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, 1999 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from __________ to __________

Commission File Number: 0-21184

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

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

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

(480) 786-7200
(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 30, 1999 was $1,750,061,763.

Number of shares of Common Stock, $.001 par value, outstanding as of April
30, 1999: 51,271,135.

Documents Incorporated by Reference

Document Part of Form 10-K
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Proxy Statement for the 1999 Annual III
Meeting of Stockholders
PART I

ITEM 1. BUSINESS

Microchip Technology Incorporated, a Delaware corporation ("Microchip" or
the "Company"), develops, manufactures and markets 8-bit microcontrollers,
application-specific standard products (ASSPs) and related memory products for
high-volume embedded control applications in the consumer, automotive, office
automation, communications and industrial markets. The Company provides highly
cost-effective embedded control products for a wide variety of applications and
believes that its PIC(R) product family is a price/performance leader in the
worldwide 8-bit microcontroller market. Microchip's embedded control products
also offer the advantages of a small footprint and low voltage operation along
with ease of development, enabling timely and cost-effective product integration
by its customers. The Company's ASSP products include a variety of specialized
integrated circuits, including its family of KEELOQ(R) security products. The
Company's memory products are primarily comprised of Serial EEPROMs, which are
used primarily to provide non-volatile memory storage in embedded control
systems.

Except as noted below, references to the Company include the Company and
its subsidiaries. The Company's executive offices are located at 2355 West
Chandler Boulevard, Chandler, Arizona 85224-6199 and its telephone number is
(480) 786-7200.

Risks and uncertainties that may affect the Company's future operating
results are set forth throughout the following discussion of the Company's
business. For further discussion on certain risk factors that may affect the
Company's future operating results, see "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation," below.

THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES, INCLUDING STATEMENTS REGARDING THE COMPANY'S STRATEGY,
FINANCIAL PERFORMANCE AND REVENUE SOURCES. THE COMPANY'S 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
7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS REPORT.

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 which 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 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.

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, RAM memory for data storage and various
input/output functions. 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.

The increasing demand for embedded control has made the market for
microcontrollers one of the largest segments of the semiconductor logic 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
over $5.00 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 six-to-20 week
lead times 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.

PRODUCTS

Microchip's strategic focus is on embedded control products, including
microcontrollers, ASSPs, related memory products and application development
systems.

MICROCONTROLLERS

Microchip offers a broad family of proprietary 8-bit microcontrollers under
the PIC(R) name and has shipped approximately 850 million PIC(R)
microcontrollers to customers worldwide since 1990. The Company's PIC(R)
products are designed for applications requiring high performance and low cost.
They feature a variety of memory configurations, low voltage and power, small
footprint and ease of use. Microchip believes this product family is currently a
price/performance leader in the 8-bit microcontroller marketplace. Microchip's
performance results from an exclusive RISC-based architecture that provides
significant speed advantages over the alternative 8-bit CISC architectures. In
addition to providing up to 40 MHz performance, this architecture offers up to a
2:1 software compaction advantage, thereby significantly reducing software
development time. RISC architectures also have the advantage of being more
easily scaled to higher internal clock speeds in future products. Prices for
Microchip's 8-bit microcontrollers range from approximately $.49 to $12.00 per
unit.

Microchip's original market focus was in the lowest cost segment of the
8-bit microcontroller marketplace. With its baseline 8-bit products, the Company
built its current market position as the leading supplier of field programmable
microcontrollers. Over the past four years, Microchip has introduced more than
100 new 8-bit microcontrollers targeted at the baseline, mid-range and high-end
segments of the 8-bit microcontroller marketplace, as well as the lower end of
the 16-bit microcontroller market. In addition, with its 8-pin, 8-bit
microcontroller, introduced in the first quarter of fiscal 1997, the Company has
also targeted a portion of the large 4-bit microcontroller marketplace. The
Company believes that these additional segments represent a significant
opportunity for future sales growth.

