UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

Filed by the Registrant x

Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement

o		Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x		Definitive Proxy Statement

o		Definitive Additional Materials

o		Soliciting Material Pursuant to § 240.14a-12

Analog Devices, Inc.

Payment of Filing Fee (Check the appropriate box):

x No fee required.

o Fee computed on table below per Exchange Act Rules l4a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.

o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount previously paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

 

 

February 8, 2006

 

Dear Shareholder:

 

You are cordially invited to attend the Annual Meeting of Shareholders to be held at 10:00 a.m. on Tuesday, March 14, 2006, at Babson College, Babson Park, Massachusetts in the Sorenson Center for the Arts.

 

At the Annual Meeting, we will consider the matters set forth in the accompanying notice of annual meeting and proxy statement, which includes a recommendation by the Company for a new stock incentive plan.

 

If approved, the new plan will decrease the total number of shares available for issuance and will diversify the equity-based portion of our compensation awards to allow for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. If our proposed plan is approved, our existing stock option plans will terminate, except for the options currently outstanding under those plans. We believe that the flexibility of using alternative forms of equity compensation will enhance the retention of key employees while being less dilutive to shareholders’ ownership.

 

Analog Devices has successfully used stock options to attract and retain employees since the Company was founded 40 years ago. As shown in the tables on pages 36 and 37, in order to facilitate our objective of attracting and retaining valuable technical talent, we have regularly granted most options to a very broad base of employees. Approximately 93% of our employees receive stock options and only a small portion of options are granted to officers. Historically, we have also generally distributed 95% of our annual option grants to employees who are not named executive officers. We believe that our stock option program has been very successful throughout Analog’s history in both motivating employees and enhancing shareholder value.

 

Despite the importance of stock options to the retention of our key employees, we have been sensitive to the potential dilution to our shareholders. As a result, during the past five years, we have been steadily reducing our net option grants from 4.3% of outstanding shares in fiscal 2001 to 2.3% in fiscal 2006. We have a goal of reducing our net annual dilution from equity-based compensation to below 2% in future years.

 

The 2006 Stock Incentive Plan proposal is more fully described beginning on page 35. We encourage you to review the proposal and urge you to vote in favor of the new plan.

 

We have long believed that good corporate governance is important to ensure that Analog Devices is managed for the long-term benefit of its shareholders. During the past year, our Board of Directors has taken a number of actions more fully described on page 11 to enhance our governance practices. These actions include the following:

 

 

Please carefully review the attached proxy materials and take the time to cast your vote.

 

Yours sincerely,

 

ANALOG DEVICES, INC.
ONE TECHNOLOGY WAY
NORWOOD, MASSACHUSETTS 02062-9106

 

NOTICE OF 2006 ANNUAL MEETING OF SHAREHOLDERS

 

To Be Held On March 14, 2006

 

To our Shareholders:

 

The 2006 Annual Meeting of Shareholders of Analog Devices, Inc. will be held at Babson College, Sorenson Center for the Arts, 231 Forest Street, Babson Park, Massachusetts 02457, on Tuesday, March 14, 2006 at 10:00 a.m. local time. At the meeting, shareholders will consider and vote on the following matters:

 

 

The shareholders will also act on any other business that may properly come before the meeting.

 

Shareholders of record at the close of business on January 13, 2006 are entitled to vote at the meeting. Your vote is important regardless of the number of shares you own. Whether you expect to attend the meeting or not, please complete, sign, date and promptly return the enclosed proxy card in the postage-prepaid envelope we have provided. You can also vote your shares over the Internet or by telephone as provided in the instructions set forth on the proxy card. Your prompt response is necessary to assure that your shares are represented at the meeting. You can change your vote and revoke your proxy at any time before the polls close at the meeting by following the procedures described in the accompanying proxy statement.

 

All shareholders are cordially invited to attend the meeting.

 

By order of the Board of Directors,

 

Margaret K. Seif

Secretary

 

Norwood, Massachusetts

February 8, 2006

TABLE OF CONTENTS

 

ANALOG DEVICES, INC.
ONE TECHNOLOGY WAY
NORWOOD, MASSACHUSETTS 02062-9106

 

PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS

 

March 14, 2006

 

This proxy statement contains information about the 2006 Annual Meeting of Shareholders of Analog Devices, Inc. The meeting will be held on Tuesday, March 14, 2006, beginning at 10:00 a.m. local time, at Babson College, Sorenson Center for the Arts, 231 Forest Street, Babson Park, Massachusetts 02457.

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Analog Devices, which is also referred to as Analog, ADI or the Company in this proxy statement, for use at the annual meeting and at any adjournment of that meeting. All proxies will be voted in accordance with the instructions they contain. If no instruction is specified on a proxy, it will be voted in favor of the matters set forth in the notice of the meeting other than the shareholder proposal and it will be voted against the shareholder proposal. A shareholder may revoke any proxy at any time before it is exercised by giving our secretary written notice to that effect.

 

Our Annual Report to Shareholders for the fiscal year ended October 29, 2005 is being mailed to shareholders with the mailing of these proxy materials on or about February 8, 2006.

 

A copy of our Annual Report on Form 10-K for the fiscal year ended October 29, 2005 as filed with the Securities and Exchange Commission, except for exhibits, will be furnished without charge to any shareholder upon written or oral request to Analog Devices, Inc., Attention of Maria Tagliaferro, Director, Corporate Communications, Analog Devices, Inc., One Technology Way, Norwood, MA 02062; telephone: 781-461-3282.

 

At the annual meeting, shareholders will consider and vote on the following matters:

 

1. The election of three members to our Board of Directors to serve as Class I directors, each for a term of three years.

 

2. The approval of our 2006 Stock Incentive Plan.

 

3. The ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending October 28, 2006.

 

4. To act on the shareholder proposal entitled “Shareholder Proposal to Amend our Governance Documents”.

 

The shareholders will also act on any other business that may properly come before the meeting.

 

To be able to vote, you must have been a shareholder of record at the close of business on January 13, 2006. This date is the record date for the annual meeting.

 

Shareholders of record at the close of business on January 13, 2006 are entitled to vote on each proposal at the annual meeting. The number of outstanding shares entitled to vote on each proposal at the meeting is 365,585,491 shares of our common stock.

 

Each share of our common stock that you owned on the record date entitles you to one vote on each matter that is voted on.

 

Your vote is important regardless of how many shares you own. Please take the time to vote. Take a moment to read the instructions below. Choose the way to vote that is easiest and most convenient for you and cast your vote as soon as possible.

 

You may vote in one of four ways. You may vote by submitting your proxy by mail, over the Internet, or by telephone, or you may vote in person at the meeting.

 

You may vote by mail.  You may vote by completing and signing the proxy card that accompanies this proxy statement and promptly mailing it in the enclosed postage-prepaid envelope. You do not need to put a stamp on the enclosed envelope if you mail it in the United States. The shares you own will be voted according to the instructions on the proxy card you mail. If you return the proxy card, but do not give any instructions on a particular matter described in this proxy statement, the shares you own will be voted in accordance with the recommendations of our Board of Directors. The Board of Directors recommends that you vote FOR Proposals 1, 2 and 3 and AGAINST Proposal 4.

 

You may vote over the Internet.  If you have Internet access, you may vote your shares from any location in the world by following the “Vote-by-Internet” instructions set forth on the enclosed proxy card.

 

You may vote by telephone.  You may vote your shares by following the “Vote-by-Telephone” instructions set forth on the enclosed proxy card.

 

You may vote in person.  If you attend the meeting, you may vote by delivering your completed proxy card in person or you may vote by completing a ballot. Ballots will be available at the meeting.

 

Yes. You can change your vote and revoke your proxy at any time before the polls close at the meeting by doing any one of the following things:

 

 

Your attendance at the meeting alone will not revoke your proxy.

 

If the shares you own are held in “street name” by a bank or brokerage firm, your bank or brokerage firm, as the record holder of your shares, is required to vote your shares according to your instructions. In order to vote your shares, you will need to follow the directions your bank or brokerage firm provides you. Many banks and brokerage firms also offer the option of voting over the Internet or by telephone, instructions for which would be provided by your bank or brokerage firm on your vote instruction form. Under the rules of the New York Stock Exchange, if you do not give instructions to your bank or brokerage firm, it will still be able to vote your shares with respect to certain “discretionary” items, but will not be allowed to vote your shares with respect to certain “non-discretionary” items. In the case of non-discretionary items, the shares will be treated as “broker non-votes.” The election of directors (proposal one) and the ratification of Ernst & Young LLP as our independent registered public accounting firm (proposal three) are each considered to be a discretionary item under the New York Stock Exchange Rules. The approval of our 2006 Stock Incentive Plan (proposal two) and the shareholder proposal (proposal four) are each considered to be a non-discretionary item. Accordingly, if you do not give your record holder voting instructions with respect to proposal two or four, or if the record holder does not exercise its discretionary authority with respect to proposal one or three, your shares will be treated as broker non-votes on the particular matter.

If your shares are held in street name, you must bring an account statement or letter from your brokerage firm or bank showing that you are the beneficial owner of the shares as of the record date in order to be admitted to the meeting on March 14, 2006. To be able to vote your shares held in street name at the meeting, you will need to obtain a proxy card from the holder of record.

 

If you participate in the Analog Devices Stock Fund through The Investment Partnership Plan of Analog Devices, or TIP, your proxy will also serve as a voting instruction for Fidelity Management Trust Company, the administrator of TIP, with respect to shares of ADI common stock attributable to your TIP account, or TIP shares, as of the record date. The combined proxy/instruction card should be signed and returned in the enclosed envelope to Computershare Trust Company, N.A., our transfer agent and registrar, or you may submit your proxy/instruction over the Internet or by telephone by following the instructions on the enclosed card. Computershare Trust Company, N.A. will notify Fidelity Management Trust Company, or Fidelity, of the manner in which you have directed your TIP shares to be voted. Fidelity will vote your TIP shares as of the record date in the manner directed by you. If Computershare Trust Company, N.A. does not receive voting instructions from you by 11:59 p.m. eastern time on March 9, 2006, Fidelity will vote your TIP shares as of the record date in the same manner, proportionally, as it votes the other shares of common stock for which proper and timely voting instructions of other TIP participants have been received by Fidelity.

