EXHIBIT 13.1
LINEAR TECHNOLOGY CORPORATION
QUARTERLY RESULTS AND STOCK MARKET DATA
(UNAUDITED)
In thousands, except per share amounts
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Fiscal 1999
Quarter Ended June 27, 1999 March 28, 1999 Dec. 27, 1998 Sept. 27, 1998
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Net sales $ 140,524 $ 130,093 $ 120,020 $ 116,032
Gross profit 104,037 94,450 85,991 82,370
Net income 54,179 49,828 45,904 44,382
Diluted earnings per share 0.34 0.31 0.29 0.28
Cash dividends per share 0.04 0.035 0.035 0.035
Stock price range per share:
High 65.69 52.38 42.09 38.00
Low 51.25 41.25 20.50 23.50
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Fiscal 1998
Quarter Ended June 28, 1998 March 29, 1998 Dec. 28, 1997 Sept. 28, 1997
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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 0.31 0.30 0.27 0.25
Cash dividends per share 0.03 0.03 0.03 0.03
Stock price range per share:
High 40.25 39.13 36.44 37.07
Low 29.38 25.97 26.35 25.88
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Diluted earnings per share amounts are based on the weighted average common
shares and dilutive stock options outstanding during the quarter and may not add
to diluted earnings per share for the year. All share and per share amounts
reflect the Company's two-for-one stock split in February 1999.
The stock activity in the above table is based on the high and low closing
prices. These prices represent quotations between dealers without adjustment for
retail markups, markdowns or commissions, and may not represent actual
transactions. The Company's common stock is traded on the NASDAQ National market
System under the symbol LLTC.
At June 27, 1999, there were approximately 1,281 shareholders of record.
EXHIBIT 13.1-2
LINEAR TECHNOLOGY CORPORATION
SELECTED FINANCIAL INFORMATION/FIVE-YEAR TREND
In thousands, except per share amounts
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FIVE FISCAL YEARS ENDED JUNE 27, 1999 1999 1998 1997 1996 1995
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Income statement information
Net sales $ 506,669 $ 484,799 $ 379,251 $ 377,771 $ 265,023
Net income 194,293 180,902 134,371 133,964 84,696
Basic earnings per share 1.28 1.19 0.90 0.90 0.58
Diluted earnings per share 1.22 1.13 0.86 0.86 0.55
Weighted average shares outstanding - Basic 152,020 152,636 149,976 148,380 146,204
Weighted average shares outstanding - Diluted 158,944 159,939 157,090 155,776 152,656
Balance sheet information
Cash, cash equivalents and short-term
investments $ 786,707 $ 637,893 $ 443,439 $ 322,472 $ 250,222
Total assets 1,046,914 892,822 679,633 529,802 367,553
Long-term debt -- -- -- -- --
Cash dividends per share $ 0.145 $ 0.12 $ 0.10 $ 0.08 $ 0.07
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All share and per share amounts reflect the Company's two-for-one stock split in
February 1999.
EXHIBIT 13.1-3
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
------------------------------------------- -----------------------
1999 1998
June 27, June 28, June 29, Over Over
1999 1998 1997 1998 1997
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Net sales 100.0% 100.0% 100.0% 5% 28%
Cost of sales 27.6 28.4 28.9 1 26
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Gross profit 72.4 71.6 71.1 6 29
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Expenses:
Research and development 10.8 9.5 9.3 18 30
Selling, general and administrative 10.7 11.0 12.1 2 17
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21.5 20.5 21.4 9 23
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Operating income 50.9 51.1 49.7 4 31
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Interest income 5.5 4.9 4.2 17 47
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Income before income taxes 56.4% 56.0% 53.9% 5 33
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Effective tax rates 32.0% 33.3% 34.3%
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Net sales were a record $506.7 million in fiscal 1999, an increase of 5% over
net sales of $484.8 million in fiscal 1998. The increase in net sales was
primarily due to an increase in unit shipments, while the average selling price
for the Company's products declined slightly during the year. Geographically,
international sales represented 54% of net sales, up from 52% in fiscal 1998.
