1
EXHIBIT 13.2
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended November 1, 1997, November 2, 1996 and October 28, 1995
(thousands except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
REVENUE Net sales....................................... $1,243,494 $1,193,786 $ 941,546
COSTS AND Cost of sales................................... 622,317 593,033 464,571
---------- ---------- ---------
EXPENSES
Gross margin.................................... 621,177 600,753 476,975
Operating expenses:
Research and development..................... 196,148 177,772 134,265
Selling, marketing, general
and administrative......................... 191,613 195,842 184,943
---------- ---------- ---------
387,761 373,614 319,208
---------- ---------- ---------
Operating income................................ 233,416 227,139 157,767
Nonoperating (income) expenses:
Interest expense............................. 12,507 11,289 4,201
Interest income.............................. (16,178) (16,535) (8,103)
Other........................................ 1,208 1,645 2,234
---------- ---------- ---------
(2,463) (3,601) (1,668)
---------- ---------- ---------
EARNINGS Income before income taxes...................... 235,879 230,740 159,435
Provision for income taxes:
Payable currently............................ 63,794 52,115 52,414
Deferred (prepaid)........................... (6,134) 6,724 (12,249)
---------- ---------- ---------
57,660 58,839 40,165
---------- ---------- ---------
Net income ..................................... $ 178,219 $ 171,901 119,270
========== ========== =========
Shares used to compute earnings per share....... 177,463 171,289 158,715
========== ========== =========
Earnings per share of common stock $ 1.04 $ 1.03 $ .75
========== ========== =========
See accompanying notes.
8
2
ANALOG DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
November 1, 1997, November 2, 1996 and October 28, 1995
(thousands except share amounts)
ASSETS 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
CURRENT Cash and cash equivalents............................... $ 289,601 $ 210,109 $ 69,303
ASSETS Short-term investments.................................. 51,006 89,810 81,810
Accounts receivable less allowances of $40,007
($14,785 in 1996 and $12,738 in 1995)................. 255,886 234,434 173,028
Inventories............................................. 225,966 218,877 143,962
Deferred tax assets..................................... 54,761 44,879 39,650
Prepaid expenses and other current assets............... 18,209 14,728 9,966
---------- ---------- ----------
Total current assets.................................... 895,429 812,837 517,719
---------- ---------- ----------
PROPERTY, Land and buildings...................................... 145,952 140,776 139,718
PLANT AND Machinery and equipment................................. 938,602 800,086 633,124
EQUIPMENT, Office equipment........................................ 58,714 46,307 41,260
AT COST Leasehold improvements.................................. 87,407 80,099 42,165
---------- ---------- ----------
1,230,675 1,067,268 856,267
Less accumulated depreciation and amortization.......... 569,040 483,946 424,305
---------- ---------- ----------
Net property, plant and equipment....................... 661,635 583,322 431,962
---------- ---------- ----------
OTHER Investments............................................. 131,468 68,382 13,980
ASSETS Intangible assets, net.................................. 14,768 16,846 17,230
Other assets............................................ 60,553 26,885 12,458
---------- ---------- ----------
Total other assets...................................... 206,789 112,113 43,668
---------- ---------- ----------
$1,763,853 $1,508,272 $ 993,349
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
CURRENT Short-term borrowings and current portion of
LIABILITIES long-term debt........................................ $ - $ 178 $ 2,299
Obligations under capital leases........................ 11,733 10,960 60
Accounts payable........................................ 97,654 90,177 100,217
Deferred income on shipments to domestic distributors... 37,013 38,400 27,588
Income taxes payable.................................... 52,550 46,459 50,086
Accrued liabilities..................................... 75,444 76,649 65,839
--------- ---------- ----------
Total current liabilities............................... 274,394 262,823 246,089
--------- ---------- ----------
NONCURRENT Long-term debt.......................................... 310,000 310,000 80,000
LIABILITIES Noncurrent obligations under capital leases............. 38,852 43,666 -
Deferred income taxes................................... 20,740 16,992 5,039
Other noncurrent liabilities............................ 31,737 11,956 6,255
--------- ---------- ----------
Total noncurrent liabilities............................ 401,329 382,614 91,294
--------- ---------- ----------
Commitments and Contingencies
STOCKHOLDERS' Preferred stock, $1.00 par value, 500,000 shares
EQUITY authorized, none outstanding.......................... - - -
Common stock, $.16 2/3 par value, 600,000,000
shares authorized, 161,941,094 shares issued
(158,745,219 in 1996 and 114,583,932 in 1995)......... 26,991 26,458 19,098
Capital in excess of par value, net of deferred compen-
sation of $6,343 ($4,679 in 1996 and $3,181 in 1995) 223,885 176,357 149,775
Retained earnings....................................... 831,584 653,365 481,464
Cumulative translation adjustment....................... 6,724 6,655 5,870
---------- ---------- ----------
1,089,184 862,835 656,207
Less shares in treasury, at cost, 35,094 in 1997
(none in 1996 and 51,876 in 1995)..................... 1,054 - 241
---------- ---------- ----------
Total stockholders' equity.............................. 1,088,130 862,835 655,966
---------- ---------- ----------
$1,763,853 $1,508,272 $ 993,349
========== ========== ==========
See accompanying notes.
9
3
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended November 1, 1997,
November 2, 1996 and October 28, 1995 COMMON STOCK CAPITAL IN CUMULATIVE TREASURY STOCK
----------------- EXCESS OF RETAINED TRANSLATION -------------------
(thousands) SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENT SHARES AMOUNT
==========================================================================================================================
Balance, October 29,
1994 75,252 $ 12,542 $141,159 $362,194 $6,020 - $ -
- --------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1995 119,270
IN FISCAL Issuance of stock under
1995 stock plans and other,
net of repurchases 1,137 190 10,462 (35) (241)
Compensation recognized
under Restricted Stock Plan 1,672
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 2,848
Three-for-two stock split 38,195 6,366 (6,366) (17) -
Currency translation
adjustment (150)
- --------------------------------------------------------------------------------------------------------------------------
Balance, October 28,
1995 114,584 19,098 149,775 481,464 5,870 (52) (241)
- --------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1996 171,901
IN FISCAL Issuance of stock under
1996 stock plans and other,
net of repurchases 2,228 371 15,474 52 241
Exercise of warrants 2,250 375 11,721
Compensation recognized
under Restricted Stock Plan 1,949
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 4,052
Four-for-three stock split 39,683 6,614 (6,614)
Currency translation
adjustment 785
- --------------------------------------------------------------------------------------------------------------------------
Balance, November 2,
1996 158,745 26,458 176,357 653,365 6,655 - -
- --------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1997 178,219
IN FISCAL Issuance of stock under
1997 stock plans and other,
net of repurchases 3,196 533 19,446 (35) (1,054)
Compensation recognized
under Restricted Stock Plan 2,309
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 25,773
Currency translation
adjustment 69
- --------------------------------------------------------------------------------------------------------------------------
Balance , November 1,
1997 161,941 $ 26,991 $223,885 $831,584 $6,724 (35) $ (1,054)
==========================================================================================================================
See accompanying notes.
10
4
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended November 1, 1997, November 2, 1996 and October 28, 1995
(thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
OPERATIONS Cash flows from operations:
Net income ............................................ $ 178,219 $ 171,901 $ 119,270
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization...................... 103,554 83,809 64,098
Deferred income taxes.............................. (6,134) 6,565 (12,360)
Other noncash (income) expenses.................... (136) (638) 151
Increase in accounts receivable.................... (25,129) (67,744) (12,747)
Increase in inventories............................ (7,739) (76,748) (14,402)
Increase in prepaid expenses and other
current assets.................................. (3,605) (4,782) (4,959)
Increase in accounts payable,
deferred income and accrued liabilities......... 4,828 24,728 45,816
Increase in income taxes payable................... 32,916 425 23,784
Increase in other liabilities...................... 20,453 6,201 1,599
---------- ---------- ----------
Total adjustments...................................... 119,008 (28,184) 90,980
---------- ---------- ----------
Net cash provided by operations........................... 297,227 143,717 210,250
---------- ---------- ----------
INVESTMENTS Cash flows from investments:
Purchase of short-term investments available for sale.. (153,269) (262,648) (166,225)
Maturities of short-term investments available for sale 192,073 254,648 162,067
Additions to property, plant and equipment, net........ (179,374) (234,099) (212,671)
Long-term investments.................................. (63,086) (54,402) -
Increase in other assets............................... (33,650) (8,971) (16,878)
Purchase of short-term investments held to maturity.... - - (7,200)
Maturities of short-term investments held to maturity.. - - 2,200
---------- ---------- ----------
Net cash used for investments............................. (237,306) (305,472) (238,707)
---------- ---------- ----------
FINANCING Cash flows from financing activities:
ACTIVITIES Proceeds from employee stock plans..................... 19,283 14,028 10,126
Payments on capital lease obligations.................. (11,164) (7,227) (237)
Proceeds from equipment financing...................... 7,123 61,793 -
Net decrease in variable rate borrowings............... (109) (3,580) (787)
Proceeds from issuance of long-term debt............... - 224,385 -
Proceeds from warrants exercised....................... - 12,096 -
Payments on long-term debt............................. - - (20,000)
---------- ---------- ----------
Net cash provided by (used for) financing activities...... 15,133 301,495 (10,898)
---------- ---------- ----------
Effect of exchange rate changes on cash................... 4,438 1,066 (455)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents...... 79,492 140,806 (39,810)
Cash and cash equivalents at beginning of year............ 210,109 69,303 109,113
---------- ---------- ----------
Cash and cash equivalents at end of year.................. $ 289,601 $ 210,109 $ 69,303
========== ========== ==========
SUPPLE- Cash paid during the year for:
MENTAL Income taxes........................................... $ 27,621 $ 52,541 $ 30,511
========== ========== ==========
INFORMATION Interest............................................... $ 16,158 $ 10,171 $ 6,685
========== ========== ==========
See accompanying notes.
11
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6
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 1, 1997, NOVEMBER 2, 1996 AND OCTOBER 28, 1995
(ALL TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Analog Devices, Inc. ("Analog" or the "Company") designs, manufactures and
markets a broad line of high-performance linear, mixed-signal and digital
integrated circuits that address a wide range of real-world signal processing
applications. The Company's two principal product groups are general-purpose,
standard-function linear and mixed-signal ICs and system-level ICs. The latter
group includes general-purpose digital signal processing ICs and
application-specific devices that typically incorporate analog and mixed-signal
circuitry and a DSP core. Analog's third product group consists of devices
manufactured using assembled product technology.
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 Saturday closest to the last day in October. Fiscal years 1997 and
1995 were each 52 week years, while 1996 was a 53 week year.
Certain amounts reported in previous years have been reclassified to conform to
the 1997 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, but also include
certificates of deposit and bankers acceptances. Long-term investments consist
of equity securities and bank money market funds as well as time deposits which
the Company intends to renew at each maturity date.
The Company classifies its investments in debt and equity securities as
"held-to-maturity," "available-for-sale," and "trading" at the time of purchase
and for such designation to be reevaluated 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. 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, declines in value
judged to be other than temporary, as well as interest, dividends and capital
gains distributions on all securities are included in earnings.
13
7
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While it is the intent of management to hold securities to maturity, unforeseen
events, while not generally expected, could cause the Company to liquidate
certain securities prior to maturity. Accordingly, those securities which could
readily be sold back to the seller are classified as available-for-sale.