 

If you participate in the Analog Ireland Success Sharing Share Plan, or the Analog Ireland Share Plan, you may vote an amount of shares of common stock equivalent to the interest in our common stock which Mercer Trustees Limited, or Mercer, the trustee of the Analog Ireland Share Plan, holds on your behalf as of the record date. Mercer will send a voting card to you that you may use to direct Mercer how to vote your shares. The voting card should be signed and returned in the enclosed envelope to Mercer. Mercer will vote the shares in the manner directed on the voting card. If Mercer does not receive your voting card by 5:00 p.m. Greenwich Mean Time (GMT) on Friday, March 3, 2006, Mercer will not vote your shares.

 

In order for business to be conducted at the meeting with respect to a particular matter, a quorum must be present for that particular matter. For each of the proposals described in the accompanying notice, a quorum consists of the holders of a majority of the shares of common stock issued, outstanding and entitled to vote at the meeting, or at least 182,792,746 shares.

 

Shares of common stock represented in person or by proxy (including “broker non-votes” and shares that abstain or do not vote with respect to a particular proposal to be voted upon) will be counted for the purpose of determining whether a quorum exists at the meeting for that proposal. “Broker non-votes” are shares that are held in “street name” by a bank or brokerage firm that indicates on its proxy that it does not have discretionary authority to vote on a particular matter.

 

If a quorum is not present, the meeting will be adjourned until a quorum is obtained.

 

Election of directors.  As provided in our bylaws, the three nominees receiving the highest number of votes cast at the meeting will be elected, regardless of whether that number represents a majority of the votes cast.

 

Approval of 2006 Stock Incentive Plan.  Under our bylaws, the affirmative vote of a majority of the total number of votes cast at the meeting is needed to approve our 2006 Stock Incentive Plan. Under the listing requirements of the New York Stock Exchange, the proposal must be approved by a majority of votes cast on the proposal, and the total votes cast on the proposal must represent 50 percent in interest of all securities entitled to vote on the proposal.

Ratification of independent public accounting firm and shareholder proposal.  Under our bylaws, the affirmative vote of a majority of the total number of votes cast at the meeting is needed to ratify Ernst & Young LLP as our independent public accounting firm and to approve the shareholder proposal.

 

Each share of common stock will be counted as one vote according to the instructions contained on a proper proxy card, whether submitted by mail, over the Internet or by telephone, or on a ballot voted in person at the meeting. With respect to proposals one, three and four, shares will not be voted in favor of the matter, and will not be counted as voting on the matter, if they either (1) abstain from voting on a particular matter, or (2) are broker non-votes. Accordingly, votes withheld for a particular director nominee and broker non-votes will have no effect on the outcome of the election of directors. Abstentions and broker non-votes will have no effect on the voting on the ratification of our independent registered public accounting firm or on the approval of the shareholder proposal. Under our bylaws, neither abstentions nor broker non-votes will have an effect on the outcome of the approval of the 2006 stock incentive plan. For the listing requirements of the New York Stock Exchange, approval of proposal two requires that (1) a majority of common stock issued, outstanding and entitled to vote at the Annual Meeting must actually vote on the matter (with abstentions counting as votes and broker non-votes not counting as votes) and (2) votes in favor must constitute at least a majority of the votes cast (with abstentions counting as votes cast and broker non-votes not counting as votes cast).

 

The votes will be counted, tabulated and certified by our transfer agent and registrar, Computershare Trust Company, N.A. A representative of Computershare Trust Company, N.A. will serve as the inspector of elections at the meeting.

 

Yes, your vote will be kept confidential and we will not disclose your vote, unless (1) we are required to do so by law (including in connection with the pursuit or defense of a legal or administrative action or proceeding), or (2) there is a contested election for the Board of Directors. The inspector of elections will forward any written comments that you make on the proxy card to management without providing your name, unless you expressly request disclosure on your proxy card.

 

The Board of Directors recommends that you vote:

 

FOR the election of each of the three nominees to serve as Class I directors on the Board of Directors, each for a term of three years;

 

FOR the approval of the 2006 Stock Incentive Plan;

 

FOR the ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for the 2006 fiscal year; and

 

AGAINST the approval of the shareholder proposal.

 

The Board of Directors does not know of any other matters that may come before the meeting. If any other matter properly comes before the meeting, the persons named in the proxy card that accompanies this proxy statement, whether you submit your proxy by mail, through the Internet or by telephone, will exercise their judgment in deciding how to vote, or otherwise act, at the meeting with respect to that matter or proposal.

 

We will report the voting results in our quarterly report on Form 10-Q for the second quarter of fiscal 2006, which we expect to file with the Securities and Exchange Commission in May 2006.

 

If you are interested in submitting a proposal for inclusion in the proxy statement for the 2007 annual meeting, you need to follow the procedures outlined in Rule 14a-8 of the Securities Exchange Act of 1934, or the Exchange Act. To be eligible for inclusion, we must receive your shareholder proposal intended for inclusion in the proxy statement for the 2007 annual meeting of shareholders at our principal corporate offices in Norwood, Massachusetts as set forth below no later than October 11, 2006.

 

ADI’s amended and restated bylaws require that ADI be given advance written notice of shareholder nominations for election to ADI’s Board of Directors and of other matters which shareholders wish to present for action at an annual meeting of shareholders (other than matters included in ADI’s proxy materials in accordance with Rule 14a-8 under the Exchange Act). The Secretary must receive such notice at the address noted below not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting, provided, however, that in the event that the date of the annual meeting is advanced by more than 20 days, or delayed by more than 60 days, from such anniversary date, ADI must receive such notice at the address noted below not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (1) the 90th day prior to such annual meeting or (2) the seventh day following the day on which notice of the meeting date was mailed or public disclosure was made, whichever occurs first. Assuming that the 2007 annual meeting is not advanced by more than 20 days nor delayed by more than 60 days from the anniversary date of the 2006 annual meeting, appropriate notice would need to be provided to ADI at the address noted below no earlier than November 14, 2006, and no later than December 14, 2006. If a shareholder fails to provide timely notice of a proposal to be presented at the 2007 annual meeting, the proxies designated by ADI’s Board of Directors will have discretionary authority to vote on any such proposal which may come before the meeting.

 

ADI’s amended and restated bylaws also specify requirements relating to the content of the notice which shareholders must provide to the Secretary of Analog Devices for any matter, including a shareholder nomination for director, to be properly presented at a shareholder meeting. A copy of the full text of our amended and restated bylaws is on file with the SEC.

 

Any proposals, nominations or notices should be sent to:

 

Secretary, Analog Devices, Inc.

c/o: Maria Tagliaferro

Director, Corporate Communications

Analog Devices, Inc.

One Technology Way

Norwood, MA 02062

Phone: 781-461-3282

Fax: 781-461-3491

Email: investor.relations@analog.com

 

We will bear the costs of solicitation of proxies. We have engaged The Altman Group, Inc. to assist us with the solicitation of proxies. We expect to pay The Altman Group less than $15,000 for their services. In addition to solicitations by mail, The Altman Group and our directors, officers and regular employees may solicit proxies by telephone, email and personal interviews without additional remuneration. Brokers, custodians and fiduciaries will be requested to forward proxy soliciting material to the owners of shares of our common stock that they hold in their names. We will reimburse banks and brokers for their reasonable out-of-pocket expenses incurred in connection with the distribution of our proxy materials.

 

Our annual report is available on our website at www.analog.com. If you would like a copy of our Annual Report on Form 10-K for the fiscal year ended October 29, 2005, we will send you one without charge. Please contact:

 

Maria Tagliaferro

Director, Corporate Communications

Analog Devices, Inc.

One Technology Way

Norwood, MA 02062

Phone: 781-461-3282

Email: investor.relations@analog.com

 

If you have any questions about the annual meeting or your ownership of our common stock, please contact Maria Tagliaferro, our director of corporate communications, at the address, telephone number or email address listed above.

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of our proxy statement and annual report to shareholders may have been sent to multiple shareholders in your household. We will promptly deliver a separate copy of either document to you if you contact us at the following address or telephone number: Investor Relations Department, Analog Devices, Inc., One Technology Way, Norwood, Massachusetts 02062, telephone: 781-461-3282. If you want to receive separate copies of the proxy statement or annual report to shareholders in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker, or other nominee record holder, or you may contact us at the above address, telephone number or email address.

 

The following table contains information regarding the beneficial ownership of our common stock as of November 25, 2005 by:

 

 

 

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and the holders of more than 10% of our common stock to file with the SEC initial reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of our records and written representations by the persons required to file these reports, all filing requirements of Section 16(a) were satisfied with respect to our most recent fiscal year.

 

Our Board of Directors is divided into three classes, with one class being elected each year and members of each class holding office for a three-year term. Our Board of Directors currently consists of ten members, three of whom are Class I directors (with terms expiring at the 2006 annual meeting), four of whom are Class II directors (with terms expiring at the 2007 annual meeting), and three of whom are Class III directors (with terms expiring at the 2008 annual meeting).

 

At the 2006 annual meeting, shareholders will have an opportunity to vote for the nominees for Class I directors, James A. Champy, Kenton J. Sicchitano and Lester C. Thurow. Messrs. Champy and Sicchitano are currently serving as Class I directors and have been directors since 2003. Mr. Thurow is currently serving as a Class I director and has been a director since 1988. The persons named in the enclosed proxy card will vote to elect these three nominees as Class I directors, unless you withhold authority to vote for the election of any or all nominees by marking the proxy card (whether executed by you or through Internet or telephonic voting) to that effect. Each of the nominees has indicated his willingness to serve, if elected. However, if any or all of the nominees should be unable or unwilling to serve, the proxies may be voted for a substitute nominee designated by our Board of Directors or our Board of Directors may reduce the number of directors.

 

The following paragraphs provide information as of the date of this proxy statement about each member of our Board of Directors, including the nominees for Class I directors. The information presented includes information each director has given us about his or her age, all positions he or she holds, his or her principal occupation and business experience for the past five years, and the names of other publicly-held companies of which he or she serves as a director. Information about the number of shares of common stock beneficially owned by each director appears under the heading “Security Ownership of Certain Beneficial Owners and Management.”

 

There are no family relationships among any of the directors and executive officers of Analog.

 

JAMES A. CHAMPY, Director since March 2003

 

Mr. Champy, age 63, has been a Vice President of Perot Systems Corporation, a technology services and business solutions company, since 1996. Mr. Champy also serves as a trustee of the Massachusetts Institute of Technology.