International sales to Europe, Japan and the Rest of the World represented 24%,
12% and 18% of net sales, respectively. In absolute dollars, sales were
relatively flat year over year in the United States, declined by 5% in Europe,
increased by 2% in Japan, and increased significantly by 39% in the Rest of the
World. The increase in the Rest of the World was due primarily to the overall
economic environment in Asia, which improved throughout the year, after having
declined significantly during the first quarter of fiscal 1999. The Company's
major end-markets are communications, computer and industrial. Sales into the
communications end-market increased during the year whereas sales into the other
areas were relatively unchanged.
Net sales were $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. International sales represented 52% and
49% of net sales in fiscal 1998 and 1997, respectively. The increase in
international sales was due primarily to 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.
Gross profit was $366.8 million or 72.4% of net sales in fiscal 1999. The
increase in gross profit as a percentage of sales as compared to 71.6% in fiscal
1998 was due primarily to the favorable effect of fixed costs allocated across a
higher sales base and slightly better manufacturing efficiencies and yields
achieved at the Company's fabrication, assembly and test facilities. These
improvements were partially offset by a modest reduction in average selling
price.
Gross profit was $347.0 million or 71.6% of net sales in fiscal 1998 compared to
$269.5 million or 71.1% of net sales in fiscal 1997. The slight increase in
gross profit as a percentage of sales 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.
Research and development ("R&D") expenses were $54.7 million, $46.2 million and
$35.4 million in fiscal 1999, 1998 and 1997, respectively, or 10.8%, 9.5% and
9.3% of net sales, respectively. The increase in R&D expenses in fiscal 1999 as
compared to 1998 was due primarily to an increase in staffing, particularly
design and test engineering personnel, which resulted in higher compensation
costs. In addition, development costs in new product areas and an increase in
patent related expenses contributed to the increase in R&D expenses. 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 spending for development mask sets and the addition of a new design center.
EXHIBIT 13.1-4
Selling, general and administrative ("SG&A") expenses were $54.3 million, $53.3
million and $45.7 million in fiscal 1999, 1998 and 1997, respectively, or 10.7%,
11.0% and 12.1% of net sales, respectively. The slight increase in SG&A expenses
in fiscal 1999 as compared to 1998 resulted from the Company's move towards a
direct sales force in certain domestic regions, which resulted in higher
compensation costs, and increased marketing expenses. The effect of these
increases was offset partially by lower external commissions. The increase in
SG&A expenses in fiscal 1998 as compared to 1997 was due primarily to an
increase in staffing, particularly sales personnel, an increase in commissions
and profit sharing costs and higher legal costs.
Interest income increased 17% in fiscal 1999 to $27.8 million and increased 47%
in fiscal 1998 to $23.7 million from $16.1 million in fiscal 1997. The year over
year increases were due primarily to the significant increases in cash, cash
equivalents and short-term investments which grew $148.8 million and $194.5
million in fiscal 1999 and 1998, respectively. The Company also repurchased
$108.7 million and $56.4 million of its common stock during fiscal 1999 and
1998, respectively. The increase in interest income in fiscal 1999 was
proportionately less than the overall increase in cash, cash equivalents and
short-term investments, due to a decrease in interest rates in domestic
financial markets.
The Company's effective tax rate was 32.0%, 33.3% and 34.3% in fiscal 1999, 1998
and 1997, respectively. The lower tax rates in fiscal 1999 and 1998 were due to
higher business activity in foreign jurisdictions, an increase in assets
employed outside of California where the Company experiences lower state tax
rates, and an increase in tax-exempt income.
Factors Affecting Future Operating Results
Except for historical information contained herein, the matters set forth in
this Annual Report, including the statements in the following paragraphs, are
forward-looking statements that are dependent on certain risks and uncertainties
including such factors, among others, as the timing, volume and pricing of new
orders received and shipped during the quarter, timely ramp-up of new
facilities, the timely introduction of new processes and products, general
conditions in the world economy, the market for the Company's goods and other
factors as described below.
