1
Exhibit 13.2
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended October 28, 2000, October 30, 1999 and October 31, 1998
(thousands, except per share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
REVENUE Net sales.............................................. $ 2,577,547 $ 1,450,379 $ 1,230,571
COSTS AND Cost of sales.......................................... 1,116,520 735,643 642,085
EXPENSES ------------ ------------- ------------
Gross margin........................................... 1,461,027 714,736 588,486
Operating expenses:
Research and development............................ 400,566 257,039 219,354
Purchased in-process research and development....... - 5,140 -
Selling, marketing, general
and administrative................................ 293,364 209,639 207,487
Restructuring charge................................ - - 17,000
Gain on sale of business............................ - - (13,100)
------------ ------------- -------------
693,930 471,818 430,741
Operating income....................................... 767,097 242,918 157,745
Equity in loss of WaferTech............................ - 1,149 9,780
Nonoperating (income) expenses:
Interest expense.................................... 5,841 10,146 13,287
Interest income..................................... (63,430) (26,726) (16,838)
Other............................................... (41,025) 809 1,057
------------ ------------- ------------
(98,614) (15,771) (2,494)
------------ ------------- ------------
EARNINGS Income before income taxes............................. 865,711 257,540 150,459
Provision for income taxes:
Payable currently................................... 271,123 44,139 43,343
Deferred ........................................... (12,544) 16,582 (12,372)
------------ ------------- ------------
258,579 60,721 30,971
------------ ------------- ------------
Net income before cumulative effect of change in
accounting principle................................ 607,132 196,819 119,488
------------ ------------- ------------
Cumulative effect of change in accounting principle,
net of $20 million of income taxes................ - - (37,080)
------------ ------------- -------------
Net income after cumulative effect of change in
accounting principle................................ $ 607,132 $ 196,819 $ 82,408
============ ============= ============
Shares used to compute earnings per share - Basic...... 353,363 336,482 323,148
============ ============= ============
Shares used to compute earnings per share - Diluted.... 381,157 362,904 355,750
============ ============= ============
Earnings per share before cumulative effect of change
in accounting principle
Earnings per share - Basic............................. $1.71 $0.58 $0.37
============ ============= ============
Earnings per share - Diluted........................... $1.59 $0.55 $0.36
============ ============= ============
Earnings per share after cumulative effect of change
in accounting principle
Earnings per share - Basic............................. $1.71 $0.58 $0.26
============ ============= ===========
Earnings per share - Diluted........................... $1.59 $0.55 $0.25
============ ============= ===========
See accompanying notes.
1
2
ANALOG DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
October 28, 2000 and October 30, 1999
(thousands, except share amounts)
ASSETS 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
CURRENT Cash and cash equivalents............................................. $1,736,421 $ 355,891
ASSETS Short-term investments................................................ 498,844 406,553
Accounts receivable less allowances of $13,156
($14,238 in 1999)................................................... 463,912 260,871
Inventories........................................................... 332,094 248,936
Deferred tax assets................................................... 108,989 89,780
Prepaid expenses and other current assets............................. 27,754 17,079
---------- ----------
Total current assets.................................................. 3,168,014 1,379,110
---------- ----------
PROPERTY, Land and buildings.................................................... 238,550 166,130
PLANT AND Machinery and equipment............................................... 1,260,572 1,088,939
EQUIPMENT, Office equipment...................................................... 86,930 74,530
AT COST Leasehold improvements................................................ 120,710 108,530
---------- ----------
1,706,762 1,438,129
Less accumulated depreciation and amortization........................ 927,536 795,323
---------- ----------
Net property, plant and equipment..................................... 779,226 642,806
---------- ----------
OTHER Investments........................................................... 217,755 119,301
ASSETS Intangible assets, net................................................ 192,698 30,563
Other assets.......................................................... 53,644 46,574
---------- ----------
Total other assets.................................................... 464,097 196,438
---------- ----------
$4,411,337 $2,218,354
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
CURRENT Short-term borrowings and current portion of
LIABILITIES long-term debt and obligations under capital leases................. $ 15,690 $ 97,061
Accounts payable...................................................... 213,196 103,368
Deferred income on shipments to distributors.......................... 140,369 100,788
Income taxes payable.................................................. 86,625 66,761
Accrued liabilities................................................... 194,017 111,285
---------- ----------
Total current liabilities............................................. 649,897 479,263
---------- ----------
NONCURRENT Long-term debt and obligations under capital leases................... 1,212,960 16,214
LIABILITIES Deferred income taxes................................................. 51,205 40,002
Other noncurrent liabilities.......................................... 193,625 66,844
---------- ----------
Total noncurrent liabilities.......................................... 1,457,790 123,060
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' Preferred stock, $1.00 par value, 471,934 shares
EQUITY authorized, none outstanding........................................ - -
Common stock, $0.16 2/3 par value, 600,000,000
shares authorized 357,969,010 shares issued
(178,049,189 in 1999)............................................... 59,663 29,675
Capital in excess of par value, net of deferred
compensation of $3,980 ($6,211 in 1999)............................ 526,820 523,106
Retained earnings..................................................... 1,717,943 1,110,811
Accumulated other comprehensive income................................ 2,841 12,209
---------- ----------
2,307,267 1,675,801
Less 45,186 shares in treasury, at cost
(3,161,774 in 1999)................................................. 3,617 59,770
---------- ----------
Total stockholders' equity............................................ 2,303,650 1,616,031
---------- ----------
$4,411,337 $2,218,354
========== =========
See accompanying notes.
2
3
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
Years ended October 28, 2000, CAPITAL IN OTHER
October 30, 1999 and October 31, 1998 COMMON STOCK EXCESS OF RETAINED COMPREHENSIVE TREASURY STOCK
------------ --------------
(thousands) SHARES AMOUNT PAR VALUE EARNINGS INCOME* SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------
Balance, November 1, 1997 161,941 $26,991 $223,885 $831,584 $ 6,724 (35) $ (1,054)
- ------------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1998 82,408
IN FISCAL Issuance of stock under
1998 stock plans and other,
net of repurchases 2,152 358 8,738 652 17,299
Compensation recognized
under Restricted Stock Plan 2,918
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 13,429
Repurchase of common stock (4,400) (84,192)
Translation adjustment (699)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1998 164,093 27,349 248,970 913,992 6,025 (3,783) (67,947)
- ------------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1999 196,819
IN FISCAL Issuance of stock under
1999 stock plans and other,
net of repurchases 2,974 496 28,159 621 8,177
Conversion of 3.50%
Subordinated notes 10,982 1,830 228,074
Compensation recognized
under Restricted Stock Plan 2,799
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 15,104
Securities valuation adjustment 6,629
Translation adjustment (445)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, October 30, 1999 178,049 29,675 523,106 1,110,811 12,209 (3,162) (59,770)
- ------------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 2000 607,132
IN FISCAL Issuance of stock under
2000 stock plans and other,
net of repurchases 6,205 1,033 52,148 (93) (8,850)
Compensation recognized
under Restricted Stock Plan 2,231
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 43,566
Two-for-one stock split 173,715 28,955 (94,231) 3,210 65,003
Securities valuation adjustment (6,629)
Translation adjustment (2,739)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, October 28, 2000 357,969 $59,663 $526,820 $1,717,943 $ 2,841 (45) $ (3,617)
==============================================================================================================================
* Comprehensive income, i.e., net income plus other comprehensive income,
totaled $598 million in 2000, $203 million in 1999 and $82 million in 1998.
See accompanying notes.
