10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

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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 MARCH 31, 2001 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: 0-21184


MICROCHIP TECHNOLOGY INCORPORATED
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(Exact Name of Registrant as Specified in Its Charter)


DELAWARE 86-0629024
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(State of Incorporation) (I.R.S. Employer
Identification No.)


2355 W. CHANDLER BLVD., CHANDLER, AZ 85224
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(Address of Principal Executive Offices, Including Zip Code)


(480) 792-7200
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(Registrant's Telephone Number, Including Area Code)


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, $.001 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS

The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
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 Form 10-K or any amendment to this Form
10-K. [X]

The approximate aggregate market value of the voting stock of the
registrant beneficially owned by stockholders, other than directors, officers
and affiliates of the registrant, at April 27, 2001 was $ 3,583,935,514.

Number of shares of Common Stock, $.001 par value, outstanding as of April
27, 2001: 131,219,921

DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENT PART OF FORM 10-K
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Proxy Statement for the 2001 Annual III
Meeting of Stockholders

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PART I

ITEM 1. BUSINESS

Microchip Technology Incorporated was incorporated in Delaware in 1989. In
this Form 10-K, "we," "us," and "our" each refers to Microchip Technology
Incorporated and its subsidiaries. Our executive offices are located at 2355
West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number
is (480) 792-7200. Our website address is microchip.com. The information on our
website is NOT incorporated into this Form 10-K.

We develop and manufacture specialized semiconductor products used by our
customers for a wide variety of embedded control applications. Our product
portfolio comprises field-programmable RISC-based microcontrollers that serve 8-
and 16-bit embedded control applications, and a broad spectrum of
high-performance linear and mixed-signal, power management and thermal
management devices. We also offer complementary microperipheral products,
including interface devices, serial EEPROMS, and our patented KEELOQ(R) security
devices. We market our products to the automotive, communications, computing,
consumer and industrial control markets. Our quality systems are ISO 9001 (1994
version) and QS9000 (1998 version) certified.

THIS FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS REGARDING OUR STRATEGY, FINANCIAL
PERFORMANCE AND REVENUE SOURCES. WE USE WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"PLAN," "EXPECT," "FUTURE," "INTEND" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING THOSE SET FORTH UNDER "ITEM 1 - BUSINESS - ADDITIONAL FACTORS
THAT MAY AFFECT RESULTS OF OPERATIONS," BEGINNING BELOW AT PAGE 9, "ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," BEGINNING AT PAGE 17, AND ELSEWHERE IN THIS FORM 10-K. ALTHOUGH WE
BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS. WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY
FORWARD-LOOKING STATEMENT.

INDUSTRY BACKGROUND

Competitive pressures require manufacturers to expand product functionality
and provide differentiation while maintaining or reducing cost. To address these
requirements, manufacturers use integrated circuit-based embedded control
systems that provide an integrated solution for application-specific control
requirements. Embedded control systems enable manufacturers to differentiate
their products, replace less efficient electromechanical control devices, add
product functionality and significantly reduce product costs. In addition,
embedded control systems facilitate the emergence of complete new classes of
products. Embedded control systems typically incorporate a microcontroller as
the principal active, and sometimes sole, component.

A microcontroller is a self-contained computer-on-a-chip consisting of a
central processing unit, non-volatile program memory, random access memory for
data storage and various input/output capabilities. In addition to the
microcontroller, a complete embedded control system incorporates
application-specific software and may include specialized peripheral device
controllers and external non-volatile memory components, such as EEPROMs to
store additional program software.

Embedded control systems enable our customers to:

* differentiate their products
* replace less efficient electromechanical control devices
* add product functionality, and
* significantly reduce product cost.
Embedded control solutions have been incorporated into thousands of
products and subassemblies in a wide variety of markets worldwide, including:

* automotive air bag systems
* remote control devices
* handheld tools
* appliances
* portable computers
* cordless and cellular telephones
* motor controls, and
* security systems.