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

DEVELOPMENT SYSTEMS

The Company offers 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. Microchip's family of development tools
operates in the standard Windows 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 $3,700. 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 which support Microchip's standard microcontroller product
architecture. The Company believes that familiarity with and adoption of the

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Company's, and third-party, development systems by an increasing number of
product designers will be an important factor in the future selection of
Microchip's embedded control products. These development tools allow design
engineers to develop thousands of application-specific products from Microchip's
standard microcontrollers. Currently, there are more than 120 third-party tool
suppliers worldwide whose products support the Company's proprietary
microcontroller architecture.

ASSPS (APPLICATION-SPECIFIC STANDARD PRODUCTS)

Microchip's application-specific standard products are specialized products
designed to perform specific end-user applications as opposed to the Company's
other products which are more general purpose in nature. The Company's 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-directional
communications and verification purposes. Applications include automotive remote
keyless entry systems, automotive immobilizer systems, automatic garage and gate
openers and smart cards.

MEMORY PRODUCTS

Microchip's memory products consist primarily of Serial EEPROMs. The
Company sells these devices primarily into the embedded control market and is
one of the largest suppliers of such devices worldwide. EEPROM (electrically
erasable programmable read only memory) products are used for non-volatile
program and data storage in systems where such data must be modified frequently.
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.

Within this market, Microchip has emphasized providing Serial EEPROMs to
customers that require features such as highly compact packaging, low operating
voltage, reduced power consumption, extended data retention and high endurance.
The Company addresses these requirements by offering products with extremely
small package sizes and very low operating voltage for both read and write
functions (1.8 volts in contrast with the industry standard of 3.3 volts),
together with a wide operating voltage range (1.8 to 5.5 volts). 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.

Microchip currently offers a complete Serial EEPROM family, which meets
three principal industry bus interface standards and is available in most
standard density, configuration and packaging alternatives. The Company's Smart
Serials(TM) line of specialized Serial EEPROMs with user-configurable
architecture and other advanced features targets applications such as cellular
telephones and data communications.

MANUFACTURING

Microchip's ownership of its manufacturing resources is an important
component of its business strategy, enabling it to maintain a high level of
manufacturing control and to be one of the lowest cost producers in the embedded
control industry. By owning its wafer fabrication and the majority of its test
operations, and by employing proprietary statistical process control techniques,
the Company has been able to achieve high production yields. Direct control over
wafer fabrication also allows Microchip to shorten the Company's design and
production cycles and to capture the manufacturing and a portion of the testing
profit margin. Wafer fabrication and wafer test facilities are located in
Chandler ("Fab 1") and Tempe ("Fab 2"), Arizona. Currently, the Company performs
product test at its facilities in Kaohsiung, Taiwan and Chachoengsao, Thailand,
located near Bangkok.

During the fourth quarter of fiscal 1999, the Company ceased manufacturing
five-inch wafers at Fab 1. Also, during the fourth quarter of fiscal 1999, the
Company announced that it was phasing out test operations at its Kaohsiung,
Taiwan facility over the first two quarters of fiscal 2000. The Company intends
to shift the Kaohsiung test operations to its Thailand facility. See also "Item
2 -- Properties," and "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Introduction, and -- Gross
Profit," below.

Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab
1 and Fab 2 currently contain approximately 27,000 square feet and 50,000 square
feet of usable clean room space, respectively. Fab 1 currently produces

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6-inch wafers, while Fab 2 currently produces 6-inch and 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. The two wafer fabrication
sites are managed by the same management team and utilize similar production
techniques.

The Company is continuing the process of transitioning products to smaller
geometries and to larger wafer sizes to reduce future manufacturing costs. The
Company is continuing the transitioning of products to its 0.7 micron process
and has commenced development of its next generation process technology. Other
companies in the industry have experienced difficulty in effecting transitions
to smaller geometry processes and to larger wafers and, consequently, have
experienced reduced manufacturing yields or delays in product deliveries. The
Company believes that its transition to smaller geometries and to larger wafers
will be important for the Company to remain competitive, and operating results,
particularly gross profit margins, could be adversely affected if the
transitions are substantially delayed or inefficiently implemented.