Securities, such as bank time deposits, which by their nature are typically held
to maturity are classified as such. The following is a summary of
available-for-sale and held-to-maturity securities at November 1, 1997, November
2, 1996 and October 28, 1995:
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------------------------------------- ----------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
1997 COST GAINS LOSSES FAIR VALUE COST
=======================================================================================================================
Cash equivalents:
Commercial paper $249,053 $ - $ - $ 249,053 $ -
Euro time deposits - - - - 16,810
Short-term investments:
Commercial paper 38,085 - - 38,085 -
Certificates of deposit 10,000 - - 10,000 -
Bankers' acceptances 2,921 - - 2,921 -
Long-term investments:
Equity securities 3,433 165 200 3,398 -
Euro time deposits - - - - 1,556
Bank money market fund 9,250 - - 9,250 -
- -----------------------------------------------------------------------------------------------------------------------
Total $312,742 $ 165 $ 200 $312,707 $18,366
=======================================================================================================================
1996
=======================================================================================================================
Cash equivalents:
Commercial paper $ 83,713 $ - $ - $ 83,713 $ -
Euro time deposits - - - - 94,656
Certificates of deposit 8,000 - - 8,000 -
Short-term investments:
Commercial paper 89,810 - - 89,810 -
Long-term investments:
Equity securities 4,186 386 2 4,570 -
Euro time deposits - - - - 836
Bank money market fund 19 - - 19 -
- -----------------------------------------------------------------------------------------------------------------------
Total $185,728 $ 386 $ 2 $ 186,112 $95,492
=======================================================================================================================
1995
=======================================================================================================================
Cash equivalents:
Commercial paper $ 27,727 $ - $ - $ 27,727 $ -
Euro time deposits - - - - 31,300
Short-term investments:
Commercial paper 73,874 - - 73,874 -
Bankers' acceptances 2,936 - - 2,936 -
Euro time deposits - - - - 5,000
- -----------------------------------------------------------------------------------------------------------------------
Total $104,537 $ - $ - $ 104,537 $36,300
=======================================================================================================================
Cash equivalents and short-term investments classified as available-for-sale and
held-to-maturity at November 1, 1997, November 2, 1996 and October 28, 1995 have
contractual maturities of six 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 unrealized gains or losses were recorded during each of
these years. Long-term bank time deposits, although renewed on a continual
basis, typically have original maturities of two weeks. As such, they are price
insensitive to changes in market interest rates and amortized cost therefore
approximates fair value. Bank money market funds, which have been categorized as
long-term investments, by their nature maintain a constant par value of $1 per
share. Amortized cost for these securities, therefore, approximates fair value.
14
8
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of long-term equity securities was determined based on published
market quotes at October 31, 1997 and November 1, 1996. Realized gains and
losses from the sale of available-for-sale securities were not material in
fiscal 1997, fiscal 1996 and fiscal 1995.
The fair value of trading securities at November 1, 1997 was $9 million and was
determined based on published market quotes at October 31, 1997. Gross realized
gains from the sale of trading securities for the year ended November 1, 1997
were not material. There were no gross realized losses from the sale of trading
securities for the year ended November 1, 1997.
c. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories at November 1, 1997, November 2, 1996 and October 28, 1995
were as follows:
1997 1996 1995
- ------------------------------------------------------------------------------
Raw materials $ 31,526 $ 31,039 $ 22,327
Work in process 128,187 115,799 77,526
Finished goods 66,253 72,039 44,109
- ------------------------------------------------------------------------------
Total inventories $ 225,966 $ 218,877 $ 143,962
==============================================================================
A director of a raw material supplier was also a director of the Company through
January 1995. Total purchases from this supplier approximated $11,038,000
through January 1995. The Company believes that the terms of these purchases
were comparable to those available from other suppliers.
d. 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
$101,432,000, $81,740,000 and $62,066,000 in 1997, 1996 and 1995, respectively.
15
9
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
e. INTANGIBLE ASSETS
Intangible assets at November 1, 1997 consist of goodwill, patents and other
intangibles. Goodwill is being amortized on a straight-line basis over a
fifteen-year period. Patents and other intangibles are being amortized on a
straight-line basis over their estimated economic lives which range from ten to
fifteen years. Amortization expense for all intangible assets was $2,122,000,
$2,069,000 and $2,032,000 in 1997, 1996 and 1995, respectively. Accumulated
amortization for all intangible assets was $14,859,000, $12,737,000 and
$10,668,000 at November 1, 1997, November 2, 1996 and October 28, 1995,
respectively. On a periodic basis, the Company estimates the future undiscounted
cash flows of the businesses to which the intangible assets relate in order to
ensure that the carrying value of such intangible assets has not been impaired.
f. 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.
g. 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. Net foreign
currency transaction gains or losses included in other expenses, net, were not
material in fiscal 1997, 1996 and 1995.
h. 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 Japanese yen and European currencies. These foreign exchange contract,
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 exchange contracts outstanding were $163
million, $147 million and $182 million at November 1, 1997, November 2, 1996 and
October 28, 1995, respectively.
16
10
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 which 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 $29 million, $28 million and $27 million at November
1, 1997, November 2, 1996 and October 28, 1995, respectively. Deferred gains or
losses attributable to foreign currency option contracts were not material at
November 1, 1997, November 2, 1996 and October 28, 1995.
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 $10.0 million at November 1, 1997, November 2, 1996 and
October 28, 1995. The currency swap agreement outstanding at November 1, 1997
has a remaining maturity of 2.5 years and is expected to remain in effect until
expiration.
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 ten 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 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 $50 million, at November 1, 1997,
November 2, 1996 and October 28, 1995.
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.
17
11
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
i. 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.