The increasing demand for embedded control has made the market for
microcontrollers one of the largest segments of the semiconductor market.
Microcontrollers are currently available in 4-bit through 32-bit architectures.
Although 4-bit microcontrollers are relatively inexpensive, typically costing
under $1.00 each, they generally lack the minimum performance and features
required by today's design engineers for product differentiation and are
typically used only to produce basic functionality in products. While 16- and
32-bit architectures provide very high performance, they are prohibitively
expensive for most high-volume embedded control applications, typically costing
$6.00 to $12.00 each. As a result, manufacturers of competitive, high-volume
products have increasingly found 8-bit microcontrollers, that typically cost
$1.00 to $8.00 each, to be the most cost-effective embedded control solution.
For example, a typical new automobile may include one 32-bit microcontroller for
engine control, three 16-bit microcontrollers for transmission control, audio
systems and anti-lock braking, and up to 50 8-bit microcontrollers to provide
other embedded control functions, such as door locking, automatic windows, sun
roof, adjustable seats, electric mirrors, air bags, fuel pump, speedometer, and
the security and climate control systems.

Most microcontrollers available today are ROM-based and must be programmed
by the semiconductor supplier during manufacturing, resulting in 5- to 15-week
lead times, based on current market conditions, for delivery of such
microcontrollers. In addition to delayed product introduction, these long lead
times can result in potential inventory obsolescence and factory shutdowns when
changes to the firmware are required. To address time-to-market constraints,
some suppliers have made EPROM, EEPROM, or Flash Memory-based programmable
microcontrollers available for prototyping and preproduction runs. However,
these microcontrollers have been relatively expensive, and manufacturers have
still been required to send program code to the semiconductor factory for ROM
programming as product changes are made. As a result, the long lead times for
production volume microcontrollers have not been significantly reduced by
traditional approaches.

OUR PRODUCTS

Our strategic focus is on embedded control products, including
microcontrollers, high-performance linear and mixed-signal, power management and
thermal management devices, and complementary microperipheral products including
interface devices, serial EEPROMS, and our patented KEELOQ(R) security devices.
We provide highly cost-effective embedded control products that also offer the
advantages of small size, low voltage operation and ease of development,
enabling timely and cost-effective product integration by our customers.

MICROCONTROLLERS

We offer a broad family of microcontroller products featuring a unique,
proprietary architecture marketed under the PIC(R) brand name. We believe that
our PIC(R) product family is a price/performance leader in the worldwide
microcontroller market. We have shipped approximately 1.5 billion PIC(R)
microcontrollers to customers worldwide since their introduction in 1990. Our
PIC(R) products are designed for applications requiring high performance, low
power and cost effectiveness. They feature a variety of memory technology
configurations, low voltage and power, small footprint and ease of use. Our
performance results from an exclusive product architecture which features dual
data and instruction pathways, referred to as a Harvard dual-bus architecture; a
reduced instruction set, referred to as RISC; and variable length instructions;
all of which provide significant speed advantages over the alternative
single-bus, CISC architectures. Prices for our microcontroller products
currently range from approximately $0.49 to $10.00 per unit.

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Our original market focus was in the low-cost segment of the 8-bit
microcontroller marketplace. With our baseline products, we built our current
market position as the leading worldwide supplier of field programmable
microcontrollers. Over the past five years, we have introduced more than 135 new
microcontrollers targeted at the baseline, mid-range and advanced high-end
segments of the traditional 8-bit microcontroller marketplace. Additionally,
with our scalable product architecture, we have successfully targeted both the
entry level of the 16-bit microcontroller market as well as the higher end of
the 4-bit microcontroller marketplace, significantly enlarging our addressable
market. We believe that all of the additional market segments we have entered
represent significant opportunities for future sales growth.

We have used our manufacturing experience and design and process technology
to bring additional enhancements and manufacturing efficiencies to the
development and production of our PIC(R) family of microcontroller products. Our
extensive experience base has enabled us to develop our advanced, low cost user
programmability feature by incorporating non-volatile memory, such as Flash,
EEPROM and EPROM Memory, into the microcontroller in addition to masked ROM
program memory being included into the microcontroller.

DEVELOPMENT SYSTEMS

We offer a comprehensive set of low cost and easy-to-learn application
development tools. These tools enable system designers to quickly and easily
program a PIC(R) microcontroller for specific applications and are a key factor
for obtaining design wins.

Our family of development tools operates in the standard Windows(R)
environment on standard PC hardware. Entry-level systems, which include an
assembler and programmer hardware, are priced at less than $200. A fully
configured system, which also provides in-circuit emulation hardware,
performance simulators and software debuggers, is priced at approximately
$2,000. Customers moving from entry-level designs to those requiring real-time
emulation are able to preserve their investment in software tools as they
migrate to future PIC(R) devices since all the product families are assembly-
and C-language compatible.