Microchip currently employs proprietary design and manufacturing processes
in developing its microcontroller and memory products. The Company believes its
processes afford it both cost-effective designs in existing and derivative
products and greater functionality in new product designs. While many of the
Company's competitors develop and optimize separate processes for their logic
and memory product lines, Microchip uses a common process technology for both
microcontroller and non-volatile memory products. This allows Microchip to more
fully absorb its process research and development costs and to deliver new
products to market more rapidly. Microchip engineers utilize advanced CAD tools
and software to perform circuit design, simulation and layout. The Company's
in-house photomask and wafer fabrication facilities enable it to rapidly verifiy
design techniques by processing test wafers quickly and efficiently.

Currently, the Company's Taiwan and Thailand subsidiaries test
approximately 90% of the products produced in Fab 1 and Fab 2. The Company
intends to shift all of its in-house test operations to the Company's Thailand
facility following the closing of the Kaohsiung facility as described above.
Currently, the 150,000 square foot Chachoengsao test facility has the capacity
to handle up to 30 million units per month. The Company is presently
constructing a 50,000 square foot expansion to the Chachoengsao facility that,
once completed, will increase the facility's capacity to 120 million units per
month. The expansion is currently scheduled to be complete by the end of the
third quarter of fiscal 2000. See "Item 2 - Properties," below. The balance of
Microchip's test requirements are fulfilled by several third-party test
contractors in Thailand, People's Republic of China, and several other countries
in Asia and the Pacific Rim. Final test and burn-in functions are handled by
advanced automated equipment.

THE FOREGOING STATEMENTS RELATED TO THE COMPANY'S INTENTION TO SHIFT ALL OF
ITS IN-HOUSE TEST OPERATIONS TO ITS THAILAND FACILITY AND THE COMPLETION OF THE
EXPANSION OF THE CHACHOENGSAO FACILITY ARE FORWARD LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS:
DELAYS IN CONSTRUCTION AND FACILITIZATION OF THE EXPANSION AREA AT THE
CHACHOENGSAO FACILITY; TIMING AND SUCCESS OF THE TRANSITION OF TEST OPERATIONS
FROM KAOHSIUNG TO CHACHOENGSAO; THE AVAILABILITY OF EQUIPMENT AND OTHER
SUPPLIES; SUPPLY DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE
PRESSURES ON PRICES; POLITICAL INSTABILITY AND EXPROPRIATION; AND OTHER ECONOMIC
CONDITIONS.

At March 31, 1999, all of the Company's assembly operations were performed
by third-party contractors located in Thailand, People's Republic of China, and
several other countries in Asia and the Pacific Rim. Due primarily to cost,
yield and cycle time considerations, the Company currently intends to develop
its own in-house assembly operations over the next fiscal year and will shift a
portion of its assembly operations to the Company's Thailand facility over time.
The Company will continue to use subcontractors to provide the remainder of its
assembly services. Reliance on third parties involves some reduction in the
Company's level of control over the assembly and test portion of its business.
While the Company reviews the quality, delivery and cost performance of these
third-party contractors, there can be no assurance that increased reliance on
third-party contractors will not adversely impact results in future reporting
periods if any third-party contractor is unable to maintain assembly and test
yields and costs at approximately their current levels. See also "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Gross Profit," below.

THE FOREGOING STATEMENTS RELATED TO THE COMPANY'S INTENTION TO DEVELOP
IN-HOUSE ASSEMBLY OPERATIONS OVER THE NEXT FISCAL YEAR AND SHIFTING A PORTION OF
ITS ASSEMBLY OPERATIONS TO ITS THAILAND FACILITY ARE FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: DELAYS IN CONSTRUCTION AND FACILITIZATION OF THE COMPANY'S IN-HOUSE
ASSEMBLY OPERATIONS; TIMING AND SUCCESS OF THE TRANSITION FROM THIRD-PARTY
ASSEMBLY PROVIDERS TO COMPANY-OWNED ASSEMBLY OPERATIONS; DIFFICULTIES IN THE
TRANSITION OF THE ASSEMBLY FUNCTION FROM THIRD PARTIES TO THE COMPANY; SUPPLY
DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES ON
PRICES; POLITICAL INSTABILITY AND EXPROPRIATION; AND OTHER ECONOMIC CONDITIONS.