During fiscal 1997, the Company received an extension of its tax holiday for its
Singapore operations through September 1999. The Company has applied for a
second extension of its Singapore tax holiday; it expects but has not assumed
that an extension will be granted. An increase in business activity and assets
employed outside of California and an increase in tax-exempt interest income
resulted in a lower effective tax rate in fiscal 1999 as compared to fiscal
1998. The Company currently expects its effective tax rate for fiscal 2000 to be
approximately 32.0%; however, the rate may decline to the 31.0% range if the
Company receives an extension of its Singapore tax holiday.
The Company plans to finish building a new wafer fabrication facility in
California in late fiscal 2000. As a result, total capital expenditures are
expected to increase significantly over fiscal 1999 levels, particularly towards
the end of fiscal 2000. The new facility is planned to be in production in
fiscal 2001, at which time depreciation will commence.
Past performance of the Company may not be a good indicator of future
performance due to factors affecting the Company, its competitors, the
semiconductor industry and the overall economy. The semiconductor industry is
characterized by rapid technological change, price erosion, cyclical market
patterns, periodic oversupply conditions, occasional shortages of materials,
capacity constraints, variation in manufacturing efficiencies and significant
expenditures for capital equipment and product development. Furthermore, new
product introductions and patent protection of existing products are critical
factors for future sales growth and sustained profitability.
Although the Company believes that it has the product lines, manufacturing
facilities and technical and financial resources for its current operations,
sales and profitability can be significantly affected by the above and other
factors. Additionally, the Company's common stock could be subject to
significant price volatility should sales and/or earnings fail to meet
expectations of the investment community. Furthermore, stocks of high technology
companies are subject to extreme price and volume fluctuations that are often
unrelated or disproportionate to the operating performance of these companies.
Liquidity and Capital Resources
At June 27, 1999, cash, cash equivalents and short-term investments totaled
$786.7 million, an increase of $148.8 million or 23.3% over cash, cash
equivalents and short-term investments of $637.9 million at the end of fiscal
1998.
The issuance of common stock under stock option plans provided $87.4 million in
proceeds and tax benefits in fiscal 1999 as compared to $60.7 million in fiscal
1998. The proceeds from stock issuances increased by $11.7 million in fiscal
1999 due to increases in the number of options exercised and the average
exercise price. The tax benefit from stock option transactions increased by
$15.0 million in fiscal 1999 due to increases in the number of options exercised
and the taxable gains on exercises resulting from higher market prices for the
Company's stock. generally, the Company receives a tax deduction for the gain
the employee recognizes on the exercise of a nonqualified stock option and
records this tax benefit as an increase in common stock and a reduction in
current income taxes payable. During fiscal 1999, the Company purchased
4,015,000 shares of its common stock on the open market for $108.7 million.
The Company's capital expenditures in fiscal 1999 totaled $39.1 million
primarily for the purchase of machinery and equipment for the Company's
fabrication, test and assembly facilities.
EXHIBIT 13.1-5
Cash dividends of $0.145 per share totaling $22.1 million were paid by the
Company in fiscal 1999 as compared to $0.12 per share totaling $18.3 million in
fiscal 1998. In April 1999, the Company's Board of Directors announced that the
quarterly cash dividend was increased to $0.04 per share from $0.035 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 27, 1999, a
hypothetical 100 basis point increase in short-term interest rates would result
in an unrealized loss in market value of the Company's investments totaling
approximately $6.8 million. However, because the Company's debt securities are
classified as available-for-sale, no gains or losses are recognized by the
Company due to changes in interest rates unless such securities are sold prior
to maturity. The Company generally holds securities until maturity and carries
the securities at amortized cost which approximates fair market value.
At the end of fiscal 1999, working capital was $779.8 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 Readiness Disclosure
The Company's Year 2000 Readiness Program remains on plan and at this time the
Company does not foresee any problems which would hinder its ability to service
customers and vendors in calendar year 2000. As of date of this filing, the
Company has substantially completed its Year 2000 Readiness Program, and senior
management continues to review progress of the remaining action items at least
monthly.