Many independent companies also develop and market application development
tools and systems that support our standard microcontroller product
architecture. Currently, there are more than 120 third-party tool suppliers
worldwide whose products support our proprietary microcontroller architecture.

We believe that familiarity with and adoption of our, and third-party,
development systems by an increasing number of product designers will be an
important factor in the future selection of our embedded control products. These
development tools allow design engineers to develop thousands of
application-specific products from our standard microcontrollers. To date, we
have shipped more than 200,000 development systems.

ASSPS

Our application-specific standard products, referred to as ASSPs, are
specialized products designed to perform specific end-user applications as
opposed to our other products which are more general purpose in nature. Our ASSP
device families currently include the KEELOQ(R) family of secure data
transmission products, as well as other specialized integrated circuit devices.
KEELOQ(R) security products are designed for low cost, secure, uni- and
bi-directional communications and verification purposes. Applications include:

* automotive remote keyless entry systems
* automotive immobilizer systems
* product authentication
* residential security
* automatic garage and gate openers, and
* residential/hotel door access.

Our ASSP products include a variety of specialized integrated circuits,
including our family of KEELOQ(R) security products for wireless communications.

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MIXED-SIGNAL ANALOG AND INTERFACE PRODUCTS

Our mixed-signal products consist of a variety of standalone analog devices
used primarily in embedded control systems to convert or buffer input and output
signals to or from a microcontroller or digital signal processor.

We believe that there is a revenue opportunity to embed, or "attach,"
approximately $1.50 of analog products around each $1.00 of microcontrollers. We
began targeting this revenue opportunity at the beginning of fiscal 2000 when we
introduced our standalone analog product family. By the end of fiscal 2000, our
mixed-signal analog and interface products consisted of more than 15 standalone
analog products, which were being shipped to more than 1,000 end customers.

In order to accelerate our microcontroller "attach" strategy, we merged
with TelCom Semiconductor, Inc., a company with a diversified portfolio of high
performance analog and mixed-signal integrated circuits, in January 2001. With
the addition of the TelCom products, our mixed-signal analog and interface
products portfolio now exceeds 250 products, including mixed-signal, linear,
supervisory, data acquisition, interface, power management and thermal
management products, being shipped to more than 6,000 customers.

MEMORY PRODUCTS

Our memory products consist primarily of serial electrically erasable
programmable read only memory, referred to as EEPROMs. We sell these devices
primarily into the embedded control market, and we are one of the largest
suppliers of such devices worldwide. EEPROM products are used for non-volatile
program and data storage in systems where such data must be either modified
frequently or retained for long periods. Serial EEPROMs have a very low I/O pin
requirement, permitting production of very small devices. As a result, Serial
EEPROMs are widely used to supply non-volatile memory in space-sensitive
applications such as portable computers, cellular and cordless telephones,
pagers and remote control devices. Our memory products are primarily comprised
of serial EEPROMs, which are used primarily to provide non-volatile memory
storage in embedded control systems.

We address customer requirements by offering products with extremely small
package sizes and very low operating voltages for both read and write functions.
High performance circuitry and microcode are also available to reduce power
consumption when a device is not in use, while permitting immediate operating
capability when required. The products also feature long data retention and high
erase/write endurance.

MANUFACTURING

The ownership of our manufacturing resources is an important component of
our business strategy, enabling us to maintain a high level of manufacturing
control and to be one of the lowest cost producers in the embedded control
industry. By owning our wafer fabrication and the majority of our test
operations, and by employing proprietary statistical process control techniques,
we have been able to achieve high production yields. Direct control over
manufacturing resources allows us to shorten our design and production cycles.
This control also allows us to capture the manufacturing and a portion of the
assembly and testing profit margin.

Our wafer fabrication and wafer test facilities are located in Chandler,
Arizona, which we refer to as Fab 1, and Tempe, Arizona, which we refer to as
Fab 2. In July 2000, we acquired a third wafer fabrication facility located in
Puyallup, Washington, which we refer to as Fab 3.

We perform product packaging and testing at our facilities located near
Bangkok, Thailand. We also use third-party assembly and test contractors in
several Asian countries.

Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab
1 currently contains approximately 40,000 square feet of usable clean room space
and currently produces 6-inch wafers. Fab 2 currently contains approximately
50,000 square feet of usable clean room space and currently produces 8-inch
wafers. Wafer sort is performed in an 8,000 square foot, Class 10,000 clean
room, equipped with automated wafer handlers and test equipment. Fab 1 and Fab 2
are managed by the same management team and utilize similar production
techniques. Fab 3 contains approximately 114,000 square feet of clean room space
and, once volume production commences, will initially produce 8-inch wafers
using our 0.5-micron and 0.35-micron process technologies.

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In response to business conditions that have resulted in lower demand for
our products, in February 2001 we announced plans to reduce cumulative wafer
capacity at Fabs 1 and 2 by 24%, and to delay the planned August 2001 start-up
of Fab 3 until December 2002.

We continue to transition products to more advanced process technologies to
reduce future manufacturing costs. We also continue to increase the percentage
of our production on 8-inch wafers. As of March 31, 2001, 8-inch wafers
accounted for approximately 80% of our production. Other companies in the
industry have experienced difficulties in effecting transitions to advanced
process technologies, resulting in reduced manufacturing yields or delays in
product deliveries. We believe that our transition to more advanced process
technologies is important for us to remain competitive. Our future operating
results could be adversely affected if the transition is substantially delayed
or inefficiently implemented.

THE FOREGOING STATEMENTS RELATED TO THE TIMING OF THE START-UP OF FAB 3 AND
THE USE OF OUR 0.35-MICRON PROCESS TECHNOLOGY AT FAB 3 ARE FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: INCREASED OR DECREASED CUSTOMER DEMAND FOR OUR PRODUCTS;
THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; SUPPLY DISRUPTION;
FLUCTUATIONS IN PRODUCTION YIELDS; PRODUCTION EFFICIENCIES AND OVERALL CAPACITY
UTILIZATION; ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING
COSTS; THE TIMING AND SUCCESS OF MANUFACTURING PROCESS TRANSITION; CHANGES IN
PRODUCT MIX; COMPETITIVE PRESSURES ON PRICES; AND OTHER ECONOMIC CONDITIONS. SEE
ALSO THE FACTORS SET FORTH UNDER "ITEM 1 - BUSINESS - ADDITIONAL FACTORS THAT
MAY AFFECT RESULTS OF OPERATIONS," BEGINNING BELOW AT PAGE 9.

We currently employ proprietary design and manufacturing processes in
developing our microcontroller and memory products. We believe our processes
afford us both cost-effective designs in existing and derivative products and
greater functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully absorb our process
research and development costs and to deliver new products to market more
rapidly. Our engineers utilize advanced CAD tools and software to perform
circuit design, simulation and layout, and our in-house photomask and wafer
fabrication facilities enable us to rapidly verify design techniques by
processing test wafers quickly and efficiently.

At March 31, 2001, several third-party contractors located throughout Asia
performed the majority of our assembly operations, and a portion of our test
requirements. The balance of the assembly and test operations is performed in
our Thailand facility. Currently, our Thailand facility tests approximately 95%
of the products produced in Fab 1 and Fab 2. The 200,000 square foot Thailand
test facility currently has the capacity to handle up to 120 million units per
month. The Thailand facility also assembles approximately 45% of the products
produced in Fab 1 and Fab 2. Final product test and burn-in functions are
handled by advanced automated equipment.

During fiscal 2002, we will rely on third-party wafer foundries to
fabricate a substantial portion of the TelCom products. We will also use
third-party wafer foundries on a strategic basis to shorten our product design
cycle on certain key technologies and products.

Our reliance on third parties involves some reduction in our level of
control over the portions of our business that we subcontract. While we review
the quality, delivery and cost performance of these third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.

Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory in foreign locations, and significant foreign sales
exposes us to foreign political and economic risks. To date, we have not
experienced any significant interruptions in our foreign business operations. If
any significant interruption in our foreign business operations materializes,
our sales could decrease and our operations performance could suffer.

Due to the high fixed costs inherent in semiconductor manufacturing,
increased manufacturing yields can have significant positive effects on gross
profit and overall operating results. During fiscal 2001, we continued to focus
on manufacturing productivity, and maintained average wafer fab line yields in
excess of 95%. Our manufacturing yields are primarily driven by a comprehensive
implementation of statistical process control, extensive employee training and
selective upgrading of our manufacturing facilities and equipment. Maintenance
of manufacturing productivity and yields are important factors in the
achievement of our operating results. The manufacture and assembly of integrated
circuits, particularly non-volatile, erasable CMOS memory and logic devices,
such as those that we produce, are complex processes. These processes are
sensitive to a wide variety of factors, including the level of contaminants in
the manufacturing environment, impurities in the materials used and the
performance of our fabrication personnel and equipment. As is typical in the
semiconductor industry, we have from time to time experienced lower than

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anticipated manufacturing yields. Our operating results will suffer if we are
unable to maintain yields at approximately the current levels.

Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of
semiconductors increases. We have experienced supply shortages from time to time
in the past, and on occasion our suppliers have told us they need more time than
expected to fill our orders. An interruption of any raw materials or equipment
sources could harm our business.

RESEARCH AND DEVELOPMENT

We are committed to continuing our investment in new and enhanced products,
including development systems software, and in our design and manufacturing
process technology. We believe these investments are significant factors in
maintaining our competitive position. Our current research and development, or
R&D, activities focus on the design of new microcontroller, memory and
mixed-signal products, ASSPs, new development systems, and software and
application-specific software libraries. We are also developing new design and
process technology to achieve further cost reductions and performance
improvements in existing products. In fiscal 2001, our R&D expenses were $78.6
million, as compared to $52.4 million in fiscal 2000 and $46.4 million in fiscal
1999.

SALES AND DISTRIBUTION

We market our products worldwide primarily through a network of direct
sales personnel and electronics distributors. Effective April 1, 2000, we
terminated our contractual relationships with predominantly all manufacturer's
representatives in the Americas, and throughout fiscal 2001, we added additional
resources to our direct sales force focusing on the Americas. From time to time,
we expect that we may restructure certain portions of our sales network as we
deem appropriate given the level of our business.

Our direct sales force focuses primarily on major strategic accounts in
three geographical markets: the Americas, Europe and Asia. We currently maintain
sales and support centers in major metropolitan areas in North America, Europe
and Asia. We believe that a strong technical service presence is essential to
the continued development of the embedded control market. The majority of our
field sales engineers, referred to as FSEs, field application engineers,
referred to as FAEs, and sales management have technical degrees and have been
previously employed in an engineering environment. We believe that the technical
knowledge of our sales force is a key competitive advantage in the sale of our
products. Currently, we strive to have at least one dedicated FAE in every sales
and support center. The primary mission of our FAE team is to provide technical
assistance to strategic accounts and to conduct periodic training sessions for
FSEs and distributor sales teams. FAEs also frequently conduct technical
seminars in major cities around the world, and work closely with our
distributors to provide technical assistance and end-user support.

Distributors focus primarily on servicing the product and technical support
requirements of our broad base of small- and medium-sized customers. We believe
that distributors provide an effective means of reaching this broad customer
base.

In fiscal 2001, we derived 65% of our net sales from sales through
distributors and 35% of our net sales from direct sales to original equipment
manufacturers, referred to as OEM, customers. Distributors accounted for 63% of
our net sales in fiscal 2000 and 59% in fiscal 1999. One distributor accounted
for 14% of our total net sales for fiscal 2001, 14% in fiscal 2000 and 11% in
fiscal 1999. No end customer accounted for more than 10% of our net sales in
fiscal years 2001, 2000 or 1999.

Generally, we do not have long-term agreements with our distributors and
our distributors may terminate their relationship with us with little or no
advanced notice. The loss of, or a disruption in the operations of, one or more
of our distributors could reduce our future net sales in a given quarter and
could result in an increase in inventory returns.

As is common in the semiconductor industry, we provide limited price
protection to our distributors. Under our current policy, distributors receive a
credit for the difference, at the time of a price reduction, between the price
they were originally charged for products in inventory and the reduced price
that we subsequently charge distributors. From time to time, and on a
case-by-case basis, distributors may also receive credit for specific
transactions that we approve in advance. We also grant some distributors limited
rights to return products. We do not recognize net sales and profit on sales to
distributors that have rights of return and price protection until those
distributors have resold the products to end customers.

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Foreign sales, primarily in Asia and Europe, represented 68% of our total
net sales in fiscal 2001, as compared to 68% in fiscal 2000 and 69% in fiscal
1999. International sales are predominately billed in U.S. Dollars. Although
foreign sales are subject to certain government export restrictions, we have not
experienced any material difficulties as a result of export restrictions to
date. For a detailed description of our sales by geographic region, see also
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - Net Sales," at page 17, and Note
17 to our consolidated financial statements.

