-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DaDmOZsuos1mwwUqNhbcc74jwxFUub+rOZCD6uWZgIb6SKDwF1+P0sgcNhGJXzQn UzgR/MZ0ki/yc15dDAbXjw== 0000891618-99-004307.txt : 19990927 0000891618-99-004307.hdr.sgml : 19990927 ACCESSION NUMBER: 0000891618-99-004307 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990626 FILED AS OF DATE: 19990924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXIM INTEGRATED PRODUCTS INC CENTRAL INDEX KEY: 0000743316 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942896096 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16538 FILM NUMBER: 99716208 BUSINESS ADDRESS: STREET 1: 120 SAN GABRIEL DR CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087377600 MAIL ADDRESS: STREET 1: 120 SAN GABRIEL DR CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 FORM 10-K. PERIOD ENDED JUNE 26, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 26, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________ COMMISSION FILE NUMBER 0-16538 MAXIM INTEGRATED PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 94-2896096 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 120 San Gabriel Drive Sunnyvale, California 94086 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (408) 737-7600 --------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any Amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 3, 1999 was approximately $5,777,000,000*. Number of shares outstanding of the registrant's Common Stock, $.001 par value, as of August 3, 1999: 136,451,206. 2 DOCUMENTS INCORPORATED BY REFERENCE: Part II - Annual Report to Stockholders for the fiscal year ended June 26, 1999 Part III - Proxy Statement for the 1999 Annual Meeting of Stockholders * Excludes the Common Stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at August 3, 1999. Exclusion of such shares should not be construed to indicate that each of such persons possesses the power, direct or indirect, to control the Registrant, or that each such person is controlled by or under common control with the Registrant. 2 3 PART I This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include (a) projections relevant to future revenue, income, earnings, capital expenditures, capital structure or other financial items, (b) statements of plans or objectives of the Company's management for future operations, including plans or objectives relating to the Company's products or services, (c) statements of future economic performance, and (d) statements of any assumptions underlying or relating to any of the foregoing. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions relating to the future operations are intended to identify forward-looking statements. All forward-looking statements are based on the Company's current expectations, estimates, projections, beliefs and plans or objectives about its business and its industry. These statements are not guarantees of future performance and are subject to risk and uncertainty. Actual results may differ materially from those predicted or implied in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Form 10-K and in the documents incorporated herein by reference. Particular attention should be paid to the section entitled "Risk Factors" at pages 12 through 17 below and to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Stockholders, which is incorporated herein by reference. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise. However, readers should carefully review future reports and documents that the Company files from time to time with the Securities and Exchange Commission, such as its quarterly reports on Form 10-Q (particularly Management's Discussion and Analysis of Financial Condition and Results of Operations) and any current reports on Form 8-K. 3 4 ITEM 1. BUSINESS Maxim Integrated Products, Inc., ("Maxim" or the "Company") designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The Company also provides a range of high-frequency design processes and capabilities that can be used in custom design. The analog market is highly fragmented and characterized by many diverse applications, a great number of product variations, and relatively long product life cycles. Maxim's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Maxim operates two wafer fabrication facilities (See "Manufacturing" below). In addition, the Company subcontracts the fabrication of a small portion of its silicon wafers to outside silicon foundries. Based on product announcements by its competitors, Maxim believes that in the past 16 years it has developed more products for the analog market, including proprietary and second-source products, than any of its competitors over the same period. THE ANALOG INTEGRATED CIRCUIT MARKET All electronic signals fall into one of two categories, linear or digital. Linear (or analog) signals represent real world phenomena, such as temperature, pressure, sound, or speed, and are continuously variable over a wide range of values. Digital signals represent the "ones" and "zeros" of binary arithmetic and are either on or off. Three general classes of semiconductor products arise from this partitioning of signals into linear or digital. There are those, such as memories and microprocessors, that operate only in the digital domain. There are linear devices such as amplifiers, references, analog multiplexers, and switches that operate primarily in the analog domain. Finally, there are mixed-signal devices that combine linear and digital functions on the same integrated circuit and interface between the analog and digital worlds. Maxim targets both the linear and mixed-signal markets, often collectively referred to as the analog market. The Company believes that, compared to the digital integrated circuit market, the analog market has generally been characterized by a wider range of standard products used in smaller quantities by a large number of customers; longer product life cycles; less competition from foreign manufacturers; lower capital requirements as a result of generally using more mature manufacturing technologies; and relatively more stable growth rates that are less influenced by economic cycles. The Company believes that the widespread application of low-cost microprocessor-based systems has affected the market for analog integrated circuits by increasing the need for interfaces with the analog world. 4 5 The analog market is a highly fragmented group of niche markets, serving numerous and widely differing applications for instrumentation, industrial control, data processing, communications, military, video, and selected medical equipment. For each application, different users may have unique requirements for circuits with specific resolution, accuracy, linearity, speed, power, and signal amplitude capability, which results in a high degree of market complexity. Maxim's products can be used in a variety of applications, but serve only certain segments of the total analog market. PRODUCTS AND APPLICATIONS The Company initially entered the analog market with a relatively narrow portfolio of products as second sources for industry-standard parts for which there was an existing customer base. After establishing a position in the market, the Company began to introduce technically innovative proprietary products. Although second sourcing continues to be a component of the Company's product development program, current research and development emphasize development of proprietary circuits. The Company believes it addresses the requirements of the market by providing competitively priced products that add value to electronic equipment with superior quality and reliability. As of the Company's product introduction year ending July 24, 1999, Maxim has introduced over 1,780 products. These products are available with numerous packaging alternatives, including packages for surface mount technology. The following table illustrates the major industries served by the Company and typical applications for which the Company's products can be used:
Industry Typical Application -------- ------------------- Communications ..................... Broadband Networks Cable System Central Office Switches Direct Broadcast TV Fiber Optics Pagers PBX Phones * Cellular/PCS * Cordless Satellite Communications Transmission Systems Video Communications Wireless Communications
5 6 Industrial Control ................. Control of * Flow * Position * Pressure * Temperature * Velocity Robotics Instrumentation .................... Automatic Test Equipment Analyzers Data Recorders Measuring Instruments * Electrical * Light * Pressure * Sound * Speed * Temperature Testers Data Processing .................... Bar-code Readers Disk Drives Hand-Held Computers/PDA Mainframes Personal Computers Printers Point of Sale Terminals Tape Drives Servers Workstations
The Company also sells products for military and selected medical equipment. While Maxim's proprietary products have received substantial market acceptance, Maxim has experienced additional competition as Maxim's competitors have developed second sources for Maxim's successful innovative proprietary products. Typically in the semiconductor industry, when a proprietary product becomes second sourced, the credibility of the original design is enhanced, and there is an opportunity to increase total revenues as the potential customers' reluctance to design in a sole-source product is removed, but gross margins may be adversely affected due to increased price competition. 6 7 PRODUCT QUALITY Maxim places strong emphasis on product quality from initial design through final quality assurance. In the product design phase, Maxim applies a set of circuit design rules that it believes results in enhanced product reliability. Upon receipt from Maxim's own fabrication facilities or from silicon foundries, a majority of processed wafers are tested for conformance with specific parameters. Products are individually tested using specialized test equipment and complex programs to ensure that they meet data sheet performance levels. In addition, long-term operating life and mechanical stress tests are routinely performed on samples to assure continued consistency. MANUFACTURING Maxim uses its own wafer fabrication facilities and, to a small extent, silicon foundries to produce wafers. The majority of processed wafers are subjected to parametric and functional testing at the Company's facilities. As is customary in the industry, the Company ships most of its processed wafers to foreign assembly subcontractors, located in the Philippines, Malaysia, Thailand and South Korea, where wafers are separated into individual integrated circuits and assembled into a variety of packages. The Company assembles some integrated circuits at its 141,000 square foot manufacturing and test facility located in the Philippines. The broad range of products demanded by the analog integrated circuit market requires multiple manufacturing process technologies. Many different process technologies are currently used for wafer fabrication of the Company's products. Historically, wafer fabrication of analog integrated circuits has not required the state-of-the-art processing equipment necessary for the fabrication of advanced digital integrated circuits, although newer processes do utilize and require some of these facilities and equipment. In addition, hybrid products are manufactured using a complex multichip technology featuring thin-film, thick-film, and laser-trimmed resistors. For the majority of these technologies in multiple fabrication lines, the Company relies on its fabrication facilities in San Jose, California and Beaverton, Oregon and, to a small extent, manufacturing subcontractors. A third fabrication facility located in Sunnyvale, California was phased out during fiscal 1999. The Company currently uses four subcontract silicon foundries that represent less than 5% of wafer production. None of the subcontractors currently used by Maxim is affiliated with Maxim. Most of the wafers produced in fiscal 1999 were manufactured at one of the Company's three wafer manufacturing facilities. In December 1989, the Company acquired a wafer fabrication facility in Sunnyvale, California capable of producing 3 micron CMOS and bipolar products. Maxim leased the building housing the facility and purchased all manufacturing assets required for its manufacturing operations. In May 1994, the Company acquired a mixed-class wafer fabrication facility in Beaverton, Oregon capable of producing CMOS and bipolar products. In November 1997, the company acquired a sub-micron wafer fabrication facility in San Jose, California. The Company transferred production from the Sunnyvale facility to the Beaverton facility and suspended wafer production at this facility in December 1998. (See "Item 2. Properties" below). 7 8 As is typical in the semiconductor industry, the Company has experienced disruptions in the supply of processed wafers due to quality problems or failure to achieve satisfactory electrical yields. If the foundries used by the Company were unwilling or the Company's own internal wafer fabrication facilities were unable to produce adequate supplies of processed wafers conforming to the Company's quality standards, the Company's business and relationships with its customers could be adversely affected. Due to the relatively lengthy manufacturing cycle, the Company builds some of its inventory in advance of receiving orders from its customers. As a consequence of inaccuracies inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some Company products and shortages of others. Such shortages can adversely affect customer relations and surpluses can result in larger-than-desired inventory levels which can adversely affect the Company's financial position. Excess inventory issues can also arise when customers cancel orders. Finished products and work in process for those orders may be unsaleable. See "Risk Factors - Factors Affecting Future Operating Results." SALES AND MARKETING In the United States and Canada, the Company sells its products through a direct sales and applications organization in eight regional sales offices and through its own and other unaffiliated distribution channels. As is customary in the industry, domestic distributors are entitled to certain price rebates and product return privileges. International sales are conducted by 13 Maxim sales offices, 35 sales representative organizations and distributors. The Company sells in both United States dollars and various foreign currencies. Over half of the Company's international sales are billed and payable in United States dollars and are therefore not directly subject to currency exchange fluctuations. A portion of the Company's sales from its United Kingdom, French, and German affiliates is denominated in the local currencies. The majority of the sales to customers and distributors located in Japan are denominated in yen. The Company places foreign currency forward contracts to protect the United States dollar value of its firm sales commitments and net monetary assets. Changes in the relative value of the dollar, however, may create pricing pressures for Maxim's products. In addition, various forms of protectionist trade legislation have been proposed in the United States and certain foreign countries. A change in current tariff structures or other trade policies could adversely affect the Company's foreign marketing strategies. In general, payment terms for foreign customers, distributors and others, are longer than for U.S. customers, and certain major foreign customers generally pay for product well beyond the scheduled payment dates. As is customary in the semiconductor industry, the Company's domestic distributors may market products competitive with Maxim's. The Company's independent sales representatives and international distributors may not represent competitive product lines, although they are permitted to sell non-competing products for other companies. International sales accounted for approximately 59%, 56%, and 57% of net revenues in fiscal 1999, 1998 and 1997, respectively. (See Note 11 "Segment Information" of the Notes to 8 9 Consolidated Financial Statements as set forth in the Company's Annual Report to Stockholders for the fiscal year ended June 26, 1999.) The Company also sells product directly to original equipment manufacturers. In particular, the Company has a long-term supply arrangement with Tektronix, Inc. for the supply of products manufactured by Tektronix prior to its sale in May 1994 of its integrated circuits operation ("ICO") to the Company and for new designs created by Tektronix. As of June 26, 1999, the Company's backlog was approximately $176 million as compared to approximately $181 million at June 27, 1998. The Company includes in its backlog customer-released orders with firm schedules for shipment within the next 12 months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to the customers. In addition, the Company's backlog includes orders from domestic distributors as to which revenues are not recognized until the products are sold by the distributors. Such products when sold may result in revenue lower than the stated backlog amounts as a result of discounts that are authorized by the Company at the time of sale by the distributors. Accordingly, the Company believes that its backlog at any time should not be used as a measure of future revenues. The Company warrants its products to its customers generally for 12 months from shipment, but in certain cases for longer periods. Warranty expense to date has been minimal. RESEARCH AND DEVELOPMENT The Company believes that research and development is critical to its future success. Objectives for the research and development function include definition and design of innovative proprietary products that meet customer needs, development of second-source products, design of parts for high yield and reliability, and development of manufacturing processes and advanced packaging to support an expanding product line. Research and development expenses were approximately $88.2 million, $72.2 million, and $51.3 million in fiscal 1999, 1998, and 1997, respectively. COMPETITION The analog integrated circuit industry is intensely competitive, and virtually all major semiconductor companies presently compete with, or conceivably could compete with, some segment of the Company's business. Maxim's primary competitors are Analog Devices, Inc. and Linear Technology Corporation. Other competitors with respect to some of the Company's products include Applied Micro Circuits Corporation, Burr-Brown Corporation, Conexant Systems Inc., Harris Corporation, Lucent Technologies, Micrel Inc., Mitsubishi Corporation, Mitsui & Co. Ltd., Motorola Inc., National Semiconductor Corporation, Philips Electronics N.V., Ricoh Company, Ltd., Seiko Corporation, SGS-Thomson Microelectronics