The Company estimates the cost of implementation for Year 2000 compliance of its
internal computer systems to be under $1.5 million, and consequently, will not
have a material impact on the Company's financial position or results of
operations. However, Year 2000 issues could have a significant impact on the
Company's operations and its financial results if the remaining modifications to
internal systems and equipment cannot be completed on a timely basis; unforeseen
needs or problems arise, or if the systems operated by third parties are not
year 2000 compliant. Should any of these unforeseen events occur, the Company
will attempt to mitigate their adverse impacts. The Company is currently
reviewing contingency plans including, but not limited to, manual back-up
systems for current automated internal systems and alternate suppliers, where
available, for external systems and services.
EXHIBIT 13.1-6
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
====================================================================================================================================
THREE YEARS ENDED JUNE 27, 1999 1999 1998 1997
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Net sales $506,669 $484,799 $379,251
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Cost of sales 139,821 137,779 109,748
Gross profit 366,848 347,020 269,503
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Expenses:
Research and development 54,662 46,198 35,401
Selling, general and administrative 54,260 53,275 45,670
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108,922 99,473 81,071
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Operating income 257,926 247,547 188,432
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Interest income 27,801 23,710 16,090
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Income before income taxes 285,727 271,257 204,522
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Provision for income taxes 91,434 90,355 70,151
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Net income $194,293 $180,902 $134,371
====================================================================================================================================
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Earnings per share:
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Basic $ 1.28 $ 1.19 $ 0.90
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Diluted $ 1.22 $ 1.13 $ 0.86
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Weighted average shares outstanding:
Basic 152,020 152,636 149,976
Diluted 158,944 159,939 157,090
Cash dividends per share $ 0.145 $ 0.12 $ 0.10
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<FN>
See accompanying notes.
</FN>
EXHIBIT 13.1-7
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
====================================================================================================================================
In thousands
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JUNE 27, 1999 AND JUNE 28, 1998 1999 1998
Assets
Current assets:
Cash and cash equivalents $ 154,220 $ 128,733
Short-term investments 632,487 509,160
Accounts receivable, net of allowance for
Doubtful accounts of $803 ($803 in 1998) 62,188 68,539
Inventories
Raw materials 2,705 4,726
Work-in-process 8,178 6,502
Finished goods 4,641 4,892
----------- -----------
Total inventories 15,524 16,120
Deferred tax assets 28,116 35,817
Prepaid expenses and other current assets 12,577 9,807
----------- -----------
Total current assets 905,112 768,176
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 78,555 54,893
Manufacturing and test equipment 166,863 151,484
Office furniture and equipment 3,234 3,147
----------- -----------
248,652 209,524
Accumulated depreciation and amortization (106,850) (84,878)
----------- -----------
Net property, plant and equipment 141,802 124,646
----------- -----------
Total assets $ 1,046,914 $ 892,822
=========== ===========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 7,873 $ 8,241
Accrued payroll and related benefits 33,653 32,130
Deferred income on shipments to distributors 35,464 33,377
Income taxes payable 27,404 32,749
Other accrued liabilities 20,881 16,529
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Total current liabilities 125,275 123,026
----------- -----------
Deferred tax liabilities 14,845 13,883
Commitments
Shareholders' equity:
Preferred stock, no par value, 2,000 shares
Authorized, none issued or outstanding -- --
Common stock, no par value, 240,000 shares
Authorized; 153,731 shares issued and
Outstanding (153,646 shares in 1998) 312,027 230,655
Retained earnings 594,767 525,258
----------- -----------
Total shareholders' equity 906,794 755,913
----------- -----------
Total liabilities and shareholders' equity $ 1,046,914 $ 892,822
=========== ===========
====================================================================================================================================
<FN>
See accompanying notes.