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The Company's reliance on facilities in Taiwan, Thailand, and other foreign
countries, and maintenance of substantially all of its finished goods in
inventory overseas, entails certain political and economic risks, including
political instability and expropriation, supply disruption, currency controls
and exchange fluctuations, as well as changes in tax laws, tariff and freight
rates. To date, the Company has not experienced any significant interruptions in
its foreign business operations. Nonetheless, the Company's business and
operating results could be adversely affected if foreign operations or
international air transportation were disrupted.

Due to the high fixed costs inherent in semiconductor manufacturing,
increased manufacturing yields can have significant positive effects on gross
profits and overall operating results. During fiscal 1999, the Company continued
to focus on manufacturing productivity, and maintained average wafer fab line
yields in excess of 90%. The yields are primarily driven by a comprehensive
implementation of statistical process control, extensive employee training and
selective upgrading of the Company's manufacturing facilities and equipment.
Maintenance of manufacturing productivity and yields are important factors in
the achievement of the Company's operating results. As is typical in the
semiconductor industry, the Company has from time to time experienced lower than
anticipated manufacturing yields. The Company's operating results would be
adversely affected if it were unable to maintain yields at approximately the
current levels.

The raw materials and equipment used in the production of the Company's
integrated circuits currently are available from a number of suppliers, and the
Company is not materially dependent on any single source of supply. Although the
Company has not experienced any material difficulty to date in obtaining raw
materials or equipment, the interruption of certain components or ingredients of
certain raw materials could reduce the availability or increase the cost of raw
materials used by the Company. The manufacture and assembly of integrated
circuits, particularly non-volatile, erasable CMOS memory and logic devices such
as those produced by the Company, is a highly complex process and 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 the fabrication equipment.

RESEARCH AND DEVELOPMENT

The Company's current research and development activities focus on the
design of new microcontroller and memory products, ASSPs, new development
systems, and software and application-specific software libraries. The Company
is also developing new design and process technology to achieve further cost
reductions and performance improvements in existing products. As of April 30,
1999, 261 employees were engaged in research and development. In fiscal 1999,
1998 and 1997, the Company's research and development expenses were $40.8
million, $38.4 million and $32.1 million, respectively. The Company expects that
it will continue to spend substantial funds on research and development
activities.

The Company's future operating results will depend to a significant extent
on its ability to continue to develop and introduce new products on a timely
basis which compete effectively on the basis of price and performance and
address customer requirements. If the Company were unable to design, develop and
introduce competitive products on a timely basis, its future operating results
would be adversely affected.

SALES AND DISTRIBUTION

The Company markets its products worldwide through a direct sales
organization and through distributors. In fiscal 1999, the Company derived
approximately 38% of its net sales from direct sales to OEM customers and 62%
from sales through distributors.

The Company's direct sales force, currently consisting of 198 people,
focuses on three geographical markets: the Americas, Europe and Asia. In the
Americas, the Company currently maintains Technical Support Centers in San Jose,
Los Angeles, Dallas, Dayton, Detroit, Chicago, Atlanta, Boston, New York,
Toronto, Bramford, Connecticut and Mt. Vernon, New Hampshire. Microchip also
maintains Technical Support Centers in Tokyo, London, Munich, Paris, Milan,
Taipei, Seoul, Singapore, Hong Kong, Shanghai and Bangalore, India. Microchip's
direct sales force is augmented by a worldwide network of national distributors
and regional distributors in North and South America. Microchip's distribution
effort also includes a network of manufacturer's representatives in North
America and Europe.