3
4
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 28, 2000, October 30, 1999 and October 31, 1998
(thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
OPERATIONS Cash flows from operations:
Net income ............................................ $ 607,132 $ 196,819 $ 82,408
Adjustments to reconcile net income
to net cash provided by operations:
Cumulative effect of change in accounting
principle, net of $20 million of income taxes... - - 37,080
Depreciation and amortization....................... 156,671 142,598 127,560
Gain on sale of investments......................... (43,857) - -
Noncash portion of restructuring costs.............. - - 10,000
Gain on sale of business............................ - - (13,100)
Purchased in-process research and development....... - 5,140 -
Equity in loss of WaferTech, net of dividends....... - 1,149 10,907
Deferred income taxes............................... (12,544) 16,582 (12,372)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable.......... (213,696) (55,980) 50,603
(Increase) decrease in inventories.................. (82,321) 28,424 (48,883)
(Increase) decrease in prepaid expenses and other
current assets.................................. (9,706) 4,292 698
Increase in investments - trading................... (123,165) (28,098) (7,319)
Increase (decrease) in accounts payable,
deferred income and accrued liabilities......... 233,408 57,096 (31,840)
Increase in income taxes payable.................... 20,204 27,774 14,476
Increase in other liabilities....................... 172,379 46,629 17,896
---------- ---------- ----------
Total adjustments...................................... 97,373 245,606 155,706
---------- ---------- ----------
Net cash provided by operations........................... 704,505 442,425 238,114
---------- ---------- ----------
INVESTMENTS Cash flows from investments:
Additions to property, plant and equipment, net........ (274,837) (77,500) (166,911)
Purchase of short-term investments available-for-sale.. (868,394) (628,823) (143,449)
Maturities of short-term investments available-for-sale 776,103 263,845 152,880
Proceeds from sale of investment....................... 64,641 - -
Change in long-term investments........................ 348 101,501 (56,110)
Payments for acquisitions, net of cash acquired........ (169,270) (20,499) -
Proceeds from sale of business......................... - - 27,000
Decrease (increase) in other assets.................... 15,192 3,435 (370)
---------- ---------- ----------
Net cash used for investments............................. (456,217) (358,041) (186,960)
---------- ---------- ----------
FINANCING Cash flows from financing activities:
ACTIVITIES Proceeds from issuance of long-term debt............... 1,172,135 - -
Repurchase of common stock............................. - - (84,192)
Proceeds from employee stock plans..................... 42,864 19,050 14,209
Payments on capital lease obligations.................. (8,293) (14,109) (11,640)
Proceeds from equipment financing...................... - - 6,094
Net (decrease) increase in variable rate borrowings.... (76,416) 1,776 60
----------- ---------- ----------
Net cash provided by (used for) financing activities...... 1,130,290 6,717 (75,469)
---------- ---------- ----------
Effect of exchange rate changes on cash................... 1,952 1,459 (1,955)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents...... 1,380,530 92,560 (26,270)
Cash and cash equivalents at beginning of year............ 355,891 263,331 289,601
---------- ---------- ----------
Cash and cash equivalents at end of year.................. $1,736,421 $ 355,891 $ 263,331
========== ========== ==========
See accompanying notes.
4
5
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 28, 2000, OCTOBER 30, 1999 AND OCTOBER 31, 1998
(ALL TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Analog Devices, Inc. (Analog, ADI or the Company) is a world leader in the
design, manufacture and marketing of high-performance analog, mixed-signal and
digital signal processing (DSP) integrated circuits (ICs) used in signal
processing applications.
As of the end of fiscal 2000, approximately 45% of Analog's revenues came from
the communications market, making it the Company's largest and fastest-growing
served market. Communications applications include wireless handsets and base
stations, as well as products used for high-speed access to the Internet,
including ICs used in ADSL and cable modems and central office networking
equipment.
Analog serves the PC market with products that monitor and manage power usage,
process signals used in flat panel displays and multimedia projectors and enable
PCs to provide CD-quality audio. Analog also serves the high-end consumer market
with ICs used in such products as digital cameras and camcorders, DVD players
and surround sound audio systems. Analog provides a broad array of products to
the industrial market, including products for automatic test equipment and for
the digital speed control of AC motors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its wholly owned subsidiaries. Upon consolidation, all significant
intercompany accounts and transactions are eliminated. The Company's fiscal year
ends on the 52-week or 53-week period ending on the Saturday closest to the last
day in October. Fiscal years 2000, 1999 and 1998 were each 52-week years.
Certain amounts reported in previous years have been reclassified to conform to
the fiscal 2000 presentation, such reclassifications were immaterial.
b. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk and maturities of three months or less at the time of
acquisition. Investments with maturities between three and twelve months at time
of acquisition are considered short-term investments. Cash, cash equivalents and
short-term investments consist primarily of commercial paper and government
agency discount notes, but also include certificates of deposit, bank time
deposits, institutional money market funds and bankers' acceptances. Long-term
investments consist of mutual funds, commercial paper and bank money market
funds that are acquired to generate returns that offset changes in certain
liabilities related to deferred compensation arrangements, as well as equity
securities.
The Company classifies its investments in readily marketable debt and equity
securities as "held-to-maturity," "available-for-sale" or "trading" at the time
of purchase and such designation is evaluated as of each balance sheet date.
Held-to-maturity securities, which are carried at amortized cost, include only
those securities the Company has the positive intent and ability to hold to
maturity. Securities, such as bank time deposits, which by their nature are
typically held to maturity, are classified as such. The Company's other readily
marketable investments are classified as either available-for-sale or trading.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of related tax, if any, reported as a separate component of
stockholders' equity. Realized gains and losses, as well as interest, dividends
and capital gains distributions on all securities, are included in earnings.
5
6
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Cash equivalents and short-term investments classified as available-for-sale
were $2,167 million and $707 million at October 28, 2000 and October 30, 1999,
respectively and those classified as held-to-maturity were $7 million and $28
million at October 28, 2000 and October 30, 1999, respectively. All of these
securities have contractual maturities of twelve months or less at time of
acquisition. Because of the short term to maturity, and hence relative price
insensitivity to changes in market interest rates, amortized cost approximates
fair value for all of these securities. As such, no realized or unrealized gains
or losses were recorded during each of these years.
Long-term investments classified as trading were $182 million and $59 million at
October 28, 2000 and October 30, 1999, respectively and were based on published
market quotes on October 27, 2000 and October 29, 1999. Gross realized and
unrealized gains and losses from trading securities were not material in fiscal
2000, fiscal 1999 and fiscal 1998. There was approximately $0 and $27 million at
October 28, 2000 and October 30, 1999, respectively, of long-term investments
classified as available-for-sale. Gross realized gains on available-for-sale
investments were $44 million in fiscal 2000 and $0 in fiscal 1999. Gross
unrealized gains were not material in fiscal 2000 and fiscal 1999. There were no
long-term investments classified as held-to-maturity at October 28, 2000 and
October 30, 1999.
c. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Cash paid during the fiscal year for:
Income Taxes $ 208,441 $ 19,582 $ 23,582
Interest $ 4,039 $ 10,808 $ 15,535
=======================================================================================================================
The Company's non-cash financing activities in fiscal 1999 consisted solely of
the conversion of its 3.50% Convertible Subordinated Notes into common stock as
described in Note 9.
d. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories at October 28, 2000 and October 30, 1999 were as follows:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Raw materials $ 17,505 $ 13,735
Work in process 179,918 150,427
Finished goods 134,671 84,774
- -----------------------------------------------------------------------------------------------------------------------
Total inventories $ 332,094 $ 248,936
=======================================================================================================================
e. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost less allowances for
depreciation and amortization. The straight-line method of depreciation is used
for all classes of assets for financial statement purposes; both straight-line
and accelerated methods are used for income tax purposes. Capitalized leases and
leasehold improvements are amortized based upon the lesser of the term of the
lease or the useful life of the asset. Depreciation and amortization are based
on the following useful lives:
Buildings & Building Equipment Up to 25 years
Machinery & Equipment 3-10 years
Office Equipment 3-8 years
Total depreciation and amortization of property, plant and equipment was $143
million, $139 million and $125 million in fiscal 2000, 1999 and 1998,
respectively. Property, plant and equipment included $82 million and $75 million
of capitalized leases in fiscal 2000 and 1999, net of $49 million and $36
million respectively, of accumulated depreciation.
6
7
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
f. GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES
AMORTIZATION LIVES 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Goodwill 5-10 Years $ 181,219 $ 16,685
Other Intangibles 5-10 Years 11,479 13,878
- -----------------------------------------------------------------------------------------------------------------------
Total $ 192,698 $ 30,563
=======================================================================================================================
Other intangibles include items such as acquired trained workforce and customer
base. Goodwill and intangibles are evaluated for impairment based on the related
undiscounted cash flows.
The balances shown are net of total accumulated amortization of $35 million and
$22 million as of October 28, 2000 and October 30, 1999, respectively.
Amortization of goodwill and other acquisition-related intangibles was $13
million, $4 million and $3 million for fiscal 2000, 1999 and 1998, respectively.
g. GRANT ACCOUNTING
The Company's manufacturing facility in Limerick, Ireland has received various
grants from the Industrial Development Authority of the Republic of Ireland.
These grants include capital, employment and research and development grants.
Capital grants for the acquisition of property and equipment are netted against
the related capital expenditures and amortized as a credit to depreciation
expense over the useful life of the related asset. Employment grants, which
relate to employee hiring and training, and research and development grants are
recognized in earnings in the period in which the related expenditures are
incurred by the Company.
h. TRANSLATION OF FOREIGN CURRENCIES
The functional currency for the Company's foreign sales operations is the
applicable local currency. Gains and losses resulting from translation of these
foreign currencies into U.S. dollars are accumulated in a separate component of
stockholders' equity. Transaction gains and losses are included in income
currently, including those at the Company's principal foreign manufacturing
operations where the functional currency is the U.S. dollar. Foreign currency
transaction gains or losses included in other expenses, net, were not material
in fiscal 2000, 1999 and 1998.
i. FOREIGN CURRENCY INSTRUMENTS AND INTEREST RATE AGREEMENTS
The Company enters into forward foreign exchange contracts, foreign currency
option contracts and currency swap agreements to offset certain operational and
balance sheet exposures from changes in foreign currency exchange rates. Such
exposures result from the portion of the Company's operations, assets and
liabilities that are denominated in currencies other than the U.S. dollar,
primarily the Japanese yen and European currencies. These foreign exchange
contracts, option and swap transactions are entered into to support product
sales, purchases and financing transactions made in the normal course of
business, and accordingly, are not speculative in nature.