</FN>
EXHIBIT 13.1-8
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
In thousands
THREE YEARS ENDED JUNE 27, 1999 1999 1998 1997
Cash flow from operating activities:
Net income $ 194,293 $ 180,902 $ 134,371
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 21,972 20,122 12,425
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 6,351 (3,703) (16,441)
Decrease (increase) in inventories 596 (3,935) 745
Decrease (increase) in deferred tax assets 7,701 (5,119) (3,498)
Decrease (increase) in prepaid expenses
and other current assets (2,770) (1,679) (245)
Increase (decrease) in accounts payable, accrued 5,507 14,024 (10,199)
payroll and other accrued liabilities
Increase (decrease) in deferred income
on shipments to distributors 2,087 3,391 5,058
Tax benefit from stock option transactions 49,077 34,125 22,272
Increase (decrease) in income taxes payable (5,345) 16,625 7,729
Increase (decrease) in deferred tax liabilities 962 12,287 (1,321)
--------- --------- ---------
Cash provided by operating activities 280,431 267,040 150,896
--------- --------- ---------
Cash flow from investing activities:
Purchase of short-term investments (529,740) (444,051) (301,746)
Proceeds from sales and maturities of short-term
investments 406,413 328,216 176,500
Purchase of property, plant and equipment (39,128) (24,421) (21,850)
--------- --------- ---------
Cash used in investing activities (162,455) (140,256) (147,096)
--------- --------- ---------
Cash flow from financing activities:
Issuance of common shares under employee stock plans 38,332 26,596 18,481
Purchase of common stock (108,736) (56,445) (11,598)
Payment of cash dividends (22,085) (18,316) (14,962)
--------- --------- ---------
Cash used in financing activities (92,489) (48,165) (8,079)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 25,487 78,619 (4,279)
Cash and cash equivalents, beginning of period 128,733 50,114 54,393
--------- --------- ---------
Cash and cash equivalents, end of period $ 154,220 $ 128,733 $ 50,114
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for income taxes $ 36,856 $ 31,742 $ 44,844
--------- --------- ---------
<FN>
See accompanying notes.
</FN>
EXHIBIT 13.1-9
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands
THREE YEARS ENDED JUNE 27, 1999
Total
Common Stock Retained Shareholders'
Shares Amount Earnings Equity
Balance at June 30, 1996 149,324 $ 132,482 $ 308,005 $ 440,487
--------- --------- --------- ---------
Issuance of common stock for cash under employee
stock option and stock purchase plans 3,528 18,481 -- 18,481
Tax benefit from stock option transactions -- 22,272 -- 22,272
Purchase and retirement of common stock (940) (832) (10,766) (11,598)
Net income -- -- 134,371 134,371
Cash dividends - $0.10 per share -- -- (14,962) (14,962)
--------- --------- --------- ---------
Balance at June 29, 1997 151,912 172,403 416,648 589,051
Issuance of common stock for cash under employee
stock option and stock purchase plans 3,738 26,596 -- 26,596
Tax benefit from stock option transactions -- 34,125 -- 34,125
Purchase and retirement of common stock (2,004) (2,469) (53,976) (56,445)
Net income -- -- 180,902 180,902
Cash dividends - $0.12 per share -- -- (18,316) (18,316)
--------- --------- --------- ---------
Balance at June 28, 1998 153,646 230,655 525,258 755,913
Issuance of common stock for cash under employee
stock option and stock purchase plans 4,100 38,332 -- 38,332
Tax benefit from stock option transactions -- 49,077 -- 49,077
Purchase and retirement of common stock (4,015) (6,037) (102,699) (108,736)
Net income -- -- 194,293 194,293
Cash dividends - $0.145 per share -- -- (22,085) (22,085)
--------- --------- --------- ---------
Balance at June 27, 1999 153,731 $ 312,027 $ 594,767 $ 906,794
========= ========= ========= =========
<FN>
See accompanying notes.
</FN>
EXHIBIT 13.1-10
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
1999 1998 1997
Europe $120,793 $126,726 $ 91,927
Japan 58,656 57,400 46,332
Asia Pacific and other 93,738 67,299 49,340
-------- -------- --------
Total export sales $273,187 $251,425 $187,599
======== ======== ========
Basis of presentation
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal 1999, 1998
and 1997 were 52 week periods. The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries
after elimination of all significant inter-company accounts and transactions.
Accounts denominated in foreign currencies have been translated using the U.S.
dollar as the functional currency.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock split
In February 1999, the Company completed a two-for-one stock split. All share and
per share information has been adjusted for the effect of this stock split.
Cash equivalents and short-Term investments
Cash equivalents are highly liquid investments with original maturities of three
months or less. Investments with maturities over three months at the time of
purchase are classified as short-term investments.