NOVEMBER 1, 1997 NOVEMBER 2, 1996 OCTOBER 28, 1995
---------------- ---------------- ----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $289,601 $289,601 $210,109 $210,109 $69,303 $69,303
Short-term investments 51,006 51,006 89,810 89,810 81,810 81,810
Long-term investments 23,168 23,168 5,425 5,425 - -
Liabilities:
Short-term borrowings - - (178) (178) (2,299) (2,299)
Long-term debt, including
current portion (310,000) (427,640) (310,000) (369,513) (80,000) (80,130)
Foreign Currency Instruments and
Interest Rate Agreements:
Interest rate swap
and cap agreements (31) (413) 18 (491) (30) (175)
Forward foreign currency
exchange contracts 2,260 (400) 2,672 3,585 7,798 9,089
Foreign currency option
contracts 267 187 130 240 388 1,645
Currency swap agreements 1,632 1,363 1,131 922 413 485
- -----------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, cash equivalents and 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.
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,
degree of risk and remaining maturities.
Interest rate swap and cap agreements-The fair value of interest rate swap and
cap agreements are 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.
18
12
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
j. 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.
k. CONCENTRATIONS OF CREDIT RISK
Financial instruments which 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 which may not be collected.
l. 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. 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.
m. REVENUE RECOGNITION
Revenue from product sales to end users is recognized upon shipment. A portion
of the Company's sales are made to domestic distributors under agreements
allowing for price protection and certain rights of return. Under these domestic
distributor agreements where pricing concessions and future returns cannot be
reasonably estimated, the Company defers recognition of such sales and related
gross margin until the merchandise is sold by the distributors. In fiscal 1997,
the Company entered into other agreements with some domestic distributors
covering the sale of selected products. Under these new agreements, price
concessions and future returns are restricted and can be reasonably estimated.
Accordingly, the Company recognizes revenue upon shipment of products covered by
these agreements and provides specific reserves for possible returns and
allowances. For sales to international distributors, the Company recognizes the
sale upon shipment, but provides specific reserves for possible returns and
allowances.
n. INCOME TAXES
Income taxes have been provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," under which
deferred tax liabilities and assets at the end of each period are determined
based on the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases using the tax rate expected to be in effect when the
taxes are actually paid or recovered. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance.
19
13
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
o. 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. In fiscal 1997, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 requires the recognition of, or
disclosure of, compensation expense for grants of stock options or other equity
instruments issued to employees based on their fair value at the date of grant.
As permitted by FAS 123, the Company elected the disclosure requirements instead
of recognition of compensation expense and therefore will continue to apply
existing accounting rules.
p. EARNINGS PER SHARE OF COMMON STOCK
The Company computes its earnings per share in accordance with the provisions of
the Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings Per Share."
Primary earnings per common share are computed based on the weighted average
number of common shares outstanding during the year, adjusted for incremental
shares assumed issued (including incremental shares for 3 1/2% convertible debt)
for dilutive common stock equivalents. Fully diluted earnings per share do not
differ materially from primary earnings per share. In February 1997, the
Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share," ("FAS 128") which supersedes APB 15 and is required to be adopted in
financial statements issued after December 31, 1997. For the first quarter of
fiscal 1998, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements, primary and fully diluted earnings per share will be replaced by
basic and diluted earnings per share. Basic earnings per share is computed based
only on the weighted average number of common shares outstanding during the
period and the dilutive effect of stock options is excluded. Diluted earnings
per share is computed essentially in the same manner as fully diluted earnings
per share with some exceptions. The primary exception affecting the Company is
that the dilutive effect of stock options is always based on the average market
price of the stock during the period, not the higher of the average and period
end market price as required under APB 15.
If the Company computed its earnings per share based on FAS 128, the pro forma
amounts for basic and diluted earnings per share would have been as follows:
1997 1996 1995
- --------------------------------------------------------------------------------------------------
Basic Earnings Per Share $1.13 $1.12 $0.79
Diluted Earnings Per Share $1.04 $1.03 $0.75
- --------------------------------------------------------------------------------------------------
q. NEW ACCOUNTING STANDARDS
The Company has not yet adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which will require adoption in fiscal 1999. The Company is in the
process of determining the effect of adoption of these statements on its
consolidated financial statements and related disclosures.
20
14
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
INDUSTRY
The Company operates predominantly in one industry segment: the design,
manufacture and marketing of a broad line of high-performance linear,
mixed-signal and digital integrated circuits that address a wide range of
real-world signal processing applications.
GEOGRAPHIC INFORMATION
The Company operates in three major geographic areas. Information on the
Company's geographic operations is set forth in the table below. 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 in the
table include export sales of $147,601,000, $159,862,000 and $97,446,000 in
1997, 1996 and 1995, respectively. Transfers between geographic areas are
negotiated based on market comparables. Operating income reflects the allocation
of corporate expenses of $22,049,000, $24,093,000 and $23,190,000 in 1997, 1996
and 1995, respectively, to the appropriate geographic area based upon their
beneficial and causal relationship to each area. Corporate identifiable assets
consist of cash equivalents, short-term investments and intangible assets.
