ITEM 1: BUSINESS
Organized in 1967, Applied Materials, Inc. ("Applied Materials" or the "Company") develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts. The Company's worldwide customers include both companies which manufacture semiconductor devices for use in their own products and companies which manufacture semiconductor devices for sale to others. Applied Materials operates exclusively in the semiconductor wafer fabrication equipment industry. The Company is also a fifty percent stockholder in Applied Komatsu Technology, Inc., a joint venture corporation which develops, manufactures, markets and services thin film transistor fabrication systems used to produce active-matrix liquid crystal displays. On November 24, 1996, the Company announced that it had entered into agreements to acquire two companies in the metrology and inspection semiconductor equipment market. Opal, Inc. is a leading supplier of critical dimension scanning electron microscope systems that measure certain critical dimensions of integrated circuits at various stages of the manufacturing process. Orbot Instruments, Ltd. is a supplier of wafer and reticle inspection systems with leading-edge technologies. Both acquisitions were completed during the Company's first fiscal quarter of 1997 ending on January 26, 1997.
PRODUCTS
Applied Materials' products are sophisticated systems that utilize state-of-the-art technology in wafer processing chemistry and physics, particulate management, process control, software and automation. Many of the Company's technologies are complementary and can be applied across all of its product offerings. The Company's products, which provide enabling technology, productivity and yield enhancements to semiconductor manufacturers, are used to fabricate semiconductor devices on a substrate of semiconductor material (primarily silicon). A finished device consists of thin film layers which can form anywhere from one to millions of tiny electronic components that combine to perform desired electrical functions. The fabrication process must control film and feature quality to ensure proper device performance while meeting yield and throughput goals. The Company currently manufactures equipment that addresses three major steps in wafer fabrication: deposition, etch and ion implantation. The Company also manufactures a Rapid Thermal Processing (RTP) system that provides versatility and broad application to many areas of semiconductor manufacturing, a Chemical Mechanical Polishing (CMP) system that planarizes wafers after various processing steps, and systems for metrology and inspection.
Single-wafer, multi-chamber architecture
Recognizing the trend toward more stringent process requirements and larger wafer sizes, Applied Materials developed a single-wafer, multi-chamber system called the Precision 5000. The Company introduced the Precision 5000 with dielectric chemical vapor deposition (DCVD) processes in 1987, etch processes in 1988 and tungsten CVD (WCVD) processes in 1989. The Precision 5000's single-wafer, multi-chamber architecture features several processing chambers, each of which is attached to a central handling system, and is designed for both serial and integrated processing. The Precision 5000's integrated processing capability makes it possible to perform multiple process steps on a wafer in a controlled environment, thus reducing the risk of particulate contamination. The Company leveraged its expertise in single-wafer, multi-chamber architecture to develop an evolutionary platform in 1990 called the Endura 5500 PVD (Physical Vapor Deposition), which features a staged, ultra-high vacuum (UHV) architecture for the rapid sputtering of aluminum and other metal films used to form the circuit interconnections on advanced devices. In October 1991, the Company announced its second-generation Precision 5000 system,
the Precision 5000 Mark II, with numerous enhancements to the platform, process chambers and remote support equipment. The Precision 5000 Mark II is used to manufacture advanced devices, such as 16 megabit DRAMs (Dynamic Random Access Memories), on 200mm (8-inch) wafers. In September 1992, the Company announced its latest generation single-wafer, multi-chamber platform, the Centura, to target the high temperature thin films market and future process applications with 0.5-micron and below specifications. This platform improves upon the Precision 5000 by incorporating high vacuum capabilities and advanced robotics that provide significantly higher throughput.
Deposition
A fundamental technology in semiconductor fabrication, deposition is a process in which a layer of either electrically insulating (dielectric) or electrically conductive material is deposited on a wafer. Deposition can be divided into several different categories, of which Applied Materials currently participates in three: chemical vapor deposition (CVD), physical vapor deposition (PVD), and epitaxial and polysilicon deposition.
CVD. Chemical vapor deposition is a process used in semiconductor fabrication in which thin films (insulators, conductors and semiconductors) are deposited from gaseous sources. In 1987, the Company introduced the Precision 5000 CVD platform for DCVD which, with its automated multi-chamber architecture, provides the flexibility to perform a broad range of deposition processes utilizing up to four individual chambers on a single system. In 1989, the Company entered the tungsten (W) CVD market with the introduction of a system for blanket tungsten deposition, the Precision 5000 WCVD. The Company has continued to add functionality to this system, including integrated tungsten plug fabrication capability which combines WCVD deposition and etchback capabilities in the same system. The Company has also added tungsten silicide and titanium nitride processes to further extend its offerings. In 1992, the Company introduced the single-wafer, multi-chamber Centura platform. The Centura platform accommodates both DCVD and metal CVD processes. In 1994, the Company introduced the Precision 5000 Mark II CVD platform with sub-atmospheric process technologies that address applications to 0.35-microns. Also in 1994, the Company announced a new chamber technology called "xZ" on the Centura platform, which provides a significant enhancement by improving system throughput, providing no consumable parts and reducing operating costs. Most of the mainstream CVD applications offered by the Company are now available using this technology, with the exception of the HDP-CVD (High-Density Plasma CVD) Centura. Launched in February, the HDP-CVD Centura system is aimed at the most advanced sectors of the semiconductor market, including emerging semiconductor production, research and development and pilot lines. In April 1996, the Company entered a new market with a high-productivity silane-based CVD process for anti-reflective coating (ARC) applications. ARC films are typically used to enhance photolithography.
PVD. Physical vapor deposition sputters metals on wafers during semiconductor fabrication to form the circuit interconnects. Unlike CVD, the sources of the deposited materials are solid sources called targets. Applied Materials entered the PVD market in April 1990 with the Endura 5500 PVD system. This system utilizes a modular, single-wafer, multi-chamber platform which accommodates UHV processes like PVD, and conventional high vacuum processes like CVD and etch. In July 1993, the Company introduced the Endura HP (High Productivity) PVD system, an enhanced version of the Endura 5500 PVD system. In November 1993, the Centura HP PVD was introduced in order to offer customers a choice of platforms using the Company's PVD technology.
In November 1994, the Endura VHP (Very High Productivity) PVD system was launched, further enhancing the wafer transfer system to raise throughput. A key advance in process technology was announced in July 1996 with the Vectra IMP (Ion Metal Plasma) chamber for titanium (Ti) and titanium nitride (TiN) deposition. This technology creates metal ions from the materials sputtered from the target, whose directionality can then be controlled in the chamber for dramatically improved step coverage performance in very small contacts and vias. In September 1996, the Liner TxZ Centura system was launched. This system combines a new CVD TiN chamber with a Coherent PVD Ti chamber, and allows for deposition of sequential layers of Ti and CVD TiN in high-aspect-ratio metal structures under vacuum.
Epitaxial and polysilicon deposition. Epitaxial (Epi) and polysilicon deposition involve depositing layers of high-quality, silicon-based compounds on the surface of a silicon wafer to change its electrical properties and, in the case of epi, to form the base on which the integrated circuit is built. In 1989, the Company introduced the Precision 7700 Epi system for advanced silicon deposition. The 7700 system extends the capabilities of radiantly-heated "barrel" technology and incorporates fully automated wafer handling as well as many features for particulate control. In September 1992, the Company announced the Poly Centura, a single-wafer, multi-chamber platform targeted at the high temperature thin film deposition of polysilicon on wafers up to 200mm (8 inches) in diameter. The Epi Centura, which features deposition of epitaxial silicon, was announced in March 1993. In December 1993, the Company launched the Polycide Centura which combines chambers for polysilicon and tungsten silicide deposition on the Centura platform.
Etch
Prior to etch processing, a wafer is patterned with photoresist during the photolithography process. Etching then selectively removes material from areas which are not covered by the photoresist pattern. Applied Materials entered the etch market in 1981 with the introduction of the AME 8100 Etch system, which utilized a batch process technology for dry plasma etching. In 1985, the Company introduced the Precision Etch 8300, which featured improved levels of automation and particulate control. The Company continues to sell the Precision Etch 8300 product. Applied Materials' first single-wafer, multi-chamber system for the dry etch market was the Precision 5000 Etch, introduced in 1988. In 1990, the Company introduced a metal etch system based on the Precision 5000 architecture which provides single-wafer, aluminum etch capabilities. In 1993, the Company introduced its next generation etch platform, the Centura HDP Dielectric Etcher, designed for critical high density plasma oxide etch applications requiring sub-0.5-micron design rules, and the Precision 5000 Mark II Etch MxP, a new model of the Precision 5000-series etch system with several enhancements including process capability for 0.35-micron applications. In July 1994, Applied Materials introduced the Metal Etch MxP Centura, which combines sub-0.5-micron process technology with improved throughput. The Company launched a new dielectric etch system in April 1995, combining its latest Centura platform with an enhanced etch chamber, called the Dielectric Etch MxP+ Centura. The Remote Plasma Source (RPS) Centura, introduced in June 1995, extended the Company's range of dielectric dry etch process technologies to several isotropic etch steps. Two new etch systems were launched in 1996 for HDP etching of metal and silicon films, using the Company's new DPS (Decoupled Plasma Source) technology. The DPS Metal Etch Centura and DPS Silicon Etch Centura are aimed at very advanced applications, primarily for deep submicron devices (0.25-micron). In addition, the products deliver very high throughput, for superior cleanroom space utilization.
Ion Implantation
During ion implantation, silicon wafers are bombarded by a high-velocity beam of electrically charged ions. These ions are embedded within a wafer at selected sites and change the electrical properties of the implanted area. Applied Materials entered the high-current portion of the implant market in 1985 with the Precision Implant 9000 and introduced the Precision Implant 9200 in 1988. In 1989, the Company added enhancements to the 9200 series, including a new option for automated selection of implant angles and new hardware/software options that enable customers to perform remote monitoring and diagnostics. In 1991, the Company announced an enhanced version of its high-current ion implanter and designated it the Precision Implant 9200XJ. In November 1992, the Company introduced a new high-current ion implantation system, the Precision Implant 9500, to address the production of high-density semiconductor devices, such as 16 megabit and 64 megabit memory devices and advanced microprocessors. In November 1994, the 9500xR model was introduced, further extending the range of the 9500 system into the traditional medium-current area with enhanced low-dose, low-energy implant performance. In October 1995, the Company introduced its latest implant system, the Precision Implant xR80. This system features low-energy and a very small system footprint, while maintaining high throughput. Two extensions of the basic xR80 architecture were introduced in 1996: the Precision Implant xR LEAP (Low Energy Advanced Processing) in May and the xR120 in July. Both of these systems extend the energy range of the xR80 system for customers needing those capabilities.
Rapid Thermal Processing