At June 27, 1999 and June 28, 1998, all of the Company's investments in debt
securities were classified as available-for-sale, which means that, although the
Company principally holds securities until maturity, they may be sold under
certain circumstances. The debt securities are carried at amortized cost which
approximates fair market value, determined using quoted market prices for these
securities. Realized and unrealized gains and losses from short-term investments
were not material at any time during 1999, 1998 and 1997. At June 27, 1999 and
June 28, 1998, 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 24%, 25% and 26%
of net sales for fiscal 1999, 1998 and 1997, 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 1999, 1998 and 1997.
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 27, 1999, 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.
EXHIBIT 13.1-11
Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost determined on a first-in, first-out basis, or market.
Property, plant and equipment
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the assets (3-7 years for equipment and 10-30
years for buildings and building improvements). Leasehold improvements are
amortized over the shorter of the asset's useful life or the expected term of
the lease. Net property, plant and equipment at June 27, 1999 was geographically
distributed as follows: United States - $108,836,000, Malaysia - $19,858,000,
Singapore - $13,015,000, and other - $93,000.
Deferred income on shipments to distributors
The Company sells to domestic distributors under agreements allowing price
protection and right of return on certain merchandise unsold by the
distributors. Because of the uncertainty associated with pricing concessions and
future returns, the Company defers recognition of such sales and profit in its
financial statements until the merchandise is sold by the domestic distributors.
The Company estimates international distributor returns and defers a portion of
international distributor sales and profits based on these estimated returns.
Stock Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123").
Earnings Per Share
Basic earnings per share is calculated using the weighted average shares of
common stock outstanding during the period. Diluted earnings per share is
calculated using the weighted average shares of common stock outstanding, plus
the dilutive effect of stock options, calculated using the treasury stock
method. The dilutive effect of stock options was 6,924,000, 7,303,000 and
7,114,000 shares for fiscal 1999, 1998 and 1997 respectively.
Comprehensive Income
The Company adopted FAS 130, "Reporting Comprehensive Income" , in fiscal 1999.
FAS 130 requires certain items, including unrealized gains and losses on the
Company's available-for-sale securities, to be included in other comprehensive
income. The adoption of FAS 130 had no impact on the Company's financial
position or results of operations, and there were no material differences
between comprehensive income and net income for fiscal 1999, 1998 and 1997.
Segment Reporting
The Company adopted FAS 131, "Disclosures About Segments of an Enterprise and
Related Information", in fiscal 1999. FAS 131 established new reporting
requirements for public companies based on the management approach to segment
reporting. In addition, FAS 131 also established new reporting requirements for
disclosures about products and services, geographical areas, and major
customers. Because the Company is viewed as a single operating segment for
management purposes, no segment information has been disclosed. The other
disclosures required by FAS 131 are included above in Note 1 to the consolidated
financial statements.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133,
"Accounting for Derivative Investments and Hedging Activities." This statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. In July 1999, the FASB issued
FAS 137, which defers the effective date of FAS 133 for one year. Accordingly,
the Company will now be required to adopt FAS 133 during fiscal 2001. The
Company does not expect the adoption of FAS 133 to have a significant effect on
the Company's financial position or results of operations.
2. Short-term Investments
Short-term investments as of June 27, 1999 and June 28, 1998 were as follows:
In thousands June 27, 1999 June 28, 1998
Municipal bonds $468,115 $336,824
U.S. Treasury securities and
obligations of U.S. government
agencies 127,612 130,416
Corporate debt securities and other 36,760 41,920
-------- --------
$632,487 $509,160
======== ========
EXHIBIT 13.1-12
The contractual maturities of short-term investments at June 27, 1999 were as
follows: one year or less - $49,286,000, one year to three years - $583,201,000.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to repay obligations without prepayment
penalties.
3. Lease commitments
The Company leases certain of its facilities under operating leases, some of
which have options to extend the lease period. In addition, the Company has
entered into long-term land leases for the sites of its Singapore and Malaysia
manufacturing facilities.
