10-K 1 f65666e10-k.txt FORM 10-K FOR FISCAL YEAR ENDED JUNE 24, 2000 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 24, 2000 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 31, 2000 was approximately $16,994,000,000*. Number of shares outstanding of the registrant's Common Stock, $.001 par value, as of August 31, 2000: 285,933,173. 2 DOCUMENTS INCORPORATED BY REFERENCE: Part II - Annual Report to Stockholders for the fiscal year ended June 24, 2000 Part III - Proxy Statement for the 2000 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 31, 2000. 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; within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, 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, without limitation, plans or objectives relating to the Company's products and their development, manufacture, marketing and sale (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 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 Established in 1983, 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, as to many circuit types, 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. Based on product announcements by its competitors, Maxim believes that in the past 17 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 larger number of customers, and in many cases, by longer product life cycles and lower capital requirements as a result of generally using more mature manufacturing technologies. The Company believes that the widespread application of low-cost microprocessor-based systems and of digital communication technologies 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 believes it addresses the requirements of the market by providing competitively priced products that add value to electronic equipment with superior quality and reliability. The Company's research and development programs emphasize development of technically innovative proprietary products. In addition, the Company also develops second source products used for industry-standard parts. In the Company's fiscal 2000 product introduction year ending July 22, 2000, Maxim introduced over 380 products bringing the Company's total new product introductions to over 2,100 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 Systems Central Office Switches Direct Broadcast TV Fiber Optics Pagers PBXs Phones * Cellular/PCS * Cordless Satellite Communications 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 * Time Testers Data Processing ............ Bar-code Readers Disk Drives Hand-Held Computers/PDAs Mainframes Personal Computers Printers Point of Sale Terminals Tape Drives Servers Workstations
The Company also sells products for military, video 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 source products for some of 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 for the end product. 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, long-term product performance. 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. After assembly has been completed, the majority of the assembled product is shipped to the Company's test facility located in Cavite, the Philippines. Once testing has been completed, the finished product is either shipped directly to customers worldwide or to other Company locations for ultimate sale to end customers. In fiscal 2000, the Company began the process of hiring employees and purchasing capital equipment for a second test facility to be located in Thailand. In addition, the Company is also expanding its existing test facility in Cavite, 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, 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. 7 8 Most of the wafers produced in fiscal 2000 were manufactured at one of the Company's two operating 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). In the past and as sometimes happens 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, most domestic distributors are entitled to certain price rebates and product return privileges. International sales are conducted by 22 Maxim sales offices, 3 sales representative organizations and 32 distributors. The Company sells in both United States dollars and various foreign currencies. A majority 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 enters into 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 8 9 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. International sales accounted for approximately 57%, 59%, and 56% of net revenues in fiscal 2000, 1999 and 1998, respectively. (See Note 11 "Segment Information" of the Notes to Consolidated Financial Statements as set forth in the Company's Annual Report to Stockholders for the fiscal year ended June 24, 2000.) The Company also sells product directly to original equipment manufacturers. In particular, the Company has a long-term supply arrangement, which expires in May 2004 after which becomes a month to month 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 24, 2000, the Company's backlog was approximately $420 million as compared to approximately $166 million at June 26, 1999. 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. Accordingly, the Company believes that its backlog at any time should not be used as a measure of future revenues. All of the backlog numbers have been adjusted to be net of cancellations and estimated future U.S. distribution ship and debit pricing adjustments. 