In June 1995, Applied Materials introduced a new system, the Rapid Thermal Processing (RTP) Centura, into the emerging RTP market. RTP uses very rapid heating cycles to perform high-temperature processes traditionally done by slower-heating batch furnace technologies. The system is designed to solve the limiting technical issues -- temperature measurement and control and uniformity and process repeatability -- that have historically kept RTP from becoming a production technology. The RTP Centura's implant annealing processes offer chipmakers improved device performance, with demonstrated potential for significant yield improvements and faster factory cycle time.
Chemical Mechanical Processing
In December 1995, the Company entered a new market with the introduction of a Chemical Mechanical Polishing (CMP) system. CMP uses a combination of corrosive slurry and mechanical pressure to flatten or "planarize" the topography on semiconductor wafers. The Company's Mirra CMP system uses a unique multi-station "carousel" design, within which several wafers can be processed simultaneously.
Metrology and Inspection
In fiscal 1997, the Company entered into the metrology and inspection market with the acquisitions of two companies, Opal, Inc., and Orbot Instruments, Ltd. Opal, Inc. is a supplier of advanced scanning electron microscopes (SEMs) for the automated measurement of sub-micron circuit features, or critical dimensions (CDs), to verify the performance of critical lithography and patterning processes. Orbot Instruments manufactures two types of optical inspection equipment: one product locates and identifies defects in the wafer circuitry and is used in the in-line examination of patterned wafers; another product assures that the masks and reticles used in the lithography process are error free.
CUSTOMER SERVICE AND SUPPORT
The demand for improved production yields of integrated circuits requires that semiconductor wafer processing equipment operate reliably, with maximum uptime and within very precise tolerances. Applied Materials installs its equipment and provides warranty service worldwide through offices located in North America, Europe (including Israel), Japan, Korea and Asia-Pacific (Taiwan, China and Singapore). Applied Materials maintains 70 sales/service offices worldwide, with 24 offices in North America, 10 offices in Europe, 25 offices in Japan, 6 offices in Korea and 5 offices in Asia-Pacific. The Company offers a variety of service contracts to customers for maintenance of installed equipment and provides a comprehensive training program for all customers.
BACKLOG
At October 27, 1996, the Company's backlog totaled $1.4 billion, compared to $1.5 billion at October 29, 1995. The Company schedules production of its systems based upon order backlog and customer commitments. The backlog includes orders for which written authorizations have been accepted and shipment dates within 12 months have been assigned. Due to possible changes in customer delivery schedules and cancellations of orders, the Company's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period.
MANUFACTURING, RAW MATERIALS AND SUPPLIES
The Company's manufacturing activities consist primarily of assembling various commercial and proprietary components into finished systems, principally in the United States, with additional operations in England, Japan, Korea and Taiwan. Production requires some raw materials and a wide variety of mechanical and electrical components, which are manufactured to the Company's specifications. Multiple commercial sources are available for most components. The Company has consolidated the number of sources for several key purchased items for purposes of improving its position with suppliers, resulting in improved on-time delivery, lower inventory levels and better pricing to the Company. There have been no significant delays in receiving components from sole source suppliers; however, the unavailability of any of these components could disrupt scheduled deliveries to customers.
MARKETING AND SALES
Because of the highly technical nature of its products, the Company markets its products worldwide through a direct sales force, with sales, service and spare parts offices in North America, Japan, Europe, Korea and Asia-Pacific. For the fiscal year ended October 27, 1996, sales to customers in North America, Europe, Japan, Korea and Asia-Pacific were approximately 31%, 16%, 24%, 14% and 15%, respectively, of the Company's net sales. For the fiscal year ended October 29, 1995, sales to customers in North America, Europe, Japan, Korea and Asia-Pacific were approximately 32%, 15%, 26%, 17% and 10%, respectively, of the Company's net sales. The Company's business is not seasonal in nature, but it is subject to the capital equipment investment patterns of major semiconductor manufacturers located throughout the world. Each region in the global semiconductor equipment market exhibits unique characteristics that cause capital equipment investment patterns to vary from period to period. While international markets provide the Company with significant growth opportunities, periodic economic downturns, trade balance issues, political instability and fluctuations in interest and foreign currency exchange rates are all risks that could affect global product and service demand.
RESEARCH AND DEVELOPMENT
The market served by the Company is characterized by rapid technological change. The Company's research and development efforts are global in nature. Engineering organizations are located in the United States, Japan, England and Israel, with process support and customer demonstration laboratories in the United States, Japan, England, Taiwan and Korea. Since 1984, the Company has operated a large-scale technology center in Narita, Japan, which has been expanded several times to meet the requirements of its Japanese customer base. In 1996, additional technology centers were opened in Korea and Taiwan to better serve customers in the Korea and Asia-Pacific regions. The Company also operates a technology center in Israel to develop controller configuration and software tools for its semiconductor processing systems. Applied Materials works closely with its global customers to design systems that meet their planned technical and production requirements. The Company's research and development activities are primarily directed toward the development of new wafer processing systems and new process applications for existing products. The Company is also investing in the development of new products in conjunction with the semiconductor industry's move to the next-generation 300mm wafer size. Together with today's standard 200mm wafers, 300mm wafers will be used to produce semiconductor devices with geometries of 0.25 micron and below, probably including the 256Mbit generation of DRAMs.
To meet emerging customer requirements for advanced manufacturing solutions, the Company is developing a capability called Process Sequence Integration (PSI). Choosing from Applied Materials' broad lineup of process technologies, customers will be able to order "process modules" which consist of multiple systems whose sequential processes can create complete structures within the semiconductor device, such as the interconnect structure found in multi-level metal device designs.
COMPETITION
The global semiconductor equipment industry is highly competitive and is characterized by increasingly rapid technological advancements and demanding worldwide service requirements. Each of the Company's products competes in markets defined by the particular wafer fabrication process it performs. There are several companies that compete with Applied Materials in each of these markets. Competition is based on many factors, primarily technological advancements, productivity and cost-effectiveness, customer support, contamination control and overall product quality. Management believes that the Company's competitive advantage in each of its served markets is based on the ability of its products and services to address customer requirements as they relate to these competitive factors.
Applied Materials is a principal supplier in each of its served markets. The Company faces strong competition throughout the world from other semiconductor equipment manufacturers as well as semiconductor manufacturers who design and produce fabrication equipment for their own internal uses and, in some cases, for resale. Management believes that the Company is a strong competitor with respect to its products, services and resources. However, new products, pricing pressures and other competitive actions from both new and existing competitors could adversely affect the Company's market position.
JOINT VENTURE
In September 1991, the Company announced its plans to develop thin film transistor (TFT) manufacturing systems for Active-Matrix Liquid Crystal Displays (AMLCDs). The AMLCD market currently includes screens for laptop, notebook and palmtop computers, desktop monitors, digital/video cameras, portable televisions and instrument displays. The Company believes that this market in the future may include high-resolution workstations and direct view wall television. In September 1993, a joint
venture was formed with Applied Materials, Inc. and Komatsu, Ltd. of Japan sharing a 50-50 ownership. The joint venture, Applied Komatsu Technology, Inc. (AKT), is accounted for using the equity method. The Company's management believes that systems developed by AKT have the potential to lower the manufacturing costs of AMLCDs and provide new process technologies to enhance flat panel capabilities. The Company has granted to AKT an exclusive license to use the Company's intellectual property to develop, manufacture and sell products for the production of flat panel displays, in exchange for royalties in respect thereof. AKT has recently broadened its product offerings, and now has process capability in CVD, PVD and Etch for a wide range of substrate sizes. Investment in research and development will continue in 1997 on next generation systems to further lower AMLCD manufacturing costs and increase substrate size capability.
PATENTS AND LICENSES
Management believes that the Company's competitive position is primarily dependent upon skills in engineering, production, and marketing rather than its patent position. However, protection of the Company's technology assets by obtaining and enforcing patents is increasingly important. Consequently, the Company has an active program to file applications in the United States and other countries on inventions which the Company considers significant. The Company has a number of patents in the United States and other countries and additional applications are pending for new developments in its equipment and processes. In addition to patents, the Company also possesses other proprietary intellectual property, including trademarks, know-how, trade secrets and copyrights.
The Company enters into patent and technology licensing agreements with others when management determines it is in the Company's best interest to do so. The Company pays royalties under existing patent license agreements for the use, in several of its products, of certain patents which are licensed to the Company for the life of the patents.
The Company has made its technology, including patents, available to AKT through a license arrangement which permits AKT to use the Company's technology to develop, manufacture and sell equipment for the flat panel display industry.
In the normal course of business, the Company from time to time receives and makes inquiries with regard to possible patent infringement. In dealing with such inquiries, it may become necessary or useful for the Company to obtain and grant licenses or other rights. However, there can be no assurance that such license rights will be available to the Company on commercially reasonable terms. While there can be no assurance about the outcome of such inquiries, the Company believes that it is unlikely that their resolution will have a material adverse effect on its financial condition or results of operations.
ENVIRONMENTAL MATTERS
Although one of the Company's locations has been designated as a Superfund site by the United States Environmental Protection Agency, neither compliance with Federal, State and local provisions regulating discharge of materials into the environment, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on the Company's capital expenditures, results of operations, financial condition or competitive position.
EMPLOYEES
At October 27, 1996, the Company employed approximately 11,403 regular full-time employees. In the high technology industry, competition for highly skilled employees is intense. The Company believes that a great part of its future success depends on its continued ability to attract and retain qualified employees. None of the Company's employees are represented by a trade union. Management considers its relations with its employees to be good.
INCORPORATION BY REFERENCE
The following portions of the Company's 1996 Annual Report are incorporated herein by reference: "Management's Discussion and Analysis of Financial Condition and Results of Operations," pages 27 through 30, and the Consolidated Financial Statements and accompanying notes thereto, pages 31 through 48.
ITEM 2:

ITEM 2: PROPERTIES
Certain information concerning the Company's principal properties at October 27, 1996 is set forth below:
- --------------- * Subject to loans totaling $73 million secured by property and equipment having an approximate net book value of $79 million at October 27, 1996.
The Company also leases office space for 70 sales and service offices throughout the world: 24 offices are located in North America, 10 in Europe, 25 in Japan, 6 in Korea and 5 in Asia-Pacific.
The Company currently owns 875,000 square feet of manufacturing and other operating facilities in California that have not yet been completed and placed in service. In addition, the Company is currently constructing 258,000 square feet of manufacturing facilities in Texas.
The Company also owns 108 acres in Austin, Texas and 30 acres in Santa Clara, California, of buildable land. The Austin and Santa Clara land can accommodate approximately 1,000,000 and 865,000 square feet, respectively, of additional building space to help satisfy the Company's current and future needs.
Management considers the above facilities suitable and adequate to meet the Company's requirements.
ITEM 3:

ITEM 3: LEGAL PROCEEDINGS
In the first of two lawsuits filed by the Company, captioned Applied Materials, Inc. v. Advanced Semiconductor Materials America, Inc., Epsilon Technology, Inc. (doing business as ASM Epitaxy) and Advanced Semiconductor Materials International N.V. (collectively "ASM") (case no. C-91-20061-RMW), Judge William Ingram of the United States District Court for the Northern District of California ruled on April 26, 1994 that ASM's Epsilon I epitaxial reactor infringed three of the Company's United States patents and issued an injunction against ASM's use and sale of the ASM Epsilon I in the United States. On October 28, 1996, the U.S. Court of Appeals for the Federal Circuit decided ASM's appeal of this decision, affirming the trial court's judgment that one of the Company's patents is valid and infringed. Permanent injunctions are now effective to halt ASM's manufacture, use and sale of its epitaxial reactors in the United States. The trial of the Company's second patent infringement lawsuit against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-92-20643-RMW), was concluded before Judge Whyte in May 1995. On November 1, 1995, the Court issued its judgment holding that two of the Company's United States patents were valid and infringed by ASM's reduced pressure epitaxial reactors. ASM appealed this decision. On December 17, 1996, the U.S. Court of Appeals for the Federal Circuit rejected ASM's appeal, and affirmed the District Court's ruling. The permanent injunction entered on March 7, 1996 prohibiting ASM's use or sale of its ribbed quartz epitaxial reactors within the United States is now effective. Trial in the District Court has been set for July 28, 1997 to determine ASM International's liability, damages and wilfulness, for both case no. C-91-20061-RMW and C-92-20643-RMW.
In a separate lawsuit filed by ASM against the Company involving one patent relating to the Company's single wafer epitaxial product line, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C-93-20853-RMW), the Court granted three motions for summary judgment in favor of the Company which eliminate the Company's liability on this patent. ASM has not indicated whether it intends to appeal this matter. The Company's counterclaims against ASM for inequitable conduct were tried by the Court in July 1996. The Company is awaiting a decision. A separate action severed from ASM's case, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C-95-20169-RMW), involves one United States patent which relates to the Company's Precision 5000 product. A prior trial date has been vacated; no trial date is currently set. In these cases, ASM seeks injunctive relief, damages and such other relief as the Court may find appropriate.
Further, the Company has filed a Declaratory Judgment action against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-95-20003-RMW), requesting that an ASM United States patent be held invalid and not infringed by the Company's single wafer epitaxial product line. No trial date has been set. On April 10, 1996, the Court denied ASM's motion for summary judgment and granted the Company's motion for summary judgment finding several independent grounds why the Company's reactors do not literally infringe ASM's patent. With this ruling, the Company's liability has been substantially eliminated on this patent. ASM has not indicated whether it intends to appeal this decision. On July 7, 1996, ASM filed a lawsuit, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C95-20586-RMW), concerning alleged infringement of a United States patent by susceptors in chemical vapor deposition chambers. Discovery is proceeding.
On January 13, 1997, the Company filed a patent infringement suit against ASM's newly released Epsilon 2000 reactor. Discovery has not yet commenced.
In September 1994, General Signal Corporation filed a lawsuit against the Company (case no. 94-461-JJF) in the United States District Court, District of Delaware. General Signal alleges that the Company infringes five of General Signal's United States patents by making, using, selling or offering for sale multi-chamber wafer fabrication equipment, including for example, the Precision 5000 series machines. General Signal seeks an injunction, multiple damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. This lawsuit is currently in active discovery and pre-trial preparation. A January 1997 trial date has been postponed, and will be rescheduled for later in 1997.
In January 1995, the Company filed a lawsuit against Novellus Systems, Inc. in the United States District Court, Northern District of California (case no. C-95-0243-MMC). This lawsuit alleges that Novellus' Concept One, Concept Two, and Maxxus F TEOS systems infringe the Company's United States patent relating to the TEOS-based, plasma enhanced CVD process for silicon oxide deposition. The lawsuit seeks an injunction, damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. Damages and counterclaims have been bifurcated for separate trial. A jury trial has been scheduled for March 24, 1997 before Judge Charles A. Legge. The Court recently ruled on a number of substantive motions finding, on the issues raised, that the Company's patent in suit is valid and definite. On September 15, 1995, the Company filed another lawsuit against Novellus alleging that Novellus' then newly announced blanket tungsten interconnect process infringes the Company's United States patent relating to a tungsten CVD process. The Company also sought a declaration that a Novellus United States patent for a gas purge mechanism is not infringed by the Company and/or is invalid. Novellus answered by denying the allegations and counterclaimed by alleging that the Company's plasma enhanced TEOS CVD systems infringe Novellus' United States patents concerning gas purge and gas debubbler mechanisms. Novellus also filed a separate lawsuit as a plaintiff before the same court which contains the same claims as those stated in Novellus' defense of the Company's lawsuit. Both cases have been assigned to Judge Legge. Discovery has commenced, and trial which had been set for August 1997 has been postponed and will be rescheduled.
In the normal course of business, the Company from time to time receives and makes inquiries with regard to possible patent infringement. Management believes that it has meritorious defenses and intends to vigorously pursue these matters.
ITEM 4:

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER OF FISCAL 1996
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and notes thereto identify and set forth information about the Company's seven executive officers:
- --------------- (1) Mr. Morgan, age 58, has been Chief Executive Officer since 1977 and Chairman of the Board of Directors since 1987. Mr. Morgan also served as President of the Company from 1976 to 1987.
(2) Mr. Bagley, age 58, was appointed Vice Chairman of the Board of Directors in December 1993. Mr. Bagley was Chief Operating Officer of the Company from 1987 through October 1995, and served as President of the Company from December 1987 to December 1993. Prior to that, Mr. Bagley served as Senior Vice President of the Company since 1981. Mr. Bagley is a director of Kulicke and Soffa Industries, Inc. and Tencor Instruments. Mr. Bagley resigned as Vice Chairman of the Board and Chief Operating Officer of the Company on May 17, 1996.
(3) Dr. Maydan, age 61, was appointed President of the Company in December 1993. Dr. Maydan served as Executive Vice President from 1990 to December 1993. Prior to that, Dr. Maydan had been Group Vice President since February 1989. Dr. Maydan joined Applied Materials in 1980 as a Director of Technology.
(4) Mr. Taylor, age 56, has been Chief Financial Officer of the Company since 1984. Mr. Taylor has also been a Senior Vice President of the Company since 1991 and was previously Vice President of Finance from 1984 to 1991.
(5) Dr. Somekh, age 50, was appointed Senior Vice President of the Company in December 1993. Dr. Somekh served as Group Vice President from 1990 to 1993. Prior to that, Dr. Somekh had been a divisional Vice President. Dr. Somekh joined Applied Materials in 1980 as a Project Manager.
(6) Dr. Wang, age 50, was appointed Senior Vice President of the Company in December 1993. Dr. Wang served as Group Vice President from 1990 to 1993. Prior to that, Dr. Wang had been a divisional Vice President. Dr. Wang joined Applied Materials in 1980 as a Manager, Process Engineering and Applications.
(7) Mr. Yawata, age 62, was appointed President and Chief Executive Officer of Applied Materials Japan, effective January 1, 1995. From 1985 through 1994, Mr. Yawata was a Vice President, and from 1993 through 1994, he was Executive Advisor to the Chairman of LSI Logic Corp. From 1985 through 1992, Mr. Yawata was President, and from 1992 through 1993, he was Chairman, of LSI Logic K.K.
PART II
ITEM 5:

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Stock Price History" on page 50 of the Applied Materials' 1996 Annual Report is incorporated herein by reference.
The Company's common stock is traded on the Nasdaq over-the-counter market. As of December 27, 1996, there were approximately 3,832 holders of record of the common stock.
To date, the Company has paid no cash dividends to its stockholders. The Company has no plans to pay cash dividends in the near future.
ITEM 6:

ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
"Selected Consolidated Financial Data" on page 26 of the Applied Materials 1996 Annual Report is incorporated herein by reference.
ITEM 7:

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" on pages 27 through 30 of the Applied Materials 1996 Annual Report is incorporated herein by reference.
ITEM 8:

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of Price Waterhouse LLP, Independent Accountants, dated November 20, 1996 and appearing on pages 31 through 48, and page 50 of the Applied Materials 1996 Annual Report, are incorporated herein by reference.
ITEM 9:

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the 1997 Annual Meeting of Stockholders ("the Proxy Statement").
ITEM 10:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning directors of the Company appears in the Company's Proxy Statement, under Item 1 -- "Election of Directors." This portion of the Proxy Statement is incorporated herein by reference.
(b) For information with respect to Executive Officers, see Part I of this Form 10-K.
ITEM 11:

ITEM 11: EXECUTIVE COMPENSATION
Information concerning executive compensation appears in the Company's Proxy Statement, under Item 1 -- "Election of Directors," and is incorporated herein by reference.
ITEM 12:

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners and management appears in the Company's Proxy Statement, under Item 1 -- "Election of Directors," and is incorporated herein by reference.
ITEM 13:

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions appears in the Company's Proxy Statement, under Item 1 -- "Election of Directors," and is incorporated herein by reference.
PART IV
ITEM 14:

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying index to financial statements and financial statement schedule are filed or incorporated by reference as part of this annual report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
The financial statement schedule listed in the accompanying index to financial statements and financial statement schedule is filed as part of this annual report on Form 10-K.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this annual report on Form 10-K.
(B) Report on Form 8-K was filed on August 13, 1996. The report contains the Company's financial statements for the period ended July 28, 1996, as attached to its press release dated August 13, 1996.
AND FINANCIAL STATEMENT SCHEDULE (ITEM 14(A))
Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements.
The consolidated financial statements listed in the above index that are included in the Company's Annual Report to Stockholders are hereby incorporated by reference. With the exception of the pages listed in the above index and the portion of such report referred to in items 1, 5, 6, 7 and 8 of this Form 10-K, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this report.
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED MATERIALS, INC.
By /s/ JAMES C. MORGAN ------------------------------------ James C. Morgan Chairman of the Board and Chief Executive Officer
Dated: January 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
**By authority of powers of attorney filed herewith.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Applied Materials, Inc.
Our audits of the consolidated financial statements referred to in our report dated November 20, 1996 appearing on page 50 of the 1996 Annual Report to Stockholders of Applied Materials, Inc., (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP - ---------------------------------- Price Waterhouse LLP
San Jose, California November 20, 1996
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS)


ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Nash Finch Company, a Delaware corporation organized in 1921 as the successor to a business founded in 1885, has its principal executive offices at 7600 France Avenue South, Edina, Minnesota 55435. Its telephone number is (612) 832-0534. Unless the context otherwise indicates, the term "Company," as used in this Report, means Nash Finch Company and its consolidated subsidiaries. Furthermore, the information contained in this document includes the applicable figures of corporations which have been acquired by the Company during fiscal year 1996.
The Company is one of the largest food wholesalers in the United States, serving approximately 2,350 affiliated and other independent retail supermarkets, other retail stores and outlets, and institutional accounts, such as military base commissaries, restaurants, schools and hospitals, as of December 28, 1996. No one customer accounts for a significant portion of the Company's sales. The Company also operates and supplies, as of December 28, 1996, 104 Company-owned supermarkets and warehouse stores. The Company's affiliated and Company-owned stores operate under a number of tradenames, including ECONOFOODS-Registered Trademark-, FOOD BONANZA-Registered Trademark-, SUN MART-TM-, FAMILY THRIFT CENTER-TM-, EASTER FOODS-TM-, FOOD FOLKS-Registered Trademark-, JACK & JILL-Registered Trademark-, ECONOMART-TM-, OUR FAMILY FOODS-Registered Trademark-, FOOD PRIDE-Registered Trademark-, SAX FOOD & DRUG -Registered Trademark- and IGA -Registered Trademark- (a registered trademark of IGA, INC.). The Company's market areas are in approximately 30 states in the Midwest, West, Mid-Atlantic and Southeast and are serviced through 20 wholesale distribution centers and one general merchandise warehouse. The Company packages, ships and markets fresh produce from California and the countries of Chile and Mexico to a variety of buyers across the United States, Canada and overseas.
In January, 1996, the Company acquired substantially all of the business and assets of Military Distributors of Virginia, Inc. ("MDV"), a Virginia corporation based in Norfolk, Virginia. MDV engages in the business of distributing groceries and related products to military commissaries in the eastern United States and Europe. The MDV operation has been consolidated with the Company's existing military distribution operations in Baltimore, Maryland, and Chesapeake, Virginia, into a single military division. Currently, this military division is operating from two distribution centers - - one in Norfolk and the other in Baltimore.
In July 1996, the Company acquired all of the outstanding shares of capital stock of T. J. Morris Company, a Georgia corporation based in Statesboro, Georgia. T. J. Morris Company is a wholesale distributor of a full-line of food and related non-food products to independent grocery retailers, including IGA Stores. The Company's existing operations based in Macon, Georgia have been consolidated with the operations of T. J. Morris Company at its Statesboro facility. Currently, the Company is operating T. J. Morris Company as a wholly-owned subsidiary.
In December 1996, the Company completed the acquisition of all of the outstanding shares of capital stock of Super Food Services, Inc. ("Super Food"), a Delaware corporation based in Dayton, Ohio. Super Food was incorporated in 1957 and, prior to the acquisition by the Company, was ranked as the 14th largest grocery wholesaler in the United States, with sales for
its fiscal year ended August 31, 1996 of of approximately $1.2 billion. Super Food services independent stores, including IGA stores, across six states, including primarily Ohio, Michigan and Kentucky. Super Foods has four distribution centers located in Bellefontaine, Ohio, Cincinnati, Ohio, Bridgeport, Michigan, and Lexington, Kentucky, which provide a full line of groceries and related products, other than produce. The distribution center in Bellefontaine, Ohio also has a portion of its space dedicated to distributing general merchandise to the other distribution centers. Since the completion of the acquisition, the Company has been engaged in the process of coordinating the distribution operations of Super Food with existing distribution operations of the Company and consolidating the general and administrative functions of Super Food with the general and administrative functions of the Company in Edina, Minnesota.
In connection with the acquisition of Super Food, the Company obtained a $500 million credit facility provided by a syndicate of banks for whom Harris Trust and Savings Bank acts as the administrative agent and Bank of Montreal and PNC Bank, National Association, act as co-syndication agents. This credit facility is a $500 million senior credit unsecured revolving facility maturing in five years, with a mandatory commitment reduction to $400 million by December 31, 1998.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Financial information about the Company's business segments for the most recent three fiscal years is contained on page 25 of the 1996 Annual Report (Note 12 to Consolidated Financial Statements). For segment financial reporting purposes, a portion of the operational profits of wholesale distribution centers are allocated to retail operations to the extent that merchandise is purchased by these distribution centers and transferred to retail stores directly operated by the Company. For fiscal 1996, 44% of such warehouse operational profits were allocated to retail operations.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
1. PRODUCTS SUPPLIED.
The Company distributes and sells a full line of food products, including dry groceries, fresh fruits and vegetables, frozen foods, fresh and processed meat products and dairy products, and a variety of non-food products, including health and beauty aids, tobacco products, paper products, cleaning supplies and small household items. The Company primarily distributes and sells nationally advertised brand products and a number of unbranded products (principally meats and produce) purchased directly from various manufacturers, processors and suppliers or through manufacturers' representatives and brokers. Many of the major suppliers of the Company are large companies. The Company has no significant long-term purchase obligations and believes that adequate and alternative sources of supply are generally available to meet the Company's needs.
The Company also distributes and sells private label products using the Company's own trademarks. A wide variety of grocery, dairy, packaged meat, frozen foods, health and beauty products, paper and household products, beverages, and other packaged products are manufactured or processed by others for the Company and sold under Company brand names.
2. DISTRIBUTION.
The Company distributes products to Company-owned supermarkets and warehouse stores and to independent customers and military base commissaries from 20 distribution centers, as of December 28, 1996, located in Colorado, Georgia, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Nebraska (2), North Carolina (2), North Dakota (2), Ohio (2), South Dakota, Virginia (2), and Wisconsin. The Company's distribution centers are located at strategic points to efficiently serve Company-owned stores, independent customers, and military base commissaries. The distribution centers are equipped with modern materials handling equipment for receiving, storing and shipping goods and merchandise and are designed for high-volume operations at low unit costs. The Company also distributes health and beauty products, general merchandise and specialty grocery products from a dedicated area of the distribution center located in Bellefontaine, Ohio, and from a warehouse facility located in Sioux Falls, South Dakota. In addition, the Company distributes produce from a separate warehouse facility in Wilmington, North Carolina.
The distribution centers serve as central sources of supply for Company-owned and independent stores, military base commissaries and other institutional customers within their operating areas. The distribution centers maintain complete inventories containing virtually every national brand grocery product sold in supermarkets, together with a wide variety of high-volume private label items. In addition, the distribution centers provide full lines of perishables, including fresh meats and poultry, fresh fruits and vegetables, (except Super Food) dairy and delicatessen products and frozen foods. Retailers order their inventory requirements at regular intervals through direct linkage with Company computers. Deliveries are made primarily by the Company's transportation fleet. The frequency of deliveries varies, depending upon customer needs. The Company currently has a modern fleet of approximately 500 tractors, 1,200 semi-trailers, and 75 small trucks and vans, most of which are owned by the Company. In addition, many types of meats, dairy products, bakery and other products are sold by the Company but are delivered by the suppliers directly to retail food stores.
Virtually all of the Company's wholesale sales to independent customers are made on a market price-plus-fee and freight basis, with the fee based on the type of commodity and quantity purchased. Selling prices are changed promptly, based on the latest market information.
The Company distributes products to military base commissaries primarily under contractual arrangements with the manufacturers of those products. The Company provides storage, handling and transportation services for the manufacturers; and, as products ordered from the Company by the commissaries are delivered to them, the Company invoices the manufacturer for the cost of the merchandise delivered plus negotiated fees.
3. WHOLESALE OPERATIONS.
As of December 28, 1996, the Company distributed food products and non-food items, on a wholesale basis, to approximately 2,350 affiliated and other independent retail supermarkets, other retail stores and outlets, and institutional accounts, such as military base commissaries, restaurants, schools and hospitals. The Company's retail supermarket customers are primarily self-service supermarkets that carry a wide variety of grocery products, health and beauty products and general merchandise. Many stores also have one or more specialty departments such as delicatessens, in-store bakeries, restaurants, pharmacies and flower shops. The stores served by the Company's wholesale operations range in size from small stores to large supermarkets containing approximately 65,000 square feet.
The Company offers to its affiliated independent retailers a broad range of services, including promotion, advertising and merchandising programs, the installation of computerized ordering, receiving and scanning systems, the establishment and supervision of computerized retail accounting, budgeting and payroll systems, personnel management assistance and employee training, consumer and market research, store development services and insurance programs. The Company's retail counselors and other Company personnel advise and counsel the affiliated independents, and directly provide many of the above services. Separate charges are made for some of these services. Other independent stores are charged for services on a negotiated basis. The Company also provides retailers with marketing and store upgrade services, many of which have been developed in connection with Company-owned stores. For example, the Company assists retailers in installing and operating delicatessens and other specialty food sections. Rather than develop a single pattern for the services it provides, the Company has developed flexible programs to serve the needs of most of its affiliated independents, whether rural or urban, large or small.
The Company's assistance to its affiliated independent stores in store development provides a means of continued growth for the Company through the development of new retail store locations and the enlargement or remodeling of existing retail stores. The services provided include site selection, marketing studies, building design, store layout and equipment planning and procurement. The Company assists its retail customers in securing existing supermarkets that are for sale from time to time in market areas serviced by the Company and, occasionally, acquires existing stores for resale to customers.
The Company also may provide financial assistance to independent retailers it services, generally in connection with new store development and the upgrading or expansion of existing stores. The Company makes secured loans to some of its affiliated independent operators, generally repayable over a period of five or seven years, for inventories, store fixtures and equipment, working capital and store improvements. Loans are secured by liens on inventory or equipment or both, by personal guarantees and by other types of security. As of December 28, 1996, the Company had outstanding $33,858,000 in such secured loans to 171 independent operators. In addition, the Company may provide such assistance to independent retailers by guarantying loans from financial institutions and leases entered into directly with lessors. The
Company also uses its credit strength to lease supermarket locations and sublease them to independent operators, at rates that are at least as high as the rent paid by the Company.
4. RETAIL OPERATIONS.
As of December 28, 1996, the Company owned and operated 108 retail outlets, including 74 supermarkets, 30 warehouse stores and 4 combination general merchandise/food stores. The Company has devoted considerable resources in recent years to acquire, construct, enlarge and modernize Company-owned stores; and, by constructing new stores or expanding existing stores, seeks to add either larger conventional supermarkets (at least 30,000 square feet) or warehouse stores (at least 45,000 square feet), as appropriate. The Company has implemented a number of automated systems, including scanning and direct store delivery for its stores. These systems provide inventory control at delivery and checkout points, reduce shrinkage and increase labor efficiency.
The Company operates its supermarkets principally under the names SUN MART-TM-, EASTER FOODS-TM- and FOOD FOLKS-Registered Trademark-. These stores, thirteen of which the Company owns (the remainder are leased), range in size up to approximately 46,000 square feet. These stores are primarily self-service supermarkets that carry a wide variety of grocery products, health and beauty products, and general merchandise. Many stores also have one or more specialty departments such as delicatessens, in-store bakeries, restaurants, pharmacies and flower shops.
The Company operates 30 warehouse stores principally under the names ECONOFOODS-Registered Trademark- and FOOD BONANZA-Registered Trademark-. These stores, seven of which the Company owns (the remainder are leased), range in size up to approximately 106,000 square feet. The Company's warehouse stores offer a wide variety of high quality groceries, fresh fruits and vegetables, dairy products, frozen foods, fresh fish, fresh and processed meat and health and beauty products, all at lower prices. Many have specialty departments such as delicatessens, in-store bakeries, pharmacies, banks and floral and video departments. These stores appeal to quality and price-conscious customers who want national brands, broad selection, and availability of convenience foods, but are willing, in some cases, to forgo standard supermarket services. The stores are able to offer lower prices due to increased business volume as well as the limited services available.
The Company also operates four combination general merchandise/food stores under the name FAMILY THRIFT CENTER-TM-. These stores, three of which are owned, range in size up to approximately 60,000 square feet. In addition to traditional supermarket food departments, these stores have expanded general merchandise and health and beauty products departments and pharmacies, and some also have sit-down restaurants, full-service floral departments and book departments.
5. PRODUCE MARKETING OPERATIONS.
Through a wholly-owned subsidiary, Nash-DeCamp Company, the Company grows, packs, ships and markets fresh fruits and vegetables from locations in California and the
countries of Chile and Mexico to customers across the United States and Canada, and also overseas. For regulatory reasons, the amount of business between Nash-DeCamp Company and the Company is limited. The Company owns and operates three modern packing, shipping and/or cold storage facilities that ship fresh grapes, plums, peaches, nectarines, apricots, pears, persimmons, kiwi fruit and other products. The Company also acts as marketing agent for other packers of fresh produce in California and in the countries of Chile and Mexico. For the above services, the Company receives, in addition to a selling commission, a fee for packing, handling and shipping produce. The Company also owns vineyards and orchards for the production of table grapes, tree fruit, kiwi and citrus.
6. COMPETITION.
All segments of the Company's business are highly competitive. The Company competes directly at the wholesale level with a number of wholesalers that supply independent retailers, including "cooperative" wholesalers that are owned by their retail customers and "voluntary" wholesalers who, like the Company, are not owned by their retail customers but sponsor a program under which single-unit or multi-unit independent retailers may affiliate under a common name. Certain of these competing wholesalers may also engage in distribution to military bases. The Company also competes indirectly with the warehouse and distribution operations of the large integrated chains, which consist of single entities owning both wholesale and retail operations. At the wholesale level, the principal methods of competition are location of distribution centers, the services offered to independent retailers, such as store financing and use of store names, and the services offered to manufacturers of products sold to military base commissaries. The success of the Company's wholesale business also depends upon the ability of its retail store customers to compete successfully with other retail food stores.
The Company competes on the retail level in a fragmented market with many organizations of various sizes, ranging from national chains and voluntary or cooperative groups to local chains and privately owned unaffiliated stores. Depending on the product and location involved, the principal methods of competition at the retail level include price, service, quality, display, selection and store location.
The Company competes directly in its produce marketing operations with a large number of other firms that pack, ship and market produce, and competes indirectly with larger, integrated firms that grow, pack, ship and market produce. The principal methods of competition in this segment are service provided to growers and the ability to sell produce at the most favorable prices.
7. EMPLOYEES.
As of December 28, 1996, the Company employed approximately 12,775 persons (approximately 7,000 full-time and 5,775 part-time).
ITEM 2.