At June 27, 1999, future minimum lease payments under non-cancelable operating
leases having an initial term in excess of one year were as follows: fiscal
2000: $1,404,000; fiscal 2001: $916,000; fiscal 2002: $876,000; fiscal 2003:
$792,000; fiscal 2004: $792,000; and thereafter: $6,581,000.
Total rent expense was $2,261,000, $2,528,000 and $2,379,000 in fiscal 1999,
1998 and 1997, 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 27, 1999, the
total authorized number of shares under all plans was 77,000,000. Options become
exercisable over a five-year period (generally 10% every six months). All
options expire ten years after the date of the grant.
In fiscal 1997, the Board of Directors approved the repricing of stock option
grants totaling 5,021,200 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.
Stock option transactions during the three years ended June 27, 1999 are
summarized as follows:
Stock Weighted-
Options Average
Outstanding Exercise Price
Outstanding options, June 30, 1996 20,715,896 $ 9.42
---------- ---------
Granted 8,115,200 14.59
Re-priced options canceled (5,021,200) 17.40
Forfeited (648,000) 13.38
Exercised (3,403,404) 4.75
---------- ---------
Outstanding options, June 29, 1997 19,758,492 $ 10.19
---------- ---------
Granted 5,751,150 28.07
Forfeited (455,368) 16.84
Exercised (3,605,282) 6.57
---------- ---------
Outstanding options, June 28, 1998 21,448,992 $ 15.46
---------- ---------
Granted 4,976,000 42.25
Forfeited (382,700) 22.92
Exercised (3,957,097) 8.81
---------- ---------
Outstanding options, June 27, 1999 22,085,195 22.56
========== =========
EXHIBIT 13.1-13
The following table sets forth certain information with respect to employee
stock options outstanding and exercisable at June 27, 1999:
Weighted Weighted Weighted
Stock Average Average Stock Average
Options Exercise Remaining Options Exercise
Range of Exercise Prices Outstanding Price Contractual Exercisable Price
Life (Years)
$ 1.14 - $12.38 9,229,807 $9.88 5.5 6,222,107 $8.71
14.44 - 29.25 7,515,488 23.93 7.9 2,418,268 21.69
30.13 - 56.31 5,339,900 42.53 9.3 389,800 32.73
---------- ------ --- --------- ------
$ 1.14 - $56.31 22,085,195 $22.56 7.2 9,030,175 $13.22
========== ====== === ========= ======
Stock purchase plan
The Company's stock purchase plan ("ESPP") permits eligible employees to
purchase common stock through payroll deductions at the lower of 85% of the fair
market value of common stock at the beginning or end of each six month offering
period. The offering periods commence on approximately May 1 and November 1 of
each year. At June 27, 1999, the shares reserved for issuance under this plan
totaled 4,200,000 and 3,410,287 shares had been issued under this plan. During
fiscal 1999, 142,935 shares were issued at a weighted-average price of $24.92
per share pursuant to this plan.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The following table summarizes pro forma net income and pro forma earnings per
share, as if the Company had elected to recognize compensation expense for its
employee stock plans as prescribed by FAS 123 (in thousands, except per share
amounts):
1999 1998 1997
---------- ----------- -----------
Pro forma net income $ 166,847 $ 163,511 $ 125,347
Pro forma earnings per share:
Basic $ 1.10 $ 1.09 $ 0.85
Diluted $ 1.05 $ 1.04 $ 0.81
For purposes of the pro forma information, the fair value of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model and the following weighted average assumptions (the fair value of shares
issued under the Company's ESPP was not significant for all periods presented):
1999 1998 1997
---- ---- ----
Expected lives 6.5 6.0 6.5
Expected volatility 54.0% 51.0% 51.0%
Dividend yields 0.3% 0.4% 0.5%
Risk free interest 5.6% 5.7% 6.6%
rates
The Black-Scholes option valuation model was developed for use in estimating the
fair value of publicly traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of publicly traded options, and because changes in these
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its stock options.
Using the Black-Scholes option pricing model, the weighted average estimated
fair value of employee stock options granted in fiscal 1999, 1998 and 1997 was
$25.09, $15.54 and $10.04 per share, respectively. For the purposes of the pro
forma information, the estimated fair values of the employee stock options are
amortized to expense using the straight-line method over the vesting period. 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 has 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 $7,577,000, $6,126,000 and $5,038,000 in fiscal 1999, 1998 and
1997, respectively.