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. Due to the research and development plans of the Company and the shortage of qualified design engineering talent, the Company does not always have the number of engineers required to meet its research and development goals. Research and development expenses were approximately $142.3 million, $88.2 million, and $72.2 million in fiscal 2000, 1999, and 1998, respectively. COMPETITION 9 10 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 competitors are Analog Devices, Inc., Applied Micro Circuits Corporation, Conexant Systems Inc., Dallas Semiconductor Corporation, Harris Corporation, Linear Technology Corporation, Lucent Technologies, Micrel Inc., Mitsubishi Corporation, Mitsui & Co. Ltd., Motorola Inc., National Semiconductor Corporation, Philips Electronics N.V., Ricoh Company Ltd., Seiko Corporation, Semtech Corporation, STMicroelectronics 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 more foreign competition will not develop in the future. Some of Maxim's competitors have 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 106 U.S. patents and 18 foreign patents with expiration dates ranging from 2001 to 2018. In addition, the Company has applied for 73 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. 10 11 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 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 have a materially adverse effect on the Company's financial position or results of operations. EMPLOYEES The supply of skilled 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. As of June 24, 2000, Maxim had 4,181 employees. 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 but not limited to the 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. These increases in demand have the potential to exceed available capacity of various suppliers to equipment manufactures. If capacity becomes constrained, this could result in reduction of orders on Maxim by the affected equipment manufactures. 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 portion of the Company's 90 day backlog. As a result, in any quarterly 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. The Company routinely estimates inventory reserves required for such product. Actual results may differ from these reserve estimates, and such differences may be material to the financial statements. Dependence on New Products and Process Technologies The Company's future success will continue to depend 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 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 (in fact, it is natural that older markets do saturate and decline); that the Company's existing and new products will meet the requirements of such markets; that the Company's products will achieve customer 13 14 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. 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 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 is currently in the process of expanding its wafer manufacturing capacity at its existing wafer manufacturing facilities in order to meet increased customer demand for its products. Should the Company be unsuccessful in completing this expansion on time or should customer demand decrease and the Company no longer need the additional capacity, the Company's financial position and results of operation could be adversely impacted. 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, some 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 source products 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, some 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 14 15 "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 collect open accounts could adversely affect the Company's results of operation. In fiscal 1999, the Company initiated its own distribution activities in the U.S.. 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 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. In Europe, this risk is reduced as Maxim distributes a significant percentage of its own product. 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. 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 not be economically feasible. Less than 5% of the Company's wafer fabrication is performed by foundries for which second sourcing is not possible. 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 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. Even if the planned Thailand test facility is successfully completed and begins operations as planned, it would not provide sufficient capacity to make up for a significant disruption in the Philippine test facility.See "Business-Manufacturing." 15 16 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 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 16 17 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 57% of the Company's net revenues in fiscal 2000 were from foreign 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 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 several of the Company's executive officers could have a material adverse effect on the Company. In addition, there could be a material adverse effect on the Company should the turnover rates for engineers and other key personnel increase significantly or should the Company be unable to continue to attract qualified personnel. ITEM 2. PROPERTIES Maxim's headquarters is located in Sunnyvale, California. Manufacturing and other operations are conducted in several locations worldwide. The following table provides certain information as to the Company's principal general offices and manufacturing facilities. 17 18
OWNED PROPERTY LOCATION USE FLOOR SPACE ----------------- --- ----------- Sunnyvale, Corporate headquarters, office space, 188,000 sq. ft. California engineering, manufacturing, administration, customer service, shipping and other San Jose, Wafer fabrication, office space and 67,000 sq. ft California administration Beaverton, Wafer fabrication, engineering, 226,000 sq. ft Oregon office space, shipping and administration Hillsboro, Unoccupied as of 6/30/00 325,000 sq. ft Oregon Cavite, Testing, engineering, office space, 141,000 sq. ft Philippines shipping and administration
LEASED PROPERTY LOCATION USE FLOOR SPACE ----------------- --- ----------- Sunnyvale, Wafer fabrication and 30,000 sq. ft. California office space Samutprakarn Province, Testing, office space and 25,000 sq. ft. Thailand administration