 

KENTON J. SICCHITANO, Director since March 2003

 

Mr. Sicchitano, age 61, has been retired since June 2001. He joined Price Waterhouse LLP, a predecessor firm of PricewaterhouseCoopers LLP, in 1970 and became a partner in 1979. PricewaterhouseCoopers LLP, or PwC, is a public accounting firm. At the time of his retirement, Mr. Sicchitano was the Global Managing Partner of Independence and Regulatory Matters for PwC. During his 31 year tenure with PwC, Mr. Sicchitano held various positions including the Global Managing Partner of Audit/Business Advisory Services and the Global Managing Partner responsible for Audit/Business Advisory, Tax/Legal and Financial Advisory Services. Mr. Sicchitano also serves as a director of PerkinElmer, Inc. and MetLife, Inc. Mr. Sicchitano is a certified public accountant.

 

LESTER C. THUROW, Director since 1988

 

Mr. Thurow, age 67, has been a Professor of Management and Economics at the Massachusetts Institute of Technology, or MIT, since 1968 and, from 1987 to 1993, was the Dean of MIT’s Sloan School of Management. Mr. Thurow also serves as a director of Taiwan Semiconductor Manufacturing Company Limited.

 

JERALD G. FISHMAN, President and Chief Executive Officer; Director since 1991

 

Mr. Fishman, age 60, has been our President and Chief Executive Officer since November 1996 and he served as our President and Chief Operating Officer from November 1991 to November 1996. Mr. Fishman served as our

Executive Vice President from 1988 to November 1991. He served as our Group Vice President-Components from 1982 to 1988. Mr. Fishman also serves as a director of Cognex Corporation and Xilinx, Inc.

 

JOHN C. HODGSON, Director since September 2005

 

Mr. Hodgson, age 62, has been Senior Vice President and Chief Customer Officer for DuPont since May 2005. Mr. Hodgson served as Chief Marketing and Sales Officer from February 2002 to May 2005 and Group Vice President and General Manager of DuPont iTechnologies from February 2000 to February 2002.

 

 

Mr. Saviers, age 61, has been retired since August 1998. He served as Chairman of the Board of Adaptec, Inc., a provider of high-performance input/output products, from August 1997 to August 1998, President and Chief Executive Officer of Adaptec from July 1995 to August 1998, and President and Chief Operating Officer of Adaptec from August 1992 to July 1995. Prior to joining Adaptec, Mr. Saviers was employed with Digital Equipment Corporation, a computer manufacturer, for more than five years, last serving as Vice President of its Personal Computer and Peripherals Operation.

 

PAUL J. SEVERINO, Director since November 2005

 

Mr. Severino, age 59, has been an investment advisor to emerging technology companies and venture funds since 1996. From 1994 to 1996, he was Chairman of Bay Networks, Inc., a data networking products services company, after its formation from the merger of Wellfleet Communications, Inc. and Synoptics Communications, Inc. Prior to that, he was a founder, President and Chief Executive Officer of Wellfleet Communications, Inc. Mr. Severino is also a director of Sonus Networks, Inc.

 

JOHN L. DOYLE, Director since 1987

 

Mr. Doyle, age 74, has been self-employed as a technical consultant since September 1991. He was employed formerly by the Hewlett-Packard Company, a provider of technology solutions, where he served as the Executive Vice President of Business Development from 1988 through 1991, Executive Vice President, Systems Technology Sector from 1986 to 1988, Executive Vice President, Information Systems and Networks from 1984 to 1986, and Vice President, Research and Development from 1981 to 1984. Mr. Doyle also serves as a director of Xilinx, Inc.

 

CHRISTINE KING, Director since June 2003

 

Ms. King, age 56, has been President and Chief Executive Officer of AMI Semiconductor, Inc., a designer and manufacturer of customer specific integrated mixed signal semiconductor products, since September 2001. From September 2000 to September 2001, Ms. King served as Vice President of Semiconductor Products for IBM Microelectronics, a provider of semiconductor products and services, foundry expertise and standard processor components. From September 1998 to September 2000, Ms. King was Vice President of the Networking Technology Business Unit for IBM. Ms. King also served as Vice President of Marketing and Field Engineering at IBM from June 1995 to September 1998 and Manager of ASIC Products at IBM from March 1992 to June 1995. Ms. King also serves as a director of AMI Semiconductor, Inc.

 

RAY STATA, Chairman of the Board of Directors; Director since 1965

 

Mr. Stata, age 71, has served as our Chairman of the Board of Directors since 1973. Mr. Stata served as our Chief Executive Officer from 1973 to November 1996 and as our President from 1971 to November 1991. Mr. Stata also serves as a trustee of the Massachusetts Institute of Technology.

 

Our Board of Directors recommends that you vote FOR the election of Messrs. Champy, Sicchitano and Thurow.

 

We have long believed that good corporate governance is important to ensure that Analog Devices is managed for the long-term benefit of its shareholders. During the past year, we have continued to review our corporate governance policies and practices and to compare them to those suggested by various authorities in corporate governance and the practices of other public companies.

 

Shareholder Voting Policy for Election of Directors.  In December 2005, our Board of Directors amended our corporate governance guidelines to include a policy that any director who receives more “withheld” votes than “for” votes in an uncontested election at an annual meeting shall offer his or her resignation to the Board promptly after the voting results are certified. A committee of independent directors, which will specifically exclude any director who is required to offer his or her own resignation, will carefully consider all relevant factors, including, as the committee deems appropriate, any stated reasons why shareholders withheld votes from such director, any alternatives for curing the underlying cause of the withheld votes, the director’s tenure, the director’s qualifications, the director’s past and expected future contributions to the company, the overall composition of our board and whether accepting the resignation would cause the company to fail to meet any applicable regulations of the Securities and Exchange Commission or the New York Stock Exchange. Our Board will act upon this committee’s recommendation within 90 days following certification of the shareholder vote and may, among other things, accept the resignation, maintain the director but address what the committee believes to be the underlying cause of the withhold votes, maintain the director but resolve that the director will not be re-nominated in the future for election, or reject the resignation. We will publicly disclose the Board’s decision with regard to any resignation offered under these circumstances with an explanation of how the decision was reached, including, if applicable, the reasons for rejecting the offered resignation.

 

Chief Compliance and Business Ethics Officer.  In September 2005, Analog created a new position of Chief Compliance and Business Ethics Officer who reports to the Chair of the Nominating and Corporate Governance Committee and appointed William A. Wise, previously Analog’s Corporate Counsel, to this position. The Chief Compliance and Business Ethics Officer is responsible for overseeing regulatory compliance and for ensuring company-wide adherence to all corporate standards of business conduct, ethics and regulatory compliance.

 

In January 2006, our Board further amended our corporate governance guidelines, and took certain other actions, as follows:

 

Stock Ownership Guidelines.  We established stock ownership guidelines for our directors and executive officers. Under our guidelines, the target share ownership levels are two times the annual cash retainer for directors, two times annual salary for the chief executive officer and one times annual salary for other executive officers. Directors (including the Chief Executive Officer) have three years to achieve their targeted level. Executive officers other than the CEO have five years to achieve the targeted level. Shares subject to unexercised options, whether or not vested, will not be counted for purposes of satisfying these guidelines.

 

Board Evaluations.  We changed our annual Board evaluation process to provide for annual evaluations of individual directors by other directors, as well as evaluations of the functioning of the Board and its committees.

 

Other Directorships.  We adopted a policy that no director shall serve on the board of directors of more than four other public companies.

 

Audit Committee.  We reconstituted the membership of our Audit Committee, adding Christine King as a member, so that all members of the audit committee are “audit committee financial experts.”

 

Termination of Stockholder Rights Plan.  Our Board voted to terminate our stockholder rights plan (also frequently referred to as a “poison pill”) which was adopted in 1998. Under the terms of our rights plan, the rights became unexercisable upon this Board vote. Pursuant to this termination, Analog will redeem all of the outstanding rights under the stockholder rights plan at a redemption price of $.0005 per right payable on March 15, 2006 to shareholders of record on February 24, 2006.

You can access the current charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics at www.analog.com/governance or by writing to:

 

Maria Tagliaferro

Director, Corporate Communications

Analog Devices, Inc.

One Technology Way

Norwood, MA 02062

Phone: 781-461-3282

Fax: 781-461-3491

Email: investor.relations@analog.com

 

Under current NYSE rules, a director of Analog only qualifies as “independent” if our Board of Directors affirmatively determines that the director has no material relationship with Analog (either directly or as a partner, shareholder or officer of an organization that has a relationship with Analog). Our Board of Directors has established guidelines to assist it in determining whether a director has a material relationship with Analog. Under these guidelines, a director is not considered to have a material relationship with Analog if he or she is independent under Section 303A.02(b) of the NYSE Listed Company Manual and he or she:

 

 

Ownership of a significant amount of Analog’s stock, by itself, does not constitute a material relationship.

 

For relationships not covered by the guidelines set forth above, the determination of whether a material relationship exists is made by the other members of our Board of Directors who are independent (as defined above).

 

Our Board of Directors has determined that each of Messrs. Champy, Doyle, Hodgson, Saviers, Severino, Sicchitano and Thurow and Ms. King is “independent” within the meaning of Section 303A.02(b) of the NYSE Listed Company Manual. Each of these directors has no relationship with Analog, other than any relationship that is categorically not material under the guidelines shown above and other than as disclosed in this proxy statement under “Directors Compensation” and “Certain Relationships and Related Transactions.” The Board has determined that the relationships described in this proxy statement do not preclude a determination of independence because the amounts involved are not material and will not impair the applicable director’s ability to render independent judgment.

 

Shareholders of record of Analog may recommend director candidates for inclusion by the Board of Directors in the slate of nominees which the Board recommends to our shareholders for election. The qualifications of recommended candidates will be reviewed by the Nominating and Corporate Governance Committee. If the Board

determines to nominate a shareholder-recommended candidate and recommends his or her election as a director by the shareholders, the name will be included in Analog’s proxy card for the shareholders meeting at which his or her election is recommended.

 

Shareholders may recommend individuals for the Nominating and Corporate Governance Committee to consider as potential director candidates by submitting their names and background and a statement as to whether the shareholder or group of shareholders making the recommendation has beneficially owned more than 5% of Analog’s common stock for at least one year as of the date such recommendation is made, to the “Analog Devices Nominating and Corporate Governance Committee” c/o Analog Devices Corporate Counsel, Analog Devices, Inc., One Technology Way, PO Box 9106, Norwood, MA 02062. The Nominating and Corporate Governance Committee will consider a recommendation only if appropriate biographical information and background material is provided on a timely basis. The process followed by the Nominating and Corporate Governance Committee to identify and evaluate candidates includes requests to Board members and others for recommendations, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by members of the Nominating and Corporate Governance Committee and the Board. Assuming that appropriate biographical and background material is provided for candidates recommended by shareholders on a timely basis, the Nominating and Corporate Governance Committee will evaluate director candidates recommended by shareholders by following substantially the same process, and applying substantially the same criteria, as it follows for director candidates submitted by Board members.