N.V., Siliconix Inc., Sipex Corporation, TelCom Semiconductor Inc., Texas Instruments Inc., Vitesse Semiconductor Corporation and others, including start-up companies. While foreign manufacturers have not played a major role in markets from which the Company currently derives a majority of its revenue, they possess the necessary technical and financial capabilities to participate in these markets, and there can be no assurance that significant foreign competition will not develop in the future. Many of Maxim's competitors have 9 10 substantially greater financial, manufacturing, and marketing resources than the Company, and some of Maxim's competitors have greater technical resources. The Company believes it competes favorably with these corporations primarily on the basis of technical innovation, product definition, quality, and service. There can be no assurance that competitive factors will not adversely affect the Company's future business. PATENTS, LICENSES, AND OTHER INTELLECTUAL PROPERTY RIGHTS The Company relies primarily upon know-how, rather than on patents, to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer the Company's products or that the confidentiality agreements with employees, consultants, silicon foundries and other suppliers and vendors will be adequate to protect the Company's interests. Maxim currently owns 85 U.S. patents and 21 foreign patents with expiration dates ranging from 2001 to 2017. In addition, the Company has applied for 71 U.S. patents, a large number of which have corresponding patent applications in multiple foreign jurisdictions. It is the Company's policy to seek patent protection for significant inventions that may be patented, though the Company may elect, in appropriate cases, not to seek patent protection even for significant inventions if other protection, such as maintaining the invention as a trade secret, is considered more advantageous. In addition, the Company has registered certain of its mask sets under the Semiconductor Chip Protection Act of 1984. There can be no assurance that any patent will issue on pending applications or that any patent issued will provide substantive protection for the technology or product covered by it. The Company believes that patent and mask work protection is of less significance in its business than experience, innovation, and management skill. Maxim has registered several of its trademarks with the U.S. Patent and Trademark Office and in foreign jurisdictions. Maxim is a party to a number of licenses, including patent licenses and other licenses obtained from Tektronix in connection with its acquisition of Tektronix's ICO in May 1994. Due to the many technological developments and the technical complexity of the semiconductor industry, it is possible that certain of the Company's designs or processes may involve infringement of patents or other intellectual property rights held by others. From time to time, the Company has received, and in the future may receive, notice of claims of infringement by its products on intellectual property rights of third parties. (See "Risk Factors-Intellectual Property Litigation and Claims," and "Legal Proceedings") If any such infringements were to exist, the Company might be obligated to seek a license from the holder of the rights and might have liability for past infringement. In the past, it has been common semiconductor industry practice for patent holders to offer licenses on reasonable terms and rates. Although in some situations, typically where the patent directly relates to a specific product or family of products, patent holders have refused to grant licenses, though the practice of offering licenses appears to be generally continuing. However, no assurance can be given that the Company will be able to obtain licenses 10 11 as needed in all cases or that the terms of any license that may be offered will be acceptable to Maxim. In those circumstances where an acceptable license is not available, the Company would need either to change the process or product so that it no longer infringes or else stop manufacturing the product or products involved in the infringement. ENVIRONMENTAL REGULATION Federal, state, and local regulations impose a variety of environmental controls on the storage, handling, discharge and disposal of certain chemicals and gases used in semiconductor manufacturing. The Company's facilities have been designed to comply with these regulations, and it believes that its activities are conducted in material compliance with such regulations. There can be no assurance, however, that interpretation and enforcement of current or future environmental regulations will not impose costly requirements upon the Company. Any failure of the Company to control adequately the storage, use, and disposal of regulated substances could result in future liabilities. Increasing public attention has been focused on the environmental impact of electronic manufacturing operations. While the Company to date has not experienced any materially adverse effects on its business from environmental regulations, there can be no assurance that changes in such regulations will not impose costly equipment or other requirements. EMPLOYEES The supply of skilled analog designers and other engineers required for Maxim's business is limited, and competition for such personnel is intense. The Company's growth also requires the hiring or training of additional middle-level managers. If the Company is unable to hire, retain, and motivate qualified technical and management personnel, its operations and financial results will be adversely affected. None of the Company's employees is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. As of June 26, 1999, Maxim had 3,045 employees. MAXTEK COMPONENTS CORPORATION In connection with Maxim's 1994 purchase of the integrated circuits business of Tektronix, Inc., Maxim and Tektronix jointly formed a new company, which is equally owned, to operate and grow Tektronix's high frequency hybrid circuit business. This company, named Maxtek Components Corporation, is an independent company devoted to design and production of multichip modules and hybrids. Maxtek's principal customer, Tektronix, accounts for approximately 40% of its revenue. Under Maxtek's supply agreements, all of its costs related to the Tektronix supply agreement are reimbursed on a cost plus profit basis. 11 12 RISK FACTORS An investment in the securities of Maxim involves certain risks. In evaluating the Company and its business, prospective investors should give careful consideration to the factors listed below, in addition to the information provided elsewhere in this Annual Report on Form 10-K, in the documents incorporated herein by reference and in other documents filed with the Securities and Exchange Commission. The statements contained in this Annual Report on Form 10-K, including those contained in documents incorporated herein by reference, that are not purely historical are forward-looking statements, including statements regarding the Company's beliefs, expectations, plans, or intentions regarding the future. All forward-looking statements included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K involve risk and uncertainty, including risk factors discussed below. Factors Affecting Future Operating Results The Company's future operating results are difficult to predict and may be affected by a number of factors. Important factors affecting the Company's ability to achieve future revenue growth include whether, and the extent to which, demand for the Company's products increases and reflects real end user demand, whether customer cancellations and delays of outstanding orders increase, and whether the Company is able to manufacture in the correct mix to respond to orders on hand and new orders received in the future. The semiconductor market has historically been cyclical and subject to significant economic downturns at various times. After a period of decreasing demand that extended into fiscal 1999, more recently the semiconductor industry, including the portions in which the Company participates, has been experiencing increased demand. However, economic conditions in Europe and Asia continue to present concerns. It is uncertain what level of demand will prevail in the future for the industry and for the markets targeted by the Company. Other key factors affecting the Company's revenues and operating results that could cause actual results to differ materially from past or predicted results include the timing of new product announcements or introductions by the Company and its competitors, competitive pricing pressures, fluctuations in manufacturing yields and manufacturing efficiency, adequate availability of wafers and manufacturing capacity, changes in product mix, and economic conditions in the United States and international markets. As a result of these and other factors, there can be no assurance that the Company will not experience material fluctuations in its future operating results on a quarterly or annual basis. 12 13 As noted above, the Company's ability to realize its quarterly revenue goals and projections is affected to a significant extent by its ability to match inventory and current production mix with the product mix required to fulfill orders on hand and orders received within a quarter for delivery in that quarter (referred to as "turns business"). This issue, which has been one of the distinguishing characteristics of the analog integrated circuit industry, results from the very large number of individual parts offered for sale, the very large number of customers combined with limitations on Maxim's and its customers' ability to forecast orders accurately and relatively lengthy manufacturing cycles. Because of this extreme complexity in the Company's business, no assurance can be given that the Company will achieve a match of inventory on hand, production units, and shippable orders sufficient to realize quarterly revenue goals. In addition, in certain markets where end-user demand may be particularly volatile and difficult to predict, for example notebook computers and telephones, some Maxim customers place orders that require Maxim to manufacture product and have it available for shipment even though the customer is unwilling to make a binding commitment to purchase all, or even any, of the product so manufactured. At any given time this situation could affect a material portion of the Company's backlog. As a result, in any fiscal period, the Company is subject to the risk of cancellation of orders leading to a sharp fall-off of sales and backlog. Further, those orders may be for products that meet the customer's unique requirements so that those cancelled orders would, in addition, result in an inventory of unsaleable products and consequent inventory write-offs. Because of lengthy manufacturing cycles for certain of the products subject to these uncertainties, the amount of unsaleable product could be substantial. Dependence on New Products and Process Technologies The Company's future success will depend very significantly on its continued ability to introduce new products and to develop new process technologies. Semiconductor design and process technology are subject to rapid technological change, requiring a high level of expenditures for research and development. Design and process development for the analog portion of the market in which the Company participates are particularly challenging. The success of new product introductions is dependent on several factors, including proper new product selection, timely product introduction, achievement of acceptable production yields, and market acceptance. From time to time, Maxim has not fully achieved its new product introduction and process development goals. There can be no assurance that the Company will successfully develop or implement new process technologies or that new products will be introduced on a timely basis or receive substantial market acceptance. In addition, the Company's growth is dependent on its continued ability to penetrate new markets such as the high-frequency communications segment of the electronics market where the Company has limited experience and competition is intense. There can be no assurance that the markets being served by the Company will continue to grow; that the Company's existing and new products will meet the requirements of such markets; that the Company's products will achieve customer acceptance in such markets; that competitors will not force prices to an unacceptably low level or take market share from the Company; or that the Company can achieve or maintain profit in these markets. 13 14 Manufacturing Risks The fabrication of integrated circuits is a highly complex and precise process. Minute impurities, contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used in the wafer manufacturing process, manufacturing equipment failures, wafer breakage, or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. The Company has from time to time in the past experienced lower-than-expected production yields, which have delayed product shipments and adversely affected gross margins. There can be no assurance that the Company will not experience a decrease in manufacturing yields or that the Company will be able to maintain acceptable manufacturing yields in the future. The number of shippable die per wafer for a given product is critical to the Company's results of operations. To the extent the Company does not achieve acceptable manufacturing yields or experiences delays in its wafer fabrication, assembly or final test operations, its results of operations could be adversely affected. During periods of decreased demand, fixed wafer fabrication costs could have an adverse effect on the Company's financial condition, gross margins, and results of operations. The Company manufactures over 95% of its wafer production requirements internally. Given the nature of the Company's products, it would be difficult to arrange for independent manufacturing facilities to supply such products. Any prolonged inability to utilize one of the Company's manufacturing facilities as a result of fire, natural disaster, or otherwise, would have a material adverse effect on the Company's results of operations. Competition The Company experiences intense competition from a number of companies, many of which have significantly greater financial, manufacturing, and marketing resources than the Company and some of which have greater technical resources than the Company and have intellectual property rights to which the Company is not privy. To the extent that the Company's proprietary products become more successful, competitors will offer second sources for some of those products, possibly causing some erosion of profit margins. Although foreign manufacturers have not played a major role in the markets from which the Company currently derives the bulk of its revenue, they possess the necessary technical and financial capabilities to participate in these markets, and there can be no assurance that significant foreign competition will not develop in the future. See "Business-Competition." Dependence on Independent Distributors and Sales Representatives A significant portion of the Company's sales is realized through independent electronics distributors and independent sales representatives that are not under the control of the Company. These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to the Company's products or terminate their representation of the Company. Payment terms for foreign distributors are substantially longer, either according to contract or by practice, than for U.S. customers. The inability to 14 15 collect open accounts could adversely affect the Company's results of operation. The Company has recently initiated its own distribution activities. It is uncertain how the Company's independent distributors will react to this change. Termination of a significant distributor, whether at the Company's or the distributor's initiative, could be significantly disruptive to the Company's current business. If the Company were unable to find suitable replacements, terminations by significant distributors or representatives could have a material adverse impact on the Company. See "Business-Sales and Marketing." Dependence on Independent Foundries, Subcontractors, and Philippines Test Facility Although the Company has an internal capability to fabricate most of its wafers, Maxim remains dependent on outside silicon foundries for a small but important portion of its wafer fabrication. None of the foundries currently used by Maxim is affiliated with Maxim, and all are relatively small operations. As is typical in the semiconductor industry, from time to time the Company has experienced disruptions in the supply of processed wafers from these foundries due to quality problems, failure to achieve satisfactory electrical yields, and capacity limitations. Procurement from foundries is done by purchase order and long-term contracts. If these foundries are unable or unwilling to produce adequate supplies of processed wafers conforming to the Company's quality standards, the Company's business and relationships with its customers for the limited quantities of products produced by these foundries would be adversely affected. Finding alternate sources of supply or initiating internal wafer processing for these products would be difficult and time consuming. There can be no assurance the Company would be successful in manufacturing such wafers internally. Maxim relies on subcontractors located in the Philippines, Malaysia, Thailand, and South Korea to separate wafers into individual integrated circuits and package them. The Company performs final testing for almost all of its products at a facility owned by the Company in the Philippines. In the past, South Korea and the Philippines have experienced relatively severe political disorders, labor disruptions, and natural disasters. Although the Company has been affected by these problems, none has materially affected the Company's revenues or costs to date. However, similar problems in the future or more aggravated consequences of current problems, could affect deliveries to Maxim of assembled, tested product, possibly resulting in substantial delayed or lost sales and/or increased expense. See "Business-Manufacturing." Availability of Materials, Supplies, and Subcontract Services Over the past few years, the semiconductor industry has experienced a very large expansion of fabrication capacity and production worldwide. As a result of increasing demands from semiconductor manufacturers, availability of certain basic materials and supplies, such as polysilicon, silicon wafers, lead frames and molding compounds, and of subcontract services, like epitaxial growth and