Forward foreign exchange contracts are utilized to manage the risk associated
with currency fluctuations on certain firm sales and purchase commitments
denominated in foreign currencies and certain non-U.S. dollar denominated asset
and liability positions. The Company's forward foreign exchange contracts are
primarily denominated in Japanese yen and certain European currencies and are
for periods consistent with the terms of the underlying transactions, generally
one year or less. The forward foreign exchange contracts that relate to firm
foreign currency sales and purchase commitments are designated and effective as
hedges of firm, identifiable foreign currency commitments, and accordingly, the
gains and losses resulting from the impact of currency exchange rate movements
on these contracts are not recognized in operations until the underlying hedged
transactions are recognized. Upon recognition, such gains and losses are
recorded in operations as an adjustment to the carrying amount of the underlying
transactions in the period in which these transactions are recognized.
Unrealized gains and losses resulting from the impact of currency exchange rate
movements on forward foreign exchange contracts designated to offset certain
non-U.S. dollar denominated assets and liabilities are recognized as other
income or expense in the period in which the exchange rates change and offset
the foreign currency gains and losses on the underlying exposures being hedged.
The contract amounts of forward foreign
7
8
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
exchange contracts outstanding were $277 million and $178 million at October 28,
2000 and October 30, 1999, respectively.
The Company also may periodically enter into foreign currency option contracts
to offset certain probable anticipated, but not firmly committed, foreign
currency transactions related to the sale of product during the ensuing nine
months. When the dollar strengthens significantly against the foreign
currencies, the decline in value of future currency cash flows is partially
offset by the gains in value of the purchased currency options designated as
hedges. Conversely, when the dollar weakens, the increase in value of future
foreign currency cash flows is reduced only by the premium paid to acquire the
options. The Company's foreign currency option contracts are primarily
denominated in Japanese yen and generally have maturities that do not exceed six
months. These foreign currency option contracts are designated and effective as
hedges of anticipated foreign currency sales transactions, and accordingly, the
premium cost and any realized gains associated with these contracts are deferred
and included in the consolidated balance sheet as prepaid expenses and accrued
liabilities, respectively, until such time as the underlying sales transactions
are recognized. Upon recognition, such premium costs and any realized gains are
recorded in sales as a component of the underlying sales transactions being
hedged. The contract amounts of foreign currency option contracts outstanding
were $7 million and $39 million, at October 28, 2000 and October 30, 1999,
respectively. Deferred gains or losses attributable to foreign currency option
contracts were not material at October 28, 2000 and October 30, 1999.
The Company uses currency swap agreements to hedge the value of its net
investment in certain of its foreign subsidiaries. Realized and unrealized gains
and losses on such agreements related to the net foreign investment being hedged
are recognized in the cumulative translation adjustment component of
stockholders' equity, with the related amounts due to or from counterparties
included in accrued liabilities or other current assets. The contract amount of
currency swap agreements outstanding, which were principally denominated in
Japanese yen, was $0 at October 28, 2000, and $10 million at October 30, 1999.
The Company enters into interest rate swap and cap agreements to manage its
exposure to interest rate movements by effectively converting a portion of its
debt and certain financing arrangements from fixed to variable rates. Maturity
dates of interest rate swap and cap agreements generally match those of the
underlying debt or financing arrangements. These agreements, which have
maturities of up to seven years, involve the exchange of fixed rate payments for
variable rate payments without the exchange of the underlying principal amounts.
Variable rates are based on six-month U.S. dollar LIBOR and are reset on a
semiannual basis. The differential between fixed and variable rates to be paid
or received is accrued as interest rates change in accordance with the
agreements and recognized over the life of the agreements as an adjustment to
interest expense. The notional principal amounts of interest rate swap and cap
agreements outstanding were approximately $10 million and $50 million at October
28, 2000 and October 30, 1999, respectively.
The cash requirements of the above-described financial instruments approximate
their fair value. Cash flows associated with these financial instruments are
classified consistent with the cash flows from the transactions being hedged.
Derivative financial instruments involve, to a varying degree, elements of
market and credit risk not recognized in the consolidated financial statements.
The market risk associated with these instruments resulting from currency
exchange rate or interest rate movements is expected to offset the market risk
of the underlying transactions, assets and liabilities being hedged. The
counterparties to the agreements relating to the Company's foreign exchange and
interest rate instruments consist of a number of major international financial
institutions with high credit ratings. The Company does not believe that there
is significant risk of nonperformance by these counterparties because the
Company continually monitors the credit ratings of such counterparties, and
limits the financial exposure and the amount of agreements entered into with any
one financial institution. While the contract or notional amounts of derivative
financial instruments provide one measure of the volume of these transactions,
they do not represent the amount of the Company's exposure to credit risk. The
amounts potentially subject to credit risk (arising from the possible inability
of counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed the obligations of the Company to the counterparties.
8
9
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
j. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
OCTOBER 28, 2000 OCTOBER 30, 1999
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 1,736,421 $ 1,736,421 $ 355,891 $ 355,891
Short-term investments 498,844 498,844 406,553 406,553
Long-term investments 181,751 181,751 85,999 85,999
Liabilities:
Short-term borrowings (5,752) (5,752) (2,344) (2,344)
Long-term debt, including current portion (1,200,261) (1,101,261) (80,000) (79,978)
Foreign Currency Instruments and
Interest Rate Agreements:
Interest rate swap and cap agreements (33) (62) 13 (36)
Forward foreign currency exchange contracts (3,555) (3,817) (4,260) (7,658)
Foreign currency option contracts 75 22 340 220
Currency swap agreements 0 0 375 325
- -----------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, cash equivalents and short-term investments-The carrying amounts of these
items are a reasonable estimate of their fair value due to the short term to
maturity and readily available market for these types of investments.
Long-term investments-The fair value of long-term investments is based on quoted
market values.
Short-term borrowings-The carrying amounts of these variable-rate borrowings
approximate fair value due to the short period of time to maturity.
Long-term debt-The fair value of long-term debt is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk and remaining maturities.
Interest rate swap and cap agreements-The fair value of interest rate swap and
cap agreements is obtained from dealer quotes. These values represent the
estimated amount the Company would receive or pay to terminate the agreements
taking into consideration current interest rates.
Forward foreign currency exchange contracts-The estimated fair value of forward
foreign currency exchange contracts is based on the estimated amount at which
they could be settled based on forward market exchange rates.
Foreign currency option contracts and currency swap agreements-The fair values
of foreign currency option contracts and currency swap agreements are obtained
from dealer quotes. These values represent the estimated net amount the Company
would receive or pay to terminate the agreements.
9
10
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
k. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Such estimates relate to
the useful lives of fixed assets, allowances for doubtful accounts and customer
returns, inventory reserves, potential reserves relating to litigation matters,
accrued liabilities and other reserves. Actual results could differ from those
estimates, and such differences may be material to the financial statements.
l. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of investments and trade accounts receivable.
The Company maintains cash, cash equivalents and short-term investments with
high credit quality financial institutions and monitors the amount of credit
exposure to any one financial institution.
The Company sells its products to distributors and original equipment
manufacturers involved in a variety of industries including industrial
automation, instrumentation, military/aerospace and, to an increasing degree,
communications, computers and peripherals, and high-performance consumer
electronics. The Company has adopted credit policies and standards to
accommodate growth in these markets. The Company performs continuing credit
evaluations of its customers' financial condition and although the Company
generally does not require collateral, letters of credit may be required from
its customers in certain circumstances. Reserves are provided for estimated
amounts of accounts receivable that may not be collected.
m. CONCENTRATION OF OTHER RISKS
The semiconductor industry is characterized by rapid technological change,
competitive pricing pressures and cyclical market patterns. The Company's
financial results are affected by a wide variety of factors, including general
economic conditions worldwide, economic conditions specific to the semiconductor
industry, the timely implementation of new manufacturing technologies, the
ability to safeguard patents and intellectual property in a rapidly evolving
market and reliance on assembly and test subcontractors, third-party wafer
fabricators and independent distributors. In addition, the semiconductor market
has historically been cyclical and subject to significant economic downturns at
various times. The Company is exposed to the risk of obsolescence of its
inventory depending on the mix of future business. As a result, the Company may
experience significant period-to-period fluctuations in future operating results
due to the factors mentioned above or other factors.
n. REVENUE RECOGNITION
Revenue from product sales to end users is recognized upon shipment. As further
explained in Note 5, commencing in 1998, revenue on shipments to all
distributors is deferred until products are resold by the distributors to end
users. Prior to 1998, revenue on most shipments to domestic distributors was
deferred until resale to end users because arrangements with these distributors
included returns and price concessions that could not be reasonably estimated.