 

Shareholders also have the right to directly nominate director candidates, without any action or recommendation on the part of the Nominating and Corporate Governance Committee or the Board, by following the procedures set forth in ADI’s amended and restated bylaws and described in the response to the question “How and when may I submit a shareholder proposal, including a shareholder nomination for director, for the 2007 annual meeting?” contained elsewhere in this proxy statement.

 

In considering whether to recommend any candidate for inclusion in the Board’s slate of recommended director nominees, including candidates recommended by shareholders, the Nominating and Corporate Governance Committee will apply the criteria set forth in Analog’s Corporate Governance Guidelines. These criteria include the candidate’s integrity, business acumen, age, experience, commitment, diligence, conflicts of interest and the ability to act in the interests of all shareholders. The Nominating and Corporate Governance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Analog believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities.

 

The Board will give appropriate attention to written communications on issues that are submitted by shareholders and other interested parties, and will respond if and as appropriate. Absent unusual circumstances or as contemplated by committee charters, the Chairman of the Nominating and Corporate Governance Committee will, with the assistance of Analog’s internal legal counsel, (1) be primarily responsible for monitoring communications from shareholders and other interested parties and (2) provide copies or summaries of such communications to the other directors as he considers appropriate.

 

Communications will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that the Chairman of the Nominating and Corporate Governance Committee considers to be important for the directors to know. In general, communications relating to corporate governance and long-term corporate strategy are more likely to be forwarded than communications relating to personal grievances and matters as to which Analog tends to receive repetitive or duplicative communications.

 

Shareholders and other interested parties who wish to send communications on any topic to the Board should address such communications to John L. Doyle, Chairman of the Nominating and Corporate Governance Committee, c/o Analog Devices Corporate Counsel, Analog Devices, Inc., One Technology Way, PO Box 9106, Norwood, MA 02062.

 

The Board of Directors has responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board’s primary responsibility is to oversee the management of the company and, in so doing, serve the best interests of the company and its shareholders. Subject to oversight by the Nominating and Corporate Governance Committee, the Board selects, evaluates and provides for the succession of executive officers and the Board nominates for election at annual shareholder meetings individuals to serve as directors of Analog Devices and elects individuals to fill any vacancies on the Board. It reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments of corporate resources. It participates in decisions that have a potential major economic impact on Analog Devices. Management keeps the directors informed of company activity through regular written reports and presentations at Board and committee meetings.

 

The Board of Directors met 13 times in fiscal 2005 (including eight teleconference meetings). During fiscal 2005, each of our directors who served as a director during fiscal year 2005 attended 75% or more of the total number of meetings of the Board of Directors and the committees of which such director was a member during the period of time which he or she served on such committee, except for Mr. Thurow, who for health reasons attended 39%, and Mr. Hodgson who joined the Board late in the year and attended 50%. The Board has standing Audit, Compensation and Nominating and Corporate Governance Committees. Each committee has a charter that has been approved by the Board. Each committee must review the appropriateness of its charter and perform a self-evaluation at least annually. Messrs. Stata and Fishman are the only directors who are also employees of Analog Devices. They do not participate in any meeting at which their compensation is evaluated. All members of all committees are non-employee directors.

 

Our Board of Directors has appointed Mr. Doyle “presiding director” to preside at all executive sessions of “non-management” directors, as defined under the rules of the NYSE.

 

Our Corporate Governance Guidelines set forth our policy that directors should attend annual meetings of shareholders. Eight of our ten directors were directors at the time of our 2005 annual meeting of shareholders and six of them attended the 2005 annual meeting of shareholders.

 

The current members of our Audit Committee are Messrs. Sicchitano (Chair) and Doyle and Ms. King. The Board of Directors has determined that each of Messrs. Sicchitano and Doyle and Ms. King qualifies as an “audit committee financial expert” under the rules of the SEC. Each of Messrs. Sicchitano and Doyle and Ms. King is an “independent director” under the rules of the NYSE governing the qualifications of the members of audit committees and Rule 10A-3(b)(1) of the Exchange Act. In addition, our Board of Directors has determined that each member of the Audit Committee is financially literate and that each of Messrs. Sicchitano and Doyle and Ms. King has accounting and/or related financial management expertise as required under the rules of the NYSE. None of Messrs. Sicchitano or Doyle or Ms. King serves on the audit committees of more than two other public companies. The Audit Committee met ten times during fiscal 2005 (including six teleconference meetings). The responsibilities of our Audit Committee and its activities during fiscal 2005 are described in the Report of the Audit Committee contained in this proxy statement.

 

The current members of the Compensation Committee are Messrs. Saviers (Chair), Champy and Severino. The Board has determined that each of Messrs. Saviers, Champy and Severino is independent as defined under the rules of the NYSE. Our Compensation Committee held six meetings (including one teleconference meeting) during fiscal 2005. The Compensation Committee evaluates and sets the compensation of our Chief Executive Officer and makes recommendations to our Board of Directors regarding the salaries and bonuses of our other executive officers and the compensation of our directors. The Compensation Committee oversees the evaluation of management by the Board of Directors. In connection with its oversight and administration of ADI’s cash and equity incentive plans, the Compensation Committee grants stock options and other stock incentives (within guidelines established by our Board of Directors) to our officers and employees. The responsibilities of our Compensation Committee and its

activities during fiscal 2005 are described in the Report of the Compensation Committee contained in this proxy statement.

 

The current members of the Nominating and Corporate Governance Committee are Messrs. Doyle (Chair), Hodgson and Thurow. The Board has determined that each of Messrs. Doyle, Hodgson and Thurow is independent as defined under the rules of the NYSE. The purpose of the Nominating and Corporate Governance Committee is to identify individuals qualified to become Board members consistent with criteria approved by the Board, recommend to the Board the persons to be nominated by the Board for election as directors at any meeting of shareholders, develop and recommend to the Board a set of corporate governance principles and oversee the evaluation of the Board. The responsibilities of the Nominating and Corporate Governance Committee also include oversight of the Board’s annual review of succession planning with respect to senior executives. The Nominating and Corporate Governance Committee has the authority to engage such independent legal and other advisors as it deems necessary or appropriate to carry out its responsibilities. Such independent advisors may be the regular advisors to the Company. The Committee is empowered without further action by the Board, to cause the Company to pay the compensation of such advisors as established by the Committee. The Committee did not retain any such advisers during fiscal year 2005. For information relating to nominations of directors by our shareholders, see “— Director Candidates” above. Our Nominating and Corporate Governance Committee held four meetings during fiscal year 2005.

 

The Audit Committee of the Board of Directors is responsible for providing independent, objective oversight of Analog’s accounting functions and internal controls. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The Audit Committee oversees our financial reporting process on behalf of our Board of Directors, reviews our financial disclosures, and meets privately, outside the presence of our management, with our independent auditors to discuss our internal accounting control policies and procedures. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited financial statements contained in the Annual Report on Form 10-K and the quarterly financial statements during fiscal 2005, including the specific disclosures in the section titled “Management Discussion and Analysis of Financial Condition and Results of Operations.” These discussions also addressed the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Audit Committee reports on these meetings to our Board of Directors. The Audit Committee also selects and appoints our independent auditors, reviews the performance of the independent auditors in the annual audit and in assignments unrelated to the audit, and reviews and approves the independent auditors’ fees. The Audit Committee operates under a written charter adopted by our Board of Directors.

 

The Audit Committee is composed of three non-employee directors, each of whom is an “independent director” under the rules of the NYSE governing the qualifications of the members of audit committees and under Rule 10A-3(b)(1) of the Exchange Act. The Board of Directors has determined that each of Messrs. Sicchitano and Doyle and Ms. King qualifies as an “audit committee financial expert” under the rules of the Securities and Exchange Commission. In addition, the Board of Directors has determined that each member of the Audit Committee is financially literate and that each of Messrs. Sicchitano and Doyle and Ms. King has accounting and/or related financial management expertise as required under the rules of the NYSE.

 

The Audit Committee held ten meetings (including six teleconference meetings) during the fiscal year ended October 29, 2005. The meetings were designed to facilitate and encourage communication between members of the Audit Committee and management as well as private communication between the members of the Audit Committee, our internal auditor and our independent auditors, Ernst & Young LLP.

 

The Audit Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of the audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as

are required to be discussed with the Audit Committee under generally accepted auditing standards. In addition, the Audit Committee has discussed with the independent auditors (i) the matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU§380), and (ii) the auditors’ independence from Analog Devices and its management, including the matters in the written disclosures we received from the auditors as required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and considered the compatibility of the provision of non-audit services by the independent auditors with the auditors’ independence.

 

Based on its review and discussions, the Audit Committee recommended to our Board of Directors (and the Board of Directors has approved) that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended October 29, 2005. The Audit Committee and Board of Directors also have recommended, subject to ratification by the shareholders, the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending October 28, 2006.

 

Audit Committee*,

 

Kenton J. Sicchitano, Chairman
John L. Doyle
Lester C. Thurow

 

 

The following table presents the aggregate fees billed for services rendered by Ernst & Young LLP, our independent registered public accounting firm, for the fiscal years ended October 29, 2005 and October 30, 2004.

 

 

These are fees related to professional services rendered in connection with the audit of our annual financial statements, the audit of management’s assessment of our internal control over financial reporting and Ernst & Young’s own audit of our internal control over financial reporting, the reviews of the financial statements included in each of our Quarterly Reports on Form 10-Q, international statutory audits, and accounting consultations that relate to the audited financial statements and are necessary to comply with generally accepted auditing standards.

 

These are fees for assurance and related services and consisted primarily of specific internal control process reviews, audits of employee benefit plans, and consultations regarding accounting and financial reporting.

 

These are fees for professional services related to tax return preparation services for our expatriates, international tax returns, tax advice and assistance with international tax audits. Included in this amount are fees of $427,000 for tax compliance services for our international affiliates and tax return preparation services for our expatriate employees on international assignments.