GEOGRAPHIC SEGMENT INFORMATION 1997 1996 1995
=======================================================================================================================
SALES North America, including export............. $ 711,252 $ 658,627 $ 509,625
Europe...................................... 359,333 364,308 264,401
Asia........................................ 172,909 170,851 167,520
----------- ----------- -----------
Total sales............................... $ 1,243,494 $ 1,193,786 $ 941,546
=========== =========== ===========
TRANSFERS North America, including export............. $ 334,783 $ 348,574 $ 286,021
BETWEEN Europe...................................... 240,592 189,911 141,925
AREAS Asia........................................ 48,131 39,749 30,180
----------- ----------- -----------
Total transfers between areas............. $ 623,506 $ 578,234 $ 458,126
=========== =========== ===========
OPERATING North America, including export............. $ 103,173 $ 121,877 $ 92,640
INCOME Europe...................................... 125,118 103,158 63,627
Asia........................................ 5,125 2,104 1,500
----------- ----------- -----------
Total operating income.................... $ 233,416 $ 227,139 $ 157,767
=========== =========== ===========
IDENTIFIABLE North America............................... $ 891,345 $ 734,637 $ 437,532
ASSETS Europe...................................... 398,033 364,084 290,008
Asia........................................ 142,838 116,527 107,742
Corporate................................... 331,637 293,024 158,067
----------- ----------- -----------
Total assets.............................. $ 1,763,853 $ 1,508,272 $ 993,349
=========== =========== ===========
21
15
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
Investments at November 1, 1997, November 2, 1996 and October 28, 1995 were as
follows:
1997 1996 1995
=======================================================================================================================
WaferTech, LLC $ 86,715 $ 42,073 $ -
CSM 20,784 20,784 13,980
Other 23,969 5,525 -
- -----------------------------------------------------------------------------------------------------------------------
$ 131,468 $ 68,382 $ 13,980
=======================================================================================================================
In June 1996, the Company entered into a joint venture agreement with Taiwan
Semiconductor Manufacturing Co., Ltd., two other companies and several
individual investors for the construction and operation of a semiconductor
fabrication facility in Camas, Washington. The Company received an 18% equity
ownership in the joint venture, known as WaferTech, in return for a $140 million
investment. The investment was made in three installments. The first installment
of $42 million was paid in fiscal 1996. A second installment of $42 million was
paid in fiscal 1997 and the remaining installment of $56 million was paid in
fiscal 1998 on November 3, 1997. In addition, the Company has an obligation to
guarantee its pro rata share of debt incurred by WaferTech, up to a maximum for
the Company of $45 million. The Company is applying the equity basis of
accounting to this investment in WaferTech based on the Company's ability to
exercise significant influence on the operating and financial policies of the
joint venture. The operating results of this joint venture to date have not been
material.
The Company has an equity investment in Chartered Semiconductor Manufacturing
Pte., Ltd. in Singapore of approximately $21 million which represents a less
than 5% ownership interest. The Company accounts for this investment under the
cost method and therefore 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."
Other investments consist primarily of long-term investments in debt and equity
securities.
5. ACCRUED LIABILITIES
Accrued liabilities at November 1, 1997, November 2, 1996 and October 28, 1995
consisted of the following:
1997 1996 1995
=======================================================================================================================
Accrued compensation
and benefits $ 49,089 $ 48,848 $ 47,785
Other 26,355 27,801 18,054
- -----------------------------------------------------------------------------------------------------------------------
Total accrued liabilities $ 75,444 $ 76,649 $ 65,839
=======================================================================================================================
22
16
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT AND CREDIT FACILITIES
3 1/2% NOTES
On December 18, 1995, the Company completed a public offering of $230,000,000 of
five-year 3 1/2% Convertible Subordinated Notes due December 1, 2000 with
semiannual interest payments due on June 1 and December 1. The Notes are
convertible, at the option of the holder, into the Company's common stock at any
time, unless previously redeemed by the Company, at a conversion price of
$20.938 per share, subject to adjustment in certain events.
6 5/8% NOTES
On March 11, 1993, the Company completed a public offering of $80 million of
seven-year 6 5/8% Notes due March 1, 2000 with semiannual interest payments due
on March 1 and September 1. Simultaneous with the sale of the Notes, the Company
entered into an interest rate swap and cap agreement for the term of the Notes
having a notional principal amount of $40 million whereby the effective net
interest rate on $40 million of the Notes will be the six-month LIBOR rate (up
to a maximum of 7%) plus 1.4%. For the year ended November 1, 1997, the net
effective interest rate on $40 million of the Notes was 7.5% after giving effect
to the interest rate swap agreement.
REVOLVING CREDIT AGREEMENT AND LINES OF CREDIT
The Company has a revolving credit agreement with several banks which commits
them to lend up to $60,000,000. The credit agreement requires the Company to
maintain stated minimum net worth and current ratio levels, plus a stated
maximum ratio of total liabilities to net worth. In addition, the credit
agreement restricts the aggregate of all cash dividend payments declared or made
subsequent to November 2, 1996 to an amount not exceeding $150,000,000 plus 50%
of the consolidated net income of the Company for the period from November 3,
1996 through the end of the Company's then most recent fiscal quarter. At
November 1, 1997 this amount was equal to $239,110,000. At November 1, 1997, the
Company was in compliance with all covenants under the credit agreement.
Long-term debt at November 1, 1997, November 2, 1996 and October 28, 1995 consisted of the following:
1997 1996 1995
==================================================================================================================
3 1/2% Convertible Subordinated
Notes due 2000 $ 230,000 $ 230,000 $ -
6 5/8% Notes due 2000 80,000 80,000 80,000
- ------------------------------------------------------------------------------------------------------------------
Long-term debt $ 310,000 $ 310,000 $ 80,000
==================================================================================================================
Aggregate principal payments on long-term debt and short-term borrowings for the
following fiscal years are: 2000-$80 million; and 2001-$230 million.
23
17
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under various
operating and capital leases which expire at various dates through 2010. 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 $13,058,000, $11,573,000 and
$11,243,000 in 1997, 1996 and 1995, respectively.