Revenue on all shipments to international distributors and certain shipments to
domestic distributors were recognized upon shipment to the distributor, with
appropriate provision of reserves for returns and allowances.
o. COMPREHENSIVE INCOME
Components of comprehensive income include net income and certain transactions
that have generally been reported in the consolidated statement of shareholders'
equity. Other comprehensive income is comprised of net income, currency
translation adjustments and available-for-sale securities valuation adjustments.
10
11
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
p. INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted income tax rates and laws that will be in effect when
the temporary differences are expected to reverse. Additionally, deferred tax
assets and liabilities are separated into current and noncurrent amounts based
on the classification of the related assets and liabilities for financial
reporting purposes.
q. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed based only on the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares outstanding during
the period, plus the dilutive effect of future issues of common stock relating
to stock option programs and convertible debt financing. In calculating diluted
earnings per share, the dilutive effect of stock options is computed using the
average market price for the period. Shares related to convertible debt
financing are excluded from the fiscal 2000 earnings per share calculation
because the effect would be anti-dilutive. The following table sets forth the
computation of basic and diluted earnings per share:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Basic:
Income before cumulative effect of change in
accounting principle $ 607,132 $ 196,819 $ 119,488
Cumulative effect of change in accounting principle -- -- (37,080)
--------- --------- ---------
Net income $ 607,132 $ 196,819 $ 82,408
========= ========= =========
Weighted shares outstanding 353,363 336,482 323,148
========= ========= =========
Earnings per share:
Income before cumulative effect of change in
accounting principle $ 1.71 $ 0.58 $ 0.37
Cumulative effect of change in accounting principle -- -- (0.11)
--------- --------- ---------
Net income $ 1.71 $ 0.58 $ 0.26
========= ========= =========
Diluted:
Income before cumulative effect of change in
accounting principle $ 607,132 $ 196,819 $ 119,488
Interest related to convertible subordinated notes, net of tax -- 1,906 5,686
--------- --------- ---------
Income before cumulative effect of change in accounting
principle including the effect of dilutive securities 607,132 198,725 125,174
--------- --------- ---------
Cumulative effect of change in accounting principle -- -- (37,080)
--------- --------- ---------
Net income $ 607,132 $ 198,725 $ 88,094
========= ========= =========
Weighted shares outstanding 353,363 336,482 323,148
Assumed exercise of common stock equivalents 27,794 18,822 10,634
Assumed conversion of subordinated notes -- 7,600 21,968
--------- --------- ---------
Weighted average common and common equivalent shares 381,157 362,904 355,750
========= ========= =========
Earnings per share:
Income before cumulative effect of change in
accounting principle $ 1.59 $ 0.55 $ 0.36
Cumulative effect of change in accounting principle -- -- (0.11)
--------- --------- ---------
Net income $ 1.59 $ 0.55 $ 0.25
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------
11
12
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
r. STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, recognizes no
compensation expense for the stock option grants. The Company also grants
restricted stock for a fixed number of shares to employees for nominal
consideration. Compensation expense related to restricted stock awards is
recorded ratably over the restriction peiod.
s. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments 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 Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which deferred the
effective date of FAS 133 for one year. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138, (FAS
138), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment to FASB Statement No 133." This statement amended
certain provisions of FAS 133. Accordingly, we will adopt FAS 133, as amended by
FAS 138, effective the first quarter of fiscal 2001. FAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
such instruments at fair market value. Under certain circumstances, a portion of
the derivative's gain or loss is initially reported as a component of
comprehensive income until the hedged transaction affects earnings. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. The provisions of FAS 133 allow
for greater flexibility in the choice of derivative instruments. As a result,
upon adoption, the Company will no longer use foreign currency option contracts
to hedge anticipated foreign currency sales transactions. Based upon the
derivative positions at October 28, 2000, the Company estimates that upon
adoption it will record a reduction of approximately $5 million in other
comprehensive income as the cumulative effect of an accounting change.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, (SAB 101), "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. The Company will adopt SAB 101 in
the fourth quarter of fiscal 2001 and does not expect SAB 101 to have a material
effect on its financial position or results of operations.
t. STOCK SPLIT
On February 15, 2000, the Company's Board of Directors approved a 2-for-1 split
of the Company's common stock, effected as a 100% stock dividend on March 15,
2000 by the distribution of one share of common stock for every share held on
the record date of February 28, 2000. In connection with the stock split the
number of common stock purchase rights that are associated with each share of
common stock was reduced from one to one-half. All historical per share amounts
in this report have been restated to reflect the split.
3. ACQUISITIONS AND DISPOSITIONS
During the third quarter of fiscal 2000, the Company acquired BCO Technologies
plc (BCO), a company with operations in Belfast, Northern Ireland, in a
cash-for-stock transaction valued at approximately $163 million. The acquisition
was accounted for as a purchase, and the excess of the purchase price over the
fair value of the assets acquired was allocated to workforce in place and
goodwill, which are being amortized on the straight-line basis over five years.
In connection with the acquisition, the Company recorded approximately $158
million of goodwill. There was no in-process research and development write-off
related to this acquisition.
During the second quarter of fiscal 1999, the Company acquired two DSP tools
companies, White Mountain DSP, Inc. (WM) of Nashua, New Hampshire, and Edinburgh
Portable Compilers Limited (EPC), of Edinburgh, Scotland. The total cost of
these acquisitions was approximately $21 million in cash and $2 million in
common stock of the Company, with additional cash consideration of up to a
maximum of $10 million (to be accounted for as additional goodwill) payable if
the acquired companies achieve certain revenue and operational objectives.
Approximately $7 million of the contingent
12
13
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
consideration has been paid. These acquisitions were accounted for as purchases,
and the excess of the purchase price over the fair value of the assets acquired
was allocated to existing technology, workforce in place, trade names and
goodwill, which are being amortized on the straight-line basis over periods
ranging from six to ten years. In connection with these acquisitions, the
Company recorded a charge of $5.1 million representing the write-off of
in-process research and development.
Pro forma results of operations for BCO, WM and EPC have not been provided
herein as they were not material to the Company on either an individual or an
aggregate basis. The results of operations of each acquisition are included in
the Company's consolidated statement of income from the date of each
acquisition.
During fiscal 1998, the Company completed the sale of its disk drive IC business
to Adaptec, Inc. The Company received approximately $27 million in cash for the
disk drive product line and, after providing for the write-off of inventory,
fixed assets and other costs incurred to complete the transaction, recorded a
net gain of approximately $13 million. The Company also entered into other
arrangements with Adaptec that provided for payments to the Company aggregating
$13 million, of which $3 million was earned in fiscal 1999 and $10 million was
earned in fiscal 1998, for assisting Adaptec in research and development
efforts.
4. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in two segments: the design, manufacture and marketing of a
broad range of integrated circuits, which comprises approximately 98% of the
Company's revenue, and the design, manufacture and marketing of a range of
assembled products, which accounts for the remaining 2% of the Company's
revenue. Effectively, the Company operates in one reportable segment.
GEOGRAPHIC INFORMATION
The Company operates in three major geographic areas. The following geographic
area data include trade sales based upon point of sale and long-lived assets
based upon physical location. The predominant countries comprising European
operations are England, France, Germany and Ireland. The predominant country
comprising Asian operations is Japan. For segment reporting purposes, sales
generated by North American operations include export sales of $570.2 million in
fiscal 2000, $262.4 million in fiscal 1999 and $128.2 million in fiscal 1998.