 

The Audit Committee of our Board of Directors has adopted policies and procedures for the pre-approval of audit and non-audit services for the purpose of maintaining the independence of our independent auditors. We may not engage our independent auditors to render any audit or non-audit service unless either the service is approved in advance by the Audit Committee or the engagement to render the service is entered into pursuant to the Audit Committee’s pre-approval policies and procedures. On an annual basis, the Audit Committee may pre-approve services that are expected to be provided to Analog by the independent auditors during the following 12 months. At the time such pre-approval is granted, the Audit Committee must (1) identify the particular pre-approved services in a sufficient level of detail so that management will not be called upon to make judgment as to whether a proposed service fits within the pre-approved services and (2) establish a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy. At regularly scheduled meetings of the Audit Committee, management or the independent auditors must report to the Audit Committee regarding each service actually provided to Analog.

 

If the cost of any service exceeds the pre-approved monetary limit, such service must be approved (1) by the entire Audit Committee if the cost of the service exceeds $100,000 or (2) by the Chairman of the Audit Committee if the cost of the service is less than $100,000 but greater than $10,000. If the cost of any service exceeds the pre-approved monetary limit, individual items with a cost of less than $10,000 each do not require further pre-approval, provided that the total cost of all such individual items does not exceed $40,000 and an update of all items in this category is provided to the Audit Committee at each quarterly scheduled meeting. However, if the cost of all such individual items will exceed $40,000, the Chairman of the Audit Committee must receive a summary of such items with a request for approval of any amounts to be incurred in excess of $40,000.

 

The Audit Committee has delegated authority to the Chairman of the Audit Committee to pre-approve any audit or non-audit services to be provided to Analog by the independent registered public accounting firm for which the cost is less than $100,000. During fiscal year 2005, no services were provided to Analog by Ernst & Young LLP other than in accordance with the pre-approval policies and procedures described above.

 

Messrs. Fishman and Stata were the only directors during fiscal 2005 that were also employees of Analog. Mr. Fishman’s compensation is included in the Summary Compensation Table on page 19 and Mr. Stata’s compensation is included under “— Certain Relationships and Related Transactions.” The following is a summary of the compensation paid to non-employee directors:

 

During fiscal year 2005, we paid each non-employee director an annual retainer of $40,000. We also paid an annual retainer of $10,000 to the Chairs of each of the Audit Committee, Compensation Committee and the Nominating and Corporate Governance Committee. We also reimburse our directors for travel and other related expenses. Each director can elect to defer receipt of his or her fees, and, prior to January 1, 2005, the proceeds from the exercise of certain stock options, under our Deferred Compensation Plan. See “Information About Executive Compensation — Deferred Compensation Plan.”

 

We grant to each non-employee director annually a stock option to purchase shares of our common stock at an exercise price per share equal to the fair market value per share on the date of grant. These grants are made on the same date as annual grants are made to our executive officers. The options are exercisable, subject to continued service on our Board of Directors, in three equal annual installments on each of the first, second and third anniversaries of the grant date. In accordance with this policy, on December 7, 2004, we granted to each non-employee director options for the purchase of 18,000 shares of our common stock at an exercise price of $37.70 per share.

For fiscal 2006, the Board revised its policy to reduce the annual director grants from 18,000 to 15,000 shares, consistent with the reduction in option grants to officers and employees. Accordingly, on December 6, 2005, we granted stock options to each non-employee director for the purchase of 15,000 shares of our common stock at an exercise price of $39.44 per share, with the exception of Mr. Hodgson, who received a pro-rated annual option grant of 3,750 shares because he had received a grant of an option for 18,000 shares upon joining the Board in September 2005.

 

During fiscal year 2005, we paid Mr. Stata, our founder and Chairman of the Board of Directors, a salary for his services as an employee of Analog Devices in the amount of $200,000, a cash bonus of $53,423 under the Company’s bonus plan for all employees, a cash service award of $7,401 pursuant to our Employee Service Award Program, and other compensation of $13,692 representing the amount contributed or accrued by us in fiscal year 2005 under applicable retirement arrangements. Mr. Stata was also given gifts valued at $13,278 in honor of the 40th anniversary of his founding of Analog Devices.

 

In fiscal 2005, the amount of interest credited with respect to Mr. Stata’s deferred compensation balance in our Deferred Compensation Plan in excess of 120% of the applicable federal long-term rate (5.57%) was $454,121, and the total amount of interest credited to Mr. Stata’s deferred compensation balance in fiscal 2005 (without any reduction for the amount of interest earned by Analog Devices on assets related to such deferred compensation balance) was $3,956,422. Mr. Stata’s deferred compensation balance was distributed, upon his request, in December 2005. See “Information About Executive Compensation-Deferred Compensation Plan” for further information.

 

On December 7, 2004, we granted a stock option to Mr. Stata for the purchase of 50,000 shares of our common stock at an exercise price of $37.70 per share. This option is exercisable, subject to Mr. Stata’s continued employment with us, in three equal annual installments, on each of the third, fourth and fifth anniversaries of the grant date. Following the end of fiscal year 2005, on December 6, 2005, we granted a stock option to Mr. Stata for the purchase of 40,000 shares of our common stock at an exercise price of $39.44 per share. This option is exercisable, subject to Mr. Stata’s continued employment with us, in five equal annual installments, on each of the first, second, third, fourth and fifth anniversaries of the grant date.

 

As of June 27, 2005, we employ Adam S. Champy, the son of James A. Champy, a director of Analog Devices, as a micromachining market engineer. Adam Champy joined Analog after graduating from the Massachusetts Institute of Technology with a Masters of Engineering in Computer Science and Electrical Engineering. In fiscal year 2005, Adam S. Champy received $33,654 of cash compensation and, on June 27, 2005, was granted a stock option for the purchase of 3,000 shares of our common stock at an exercise price of $37.28 per share.

 

During fiscal year 2005, we had a contract with Fidelity Employer Services Company LLC (FESCO), Fidelity Institutional Retirement Services Company (FIRSCO), and Fidelity Brokerage Services LLC (FBS) to provide payroll and benefits administration, Deferred Compensation Plan administration, 401(k) plan administration, and stock plan administration. Fidelity Management Trust Company (FMTC) serves as trustee with respect to the assets of our 401(k) plan and Deferred Compensation Plan. We paid fees for these services totaling approximately $1.7 million in fiscal year 2005. Additionally, fees are paid by plan participants in the form of commissions and brokerage fees generated on various transactions. FESCO, FIRSCO, FBS and FMTC are subsidiaries of FMR Corp. Based on a Form 13F-HR filed by FMR Corp. on November 14, 2005, FMR Corp. beneficially owned more than five percent of our common stock as of September 30, 2005.

 

The following table contains certain information about the compensation for each of the last three fiscal years of our chief executive officer, our four other most highly compensated executive officers who were serving as executive officers on October 29, 2005 and our chief financial officer:

 

Summary Compensation Table

 

 

 

 

 

The grant date fair-value of these options was computed using a Black-Scholes valuation methodology pursuant to Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. The grant date fair value of the options was estimated using the following assumptions:

 

 

The actual value realized from the option, if any, will depend on the future sale price after the option is exercised and the shares are sold.

 

 

The following contains information regarding stock options granted during fiscal year 2005 to the executive officers named in the Summary Compensation Table:

 

Option Grants in Last Fiscal Year

 

 

 

 

Following the end of fiscal year 2005, on December 6, 2005, we granted stock options for the purchase of 50,000 shares of our common stock to each of Messrs. Marshall and McDonough, stock options for the purchase of 40,000 shares to Mr. McAdam and stock options for the purchase of 25,000 shares to Mr. Fuller, in each case at an exercise price of $39.44 per share. These options are exercisable, subject to the optionee’s continued employment with us, in five equal annual installments, on each of the first, second, third, fourth and fifth anniversaries of the grant date except for Mr. McDonough’s option, which is exercisable in installments of one-fifth on each of the first and second anniversaries of the grant date and three-fifths on the third anniversary of the grant date. At Mr. Fishman’s request, the Compensation Committee has granted to him no stock options since the end of fiscal year 2005, consistent with the Company’s objective to reduce its overall annual stock option dilution rate.

 

The following table contains information concerning the exercise of stock options during the fiscal year ended October 29, 2005 by each of our executive officers named in the Summary Compensation Table and the number and value of unexercised options held by each of them on October 29, 2005:

 

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values

 

 

 

 

Messrs. Marshall and McAdam are the only executive officers named in the Summary Compensation Table included in this proxy statement who participate in a defined-benefit plan, The Analog Devices B.V. Executive Pension Scheme.

 

The Analog Devices B.V. Executive Pension Scheme is a defined-benefit pension plan covering all permanent, full-time executive employees of our Irish subsidiaries. This pension plan has the following features:

 

A participant will be entitled to receive an annual pension equal to the sum of 1/60th of the participant’s “final pensionable salary”, multiplied by the number of years of “pensionable service” with us. “Final pensionable salary” is defined as the annual average of the three highest consecutive “pensionable salaries” during the 10 years preceding the normal retirement date or earlier termination date. “Pensionable salary” is defined at any date as the salary on that date less an amount equal to one and one-half times the Contributory Old Age Pension payable under the Social Welfare Acts in Ireland. “Pensionable service” is defined as the period of service of the participant with us up to the normal retirement date, the date of earlier retirement or the date of terminating service with us. For senior executives retiring at age 60, pensionable service is defined as if service continued to age 65. The normal retirement date under the pension plan is defined as the last day of the month in which a participant attains his or her 65th birthday. For senior executives, the retirement age under the pension plan is 60.

Pension Plan Table(1)(2)
Annual Estimated Benefits Provided by
The Analog Devices B. V. Executive Pension Scheme

 

 

 

 

Our stock option program is a broad-based, long-term employee retention program that is intended to attract, retain and motivate our employees, officers and directors and to align their interests with those of our shareholders. We have two plans under which we currently grant stock options:

 

 

Substantially all of our employees participate in one or both of these plans. All options have a term of ten years and generally vest either in three equal installments on each of the third, fourth and fifth anniversaries of the date of grant; four equal installments on each of the second, third, fourth and fifth anniversaries of the date of grant; or five equal installments on each of the first, second, third, fourth and fifth anniversaries of the date of grant. Our option plans do not permit us to grant options at exercise prices that are below the fair market value of our common stock as of the date of grant. We believe that these plans are critical to our efforts to create and maintain a competitive advantage in the extremely competitive semiconductor industry.

 

We plan to reduce the dilution related to our option program to approximately 2.3% in fiscal year 2006. The dilution percentage is calculated as the total number of shares of common stock underlying new option grants for the

year, net of options forfeited by employees leaving Analog, divided by total outstanding shares of our common stock as of the end of the fiscal year.