ITEM 2. PROPERTIES.
The principal executive offices of the Company are located in Edina, Minnesota, and consist of approximately 68,000 square feet of office space in a building owned by the Company. In addition to the executive offices, the Company leases an additional 15,275 square feet of office space in Edina, Minnesota. The locations and sizes of the Company's distribution centers, as of December 28, 1996, are listed below (all of which are owned, except as indicated). The distribution center facilities which are leased have varying terms, all with remaining terms of less than 20 years. Total rent in fiscal year 1996 for the leased facilities was $5,868,813.
Approx. Size Location (Square Feet) --------- ------------ Midwest/West: Denver, Colorado (1) 335,800 Cedar Rapids, Iowa 351,900 Liberal, Kansas 176,500 St. Cloud, Minnesota 325,100 Grand Island, Nebraska 177,700 Lincoln, Nebraska 226,000 Fargo, North Dakota 288,800 Minot, North Dakota 185,200 Rapid City, South Dakota 186,600 Sioux Falls, South Dakota (2) 252,400 Appleton, Wisconsin 430,900
Southeast: Stateboro, Georgia (1)(3) 287,800 Baltimore, Maryland (1)(4) 234,500 Lumberton, North Carolina (1)(5) 256,600 Rocky Mount, North Carolina (1) 191,800 Bluefield, Virginia 186,400 Norfolk, Virginia (1)(6) 567,900
Super Food Services, Inc. Lexington, Kentucky (1) 319,400 Bellefontaine, Ohio (7) 773,700 Cincinnati, Ohio (8) 572,750 Bridgeport, Michigan (1) 581,300
Total Square Footage 6,909,050
- -------------- (1) Leased facility. (2) Includes 79,300 square feet of warehouse space which is leased by the Company. (3) Includes 46,400 square feet of space which is owned by the Company.
(4) Includes 60,000 square feet of refrigerated warehouse space located in Jessup, Maryland. Since year-end, the operations have been consolidated with those in Norfolk, Virginia and the Company no longer operates from the Jessup facility. (5) Includes 16,100 square feet of produce warehouse space located in Wilmington, North Carolina which is owned by the Company. (6) Includes 49,645 square feet which is owned by the Company. (7) Includes 162,700 square feet which is leased by the Company. General merchandising services utilizes approximately 480,000 square feet of the total space (owned and leased). (8) Includes 151,600 square feet which was leased by the Company as of year-end. As of February 14, 1997, the Company no longer occupies 81,000 square feet of such leased space.
The following table shows the number and aggregate size of Company-owned and operated supermarkets and warehouse stores operated at December 28, 1996:
Supermarkets: Number of stores 74 Total square feet 1,641,670
Warehouse stores: Number of stores 30 Total square feet 1,288,000
Combination General Merchandise/Food: Number of stores 4 Total square feet 172,000
Totals: Number of stores 108 Total square feet 3,101,670
The Company leases 61 of its supermarket store buildings and one (1) combination general merchandise/food store building (the remainder are owned), which range in size up to approximately 60,000 square feet. The Company also leases 23 of its warehouse store buildings, which range in size up to approximately 106,000 square feet. These leases are for varying terms, primarily under 20 years. The total rent in fiscal year 1996 for store buildings was approximately $8,834,000.
Further information about the lease obligations of the Company is given in Note 7 to the Consolidated Financial Statements on page 24 of the 1996 Annual Report, incorporated herein by reference.
Nash-DeCamp Company has executive offices comprising approximately 9,000 square feet of leased space in an office building located in Visalia, California. It owns and operates three packing, shipping and/or cold storage facilities in California in connection with its produce marketing operations, with total space of approximately 174,000 square feet. In addition to such storage facilities, Nash-DeCamp Company also owns approximately 713 acres for the production
of table grapes, 40 acres for the production of kiwi fruit, 903 acres for the production of peaches, plums, apricots and nectarines, 614 acres for the production of citrus, and 198 acres of open ground for future development, all in San Joaquin Valley of California. Nash-DeCamp Company also leases 123 acres of tree fruit located in the San Joaquin Valley and, through a wholly-owned Chilean subsidiary, approximately 740 acres in Chile for the production of table grapes.
Nash-DeCamp Company makes a continuing effort to keep all of its properties and facilities modern, efficient and adequate for its operational needs, through the acquisition, disposition, expansion and improvement of such properties and facilities. As a result, Nash-DeCamp Company believes that its properties and facilities are, on an aggregate basis, fully utilized and adequate for the conduct of its business.
ITEM 3

ITEM 3 LEGAL PROCEEDINGS.
In November 1992, Jin Ku Kim, currently an employee of the Company, commenced an action against the Company in U.S. District Court for the Northern District of Iowa claiming damages as a result of the alleged failure of the Company to promote Mr. Kim to the position of shipping foreman in November 1990 and April 1992 because of his national origin and race, and the alleged retaliation against him by the Company in terms and conditions of employment after he filed charges of employment discrimination with the Cedar Rapids, Iowa, Civil Rights Commission. On September 16, 1994, a jury verdict was entered against the Company in the amount of $8,786,000, including $36,000 in back pay, $1,750,000 in mental anguish and loss of enjoyment of life and $7,000,000 in punitive damages. On April 13, 1995, the U.S. District Court entered an Amended Judgment reducing the jury award to a total of $421,000 plus attorneys' fees and costs of $114,556. Both Mr. Kim and the Company have filed appeals from the Amended Judgment with the United States Court of Appeals for the Eighth Circuit. Mr. Kim's appeal seeks reinstatement of the jury verdict and the Company's appeal seeks judgment as a matter of law or further reduction of the damage award; both parties seek a new trial in the alternative. Briefs have been submitted and the case was argued on December 14, 1995. No decision has been issued. The Company continues to deny that Mr. Kim has suffered any discrimination or retaliation, or any damages as a result thereof. The Company believes that there is substantial basis, both in the facts of this case and in law, supporting the Company's position before the Eighth Circuit. Although no assurance can be given that the Eighth Circuit will award the relief the Company seeks, the Company believes that the jury verdict will not be reinstated and that the reserves it has established are reasonably adequate to cover its liability.
On April 2, 1996 an individual engaged in growing citrus crops in Fresno County commenced an action entitled EMILIANO MORENO V. NASH-DECAMP COMPANY, ET. AL., against Nash-DeCamp Company and others, including three of its officers and directors, in the United States District Court for the Eastern District of California. Nash-DeCamp Company provided services to the plaintiff relating to the packing, marketing and distribution of produce grown by the plaintiff, and advanced financing to assist the plaintiff in growing and harvesting his crops. Plaintiff's complaint alleges that the defendants engaged in various acts of misconduct relating to the handling, packaging and pricing of such produce in violation of various federal and state laws, resulting in unspecified damages to the plaintiff. In his complaint, plaintiff sought unspecified compensatory damages, punitive and exemplary damages, treble damages, attorneys' fees and costs of suit, as well as injunctive relief. The defendants filed an answer raising various defenses to and denying the allegations set forth in the complaint. In addition, Nash-DeCamp Company has filed a counterclaim to recover monies owed to it by plaintiff, costs of suit, attorneys' fees, all proceeds from any disposition of the 1995-1996 citrus crops, and other damages and interest. As of March 24, 1997, this matter was still in the discovery stages. Nash-DeCamp Company intends to vigorously defend plantiff's claims and to pursue the recovery of sums owed to it by plaintiff.
ITEM 4

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, their ages, the year first elected or appointed as an executive officer and the offices held as of March 1, 1997 are as follows:
There are no family relationships between or among any of the executive officers or directors of the Company. Executive officers of the Company are elected by the Board of Directors for one-year terms, commencing with their election at the first meeting of the Board of Directors immediately following the annual meeting of stockholders and continuing until the next such meeting of the Board of Directors. Except as indicated below, there has been no change in position of any of the executive officers during the last five years.
Mr. Flaten was elected Chief Executive Officer in November 1994. His election as President and Chief Operating Officer was effective in November 1991. He had been elected Executive Vice President, Sales and Operations of Nash Finch in February 1991.
Mr. Bishop was elected as Senior Vice President, Sales and Logistics effective in December 1994 after joining the Company in the same month. He was previously employed by Scrivner, Inc., a wholesale and retail food distribution company, serving as its President and Chief Operating Officer from 1987 to 1994.
Mr. May was elected as Vice President, Strategic Technology Programs and Marketing Services in July 1996 joining the Company in June. He was previously employed by Spartan Stores Inc., a wholesale food distribution company, serving as its Senior Vice President, Operations, Procurement, MIS and Customer Service from July 1988 to June 1996.
Mr. Richards was elected as Vice President, Corporate Retail Stores in July 1996. He previously served as operating Vice President, Southeast Division from December 1994 to June 1996. Prior to joining the Company, he was employed by Scrivner, Inc., a wholesale and retail food distribution company, serving as its Senior Vice President, Store Development from July 1993 to August 1994 and its Executive Vice President, Corporate Stores from January 1992 to July 1993.
Mr. Lumsden was elected Vice President, Warehouse and Transportation in May 1992. He previously served as Director, Warehouse and Transportation from May 1990 to May 1992.
Mr. Maurice was elected Vice President, Store Development in May 1993. He previously served as operating Vice President, Central Division for more than five years.
Mr. Scherer was appointed as Chief Financial Officer in November 1995. His election as Vice President was effective in December 1994, and he served as Vice President, Planning and Financial Services from December 1994 to November 1995. He previously served as Director of Strategic Planning and Financial Services from April 1994 to December 1994, and Director of Planning and Budgets from January 1988 through April 1994.
Mr. Seiler was elected as Vice President, Corporate Retail Operations effective as of October 1994. He previously served as operating Vice President, Iowa Division from May 1993 to October 1994 and Iowa Division Manager from June 1991 to May 1993.
Mr. Timberlake was elected as Vice President, Human Resources in November 1995. He previously served as Director of Human Resources from January 1993 to November 1995 and Director of Training and Management Development from February 1988 to January 1993.
Mr. McCurry was elected as Vice President, Independent Store Operations in May 1996. He previously served as Director of Independent Store Operations from August 1993 to May 1996 and as Distribution Center Manager, Sioux Falls, South Dakota, from January 1991 to August 1993.
Ms. Allen was elected as Treasurer effective as of January 1996. She previously served as Assistant Treasurer from May 1995 to January 1996, Treasury Manager from January 1993 to May 1995, and Treasury Assistant from September 1987 to January 1993.
PART II
ITEM 5.

ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Price Range of Common Stock and Dividends" on page 15 of the Company's 1996 Annual Report is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The financial information under the caption "Consolidated Summary of Operations" on pages 26 and 27 of the Company's 1996 Annual Report is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 and 15 of the Company's 1996 Annual Report is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and the report of its independent auditors on pages 16-25 of the Company's 1996 Annual Report are incorporated herein by reference, as is the unaudited information set forth under the caption "Quarterly Financial Information" on page 15.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
A. Directors of the Registrant.
The information under the captions "Election of Directors--Information About Directors and Nominees" and "Election of Directors--Other Information About Directors and Nominees" in the Company's 1997 Proxy Statement is incorporated herein by reference.
B. Executive Officers of the Registrant.
Information concerning executive officers of the Company is included in this Report under Item 4A, "Executive Officers of the Registrant."
C. Compliance with Section 16(a) of the Exchange Act of 1934.
Information under the caption "Compliance with Section 16(a) of the Exchange Act" in the Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors--Compensation of Directors" and "Executive Compensation and Other Benefits" in the Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Stockholders and Beneficial Ownership of Management" in the Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors--Other Information About Directors and Nominees" in the Company's 1997 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements.
The following Financial Statements are incorporated herein by reference from the pages indicated in the Company's 1996 Annual Report:
Independent Auditors' Report -- page 16
Consolidated Statements of Earnings for the years ended December 28, 1996, December 30, 1995, and December 31, 1994 -- page 16
Consolidated Statements of Stockholders' Equity for the years ended December 28, 1996, December 30, 1995, and December 31, 1994 -- page 20
Notes to Consolidated Financial Statements -- pages 20-25
2. Financial Statement Schedules.
The following financial statement schedules are included herein and should be read in conjunction with the consolidated financial statements referred to above (page numbers refer to pages in this Report):
Page ---- (a) Valuation and Qualifying Accounts . . . . . . . . . . 18
(b) Other Schedules. Other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
3. EXHIBITS.
The exhibits to this Report are listed in the Exhibit Index on pages E-1 to E-7 herein.
A copy of any of these exhibits will be furnished at a reasonable cost to any person who was a stockholder of the Company as of March 24, 1997, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to Nash Finch Company, 7600 France Avenue South, P.O. Box 355, Minneapolis, Minnesota, 55440-0355, Attention: Secretary.
The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c):
A. Nash Finch Profit Sharing Plan -- 1994 Revision and Nash Finch Profit Sharing Trust Agreement (as restated effective January 1, 1994) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (File No. 0-785)).
B. Nash Finch Profit Sharing Plan -- 1994 Revision -- First Declaration of Amendment (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-785)).
C. Nash Finch Profit Sharing Plan -- 1994 Revision -- Second Declaration of Amendment (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (File No. 0-785)).
D. Nash Finch Executive Incentive Bonus and Deferred Compensation Plan (as amended and restated effective December 31, 1993) (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (File No. 0-785)).
E. Excerpts from minutes of the Board of Directors regarding Nash Finch Pension Plan, as amended (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1987 (File No. 0-785)).
F. Excerpts from minutes of the Board of Directors regarding Nash Finch Pension Plan, as amended (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (File No. 0-785)).
G. Excerpts from minutes of the Board of Directors regarding director compensation (filed herewith as Exhibit 10.22).
H. Excerpts from minutes of the Board of Directors regarding director compensation (filed herewith as Exhibit 10.23).
I. Form of Director Fee Deferral Agreement (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (File No. 0-785)).
J. Form of letter agreement specifying benefits in the event of termination of employment following a change in control of Nash Finch (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (File No. 0-785)).
K. Nash Finch Income Deferral Plan (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (File No. 0-785)).
L. Nash Finch 1994 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed July 8, 1994 (File No. 33-54487)).
M. Nash Finch 1995 Director Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 17, 1995 (File No. 0-785)).
(b) Reports on Form 8-K:
On November 22, 1996, the Company filed a Form 8-K with the Securities and Exchange Commission to report the Company's purchase of shares of outstanding common stock of Super Food Services, Inc. pursuant to a cash tender offer and the consummation of the merger of Super Food Services, Inc. with NFC Acquisition Corporation. On January 31, 1997, Amendment No. 1 on Form 8-K/A, amending the November 22, 1996 filing to include financial statements for the most recent fiscal year of Super Food Services, Inc. and required pro forma financial information, was filed.
(a) Recoveries on accounts previously charged off. (b) Accounts charged off. (c) Change in current portion shown as current liability. (d) Includes current and non-current receivables. (e) Reserve for estimated losses on notes previously sold reclassified from other current liability.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997 NASH-FINCH COMPANY
By/s/Alfred N. Flaten ----------------------------- Alfred N. Flaten President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 28, 1997 by the following persons on behalf of the Registrant and in the capacities indicated.
NASH FINCH COMPANY
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended December 28, 1996
E-1
E-2
E-3
E-4
E-5
E-6
E-7