GEOGRAPHIC SEGMENT INFORMATION 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
SALES North America, including export............. $ 1,722,056 $ 929,971 $ 748,283
Europe...................................... 504,669 313,598 312,523
Asia........................................ 350,822 206,810 169,765
----------- ----------- -----------
Total sales............................... $ 2,577,547 $ 1,450,379 $ 1,230,571
=========== =========== ===========
LONG-LIVED North America............................... $ 466,612 $ 417,854 $ 448,384
ASSETS Europe...................................... 388,439 178,361 187,921
Asia........................................ 116,873 77,154 82,941
----------- ----------- -----------
Total long-lived assets................... $ 971,924 $ 673,369 $ 719,246
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------
5. ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON CERTAIN SALES TO DISTRIBUTORS
In the fourth quarter of fiscal 1998, the Company changed its accounting method
for recognizing revenue on all shipments to international distributors and
certain shipments to domestic distributors. The change was made with an
effective date of November 2, 1997 (the beginning of fiscal 1998). While the
Company has historically deferred revenue on most shipments made to domestic
distributors until the products were resold by the distributors to end users, it
recognized revenue on shipments to international distributors and certain
shipments to domestic distributors upon shipment to the distributors, net of
appropriate reserves for returns and allowances. As a result of this accounting
change, revenue recognition on shipments to distributors worldwide is deferred
until the products are resold to the end users. The
13
14
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company believes that deferral of revenue and related gross margin on shipments
to distributors until the product is shipped by the distributors is a more
meaningful measurement of results of operations because it better conforms to
the substance of the transaction considering the changing business environment
in the international marketplace; is consistent with industry practice; and
will, accordingly, better focus the entire organization on sales to end users
and, therefore, is a preferable method of accounting. The cumulative effect in
1998 of the change in accounting principle was a charge of approximately $37
million (net of $20 million of income taxes) or $0.11 per diluted share. The
estimated pro forma effect of the accounting change on the prior years' results
is as follows:
1998
- -----------------------------------------------------------------------------
As reported:
Net sales $1,230,571
Net income $82,408
Basic earnings per share $0.26
Diluted earnings per share $0.25
Pro forma amounts with the change in accounting
principle related to revenue recognition
applied retroactively: (unaudited)
Net sales $1,230,571
Net income $119,488
Basic earnings per share $0.37
Diluted earnings per share $0.36
- -----------------------------------------------------------------------------
6. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $17 million during the third
quarter of fiscal 1998. Of this charge, $7 million related to a worldwide
workforce reduction of approximately 350 employees, which was completed during
the fourth quarter of fiscal 1998, in the manufacturing, selling and general and
administrative areas. In addition, the Company performed a review of its
business strategy and concluded that the key to success in the DSP market was to
focus on opportunities in the general-purpose DSP market that could provide
consistent growth, while at the same time being more selective in pursuing
vertical market DSP opportunities. As a result of this review, the Company
scaled back its efforts in some of the higher volume, lower margin, shorter life
cycle product areas and wrote off $10 million, which was the carrying value of
specific assets associated with these businesses.
7. INVESTMENTS
Investments at October 28, 2000 and October 30, 1999 were as follows:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
WaferTech, LLC $ 32,852 $ 32,852
CSM - 27,413
Other 184,903 59,036
- -----------------------------------------------------------------------------------------------------------------------
Total investments $ 217,755 $ 119,301
=======================================================================================================================
In January 1999, the Company concluded an agreement to sell to other WaferTech
partners 78% of its 18% equity ownership in WaferTech for cash equal to the
carrying value of the 78% equity ownership at October 31, 1998. During fiscal
1999, the Company invested an additional $4 million in WaferTech. The Company no
longer exercises significant influence over WaferTech's operating and financial
policies and, accordingly, accounts for its remaining 4% investment under the
cost method. Changes in the value of the investment are not recognized unless an
impairment in the value of the investment is deemed by management to be "other
than temporary." During the first quarter of fiscal 2001, the Company sold its
investment in WaferTech - See Note 15.
14
15
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company had an equity investment in Chartered Semiconductor Manufacturing
Pte., Ltd., (CSM), in Singapore of approximately $27 million which represented a
less than 5% ownership interest. During fiscal 2000, the Company sold its equity
investment for $65 million, realizing a $44 million gain over the original cost
of $21 million. This gain is included in other nonoperting income.
Other investments consist primarily of long-term investments in mutual funds and
bank money market funds, which are related to the Company's deferred
compensation plan and are largely offset by a corresponding noncurrent liability
to the plan participants. These investments are classified as trading.
Investments are stated at fair value, which is based on market quotes, interest
rates or management estimates, as appropriate. Adjustments to fair value of
investments classified as available-for-sale are recorded as an increase or
decrease in stockholders' equity. Adjustments to fair value of and income
pertaining to other investments are recorded in operating expense.
8. ACCRUED LIABILITIES
Accrued liabilities at October 28, 2000 and October 30, 1999 consisted of the
following:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Accrued compensation
and benefits $ 99,984 $ 65,997
Other 94,033 45,288
- -----------------------------------------------------------------------------------------------------------------------
Total accrued liabilities $ 194,017 $ 111,285
=======================================================================================================================
9. DEBT AND CREDIT FACILITIES
Long-term debt at October 28, 2000 and October 30, 1999 consisted of the
following:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
4.75% Convertible Subordinated
Notes due October 1, 2005 $1,200,000 $ -
6.625% Notes due March 1, 2000 - 80,000
Other 261 -
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 1,200,261 80,000
Less: Current portion long-term debt - (80,000)
- -----------------------------------------------------------------------------------------------------------------------
Total long-term debt $1,200,261 $ -
=======================================================================================================================
On October 1, 2000, the Company issued $1,200 million of 4.75% Convertible
Subordinated Notes due October 1, 2005 (2005 Notes) with semiannual interest
payments on April 1 and October 1 of each year, commencing April 1, 2001. The
2005 Notes are convertible, at the option of the holder, into the Company's
common stock at any time unless previously redeemed or repurchased, at a
conversion price of $129.78 per share, subject to adjustment in certain events.
The net proceeds of the offering were $1,172 million after payment of the
underwriting discount and expenses of the offering, which will be amortized over
the term of the 2005 Notes.
As of March 11, 1999, the Company had converted $229,967,000 of the $230 million
principal amount of its 3.50% Convertible Subordinated Notes due 2000 (2000
Notes) into an aggregate of 10,983,163 shares of the Company's common stock, and
the remaining 2000 Notes were redeemed by a cash payment of $33,000. This
conversion did not have an impact on diluted earnings per share.
Simultaneous with the sale of the 6.625% Notes, the Company entered into an
interest rate swap and cap agreement for the term of the 6.625% Notes having a
notional principal amount of $40 million whereby the effective net interest rate
on $40 million of the 6.625% Notes will be the six-month LIBOR rate (up to a
maximum of 7%) plus 1.4%. The notes were repaid in March 2000. While outstanding
in the year ended October 28, 2000, the net effective interest rate on $40
million of the 6.625% 2000 Notes was 8.2% after giving effect to the interest
rate swap agreement.
15
16
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
There were $5.8 million and $2.3 million of foreign currency borrowings
outstanding at October 28, 2000 and October 30, 1999, respectively, which were
at prevailing market rates for the respective currencies. Borrowings under the
Company's credit agreement and lines of credit are generally due within six
months.
10. LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under various
operating and capital leases that expire at various dates through 2030. The
lease agreements frequently include renewal and purchase provisions and require
the Company to pay taxes, insurance and maintenance costs.
Total rental expense under operating leases was approximately $19 million in
fiscal 2000, $17 million in fiscal 1999 and $16 million in fiscal 1998.
The following is a schedule of future minimum lease payments under capital
leases and rental payments required under long-term operating leases at October
28, 2000:
OPERATING CAPITAL
FISCAL YEARS LEASES LEASES
- -------------------------------------------------------------------------------------------
2001 $ 14,298 $ 10,689
2002 10,143 9,376
2003 7,335 3,930
2004 5,723 57
2005 4,804 -
Later Years 12,849 -
- -------------------------------------------------------------------------------------------
Total $ 55,152 24,052
=========
Less amount representing interest (1,415)
---------
Present value of minimum lease payments $ 22,637
=========
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a federal lawsuit brought in the Southern District
of New York by U.S. Philips Corporation (Philips). On October 2, 2000, Philips
filed suit against the Company, Cirrus Logic, Inc., Cypress Semiconductor
Corporation, Linear Technology Corporation and Standard Microsystems Corporation
alleging patent infringement and seeking injunctive relief and unspecified
damages. Because the lawsuit is in pre-trial stages, management is unable to
estimate the effect of this lawsuit on its consolidated financial position or
consolidated results of operations.
The Company is a defendant in a federal lawsuit brought in Florida by Jordan
Spencer Jacobs (Jacobs). On May 12, 2000, Jacobs filed suit against the Company,
Microsoft Corporation and Pelican Accessories, Inc. alleging patent infringement
and seeking injunctive relief and unspecified damages. The parties are presently
engaged in discovery. Because the lawsuit is in pre-trial stages, management is
unable to estimate the effect of this lawsuit on its consolidated financial
position or consolidated results of operations.
On January 18, 2000, the Company became aware that Silicon Laboratories, Inc.
(Silicon) had named ADI as a defendant in a lawsuit filed in the United States
District Court for the Western District of Texas, which alleged misappropriation
of trade secrets and patent infringement by the Company. Subsequent to fiscal
2000, the Company entered into a settlement with Silicon that was not material.