EXHIBIT 13.1-14
5. Income taxes
The components of income before income taxes are as follows:
In thousands 1999 1998 1997
United States operations $246,190 $240,072 $181,258
Foreign operations 39,537 31,185 23,264
-------- -------- --------
$285,727 $271,257 $204,522
======== ======== ========
The provision for income taxes consists of the following:
In thousands 1999 1998 1997
United States federal:
Current $ 71,433 $ 72,363 $ 64,694
Deferred 8,442 6,772 (4,589)
-------- -------- --------
79,875 79,135 60,105
-------- -------- --------
State:
Current 9,119 9,744 9,526
Deferred 222 396 (230)
-------- -------- --------
9,341 10,140 9,296
-------- -------- --------
Foreign-Current 2,218 1,080 750
-------- -------- --------
$ 91,434 $ 90,355 $ 70,151
======== ======== ========
Actual current tax liabilities are lower than the amounts reflected above by the
tax benefit from stock option activity of approximately $49,077,000, $34,125,000
and $22,272,000 for fiscal 1999, 1998 and 1997, 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 1999 1998 1997
Tax at U.S. statutory rate $ 100,005 $ 94,940 $ 71,583
State income taxes, net of federal benefit 6,072 6,591 6,042
Earnings of foreign subsidiaries subject to lower rates (8,043) (6,735) (6,060)
Tax-exempt interest income (5,922) (4,857) (2,913)
Other (678) 416 1,499
--------- --------- ---------
$ 91,434 $ 90,355 $ 70,151
========= ========= =========
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 27, 1999 and June 28, 1998 are as follows:
In thousands 1999 1998
Deferred tax assets:
Inventory valuation $10,764 $ 9,124
Deferred income on shipments to distributors 13,215 13,184
State income taxes 2,475 10,387
Other 1,662 3,122
------- -------
Total deferred tax assets 28,116 35,817
------- -------
Deferred tax liabilities:
Depreciation and amortization 6,892 9,183
Unremitted earnings of subsidiaries 7,953 4,700
------- -------
Total deferred tax liabilities 14,845 13,883
------- -------
Net deferred tax assets $13,271 $21,934
======= =======
EXHIBIT 13.1-15
The Company's Singapore subsidiary has been granted a ten-year tax holiday,
which is scheduled to expire in September 1999. The Company has applied for a
second extension of its Singapore tax holiday; it expects but has not assumed
that an extension will be granted. Also, the Company's Malaysia subsidiary has
been granted a five-year tax holiday, which is scheduled to expire in June 2000.
The impact of the Singapore and Malaysia tax holidays was to increase net income
by approximately $6,086,000 ($0.04 per diluted share) in fiscal 1999, $5,135,000
($0.03 per diluted share) in fiscal 1998 and $5,002,000 ($0.03 per diluted
share) in fiscal 1997. 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 $94,244,000.
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 27, 1999 and June 28, 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 27, 1999. 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 27, 1999 and June 28, 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 27, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
July 16, 1999
EXHIBIT 13.1-17
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
Former President and Chief Executive Officer
StrataCom, Inc.
Manufacturer, Telecommunication
Systems and Products
Robert H. Swanson, Jr.
Chairman and Chief Executive Officer
Linear Technology Corporation
OFFICERS
Robert H. Swanson, Jr.
Chairman and Chief Executive Officer
Clive B. Davies, Ph.D.
President
Paul Chantalat
Vice President, Quality and Reliability
Paul Coghlan
Vice President, Finance and Chief Financial Officer
Timothy D. Cox
Vice President, North American Sales
Robert C. Dobkin
Vice President, Engineering and Chief Technical Officer
Louis Di Nardo
Vice President, Marketing
Lothar Maier
Vice President and Chief Operating Officer
EXHIBIT 13.1-18
Hans J. Zapf
Vice President, International Sales
Arthur F. Schneiderman
Secretary
Attorney, Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation
Legal Counsel
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A.
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 27, 1999, 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