In addition to the leased property listed in the table, the Company also leases sales offices and other premises at various locations in the United States and overseas under operating leases. These leases expire at various dates through the year 2010. The Company anticipates no difficulty in retaining occupancy of any of its manufacturing, office or sales facilities through lease renewals prior to expiration or through month-to-month occupancy or in replacing them with equivalent facilities. In October of 1999, the Company began construction of a 120,000 square foot office building at its headquarters with a parking structure adjacent to the building. These structures should be available for use in fiscal 2001. In March 2000, the Company acquired the 325,000 square foot building referred to above on 34.3 acres in Hillsboro, Oregon. Maxim rents a part of this space and will utilize the remainder to house some of its employees presently at its Beaverton site. The Company expects these buildings and the contiguous land to be adequate for its business purposes through fiscal 2001. 18 19 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 2001. The Company has asserted in its answer, and continues to believe, that the allegations in the complaint are without merit. 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 24, 2000 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 19 20 Annual Report to Stockholders for the fiscal year ended June 24, 2000 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 24, 2000 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 24, 2000 under subheading "Interest Income and Other, Net" under the heading "Financial Information - Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 24, 2000 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 2000 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 59 President, Chief Executive Officer and Chairman of the Board Frederick G. Beck 62 Vice President Tunc Doluca 42 Vice President Laszlo V. Gal, Ph.D. 52 Vice President Robi B. Georges 42 Vice President Richard C. Hood 50 Vice President Kenneth J. Huening 39 Vice President Carl W. Jasper 44 Vice President and Chief Financial Officer Nasrollah Navid, Ph. D. 51 Vice President Pirooz Parvarandeh 40 Vice President Charles G. Rigg 56 Vice President Robert F. Scheer 47 Vice President Sharon E. Smith-Lenox 48 Corporate Controller and Principal Accounting Officer Vijay Ullal 41 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. 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. Georges joined Maxim in June 1983 and was promoted to Vice President in June 2000. 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. Ms. Smith-Lenox joined Maxim in October 1999 as Principal Accounting Officer. Prior to joining Maxim, she was with Hewlett Packard Company from September 1983 to October 1999 where she held various management positions in Accounting and Finance, most recently including 22 23 that of Controller. Prior to that she was with KPMG, San Francisco from 1980 to 1983. 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. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2000 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 2000 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 2000 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 2000 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8. Consolidated Balance Sheets at June 24, 2000 and June 26, 1999. Consolidated Statements of Income for each of the three years in the period ended June 24, 2000. Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 24, 2000. Consolidated Statements of Cash Flows for each of the three years in the period ended June 24, 2000. Notes to Consolidated Financial Statements. (a) (2) The following financial statement schedule is filed as part of this Form 10-K. 23 24 Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, or because the required 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 22, 2000 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) By /s/ Sharon E. Smith-Lenox ------------------------------------ Sharon E. Smith-Lenox Corporate Controller (Principal Accounting 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 22, 2000 ----------------------------------- Executive Officer and John F. Gifford Chairman of the Board (Principal Executive Officer) /s/ James R. Bergman Director September 22, 2000 ----------------------------------- James R. Bergman /s/ B. Kipling Hagopian Director September 22, 2000 ----------------------------------- B. Kipling Hagopian /s/ Eric P. Karros Director September 22, 2000 ----------------------------------- Eric P. Karros /s/ A.R. Wazzan Director September 22, 2000 ----------------------------------- A.R. Wazzan
25 26 EXHIBIT INDEX
Exhibit Sequentially Number Numbered Page Description ------ ------------- ----------- 3.1 O Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on September 21, 1995 3.3 T Amendment to Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on November 19, 1999. 3.4 U Amended and Restated Bylaws of the Company, as amended 10.5 O 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 O Technology Transfer Agreement dated May 27, 1994 by and between the Company and Tektronix, Inc.(2) 10.11 O 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. 27 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 24, 2000 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. O 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. T Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 25, 1999. U Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 2000. 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 27, 1998 $1,344 $ 568 $ 20 $1,892 Year ended June 26, 1999 $1,892 $ 182 $ 589 $1,485 Year ended June 24, 2000 $1,485 $ 500 $ 214 $1,771
(1) Uncollectible accounts written off. S-1