ion implantation and assembly of integrated circuits into packages, have from time to time, over the past few years, been in short supply and may be expected to come into short supply again if overall industry demand increases. Maxim devotes continuous efforts to maintain availability of all required materials, supplies, and subcontract services. However, Maxim does not have long-term agreements providing for all of these materials, supplies, and services, and shortages could occur as a result of capacity limitations or production constraints on suppliers that 15 16 could have materially adverse effects on Maxim's ability to achieve its planned production. In addition, suppliers of semiconductor manufacturing equipment are sometimes unable to deliver test and/or fabrication equipment to a schedule that meets the Company's requirements. Delays in delivery of equipment needed for planned growth could adversely affect the Company's ability to achieve its manufacturing and revenue plan in the future. Protection of Proprietary Information The Company relies primarily upon know-how, rather than on patents, to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer the Company's products or that the confidentiality agreements upon which the Company relies will be adequate to protect its interests. Other companies have obtained patents covering a variety of semiconductor designs and processes, and the Company might be required to obtain licenses under some of these patents or be precluded from making and selling the infringing products. There can be no assurance that Maxim would be able to obtain licenses, if required, upon commercially reasonable terms. See "Business-Patents, Licenses, and Other Intellectual Property Rights," and "Risk Factors-Intellectual Property Litigation and Claims." Intellectual Property Litigation and Claims The Company is subject to various legal proceedings (See Item 3, Legal Proceedings) and other similar claims that involve possible infringement of patent or other intellectual property rights of third parties. In addition, from time to time, the Company receives notices that its products or processes may be infringing the intellectual property rights of others. See "Business-Patents, Licenses, and Other Intellectual Property Rights." If one or more of the Company's products or processes were determined to infringe any such intellectual property rights, the Company might be enjoined by a court from further manufacture and/or sale of the affected products. The Company would then need to obtain a license from the holders of the rights and/or to reengineer the Company's products or processes in such a way as to avoid the alleged infringement. In any of those cases, there can be no assurance that the Company would be able to obtain any necessary license on commercially reasonable terms or that the Company would be able to reengineer its products or processes to avoid infringement. An adverse result in litigation arising from such a claim could involve an injunction to prevent the sales of a material portion of the Company's products, a reduction or the elimination of the value of related inventories, and the assessment of a substantial monetary award for damages related to past sales. Foreign Trade and Currency Exchange Many of the materials and manufacturing steps in the Company's products are supplied by foreign companies or by the Company's operations abroad, such as its test operations in the Philippines. Approximately 59% of the Company's net revenues in fiscal 1999 were from foreign 16 17 customers. Accordingly, both manufacturing and sales of the Company's products may be adversely affected by political or economic conditions abroad. In addition, various forms of protectionist trade legislation have been proposed in the United States and certain foreign countries. A change in current tariff structures or other trade policies could adversely affect the Company's foreign manufacturing or marketing strategies. Currency exchange fluctuations could also increase the cost of components manufactured abroad and the cost of the Company's products to foreign customers or decrease the costs of products from the Company's foreign competitors. See "Business-Manufacturing" and "Business-Sales and Marketing." Dependence on Key Personnel The Company's success depends to a significant extent upon the continued service of its president, John F. Gifford, its other executive officers, and key management and technical personnel, particularly its experienced analog design engineers, and on its ability to continue to attract, retain, and motivate qualified personnel. The Company does not maintain any key person life insurance policy on any such person. The competition for such employees is very intense. The loss of the services of Mr. Gifford, or of one or more of the Company's executive officers, design engineers, other key personnel, or the inability to continue to attract qualified personnel, could have a material adverse effect on the Company. 17 18 ITEM 2. PROPERTIES Maxim's headquarters are located in a 63,000-square-foot building in Sunnyvale, California, which the Company purchased in October 1987. Between December 1989 and June 1999, the Company purchased 6 buildings adjacent to its headquarters building in Sunnyvale with an aggregate of 95,000 square feet of space. These buildings serve as the executive offices of the Company and also provide space for engineering, manufacturing, administration, customer service and other uses. In December 1989, in connection with acquiring one of its wafer fabrication facilities, Maxim assumed the operating lease of the 30,000-square-foot building in Sunnyvale, California. This lease extends through November 2003 and has a five-year lease extension option. In May 1994, Maxim purchased the Tektronix integrated circuit operation. This facility, which is located in Beaverton, Oregon, on 21 acres, totals 226,000 square feet and contains 80,000 square feet of wafer fabrication areas as well as engineering, manufacturing, and general office space. A portion of the space is leased to an unrelated party. In fiscal 1996, the Company acquired an approximately 9-acre parcel and a 30,000-square-foot building in Sunnyvale, California, to support future expansion. The Company currently is utilizing the 30,000 square feet as office space. In 1997, the Company completed construction of an approximate 141,000-square-foot facility at Gateway Business Park in Cavite Province, Philippines. The facility is now operating as the Company's principal final test operation, and it also provides other related manufacturing operations for the Company. In November 1997, the Company acquired a 67,000-square-foot building including a sub-micron wafer fabrication facility in San Jose, California. The Company expects these buildings and the contiguous land to be adequate for its business purposes through fiscal 2000. ITEM 3. LEGAL PROCEEDINGS Linear Technology Corporation vs. Maxim Integrated Products, Inc. et al., Action No. C-98-1727 FMS in the Federal District Court for the Northern District of California. On June 26, 1997, a complaint was filed by Linear Technology Corporation ("LTC") naming the Company and certain other unrelated parties as defendants. The complaint alleges that each of the defendants, including the Company, has willfully infringed, induced infringement and contributorily infringed LTC's United States Patent 5,481,178 relating to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit, all of which has allegedly damaged LTC in an unspecified amount. The complaint further alleges that the Company's actions have been, and continue to be, willful and deliberate and seeks a permanent injunction against the Company as well as unspecified actual and treble damages including costs, expenses, and attorneys fees. The Company answered the complaint on October 20, 1997, denying all of LTC's substantive allegations and counterclaiming for a declaration that LTC's patent is invalid and not infringed. The parties are still involved in discovery proceedings. The case has been bifurcated into separate liability and damages trials, with the issues of liability and willfulness likely to go to jury trial in calendar year 2000. The Company has asserted in its answer, and continues to believe, that the allegations in the complaint are without merit. 18 19 Although the outcome of a jury trial involving patents and intellectual property is inherently uncertain, the Company does not believe that the ultimate outcome of the matter will have a material adverse effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended June 26, 1999 under the headings "Financial Information - Financial Highlights by Quarter" and "Corporate Data, Stockholder Information." ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended June 26, 1999 under the heading "Financial Information - Selected Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended June 26, 1999 under the heading "Financial Information - Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended June 26, 1999 under the subheading "Interest Income" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." 19 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended June 26, 1999 under the headings "Financial Information - Consolidated Balance Sheets, - - Consolidated Statements of Income, - Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, - Notes to Consolidated Financial Statements, - Report of Ernst & Young LLP, Independent Auditors and - Financial Highlights by Quarter." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable 20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Other than as follows, the information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the headings "Proposal 1 - Election of Directors" and "Compliance with Section 16(A) of the Securities Exchange Act of 1934." The officers of the Company, including executive officers and other Vice Presidents, are as follows:
Name Age Position - ---- --- -------- John F. Gifford 58 President, Chief Executive Officer and Chairman of the Board Frederick G. Beck 61 Vice President Ziya G. Boyacigiller 47 Vice President Tunc Doluca 41 Vice President Laszlo V. Gal, Ph.D. 51 Vice President Richard C. Hood 49 Vice President Kenneth J. Huening 38 Vice President Carl W. Jasper 43 Vice President and Chief Financial Officer Nasrollah Navid, Ph. D. 50 Vice President Pirooz Parvarandeh 39 Vice President Charles G. Rigg 55 Vice President Robert F. Scheer 46 Vice President Vijay Ullal 40 Vice President
21 22 Mr. Gifford, a founder of the Company, has served as Maxim's President, Chief Executive Officer and Chairman of the Board since its incorporation in April 1983. Mr. Beck, a founder of the Company, has served as Vice President since May 1983, except for a medical leave between December 1991 and January 1994. Mr. Boyacigiller joined Maxim in June 1983 and was promoted to Vice President in April 1995. Prior to April 1995, he served in business management and integrated circuits design positions. Mr. Doluca joined Maxim in October 1984 and was promoted to Vice President in July 1994. Prior to July 1994, he served in a number of integrated circuit development positions. Dr. Gal joined Maxim in April 1999 as Vice President. Prior to joining Maxim, he was with Applied Micro Circuits Corporation where he served as Vice President of Engineering from January 1997 to April 1999. Before joining Applied Micro Circuits Corporation, Dr. Gal's tenure included 11 years at Unisys (1983-1994) and 3 years at Motorola (1994-1997) in various technical and management positions. Mr. Hood, a founder of the Company, joined the Company in June 1983 and was promoted to Vice President in February 1997. Prior to February 1997, he served in a number of engineering and manufacturing positions. Mr. Huening joined Maxim in December 1983 and was promoted to Vice President in December 1993. Prior to December 1993, he served in a number of quality assurance positions. Mr. Jasper joined Maxim in May 1998 and was promoted to Principal Accounting Officer in June 1998 and to Vice President and Chief Financial Officer in April 1999. Prior to joining Maxim, he was with Read-Rite Corporation from November 1995 to April 1998 where he held the position of Vice President, Corporate Controller and prior to that was with Ernst & Young LLP from September 1983 to November 1995. Dr. Navid joined Maxim in May 1997 as Vice President. Prior to joining Maxim and since 1980, he was with Philips Semiconductors where he served in a number of wireless communications product line management positions. Mr. Parvarandeh joined Maxim in August 1988 and was promoted to Vice President in July 1997. Prior to July 1997, he served in a number of integrated circuit development positions. Mr. Rigg joined Maxim in August 1996 as managing director and general counsel and was promoted to Vice President in April 1999. Prior to joining Maxim, he was with Ropers, Majeski, Kohn and Bentley from 1970 to 1996 where he held various positions, including director. Mr. Scheer joined Maxim in June 1983 and was promoted to Vice President in June 1992. Mr. Ullal joined Maxim in December 1989 and was promoted to Vice President in March 1996. Prior to March 1996, he served in a number of wafer fab operation positions. 22 23 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the headings "Executive Compensation" and "Performance Graph." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following financial statements are included in the Company's 1999 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8. Consolidated Balance Sheets at June 26, 1999 and June 27, 1998. Consolidated Statements of Income for each of the three years in the period ended June 26, 1999. Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 26, 1999. Consolidated Statements of Cash Flows for each of the three years in the period ended June 26, 1999. Notes to Consolidated Financial Statements (a)(2) The following financial statement schedule is filed as part of this Form 10-K. Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, or because the required 23 24 information is included in the consolidated financial statements or notes thereto. (a)(3) Exhibits. See attached Exhibit Index. (b) Reports on Form 8-K. None 24 25 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. Date: September 24, 1999 MAXIM INTEGRATED PRODUCTS, INC. By /s/ Carl W. Jasper ----------------------------------------- Carl W. Jasper, Vice President and Chief Financial Officer (For the Registrant and as Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ John F. Gifford President, Chief September 24, 1999 - ------------------- Executive Officer and John F. Gifford Chairman of the Board (Principal Executive Officer) /s/ James R. Bergman Director September 24, 1999 - ---------------------------- James R. Bergman /s/ B. Kipling Hagopian Director September 24, 1999 - ----------------------------- B. Kipling Hagopian /s/ A.R. Wazzan Director September 24, 1999 - ----------------------------- A.R. Wazzan
25 26 EXHIBIT INDEX
Exhibit Sequentially Number Numbered Page Description - ------- ------------- ----------- 3.1 0 Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on September 21, 1995 3.3 R Amendment to Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on December 3, 1997. 3.4 S Amended and Restated Bylaws of the Company, as amended 10.5 0 Agreement dated as of July 14, 1987, amended and restated February 1994 between John F. Gifford and the Company(1) 10.6 X Agreement dated as of March 7, 1991 between John F. Gifford and the Company(1) 10.8 * Form of Indemnity Agreement 10.9 Z Asset Purchase Agreement by and between the Company and Tektronix, Inc., dated as of March 31, 1994, as amended, with certain attachments(2) 10.10 0 Technology Transfer Agreement dated May 27, 1994 by and between the Company and Tektronix, Inc.(2) 10.11 0 Incentive Stock Option Plan, as amended(1) 10.12 R 1987 Supplemental Stock Option Plan, as amended(1) 10.13 R Supplemental Nonemployee Stock Option Plan, as amended(1)
- ---------- (1) Management contract or compensatory plan or arrangement. (2) Schedules and certain attachments omitted pursuant to Item 601(b) of Registration S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Commission. Certain material omitted pursuant to the request for confidential treatment by the Company. 26 27
Exhibit Sequentially Number Numbered Page Description - ------- ------------- ----------- 10.14 R 1987 Employee Stock Participation Plan, as amended(1) 10.15 R 1988 Nonemployee Director Stock Option Plan, as amended(1) 10.16 1996 Stock Incentive Plan, as amended(1) 10.18 R Bonus Plan(1) 13.1 Portions of the Annual Report to Stockholders for the fiscal year ended June 26, 1999 incorporated by reference into the Form 10-K 21 List of Subsidiaries 23 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedules
- --------------- * Incorporated by Reference to the Company's Registration Statement on Form S-1 No. 33-19561. X Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1991. Z Incorporated by Reference to the Company's Form 8-K filed with the Commission on June 11, 1994. 0 Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. R Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended June 27, 1998. S Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 26, 1998. 27 28 MAXIM INTEGRATED PRODUCTS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
Additions Charged Balance at to Costs Balance at Beginning and End of Period Expenses Deductions(1) of Period ---------- -------- ------------- --------- Allowance for doubtful accounts: Year ended June 30, 1997 $ 1,290 $ 54 $ - $1,344 Year ended June 27, 1998 $ 1,344 $ 568 $ 20 $1,892 Year ended June 26, 1999 $ 1,892 $ 182 $ 589 $1,485