The Company was a defendant in a federal lawsuit brought in Arizona by the
Lemelson Medical, Education & Research Foundation, L.P. (Lemelson). On July 31,
1998, Lemelson commenced an action in federal court against the Company and 26
other companies alleging infringement of 16 patents allegedly covering various
manufacturing processes and techniques used in the fabrication of semiconductor
products. Lemelson served the Company with a complaint on
16
17
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
November 24, 1998 seeking unspecified damages, treble damages for willful
infringement and injunctive relief. During fiscal 2000, the Company entered into
a settlement agreement with Lemelson that was not material.
The Company is a defendant in a federal lawsuit brought in California by Linear
Technology Corporation (LTC). On June 26, 1997, LTC filed suit against the
Company, Impala Linear Corporation, Toyoda Automatic Loom Works, Ltd., Maxim
Integrated Products, Inc. and Unitrode Corporation alleging patent infringement
and seeking injunctive relief and unspecified damages. The parties are presently
engaged in discovery. The case was originally scheduled for trial on liability
issues beginning on September 7, 1999. The original district judge recused
himself and the case has not yet been rescheduled for trial. While the Company
can give no assurance that it will prevail in this litigation, it believes that
resolution of this litigation will not have a material adverse effect on the
Company's consolidated financial position, although an unfavorable outcome could
have a material adverse effect on the Company's results of operations or cash
flow in the quarter, or annual period in which this matter is resolved.
Patent infringement suits were pending against the Company by Sextant Avionique,
S.A. (Sextant) in France claiming that the Company's accelerometer infringes
certain patents. Sextant has obtained a court ruling that the Company infringed
Sextant's French patents, and therefore, unless the decision is reversed, the
Company will be unable to manufacture or sell any infringing accelerometers in
France. The Company is currently appealing the French court's decision. The
Company does not believe that the French court's decision will have a material
adverse effect on its consolidated financial position or consolidated results of
operations.
From time to time as a normal incidence of the nature of the Company's business,
various claims, charges and litigation are asserted or commenced against the
Company arising from, or related to, contractual matters, patents, trademarks,
personal injury, environmental matters, product liability, insurance coverage
and personnel and employment disputes. As to such claims and litigation, the
Company can give no assurance that it will prevail. However, the Company does
not believe that these matters will have a material adverse effect on the
Company's consolidated financial position, although an adverse outcome of any of
these matters could have a material adverse effect on the Company's consolidated
results of operations or cash flow in the quarter, or annual period in which one
or more of these matters are resolved.
WAFER SUPPLY AGREEMENTS
The Company maintained a deposit of $20 million with Chartered Semiconductor
Manufacturing Pte., Ltd., (CSM). This deposit was classified in the balance
sheet line item "Other assets." The outstanding balance of the deposit is
refunded in proportion to the Company's purchases of wafers from CSM.
Approximately $1 million of the deposit was outstanding as of October 28, 2000
and has since been refunded.
12. STOCKHOLDERS' EQUITY
STOCK PLANS
In fiscal 1998, the stockholders approved the 1998 Stock Option Plan (1998
Plan), which provides for the issuance of nonstatutory and incentive stock
options to purchase up to 30 million shares of common stock. In March 2000, the
stockholders approved an amendment to the 1998 Plan to increase the shares
reserved for issuance by an additional 34 million shares. Officers, employees,
directors, consultants and advisors of the Company and its subsidiaries are
eligible to be granted options under this plan at a price not less than 100%
(110% in the case of incentive stock options granted to 10% or greater
stockholders) of the fair market value of the common stock at the time the
option is granted. The Company's 1988 Stock Option Plan was terminated upon
adoption of the 1998 Stock Option Plan; however, options to purchase common
stock remain outstanding under the plan. There are no remaining options
outstanding under the Company's 1980 Stock Option Plan.
While the Company may grant options to employees, which become exercisable at
different times or within different periods, the Company has generally granted
options to employees that are exercisable on a cumulative basis in annual
installments of 33 1/3% each on the third, fourth and fifth anniversaries of the
date of grant.
17
18
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the 1994 Director Option Plan, which was amended in 1998, each
non-employee director was granted annually a non-statutory option to purchase
21,000 shares of common stock at an exercise price equal to the fair market
value on the date of grant. Up to 1999, each newly elected non-employee director
received a grant of an option to purchase 21,000 shares of Common Stock upon his
or her election to the Board (the "Initial Grant"). The 1994 Director Plan was
amended in 1999 whereby the number of shares of Common Stock underlying the
Initial Grant was increased from 21,000 to 60,000. On December 8, 1999, the 1994
Director Option Plan was terminated (effective March 14, 2000), and the Board of
Directors authorized that from and after March 14, 2000, all options granted to
non-employee directors will be granted under the Company's 1998 Stock Option
Plan. The options granted under the 1998 Stock Option Plan, as well as the
options previously granted under the 1994 Director Option Plan, are exercisable
on a cumulative basis in annual installments of 33 1/3% each on the first,
second and third anniversaries of the date of grant. The Company also has
options outstanding under the 1992 Director Option Plan that are exercisable on
a cumulative basis in annual installments of 33 1/3% each on the third, fourth
and fifth anniversaries of the date of grant.
Information with respect to activity under the stock option plans is set forth
below:
OPTIONS OUTSTANDING
SHARES ---------------------------------
AVAILABLE WEIGHTED AVERAGE
STOCK OPTION ACTIVITY FOR GRANT NUMBER PRICE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------
Balance, November 1, 1997 13,996 33,810 $ 6.46
- -----------------------------------------------------------------------------------------------------------------------
Shares authorized for 1998 Stock Option Plan 30,000 - -
Additional shares authorized for 1994 Director Stock
Option Plan 300 - -
Shares authorized for Medialight acquisition 204 - -
Options granted (39,892) 39,892 $ 8.37
Options exercised - (4,028) $ 3.18
Options canceled 18,256 (18,256) $ 11.58
Shares canceled upon termination of 1988 Stock
Option Plan (5,158) - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1998 17,706 51,418 $ 6.39
- -----------------------------------------------------------------------------------------------------------------------
Options granted (1,320) 1,320 $ 17.26
Options exercised - (6,054) $ 4.26
Options canceled 1,302 (1,302) $ 7.65
- -----------------------------------------------------------------------------------------------------------------------
Balance October 30, 1999 17,688 45,382 $ 6.97
- -----------------------------------------------------------------------------------------------------------------------
Additional shares authorized for 1998 Stock Option Plan 34,000 - -
Options granted (15,833) 15,833 $ 31.03
Options exercised - (7,210) $ 5.05
Options canceled 1,755 (1,755) $ 14.02
- -----------------------------------------------------------------------------------------------------------------------
Balance, October 28, 2000 37,610 52,250 $ 14.31
=======================================================================================================================
OPTION AMENDMENT
In September 1998, the Board of Directors approved a stock option program
amendment pursuant to which all employees with stock options granted during the
period beginning December 1, 1996 and ending on August 3, 1998 could elect to
reduce the option exercise price to $7.38 per share (equal to the then fair
market value). Upon such election, the vesting schedule for the affected options
was reset, whereby one-third vest on September 8, 2001, one-third on September
8, 2002 and the final one-third on September 8, 2003. A total of 16,442,996
options with exercise prices ranging from $11.13 to $17.13 per share were
amended under the program. The activity as a result of this option program
amendment is presented in the preceding table as cancellations and subsequent
grants.
18
19
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about options outstanding at October
28, 2000:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE 10/28/00 LIFE (YEARS) PRICE AT 10/28/00 PRICE
- -----------------------------------------------------------------------------------------------------------------------
$ 0.98 - $ 9.93 35,115 6.6 $ 6.87 5,369 $ 5.38
$ 9.94 - $ 19.85 1,293 7.6 $ 13.11 150 $ 13.11
$ 19.86 - $ 29.78 14,828 9.1 $ 28.67 9 $ 28.54
$ 29.79 - $ 59.55 390 9.2 $ 42.52 - $ -
$ 59.56 - $ 99.25 624 9.6 $ 76.99 - $ -
- -----------------------------------------------------------------------------------------------------------------------
$ 0.98 - $ 99.25 52,250 7.4 $ 14.31 5,528 $ 5.62
====== =====
The Company has an employee stock purchase plan (ESPP) that allows eligible
employees to purchase, through payroll deductions, shares of the Company's
common stock at 85% of the fair market value at specified dates. Employees
purchased 1,011,624 shares in fiscal 2000 (1,312,800 and 1,205,000 in fiscal
1999 and 1998, respectively) for $16.5 million ($12.9 million and $11.8 million
in fiscal 1999 and 1998, respectively). At October 28, 2000, approximately
3,382,000 common shares, net of retirements, remained available for issuance
under the stock purchase plan.