Microchip believes that a strong technical service presence is essential to
the continued development of the embedded control market. The majority of
Microchip's field sales engineers (FSEs), field application engineers (FAEs) and
sales management have technical degrees and have been previously employed in an
engineering environment. The Company

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believes the technical knowledge of its sales force is a key competitive
advantage in the sale of field programmable products. Currently, Microchip has
at least one dedicated application engineer in every Technical Support Center.
The primary mission of the FAE team is to provide technical assistance to OEM
customers and to conduct periodic training sessions for FSEs, manufacturer's
representatives and distributor sales teams. The FAEs also conduct frequent
technical seminars in major cities around the world. FAEs also work closely with
the Company's distributors and manufacturer's representatives to provide
technical assistance in end-user support and to assist in the sales process.

As is common in the semiconductor industry, the Company grants price
protection to distributors. Under this 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 which the
Company subsequently charges distributors. From time to time, distributors also
receive credit on an individual basis for Company-approved price reductions on
specific transactions. The Company also grants some distributors limited rights
to return products. The Company defers recognition of 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.

Foreign sales, primarily in Asia and Europe, represented approximately 69%,
68% and 66% of consolidated net sales in fiscal years 1999, 1998 and 1997,
respectively. International sales are predominately billed in U.S. Dollars.
Although foreign sales are subject to certain government export restrictions,
the Company has not experienced any material difficulties as a result of export
restrictions to date.

The Company's policy is to hedge its net foreign currency positions in the
normal course of business to reduce its exposure to fluctuations in foreign
exchange rates. Foreign exchange gains and losses were not material during
fiscal years 1997 through 1999.

BACKLOG

As of April 30, 1999, the Company's backlog was approximately $73.8
million, as compared to $76.7 million as of April 26, 1998. The Company includes
in its backlog all purchase orders scheduled for delivery within the subsequent
12 months.

Microchip produces standard products that can be shipped from inventory
within a short time after receipt of an order. The Company's business and, to a
large extent, that of the entire semiconductor industry, is characterized by
short-term orders and shipment schedules. Orders constituting the Company's
current backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty. Accordingly,
although useful for scheduling production, backlog as of any particular date may
not be a reliable measure of sales for any future period. Turns orders (orders
received in a quarter for shipment in that quarter) have become an increasingly
important component of the Company's quarterly operating results. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Net Sales," below.

COMPETITION

The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and foreign
competition with respect to many products. The Company competes with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. The Company's overall average selling prices for
its microcontroller products have remained relatively constant, while average
selling prices of its memory products have declined over time. Over the last two
fiscal years, the Company has experienced increased pricing pressure on its
memory products, primarily due to the less proprietary nature of these products
and increased competition. Over time, the Company expects to continue to
experience increased pricing competition and declining prices for memory
products. While average selling prices for microcontrollers have remained
relatively constant, the Company has experienced, and expects to continue to
experience, increasing pricing pressure in certain microcontroller product
lines, due primarily to competitive conditions. The Company has been able to
maintain average selling prices by continuing to introduce new products with
more features and higher prices, thereby offsetting price declines in older
products. There can be no assurance that average selling prices for the
Company's microcontroller or other products can be maintained due to increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results. In addition, the Company's ability to
compete successfully

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depends on a number of factors both within and outside its control, including
the quality, performance, reliability, features, ease of use, pricing and
diversity of its products; the quality of its customer service and its ability
to address the needs of its customers; its success in designing and
manufacturing new products including those implementing new technologies;
efficiency of production, adequate sources of raw materials and other supplies
at acceptable prices; protection of the Company's products and processes by
effective utilization of intellectual property laws; the rate at which customers
incorporate the Company's products into their own products; product
introductions by the Company's competitors; the number, nature and success of
its competitors in a given market; and general market and economic conditions.
Furthermore, capacity in the semiconductor industry is increasing over time and
such increased capacity or improved product availability could adversely affect
the Company's competitive position.