- ---------------- (1) Uncollectible accounts written off. 28 EX-10.16 2 1996 STOCK INCENTIVE PLAN 1 Exhibit 10.16 MAXIM INTEGRATED PRODUCTS, INC. 1996 STOCK INCENTIVE PLAN Adopted August 16, 1996 Approved by Shareholders November 14, 1996 As further amended by the Board of Directors on April 16, 1997 and May 15, 1997 Approved by Shareholders November 13, 1997 As further amended by the Board of Directors on March 10, 1998, May 14, 1998, and August 13, 1998 Approved by Shareholders November 19, 1998 As further amended by the Board of Directors on August 12, 1999. 1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of the Committees appointed to administer the Plan. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. (c) "Applicable Laws" means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Options granted to residents therein. (d) "Board" means the Board of Directors of the Company. (e) "Change in Control" means a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or 1 2 exchange offer made directly to the Company's stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means any committee appointed by the Board to administer the Plan. (h) "Common Stock" means the common stock of the Company. (i) "Company" means Maxim Integrated Products, Inc., a Delaware corporation. (j) "Consultant" means any person who is a consultant, advisor, independent contractor, vendor, customer or other person having a past, current or prospective business relationship with the Company or any Parent or Subsidiary. (k) "Continuing Directors" means members of the Board who either (i) have been Board members continuously for a period of at least thirty-six (36) months or (ii) have been Board members for less than thirty-six (36) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. (l) "Continuous Status as an Employee, Director or Consultant" means that the employment, director or consulting relationship with the Company, any Parent, or Subsidiary, is not interrupted or terminated. Continuous Status as an Employee, Director or Consultant shall not be considered interrupted in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. A leave of absence approved by the Company shall include sick leave, military leave, or any other personal leave approved by an authorized representative of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. (m) "Corporate Transaction" means any of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated, 2 3 (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with complete liquidation or dissolution of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. (n) "Covered Employee" means any person who is a "covered employee" under Section 162(m)(3) of the Code. (o) "Director" means a member of the Board. (p) "Employee" means any person, including an Officer or Director, who is an employee of the Company or any Parent or Subsidiary of the Company for purposes of Section 422 of the Code. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. Except for purposes of grants of Incentive Stock Options, "Employee" also includes any person whom an officer identifies as a prospective employee of the Company or any Parent or Subsidiary of the Company. (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (r) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) Where there exists a public market for the Common Stock, the Fair Market Value of a share of Common Stock shall be (A) the closing sale price of the Common Stock for the last market trading day prior to the date of the determination or on the date of the determination, as determined by the Administrator at the time of the determination (or, if no sales were reported on either such date, on the last trading date on which sales were reported) on the stock exchange determined by the Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the closing price of a Share on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such price was reported on that date, on the last date on which such price was reported), in each case, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (ii) In the absence of an established market of the type described in (i), above, for the Common Stock, the Fair Market Value thereof shall be determined by the Administrator in good faith. (s) "Grantee" means an Employee, Director or Consultant who receives an Option under the Plan. (t) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. 3 4 (u) "Non-Qualified Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (v) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (w) "Option" means a stock option granted pursuant to the Plan. (x) "Option Agreement" means the written agreement evidencing the grant of an Option executed by the Company and the Grantee, including any amendments thereto. (y) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (z) "Performance-Based Compensation" means compensation qualifying as "performance-based compensation" under Section 162(m) of the Code. (aa) "Plan" means this 1996 Stock Incentive Plan. (bb) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor thereto. (cc) "Share" means a share of the Common Stock. (dd) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. (ee) "Subsidiary Disposition" means the disposition by the Company of its equity holdings in any subsidiary corporation effected by a merger or consolidation involving that subsidiary corporation, the sale of all or substantially all of the assets of that subsidiary corporation or the Company's sale or distribution of substantially all of the outstanding capital stock of such subsidiary corporation. 3. Stock Subject to the Plan. (a) Subject to the provisions of Section 10 below, the maximum aggregate number of Shares which may be issued pursuant to this Plan is 28,000,000 Shares [adjusted to reflect the stock dividend effective December 5, 1997]; provided, however, that such maximum aggregate number of Shares shall be increased by the number of Shares or options returned to the Company's Incentive Stock Option Plan, 1987 Employee Stock Participation Plan, and Supplemental Nonemployee Stock Option Plan. Notwithstanding the foregoing, the maximum aggregate number of Shares available for grant of Incentive Stock Options shall be 28,000,000 Shares, and such number shall not be subject to adjustment as described above. The Shares to be issued pursuant to the Plan may be authorized, but unissued, or reacquired Common Stock. (b) If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option exchange program, or if any unissued Shares are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option or any withholding taxes due with respect to such Option, such unissued or 4 5 retained Shares shall become available for future grant under the Plan (unless the Plan has terminated). Shares that actually have been issued under the Plan pursuant to an Option shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Plan Administrator. (i) Administration with Respect to Directors and Officers. With respect to grants of Options to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. (ii) Administration With Respect to Consultants and Other Employees. With respect to grants of Options to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. The Board may authorize one or more Officers to grant such Options and may limit such authority by requiring that such Options must be reported to and ratified by the Board or a Committee within six (6) months of the grant date, and if so ratified, shall be effective as of the grant date. (iii) Administration With Respect to Covered Employees. Notwithstanding the foregoing, grants of Options to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Options qualifying as Performance-Based Compensation. In the case of such Options granted to Covered Employees, references to the "Administrator" or to a "Committee" shall be deemed to be references to such Committee or subcommittee. (iv) Administration Errors. In the event an Option is granted in a manner inconsistent with the provisions of this subsection (a), such Option shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion: (i) to select the Employees, Directors and Consultants to whom Options may be granted from time to time hereunder; 5 6 (ii) to determine whether and to what extent Options are granted hereunder; (iii) to determine the number of Shares or the amount of other consideration to be covered by each Option granted hereunder; (iv) to determine the Fair Market Value of the Common Stock in accordance with Section 2(r) of the Plan; (v) to approve forms of Option Agreement for use under the Plan; (vi) to determine the terms and conditions of any Option granted hereunder; (vii) to amend the terms of any outstanding Option granted under the Plan, provided that any amendment that would adversely affect the Grantee's rights under an outstanding Option shall not be made without the Grantee's written consent; (viii) to reduce the exercise price of any Option to reflect a reduction in the Fair Market Value of the Common Stock since the grant date of the Option without a material adverse impact on the Grantee; provided, however, that (A) such reductions in the aggregate do not apply to Options covering more than five percent (5%) of the maximum aggregate number of Shares available under Section 3((a)), above (as amended from time to time), in any twelve (12) month period, (B) such reduction is approved by a majority of the members of the Administrator, and (C) the Administrator determines in good faith and in writing that such reductions occur only infrequently and principally in response to conditions other than poor operating performance by the Company. For purposes of this subsection ((viii)), the issuance of an Option in replacement of an existing Option with a lower exercise price (or a lower base amount on which appreciation is measured) without a material adverse impact on the Grantee shall be deemed to be a reduction in the exercise price of the earlier granted Option; (ix) to construe and interpret the terms of the Plan and Options granted pursuant to the Plan; (x) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such laws; provided, however, that no Option shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; and (xi) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be conclusive and binding on all persons. 5. Eligibility. Non-Qualified Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees. An Employee, Director or Consultant who has been granted an Option may, if otherwise eligible, be granted additional Options. Options may be granted to such Employees of the Company and its 6 7 subsidiaries who are residing in foreign jurisdictions as the Administrator may determine from time to time. 6. Terms and Conditions of Options. (a) Designation of Option. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is granted. (b) Conditions of Option. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms and conditions of each Option including, but not limited to, the Option vesting schedule, form of payment upon exercise of the Option and satisfaction of any performance criteria. (c) Individual Option Limit. The maximum number of Shares with respect to which Options may be granted to any individual in any fiscal year of the Company shall be 6,000,000 [adjusted to reflect the stock dividend effective December 5, 1997]. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization pursuant to Section 10, below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitation with respect to an individual, if any Option is canceled, the canceled Option shall continue to count against the maximum number of Shares with respect to which Options may be granted to the individual. For this purpose, the repricing of an Option shall be treated as the cancellation of the existing Option and the grant of a new Option. (d) Term of Option. The term of each Option shall be ten (10) years from the date of grant for all Grantees other than Directors who are not Employees, in whose case the term shall be five (5) years from the date of grant. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. (e) Transferability of Options. Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Grantee only by the Grantee. Non-Qualified Stock Options shall be transferable to the extent provided in the Option Agreement. (f) Time of Granting Options. The date of grant of an Option shall for all purposes be the date on which the Administrator makes the determination to grant such Option, or such other date as is determined by the Administrator. Notice of the grant determination shall 7 8 be given to each Employee, Director or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. (g) Vesting During Leave of Absence. During any leave of absence from employment, directorship or consulting arrangement with the Company or any Parent or Subsidiary, vesting of such Grantee's Options shall cease, and shall resume upon the Grantee's return to his or her relationship with the Company, Parent or Subsidiary. The dates on which such Grantee's Options vest shall thereafter be adjusted by the duration of the leave of absence. 7. Option Exercise Price, Consideration and Taxes. (a) Exercise Price. The exercise price for an Option shall be as follows: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than eighty-five percent (85%) of the Fair Market Value per Share on the date of grant unless otherwise determined by the Administrator; provided, however, that in the case the per Share exercise price is less than one hundred percent (100%) of the Fair Market Value per Share on the date of the grant, the Administrator determines in writing and in good faith that (A) such grants are made infrequently, (B) there is a good business reason for the grant that outweighs the normal presumption of a per Share exercise price of not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant, and (C) the aggregate number of Shares subject to such Options does not exceed five percent (5%) of the aggregate maximum number of Shares under Section 3((a)), above, as amended from time to time. (iii) In the case of Options intended to qualify as Performance-Based Compensation, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (b) Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise of an Option including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following: (i) cash; 8 9 (ii) check; (iii) delivery of Grantee's promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate; (iv) surrender of Shares (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator); (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (vi) any combination of the foregoing methods of payment. (c) Taxes. In connection with each option granted pursuant to this Plan, at any time when the Company could have any withholding obligation (whether for Federal, state, local or foreign income, disability, Medicare, employment or other taxes or otherwise) as a result of exercise of an option, the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise, or the disposition of shares acquired upon such exercise, the Company shall have no obligation to permit exercise of such option or to issue any shares upon exercise of the option unless and until either the exercise of the option is accompanied by sufficient payment, as determined by the Company in its absolute discretion, to meet those withholding obligations on such exercise, lapse or disposition or other arrangements are made that are satisfactory to the Company in its absolute discretion to provide otherwise for such payment. The Company shall have no liability to any optionee or transferee for exercising the foregoing right not to permit exercise or issue shares. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. (i) Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Option Agreement. (ii) An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to an Option, notwithstanding the exercise of an Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a 9 10 dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Option Agreement or Section 10, below. (b) Exercise of Option Following Termination of Employment, Director or Consulting Relationship. (i) An Option may not be exercised after the termination date of such Option set forth in the Option Agreement and may be exercised following the termination of a Grantee's Continuous Status as an Employee, Director or Consultant only to the extent that the Grantee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such option as set forth in the Option Agreement). Options shall be exercisable for a period of ninety (90) days following termination generally, and for a period of five hundred forty-seven (547) days following termination due to death of the Grantee or three hundred sixty-five (365) days following termination due to the disability of the Grantee (or, in each case, such other period of time as is determined by the Administrator, which such determination in the case of an Incentive Stock Option shall be made at the time of grant of the Option). (ii) All Options shall terminate to the extent not exercised on the last day of the period specified in paragraph (i) above or the last day of the original term of the Option, whichever occurs first. (iii) Any Option designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee's Continuous Status as an Employee, Director or Consultant shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Option Agreement. (c) Exercise of Option Following Termination of Employment, Director or Consulting Relationship. In the event of termination of a Grantee's Continuous Status as an Employee, Director or Consultant with the Company for any reason other than disability or death (but not in the event of an Grantee's change of status from Employee to Consultant or from Consultant to Employee), such Grantee may, but only within ninety (90) days after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Grantee was entitled to exercise it at the date of such termination or to such other extent as may be determined by the Administrator. If the Grantee should die within ninety (90) days after the date of such termination, the Grantee's estate or the person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option to the extent that the Grantee was entitled to exercise it at the date of such termination within five hundred forty-seven (547) days of the Grantee's date of death, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement. In the event of an Grantee's change of status from Employee to Consultant, an Employee's Incentive Stock Option shall convert automatically to a Non-Qualified Stock Option on the ninety-first (91st) day following such change of status. If the Grantee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. 10 11 (d) Disability of Grantee. In the event of termination of a Grantee's Continuous Status as an Employee, Director or Consultant as a result of his or her disability, Grantee may, but only within three hundred sixty-five (365) days from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Non-Qualified Stock Option on the day three (3) months and one day following such termination. To the extent that Grantee is not entitled to exercise the Option at the date of termination, or if Grantee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (e) Death of Grantee. In the event of the death of a Grantee, the Option may be exercised at any time within five hundred forty-seven (547) days following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), by the Grantee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Grantee was entitled to exercise the Option at the date of death. If, at the time of death, the Grantee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Grantee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate. (f) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Grantee at the time that such offer is made. 9. Conditions Upon Issuance of Shares. (a) Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws. 10. Adjustments Upon Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of 11 12 issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other similar event resulting in an increase or decrease in the number of issued shares of Common Stock. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Option. 11. Corporate Transactions/Changes in Control/Subsidiary Dispositions. (a) The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction, Change in Control or Subsidiary Disposition or at the time of an actual Corporate Transaction, Change in Control or Subsidiary Disposition and exercisable at the time of the grant of an Option under the Plan or any time while an Option remains outstanding, to provide for the full automatic vesting and exercisability of one or more outstanding unvested Options under the Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Options in connection with a Corporate Transaction, Change in Control or Subsidiary Disposition, on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Option vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Status as an Employee or Consultant of the Grantee within a specified period following the effective date of the Change in Control or Subsidiary Disposition. The Administrator may provide that any Options so vested or released from such limitations in connection with a Change in Control or Subsidiary Disposition, shall remain fully exercisable until the expiration or sooner termination of the Option. Effective upon the consummation of a Corporate Transaction, all outstanding Options under the Plan shall terminate unless assumed by the successor company or its Parent. (b) The portion of any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction, Change in Control or Subsidiary Disposition shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the extent such dollar limitation is exceeded, the accelerated excess portion of such Option shall be exercisable as a Non-Qualified Stock Option. 12. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated. 13. Amendment, Suspension or Termination of the Plan. (a) The Board may at any time amend, suspend or terminate the Plan. To the extent required to comply with Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such manner and to such a degree as required. (b) No Option may be granted during any suspension of the Plan or after termination of the Plan. (c) Any amendment, suspension or termination of the Plan shall not affect Options already granted, and such Options shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the 12 13 Grantee and the Administrator, which agreement must be in writing and signed by the Grantee and the Company. 14. Reservation of Shares. (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. (b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 15. No Effect on Terms of Employment. The Plan shall not confer upon any Grantee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 13 EX-13.1 3 PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 COVER 1 1 2 This Annual Report and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include (a) projections relevant to future revenue, income, earnings, capital expenditures, capital structure or other financial items, (b) statements of plans or objectives of the Company's management for future operations, including plans or objectives relating to the Company's products or services, (c) statements of future economic performance, and (d) statements of any assumptions underlying or relating to any of the foregoing. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions relating to the future are intended to identify forward-looking statements. All forward-looking statements are based on the Company's current outlook, expectations, estimates, projections, beliefs, and plans or objectives about its business and its industry. These statements are not guarantees of future performance and are subject to risk and uncertainty. Actual results may differ materially from those in any such forward-looking statement. Particular attention should be paid to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Annual Report. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise. However, readers should carefully review future reports and documents that the Company files from time to time with the Securities and Exchange Commission, such as its Annual Reports on Form 10-K and its Quarterly Reports on Form 10-Q (particularly the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors") and any current reports on Form 8-K. 2 3 Established in 1983, Maxim Integrated Products is a worldwide leader in design, development, manufacture, and marketing of linear and mixed-signal integrated circuits. Maxim circuits "connect" the real world and digital world by detecting, measuring, amplifying, and converting real world signals, such as temperature, pressure, or sound, into the digital signals necessary for computer processing. Products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, sensors, and voltage references. Our products are used in a wide variety of microprocessor-based electronics equipment, including personal computers and peripherals, process control, instrumentation, test equipment, handheld devices, wireless and fiber communications, and video displays. Maxim markets over 1,780 products, of which over 1,480 are proprietary, and net revenues were $607.0 million for the year ended June 26, 1999. The Company has over 3,000 employees. Our headquarters is in Sunnyvale, California, and we have facilities in San Jose, California; Beaverton, Oregon; and other locations worldwide. Maxim's mission is to continuously invent high-quality analog engineering solutions that add value to our customers' microprocessor-based electronics worldwide. We have consistently increased our stockholders' equity by meeting our cost and performance goals, minimizing time-to-market, and maximizing our engineering productivity. TABLE OF CONTENTS Financial Highlights............................. 4 Letter To Our Stockholders....................... 5 Quarterly Highlights............................. 8 Financial Information............................ 11 Board of Directors and Corporate Officers........ 37 Corporate Data, Stockholder Information.......... 38
3 4 Financial Highlights
(Amounts in thousands, except share data) FY1999 FY1998 FY1997 - ------------------------------------------------------------------------------------------- Net revenues $606,965 $560,220 $433,710 Net income $196,122 $178,144 $136,974 Earnings per share--diluted $ 1.29 $ 1.18 $ 0.94 - -------------------------------------------------------------------------------------------
[NET REVENUES PERFORMANCE GRAPH] [OPERATING INCOME PERFORMANCE GRAPH] [STOCKHOLDERS' EQUITY PERFORMANCE GRAPH] 4 5 To Our Stockholders [PHOTO OMITTED] As the 1990s draw to a close, rankings are being published for the best performing companies of the decade. It should be no surprise that Maxim is turning up on such lists as the top performing semiconductor company of the `90s. Few companies in any industry can match Maxim's consistency of performance over the past 10 years. The average compounded annual return on the Company's stock price over the past 10 years was 51 percent. More important to both Maxim and our stockholders is our ability to extend this track record of growth and stability into the next decade. FINANCIAL HIGHLIGHTS Maxim ended fiscal 1999 with net revenues of $607.0 million. Operating income was $276.8 million, and diluted earnings per share were $1.29. The Company increased cash and short-term investments by $191.8 million after paying $113.9 million to repurchase 2.9 million shares of its common stock and $38.7 million for capital equipment. Total assets increased to $1.0 billion. Stockholders' equity grew to $879.2 million in fiscal 1999 from $631.0 million in fiscal 1998. Return on average stockholders' equity for 1999 was 26.0 percent. This return, one of the highest in the industry, confirms that the Company has continued to make good product and capacity investment decisions with stockholders' assets. ON TRACK WITH PRODUCT AND PROCESS DEVELOPMENT Maxim has long been the leader in analog and mixed-signal IC design. Today, we are also a leader in manufacturing process innovation. This year, we were the first company to introduce standard ICs designed using high-frequency silicon germanium (SiGe) technology. We are now delivering SiGe products for both wireless communications and telecom applications. Maxim power management products designed on our state-of-the-art 1.2-um BiCMOS process are leading the industry with their low power and high levels of integration. Also during the year, we brought to market high-performance sigma delta analog-to-digital converters that employ state-of-the-art mixed-signal submicron processes, combining extremely high accuracy and very low power for industrial applications. Although we missed by 5 percent our goal of introducing over 300 products during our product announcement year, we executed well overall and significantly surpassed last year's level. The products we introduced this year are key to our achieving revenue growth plans for FY2002. Our goal for FY2000 is to increase product introductions once again by the amount required to meet our objectives for increased revenues in FY2003 and FY2004. 5 6 To Our Stockholders ADDITION OF OUTSTANDING EXECUTIVE TALENT Maxim added two new business unit executives during the year and created one new business unit staffed to focus on products for emerging markets that will be important to Maxim in 4 to 5 years. Maxim was very successful this year in hiring senior technical managers throughout the Company. We believe ours to be the broadest and strongest senior management team in our industry--bar none. Successful companies attract the best talent, and Maxim added to its team a significant number of expert professionals this year, thanks to our exciting corporate culture, the growth of our stock option value, and our highly effective mentorship programs. RECENTLY ACQUIRED FACILITIES IN SUCCESSFUL OPERATION This year, after 9 great years of operation and 1 million 4-inch wafers produced, we closed our Sunnyvale fabrication facility. This decision was based on our having successfully achieved cost-effective production levels in our 6-inch submicron wafer fabrication facility in San Jose, acquired in November 1997. Our 80,000-square-foot Oregon fab produced 70 percent of our needs for 6-inch wafers during the year. We are currently utilizing approximately 53,000 square feet for today's demand. An additional 7,500-square-foot R&Dfab will be put in operation in Q1 FY00. Our Oregon facility operated at less than the optimal capacity levels that it is expected to achieve in the coming years. Today, the San Jose and Beaverton facilities combined have the capacity to manufacture approximately $225 million in product revenue per quarter. We believe that an additional capital investment of less than $50 million in those two facilities would enable us to manufacture approximately $290 million in product revenue per quarter. We are now testing over 90 percent of our packaged units at our test facility in the Philippines, a 45 percent increase over FY98 levels. This operation contributed over $8 million to profit through cost reductions this past year and significantly contributed to improved product quality. We have sufficient improved floorspace at our Philippines facility to significantly increase production test volume, if required, with the addition of test equipment. At the same time, we are exploring other geographic locations for possible diversification of our test activities. BUSINESS IMPROVED AS THE YEAR PROGRESSED During the uncertainty of FY99, when we had limited visibility of future end-market demand, although we closely managed our resources, we continued our emphasis on new product and technology development. As a result of our unwavering commitment to new product development, we believe that this year's correction will have a limited impact on our long-term growth objectives. Bookings for the Company began to improve in Q2 FY99 after three quarters of decline, and bookings for Q4 FY99 reached a company record level of $198 million. However, backlog was sufficiently depleted during the year to preclude material growth until such time as healthy backlog is restored. 6 7 To Our Stockholders Beginning in the second quarter, we saw a high percentage of short-term orders and a decline in order cancellations. Earlier in the year we attributed the high level of short-term orders to the reduced lead times we were able to offer and limited customer visibility of demand for their products. We believe that customers are now more optimistic about demand for their products and are considering more aggressive growth models. PLANS IN PLACE FOR FY2000 AND BEYOND We believe that our accomplishments this year in introducing and merchandising new products, achieving significant technology developments, augmenting fab and test capacity, and attracting technical experts continue to position us to meet what we believe will be growing demand for our products in the longer term. We have greater organizational depth than ever before, as well as several new emerging product lines. We believe that we have a well-positioned opportunity to take our place among the great IC companies of the past, present, and future. Sincerely, /s/ JOHN F. GIFFORD ----------------------------------- John F. Gifford President, Chief Executive Officer and Chairman of the Board 7 8 Quarterly Highlights First Quarter FY99 o Net revenues of $155.3 million o Net income of $49.4 million ($0.33 diluted earnings per share) [NET REVENUES PERFORMANCE GRAPH] [OPERATING INCOME PERFORMANCE GRAPH] [STOCKHOLDERS' EQUITY PERFORMANCE GRAPH] Second Quarter FY99 o Net revenues of $145.0 million o Net income of $46.5 million ($0.31 diluted earnings per share) [NET REVENUES PERFORMANCE GRAPH] [OPERATING INCOME PERFORMANCE GRAPH] [STOCKHOLDERS' EQUITY PERFORMANCE GRAPH] 8 9 QUARTERLY HIGHLIGHTS THIRD QUARTER FY99 o Net revenues of $147.2 million o Net income of $47.7 million ($0.31 diluted earnings per share) [NET REVENUES PERFORMANCE GRAPH] [OPERATING INCOME PERFORMANCE GRAPH] [STOCKHOLDERS' EQUITY PERFORMANCE GRAPH] FOURTH QUARTER FY99 o Net revenues of $159.5 million o Net income of $52.6 million ($0.34 diluted earnings per share) [NET REVENUES PERFORMANCE GRAPH] [OPERATING INCOME PERFORMANCE GRAPH] [STOCKHOLDERS' EQUITY PERFORMANCE GRAPH] 9 10 FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................... 12 Consolidated Balance Sheets ............................................ 18 Consolidated Statements of Income ...................................... 19 Consolidated Statements of Stockholders' Equity ........................ 20 Consolidated Statements of Cash Flows .................................. 21 Notes to Consolidated Financial Statements ............................. 22 Report of Ernst & Young LLP, Independent Auditors ...................... 34 Selected Financial Data ................................................ 35 Financial Highlights by Quarter ........................................ 36
11 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: Net Revenues Maxim Integrated Products, Inc. (the Company) reported net revenues of $607.0 million in fiscal 1999, $560.2 million in fiscal 1998, and $433.7 million in fiscal 1997. The increases in net revenues for fiscal 1999 and fiscal 1998 are related primarily to higher unit shipments resulting from continued introduction of new proprietary products and increased market acceptance of the Company's proprietary and second-source products. [Net Revenues PERFORMANCE GRAPH] Approximately 59% of the Company's fiscal 1999 net revenues was derived from customers outside the U.S., primarily in Europe and the Pacific Rim (56% in fiscal 1998 and 57% in fiscal 1997). While a majority of the Company's sales are denominated in U.S. dollars, the Company enters into foreign currency forward contracts to mitigate its risk on firm commitments and net monetary assets denominated in foreign currencies; as a result, the impact of changes in foreign exchange rates on revenues and the Company's results of operations for 1999 was minimal. [Gross Margin PERFORMANCE GRAPH] Gross Margin The Company's gross margin as a percentage of net revenues was 68.8%, 67.2%, and 66.5% in fiscal 1999, 1998, and 1997, respectively. The continued improvements in gross margin are principally due to production efficiencies obtained through economies of scale and cost reductions. These efficiencies were partially offset in fiscal 1999 by an increase in inventory reserves of $8.0 million ($10.4 million in fiscal 1998) and the write-down of certain equipment of $2.7 million ($8.2 million in fiscal 1998). [Research and Development PERFORMANCE GRAPH] Research and Development The Company is continuously working to introduce new products through its research and development efforts. Research and development expenses were 14.5%, 12.9%, and 11.8% of net revenues in fiscal 1999, 1998, and 1997, respectively. The increase in research and development expenses as a percentage of net revenues was due primarily to increased headcount and wafer and mask expenses to support new product development. The Company intends to continue increasing its R&D expenditures on an absolute dollar basis in future periods. However, the level of R&D expenditures as a percentage of net revenues will vary from period to period, depending on the level of net revenues. 12 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [Selling, General and Administrative PERFORMANCE GRAPH] Selling, General and Administrative Selling, general and administrative expenses were 8.6%, 8.8%, and 8.8% of net revenues in fiscal 1999, 1998, and 1997, respectively. Selling, general and administrative expenses increased in fiscal 1999 in absolute dollars as a result of additional headcount and related expenses to support the Company's increased level of revenues. The increase in selling, general and administrative expenses in fiscal 1998 in absolute dollars was primarily due to increased expenses associated with the Company's direct sales efforts. Interest Income, Net Interest income, net increased to $20.4 million in fiscal 1999 from $14.9 million in fiscal 1998 and $8.6 million in fiscal 1997, primarily due to higher levels of invested cash, cash equivalents, and short-term investments. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. Under its investment policy, the Company invests exclusively in U.S. Treasury and Federal Agency debt securities with a maturity of one year or less. Investments mature at frequent intervals during the year, at which time the funds are available for use in the business, or for reinvestment, as cash demands dictate. This policy is intended to reduce default risk, market risk, and reinvestment risk. The Company does not use derivative financial instruments in its investment portfolio. The fair value of the Company's investment portfolio or related interest income would not be significantly impacted by a material change in interest rates, due to the short-term nature of the Company's investment portfolio. At June 26, 1999, the Company's investment portfolio had an expected weighted average return of 4.9% and a weighted maturity of 245 days. Provision for Income Taxes The effective tax rate was 34% for fiscal 1999, 1998, and 1997. 13 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK: Both end-market bookings and net bookings for the Company were greater during the fourth quarter of fiscal 1999 than during the prior quarters of the fiscal year. These increased booking levels reflect increased demand for the Company's products, primarily in the United States and Japan. Although bookings in the fourth quarter of fiscal 1999 increased by 16% over third quarter bookings, the Company expects that bookings will adjust to lower growth levels in future quarters. At the end of the fourth quarter of fiscal 1999, backlog shippable within the next 12 months was approximately $176 million (compared to $181 million at the end of fiscal 1998 and $152 million at the end of fiscal 1997). The backlog level at the end of fiscal 1999 had been sufficiently depleted to preclude significant revenue growth until such time as backlog is significantly increased above current levels. Because the Company's backlog of orders at any point is not necessarily based on firm, noncancelable orders and because the Company's customers do in fact routinely cancel orders for their own convenience with little notice, opening backlog has limited value as a predictor of future revenues. The Company's ability to increase its revenues and earnings in the first quarter of fiscal 2000 and beyond will depend in part on the continued growth in end-market bookings and net bookings. FINANCIAL CONDITION: Overview Total assets grew to $1,022.3 million at the end of fiscal 1999, up from $769.5 million at the end of fiscal 1998. The increase is primarily due to favorable operating results for the year. Accounts receivable decreased to $79.3 million at the end of fiscal 1999 from $101.9 million at the end of fiscal 1998, primarily due to shipments occurring at a more linear rate throughout fiscal 1999 as compared to fiscal 1998. Inventory grew at a slower rate than revenues, increasing slightly from $44.7 million in fiscal 1998 to $45.3 million in fiscal 1999 due to continued improvements in productivity. 14 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [Cash, Cash Equivalents and Short-Term Investments PERFORMANCE GRAPH] Liquidity and Capital Resources The Company's primary source of funds for fiscal 1999, 1998, and 1997 has been from net cash generated from operating activities of approximately $306.2 million, $295.5 million, and $187.1 million, respectively. In addition, the Company received approximately $51.1 million, $37.2 million, and $31.2 million of proceeds from the exercises of stock options and purchases of common stock under the Employee Stock Participation Plan during fiscal 1999, 1998, and 1997, respectively. Another source of cash from the Company's option programs is the tax deductions that arise from exercise of options. These tax benefits amounted to $114.3 million, $74.3 million, and $52.4 million in fiscal 1999, 1998, and 1997, respectively. It has been the Company's policy to reduce the dilution effect from stock options by repurchasing its common stock from time to time in amounts based on estimates of proceeds from stock option exercises and of tax benefits related to such exercises. The Company plans to continue this policy although, at management's discretion, it may repurchase its common stock in amounts significantly in excess of or below such estimates. The principal uses of funds for fiscal 1999, 1998, and 1997 were repurchases of $113.9 million, $123.1 million, and $80.7 million of the Company's common stock, and purchases of property, plant and equipment of $54.3 million, $109.4 million, and $44.2 million, respectively. In fiscal 1998, $42.0 million of the $109.4 million in capital purchases was for a sub-micron wafer fabrication facility located in San Jose, California. As of June 26, 1999, the Company's available funds consisted of $514.7 million in cash, cash equivalents, and short-term U.S. Treasury and Federal Agency debt securities. The Company anticipates that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including its anticipated level of capital expenditures, through the end of fiscal 2000. 15 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year 2000 Issue: As a result of certain computer programs' being written using two digits rather than four to define the applicable year, any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 (the "Year 2000 issue"). This could result in a system failure or miscalculations, causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. The Company has evaluated the required modifications to both new and existing software and hardware systems to mitigate the Year 2000 issue and is 100% complete with respect to remediation on systems identified and determined to be critical to the Company's operations. Remediation continues on noncritical systems. The Company expects to have all required modifications completed prior to December 31, 1999. The Company is working with its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to minimize their own Year 2000 issue. The Company currently has no contingency plan in the event that it is unable to complete system modifications to address the Year 2000 issue. The Company has limited contingency plans with respect to third parties in the event that they are unable to complete system modifications to mitigate the Year 2000 issue. Costs incurred to date related to the Year 2000 issue have been minimal. While the Company has fully completed the evaluation of its Year 2000 issue and is approximately 85% complete with respect to remediation on all its systems (critical and noncritical), there can be no assurance that further evaluation and remediation will not be required. The Company does not anticipate that the future cost of these efforts, should they be necessary, will be material. The date on which the Company plans to complete any necessary Year 2000 modifications and costs related to completing such modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans, and other factors. However, there can be no assurance that these estimates will be achieved, and actual completion dates and costs could differ significantly from those estimates. Specific factors that might cause such significant differences include, but are not limited to, the identification of additional systems that require remediation, the availability and cost of personnel trained in this area, the ability to identify, locate, and correct all relevant computer codes, and similar uncertainties. Any failure to timely, successfully, and cost effectively assess, remediate, and resolve the Company's Year 2000 issues, including those regarding its own as well as suppliers' and third parties' internal systems, products, services, and contingency plans, may have a material adverse effect on the Company's business and results of operations. The Company is continuing its efforts to ensure Year 2000 readiness, and there can be no assurance that there will not be new Year 2000 issues not identified above and significant delays in or increased costs associated with such efforts which could have a material adverse effect on the Company's business and results of operations. Maxim believes that its most reasonably likely worst-case Year 2000 scenarios would relate to problems with the systems of third parties rather than with the Company's internal systems. The Company has little control over assessing and remediating the Year 2000 problems of third parties. The Company believes the risks are greatest with infrastructure (e.g., electricity and water supply), telecommunications, transportation supply chains, and critical suppliers of materials. 16 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's linear and mixed-signal integrated circuit production is conducted at both domestic and foreign facilities. The Company does not generally maintain facilities that would allow it to generate its own electrical or water supply in lieu of that supplied by utilities. A worst-case scenario involving a critical supplier of materials would be the partial or complete shutdown of the supplier and its resulting inability to provide critical supplies to the Company on a timely basis. The Company does not have the capability to replace third party supplies with internal production. The Company is working with suppliers of critical materials to ensure buffer supplies are maintained. The Company is not in a position to identify or to avoid all possible worst-case scenarios. Due to the large number of variables involved, the Company cannot provide an estimate of the damage it might suffer if any worst-case scenario were to occur. Forward-Looking Information: Forward-looking statements in this Annual Report, including this "Management's Discussion and Analysis" section, involve risk and uncertainty. There are numerous factors that could cause the Company's actual results to differ materially from results predicted or implied. Important factors affecting the Company's ability to achieve future revenue growth include whether, and the extent to which, demand for the Company's products increases and reflects real end-user demand; whether customer cancellations and delays of outstanding orders increase; and whether the Company is able to manufacture in a correct mix to respond to orders on hand and new orders received in the future; whether the Company is able to achieve its new product development and introduction goals, including, without limitation, goals for recruiting, retaining, training, and motivating engineers, particularly design engineers, and goals for conceiving and introducing timely new products that are well received in the marketplace; and whether the Company is able to successfully commercialize its new technologies, such as its new second-generation high-frequency technologies, that it has been investing in by designing and introducing new products based on these new technologies. Other important factors that could cause actual results to differ materially from those predicted include overall worldwide economic conditions; demand for electronic products and semiconductors generally; demand for the end-user products for which the Company's semiconductors are suited; timely availability of raw material, equipment, supplies, and services; unanticipated manufacturing problems; technological and product development risks; competitors' actions; the ability of the Company to mitigate the Year 2000 issue; and other risk factors described in the Company's filings with the Securities and Exchange Commission. All forward-looking statements included in this document are made as of the date hereof, based on the information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement. 17 17 CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------- (Amounts in thousands, except share data) June 26, 1999 June 27, 1998 -------------------------------------------------------------------------------------------------- Assets -------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 34,126 $ 16,739 Short-term investments 480,580 306,209 -------------------------------------------------------------------------------------------------- Total cash, cash equivalents and short-term investments 514,706 322,948 -------------------------------------------------------------------------------------------------- Accounts receivable (net of allowance for doubtful accounts of $1,485 in 1999 and $1,892 in 1998) 79,330 101,921 Inventories 45,283 44,707 Deferred tax assets 47,850 34,400 Income tax refund receivable 36,649 -- Other current assets 5,056 4,039 -------------------------------------------------------------------------------------------------- Total current assets 728,874 508,015 -------------------------------------------------------------------------------------------------- Property, plant and equipment, at cost, less accumulated depreciation 290,133 255,453 Other assets 3,307 6,024 -------------------------------------------------------------------------------------------------- Total assets $ 1,022,314 $ 769,492 -------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity -------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 40,257 $ 35,169 Income taxes payable 2,484 27,412 Accrued salaries 26,364 21,421 Accrued expenses 35,477 22,604 Deferred income on shipments to distributors 16,316 23,686 -------------------------------------------------------------------------------------------------- Total current liabilities 120,898 130,292 -------------------------------------------------------------------------------------------------- Other liabilities 4,000 4,000 Deferred tax liabilities 18,200 4,200 Commitments and contingencies -------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $0.001 par value; Authorized: 2,000,000 shares; Issued and outstanding: none -- -- Common stock, $0.001 par value; Authorized: 240,000,000 shares; Issued and outstanding: 135,835,376 in 1999 and 130,752,346 in 1998 136 131 Additional paid-in capital 132,514 81,118 Retained earnings 748,036 551,914 Accumulated other comprehensive income (1,470) (2,163) -------------------------------------------------------------------------------------------------- Total stockholders' equity 879,216 631,000 -------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,022,314 $ 769,492 --------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 18 18 CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------- (Amounts in thousands, except per share data) For the years ended June 26, 1999 June 27, 1998 June 30, 1997 - -------------------------------------------------------------------------------------------------------------- Net revenues $606,965 $560,220 $433,710 Cost of goods sold 189,673 183,724 145,307 - -------------------------------------------------------------------------------------------------------------- Gross margin 417,292 376,496 288,403 - -------------------------------------------------------------------------------------------------------------- Operating expenses: Research and development 88,249 72,204 51,264 Selling, general and administrative 52,275 49,256 38,194 - -------------------------------------------------------------------------------------------------------------- Total operating expenses 140,524 121,460 89,458 - -------------------------------------------------------------------------------------------------------------- Operating income 276,768 255,036 198,945 Interest income, net 20,386 14,879 8,590 - -------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 297,154 269,915 207,535 Provision for income taxes 101,032 91,771 70,561 - -------------------------------------------------------------------------------------------------------------- Net income $196,122 $178,144 $136,974 - -------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.48 $ 1.37 $ 1.09 Diluted $ 1.29 $ 1.18 $ 0.94 - -------------------------------------------------------------------------------------------------------------- Shares used in the calculation of earnings per share: Basic 132,722 129,838 125,430 Diluted 152,059 150,661 145,754 - --------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements 19 19 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------- Common Stock Additional Other ------------------------- Paid-In Retained Comprehensive (Amounts in thousands, except share data) Shares Par Value Capital Earnings Income Total - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1996 122,891,038 $ 123 $ 89,878 $236,796 $(1,372) $ 325,425 Components of comprehensive income: Net income -- -- -- 136,974 -- 136,974 Translation adjustment -- -- -- -- 266 266 --------- Total comprehensive income 137,240 --------- Exercise of stock options under the Stock Option and Purchase Plans 8,448,466 8 31,200 -- -- 31,208 Repurchase of common stock (3,881,000) (4) (80,701) -- -- (80,705) Tax benefit on exercise of non-qualified stock options and disqualifying dispositions under stock plans -- -- 52,397 -- -- 52,397 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1997 127,458,504 127 92,774 373,770 (1,106) 465,565 Components of comprehensive income: Net income -- -- -- 178,144 -- 178,144 Translation adjustment -- -- -- -- (1,057) (1,057) --------- Total comprehensive income 177,087 --------- Exercise of stock options under the Stock Option and Purchase Plans 6,939,982 7 37,222 -- -- 37,229 Repurchase of common stock (3,646,140) (3) (123,131) -- -- (123,134) Tax benefit on exercise of non-qualified stock options and disqualifying dispositions under stock plans -- -- 74,253 -- -- 74,253 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 27, 1998 130,752,346 131 81,118 551,914 (2,163) 631,000 Components of comprehensive income: Net income -- -- -- 196,122 -- 196,122 Translation adjustment -- -- -- -- 693 693 --------- Total comprehensive income 196,815 --------- Exercise of stock options under the Stock Option and Purchase Plans 7,998,030 8 51,055 -- -- 51,063 Repurchase of common stock (2,915,000) (3) (113,940) -- -- (113,943) Tax benefit on exercise of non-qualified stock options and disqualifying dispositions under stock plans -- -- 114,281 -- -- 114,281 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 26, 1999 135,835,376 $ 136 $ 132,514 $748,036 $(1,470) $ 879,216 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 20 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------- (Amounts in thousands) Increase (decrease) in cash and cash equivalents For the years ended JUNE 26, 1999 June 27, 1998 June 30, 1997 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 196,122 $ 178,144 $ 136,974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and other 17,639 15,082 17,013 Reduction of equipment value 2,700 12,342 -- Changes in assets and liabilities: Accounts receivable 22,591 (10,279) (10,978) Inventories (576) (7,874) (6,362) Deferred taxes 550 (10,300) 775 Income tax refund receivable (36,649) -- -- Other current assets (1,017) (960) 409 Accounts payable 5,088 9,920 (4,489) Income taxes payable 89,353 90,749 43,990 Deferred income on shipments to distributors (7,370) 7,350 1,805 All other accrued liabilities 17,816 11,305 7,943 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 306,247 295,479 187,080 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment, net (54,326) (109,426) (44,187) Other non-current assets 2,717 (1,153) 1,304 Purchase of held-to-maturity securities -- -- (24,313) Purchases of available-for-sale securities (571,083) (384,305) (239,437) Proceeds from maturities of held-to-maturity securities -- 5,800 95,122 Proceeds from sales/maturities of available-for-sale securities 396,712 277,687 32,207 - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (225,980) (211,397) (179,304) - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of common stock 51,063 37,229 31,208 Repurchase of common stock (113,943) (123,134) (80,705) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (62,880) (85,905) (49,497) - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 17,387 (1,823) (41,721) Cash and cash equivalents: Beginning of year 16,739 18,562 60,283 - -------------------------------------------------------------------------------------------------------------------------- End of year $ 34,126 $ 16,739 $ 18,562 - -------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: - -------------------------------------------------------------------------------------------------------------------------- Income taxes $ 43,316 $ 8,293 $ 19,967 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 21 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations: Maxim Integrated Products, Inc. (the Company) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits. Products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, sensors, and voltage references. Maxim Integrated Products, Inc., is a global company with manufacturing facilities in the United States, testing facilities in the Philippines, and sales offices throughout the world. The Company's products are sold to customers in numerous markets, including data processing, telecommunications, networking, industrial control, instrumentation, and military markets. 