Under the 1991 Restricted Stock Plan, a maximum of 5,400,000 shares of common
stock was authorized for awards by the Company to key employees for nominal
consideration. This plan succeeded the Company's 1978 Restricted Stock Plan that
provided for the issuance of up to 14,745,600 shares of common stock. Shares
awarded from both plans are restricted as to transfer, usually for a period of
five years and, under certain conditions, may be subject to repurchase by the
Company at the original purchase price per share. There were no additional
shares awarded under the restricted stock plans in fiscal 2000 and fiscal 1999.
Shares awarded under the Company's restricted stock plans, net of cancellations,
for fiscal 1998 were 435,000. The fair market value of the shares at the date of
award was $6,293,000 in fiscal 1998 and was accounted for as deferred
compensation and is being amortized over the restriction period. During fiscal
2000, 1999 and 1998, $2,231,000, $2,799,000 and $2,918,000, respectively, of
such compensation was charged to expense. At October 28, 2000, there were
1,196,982 shares of common stock, net of forfeitures, available for issuance
under the 1991 Restricted Stock Plan.
As of October 28, 2000, a total of 94,439,169 common shares were reserved for
issuance under the Company's stock plans.
COMMON STOCK REPURCHASE
In November 2000, the Board of Directors authorized the Company to repurchase up
to 15 million shares of its common stock. The repurchased shares will be held as
treasury shares and will be available for issuance under the Company's stock
option plans, employee stock purchase plan and other benefit plans.
In May and October of 1998, the Board of Directors authorized the Company to
repurchase up to 8 million and 16 million shares, respectively, of its common
stock over the succeeding 12 months. At October 31, 1998, the Company had
purchased 8,800,000 shares of its common stock at an average purchase price of
$9.57 per share. The Company did not purchase any shares in fiscal 2000 and
fiscal 1999. The repurchased shares were held as treasury shares, and were used
to partially fund the Company's employee stock plans and the two-for-one stock
split effected March 15, 2000.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123 (FAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations, in accounting for stock-based awards
to employees. Under APB 25, the Company generally recognizes no compensation
expense with respect to such awards.
19
20
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
FAS 123 for awards granted after October 28, 1995 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FAS 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted average assumptions:
OPTIONS ESPP
-------------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Expected life (years) 4.9 6.1 6.1 1.0 1.0 1.0
Expected stock price volatility 56.6% 52.9% 49.5% 72.5% 64.1% 57.6%
Risk-free interest rate 6.0% 5.3% 5.3% 6.3% 5.1% 5.4%
- -----------------------------------------------------------------------------------------------------------------------
The following is a summary of weighted average grant date values generated by
application of the Black-Scholes model:
WEIGHTED AVERAGE GRANT DATE VALUE
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Stock option plans $ 16.90 $ 9.77 $ 4.91
ESPP $ 7.88 $ 4.40 $ 4.17
- -----------------------------------------------------------------------------------------------------------------------
As required under FAS 123, the reported net income and diluted earnings per
share have been presented to reflect the impact had the Company been required to
include the amortization of the Black-Scholes option value as expense. For
purposes of this disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro forma
information follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 526,615 $162,872 $56,719
Pro forma diluted earnings per share $1.38 $0.45 $0.16
- -----------------------------------------------------------------------------------------------------------------------
The effects on pro forma disclosures of applying FAS 123 are not likely to be
representative of the effects on pro forma disclosures of future years. Because
FAS 123 is applicable only to options granted subsequent to October 28, 1995,
the pro forma effect is not fully reflected for fiscal years 1999 and 1998.
PREFERRED STOCK
The Company has 471,934 authorized shares of $1.00 par value Preferred Stock.
The Board of Directors is authorized to fix designations, relative rights,
preferences and limitations on the preferred stock at the time of issuance. An
aggregate of 300,000 shares of preferred stock have been designated as Series A
Junior Participating Preferred Stock for issuance in connection with the
Company's Stockholder Rights Plan.
COMMON STOCK PURCHASE RIGHTS
In March 1998, the Board of Directors adopted a Stockholder Rights Plan (the
Stockholder Rights Plan) that replaced a plan adopted by the Board in 1988.
Pursuant to the Stockholder Rights Plan, after giving effect to the Company's
two-for-one stock split effected on March 15, 2000, each share of the Company's
Common Stock (Common Stock) currently has an associated one-half of a right.
Under certain circumstances, each whole right would entitle the registered
holder to purchase from the Company one one-thousandth share of Series A Junior
Participating Preferred Stock at a purchase price of $180 in cash, subject to
adjustment.
20
21
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The rights are not exercisable and cannot be transferred separately from the
Common Stock until ten business days (or such later date as may be determined by
the Board of Directors) after (i) the public announcement that a person or group
of affiliated or associated persons has acquired (or obtained rights to acquire)
beneficial ownership of 15% or more of Common Stock or (ii) the commencement of
a tender offer or exchange offer that would result in a person or group
beneficially owning 20% or more of the outstanding Common Stock. If and when the
rights become exercisable, each holder of a right shall have the right to
receive, upon exercise, that number of shares of Common Stock (or in certain
circumstances, cash property or other securities of the Company) that equals the
exercise price of the right divided by 50% of the current market price (as
defined in the Stockholder Rights Plan) per share of Common Stock at the date of
the occurrence of such event. In the event at any time after any person becomes
an acquiring person, (i) the Company is consolidated with, or merged with and
into, another entity and the Company is not the surviving entity of such
consolidation or merger or if the Company is the surviving entity, but shares of
its outstanding common stock are changed or exchanged for stock or securities or
cash or any other property, or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a right shall thereafter
have the right to receive upon exercise, that number of shares of common stock
of the acquiring company that equals the exercise price of the right divided by
50% of the current market price of such common stock at the date of the
occurrence of the event.
The rights have certain anti-takeover effects, in that they would cause
substantial dilution to a person or group that attempts to acquire a significant
interest in the Company on terms not approved by the Board of Directors. The
rights expire on March 17, 2008 but may be redeemed by the Company for $.001 per
right at any time prior to the tenth day following a person's acquisition of 15%
or more of the Company's Common Stock. So long as the rights are not separately
transferable, each new share of Common Stock issued will have one-half of a
right associated with it.
13. RETIREMENT PLANS
The Company and its subsidiaries have various savings and retirement plans
covering substantially all employees. The Company maintains a defined
contribution plan for the benefit of its eligible United States employees. This
plan provides for Company contributions of up to 5% of each participant's total
eligible compensation. In addition, the Company contributes an amount equal to
each participant's contribution, if any, up to a maximum of 2% of each
participant's total eligible compensation, plus 50% of the contributions between
2% and 4%. The Company also has various defined benefit pension and other
retirement plans for certain foreign employees that are consistent with local
statutes and practices. The total expense related to all of the Company's
retirement plans was approximately $26 million in fiscal 2000 and $21 million in
fiscal years 1999 and 1998, which primarily consisted of costs related to the
U.S. defined contribution plan. Also included in total expense is pension
expense related to foreign defined benefit plans of approximately $3 million for
each of the fiscal years 2000, 1999 and 1998.
NON-U.S. PLAN DISCLOSURES
The Company's funding policy for its foreign defined benefit pension plans is
consistent with the local requirements of each country. The plans' assets
consist primarily of U.S. and foreign equity securities, bonds, property and
cash.
Net annual periodic pension cost of non-U.S. plans is presented in the following
table:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Service cost of benefits earned during the year $ 4,110 $ 4,079 $ 3,208
Interest cost on projected benefit obligation 3,085 3,273 3,246
Expected return on plan assets (8,819) (6,052) (12,623)
Net amortization and deferrals 4,588 1,846 9,440
- -----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 2,964 $ 3,146 $ 3,271
=======================================================================================================================
21
22
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Obligation and asset data of the plans at fiscal year end is presented in the
following table:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION:
Beginning balance $ 54,914 $ 56,485
Service cost 4,110 4,079
Interest cost 3,085 3,273
Plan participants' contributions 1,299 1,267
Benefits paid (709) (1,540)
Actuarial (gain)/loss 5,773 (7,939)
Exchange rate adjustment (5,166) (711)
- -----------------------------------------------------------------------------------------------------------------------
Ending balance $ 63,306 $ 54,914
=======================================================================================================================
PLAN ASSETS AT FAIR VALUE:
Beginning balance $ 66,157 $ 58,784
Actual return on plan assets 8,583 6,052
Company contributions 2,125 2,646
Plan participants' contributions 1,299 1,267
Benefits paid (709) (1,540)
Exchange rate adjustment (7,091) (1,052)
- -----------------------------------------------------------------------------------------------------------------------
Ending balance $ 70,364 $ 66,157
=======================================================================================================================
RECONCILIATION OF FUNDED STATUS:
Fund status - Plan assets in excess of benefit obligation $ (7,058) $ (11,243)
Unrecognized net gain 13,496 15,148
Unrecognized prior service cost (1,477) (1,077)
- -----------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 4,961 $ 2,828
=======================================================================================================================
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
Prepaid benefit cost $ (2,587) $ (4,201)
Accrued benefit cost 7,548 7,029
- -----------------------------------------------------------------------------------------------------------------------
Total $ 4,961 $ 2,828
=======================================================================================================================
Accrued benefit cost at October 28, 2000 includes projected benefit obligations
of $13.2 million and accumulated benefit obligations of $9.7 million, versus
plan assets of $4.9 million for three plans whose obligations exceeded their
assets. Accrued benefit cost at October 30, 1999 includes projected benefit
obligations of $14.8 million and accumulated benefit obligations of $8.7
million, versus plan assets of $6.4 million for four plans whose obligations
exceeded their assets.