The Company currently competes principally on the basis of the technical
innovation and performance of its embedded control products, including their
speed, functionality, density, power consumption, reliability and packaging
alternatives, as well as on price and product availability. The Company believes
that other important competitive factors in the embedded control market include
ease of use, functionality of application development systems and technical
service and support. The Company believes that it competes favorably with other
companies on all of these factors, although there is no assurance that the
Company will continue to be able to compete successfully in the future.

PATENTS, LICENSES AND TRADEMARKS

The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and
manufacturing processes, and to protect its proprietary information. As of March
31, 1999, the Company owned 86 U.S. patents and 20 foreign patents, expiring on
various dates between 2005 and 2017, and had an additional 91 U.S. patent
applications and 96 foreign patent applications pending. The Company intends to
continue to seek patents on its inventions used in its products and
manufacturing processes. However, the Company believes that its continued
success depends primarily on such factors as the technological skills and
innovative abilities of its personnel rather than on its patents. There can be
no assurance the Company's existing patents or any new patents that are issued
will be of sufficient scope or strength to provide meaningful protection or
other commercial advantage to the Company.

The Company has 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, the
Company has from time to time received, and may in the future receive,
communications alleging possible infringement of patents or other intellectual
property rights of others. The Company investigates all such notices and
responds as it believes is appropriate. Based on industry practice, the Company
believes that in most cases it could obtain any necessary licenses or other
rights on commercially reasonable terms. However, no assurance can be given that
licenses would be on acceptable terms, that litigation would not ensue, that
damages for any past infringement would not be assessed or that the Company
would not be forced to pay royalties on future sales. Litigation, which could
result in substantial cost to the Company and diversion of management effort,
may be necessary to enforce patents or other intellectual property rights of the
Company, or to defend the Company against claimed infringement of the rights of
others. See "Item 3 - Legal Proceedings," below.

ENVIRONMENTAL REGULATION

The Company is subject to a variety of federal, state and local
governmental regulations related to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
processes, including the Resource Conversation 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. The Company believes it has obtained all necessary
environmental permits to conduct its business. Although the Company believes
that its activities conform to presently applicable environmental regulations,
the failure to comply with present or future regulations could result in fines
being imposed on the Company, suspension of production or a cessation of
operations. While the Company has not experienced any materially adverse effects
on its operations from governmental regulations, there can be no assurance that
changes in such regulations will not require the Company to acquire costly
equipment or to incur other significant expenses to comply with environmental
regulations. Any failure by the Company to control the use of or adequately
restrict the discharge of hazardous substances could subject it to future
liabilities. There can be no assurance that environmental problems will not
occur in the future which could subject the Company to future costs or
liabilities.

7
EMPLOYEES

As of April 30, 1999, the Company had 1,977 employees, including 1,365 in
manufacturing, 261 in research and development, 224 in sales and marketing and
127 in finance and administration. Approximately 46% of the Company's employees
work at the facilities located in Kaohsiung, Taiwan and Chachoengsao, Thailand.
No employees in the U.S. or Thailand are represented by a labor organization.
All employees in the Kaohsiung facility, except for certain management
employees, are represented by a labor organization. The Company has never had a
work stoppage and believes that its employee relations are good.

EXECUTIVE OFFICERS

The following sets forth certain information regarding the Company's
executive officers as of April 30, 1999:

Name Age Position
---- --- --------
Steve Sanghi 43 Chairman of the Board, President and Chief
Executive Officer
Timothy B. Billington 56 Vice President, Manufacturing and Technology Group
C. Philip Chapman 45 Vice President, Chief Financial Officer and
Secretary
George P. Rigg 59 Vice President, Advanced Microcontroller and
Systems Group
Mitchell R. Little 46 Vice President, Americas Sales

Mr. Sanghi is currently, and has been since August 1990, President of the
Company, since October 1991, Chief Executive Officer and since October 1993,
Chairman of the Board of Directors. He has served as a director of the Company
since August 1990. He served as the Company's Chief Operating Officer from
August 1990 through October 1991 and as Senior Vice President of Operations from
February 1990 through August 1990. Mr. Sanghi holds an M.S. degree in Electrical
and Computer Engineering from the University of Massachusetts and a B.S. degree
in Electronics and Communication from Punjab University, India. Mr. Sanghi also
serves as chairman of the board of directors of ADFlex Solutions, Inc., a U.S.
supplier of flexible circuit-based interconnect solutions.