2. Summary of Significant Accounting Policies: Basis of presentation: The consolidated financial statements include the accounts of Maxim Integrated Products, Inc., and all of its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. The Company has a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every sixth or seventh fiscal year will be a 53-week fiscal year. Fiscal years 1999, 1998, and 1997 were 52-week years. Cash equivalents and short-term investments: For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments consist of U.S. Treasury and Federal Agency debt securities with original maturities beyond three months and within one year. All of the Company's cash equivalents and short-term investments are considered available-for-sale. Such securities are carried at fair market value based on market quotes. Unrealized gains and losses, net of tax, on securities in this category are reportable as a separate component of stockholders' equity. The cost of securities sold is based on the specific identification method. Interest earned on securities is included in interest income. Derivative financial instruments held for purposes other than trading: The Company enters into forward exchange contracts to hedge certain firm sales commitments denominated in foreign currencies and the net monetary assets and liabilities of its foreign subsidiaries. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual dollar cash flows resulting from the sale of products to international customers will be adversely affected by changes in exchange rates. Gains and losses related to these contracts are deferred and included in operating income to match with the overall gains or losses from the underlying transactions. Any gain or loss realized from early termination of a forward contract is included in operating income upon termination. Inventories: Inventories are stated at the lower of standard cost (which approximates first in, first out) or market. 22 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property, plant and equipment: Property, plant and equipment are stated at cost, and depreciation is computed on the straight line method over estimated useful lives of 2 to 40 years. Leasehold improvements are amortized over the lesser of their useful lives or the remaining term of the related lease. Revenue recognition: Revenue from product sales direct to customers is generally recognized upon shipment. A portion of the Company's sales are made to domestic distributors under agreements which provide for certain price rebates and limited product return privileges. As a result, the Company defers recognition of such sales until the merchandise is sold by the domestic distributors. Foreign currency translation and remeasurement: For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Exchange gains or losses arising from the translation of foreign currency denominated assets and liabilities are included as a component of stockholders' equity. For foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured at the year-end exchange rates. Certain non-monetary assets and liabilities are remeasured using historical rates. Statements of operations are remeasured at the average exchange rates during the year. Net gains and losses from foreign currency remeasurements have been minimal and are included in selling, general and administrative expenses. During fiscal 1999, the Company changed the functional currency of its foreign operations having the local currency as the functional currency to the U.S. dollar to reflect the significance of U.S.-dollar-based revenues for its foreign operations. This change did not have a material impact on the Company's financial position or results of operation. The ending foreign currency translation adjustment of $(1,470,000) will remain as a component of stockholders' equity. Employee stock plans: The Company accounts for its stock option and employee stock purchase plans in accordance with provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In addition, the Company discloses pro forma information related to its stock plans according to Financial Accounting Standards Board Statement No. 123 (SFAS 123), "Accounting for Stock Based Compensation." See Note 8 of "Notes To Consolidated Financial Statements." 23 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings per share: Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options and other potentially dilutive securities. The number of incremental shares from the assumed issuance of stock options and other potentially dilutive securities is calculated applying the treasury stock method. New accounting pronouncements: Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," was issued by the Financial Accounting Standards Board in June 1998. The standard will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or be recognized in other comprehensive income until the hedged item is recognized in earnings. The change in a derivative's fair value related to the ineffective portion of a hedge, if any, will be immediately recognized in earnings. The Company will adopt this standard as of the beginning of fiscal year 2001. The effect of adopting the standard is currently being evaluated, but is not expected to have a material effect on the Company's financial position or results of operations. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to the useful lives of fixed assets, allowances for doubtful accounts and customer returns, inventory reserves, potential reserves relating to litigation matters, accrued liabilities, and other reserves. Actual results may differ from those estimates, and such differences may be material to the financial statements. 24 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration of credit risk: Due to the Company's credit evaluation and collection process, bad debt expenses have been immaterial. Credit risk with respect to trade receivables is limited, because a large number of geographically diverse customers make up the Company's customer base, thus spreading the credit risk. While a significant portion of the Company's revenues are made through domestic and international distributors, no single customer has accounted for greater than 10% of net revenues in the last three fiscal years. The Company places its investments with government entities and high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentration of other risks: The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Company's results of operations are affected by a wide variety of factors, including general economic conditions, both at home and abroad, economic conditions specific to the semiconductor industry and to the analog portion of that industry, demand for the Company's products, the timely introduction of new products, implementation of new manufacturing technologies, the ability to manufacture efficiently, the ability to safeguard patents and intellectual property in a rapidly evolving market, and reliance on assembly and wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to the factors mentioned above or other factors. 25 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Financial Instruments: Investments: Short-term investments in available-for-sale securities are as follows:
------------------------------------------------------------------------------ (Amounts in thousands) June 26, 1999 June 27, 1998 ------------------------------------------------------------------------------ U.S. Treasury securities at market value $262,425 $147,880 Federal Agency Debt securities at market value 218,155 158,329 ------------------------------------------------------------------------------ $480,580 $306,209 ------------------------------------------------------------------------------
Due to short maturity terms and relative price insensitivity to market interest rates, amortized cost approximates fair market value, and no unrealized gains or losses have been recorded at June 26, 1999 and June 27, 1998. Fair market values are calculated based upon prevailing market quotes at the end of each fiscal year. Gross realized gains or losses for the fiscal years ended June 1999, 1998, and 1997 were immaterial. Foreign exchange contracts: At June 26, 1999, the Company held forward exchange contracts, all having maturities of less than one year, to exchange various foreign currencies for U.S. dollars in the amount of $43.9 million. Gains and losses related to these contracts are deferred and matched with the overall gains or losses from the underlying transactions. The table below summarizes, by currency, the notional amounts of the Company's forward exchange contracts and net unrealized gain or loss at the end of fiscal 1999 and 1998. The net unrealized gain or loss approximates carrying value of these contracts.
---------------------------------------------------- June 26, 1999 June 27, 1998 ---------------------------------------------------- Notional Unrealized Notional Unrealized (Amounts in thousands) Amounts Gain/(Loss) Amounts Gain/(Loss) ------------------------------------------------------------------------------------- Currency: Japanese Yen $23,238 $ 565 $33,158 $ 2,162 British Pound Sterling 10,086 101 6,463 (37) German Mark 7,692 351 8,870 77 French Franc 2,918 101 3,982 (1) ------------------------------------------------------------------------------------- $43,934 $ 1,118 $52,473 $ 2,201 -------------------------------------------------------------------------------------
The net unrealized gain is potentially subject to credit risk as it represents appreciation of the hedge position over spot exchange rates at year end. The Company controls credit risk through credit approvals and monitoring procedures. 26 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Inventories: The components of inventories were:
(Amounts in thousands) June 26, 1999 June 27, 1998 ------------------------------------------------------------ Raw materials $ 3,473 $ 4,826 Work-in-process 18,932 29,575 Finished goods 22,878 10,306 ------------------------------------------------------------ $45,283 $44,707 ------------------------------------------------------------
5. Property, Plant and Equipment: Property, plant and equipment consists of:
(Amounts in thousands) June 26, 1999 June 27, 1998 ---------------------------------------------------------------------------- Land $ 26,817 $ 26,817 Buildings 47,923 47,923 Building improvements 44,869 33,082 Machinery and equipment 270,767 231,380 ---------------------------------------------------------------------------- 390,376 339,202 ---------------------------------------------------------------------------- Less accumulated depreciation and amortization (100,243) (83,749) ---------------------------------------------------------------------------- $ 290,133 $ 255,453 ----------------------------------------------------------------------------
During fiscal 1999, the Company recorded a charge of $2.7 million to cost of goods sold to reduce the carrying value of capital equipment to net realizable value. During fiscal 1998, the Company recorded charges of $12.3 million to reduce the carrying value of certain pieces of capital equipment, of which $8.2 million was charged to cost of goods sold, $3.1 million was charged to research and development expenses, and $1.0 million was charged to selling, general and administrative expenses. 27 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Commitments and Contingencies: The Company is a defendant in a patent infringement lawsuit that alleges that certain of the Company's products infringe a United States patent owned by the plaintiff in the lawsuit. The lawsuit is in the discovery phase, with a jury trial on the issues of liability and willfulness likely to occur in calendar 2000. In addition, the Company is subject to other legal proceedings and claims that arise in the normal course of its business. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position of the Company. The Company leases certain facilities, including a wafer fabrication facility for which the lease expires in November 2003. Under that lease, the Company has a five-year lease extension option and is responsible for maintenance, taxes, and insurance on the facility. Future annual minimum lease payments for all leased facilities are as follows:
Fiscal Year (Amounts in thousands) -------------------------------------------------------------------------- 2000 $1,745 2001 1,378 2002 1,059 2003 982 2004 453 2005-2010 479 -------------------------------------------------------------------------- $6,096 --------------------------------------------------------------------------
Rent expense was approximately $1.3 million in fiscal 1999 and $1.4 million in each of fiscal 1998 and 1997. 7. Comprehensive Income: The Company adopted SFAS No. 130, "Reporting Comprehensive Income," at the beginning of fiscal 1999. The adoption has no impact on net income or total stockholders' equity. Comprehensive income consists of net income and foreign currency translation adjustments. Accumulated other comprehensive income presented in the consolidated balance sheets consists of foreign currency translation adjustments. Foreign currency translation adjustments are not tax affected. 28 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Employee Stock and Benefit Plans: Stock option and purchase plans: At June 26, 1999, the Company has reserved a total of 45,351,572 of its common shares for issuance to employees and certain others under its 1996 Stock Incentive Plan, 1987 Supplemental Stock Option Plan, 1983 Incentive Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), 1988 Nonemployee Director Stock Option Plan, and Supplemental Nonemployee Stock Option Plan. Under the plans, options are generally granted at a price not less than fair market value as determined by the Board at the date of grant. Subject to certain limitations, the Board has authority to make grants at prices less than fair market value. Options granted under the stock option plans described above generally vest within 5 years and expire from 5 to 10 years from the date of the grant or such shorter term as may be provided in the agreement. Under the 1987 Employee Stock Participation Plan, employees of the Company may purchase shares of common stock at a price not less than the lesser of 85% of the fair market value of the stock on the date the purchase right is granted or the date the right is exercised. During fiscal 1999, the Company received $114,281,000 of tax benefit on the exercise of nonqualified stock options and on disqualifying dispositions under stock plans ($74,253,000 in fiscal 1998 and $52,397,000 in fiscal 1997). Information with respect to activity under the stock option plans and ESP Plan is set forth below:
Outstanding Options ------------------------------- Shares Weighted Average Available Number of Price for Grant Shares Per Share ------------------------------------------------------------------------------- Balance, June 30, 1996 857,824 45,850,226 $ 5.93 Shares reserved 14,530,000 -- -- Options granted (8,931,886) 8,931,886 $ 18.94 Options terminated 1,172,966 (1,172,966) $ 12.70 Options exercised -- (8,448,466) $ 3.71 ------------------------------------------------------------------------------- Balance, June 30, 1997 7,628,904 45,160,680 $ 8.64 Options granted (7,883,730) 7,883,730 $ 31.13 Options terminated 1,408,924 (1,408,924) $ 15.14 Options exercised -- (6,939,982) $ 5.36 ------------------------------------------------------------------------------- Balance, June 27, 1998 1,154,098 44,695,504 $ 12.97 Shares reserved 7,500,000 -- -- Options granted (7,755,474) 7,755,474 $ 37.86 Options terminated 2,837,502 (2,837,502) $ 18.43 Options exercised -- (7,998,030) $ 6.78 ------------------------------------------------------------------------------- Balance, June 26, 1999 3,736,126 41,615,446 $ 18.27 -------------------------------------------------------------------------------
At June 26, 1999, 16,604,914 options to purchase shares of common stock were exercisable (options exercisable at June 27, 1998 and June 30, 1997 were 17,308,790 and 16,217,762, respectively). 29 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about options outstanding at June 26, 1999:
Outstanding Options Options Exercisable ----------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Prices June 26, 1999 Life (Years) Price June 26, 1999 Price --------------------------------------------------------------------------------------------- $ 0.89 - $ 5.56 9,996,153 3.5 $ 3.75 9,315,451 $ 3.64 $ 5.78 - $14.75 7,989,910 5.0 $ 8.38 4,653,848 $ 7.62 $14.78 - $22.56 8,709,085 7.0 $17.22 1,649,436 $16.65 $22.63 - $33.06 9,026,653 8.3 $27.79 791,309 $26.63 $33.13 - $59.00 5,893,645 9.3 $43.32 194,870 $35.92 --------------------------------------------------------------------------------------------- $ 0.89 - $59.00 41,615,446 6.3 $18.27 16,604,914 $ 7.52 ---------------------------------------------------------------------------------------------
Stock-based compensation: Under SFAS 123, the Company may elect to continue to account for the grant of stock options under APB Opinion 25, in which options granted with an exercise price equal to the fair market value on the date of grant do not require recognition of expense in the Company's financial statements. Under SFAS 123, the Company is, however, required to provide pro forma disclosure regarding net income and earnings per share as if the Company had accounted for its employee stock options (including shares issued under the 1996 Stock Incentive Plan, 1987 Supplemental Stock Option Plan, 1998 Nonemployee Director Stock Option Plan, and Supplemental Nonemployee Stock Option Plan, collectively called "options") granted subsequent to June 30, 1995, under the methodology prescribed by that statement. Since the Company has elected to account for the grant of options under APB Opinion No. 25, the following information is for disclosure purposes only and it will not affect the current or future earnings of the Company. The valuation of options granted in fiscal 1999, 1998, and 1997 reported below has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Stock Option Plans Employee Stock Participation Plan -------------------------------------------------------------------------- Fiscal year 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------------- Expected option holding period (in years) 4.4 4.0 4.4 0.5 0.5 0.5 Risk-free interest rate 6.0% 6.0% 6.4% 5.4% 5.3% 5.4% Stock price volatility 0.51 0.48 0.47 0.51 0.48 0.47 Dividend yield -- -- -- -- -- -- ----------------------------------------------------------------------------------------------------------------------------
401(k) retirement plan: The Company sponsors a 401(k) retirement plan [401(k) Plan] under which full-time U.S. employees may contribute, on a pretax basis, between 5% and 15% of their total annual income from the Company, subject to a maximum aggregate annual contribution imposed by the Internal Revenue Code. Company contributions to the 401(k) Plan were immaterial in fiscal 1999, 1998, and 1997. 30 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate of value, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the value of the options. The following is a summary of weighted average grant date values generated by application of the Black- Scholes model:
Weighted Average Grant Date Value For the years ended June 26, 1999 June 27, 1998 June 30, 1997 ------------------------------------------------------------------------------------------------------------- Stock Option Plans $ 19.21 $ 14.59 $ 9.83 Employee Stock Participation Plan $ 9.76 $ 7.12 $ 5.99 -------------------------------------------------------------------------------------------------------------
As required under SFAS 123, the reported net income and earnings per share have been presented to reflect the impact had the Company been required to include the amortization of the Black-Scholes option value as an expense. The adjusted amounts are as follows:
For the years ended June 26, 1999 June 27, 1998 June 30, 1997 ------------------------------------------------------------------------------------------------------------- Pro forma net income adjusted for SFAS 123 (in thousands) $ 158,092 $ 145,204 $ 121,190 ------------------------------------------------------------------------------------------------------------- Pro forma diluted earnings per share adjusted for SFAS 123 $ 1.04 $ 0.96 $ 0.83 -------------------------------------------------------------------------------------------------------------
The effects of the disclosures above relate only to options granted after June 30, 1995. Therefore, the impact on net income recalculated under SFAS 123 is not likely to be representative of similar disclosures in future years as additional option grants will impact future disclosures. 9. Earnings Per Share: The following table sets forth the computation of basic and diluted earnings per share:
(Amounts in thousands, except per share data) For the years ended June 26, 1999 June 27, 1998 June 30, 1997 --------------------------------------------------------------------------------------- Numerator for basic earnings per share and diluted earnings per share Net Income $196,122 $178,144 $136,974 --------------------------------------------------------------------------------------- Denominator for basic earnings per share 132,722 129,838 125,430 Effect of dilutive securities: Stock options and warrants 19,337 20,823 20,324 --------------------------------------- Denominator for diluted earnings per share 152,059 150,661 145,754 --------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.48 $ 1.37 $ 1.09 Diluted $ 1.29 $ 1.18 $ 0.94 ---------------------------------------------------------------------------------------
31 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Income Taxes: The provision for income taxes consists of the following:
(Amounts in thousands) For the years ended June 26, 1999 June 27, 1998 June 30, 1997 ------------------------------------------------------------------------- Federal Current $ 84,299 $ 87,461 $54,976 Deferred 450 (9,200) 4,015 State Current 12,004 9,305 8,225 Deferred 100 (1,100) 595 Foreign Current 4,179 5,305 2,750 ------------------------------------------------------------------------- $101,032 $ 91,771 $70,561 -------------------------------------------------------------------------
Pretax income from foreign operations was approximately $12.0 million, $18.0 million, and $6.4 million for the years ended June 26, 1999, June 27, 1998, and June 30, 1997, respectively. The Company enjoys a tax holiday with respect to its operations in Cavite, Philippines, which will expire in fiscal 2002. The impact of this holiday was to increase net income by approximately $991,000 ($0.01 diluted earnings per share) and $1,274,000 ($0.01 diluted earnings per share) during fiscal 1999 and 1998, respectively. At June 26, 1999, accumulated pretax earnings of approximately $6,663,000 are intended to be permanently reinvested outside the United States, and no federal tax has been provided on these earnings. The provision for income taxes differs from the amount computed by applying the statutory rate as follows:
For the years ended June 26, 1999 June 27, 1998 June 30, 1997 ---------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State tax, net of federal benefit 2.6 2.0 2.8 General business credits (0.7) (1.0) (0.7) Exempt earnings of Foreign Sales Corporation (2.5) (2.0) (2.5) Other (0.4) -- (0.6) ---------------------------------------------------------------------------------- 34.0% 34.0% 34.0% ----------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company's deferred tax assets and liabilities are as follows:
(Amounts in thousands) June 26, 1999 June 27, 1998 ------------------------------------------------------------------------------------------------ Deferred tax assets: Inventory valuation and reserves $ 16,679 $ 8,958 Distributor related accruals 9,980 8,943 Accrued compensation 10,762 4,783 Other reserves and accruals not currently deductible for tax reporting 13,973 13,502 ------------------------------------------------------------------------------------------------ Total deferred tax assets 51,394 36,186 ------------------------------------------------------------------------------------------------ Deferred tax liabilities--fixed assets cost recovery (21,744) (5,986) ------------------------------------------------------------------------------------------------ Net deferred tax assets $ 29,650 $ 30,200 ------------------------------------------------------------------------------------------------
32 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Segment Information: The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information" in fiscal 1999. The new standard revises the way operating segments are reported. The Company operates and tracks its results in one operating segment. The Company designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS 131. Enterprise-wide information is provided in accordance with SFAS 131. Geographical revenue information is based on the customer's ship-to location. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each fiscal year. Net revenues from unaffiliated customers by geographic region were as follows:
(Amounts in thousands) For the years ended June 26, 1999 June 27, 1998 June 30, 1997 --------------------------------------------------------------------------- United States $249,923 $244,927 $188,209 Europe 152,769 148,245 109,849 Pacific Rim 187,857 161,985 125,425 Rest of World 16,416 5,063 10,227 --------------------------------------------------------------------------- $606,965 $560,220 $433,710 ---------------------------------------------------------------------------
Net long-lived assets by geographic region were as follows:
(Amounts in thousands) June 26, 1999 June 27, 1998 -------------------------------------------------------- United States $264,190 $233,747 Rest of World 25,943 21,706 -------------------------------------------------------- $290,133 $255,453 --------------------------------------------------------
33 33 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Maxim Integrated Products, Inc. We have audited the accompanying consolidated balance sheets of Maxim Integrated Products, Inc., as of June 26, 1999 and June 27, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended June 26, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxim Integrated Products, Inc., at June 26, 1999 and June 27, 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 26, 1999, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California July 30, 1999 34 34 SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------- (Amounts in thousands, except per share data) - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Year 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Net revenues $ 606,965 $560,220 $433,710 $421,626 $250,820 - ---------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 189,673 $183,724 $145,307 $146,253 $103,598 Gross margin % 68.8% 67.2% 66.5% 65.3% 58.7% - ---------------------------------------------------------------------------------------------------------------------------------- Operating income $ 276,768 $255,036 $198,945 $185,890 $ 57,234 % of net revenues 45.6% 45.5% 45.9% 44.1% 22.8% - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 196,122 $178,144 $136,974 $123,345 $ 38,906 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.48 $ 1.37 $ 1.09 $ 1.03 $ 0.34 Diluted $ 1.29 $ 1.18 $ 0.94 $ 0.87 $ 0.29 - ---------------------------------------------------------------------------------------------------------------------------------- Shares used in the calculation of earnings per share: Basic 132,722 129,838 125,430 120,204 115,703 Diluted 152,059 150,661 145,754 141,854 133,004 - ---------------------------------------------------------------------------------------------------------------------------------- Cash, cash equivalents and short-term investments $ 514,706 $322,948 $223,953 $129,253 $ 92,295 Working capital $ 607,976 $377,723 $291,786 $176,182 $ 95,978 Total assets $1,022,314 $769,492 $556,386 $417,794 $256,133 Stockholders' equity $ 879,216 $631,000 $465,565 $325,425 $178,710 - ----------------------------------------------------------------------------------------------------------------------------------
35 35 FINANCIAL HIGHLIGHTS BY QUARTER
- ---------------------------------------------------------------------------------------------------------------------- Unaudited (Amounts in thousands, except per share data) - ---------------------------------------------------------------------------------------------------------------------- Quarter Ended 1999 6/26/99 3/27/99 12/26/98 9/26/98 - ---------------------------------------------------------------------------------------------------------------------- Net revenues $ 159,484 $ 147,188 $ 145,012 $155,281 - ---------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 48,273 $ 45,538 $ 45,409 $ 50,453 Gross margin % 69.7% 69.1% 68.7% 67.5% - ---------------------------------------------------------------------------------------------------------------------- Operating income $ 73,899 $ 67,004 $ 65,575 $ 70,290 % of net revenues 46.3% 45.5% 45.2% 45.3% - ---------------------------------------------------------------------------------------------------------------------- Net income $ 52,566 $ 47,669 $ 46,492 $ 49,395 - ---------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.39 $ 0.36 $ 0.35 $ 0.38 Diluted $ 0.34 $ 0.31 $ 0.31 $ 0.33 - ---------------------------------------------------------------------------------------------------------------------- Shares used in calculation of earnings per share: Basic 135,235 133,762 131,309 130,581 Diluted 155,622 153,981 149,972 148,660 - ---------------------------------------------------------------------------------------------------------------------- Market price range - High $ 64.81 $ 55.00 $ 44.94 $ 36.06 - Low $ 49.19 $ 40.88 $ 22.56 $ 27.19 - ---------------------------------------------------------------------------------------------------------------------- Quarter Ended 1998 6/27/98 3/28/98 12/27/97 9/27/97 - ---------------------------------------------------------------------------------------------------------------------- Net revenues $ 155,181 $ 145,039 $ 135,000 $125,000 - ---------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 50,424 $ 47,250 $ 44,550 $ 41,500 Gross margin % 67.5% 67.4% 67.0% 66.8% - ---------------------------------------------------------------------------------------------------------------------- Operating income $ 70,082 $ 66,242 $ 61,626 $ 57,086 % of net revenues 45.2% 45.7% 45.6% 45.7% - ---------------------------------------------------------------------------------------------------------------------- Net income $ 49,201 $ 46,150 $ 42,829 $ 39,964 - ---------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.37 $ 0.35 $ 0.33 $ 0.31 Diluted $ 0.33 $ 0.31 $ 0.29 $ 0.26 - ---------------------------------------------------------------------------------------------------------------------- Shares used in calculation of earnings per share: Basic 131,546 130,510 128,733 128,564 Diluted 150,862 151,223 149,749 150,810 - ---------------------------------------------------------------------------------------------------------------------- Market price range - High $ 40.62 $ 42.00 $ 38.19 $ 37.50 - Low $ 27.62 $ 28.50 $ 28.50 $ 27.94 - ----------------------------------------------------------------------------------------------------------------------
36 36 BOARD OF DIRECTORS AND CORPORATE OFFICERS BOARD OF DIRECTORS John F. Gifford Chairman of the Board, President and Chief Executive Officer James R. Bergman Director General Partner of DSV Partners B. Kipling Hagopian Director Special Limited Partner of Brentwood Venture Capital Partner, Apple/Oaks Partners LLC Dr. A. R. Frank Wazzan Director Dean of Engineering & Applied Sciences at University of California, Los Angeles CORPORATE OFFICERS John F. Gifford Chairman of the Board, President and Chief Executive Officer Frederick G. Beck Vice President Ziya G. Boyacigiller Vice President Tunc Doluca Vice President Laszlo V. Gal, Ph.D. Vice President Anthony C. Gilbert Corporate Secretary Richard C. Hood Vice President Kenneth J. Huening Vice President Carl W. Jasper Vice President and Chief Financial Officer Nasrollah Navid, Ph.D. Vice President Pirooz Parvarandeh Vice President Charles G. Rigg Vice President Robert F. Scheer Vice President Vijay Ullal Vice President 37 37 CORPORATE DATA STOCKHOLDER INFORMATION INDEPENDENT AUDITORS Ernst & Young LLP San Jose, California LEGAL COUNSEL Morrison & Foerster LLP Palo Alto, California REGISTRAR/TRANSFER AGENT Boston EquiServe Boston, Massachusetts CORPORATE HEADQUARTERS 120 San Gabriel Drive Sunnyvale, California 94086 (408) 737-7600 FORM 10-K A copy of the Company's Form 10-K filed with the Securities & Exchange Commission, without exhibits, is available without charge upon writing to: Stockholder Relations Maxim Integrated Products, Inc. 120 San Gabriel Drive Sunnyvale, California 94086 STOCK LISTING At June 26, 1999, there were approximately 1,239 stockholders of record of the Company's common stock. Maxim common stock is traded on the NASDAQ National Market under the symbol MXIM. The Company has never paid cash dividends on its common stock and has no present plans to do so. ANNUAL MEETING The annual meeting of stockholders will be on Thursday, November 18, 1999 at 11:00 a.m. at the Company's Event Center, 433 Mathilda Avenue, Sunnyvale, California 94086. 38 38 COVER 3 39 COVER 4 EX-21 4 LIST OF SUBSIDIARIES 1 Exhibit 21 EXHIBIT 21 LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- Maxim Integrated Products England UK Limited Maxim International Inc. Virgin Islands Maxim GmbH Germany Maxim SARL France Maxim Japan K.K. Japan Maxim Integrated Products Korea, Inc. Korea Maxim Phil. Operating Corporation Philippines Maxim Phil. Holding Corporation Philippines These Subsidiaries are 100% owned by the Registrant. Maxtek Components Corporation Oregon This Subsidiary is 50% owned by the Registrant. Maxim Phil. Land Corporation Philippines This Subsidiary is 40% owned by the Registrant.
29 EX-23 5 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Maxim Integrated Products, Inc. of our report dated July 30, 1999, included in the Annual Report to Shareholders of Maxim Integrated Products, Inc. Our audits also included the consolidated financial statement schedule of Maxim Integrated Products, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-57849, 33-72186, 33-54026, 33-44485, 33-37470, 33-37469, 33-34728, 33-34519, 33-25639 and 33-22147) pertaining to the 1993 Incentive Stock Option Plan, the 1983 Supplemental Nonemployee Stock Option Plan, the 1987 Supplemental Stock Option Plan, the 1987 Employee Stock Option Participation Plan, and the 1988 Nonemployee Director Stock Option Plan of our report dated July 30, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of Maxim Integrated Products, Inc. /s/ ERNST & YOUNG LLP San Jose, California September 22, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME AND NOTES THERETO FOR ITS FISCAL YEAR END JUNE 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS AND NOTES IN ITS ANNUAL REPORT ON FORM 10-K. 1,000 YEAR JUN-26-1999 JUN-28-1998 JUN-26-1999 514,706 0 80,815 (1,485) 45,283 728,874 390,376 (100,243) 1,022,314 120,898 0 0 0 136 879,080 1,022,314 606,965 606,965 189,673 189,673 140,524 0 (20,386) 297,154 101,032 196,122 0 0 0 196,122 1.48 1.29
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