 

All stock option grants to executive officers and directors can be made only from shareholder-approved plans and are made after a review by, and with the approval of, the Compensation Committee of our Board of Directors. All members of the Compensation Committee are independent directors, as defined by the New York Stock Exchange.

 

In December 2002, our Board of Directors adopted an amendment to each of our 2001 Broad-Based Stock Option Plan and our 1998 Stock Option Plan to provide that the terms of outstanding options under these plans may not be amended to provide an option exercise price per share that is lower than the original option exercise price per share.

 

The following table provides information as of October 29, 2005 about the securities issued, or authorized for future issuance, under our equity compensation plans, consisting of our 2001 Broad-Based Stock Option Plan, our 1998 Stock Option Plan, our Restated 1994 Director Option Plan, our Restated 1988 Stock Option Plan, our 1992 Employee Stock Purchase Plan, our 1998 International Employee Stock Purchase Plan and our Employee Service Award Program.

 

Equity Compensation Plan Information

 

 

 

 

In December 2001, our Board of Directors adopted the 2001 Broad-Based Stock Option Plan pursuant to which non-statutory stock options for up to 50,000,000 shares of common stock may be granted to employees, consultants or advisors of Analog and its subsidiaries, other than executive officers and directors. The 2001 plan was filed most recently as an exhibit to our Annual Report on Form 10-K for the fiscal year ended November 2, 2002 (File No. 1-7819) as filed with the SEC on January 29, 2003. In December 2002, our Board of Directors adopted an amendment to the 2001 plan to provide that the terms of outstanding options under the 2001 plan may not be amended to provide an option exercise price per share that is lower than the original option exercise price per share.

 

Our Board of Directors is authorized to administer the 2001 plan. Our Board of Directors is authorized to adopt, amend and repeal the administrative rules relating to the 2001 plan and to interpret the provisions of the 2001 plan. Our Board of Directors may amend, suspend or terminate the 2001 plan at any time. Our Board of Directors has delegated to the Compensation Committee authority to administer certain aspects of the 2001 plan.

 

Our Board of Directors and our Compensation Committee have the authority to select the recipients of options under the 2001 plan and determine (1) the number of shares of common stock covered by such options, (2) the dates upon which such options become exercisable (which is typically in three equal installments on each of the third, fourth and fifth anniversaries of the date of grant; four equal installments on each of the second, third, fourth and fifth anniversaries of the date of grant; or five equal installments on each of the first, second, third, fourth and fifth anniversaries of the date of grant), (3) the exercise price of options (which may not be less than the fair market value of the common stock on the date of grant), and (4) the duration of the options (which may not exceed 10 years).

 

If any option granted under the 2001 plan expires or is terminated, surrendered, canceled or forfeited, the unused shares of common stock covered by that option will again be available for grant under the 2001 plan. No option may be granted under the 2001 plan after December 5, 2011, but options previously granted may extend beyond that date.

 

Our Board of Directors is required to make appropriate adjustments in connection with the 2001 plan to reflect any stock split, stock dividend, recapitalization, liquidation, spin-off or other similar event. The 2001 plan also contains provisions addressing the consequences of any reorganization event or change in control.

 

If a reorganization event occurs, the 2001 plan requires our Board of Directors to provide that all the outstanding options are assumed, or equivalent options substituted, by the acquiring or succeeding entity, and if not, all then unexercised options, would become exercisable in full and would terminate immediately prior to the consummation of the reorganization event. If those options are assumed or replaced with substituted options, they would continue to vest in accordance with their original vesting schedules. If the reorganization event also constitutes a change in control, one-half of the shares of common stock subject to then outstanding unvested options would become immediately exercisable and the remaining one-half of the unvested options would continue to vest in accordance with the original vesting schedules of such options, provided that any remaining unvested options held by an optionee would vest and become exercisable in full if, on or prior to the first anniversary of the change in control, such optionee’s employment is terminated without “cause” or for “good reason” (as those terms are defined in the 2001 plan).

 

The 1998 International Employee Stock Purchase Plan, as amended to date, or the International ESPP, was adopted by the Board of Directors in June 1998 and most recently amended by the Board in December 2005. The International ESPP is intended to provide a method whereby employees of subsidiary corporations of ADI residing in countries other than the United States have the opportunity to acquire shares of common stock of ADI. There are a total of 1,000,000 shares of ADI common stock authorized for issuance under the International ESPP, of which 747,647 shares have been issued as of the date of this proxy statement.

 

The Board of Directors has appointed the Compensation Committee of the Board to administer the International ESPP. The Compensation Committee is authorized to interpret the provisions of the International ESPP and adopt rules relating to its administration, subject to the final jurisdiction of the Board of Directors. The Board of Directors may at any time terminate or amend the International ESPP. Unless extended or earlier terminated by the

Board of Directors, the International ESPP will terminate on June 1, 2008. During fiscal 2005, our Board of Directors decided that the current offering period, which ends June 1, 2006, will be the last offering period under the International ESPP.

 

The International ESPP permits eligible employees to purchase during one or more offering periods shares of ADI common stock. An offering period generally extends for twelve months; however, the Board of Directors or the Compensation Committee may in its discretion choose a different period of fewer than twelve months. The purchase price per share under the International ESPP is equal to the lower of 85% of the composite closing price of a share of ADI common stock as reported on the NYSE on the offering commencement date or the offering termination date. Under the International ESPP, employees may authorize ADI to withhold up to 10% of their annual base salary (or, in the case of an offering of less than twelve months, up to 10% of their base salary for each payroll period in that offering period) to purchase shares under the International ESPP, subject to certain limitations.

 

The Board of Directors is required to make appropriate adjustments with respect to the International ESPP in the event of a change in the outstanding shares of common stock of ADI by reason of a stock dividend, subdivision, combination or exchange of shares, recapitalization or other similar event. The International ESPP also contains provisions addressing the consequences of a merger or consolidation of ADI or a sale of assets of ADI.

 

The Employee Service Award Program, or the Program, is designed to recognize and thank employees for their long-term working relationship with ADI. All regular employees of ADI who are not executive officers are eligible to receive these awards in the form of ADI common stock. Executive officers of ADI receive these awards in cash in lieu of stock. The awards are granted to employees starting with the employee’s tenth anniversary of employment with ADI and thereafter at the end of each subsequent five-year period of employment with ADI. The value of the award at the employee’s tenth anniversary with ADI is $1,000 and the value of the award increases by $500 at each subsequent five-year service milestone. The number of shares awarded to an eligible employee is equal to the dollar value of the award divided by the closing per share price of ADI common stock as reported on the NYSE on a specified date. The Board of Directors may terminate, amend or suspend the Program at any time in its discretion.

 

We have change in control employee retention agreements with each of our 11 current executive officers and with 42 additional key managers providing for severance benefits in the event of termination within 24 months following a change in control (as defined in each retention agreement) that was approved by our Board of Directors. The retention agreements also provide for severance benefits if (1) we terminate the employee (other than termination for “cause”), or (2) the employee terminates his or her employment for “good reason” (as defined in his or her retention agreement) within 24 months after a change in control (as defined in each retention agreement) that was approved by our Board of Directors. The retention agreements also provide for severance benefits if an employee is terminated (other than for “cause”) within 12 months after a change in control that was not approved by our Board of Directors. The retention agreements do not provide for severance benefits in the event of an employee’s death or disability. Each retention agreement provides that, in the event of a potential change in control (as defined in each retention agreement), the employee shall not voluntarily resign as an employee, subject to certain conditions, for at least six months after the occurrence of the potential change in control. The retention agreements are automatically renewed each year unless we give the employee three months’ notice that his or her agreement will not be extended.

 

The retention agreements provide for the following severance benefits: (1) a lump-sum payment equal to 200% (299% in the case of 11 of the 53 employees who are parties to the agreements, including Messrs. Fishman, McAloon, Marshall, McAdam, Fuller and McDonough) of the sum of the employee’s annual base salary plus the total cash bonuses paid or awarded to him or her in the four fiscal quarters preceding his or her termination, and (2) the continuation of life, disability, dental, accident and group health insurance benefits for a period of 24 months. In addition, if payments to the employee under his or her retention agreement (together with any other payments or benefits, including the accelerated vesting of stock options or restricted stock awards that the employee receives in connection with a change in control) would result in the triggering of the provisions of Sections 280G and 4999 of

the Internal Revenue Code of 1986, the retention agreements provide for the payment of an additional amount so that the employee receives, net of excise taxes, the amount he or she would have been entitled to receive in the absence of the excise tax provided in Section 4999 of the Internal Revenue Code.

 

For other employees and senior management who are not parties to retention agreements, we have change in control policies in place that provide for lump-sum severance payments, based on length of service with us, in the event of the termination of his or her employment under certain circumstances within 18 months after a change in control (as defined in these policies). Severance payments range from a minimum of 2 weeks of annual base salary (for hourly employees with less than 5 years of service) to a maximum of 104 weeks of base salary. In addition to this payment, senior management employees with at least 21 years of service receive an amount equal to the total cash bonuses paid or awarded to the employee in the four fiscal quarters preceding termination. In addition to the agreements and policies described above, certain of our stock option and restricted stock awards provide for immediate vesting of some or all outstanding awards upon any change in control of Analog Devices.

 

On November 14, 2005, we entered into an employment agreement with Jerald G. Fishman. Under the employment agreement, the Company has agreed to continue to employ Mr. Fishman, and Mr. Fishman has agreed to continue to serve, as President and Chief Executive Officer of our Company for a term of five years. The employment agreement provides for severance benefits if Mr. Fishman’s employment with us is terminated without “cause” or terminates for “good reason,” as each of those terms is defined in his employment agreement. These benefits will be paid, following a change in control, only if they are greater than the severance benefits provided under his employee retention agreement. The benefits provided under the employment agreement are as follows: a lump-sum payment equal to (1) Mr. Fishman’s base salary at the time of termination plus his target annual bonus (i.e. the agreed upon percentage of his base salary) for the fiscal year in which termination occurs, multiplied by (2) a number equal to the lesser of (a) three or (b) the number of full years (plus a fraction representing any partial year) remaining in the employment period immediately prior to such termination. Mr. Fishman’s employment agreement also provides that if his employment with us is terminated without “cause” or terminates for “good reason,” all then unvested outstanding stock options to purchase common stock of our company held by Mr. Fishman become fully vested and exercisable in full.

 

Since 1995, our executive officers and directors, along with 76 management and engineering employees are currently eligible to participate in the Deferred Compensation Plan, or the DCP. The DCP was established to provide participants with the opportunity to defer the receipt of all or a portion of their compensation, which includes salary, bonus, director fees and the company matching contribution as described below. Prior to January 1, 2005, participants could also defer gains on stock options and restricted stock granted before July 23, 1997. The Company has operated the DCP in a manner it believes is consistent with Internal Revenue Service guidance regarding non qualified deferred compensation plans.

 

We credit each participant’s account with earnings each year on the deferred amounts. These earnings represent the amounts that would have been earned had the deferred amounts been invested in one or more of the various investment options (as selected by the participant). Participants have elected to invest most of their DCP balances in a fixed-rate investment option that provides for a return based on the Moody’s Baa index. Earnings credited to participants electing the fixed-rate investment option for fiscal 2005 were calculated using an average interest-rate of 6.48%.

 

In addition, for each calendar year, we credit the account of each participant with a contribution designed to approximate the additional contribution that would have been made under The Investment Partnership Plan for the participant if certain limitations under the Internal Revenue Code did not exist. This contribution (the company match) is equal to 7% of the greater of (1) the amount of compensation deferred by the participant during that calendar year or (2) the participant’s compensation for that calendar year in excess of the compensation limit that applies under The Investment Partnership Plan of Analog Devices. The compensation limit that applies under The Investment Partnership Plan for calendar year 2006 is $220,000.

 

Under the terms of the DCP, only the payment of the compensation earned is deferred and there is no deferral of the expense in the Company’s financial statements related to the participant’s deferred compensation and

investment earnings. Salary, bonuses, directors fees and investment earnings on deferred balances are charged to our income statement as an expense in the period they are earned. The Company’s balance sheet includes separate line items for the Deferred Compensation Plan Investments and Deferred Compensation Plan Liabilities.

 

The Company holds DCP assets in a separate trust segregated from other assets. To the extent possible, the Company invests in the same investment alternatives that the DCP participants select for their DCP balances. As a result, a small portion of these assets are invested in mutual funds. Since most participants have selected a fixed rate investment option, the remaining portion of these assets are invested in high-quality, short-term interest-bearing instruments.

 

Participants who terminate their employment with us due to retirement, disability or death will be paid their Deferred Compensation Plan balance in either a lump sum or in installments over ten or fewer years, based on the elections they have made. Participants who terminate their employment with us for any other reason will receive payment of their Deferred Compensation Plan balance in the form of a lump sum.

 

The enactment of tax legislation in 2004 imposed significant changes on deferred compensation plans. The Company has conformed its DCP to the current tax law. As permitted by the current tax law, the Company in fiscal 2005 offered participants the opportunity to withdraw funds from the DCP until December 31, 2005.

 

The following table shows for each executive officer named in the Summary Compensation Table and director who participates in the DCP the deferred compensation activity for fiscal year 2005:

 

 

 

 

Our executive compensation program is designed to attract, retain and reward the executives responsible for leading us toward the achievement of our business objectives. The Compensation Committee makes decisions each year regarding executive compensation, including annual base salaries, bonus awards and stock option grants. All compensation for executive officers is reviewed by the full Board of Directors. This report is submitted by the Compensation Committee and addresses the compensation policies for fiscal year 2005 as they affected each of our executive officers.

 

Our executive compensation philosophy is based on the belief that competitive compensation is essential to attract, motivate and retain highly qualified and industrious employees. Our policy is to provide total compensation that is competitive for comparable work and comparable corporate performance. The compensation program includes both motivational and retention-related compensation components. Bonuses are included to encourage effective performance relative to our current plans and objectives. Stock options are included to promote longer-term focus, to help retain key contributors and to more closely align their interests with those of our shareholders. Our philosophy has been in recent years to increase the proportion of total compensation for executive officers attributable to variable compensation.

 

Our compensation policy seeks to relate compensation with our financial performance and business objectives. We reward individual performance and also tie a significant portion of total executive compensation to the annual and long-term performance of Analog Devices. While compensation survey data are useful guides for comparative purposes, we believe that a successful compensation program also requires the application of judgment and subjective determinations of individual performance. To that extent, the Compensation Committee applies its judgment in reconciling the program’s objectives with the realities of retaining valued employees.

 

The Compensation Committee has retained a compensation consultant to assist, among other things, in establishing annual compensation levels for executive officers.

 

Annual compensation for our executives consists of three principal elements: base salary, bonus, and equity ownership in the form of stock options.

 

 

Annual cash compensation consists of two elements: base salary and bonus. In setting the annual cash compensation for our executives for fiscal 2005, the Compensation Committee reviewed compensation for comparable positions in a group of seven peer companies selected by the Compensation Committee for comparison purposes. Most of these companies are engaged in the manufacture and sale of semiconductor devices, instruments and computer software. We also regularly compare our pay practices with other leading companies through reviews of survey data and information gleaned from the public disclosure filings of publicly-traded companies.

 

Increases in annual base salary are based on an evaluation of the performance of the operation or activity for which an executive has responsibility, the impact of that operation or activity on our overall performance, the skills and experience required for the job, and a comparison of these elements with similar elements for other executives both within and outside Analog Devices.

 

During fiscal 2005, our executive officers participated in the same bonus plan as our employees. Under that plan, approved by our Board of Directors, the sole financial performance metric was operating profit before tax as a percentage of sales. Operating profit before tax was adjusted for the purposes of this bonus calculation, in the discretion of the Compensation Committee, to exclude special charges relating to restructuring actions. The ratio of bonus to base salary varies significantly across the levels in our organization to reflect the ability of the individual to impact our overall performance and generally, is higher for employees with higher base salaries. For fiscal 2005, we paid bonuses to the executive officers named in the Summary Compensation Table that ranged from 29% to 45% of their respective base salaries.

 

 

Total compensation at the executive level also includes long-term incentives afforded by stock options. The purpose of our stock ownership program is to reinforce the mutuality of long-term interests between our employees and shareholders, and to assist in the attraction and retention of important key executives, managers and individual contributors, mostly engineers, who are essential to our success.

We have a goal to keep dilution related to our option program to approximately 2.3%, net of forfeitures, in fiscal 2006. The dilution percentage is calculated as the total number of shares of common stock underlying new option grants for the year, net of options forfeited by employees leaving Analog, divided by total outstanding shares of our common stock.

 

The design of our stock programs includes time-based vesting periods to optimize the retention value of these options and to orient our managers to longer-term success. Generally, if employees leave Analog Devices before completion of these vesting periods, they forfeit the unvested portions of these awards. Our options typically do not fully vest until five years from the date of grant. While we believe that these longer vesting periods are in the best interest of our shareholders, they tend to increase the number of stock options outstanding at any given time compared to companies that grant stock options with shorter vesting schedules.

 

The number of shares of common stock underlying stock option awards is generally intended to reflect the significance of the executive’s current and anticipated contributions to our overall performance. The exercise price per share of the stock options we grant is equal to the fair market value of a share of our common stock on the date of grant. Before awarding any stock option grants to our executives, the Compensation Committee reviews survey information of the stock option programs of peer companies and other companies with comparable capitalization. The value realizable from exercisable stock options depends on the price of our common stock at the time the stock is sold.

 

We maintain a Deferred Compensation Plan under which our executive officers and directors, along with a group of management and engineer employees, are eligible to defer receipt of all or any portion of their compensation. See “— Deferred Compensation Plan” above for further information regarding this plan.

 

Mr. Fishman, in his capacity as our President and Chief Executive Officer, is eligible to participate in the same executive compensation program available to our other senior executives. Prior to establishing Mr. Fishman’s compensation level for fiscal 2005, the Committee reviewed all forms of Mr. Fishman’s compensation, including the aggregate value of his stock options held at fiscal year-end, his deferred compensation plan balances and potential obligations under his change in control retention agreement. The Committee’s goal was to set Mr. Fishman’s total compensation at the higher end of the range of chief executive officers of peer companies. For fiscal 2005, Mr. Fishman’s annual base salary was set at $930,935 and he earned a bonus of $414,445. Also, on December 7, 2004, we granted a stock option to Mr. Fishman for 400,000 shares of our common stock at an exercise price of $37.70 per share.

 

The retention of Mr. Fishman’s salary at the same level as that paid to Mr. Fishman since 2003 reflects ADI’s continued efforts to constrain expenses throughout the organization and to increase the variable portion of executive officers’ compensation. For fiscal 2005, Mr. Fishman’s target bonus award was 100% of his annual base salary. The bonus award paid to Mr. Fishman for fiscal 2005 represented 45% of Mr. Fishman’s base salary and was calculated under the company-wide bonus plan based on the Company’s operating profit before tax as a percentage of revenue. Operating profit before tax was adjusted for the purposes of all bonus calculations, including Mr. Fishman’s bonus calculation, to exclude special charges relating to restructuring actions. In establishing Mr. Fishman’s compensation for fiscal 2005, the Committee took into account Mr. Fishman’s strong leadership in guiding ADI through the downturn in the semiconductor industry, his position as a leading executive in the semiconductor industry and ADI’s performance over the past fiscal year relative to its peer companies.

 

On November 14, 2005, we entered into an employment agreement with Mr. Fishman. Under the employment agreement, we agreed to continue to employ Mr. Fishman, and Mr. Fishman has agreed to continue to serve, as President and Chief Executive Officer of our company for a term of five years. The employment agreement provides for an annual base salary subject to future increase by the Compensation Committee, and provides for the payment of annual bonuses and annual equity incentive awards as determined by the Compensation Committee. The employment agreement also provides for the establishment of a long-term equity and/or cash retention arrangement

for Mr. Fishman upon such terms that may in the future be agreed upon by Mr. Fishman and the Compensation Committee. See “— Severance and Other Agreements.”

 

For fiscal 2006, the Committee has maintained Mr. Fishman’s salary at $930,935 and, at Mr. Fishman’s request, has granted to him no stock options, consistent with the Company’s objective to reduce its overall annual stock option dilution rate. Mr. Fishman, along with all other executive officers, is eligible to participate in the Company’s executive bonus plan for fiscal 2006. The bonus payable under the executive bonus plan is based on the same metric as the fiscal 2006 bonus plan for Analog employees, but has three additional adjustments based on individual performance and Company performance. The primary metric is operating profit before tax as a percentage of revenue. Operating profit before tax can be adjusted for purposes of calculating the bonus payment at the sole discretion of the Compensation Committee. This percentage is used to calculate a bonus payout factor, which can range from zero to three. Mr. Fishman’s salary paid during the period is then multiplied by the bonus payout factor and his individual bonus target percentage. Mr. Fishman’s fiscal year 2006 bonus target percentage was set by the Compensation Committee at 120%. The bonus is then subject to an adjustment that can reduce, but not increase, the bonus calculated above by as much as 50% based on an evaluation of Mr. Fishman’s individual performance. The bonus derived from the above calculation is then potentially further adjusted for each of the following Company performance-related items: (1) an adjustment to increase the bonus calculated above by 25% based on the Company’s sales growth during the bonus period relative to the sales growth of a group of peer companies selected by the Compensation Committee; and (2) an adjustment to increase the bonus calculated above, prior to the potential sales growth adjustment, by 25% if Analog’s annual fiscal year 2006 diluted earnings per share is equal to or exceeds the plan established at the beginning of the year. Diluted EPS can be adjusted for purposes of calculating the bonus payment at the sole discretion of the Compensation Committee. The last two potential adjustments are independently applied to the initial bonus calculation, and therefore, are not compounded. The Compensation Committee will determine, in its sole discretion, if the sales growth and EPS targets have been achieved.