The following is a schedule of future minimum lease payments under capital
leases and rental payments required under long-term operating leases at November
1, 1997:
OPERATING CAPITAL
FISCAL YEARS LEASES LEASES
=======================================================================================================================
1998 $ 11,229 $ 13,416
1999 10,608 13,398
2000 8,369 13,361
2001 4,997 6,652
2002 2,617 4,745
Later Years 3,883 3,700
- -----------------------------------------------------------------------------------------------------------------------
Total $ 41,703 55,272
=========
Less amount representing interest (4,687)
---------
Present value of minimum lease payments $ 50,585
=========
Net property, plant and equipment includes the following for capital leases:
1997 1996 1995
=======================================================================================================================
Land and buildings $ - $ - $ 1,828
Machinery and equipment 68,912 61,793 829
- -----------------------------------------------------------------------------------------------------------------------
68,912 61,793 2,657
Less accumulated amortization (13,859) (4,198) (2,639)
- -----------------------------------------------------------------------------------------------------------------------
Net capital leases $ 55,053 $ 57,595 $ 18
=======================================================================================================================
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company was a defendant in two lawsuits brought in Texas by Texas
Instruments, Inc. ("TI"), alleging patent infringement, including patent
infringement arising from certain plastic encapsulation processes, and seeking
an injunction and unspecified damages against the Company. The alleged
infringement of one of these patents was also the subject matter of a proceeding
brought by TI against the Company before the International Trade Commission
("ITC"). On January 10, 1994, the ITC brought an enforcement proceeding against
the Company alleging that the Company had violated the ITC's cease and desist
order of February 1992 (as modified in July 1993), which prohibited the
Company's importation of certain plastic encapsulated circuits, and seeking
substantial penalties against the Company for these alleged violations. In
addition, in June 1992, the Company commenced a lawsuit against TI in
Massachusetts alleging certain TI digital signal processors infringed one of the
Company's patents. Effective April 1, 1995, the Company and TI settled both
Texas lawsuits and the Massachusetts lawsuit principally by means of a
royalty-free cross license of certain of the Company's and TI's patents.
24
18
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 25, 1995, the Company filed with the ITC a motion to terminate the ITC
enforcement proceeding on the grounds that further action by the ITC was
unnecessary in light of the Company's settlement with TI. On May 8, 1995, an
Administrative Law Judge issued a recommended determination to the ITC to grant
the Company's motion to terminate the ITC proceeding. The investigative office
of the ITC opposed the motion, claiming that, notwithstanding the Company's
settlement with TI, the Company's alleged violation of the ITC's cease and
desist order warranted the imposition of substantial penalties. On September 11,
1996, the ITC adopted the determination of the Administrative Law Judge to
terminate the enforcement proceeding and referred to the Department of Justice
by letter certain allegations that the Company made false representations in
reports filed with the ITC. The Company advised the Department of Justice that
it has consistently and vigorously denied such allegations during the entire
course of the proceedings before the ITC and the Department of Justice informed
the Company that its statement would be considered in connection with any action
it may take on the matter. The Company is aware of no further activity by the
Department of Justice, and is unable to determine whether further activity will
occur regarding the foregoing matter.
In addition, 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 and product
liability. Such litigation includes patent infringement actions brought against
the Company by Sextant Avionique, S.A. in France and the United States and
Commissariat A. L'energie Atomique C.E.A. in France, claiming that the Company's
accelerometer infringes certain patents. In the French proceeding commenced by
Sextant Avionique, S.A., the French court has found that the Company has
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 does not believe that this decision will
have any material adverse effect on its consolidated financial position or
consolidated results of operations. As to other pending 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 or consolidated results of operations. However,
an adverse resolution could have an adverse effect on the Company's consolidated
results of operations in the quarter in which these matters are resolved.
IRISH GRANTS
The Company's manufacturing facility in Limerick, Ireland has received operating
and capital grants from Ireland's Industrial Development Authority. A liability
to repay up to $18 million of the grants received by the Company would arise in
the unlikely event the Company should discontinue its Irish operations prior to
the commitment periods noted in the grant agreements which expire at various
dates through 2006.
WAFER SUPPLY AGREEMENTS
In fiscal 1997, in accordance with a previous agreement, the Company paid $12
million to Chartered Semiconductor Manufacturing Pte., Ltd. for a total deposit
of $20 million. This deposit is classified in the balance sheet line item "Other
assets." Under the terms of this agreement, the deposit will guarantee access to
certain quantities of sub-micron wafers through fiscal 2000. If the Company does
not purchase the minimum quantities under the agreement, the deposit will be
forfeited for the value of the wafer shortfall up to the total amount of $20
million. At the end of the agreement term, the Company's deposit will be
returned, net of any forfeitures.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1997, the stockholders approved an amendment to the Company's Articles
of Organization to increase the authorized number of shares of common stock from
450,000,000 to 600,000,000.
25
19
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PLANS
The 1988 Stock Option Plan provides for the issuance of nonstatutory and
incentive stock options to purchase up to 29,900,000 shares of common stock.
Under this plan, options may be granted to selected employees of the Company and
its subsidiaries at a price not less than 100% of the fair market value of the
underlying stock on the date of grant. The Company's 1980 Stock Option Plan was
terminated upon adoption of the 1988 Stock Option Plan; however, options to
purchase common stock remain outstanding under that 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 which 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.
Under the 1994 Director Option Plan, each nonemployee director is granted
annually for four years a nonstatutory option to purchase 10,500 shares of
common stock at an exercise price equal to the fair market value on the date of
grant. A total of 400,000 shares of common stock may be issued under this plan.
These options 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 and the
1989 Director Stock Option Plan. Options granted under these plans 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, October 29, 1994 7,743 12,593 $ 4.40
- -----------------------------------------------------------------------------------------------------------------------
Shares authorized for 1994 Director Stock Option Plan 400 - -
Options granted (3,550) 3,550 $ 10.39
Options exercised - (1,416) $ 2.80
Options canceled (1) 495 (524) $ 5.70
Shares canceled upon termination of
1992 Director Option Plan (91) - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, October 28, 1995 4,997 14,203 $ 6.01
- -----------------------------------------------------------------------------------------------------------------------
Additional shares authorized for 1988 Stock Option Plan 9,200 - -
Options granted (3,881) 3,901 $ 16.22
Options exercised - (2,072) $ 2.80
Options canceled (1) 451 (454) $ 10.37
- -----------------------------------------------------------------------------------------------------------------------
Balance, November 2, 1996 10,767 15,578 $ 8.87
- -----------------------------------------------------------------------------------------------------------------------
Options granted (4,081) 4,081 $ 23.33
Options exercised - (2,432) $ 4.21
Options canceled (1) 312 (322) $ 14.13
- -----------------------------------------------------------------------------------------------------------------------
Balance, November 1, 1997 6,998 16,905 $ 12.92
=======================================================================================================================
(1) Options canceled which were originally issued from the 1988 Stock Option
Plan and the 1994 Director Option Plan are available for subsequent grants.
The remaining options canceled in 1997, 1996 and 1995 were issued from the
1980 Stock Option and 1992 Director Option Plans under which no further
options will be granted.
26
20
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At November 1, 1997, options to purchase 3,434 shares of common stock were
exercisable (3,588 at November 2, 1996 and 3,979 at October 28, 1995).
The following table summarizes information about options outstanding at November
1, 1997:
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE 11/1/97 LIFE (YEARS) PRICE AT 11/1/97 PRICE
- -----------------------------------------------------------------------------------------------------------------------
$ 1.96 - $ 6.63 2,771 4.02 $ 3.03 2,726 $ 2.98
$ 7.04 - $ 13.44 6,434 6.69 $ 8.88 679 $ 7.81
$ 14.63 - $ 20.25 3,707 8.10 $ 16.32 23 $ 17.59
$ 20.44 - $ 26.75 3,905 9.31 $ 23.08 6 $ 24.53
$ 27.38 - $ 34.63 88 9.70 $ 30.38 - $ -
- -----------------------------------------------------------------------------------------------------------------------
$ 1.96 - $ 34.63 16,905 7.18 $ 12.92 3,434 $ 4.07
=======================================================================================================================
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 579,200 shares in 1997 (664,200 and 835,700 in 1996 and 1995,
respectively) for $10.2 million ($9.0 million and $6.9 million in 1996 and 1995,
respectively). At November 1, 1997, 964,200 common shares remained available for
issuance under the stock purchase plan.
Under the 1991 Restricted Stock Plan, a maximum of 2,700,000 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
which provided for the issuance of up to 7,372,800 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. Shares awarded under
the Company's restricted stock plans, net of cancellations, for 1997, 1996 and
1995 were 168,000, 212,000 and 20,000, respectively. The fair market value of
the shares at the date of award was accounted for as deferred compensation and
is being amortized over the restricted period. During 1997, 1996 and 1995,
$2,309,000, $1,949,000 and $1,672,000, respectively, of such compensation was
charged to expense. At November 1, 1997, there were 815,000 shares of common
stock available for issuance under the 1991 Restricted Stock Plan.
As of November 1, 1997, a total of 36,647,062 common shares were reserved for
issuance under the Company's stock plans.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 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 recognized no compensation
expense with respect to such awards.
27
21
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 which 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
---------------------- -----------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Expected life (years) 6.2 6.2 1.0 1.0
Expected stock price volatility 47.7% 43.5% 56.0% 55.8%
Risk-free interest rate 6.2% 5.7% 5.8% 5.8%
- -----------------------------------------------------------------------------------------------------------------------
The following is a summary of weighted average grant date values generated by
application of the Black-Scholes model:
WEIGHTED AVERAGE GRANT DATE VALUE
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Stock option plans $ 12.68 $8.36
ESPP $ 9.53 $7.37
- -----------------------------------------------------------------------------------------------------------------------
As required under FAS 123, the reported net income and 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:
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income $170,173 $170,717
Pro forma earnings per share $0.97 $1.00
- -----------------------------------------------------------------------------------------------------------------------
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 will not be fully reflected until 2000.
PREFERRED STOCK
The Company has 500,000 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.
COMMON STOCK PURCHASE RIGHTS
In 1988, the Board of Directors adopted a Stockholder Rights Plan which was
amended in 1989. Pursuant to the Stockholder Rights Plan, each share of common
stock has an associated right. Under certain circumstances, each right entitles
the holder to purchase from the Company one share of common stock at an exercise
price of $20.00 per share, subject to adjustment.
28
22
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 days after a person acquires 20% or more or makes a
tender offer for 30% or more of the Company's common stock. If, after the rights
become exercisable, (i) any person becomes the owner of 20% or more of the
Company's common stock, or (ii) the Company is the surviving entity in a merger
with a 20% or more stockholder, or (iii) a 20% or more stockholder engages in
certain "self-dealing" transactions with the Company, each right not owned by
such person will entitle its holder to purchase, at the right's exercise price,
common stock having a value of two times the exercise price of the right. In
addition, if the Company is either (i) acquired in a merger or other business
combination in which the Company is not the surviving entity, or (ii) sells or
transfers 50% or more of its assets or earning power to another party, each
right will entitle its holder to purchase, upon exercise, common stock of the
acquiring Company having a value equal to two times the exercise price of the
right.
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 February 12, 1998 but may be redeemed by the Company for $.0067
per right at any time prior to the tenth day following a person's acquisition of
20% or more of the Company's common stock. So long as the rights are not
separately transferable, the Company will issue one right with each new share of
common stock issued.
10. 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 contributed an amount equal to
each participant's contribution, if any, up to a maximum of 2% of each
participant's total eligible compensation. During fiscal 1996, the Company's
contributions increased to match an additional 50% of employee contributions
between 2% and 4% of total eligible compensation. 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 in 1997, 1996 and 1995 was $19 million,
$17 million and $14 million, respectively, which primarily consists of costs
related to the domestic defined contribution plan. Also included in total
expense is pension expense related to foreign defined benefit plans of
approximately $3 million for 1997, 1996 and 1995. Summary data related to these
foreign plans at November 1, 1997 is as follows: accumulated benefit obligation,
substantially vested, of $26 million; projected benefit obligation of $51
million; plan assets at fair value of $51 million; discount rates ranging from
4% to 12%; compensation increase rates ranging from 3% to 10% and expected rate
of return on assets ranging from 0% to 13%.
29
23
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory rates to
income tax expense is as follows:
LIABILITY METHOD
----------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Income tax provision reconciliation:
Tax at statutory rate $ 82,578 $ 80,759 $ 55,803
Irish income subject to lower tax rate (19,880) (17,813) (13,436)
Change in valuation allowance (1,835) (2,641) -
State income taxes, net of federal benefit 964 1,338 1,833
Research and development tax credits (5,000) (1,300) (325)
Foreign Sales Corporation (3,161) (3,575) (3,200)
Amortization of goodwill 528 506 503
Net foreign tax in excess of (less than)
U.S. federal statutory tax rate 2,765 957 (1,076)
Other, net 701 608 63
- -----------------------------------------------------------------------------------------------------------------------
Total income tax provision $ 57,660 $ 58,839 $ 40,165
=======================================================================================================================
For financial reporting purposes, income before income taxes includes the
following components:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Pretax income:
Domestic $ 84,599 $ 101,760 $ 76,230
Foreign 151,280 128,980 83,205
- -----------------------------------------------------------------------------------------------------------------------
$ 235,879 $ 230,740 $ 159,435
=======================================================================================================================
The components of the provision for income taxes are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 35,500 $ 34,278 $ 32,860
Foreign 26,811 15,737 16,734
State 1,483 2,100 2,820
- -----------------------------------------------------------------------------------------------------------------------
Total current $ 63,794 $ 52,115 $ 52,414
=======================================================================================================================
Deferred (prepaid):
Federal $ (3,364) $ 1,318 $ (10,887)
Foreign (2,770) 5,406 (1,362)
- -----------------------------------------------------------------------------------------------------------------------
Total deferred (prepaid) $ (6,134) $ 6,724 $ (12,249)
=======================================================================================================================
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 $470,468,000 of unremitted earnings of international
subsidiaries.
The Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets that may not be realized due to the expiration of book
and tax capital losses. For tax purposes, the Company has a capital tax loss
carryforward of approximately $13,009,000 expiring through the year 2002. The
balance for the valuation allowance for deferred assets was $5.6 million at
November 1, 1997, $7.4 million at November 2, 1996 and $10.0 million at October
28, 1995.
30
24
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets and liabilities
for the fiscal years ended November 1, 1997, November 2, 1996 and October 28,
1995 are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Inventory reserves $ 21,734 $ 20,061 $ 18,309
Capital loss carryover 5,559 7,394 8,513
Deferred income on shipments to distributors 13,601 12,518 7,898
Reserves for compensation and benefits 6,965 5,330 4,274
Restricted stock 2,689 1,893 2,031
Intercompany profits in foreign inventories 4,973 3,965 5,335
Reserve for bad debts 6,508 2,242 1,171
Foreign tax credits 1,795 381 2,301
Other 2,289 1,739 4,646
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 66,113 55,523 54,478
Valuation allowance for deferred tax assets (5,559) (7,394) (10,035)
- -----------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 60,554 $ 48,129 $ 44,443
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ (26,533) $ (20,242) $ (9,832)
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred liabilities $ (26,533) $ (20,242) $ (9,832)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 34,021 $ 27,887 $ 34,611
=======================================================================================================================
31
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 November 1, 1997, November 2, 1996 and October 28, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended November 1, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Analog
Devices, Inc. at November 1, 1997, November 2, 1996 and October 28, 1995, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended November 1, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
------------------------------
Boston, Massachusetts
December 2, 1997
32
26
ANALOG DEVICES, INC.
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 1997 and fiscal 1996 (thousands of
dollars except as noted):
4Q97 3Q97 2Q97 1Q97 4Q96 3Q96 2Q96 1Q96
- -----------------------------------------------------------------------------------------------------------------------
Net sales 332,479 318,139 300,813 292,063 304,647 305,042 303,328 280,769
- -----------------------------------------------------------------------------------------------------------------------
Cost of sales 164,336 158,816 150,544 148,621 152,121 152,331 150,362 138,219
Gross margin 168,143 159,323 150,269 143,442 152,526 152,711 152,966 142,550
% of sales 51% 50% 50% 49% 50% 50% 50% 51%
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 52,781 49,895 47,768 45,704 46,498 45,569 44,848 40,857
Selling, marketing, general
and administrative 50,684 48,939 46,859 45,131 48,460 48,562 50,017 48,803
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 103,465 98,834 94,627 90,835 94,958 94,131 94,865 89,660
% of sales 31% 31% 31% 31% 31% 31% 31% 32%
- -----------------------------------------------------------------------------------------------------------------------
Operating income 64,678 60,489 55,642 52,607 57,568 58,580 58,101 52,890
% of sales 20% 19% 19% 18% 19% 19% 19% 19%
- -----------------------------------------------------------------------------------------------------------------------
Nonoperating expenses (income):
Interest expense 2,804 2,950 2,973 3,780 3,155 3,266 3,040 1,828
Interest income (4,642) (4,166) (3,976) (3,394) (4,141) (3,688) (4,807) (3,899)
Other 325 413 477 (7) 626 (181) 417 783
- -----------------------------------------------------------------------------------------------------------------------
Total nonoperating
(income) expense (1,513) (803) (526) 379 (360) (603) (1,350) (1,288)
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 66,191 61,292 56,168 52,228 57,928 59,183 59,451 54,178
% of sales 20% 19% 19% 18% 19% 19% 20% 19%
- -----------------------------------------------------------------------------------------------------------------------
Provision for income taxes 15,238 15,323 14,051 13,048 13,908 15,387 15,458 14,086
- -----------------------------------------------------------------------------------------------------------------------
Net income 50,953 45,969 42,117 39,180 44,020 43,796 43,993 40,092
% of sales 15% 14% 14% 13% 14% 14% 15% 14%
Per share .29 .27 .25 .23 .26 .26 .26 .25
- -----------------------------------------------------------------------------------------------------------------------
Shares used to compute
earnings per share
(in thousands) 179,408 177,773 176,721 175,950 174,082 172,921 172,576 165,576
- -----------------------------------------------------------------------------------------------------------------------
33