The range of assumptions used for the non-U.S. defined benefit plans reflects
the different economic environments within the various countries. The projected
benefit obligation was determined using the following assumptions:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Discount rate 3% - 12% 4% - 12%
Rate of increase in compensation levels 3% - 10% 4% - 10%
Expected long-term returns on assets 5% - 12% 5% - 12%
- -----------------------------------------------------------------------------------------------------------------------
22
23
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory rates to
income tax expense is as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Income tax provision reconciliation:
Tax at statutory rate $ 302,999 $ 90,139 $ 52,660
Irish income subject to lower tax rate (35,605) (25,557) (10,960)
Change in valuation allowance - - (5,559)
State income taxes, net of federal benefit 6,448 260 502
Research and development tax credits (11,288) (2,700) (4,400)
Foreign Sales Corporation (5,392) (4,923) (1,745)
Amortization of goodwill 1,037 1,189 545
Net foreign tax in excess of
U.S. federal statutory tax rate 428 (156) 125
Other, net (48) 2,469 (197)
- -----------------------------------------------------------------------------------------------------------------------
Total income tax provision $ 258,579 $ 60,721 $ 30,971
=======================================================================================================================
For financial reporting purposes, income before income taxes includes the
following components:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Pretax income:
Domestic $ 622,331 $ 114,333 $ 34,290
Foreign 243,380 143,207 116,169
- -----------------------------------------------------------------------------------------------------------------------
$ 865,711 $ 257,540 $ 150,459
=======================================================================================================================
The components of the provision for income taxes are as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 224,413 $ 19,949 $ 24,588
Foreign 37,205 23,790 17,983
State 9,505 400 772
- -----------------------------------------------------------------------------------------------------------------------
Total current $ 271,123 $ 44,139 $ 43,343
=======================================================================================================================
Deferred (prepaid):
Federal $ (11,807) $ 16,262 $ (7,792)
Foreign (737) 320 (4,580)
- -----------------------------------------------------------------------------------------------------------------------
Total deferred (prepaid) $ (12,544) $ 16,582 $ (12,372)
=======================================================================================================================
23
24
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's practice is to reinvest indefinitely the earnings of certain
international subsidiaries. Accordingly, no U.S. income taxes have been provided
for approximately $714,467,000 of unremitted earnings of international
subsidiaries.
The significant components of the Company's deferred tax assets and liabilities
for the fiscal years ended October 28, 2000 and October 30, 1999 are as follows:
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Inventory reserves $ 34,702 $ 32,816
Deferred income on shipments to distributors 45,864 34,750
Reserves for compensation and benefits 21,968 12,769
Intercompany profits in foreign inventories 2,945 5,181
Other - 8,730
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 105,479 94,246
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (46,729) (44,468)
Other (966) -
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (47,695) (44,468)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 57,784 $ 49,778
=======================================================================================================================
15. SUBSEQUENT EVENTS
The Company completed the acquisition of ChipLogic, Inc. (ChipLogic) of Santa
Clara, California on January 4, 2001, in a transaction valued at approximately
$86 million. ChipLogic is a developer of high-performance integrated circuits
and software focused on the convergence of voice, broadband access and network
protocol processing. The Company has filed a registration statement in
connection with this transaction with the Securities and Exchange Commission.
The transaction is being effected in the form of a merger of a wholly owned
subsidiary of the Company into ChipLogic under which the Company will issue one
share of common stock for each share of ChipLogic common stock. ChipLogic had
approximately 1.65 million shares of common stock outstanding on a fully diluted
basis.
Through January 17, 2001, the Company also completed four smaller acquisitions
in transactions that had a total value of approximately $50 million, including
contingent consideration. These transactions are expected to be accounted for as
purchases.
On December 27, 2000, the Company sold its investment in WaferTech, LLC to
Taiwan Semiconductor Manufacturing Company for approximately $61 million. In the
first quarter of fiscal 2001, the Company will record a pretax realized gain on
the sale of this investment of approximately $28 million.
24
25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Analog Devices, Inc.
We have audited the accompanying consolidated balance sheets of Analog Devices,
Inc. as of October 28, 2000 and October 30, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended October 28, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Analog
Devices, Inc. at October 28, 2000 and October 30, 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 28, 2000, in conformity with accounting principles
generally accepted in the United States.
As discussed in Notes 2(n) and 5 to the consolidated financial statements, in
the fiscal year ended October 31, 1998, the Company changed its method for
recognizing revenue on certain shipments to distributors.
/s/ Ernst & Young LLP
Boston, Massachusetts
November 13, 2000, except for Note 15,
as to which the date is January 17, 2001.
25
26
ANALOG DEVICES, INC.
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 2000 and fiscal 1999 (thousands
except as noted):
4Q00 3Q00 2Q00 1Q00 4Q99 3Q99 2Q99 1Q99
- -----------------------------------------------------------------------------------------------------------------------
Net sales 805,617 700,658 580,995 490,277 431,036 378,776 340,067 300,500
- -----------------------------------------------------------------------------------------------------------------------
Cost of sales 333,730 300,519 257,184 225,087 205,922 190,481 176,435 162,805
Gross margin 471,887 400,139 323,811 265,190 225,114 188,295 163,632 137,695
% of sales 59% 57% 56% 54% 52% 50% 48% 46%
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 123,423 103,429 90,702 83,012 75,414 67,142 61,899 52,584
Purchased in- process research
and development - - - - - - 5,140 -
Selling, marketing, general
and administrative 80,569 77,198 71,073 64,524 59,702 54,589 49,167 46,181
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 203,992 180,627 161,775 147,536 135,116 121,731 116,206 98,765
% of sales 25% 26% 28% 30% 31% 32% 34% 33%
- -----------------------------------------------------------------------------------------------------------------------
Operating income 267,895 219,512 162,036 117,654 89,998 66,564 47,426 38,930
% of sales 33% 31% 28% 24% 21% 18% 14% 13%
- -----------------------------------------------------------------------------------------------------------------------
Equity in loss of WaferTech - - - - - - - 1,149
- -----------------------------------------------------------------------------------------------------------------------
Nonoperating expenses (income):
Interest expense 2,978 360 822 1,681 1,964 1,632 2,439 4,111
Interest income (22,160) (15,769) (13,595) (11,906) (9,428) (6,881) (6,117) (4,300)
Other 1,732 (44,020)* 449 814 (169) (31) 400 609
- -----------------------------------------------------------------------------------------------------------------------
Total nonoperating
(income) expense (17,450) (59,429) (12,324) (9,411) (7,633) (5,280) (3,278) 420
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 285,345 278,941 174,360 127,065 97,631 71,844 50,704 37,361
% of sales 35% 40% 30% 26% 23% 19% 15% 12%
- -----------------------------------------------------------------------------------------------------------------------
Provision for income taxes 85,473 86,740 52,308 34,058 24,413 17,243 11,598 7,467
- -----------------------------------------------------------------------------------------------------------------------
Net income 199,872 192,201 122,052 93,007 73,218 54,601 39,106 29,894
% of sales 25% 27% 21% 19% 17% 14% 12% 10%
Per share - basic .56 .54 .35 .26 .21 .16 .12 .09
Per share - diluted .52 .50 .32 .25 .20 .15 .11 .09
- -----------------------------------------------------------------------------------------------------------------------
Shares used to compute earnings
per share (in thousands)
Basic 356,376 355,018 352,706 349,352 347,340 345,420 334,024 319,144
Diluted 384,307 383,544 382,321 374,458 369,548 366,960 361,396 353,714
- -----------------------------------------------------------------------------------------------------------------------
*Includes $44 million of realized gain on sale of investment in Chartered
Semiconductor Manufacturing Pte., Ltd.
26