 

Under the terms of the change in control retention agreement and employment agreement between Mr. Fishman and Analog Devices, as described above under “— Severance and Other Agreements,” if Mr. Fishman were terminated without “cause” or resigned for “good reason” within 24 months following a change in control, he would receive, as of January 1, 2006, the following estimated benefits:

 

 

 

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction to public companies for certain compensation in excess of $1 million paid to the company’s Chief Executive Officer and the four other most highly compensated executive officers. Certain compensation, including qualified performance-based compensation, will not be subject to the deduction limit if certain requirements are met. The Compensation Committee reviews the potential effect of Section 162(m) periodically and generally seeks to structure the long-term incentive compensation granted to its executive officers, except cash bonus awards, in a manner that is intended to avoid disallowance of deductions under Section 162(m), provided that a portion of the payments made to named executive officers in 2005 under the Deferred Compensation Plan prior to their cessation of employment will be subject to the Section 162(m) limitation. Nevertheless, there can be no assurance that compensation attributable to awards granted under Analog Devices’ plans will be treated as qualified performance-based compensation under Section 162(m). In addition, the Compensation Committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limit when the Compensation Committee believes such payments are appropriate and in the best interests of Analog Devices and our shareholders, after taking into consideration changing business conditions and the performance of its employees.

 

Compensation Committee,

 

 

F. Grant Saviers, Chairman
James A. Champy
Paul J. Severino

 

During fiscal year 2005, Messrs. Champy and Saviers served as members of our Compensation Committee. Subsequent to the end of fiscal year 2005, Mr. Severino was appointed to the Compensation Committee. No member of our Compensation Committee was at any time during fiscal year 2005, or formerly, an officer or employee of Analog or any subsidiary of Analog. Mr. Champy’s son, Adam S. Champy, is employed by us as a micromachining market engineer. Adam Champy joined Analog after graduating from the Massachusetts Institute of Technology with a Masters of Engineering in Computer Science and Electrical Engineering. In fiscal year 2005, Adam S. Champy received $33,654 of cash compensation and, on June 27, 2005, was granted an option for the purchase of 3,000 shares of our common stock at an exercise price of $37.28 per share. No other member of our Compensation Committee had any relationship with us during fiscal year 2005 requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934.

 

During fiscal year 2005, none of our executive officers served as a member of the board of directors or compensation committee (or other committee serving an equivalent function) of any entity that had one or more executive officers serving as a member of our Board of Directors or Compensation Committee.

 

The following graph compares cumulative total shareholder return on our common stock since October 27, 2000 with the cumulative total return for the Standard & Poor’s 500 Index and the Standard & Poor’s Information Technology Sector Index. This graph assumes the investment of $100 on October 27, 2000 in our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s Technology Sector Index and assumes all dividends are reinvested. Measurement points are the last trading day for each respective fiscal year.

 

 

In our Form 10-K filing dated November 30, 2004, we disclosed that the Securities and Exchange Commission, or SEC, had initiated an inquiry into our stock option granting practices, focusing on options that were granted shortly before the issuance of favorable financial results. On November 15, 2005, we announced that a tentative settlement has been reached.

 

Since receiving notice of this inquiry, we have been cooperating with the SEC and believe that the matter will be concluded in the near future. We and our President and Chief Executive Officer, Mr. Fishman, have made an offer of settlement to the Staff of the SEC, which is subject to agreement regarding the specific language of the SEC’s administrative order and other settlement documents. The SEC Staff has decided to recommend the offer of settlement to the Commission. A final settlement is subject to review and approval by the Commission.

 

Our Board of Directors and Mr. Fishman believe that it is in the best interests of our shareholders to settle this case on the proposed terms rather than face a protracted dispute with the SEC.

 

The contemplated settlement addresses two separate issues. The first issue concerns our disclosure regarding grants of options to our employees and directors prior to the release of favorable financial results. Specifically, the issue relates to options granted to our employees (including officers) on November 30, 1999 and to employees (including officers) and directors on November 10, 2000. The SEC settlement would conclude that we should have made disclosures in our proxy filings to the effect that we priced these stock options prior to releasing favorable financial results.

 

The second issue addressed by the tentative settlement concerns the grant dates for options granted to our employees (including officers) in 1998 and 1999, and the grant date for options granted to employees (including officers) and directors in 2001. Specifically, the settlement would conclude that the appropriate grant date for the September 4, 1998 options should have been September 8th (which is one trading day later than the date that was used to price the options); the appropriate grant date for the November 30, 1999 options should have been November 29th (which is one trading day earlier than the date that was used); and the appropriate grant date for the July 18, 2001 options should have been July 26th (which is five trading days after the original date).

 

In connection with the contemplated settlement, Analog would consent to a cease-and-desist order under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, would pay a civil money penalty of $3 million, and would reprice options granted to Mr. Fishman and other directors in certain years. Options granted to all other employees would be excluded from the repricing. Mr. Fishman would consent to a cease-and-desist order under Sections 17(a)(2) and (3) of the Securities Act, would pay a civil money penalty of $1 million, and would make a disgorgement payment with respect to options granted in certain years. With the exception of options granted in 1998, Mr. Fishman has not exercised or sold any of the options identified in this matter. We and Mr. Fishman would settle this matter without admitting or denying the Commission’s findings.

 

We have determined that no restatement of our historical financial results would be necessary due to the proposed settlement, because the effects of using revised measurement dates for options granted in 1998, 1999 and 2001 are not material to any of the fiscal years 1998 through 2005, based on the materiality guidelines contained in SAB 99. If a stock-based compensation charge had been taken as a result of the revised measurement dates for these option grants to all employees (including officers) and directors, our net income for fiscal years 1998 through 2005 would have been reduced by $21.8 million in total. During this period, we earned cumulative net income of over $2.5 billion. There would be no impact on revenue, cash flow from operations, or shareholders’ equity as a result of using the revised measurement dates. The impact on net income in individual fiscal years would have been as follows: fiscal 1998 ($0.2 million), fiscal 1999 ($1.4 million), fiscal 2000 ($1.8 million), fiscal 2001 ($3.7 million), fiscal 2002 ($8.1 million), fiscal 2003 ($6.1 million), fiscal 2004 ($0.5 million).

 

On January 23, 2006, our Board of Directors adopted, subject to shareholder approval, the 2006 Stock Incentive Plan (the “2006 Plan”). If approved, the 2006 Plan will decrease the number of shares available for issuance and will diversify the equity-based portion of our compensation awards to include stock options, stock appreciation rights, restricted stock and restricted stock units. The 1998 Stock Option Plan (the “1998 Plan”) and our 2001 Broad-Based Stock Option Plan (the “2001 Plan”) (together referred to as the “Prior Plans”) would terminate, except for the options currently outstanding under those plans. The new 2006 Plan will decrease the total number of shares available for future issuance since the 15 million shares requested for the new 2006 Plan are fewer than the 15.8 million shares available for issuance pursuant to future option grants under the Prior Plans.

 

Analog Devices has successfully used stock options to attract and retain employees since the company was founded 40 years ago. In order to facilitate the objective of attracting and retaining valuable technical talent, we have regularly granted options to a very broad base of employees. Approximately 93% of our employees received stock options during fiscal 2005. Historically, we have also generally distributed 95% of our annual option grants to employees who are not named executive officers. We believe that our stock option program has been very successful throughout Analog’s history in both motivating employees and enhancing shareholder value.

 

During the past year, we have been carefully considering the effectiveness of our entire compensation package and the cost of equity-based compensation awards. As part of this review, we have assessed the benefits of alternative forms of equity compensation, including stock appreciation rights, restricted stock and restricted stock units. Our review has led to a conclusion that Analog Devices should have available a plan that affords us the flexibility to issue stock options, stock appreciation rights, restricted stock and restricted stock units. Many other semiconductor companies and direct competitors of ours have begun utilizing restricted stock as a part of their compensation programs for at least a portion of their employees. Some of our shareholders have also expressed a view that they would recommend utilization of restricted stock as part of a compensation package for some employees.

 

Despite the importance of stock options to the retention of our key employees, we have been sensitive to the potential dilution to our shareholders. As a result, during the past five years, we have been steadily reducing our net option grants from 4.3% of outstanding shares in fiscal 2001 to 2.3% in fiscal 2006. We have a goal of reducing our net annual dilution from equity-based compensation to below 2% in future years.

 

The Prior Plans only allow issuance of stock options. The 2006 Plan is intended to replace the Prior Plans by giving us the flexibility to grant various types of awards, including options, stock appreciation rights, restricted stock awards and restricted stock units and other stock-based awards. We consider this flexibility to be critical to our ability to maintain a competitive position in attracting, retaining and motivating key personnel.

 

Under the 2006 Plan, we may issue up to 15 million shares of our common stock, plus any shares that are subject to outstanding options under the Prior Plans as of January 23, 2006 that are subsequently terminated or expire without being exercised. We will not grant further options under the Prior Plans after approval of the 2006 Plan by our shareholders.

 

The 2006 Plan provides the flexibility needed to appropriately structure future equity compensation programs as well as individual awards that both motivate our employees and reduce the cost to our shareholders.

 

The 2006 Plan includes the following terms:

 

 

 

The following tables provide information relating to option grants during our last five fiscal years, option activity during fiscal year 2005 and fiscal year 2006 through December 31, 2005 and options outstanding as of December 31, 2005:

 

Employee and Executive Option Grants

 

 

 

Summary of Option Activity — Fiscal 2005 and Fiscal 2006 through December 31, 2005

 

 

 

 

In-the-Money and Out-of-the-Money Option Information as of December 31, 2005