Mr. Billington has served as Vice President, Manufacturing and Technology
Group since November 1998. From October 1994 to November 1998, he served as Vice
President, Manufacturing Operations. From April 1991 until October 1994, he
served as Vice President, Process Development and Manufacturing Operations.
Prior to his appointment as Vice President, Mr. Billington served as Director of
Wafer Fabrication from November 1990 to April 1991 and Wafer Fabrication Manager
from June 1989 to November 1990. Mr. Billington holds a B.S. degree in marketing
from Abilene Christian University.

Mr. Chapman has served as the Company's Vice President and Chief Financial
Officer since joining the Company in September 1992 and as Secretary of the
Company since December 1992. Mr. Chapman holds an M.B.A. from the Harvard
Graduate School of Business Administration and B.A. degrees in Accounting and
Managerial Finance from the University of California.

Mr. Rigg has served as Vice President, Advanced Microcontroller and Systems
Group since March 1997. From November 1995 to March 1997, he served as Vice
President, Advanced Microcontroller and Technology Division. From June 1989 to
November 1995, he served as Vice President, Logic Products Division. Mr. Rigg
holds a B.S. degree in Physics from Manchester University, England.

Mr. Little has served as Vice President, Americas Sales since April 1998.
From November 1995 to April 1998, he served as Vice President, Standard
Microcontroller and ASSP Division. From September 1993 to November 1995, he
served as Vice President, Memory Products and ASSP Division. Prior to his
appointment as Vice President, Mr. Little served as Division Director for the
Company's Memory Products Division from July 1991 to September 1993, and as
Director of Memory Marketing from November 1989 to July 1991. Mr. Little holds a
BSET from United Electronics Institute.

8
ITEM 2. PROPERTIES

The Company's current headquarters, research and development center and one
of its U.S. wafer fabrication facilities are located in three buildings totaling
approximately 242,000 square feet situated on a 77-acre parcel of land in
Chandler, Arizona. A second U.S. manufacturing site consisting of a wafer
fabrication facility, office and warehouse facilities and a development systems
center, totaling approximately 253,000 square feet, is situated on a 22-acre
parcel of land in Tempe, Arizona. The Company owns the Chandler and Tempe
facilities. Company-owned final test facilities are located in Taiwan and
Thailand. The Taiwan operations are housed in a three-story, 88,700 square foot
building located in the Kaohsiung Export Processing Zone in Kaohsiung, Taiwan,
Republic of China. The Taiwan building is owned by the Company's Taiwan
subsidiary and is located on land that is leased to the Company pursuant to
leases from the Taiwan government expiring in December 2002 and 2003. The
Company will not renew these leases as the Company's Kaohsiung operations will
be closed by the end of the second quarter of fiscal year 2000. The Company's
Thailand final test and assembly operations are housed in a 150,000 square foot
facility located in the Alphatechnopolis Industrial Park in Chachoengsao,
Thailand, near Bangkok. An expansion of 50,000 square feet is presently under
construction and is scheduled to be complete by the end of the third quarter of
fiscal year 2000. This area will house additional test capacity and will also be
available for incremental assembly capacity. The Thailand facility, owned by the
Company's Thailand subsidiary, is situated on land to which the Company expects
to acquire title by the end of fiscal 2000, in accordance with an agreement
between the Company and the land owner. The Company leases space for 23
Technical Support Centers in major metropolitan areas in the United States,
Europe and Asia. See "Item 1 - Business - Sales and Distribution," above. The
Company's aggregate monthly rental payments for its leased facilities are
approximately $128,000.