BACKLOG

As of April 27, 2001, our backlog was approximately $137.9 million, as
compared to $212.7 million as of April 28, 2000. Our backlog includes all
purchase orders scheduled for delivery within the subsequent 12 months.

We primarily produce standard products that can be shipped from inventory
within a short time after we receive an order. Our business and, to a large
extent, that of the entire semiconductor industry, is characterized by
short-term orders and shipment schedules. Orders constituting our current
backlog are subject to changes in delivery schedules, or to cancellation at the
customer's option without significant penalty. Thus, while backlog is useful for
scheduling production, backlog as of any particular date may not be a reliable
measure of sales for any future period. Orders received in a quarter for
shipment in that quarter, which we refer to as turns orders, have become an
increasingly important component of our quarterly operating results. See
"Additional Factors That May Affect Results of Operations," beginning below at
page 9.

COMPETITION

The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and greater financial, technical, marketing,
distribution and other resources than we with which to pursue engineering,
manufacturing, marketing and distribution of their products. Emerging companies
may also increase their participation in the market for embedded control
applications. Furthermore, capacity in the semiconductor industry is increasing
over time and such increased capacity or improved product availability could
adversely affect our competitive position.

We currently compete principally on the basis of the technical innovation
and performance of our embedded control products, including their speed,
functionality, density, power consumption, reliability and packaging
alternatives, as well as on price and product availability. We believe that
other important competitive factors in the embedded control market include ease
of use, functionality of application development systems and technical service
and support. We believe that we compete favorably with other companies on all of
these factors, but we may be unable to compete successfully in the future, which
could harm our business.

PATENTS, LICENSES AND TRADEMARKS

As of March 31, 2001, we owned 180 U.S. patents and 51 foreign patents,
expiring on various dates between 2003 and 2020, and had an additional 100 U.S.
patent applications and 127 foreign patent applications pending. We intend to
continue to seek patents on our inventions and manufacturing processes. The
process of seeking patent protection can be long and expensive, and patents may
not be issued from currently pending or future applications. In addition, our
existing patents and any new patents that are issued may not be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to us. We may be subject to or may initiate interference proceedings in the U.S.
Patent and Trademark Office, which can require significant financial and
management resources. In addition, the laws of certain foreign countries do not
protect our intellectual property rights to the same extent as the laws of the
United States. We believe, however, that our continued success depends primarily
on such factors as the technological skills and innovative abilities of our
personnel rather than on our patents.

We have entered into certain intellectual property licenses and
cross-licenses with other companies related to semiconductor products and
manufacturing processes. As is typical in the semiconductor industry, we have
from time to time received, and may in the future receive, communications
alleging possible infringement of patents or other intellectual property rights
of others. We investigate all such notices and respond as we believe is
appropriate. Based on industry practice, we believe that in most cases we can
obtain any necessary licenses or other rights on commercially reasonable terms,
but we cannot assure that licenses would be on acceptable terms, that litigation
would not ensue or that damages for any past infringement would not be assessed.
Litigation, which could result in substantial cost to us and diversion of
management effort, may be necessary to enforce our patents or other intellectual
property rights, or to defend us against claimed infringement of the rights of

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others. The failure to obtain necessary licenses or other rights, or litigation
arising out of infringement claims, could harm our business.

ENVIRONMENTAL REGULATION

We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes,
including the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Superfund Amendment
and Reauthorization Act, the Clean Air Act and the Water Pollution Control Act.
We believe that we have obtained all of the environmental permits required to
conduct our business. Although we believe that our activities conform to
presently applicable environmental regulations, our failure to comply with
present or future regulations could result in the imposition of fines,
suspension of production or a cessation of operations. Any such regulation could
require us to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. While we have not experienced any
materially adverse effects on our operations from governmental regulations, any
failure by us to control the use of or adequately restrict the discharge of
hazardous substances could subject us to future liabilities. Environmental
problems may occur that could subject us to future costs or liabilities.

EMPLOYEES

As of April 27, 2001, we had 3,011 employees worldwide, including 1,983 in
manufacturing, 489 in research and development, 384 in sales and marketing and
155 in finance and administration. Approximately 39% of our employees work at
our Thailand facility. No employees in the U.S. or Thailand are represented by a
labor organization. We have never had a work stoppage and believe that our
employee relations are good.

EXECUTIVE OFFICERS

The following sets forth certain information regarding our executive
officers as of April 27, 2001: