 in the financial
statement footnotes. The Company continues 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):
1998 1997 1996
---- ---- ----
Pro-forma net income $163,511 $125,347 $128,986
Pro-forma earnings per share:
Basic $2.17 $1.70 $1.76
Diluted $2.07 $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
------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Expected lives 6.0 6.5 6.5 0.5 0.5 0.5
Expected volatility 51.0% 51.0% 51.0% 40.0% 40.0% 40.0%
Dividend yields 0.4% 0.5% 0.5% 0.4% 0.5% 0.5%
Risk free interest rates 5.7% 6.6% 6.5% 5.3% 5.4% 5.4%
Using the Black-Scholes option pricing model, the weighted average estimated
fair value of employee stock options granted in fiscal 1998, 1997 and 1996 was
$31.07, $20.07 and $19.85 per share, respectively. The weighted average
estimated fair value of ESPP shares granted in fiscal 1998, 1997 and 1996 was
$16.93, $10.14 and $9.95 per share, 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 the implementation of FAS 123 in fiscal 1996
have not been taken into consideration. Accordingly, the pro-forma effect of FAS
123 will not be fully reflected until fiscal 2000 when the pro-forma effect will
include compensation expense for stock option grants issued during the previous
five years.
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 $6,126,000, $5,038,000 and $4,864,000 in fiscal 1998, 1997 and
1996, respectively.
5. Income Taxes
The components of income before income taxes are as follows:
In thousands 1998 1997 1996
United States operations $240,072 $181,258 $189,275
Foreign operations 31,185 23,264 14,627
-------- -------- --------
$271,257 $204,522 $203,902
======== ======== ========
Exhibit 13.1-14
The provision for income taxes consists of the following:
In thousands 1998 1997 1996
United States federal:
Current $72,363 $64,694 $67,498
Deferred 6,772 (4,589) (6,725)
------- ------- -------
79,135 60,105 60,773
------- ------- -------
State:
Current 9,744 9,526 8,897
Deferred 396 (230) (145)
------- ------- -------
10,140 9,296 8,752
------- ------- -------
Foreign-Current 1,080 750 413
------- ------- -------
$90,355 $70,151 $69,938
======= ======= =======
Actual current tax liabilities are lower than the amounts reflected above by the
tax benefit from stock option activity of approximately $34,125,000, $22,272,000
and $19,989,000 for fiscal 1998, 1997 and 1996, 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 1998 1997 1996
Tax at U.S. statutory rate $94,940 $71,583 $71,366
State income taxes, net of federal benefit 6,591 6,042 5,689
Earnings of foreign subsidiaries subject to lower rates (6,735) (6, 060) (4,699)
Tax-exempt interest income (4,857) (2,913) (2,529)
Other 416 1,499 111
------- ------- --------
$90,355 $70,151 $69,938
======= ======= =======
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 28, 1998 and June 29, 1997 are as follows:
In thousands 1998 1997
Deferred tax assets:
Inventory valuation $ 9,124 $ 8,423
Deferred income on shipments to distributors 13,184 11,395
State income taxes 10,387 7,675
Other 3,122 3,205
------- -------
Total deferred assets 35,817 30,698
------- -------
Deferred tax liabilities:
Depreciation and amortization 9,183 1,596
Unremitted earnings of subsidiaries 4,700 --
------- -------
Total deferred tax liabilities 13,883 1,596
------- -------
Net deferred tax assets $21,934 $29,102
======= =======
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, which is scheduled to
expire in June 2000.
Exhibit 13.1-15
The impact of the Singapore and Malaysia tax holidays was to increase net income
by approximately $5,135,000 ($0.06 per diluted share) in fiscal 1998, $5,002,000
($0.06 per diluted share) in fiscal 1997 and $3,731,000 ($0.05 per diluted
share) in fiscal 1996. 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 $71,265,000.
Exhibit 13.1-16
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Linear Technology Corporation
We have audited the accompanying consolidated balance sheets of Linear
Technology Corporation as of June 28, 1998 and June 29, 1997 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 28, 1998. 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 28, 1998 and June 29, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 28, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
July 17, 1998
Exhibit 13.1-17
COMPANY PROFILE Hans J. Zapf
Linear Technology Corporation Vice President, International Sales
designs, manufactures and markets
a broad line of standard high Arthur F. Schneiderman
performance linear integrated circuits Secretary
utilizing bipolar and silicon gate Attorney, Wilson, Sonsini, Goodrich & Rosati,
CMOS and BiCMOS process technologies. Professional Corporation
Legal Counsel
BOARD OF DIRDECTORS
Thomas S. Volpe TRANSFER AGENT AND REGISTRAR
Managing Partner BankBoston, N.A.
Volpe, Brown, Whelen & Co. LLC Boston, Massachusetts
Investment Banking Firm
INDEPENDENT AUDITORS
David S. Lee Ernst & Young LLP
Chairman of the Board San Jose, California
Cortelco Systems Holding Corp.
Manufacturer, Telecommunication CORPORATE AND INVESTOR INFORMATION
Systems and Products Please direct inquiries to:
Paul Coghlan
Leo T. McCarthy Vice President, Finance and CFO,
President Linear Technology Corporation
The Daniel Group 1630 McCarthy Blvd.
International Consulting Firm Milpitas, California, 95035-7417
Former Lieutenant Governor
State of California SEC FORM 10-K
If you would like a copy of our Annual Report on
Richard M. Moley Form 10-K for the fiscal year ended June 28, 1998,
Former President and Chief Executive Officer as filed with the Securities and Exchange
StrataCom, Inc. Commission, you may obtain it without charge.
Manufacturer, Telecommunication Direct your request to:
Systems and Products Paul Coghlan,
Vice President, Finance and CFO
Robert H. Swanson, Jr. Linear Technology Corporation,
President and Chief Executive Officer 1630 McCarthy Blvd.
Linear Technology Corporation Milpitas, California, 95035-7417
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
Tim Cox
Vice President, North American Sales
Clive B. Davies, Ph.D.
Vice President and Chief Operating Officer
Louis Di Nardo
Vice President, Marketing
Robert C. Dobkin
Vice President, Engineering
Sean T. Hurley
Vice President, Operations
Exhibit 13.1-18