The Company currently believes that its existing facilities, together with
the additional capacity presently under construction in Thailand, will be
adequate to meet its requirements for the next 12 months.

THE FOREGOING STATEMENTS RELATED TO THE SCHEDULED COMPLETION OF THE
EXPANSION OF THE CHACHOENGSAO FACILITY, ACQUISITION OF TITLE OF THE LAND ON
WHICH THE CHACHOENGSAO FACILITY IS SITUATED AND THE ADEQUACY OF FACILITIES FOR
THE NEXT 12 MONTHS ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: DELAYS IN
CONSTRUCTION AND FACILITIZATION OF THE EXPANSION AREA AT THE CHACHOENGSAO
FACILITY; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; SUPPLY DISRUPTION;
LABOR UNREST; CHANGES IN PRODUCT MIX; THE CYCLICAL NATURE OF THE SEMICONDUCTOR
INDUSTRY AND THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; DEMAND FOR THE
COMPANY'S PRODUCTS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES
AND OVERALL CAPACITY UTILIZATION; COMPETITIVE PRESSURES ON PRICES; POLITICAL
INSTABILITY AND EXPROPRIATION; ECONOMIC CONDITIONS IN THAILAND; AND OTHER
ECONOMIC CONDITIONS.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is involved in a
limited number of legal actions, both as plaintiff and defendant, and could
incur uninsured liability in any one or more of them. Although the outcome of
these actions is not presently determinable, the Company believes that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's results of operations or financial conditions. Litigation relating
to the semiconductor industry is not uncommon, and the Company is, and from time
to time, has been, subject to such litigation. No assurances can be given with
respect to the extent or outcome of any such litigation in the future. See "Item
1 --Business --Patents, Licenses and Trademarks," above.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1999.

9
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MCHP." The Company's Common Stock has been quoted on the Nasdaq
National Market since March 19, 1993. The following table sets forth the
quarterly high and low closing prices of the Common Stock as reported by the
Nasdaq National Market for the last two years:

Fiscal 1999 High Low Fiscal 1998 High Low
----------- ---- --- ----------- ---- ---

First Quarter $31.750 $20.813 First Quarter $36.25 $29.00
Second Quarter 33.375 18.313 Second Quarter 48.88 29.88
Third Quarter 39.188 18.375 Third Quarter 48.38 26.94
Fourth Quarter 40.875 27.125 Fourth Quarter 31.88 21.00

On May 17, 1999, the closing sale price for the Company's Common Stock was
$43.0625 per share. As of such date, there were approximately 480 holders of
record of the Company's Common Stock. This figure does not reflect beneficial
ownership of shares held in nominee names.

The Company has not paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in the
operations of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.

The trading price of the Company's Common Stock has been, and in the future
could be, subject to wide fluctuations in response to quarterly variations in
operating results of the Company and other semiconductor companies, actual or
anticipated announcements of technical innovations or new products by the
Company or its competitors, changes in analysts' estimates of the Company's
financial performance, general conditions in the semiconductor industry,
worldwide economic and financial conditions and other events or factors. In
addition, the stock market has experienced significant price and volume
fluctuations which have particularly affected the market prices for many high
technology companies and which often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may adversely affect the market price of the Company's Common Stock.

During fiscal 1999, the Company sold put options whereby the Company agreed
to acquire Common Stock at various prices as part of its stock repurchase
program. The issuance of stock put options was deemed exempt from registration
under the Securities Act of 1933, as amended, in reliance on Section 4(2) of
such Act. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources, above,
and Note 13 to the Consolidated Financial Statements.

10
ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data for the five-year period
ended March 31, 1999 should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
7 of this report. The Company's consolidated income statement data for each of
the years in the three year period ended March 31, 1999, and the balance sheet
data as of March 31, 1999 and 1998, are derived from the audited consolidated
financial statements of the Company, included in Item 8 of this report.