EX-99.(A)(1)(A) 2 dex99a1a.htm OFFER TO EXCHANGE CERTAIN OUTSTANDING STOCK OPTIONS FOR RESTRICTED STOCK UNITS Offer to Exchange Certain Outstanding Stock Options for Restricted Stock Units
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Exhibit (a)(1)(A)

 


 

MAXIM INTEGRATED PRODUCTS, INC.

 


 

OFFER TO EXCHANGE

CERTAIN OUTSTANDING STOCK OPTIONS

FOR RESTRICTED STOCK UNITS

 


 

February 1, 2006


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MAXIM INTEGRATED PRODUCTS, INC.

Offer to Exchange Certain

Outstanding Stock Options for Restricted Stock Units

 


 

Unless extended, this offer and the accompanying withdrawal rights will expire at 5:00 p.m.,

Pacific Standard Time, on March 1, 2006.

 


 

By this offer, we are giving you the opportunity to exchange your vested, outstanding stock options granted under the Maxim Integrated Products, Inc. 1996 Stock Incentive Plan, as amended and restated, the Maxim Integrated Products, Inc. 1987 Supplemental Stock Option Plan, as amended, the Dallas Semiconductor Corporation 1987 Stock Option Plan, as amended and restated, or the Dallas Semiconductor Corporation 1993 Officer and Director Stock Option Plan, with an exercise price equal to or greater than $35 for restricted stock units. Restricted stock units are a promise by Maxim to issue shares of Common Stock in the future, provided the vesting criteria are satisfied. You may participate in this offer if you are an eligible service provider of Maxim Integrated Products, Inc. or one of our subsidiaries (collectively referred to as Maxim, we, our or us), and reside in one of the following countries: Austria, Canada, China, Finland, France, Germany, India, Israel, Japan, Korea, Malaysia, the Netherlands, the Philippines, Singapore, Spain, Switzerland, Taiwan, Thailand, the United Kingdom or the United States. Eligible service providers consist of all employees, other than officers, of Maxim and its subsidiaries located in the countries listed in the preceding sentence as of February 1, 2006.

 

This offer is not conditioned upon a minimum number of options being tendered for exchange. However, this offer is conditioned upon our Common Stock price being equal to or greater than $38 on the expiration date, as well as other conditions applicable between the commencement of this offer and the expiration date as described herein. If any of these conditions are not satisfied, we will not be obligated to accept and exchange properly tendered eligible options, though we may, in our sole discretion, extend the offering period or waive the relevant conditions if they are not satisfied on or before (as the case may be) the expiration date.

 

If you participate in this offer, the number of restricted stock units that you will receive depends on:

 

  (i) the exercise price and the date on which your eligible options were originally granted;

 

  (ii) the price of our Common Stock on the expiration date of this offer; and

 

  (iii) which set of exchange ratios applies to your eligible options—either the Standard Exchange Ratios or the Minimum Value Exchange Ratios.

 

To determine the number of restricted stock units you will receive upon exchange of your eligible options, please refer to Schedule C. Schedule C displays two alternative sets of exchange ratios. The first set of exchange ratios—entitled “Standard Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option unless the Minimum Value Exchange Ratios apply. All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

The second set of exchange ratios—entitled “Minimum Value Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option only if you are eligible to use the Minimum Value Exchange Ratios for that eligible option, and you elect to do so. You are eligible to use the applicable Minimum Value Exchange Ratio for any given eligible option if and only if it is greater than the applicable Standard Exchange Ratio for that same eligible option. In that case, you have a choice with respect to that eligible option: you may elect to use the applicable Minimum Value Exchange Ratio (and receive a greater number of restricted stock units than you would if you had elected to use the Standard Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in six equal quarterly installments over the approximate eighteen (18) month period following


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the restricted stock unit grant date, OR you may elect to use the applicable Standard Exchange Ratio (and receive a lesser number of restricted stock units than you would if you had elected to use the Minimum Value Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

Please note that, regardless which set of exchange ratios applies in any given case, the exchange ratios shall not increase further if our Common Stock price exceeds $48.00 on the expiration date.

 

Schedule D, which is included solely for your reference, shows the approximate dollar value we have assigned to each of your eligible options based on the original grant date of those eligible options and the price of our Common Stock on the expiration date, and are set forth in two groups. The first group—entitled “Standard Exchange Ratio—Approximate Dollar Values”—shows the approximate dollar value we have assigned to an eligible option if the Standard Exchange Ratios apply. The second group—entitled “Minimum Value Exchange Ratio—Approximate Dollar Values”—shows the approximate dollar value we have assigned to an eligible option if the Minimum Value Exchange Ratios apply.

 

We will grant restricted stock units on the same U.S. business date on which we cancel the exchanged options. We refer to this date as the restricted stock unit grant date. We expect the restricted stock unit grant date to be March 1, 2006.

 

All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/4th of the restricted stock units will vest on May 15, 2006, another 1/4th will vest on August 15, 2006, another 1/4th will vest on November 15, 2006, and the final 1/4th will vest on February 15, 2007.

 

All restricted stock units issued in accordance with the Minimum Value Exchange Ratios will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/6th of the restricted stock units will vest on May 15, 2006, another 1/6th will vest on August 15, 2006, another 1/6th will vest on November 15, 2006, another 1/6th will vest on February 15, 2007, another 1/6th will vest on May 15, 2007, and the final 1/6th will vest on August 15, 2007.

 

If you live and work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details. Vesting of the restricted stock units is subject to your continuing to be employed by, or provide services to, Maxim or one of its subsidiaries through each relevant vesting date.

 

Our Common Stock is traded on the Nasdaq National Market under the symbol “MXIM.” On January 27, 2006, the closing price of our Common Stock was $42.26 per share. You should evaluate current market quotes for our Common Stock, among other factors, before deciding to participate in this offer.

 

Terms in italics in this introduction are the defined terms that we use throughout this offer to exchange document. Definitions for these terms can be found on pages 3 and 4 of the Summary Term Sheet.

 

See “Risks of Participating in the Offer” beginning on page 16 for a discussion of risks that you should consider before participating in this offer.


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IMPORTANT

 

If you participate in this offer, you must complete and sign the attached election form and deliver it by facsimile to Carl Jasper, our Chief Financial Officer, at fax number (408) 530-9176, or deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper at Stock Administration, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086, in each case before 5:00 p.m., Pacific Standard Time, on March 1, 2006. Responses submitted by any other means are not permitted. Only responses that are complete, signed and actually received by Carl Jasper by the deadline will be accepted.

 

Neither the Securities and Exchange Commission nor any state or foreign securities commission has approved or disapproved of these securities or passed judgment upon the accuracy or adequacy of this offer. Any representation to the contrary is a criminal offense.

 

You should direct questions about this offer to Tim Ruehle, our Corporate Treasurer, at:

 

Tim Ruehle

Maxim Integrated Products, Inc.

120 San Gabriel Dr.

Sunnyvale, CA 94086

(408) 737-7600, ext. 7126

 

You should direct requests for additional copies of this offer to exchange and the other option exchange program documents to Carl Jasper, our Chief Financial Officer, at:

 

Carl Jasper

Maxim Integrated Products, Inc.

120 San Gabriel Dr.

Sunnyvale, CA 94086

(408) 737-7600, ext. 4192

 

Offer to Exchange dated February 1, 2006.


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You should rely only on the information contained in this offer to exchange or documents to which we have referred you. We have not authorized anyone to provide you with different information. We are not aware of any jurisdiction where the making of this offer is not in compliance with applicable law. If we become aware of any jurisdiction where the making of this offer is not in compliance with any valid applicable law, we will make a good faith effort to comply with such law. If, after such good faith effort, we cannot comply with such law, we will not make the offer, nor will options be accepted from option holders residing in such jurisdiction. You should not assume that the information provided in this offer to exchange is accurate as of any date other than the date as of which it is shown, or if no date is otherwise indicated, the date of this offer. This offer to exchange summarizes various documents and other information. These summaries are qualified in their entirety by reference to the documents and information to which they relate.

 

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SUMMARY TERM SHEET

   1

RISKS OF PARTICIPATING IN THE OFFER

   16

Economic Risks

   16

Tax-Related Risks

   17

Business-Related Risks

   18

THE OFFER

   25

Section 1.

  Eligibility    25

Section 2.

  Number of options; expiration date    25

Section 3.

  Purposes of the offer    28

Section 4.

  Procedures for electing to exchange options    29

Section 5.

  Withdrawal rights and change of election    30

Section 6.

  Acceptance of eligible options for exchange and issuance of restricted stock units    31

Section 7.

  Conditions of the offer    32

Section 8.

  Price range of shares underlying the options    34

Section 9.

  Source and amount of consideration; terms of restricted stock units    34

Section 10.

  Information concerning Maxim    39

Section 11.

  Interests of directors and executive officers; transactions and arrangements
concerning the options
   39

Section 12.

  Status of options acquired by us in the offer; accounting consequences of the offer    40

Section 13.

  Legal matters; regulatory approvals    41

Section 14.

  Material U.S. federal income tax consequences    42

Section 15.

  Material income tax consequences and certain other considerations for
employees who reside outside the United States
   43

Section 16.

  Extension of offer; termination; amendment    44

Section 17.

  Fees and expenses    45

Section 18.

  Additional information    45

Section 19.

  Financial statements    45

Section 20.

  Miscellaneous    46

SCHEDULE A

  Information Concerning the Executive Officers and Directors of Maxim    A-1

SCHEDULE B

  Financial Statements of Maxim Integrated Products, Inc.    B-1

SCHEDULE C

  Exchange Ratios    C-1

SCHEDULE D

  Approximate Dollar Values    D-1

SCHEDULE E

  Guide to Issues in Countries Outside the United States    E-1

SCHEDULE F

  Election Form    F-1

SCHEDULE G

  Withdrawal Form    G-1

 

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SUMMARY TERM SHEET

 

The following summary provides answers to some of the questions that you may have about this offer. You should carefully read this entire offer to exchange document, the accompanying letter from John F. Gifford (our Chief Executive Officer) dated February 1, 2006, and the election and withdrawal forms together with their associated instructions. This offer is made subject to the terms and conditions of these documents as they may be amended. Please note that the information in the following summary is not complete. Additional important information is contained in the remainder of this offer to exchange document and the other offer documents. We have included in this summary references to other sections in this offer to help you find a more complete description of these topics.

 

Q1. What is the offer?

 

A1. This offer is a voluntary opportunity for eligible service providers to exchange eligible options for restricted stock units. The following is a brief summary of the terms of this offer:

 

Terms in italics in this Question & Answer 1 are the defined terms that are used throughout this offer to exchange document. The definitions of these terms can be found at the bottom of this Question & Answer 1 on pages 3 and 4 of this Summary Term Sheet.

 

Participant Eligibility

 

    All eligible service providers are eligible to participate in the offer. (See Section 1)

 

Eligible Options

 

    All eligible options may be tendered and exchanged in the offer. (See Section 2)

 

    If you participate in this offer, you may choose which of your eligible options to exchange. (See Section 2)

 

    This offer is not conditioned upon a minimum number of options being tendered for exchange. However, this offer is conditioned upon our Common Stock price being equal to or greater than $38 on the expiration date, as well as other conditions applicable between the commencement of this offer and the expiration date as described herein. (See Section 7)

 

    Any portion of an eligible option that is subject to a domestic relations order (or comparable legal document as the result of the end of a marriage) and that is beneficially owned by a person who is not an eligible service provider of Maxim is not eligible to be exchanged in this offer (even if legal title to that portion of the option grant is held by an eligible service provider). The portion that is beneficially owned by our eligible service provider may be exchanged. (See Section 2)

 

Exchange Ratios

 

    As previously noted, the number of restricted stock units that you will receive depends on: (i) the exercise price and the date on which your eligible options were originally granted; (ii) the price of our Common Stock on the expiration date of this offer; and (iii) which set of exchange ratios applies to your eligible options—either the Standard Exchange Ratios or the Minimum Value Exchange Ratios. To determine the number of restricted stock units you will receive upon exchange of your eligible options, please refer to Schedule C. Schedule C displays two alternative sets of exchange ratios.

 

    The first set of exchange ratios—entitled “Standard Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option unless the Minimum Value Exchange Ratios apply. All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

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    The second set of exchange ratios—entitled “Minimum Value Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option only if you are eligible to use the Minimum Value Exchange Ratios for that eligible option, and you elect to do so. You are eligible to use the applicable Minimum Value Exchange Ratio for any given eligible option if and only if it is greater than the applicable Standard Exchange Ratio for that same eligible option. In that case, you have a choice with respect to that eligible option: you may elect to use the applicable Minimum Value Exchange Ratio (and receive a greater number of restricted stock units than you would if you had elected to use the Standard Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date, OR you may elect to use the applicable Standard Exchange Ratio (and receive a lesser number of restricted stock units than you would if you had elected to use the Minimum Value Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

    Please note that, regardless which set of exchange ratios applies in any given case, the exchange ratios shall not increase further if our Common Stock price exceeds $48.00 on the expiration date.

 

For purposes of this offer, including the exchange ratios, the term “option” generally refers to an option to purchase one share of our Common Stock. For purposes of applying the exchange ratios, fractional restricted stock units will be rounded up to the nearest whole restricted stock unit on a grant-by-grant basis. (See Section 2)

 

Restricted Stock Units

 

    Restricted stock units are a promise by Maxim to issue shares of Common Stock in the future, provided the vesting criteria are satisfied. Restricted stock units granted in connection with this offer will be granted on the same U.S. business day as the cancellation date. We refer to this date as the restricted stock unit grant date. We expect that the restricted stock unit grant date will be March 1, 2006. (See Sections 1 and 6)

 

Exercise Price of the Restricted Stock Units

 

    The purchase price of a share of Common Stock to be issued pursuant to a restricted stock unit will be the par value of our Common Stock which is equal to one tenth of one cent ($.001). Upon the date the restricted stock units are settled, the par value shall be deemed to have been paid by your past services rendered to Maxim or one of its subsidiaries. As a result, you do not have to make any cash payment to Maxim to receive your shares of Common Stock upon settlement of your restricted stock units. (See Section 9)

 

Vesting and Exercisability of Restricted Stock Units

 

    All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/4th of the restricted stock units will vest on May 15, 2006, another 1/4th will vest on August 15, 2006, another 1/4th will vest on November 15, 2006, and the final 1/4th will vest on February 15, 2007. If you live and work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details.

 

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    All restricted stock units issued in accordance with the Minimum Value Exchange Ratios will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/6th of the restricted stock units will vest on May 15, 2006, another 1/6th will vest on August 15, 2006, another 1/6th will vest on November 15, 2006, another 1/6th will vest on February 15, 2007, another 1/6th will vest on May 15, 2007, and the final 1/6th will vest on August 15, 2007. If you live and work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details.

 

    Vesting of the restricted stock units is subject to your continuing to be employed by, or provide services to, Maxim or one of its subsidiaries through each relevant vesting date.

 

    We will make minor modifications to the vesting schedule of any restricted stock units to eliminate fractional vesting (such that a whole number of restricted stock units will vest on each vesting date); this will be done by rounding down to the nearest whole number of restricted stock units that will vest on a particular vesting date. Fractional shares that do not vest on a particular date as a result of such rounding will be carried forward to the next scheduled vesting date.

 

     (See Section 9)

 

     Terms Used in This Offer

 

    cancellation date” refers to the same U.S. business day as the expiration date. This is the date on which exchanged options will be cancelled. We expect that the cancellation date will be March 1, 2006. If the expiration date is extended, then the cancellation date will be similarly extended.

 

    Common Stock” refers to Maxim’s common stock.

 

    eligible service providers” refers to all employees, other than officers, of Maxim and its subsidiaries located in Austria, Canada, China, Finland, France, Germany, India, Israel, Japan, Korea, Malaysia, the Netherlands, the Philippines, Singapore, Spain, Switzerland, Taiwan, Thailand, the United Kingdom or the United States as of February 1, 2006, provided that such employees remain employees of Maxim or one of its subsidiaries located in such countries, or a successor entity thereto, at all times up to and through the cancellation date.

 

    eligible options” refers to all stock options that: (i) have an exercise price per share equal to or greater than $35, (ii) were granted under the Maxim Integrated Products, Inc. 1996 Stock Incentive Plan, as amended and restated, the Maxim Integrated Products, Inc. 1987 Supplemental Stock Option Plan, as amended, the Dallas Semiconductor Corporation 1987 Stock Option Plan, as amended and restated, or the Dallas Semiconductor Corporation 1993 Officer and Director Stock Option Plan, and (iii) are outstanding and vested immediately prior to 5:00 p.m., Pacific Standard Time, on February 24, 2006.

 

    exchanged options” refers to all eligible options that you tender and that are accepted for exchange pursuant to this offer.

 

    executive officers” refers to those officers of Maxim listed on Schedule A to this offer to exchange document who are officers for purposes of Section 16 of the Securities Exchange Act of 1934, as amended.

 

    expiration date” refers to the date that this offer expires. We expect that the expiration date will be March 1, 2006 at 5:00 p.m., Pacific Standard Time. We may extend the expiration date at our discretion. If we extend the offer, the term “expiration date” will refer to the time and date at which the extended offer expires.

 

    offer period” or “offering period” refers to the period from the commencement of this offer to the expiration date. This period will commence on February 1, 2006 and we expect it to end at 5:00 p.m., Pacific Standard Time, on March 1, 2006.

 

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    restricted stock unit grant date” refers to the date that is the same U.S. business date as the cancellation date. This is the date when restricted stock units will be granted. We expect that the restricted stock unit grant date will be March 1, 2006. If the expiration date is extended, then the restricted stock unit grant date will be similarly extended.

 

    restricted stock units” refers to the restricted stock units issued pursuant to this offer that replace your exchanged options.

 

    Stock Option Plans” refers collectively to the Maxim Integrated Products, Inc. 1996 Stock Incentive Plan, as amended and restated, the Maxim Integrated Products, Inc. 1987 Supplemental Stock Option Plan, as amended, the Dallas Semiconductor Corporation 1987 Stock Option Plan, as amended and restated, and the Dallas Semiconductor Corporation 1993 Officer and Director Stock Option Plan.

 

Q2. How do I participate in this offer?

 

A2. If you choose to participate in this offer, you must do the following before 5:00 p.m., Pacific Standard Time, on March 1, 2006:

 

     1. Properly complete and sign the election form attached hereto as Schedule F.

 

     2. Deliver the completed and signed election form to Carl Jasper either by facsimile at fax number (408) 530-9176, or deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper at Stock Administration, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086.

 

     To help you identify your eligible options and to give you the tools to make an informed decision, we will distribute to you a summary of all your eligible options, broken down by grant date.

 

     This offer is not conditioned upon a minimum number of options being tendered for exchange. However, this offer is conditioned upon our Common Stock price being equal to or greater than $38 on the expiration date, as well as other conditions applicable between the commencement of this offer and the expiration date as described herein.

 

     We will strictly enforce the expiration date, subject only to an extension thereof that we may grant in our sole discretion. We reserve the right to reject any options tendered for exchange that we determine are not in appropriate form or that we determine are unlawful to accept. Subject to the terms and conditions of this offer, we will accept all properly tendered eligible options promptly after the expiration of this offer. (See Section 4)

 

     We may extend the expiration date of this offer. If we do, we will issue a press release, e-mail or other communication disclosing the extension no later than 6:00 a.m., Pacific Standard Time, on the U.S. business day following the previously-scheduled expiration date.

 

     The delivery of all required documents, including election forms, is your sole responsibility. Delivery will be deemed made only when actually received by Maxim in one of the following ways: (1) you may fax the completed form to Carl Jasper, our Chief Financial Officer, at fax number (408) 530-9176, or (2) you may deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper, Stock Administration, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086. Responses submitted by any other means are not permitted. In all cases, you should allow sufficient time to ensure timely delivery. Only responses that are complete, signed and actually received by Carl Jasper by the deadline will be accepted. (See Section 4)

 

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Q3. Are there any conditions to this offer?

 

A3. Yes. While the completion of this offer is not conditioned upon any minimum number of options being tendered for exchange, it is subject to the condition that our Common Stock price be equal to or greater than $38 on the expiration date, as well as a number of customary conditions that are described in Section 7 of this offer to exchange. If any of these conditions are not satisfied, we will not be obligated to accept and exchange properly tendered eligible options, though we may, in our sole discretion, extend the offering period or waive the relevant conditions if they are not satisfied as of the expiration date. (See Section 7)

 

Q4. Why is Maxim making this offer?

 

A4. This offer is primarily designed to foster retention of our valuable employees and to better align their interests with those of our stockholders to maximize stockholder value. We issued the currently outstanding options to attract and retain the best available personnel and to provide additional incentive to our employees. Some of those outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price for our Common Stock. These options are commonly referred to as being “underwater.” By making this offer, we intend to provide eligible service providers with the opportunity to own restricted stock units that have a greater retention value. In addition, one beneficial consequence of this offer will be to reduce Maxim’s option overhang, which is most simply defined as the number of options outstanding as a percentage of the total number of shares outstanding. The exchange ratios used in this offer will result in this reduction of Maxim’s option overhang. (See Section 3)

 

Q5. Who may participate in this offer?

 

A5. You may participate in this offer if you are an eligible service provider holding eligible options. (See Section 1)

 

Q6. Are there circumstances under which I would not be granted restricted stock units?

 

A6. Yes. If, for any reason, you are no longer an eligible service provider to Maxim or one of its subsidiaries on the restricted stock unit grant date, you will not receive any restricted stock units. Instead, you will keep your eligible options under their existing terms and conditions (including vesting schedules and expirations dates). Unless expressly provided otherwise by the applicable laws of a jurisdiction outside the United States, your employment with Maxim will remain “at-will” regardless of your participation in the offer and can be terminated by you or us at any time, with or without cause or notice. (See Section 1)

 

     Moreover, even if we accept your eligible options for exchange in this offer, we will not grant restricted stock units to you if we are prohibited from doing so by applicable laws. For example, we could become prohibited from granting restricted stock units as a result of changes in SEC or Nasdaq rules. We do not anticipate any such prohibitions at this time. (See Section 13)

 

Q7. Am I required to participate in this option exchange program?

 

A7. No. Participation in this offer is completely voluntary. (See Section 2)

 

Q8. How many restricted stock units will I receive for the options that I exchange?

 

A8. The number of restricted stock units that you will receive depends on:

 

  (i) the exercise price and the date on which your eligible options were originally granted;

 

  (ii) the price of our Common Stock on the expiration date of this offer; and

 

  (iii) which set of exchange ratios applies to your eligible options—either the Standard Exchange Ratios or the Minimum Value Exchange Ratios.

 

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     To determine the number of restricted stock units you will receive upon exchange of your eligible options, please refer to Schedule C. Schedule C displays two alternative sets of exchange ratios.

 

     The first set of exchange ratios—entitled “Standard Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option unless the Minimum Value Exchange Ratios apply. All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

     The second set of exchange ratios—entitled “Minimum Value Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option only if you are eligible to use the Minimum Value Exchange Ratios for that eligible option, and you elect to do so. You are eligible to use the applicable Minimum Value Exchange Ratio for any given eligible option if and only if it is greater than the applicable Standard Exchange Ratio for that same eligible option. In that case, you have a choice with respect to that eligible option: you may elect to use the applicable Minimum Value Exchange Ratio (and receive a greater number of restricted stock units than you would if you had elected to use the Standard Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date, OR you may elect to use the applicable Standard Exchange Ratio (and receive a lesser number of restricted stock units than you would if you had elected to use the Minimum Value Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

     Please note that, regardless which set of exchange ratios applies in any given case, the exchange ratios shall not increase further if our Common Stock price exceeds $48.00 on the expiration date. Please also note that the exchange ratios apply to each of your option grants separately. This means that the various options you have received may be subject to different exchange ratios.

 

     The examples set forth below will assist you in determining the number of restricted stock units to which you will be entitled upon exchange of your eligible options. For purposes of this offer, including the exchange ratios, the term “option” generally refers to an option to purchase one share of our Common Stock. For purposes of applying the exchange ratios, fractional restricted stock units will be rounded up to the nearest whole restricted stock unit on a grant-by-grant basis.

 

     Example 1—If our Common Stock price is $38.00 on the expiration date:

 

     (a) 1,000 options granted on October 22, 1999 will be exchanged for 203 restricted stock units (based on an exchange ratio of .2025 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. Please note that the Minimum Value Ratio for this option (.1818) is less than the Standard Exchange Ratio (.2025); accordingly, only the Standard Exchange Ratio applies.

 

    

(b) 1,000 options granted on May 11, 2000 will, at your election, be subject to either the Standard Exchange Ratio or the Minimum Value Exchange Ratio. If you choose the Standard Exchange Ratio, then those 1,000 options will be exchanged for 83 restricted stock units (based on an exchange ratio of .0823 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. If you choose the Minimum Value Exchange Ratio, then those 1,000 options will be exchanged for 182 restricted stock units (based on an exchange ratio of .1818

 

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restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date.

 

     Example 2—If our Common Stock price is $48.00 or higher on the expiration date:

 

     (a) 1,000 options granted on October 22, 1999 will be exchanged for 325 restricted stock units (based on an exchange ratio of .3246 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. Please note that the Minimum Value Ratio for this option (.1649) is less than the Standard Exchange Ratio (.3246); accordingly, only the Standard Exchange Ratio applies.

 

     (b) 1,000 options granted on May 11, 2000 will, at your election, be subject to either the Standard Exchange Ratio or the Minimum Value Exchange Ratio. If you choose the Standard Exchange Ratio, then those 1,000 options will be exchanged for 119 restricted stock units (based on an exchange ratio of .1189 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. If you choose the Minimum Value Exchange Ratio, then those 1,000 options will be exchanged for 165 restricted stock units (based on an exchange ratio of .1649 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date.

 

     Example 3—If our Common Stock price is $43.00 (the midpoint between $38.00 and $48.00) on the expiration date:

 

     (a) 1,000 options granted on October 22, 1999 will be exchanged for 266 restricted stock units (based on an exchange ratio of .2657 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. Please note that the Minimum Value Ratio for this option (.1839) is less than the Standard Exchange Ratio (.2657); accordingly, only the Standard Exchange Ratio applies.

 

     (b) 1,000 options granted on May 11, 2000 will, at your election, be subject to either the Standard Exchange Ratio or the Minimum Value Exchange Ratio. If you choose the Standard Exchange Ratio, then those 1,000 options will be exchanged for 100 restricted stock units (based on an exchange ratio of .0999 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. If you choose the Minimum Value Exchange Ratio, then those 1,000 options will be exchanged for 184 restricted stock units (based on an exchange ratio of .1839 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date.

 

     (See Section 2)

 

Q9. What is the dollar value of each eligible option that I exchange for restricted stock units if I elect the Minimum Value Exchange Ratio?

 

A9. Each eligible option is worth approximately: (i) $7.00 if the price of our Common Stock on the expiration date is between $38.00 and $38.99, (ii) $7.50 if the price of our Common Stock on the expiration date is between $39.00 and $39.99, and (iii) $8.00 if the price of our Common Stock on the expiration date is $40.00 or higher.

 

     (See Section 2 and Schedule D)

 

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Q10. Why isn’t the exchange ratio simply one-for-one and how were the exchange ratios calculated?

 

A10. Our stock option exchange program must balance the interests of Maxim and its employees and stockholders. In general, the exchange ratios selected for this offer were intended to result in your receiving approximately the same value in restricted stock units as you are giving up by exchanging your eligible options, as calculated using the Black-Scholes valuation model (a widely-used model for calculating the value of derivative securities) using expected option lives consistent with historical exercise patterns. There are, however, two exceptions to this principle. First, as noted above, the exchange ratios will not increase further if our Common Stock price exceeds $48.00 on the expiration date. This means that, if our Common Stock price is greater than $48.00 on the expiration date, the value of the restricted stock units that you receive may be less than the value of the eligible options being exchanged, calculated using the Black-Scholes valuation model. Second, if you are eligible to select the Minimum Value Exchange Ratio with respect to any eligible options and choose to do so, then, assuming that our Common Stock price is not greater than $48.00 on the expiration date, the value of the restricted stock units that you receive will be greater than the value of those eligible options being exchanged, calculated using the Black-Scholes valuation model.

 

     In addition, the exchange ratios selected for this offer will decrease the total number of options outstanding and therefore benefit stockholders by decreasing potential stockholder dilution. Due to their vesting schedules, the restricted stock units will have a greater eligible service provider retention value than the exchanged options and therefore benefit Maxim in its efforts to retain valuable service providers. For eligible service providers, this offer is a voluntary opportunity to exchange eligible options for restricted stock units, which are more certain to provide liquidity than the exchanged options.

 

     (See Section 3)

 

Q11. If the price of Maxim’s Common Stock were to increase after the date on which my options are cancelled, is it possible that those cancelled options would have ultimately been more economically valuable than the restricted stock units I received in exchange for them?

 

A.11 Yes. If the price of our Common Stock increases after the date on which your options are cancelled, those cancelled options might prove to have been worth more than the restricted stock units that you received in exchange for them. Because the exchange ratios utilized in this offer are not one-for-one with respect to exchanged options, it is possible that, at some point in the future, your old options would have been economically more valuable than the restricted stock units granted pursuant to this exchange offer. For example, if our Common Stock price is $38.00 on the expiration date and you exchange 1,000 eligible options granted on October 22, 1999 with an exercise price of $35.22 per share, you would receive a grant of 203 restricted stock units (based on an exchange ratio of .2025 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit). Assume, for illustrative purposes only, that twelve months after the restricted stock unit grant date the price of our Common Stock had increased to $50.00 per share. Under this example, if you had kept your exchanged options and sold them at $50.00 per share, you would have realized a pre-tax gain of $14,780, but if you exchanged your options and sold the shares subject to the restricted stock grant eighteen months later at $50.00 per share, you would only realize a pre-tax gain of $10,150.

 

    

For any particular option, the price of our Common Stock at which the exchange would be a “break-even” proposition can be calculated in several simple steps. First, divide one (1) by the applicable exchange ratio. Then, take that resulting number and divide it by itself minus one (1) – this number will be the “break-even multiple.” Thus, for the example in the preceding paragraph, you would first divide one (1) by .2025, yielding 4.94. You would then divide 4.94 by 3.94, yielding 1.25 – this number is the “break-even multiple.” Since the option exercise price in the example was $35.22, the “break-even price” of our Common Stock for that option would be $35.22 multiplied by 1.25, or $44.03. If the price of our Common Stock at the time of sale were to exceed the “break-even price” (such as $44.03 in the above example), you

 

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would be better off economically keeping the exchanged options. However, if the price of our Common Stock at the time of sale were less than the “break-even price,” you would be better of economically with the restricted stock units.

 

     Note that this discussion of the “break-even multiple” and “break-even price” does not take into account vesting. Because only vested options are eligible for exchange, in all cases the restricted stock units issued in the offer will vest after the corresponding exchanged options. You should take both the “break-even multiple” (and your judgment regarding the future value of our Common Stock) and the change in vesting into account when deciding whether to participate in this offer.

 

Q12. What will be the purchase price of the shares of Common Stock to be issued upon settlement of my restricted stock units?

 

A12. The purchase price of the shares of Common Stock to be issued upon settlement of your restricted stock units will be the par value of our Common Stock which is equal to one tenth of one cent ($.001) and the par value will be deemed paid by your past services rendered to Maxim or its subsidiaries. As a result, you do not have to make any cash payment to Maxim to receive the shares of Common Stock to be issued upon settlement of your restricted stock units. (See Section 9)

 

Q13. When will my restricted stock units vest?

 

A13. All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/4th of the restricted stock units will vest on May 15, 2006, another 1/4th will vest on August 15, 2006, another 1/4th will vest on November 15, 2006, and the final 1/4th will vest on February 15, 2007. If you live or work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details.

 

     All restricted stock units issued in accordance with the Minimum Value Exchange Ratios will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/6th of the restricted stock units will vest on May 15, 2006, another 1/6th will vest on August 15, 2006, another 1/6th will vest on November 15, 2006, another 1/6th will vest on February 15, 2007, another 1/6th will vest on May 15, 2007, and the final 1/6th will vest on August 15, 2007. If you live or work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details.

 

    Vesting of the restricted stock units is subject to your continuing to be employed by, or provide services to, Maxim or one of its subsidiaries through each relevant vesting date. Restricted stock units which do not vest will be forfeited to Maxim, and you will have no further rights with respect thereto.

 

    After the restricted stock units vest, continued service to Maxim or one of its subsidiaries is not required to retain the shares of Common Stock issued upon settlement of your restricted stock units.

 

    We will make minor modifications to the vesting schedule of any restricted stock units to eliminate fractional vesting (such that a whole number of restricted stock units will vest on each vesting date); this will be done by rounding down to the nearest whole number of restricted stock units that will vest on a particular vesting date. Fractional shares that do not vest on a particular date as a result of such rounding will be carried forward to the next scheduled vesting date.

 

     Example 1: Suppose you tender for exchange 1,000 eligible options that were granted to you on May 11, 2000 and our Common Stock price is $38.00 on the expiration date. If you elect to use the Standard Exchange Ratio, you will be issued 83 restricted stock units (based on an exchange ratio of .0823 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit).

 

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     Those 83 restricted stock units would vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date, subject to your continued service through each relevant vesting date, as follows:

 

    25% (approximately 20 restricted stock units, rounding down to the nearest whole restricted stock unit) would vest on May 15, 2006;

 

    25% (approximately 21 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on August 15, 2006;

 

    25% (approximately 21 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on November 15, 2006; and

 

    25% (approximately 21 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date) would vest on February 15, 2007.

 

     Example 2: Suppose you tender for exchange 1,000 eligible options granted on May 11, 2000 and our Common Stock price is $38.00 on the expiration date. If you elect to use the Minimum Value Exchange Ratio, you will be issued 182 restricted stock units (based on an exchange ratio of .1818 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit). Those 182 restricted stock units would vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date, subject to your continued service through each relevant vesting date, as follows:

 

    16 2/3% (approximately 30 restricted stock units, rounding down to the nearest whole restricted stock unit) would vest on May 15, 2006;

 

    16 2/3% (approximately 30 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on August 15, 2006;

 

    16 2/3% (approximately 31 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting dates) would vest on November 15, 2006;

 

    16 2/3% (approximately 30 restricted stock units, rounding down to the nearest whole restricted stock unit) would vest on February 15, 2007;

 

    16 2/3% (approximately 30 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on May 15, 2007; and

 

    16 2/3% (approximately 31 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting dates) would vest on August 15, 2007.

 

Q14. If I participate in this offer, do I have to exchange all of my options?

 

A14. No. If you decide to participate in this offer, you may elect to exchange any of your eligible options and you may pick and choose between particular option grants. This means that you may elect to exchange only some of the shares covered by any particular option grant. Further, you may elect to exchange the remaining portion of an option grant that you have already partially exercised. (See Section 2)

 

Q15. What happens if I have an option grant that is subject to a domestic relations order or comparable legal document as the result of the end of a marriage?

 

A15.

If you have an option grant that is subject to a domestic relations order (or comparable legal document as the result of the end of a marriage) and a person who is not an eligible service provider beneficially owns a portion of that option grant, you may tender only the portion beneficially owned by you. Any portion beneficially owned by a person who is not an eligible service provider may not be exchanged in this offer

 

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to exchange (even if legal title to that portion of the option grant is held by you and you are an eligible service provider).

 

     For instance, if you are an eligible service provider and you hold an option grant to purchase 3,000 shares that is subject to a domestic relations order, 1,000 of which are beneficially owned by your former spouse, and you have exercised 500 of the remaining 2,000 shares, then you may elect to exchange shares from the portion of the option grant that you beneficially own covering the outstanding 1,500 shares, or you may elect not to participate in the offer at all. That is your only choice with respect to such an option grant. (See Section 2)

 

Q16. When will my exchanged options be cancelled?

 

A16. Your exchanged options will be cancelled on the same U.S. business day as the expiration date. We refer to this date as the cancellation date. We expect that the cancellation date will be March 1, 2006, unless the offer period is extended. (See Section 6)

 

Q17. Once I surrender my exchanged options, is there anything I must do to receive the restricted stock units?

 

A17. Once your exchanged options have been cancelled, there is nothing that you must do to receive your restricted stock units, other than to sign and enter into a restricted stock unit agreement with the Company. (See Section 9) Your restricted stock units will be granted to you on the same day that the exchanged options are cancelled. We expect that the restricted stock grant date will be March 1, 2006. In order to receive the shares covered by the restricted stock unit grant, you will need to remain an eligible service provider through each applicable vesting date, as described in Question and Answer 13. (See Section 1)

 

Q18. When will I receive restricted stock units?

 

A18. We will grant the restricted stock units on the restricted stock unit grant date. The restricted stock unit grant date will be the same U.S. business day as the date on which we cancel the options accepted for exchange. We expect the restricted stock unit grant date will be March 1, 2006. If the expiration date is delayed, the restricted stock unit grant date will be similarly delayed. You will receive your restricted stock unit agreement promptly after the expiration of the offer. You will receive the shares subject to the restricted stock unit when and if your restricted stock unit vests. (See Section 6)

 

Q19. Can I exchange shares of Maxim Common Stock that I acquired upon exercise of Maxim options?

 

A19. No. This offer relates only to eligible options. You may not exchange shares of Maxim Common Stock in this offer. (See Section 2)

 

Q20. Why are you offering to exchange options for restricted stock units rather than new options?

 

A20. The primary purpose of this offer is to foster retention of our valuable employees and to better align their interests with those of our stockholders to maximize stockholder value. We issued the currently outstanding options to attract and retain the best available personnel and to provide additional incentive to our employees. Some of those outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price for our Common Stock. These options are commonly referred to as being “underwater.” Due to their vesting schedules, the restricted stock units will have greater employee retention value than the exchanged options and therefore benefit Maxim in its efforts to retain valuable employees. For eligible service providers, this offer is a voluntary opportunity to exchange eligible options for restricted stock units, which are more certain to provide liquidity than the exchanged options.

 

    

In addition, one beneficial consequence of this offer will be to reduce our stock option overhang. Stock options represent potential future issuance of shares, which would create dilution and may put downward

 

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pressure on stock prices. The measure of stock option usage is called “overhang,” defined most simply as stock options granted as a percentage of the total shares outstanding. Using this definition, Maxim’s stock option overhang was approximately 31.75% as of the close of business on December 24, 2005. The exchange ratios selected for this offer will decrease the total number of options outstanding and therefore benefit stockholders by reducing potential stockholder dilution, while still providing a substantial incentive to our service providers to exert maximum efforts to increase the value of Maxim’s business.

 

Q21. Will I be required to give up all of my rights under the cancelled options?

 

A21. Yes. Once we have accepted your exchanged options, your exchanged options will be cancelled and you will no longer have any rights thereunder. We intend to cancel all exchanged options on the same U.S. business day as the expiration date. We refer to this date as the cancellation date. We expect that the cancellation date will be March 1, 2006. (See Section 6)

 

Q22. Will the terms and conditions of my restricted stock units be the same as my exchanged options?

 

A22. Restricted stock units are a different type of award than stock options, and so the terms and conditions of your restricted stock units will necessarily be different from your stock options. Your restricted stock units will be granted under our 1996 Stock Incentive Plan, and will be subject to a restricted stock unit agreement between you and the Company. (See Section 9)

 

Q23. What happens to my options if I choose not to participate or if my options are not accepted for exchange?

 

A23. If you choose not to participate or your options are not accepted for exchange, your existing options will remain outstanding under their current terms and conditions and will retain, without limitation, their existing exercise price(s), vesting schedule(s), and expiration date(s). (See Section 6)

 

Q24. How does Maxim determine whether an option has been properly tendered?

 

A24. We retain sole discretion to resolve all questions related to the validity, form, and eligibility (including time of receipt and acceptance) of any options. Our determination of these matters will be final and binding on all parties. We reserve the right to reject any election form or any options tendered for exchange that we determine are not in appropriate form or that we determine are unlawful to accept. We will accept all properly tendered options that are not validly withdrawn, subject to the terms of this offer. This offer is not conditioned on a minimum number of options being tendered for exchange. However, this offer is conditioned upon our Common Stock price being equal to or greater than $38 on the expiration date, as well as other conditions applicable between the commencement of this offer and the expiration date as described herein. If any of these conditions are not satisfied, we will not be obligated to accept and exchange properly tendered eligible options, though we may, in our sole discretion, extend the offering period or waive the relevant conditions if they are not satisfied on or before (as the case may be) the expiration date. No tender of options will be deemed to have been properly made until all defects or irregularities have been cured or waived by us. We have no obligation to give notice of any defects or irregularities in any election form and we will not incur any liability for failure to give any notice. (See Section 4)

 

Q25. Will I have to pay taxes if I participate in the offer?

 

A25.

If you participate in the offer and are a citizen or resident of the U.S., you generally will not be required under current U.S. law to recognize income for U.S. federal income tax purposes at the time of the exchange. On the restricted stock unit grant date, you generally will not be required under current law to recognize income for U.S. federal income tax purposes. However, you generally will have taxable income when your restricted stock units vest, at which time Maxim will also generally have a tax withholding obligation. Although not obligated to do so, Maxim intends to automatically withhold a sufficient number

 

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of otherwise distributable shares of Common Stock when restricted stock units vest to satisfy its tax withholding obligation. You may also have taxable income when you sell the shares issued upon settlement of the restricted stock unit. (See Section 14)

 

     If you are a tax resident of a country other than the U.S., the tax consequences of participating in the offer, as well as for your restricted stock units, may be different. Please be sure to read Schedule E attached hereto which discusses the potential tax consequences in countries outside the U.S. (See Section 15)

 

     For all employees, we strongly recommend that you consult with your own tax advisor to determine the personal tax consequences to you of participating in this offer. If you are a tax resident of or subject to the tax laws in more than one country, you should be aware that there might be additional tax and social insurance consequences in more than one country that may apply to you.

 

Q26. What if Maxim is acquired by another company?

 

A26. Although we are not anticipating any such merger or acquisition, if we merge or consolidate with or are acquired by another entity, prior to the expiration of the offer, you may choose to withdraw any options which you tendered for exchange and your options will be treated in accordance with the option plan under which they were granted and your option agreement. Further, if Maxim is acquired prior to the expiration of the offer, we reserve the right to withdraw the offer, in which case your options and your rights thereunder will remain intact and you will receive no restricted stock units in exchange for them. If Maxim is acquired prior to the expiration of the offer but does not withdraw the offer, we (or the successor entity) will notify you of any material changes to the terms of the offer or the restricted stock units to be granted in exchange for tendered eligible options, including any adjustments to the purchase price or number of shares that will be subject to the restricted stock units. Under such circumstances, the type of security and the number of shares covered by your restricted stock unit award would be adjusted based on the consideration per share given to holders of our Common Stock in connection with the acquisition. As a result of this adjustment, you may receive restricted stock units covering more or fewer shares of the acquiror’s Common Stock than the number of shares subject to the eligible options that you tendered for exchange or than the number you would have received pursuant to the restricted stock units if no acquisition had occurred.

 

     A transaction involving us, such as a merger or other acquisition, could have a substantial effect on our stock price, including significantly increasing the price of our Common Stock. Depending on the structure and terms of this type of transaction, option holders who elect to participate in the offer might be deprived of the benefit of the appreciation in the price of our Common Stock resulting from the merger or acquisition. This could result in a greater financial benefit for those option holders who did not participate in this offer and retained their original options.

 

     Finally, if another company acquires us, that company may, as part of the transaction or otherwise, decide to terminate some or all of our employees before the completion of this option exchange program. Termination of your employment for this or any other reason before the restricted stock unit grant date means that the tender of your eligible options will not be accepted, you will keep your tendered options in accordance with their original terms, and you will not receive any restricted stock units or other benefit for your tendered options.

 

     If we are acquired after your tendered options have been accepted, cancelled, and exchanged for restricted stock units, your restricted stock units will be treated in the acquisition transaction in accordance with the terms of the transaction agreement, the terms of the 1996 Stock Incentive Plan, as amended and restated, and your new restricted stock unit agreement.

 

     (See Section 9)

 

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Q27. Will I receive a restricted stock unit agreement if the eligible options I tender are accepted for exchange?

 

A27. Yes. All restricted stock units will be subject to a restricted stock unit agreement between you and Maxim, as well as to the terms and conditions of the 1996 Stock Incentive Plan (and, if you live and work in France, of the French sub-plan to the 1996 Stock Incentive Plan). Your execution of the restricted stock unit agreement is a condition to receiving any shares of Common Stock under the restricted stock units. (See Section 9)

 

Q28. If Maxim extends the expiration date offer, how will I be notified?

 

A28. If we extend this offer, we will issue a press release, e-mail or other form of communication disclosing the extension no later than 6:00 a.m., Pacific Standard Time, on the next U.S. business day following the previously-scheduled expiration date. (See Sections 2 and 16)

 

Q29. How will I be notified if the terms of the offer are changed?

 

A29. If we change the terms of the offer, we will issue a press release, e-mail or other form of communication disclosing the change no later than 6:00 a.m., Pacific Standard Time, on the next U.S. business day following the day we change the terms of the offer. (See Sections 2 and 16)

 

Q30. Can I change my mind and withdraw from this offer?

 

A30. Yes. You may change your mind after you have submitted an election form and withdraw from the offer at any time before the expiration date. If we extend the expiration date, you may withdraw your election at any time until the extended offer expires. You may change your mind as many times as you wish, but you will be bound by the last properly-submitted election or withdrawal form we receive before the expiration date. (See Section 5)

 

Q31. How do I withdraw my election?

 

A31. To withdraw your election, you must do the following before the expiration date:

 

     1. Properly complete and sign the attached withdrawal form.

 

     2. Deliver the completed and attached withdrawal form to Carl Jasper either via facsimile at fax number (408) 530-9176, or deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper at Stock Administration, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086.

 

     (See Section 5)

 

Q32. What if I withdraw my election and then decide again that I want to participate in this offer?

 

A32. If you have withdrawn your election to participate and then decide again that you would like to participate in this offer, you may re-elect to participate by submitting a new properly completed election form before the expiration date that is signed and dated after the date of your withdrawal form. (See Question and Answer 2 and Section 5)

 

Q33. Is Maxim making any recommendation as to whether I should exchange my eligible options?

 

A33.

No. We are not making any recommendation as to whether you should accept this offer. We understand that the decision whether or not to exchange your eligible options in this offer will be a challenging one for many employees. The program does carry risk (see “Risks of Participating in the Offer” beginning on page 16 for information regarding some of these risks), and there are no guarantees that you would not ultimately receive greater value from your eligible options than from the restricted stock units you will

 

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receive in the exchange. As a result, you must make your own decision as to whether or not to participate in this offer. For questions regarding personal tax implications or other investment-related questions, you should talk to your own legal counsel, accountant and/or financial advisor. (See Section 3)

 

Q34. Who can I talk to if I have questions about the offer, or if I need additional copies of the offer documents?

 

A34. You should direct questions about this offer to Tim Ruehle, our Corporate Treasurer, at:

 

     Tim Ruehle
     Maxim Integrated Products, Inc.
     120 San Gabriel Drive
     Sunnyvale, CA 94086
     (408) 737-7600, ext. 7126

 

     You should direct requests for additional copies of this offer to exchange and the other option exchange program documents to Carl Jasper, our Chief Financial Officer, at:

 

     Carl Jasper
     Stock Administration
     Maxim Integrated Products, Inc.
     120 San Gabriel Drive
     Sunnyvale, CA 94086
     (408) 737-7600, ext. 4192

 

     (See Section 10)

 

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RISKS OF PARTICIPATING IN THE OFFER

 

Participating in the offer involves a number of risks, including those described below. This list, the risk factors under the heading entitled “Trends, Risks and Uncertainties” in our annual report on Form 10-K for the fiscal year ended June 25, 2005 filed with the Securities and Exchange Commission (SEC), and the risk factors discussed in our quarterly report on Form 10-Q for the fiscal quarter ended September 24, 2005 filed with the SEC, highlight the material risks of participating in this offer. You should carefully consider these risks and are encouraged to speak with an investment and tax advisor as necessary before deciding to participate in the offer. In addition, we strongly urge you to read the sections in this offer to exchange discussing the tax consequences in the United States, Schedule E attached to this offer to exchange which discusses the tax consequences and certain other considerations for eligible service provides outside the United States, as well as the rest of this offer to exchange for a more in-depth discussion of the risks that may apply to you before deciding to participate in the exchange offer.

 

In addition, this offer and our SEC reports referred to above include “forward-looking statements.” When used in this offer to exchange, the words “anticipate,” “believe,” “estimate,” “expect,” “intend” and “plan” as they relate to us are intended to identify these forward-looking statements. All statements by us regarding our expected future financial position and operating results, our business strategy, our financing plans and expected capital requirements, forecasted trends relating to our services or the markets in which we operate and similar matters are forward-looking statements, and are dependent upon certain risks and uncertainties, including those set forth in this section and other factors elsewhere in this offer to exchange. You should carefully consider these risks, in addition to the other information in this offer to exchange and in our other filings with the SEC. The documents we file with the SEC, including the reports referred to above, discuss some of the risks that could cause our actual results to differ materially from those contained, predicted or implied in the forward-looking statements.

 

The following discussion should be read in conjunction with the financial statements and notes to the financial statements attached hereto as Schedule B, as well as our most recent Forms 10-K, 10-Q and 8-K filed with the SEC. We caution you not to place undue reliance on the forward-looking statements contained in this offer, which speak only as of the date hereof. The Company disclaims any duty, and undertakes no obligation, to update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise, or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Economic Risks

 

If the price of our Common Stock increases after the date on which your options are cancelled, your cancelled options might be worth more than the restricted stock units that you receive in exchange for them.

 

Because the exchange ratios utilized in this offer are not one-for-one with respect to exchanged options, it is possible that, at some point in the future, your old options would have been economically more valuable than the restricted stock units granted pursuant to this exchange offer. For example, if our Common Stock price is $38.00 on the expiration date and you exchange 1,000 eligible options granted on October 22, 1999 with an exercise price of $35.22 per share, you would receive a grant of 203 restricted stock units (based on an exchange ratio of .2025 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit). Assume, for illustrative purposes only, that twelve months after the restricted stock unit grant date the price of our Common Stock had increased to $50.00 per share. Under this example, if you had kept your exchanged options and sold them at $50.00 per share, you would have realized a pre-tax gain of $14,780, but if you exchanged your options and sold the shares subject to the restricted stock grant eighteen months later at $50.00 per share, you would only realize a pre-tax gain of $10,150.

 

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For any particular option, the price of our Common Stock at which the exchange would be a “break-even” proposition can be calculated in several simple steps. First, divide one (1) by the applicable exchange ratio. Then, take that resulting number and divide it by itself minus one (1)—this number will be the “break-even multiple.” Thus, for the example in the preceding paragraph, you would first divide one (1) by .2025, yielding 4.94. You would then divide 4.94 by 3.94, yielding 1.25—this number is the “break-even multiple.” Since the option exercise price in the example was $35.22, the “break-even price” of our Common Stock for that option would be $35.22 multiplied by 1.25, or $44.03. If the price of our Common Stock at the time of sale were to exceed the “break-even price” (such as $44.03 in the above example), you would be better off economically keeping the exchanged options. However, if the price of our Common Stock at the time of sale were less than the “break-even price,” you would be better of economically with the restricted stock units.

 

Note that this discussion of the “break-even multiple” and “break-even price” does not take into account vesting. Because only vested options are eligible for exchange, in all cases the restricted stock units issued in the offer will vest after the corresponding exchanged options. You should take both the “break-even multiple” (and your judgment regarding the future value of our Common Stock) and the change in vesting into account when deciding whether to participate in this offer.

 

If we are acquired by or merge with another company, your cancelled options might be worth more than the restricted stock units that you receive in exchange for them.

 

A transaction involving us, such as a merger or other acquisition, could have a substantial effect on our stock price, including significantly increasing the price of our Common Stock. Depending on the structure and terms of this type of transaction, option holders who elect to participate in the offer might be deprived of the benefit of the appreciation in the price of our Common Stock resulting from the merger or acquisition. This could result in a greater financial benefit for those option holders who did not participate in this offer and retained their original options.

 

If your employment terminates for any reason before your restricted stock units vest, you will not receive any value from your restricted stock units.

 

If you do not remain an eligible service provider through the date your restricted stock units first vest, you will not receive any shares of Common Stock upon settlement of your restricted stock units. Instead, your restricted stock units will expire immediately upon your termination. As a result, you will receive no value from your restricted stock units.

 

Tax-Related Risks

 

Tax effects of restricted stock units for United States Tax Residents.

 

If you participate in the offer and are a citizen or resident of the U.S., you generally will not be required under current U.S. law to recognize income for U.S. federal income tax purposes at the time of the exchange. On the restricted stock unit grant date, you generally will not be required under current law to recognize income for U.S. federal income tax purposes. However, you generally will have taxable income when your restricted stock units vest, at which time Maxim will also generally have a tax withholding obligation. Although not obligated to do so, Maxim intends to automatically withhold a sufficient number of otherwise distributable shares of Common Stock when restricted stock units vest to satisfy its tax withholding obligation. You may also have taxable income when you sell the shares issued upon settlement of the restricted stock units.

 

Tax effects of restricted units for tax residents of countries outside the United States.

 

If you participate in the offer and are a tax resident of a country outside the United States, you should refer to Schedule E for more information on the tax and social security consequences and other considerations applicable to the exchange of the options and grant of restricted stock units.

 

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Tax-related risks for tax residents of multiple countries.

 

If you are subject to the tax laws in more than one jurisdiction, you should be aware that there may be tax and social security consequences in more than one country that may apply to you. You should be certain to consult your own tax advisor to discuss these consequences.

 

Business-Related Risks

 

Risk Factors

 

You should carefully consider the following:

 

Factors Affecting Future Operating Results

 

The Company’s future operating results are difficult to predict and may be affected by a number of factors.

 

The semiconductor market has historically been cyclical and subject to significant economic downturns at various times. After a period of increasing demand that extended through fiscal year 2000, the semiconductor industry, including the portions in which the Company participates, experienced dramatically decreased demand. Although some of the causes of that decrease are known, including significant excess inventories in the hands of equipment manufacturers and other potential customers, it remains unclear what all the causes may have been. In fiscal year 2005, Maxim achieved increases in net revenues and net income of 16.2% and 28.8%, respectively over fiscal year 2004 levels. However, Maxim’s ability to achieve future revenue and net income growth depends on whether, and the extent to which, demand for its products increases and reflects real end-user demand and whether customer cancellations and delays of outstanding orders remain small.

 

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 other materials and manufacturing capacity, changes in product mix, our ability to turn backlog into revenues 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.

 

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 and 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 or annual revenue and net income goals.

 

In addition, in certain markets where end-user demand may be particularly volatile and difficult to predict, such as notebook computers, cellular handsets, and certain consumer products 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. At any given time, this situation could affect a portion of the Company’s 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, resulting in potential 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

 

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Company routinely estimates inventory reserves required for such product. Actual results may differ from these reserve estimates, and such differences may be material to Maxim’s financial condition, gross margins, and results of operations.

 

Dependence on New Products, Process Technologies and Market Penetration

 

The Company’s future success will continue to depend on its ability to introduce new products, enter new markets and to develop new process technologies. Semiconductor design and process technologies are subject to rapid technological change, requiring a high level of expenditures for research and development. Design and process development for the portions of the semiconductor 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 test times and 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 grow (for example, 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 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 profitability 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 dice on each wafer to be nonfunctional. The Company has from time to time experienced reliability problems and 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 reliability or quality problems that could expose the Company to liability, product returns and product warranty claims.

 

The number of shippable dice 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, wafer sort, 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 continuing its ramp up of wafer manufacturing production at its wafer manufacturing facility located in San Antonio, Texas, which began in fiscal year 2005. The conversion to 8-inch wafer manufacturing at the facility located in Dallas, Texas will continue throughout fiscal year 2006. In addition, the Company is converting a portion of its wafer manufacturing facility located at Beaverton, Oregon to eight-inch wafer manufacturing and developing new processes, which are necessary for the successful entry into significantly large markets, in anticipation of increased customer demand for its products. Should the Company be unsuccessful in completing its planned production ramp up at the San Antonio, Texas, wafer manufacturing facility, or conversion to eight-inch wafer manufacturing at its wafer manufacturing facility located at Dallas, Texas and Beaverton, Oregon, or should customer demand fail to increase and the Company no longer needs the additional capacity, the Company’s financial position and results of operations could be adversely impacted.

 

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As of June 25, 2005, the Company manufactured approximately 96% of its wafer production requirements internally. Given the nature of the Company’s products, it would be very difficult and costly 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, unavailability of electric power or otherwise, would have a material adverse effect on the Company’s results of operations and financial condition.

 

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 or functionally equivalent products for some of those products, which could erode the Company’s profit margins.

 

Dependence on Independent Distributors and Sales Representatives

 

A portion of the Company’s sales is realized through independent electronics distributors and a limited portion of the Company’s sales is realized through independent sales representatives that are not under the control of the Company. Dallas Semiconductor continues to derive a larger percentage of its sales through the distribution channel than the Maxim only business. 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 Company generally requires foreign distributors to provide a letter of credit to the Company in an amount equal to the credit limit set for accounts receivable from such foreign distributors. The letter of credit provides for collection on accounts receivable from the foreign distributor should the foreign distributor default on their accounts receivable to the Company. The Company does not require letters of credit from any of its domestic distributors and is not protected against accounts receivable default or bankruptcy by these distributors. The inability to collect open accounts receivable could adversely affect the Company’s results of operations. 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.

 

Dependence on Independent Foundries, Subcontractors, Thailand Test Facility and Philippines Test and Shipping Facility

 

Although the Company has an internal capability to fabricate most of its wafers, Maxim remains dependent on outside silicon foundries for a small portion of its wafer fabrication. None of the independent foundries currently used by Maxim is affiliated with the Company. 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 contracts. If these foundries are unable or unwilling to produce adequate supplies of processed wafers conforming to the Company’s quality standards or unable to provide timely delivery, 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 may not be economically feasible.

 

Maxim relies on assembly subcontractors located in the Philippines, Malaysia, Thailand, China, Singapore, Taiwan and South Korea to separate wafers into individual integrated circuits and to package them. None of the assembly subcontractors currently used by Maxim is affiliated with the Company. Reliability problems experienced by the Company’s assemblers could cause serious problems in delivery and quality resulting in

 

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potential product liability to the Company. In fiscal year 2005, the Company performed approximately one fourth of its wafer sort operations at its U.S. facilities, the remaining wafer sort operations were performed offshore at its facility located in Cavite, the Philippines, and Chonburi Province, Thailand. In the past, the Company’s assembly contractors in Malaysia, South Korea and the Philippines have been impacted by political disorders, labor disruptions, criminal activities and natural disasters. Although the Company has been affected by these problems in the past, 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. The Company anticipates that its Thailand test facility will perform about one-fourth of the Company’s wafer sort and approximately 40% of the Company’s final testing for its products in fiscal year 2006, but would not provide sufficient capacity to make up for a significant disruption in the Philippines test facility.

 

The Company performs substantially all of its final testing at its facilities in the Philippines and Thailand. Given the nature of the Company’s test operations, it would be very difficult and costly to arrange for independent testing facilities to supply such test services. Any prolonged inability to utilize one of the Company’s testing facilities as a result of fire, natural disaster, political instability, unavailability of electric power or otherwise, would have a material adverse effect on the Company’s results of operations and financial condition.

 

As previously noted, once testing has been completed, finished product is currently shipped to the Company’s finished goods location at its test facility in Cavite, the Philippines. In fiscal year 2006, the Company plans to establish a shipping operation at its test facility in Chonburi Province, Thailand. Once established, finished product will be shipped directly from either Cavite, the Philippines or Chonburi Province, Thailand to customers worldwide or to other Company locations for sale to end customers or distributors. Should there be disruption for any reason to the shipping operations in Cavite, the Philippines or should the Company be unable to establish a shipping operation at its Thailand test facility, the Company might not be able to meet its revenue plan in the fiscal period impacted by the disruption. Failure to meet the revenue plan may materially adversely impact the Company’s results of operations.

 

Availability and Quality of Materials, Supplies, and Subcontract Services

 

The semiconductor industry has experienced a very large expansion of fabrication capacity and production worldwide over time. As a result of increasing demand from semiconductor and other manufacturers, availability of certain basic materials and supplies, such as chemicals, gases, polysilicon, silicon wafers, ultra-pure metals, lead frames and molding compounds, and of subcontract services, like epitaxial growth, ion implantation and assembly of integrated circuits into packages, have from time to time, over the past several years, been in short supply and could come into short supply again if overall industry demand continues to increase in the future. The Company purchases materials and supplies from many suppliers, some of which are sole-sourced. If these supplies are interrupted, the Company may not be able to find replacement supplies. In addition, from time to time natural disasters can lead to a shortage of some of the above materials due to disruption of the manufacturer’s production. 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 a materially adverse effect on Maxim’s ability to achieve its planned production.

 

A number of Dallas Semiconductor products, including nonvolatile Static Random Access Memory products (SRAMs), real time clocks, and iButton products use components such as static memory circuits, batteries, PC boards, and crystals that are purchased from third parties. The Company anticipates that from time to time supplies of these components may not be sufficient to meet all customer requested delivery dates for products containing the components. As a result of any such shortages, future sales and earnings from products using these components could be adversely affected. Additionally, significant fluctuations in the purchase price for these components could affect gross margins for the products involved. Suppliers could also discontinue the

 

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manufacture of such purchased products or could have quality problems that could affect the Company’s ability to meet customer commitments. Quality problems experienced by suppliers could be impossible to reproduce or detect in a controlled environment, or could not be detected by the Company’s quality control procedures. Should this occur, such defects may become part of the Company’s finished product which would ultimately be sold to customers. If such defects cause quality control problems in the manufacture of customers’ end products or cause direct or indirect damages to either the Company’s customers or the ultimate end user, the Company may be liable for increased production costs at its customers and both direct and indirect damages caused by the defective product. Such liability could have a material adverse impact on the Company’s results of operation and financial condition.

 

In addition, suppliers of semiconductor manufacturing equipment are sometimes unable to deliver test and/or fabrication equipment to a schedule or equipment performance specification that meets the Company’s requirements. Delays in delivery of equipment needed for growth could adversely affect the Company’s ability to achieve its manufacturing and revenue plans in the future.

 

Protection of Proprietary Information

 

The Company relies upon both know-how and 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. Moreover, the laws of foreign countries do not protect proprietary rights to the same extent as the United States, and we may encounter problems in protecting our proprietary rights in those foreign countries. 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, if such patents are found to be valid. There can be no assurance that Maxim would be able to obtain licenses, if required, upon commercially reasonable terms or at all.

 

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. To date, the Company has not paid or been required to defend any indemnification claims, and accordingly, the Company has not accrued any amounts for its indemnification obligations. However, there can be no assurances that the Company will not have any future financial exposure under those indemnification obligations.

 

Litigation and Claims

 

From time to time, the Company has been subject to various legal proceedings and other similar claims that involved possible infringement of patent, other intellectual property rights of third parties or misappropriation of trade secrets. In the third quarter of fiscal year 2005, the Company and Linear Technology Corporation (LTC) settled their on-going patent litigation that was brought by LTC against Maxim and other unrelated parties concerning LTC’s United States Patent 5,481,178, which relates to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit. The settlement agreement resolved all legal claims between the LTC and the Company and their respective subsidiaries, and it provided for the license of LTC’s United States Patent 5,481,178 to the Company for use in current and future products. Under the terms of the settlement agreement, the Company paid LTC $40 million in the fourth quarter of fiscal year 2005 and will pay LTC additional amounts in fiscal year 2006 through fiscal year 2013. In the second quarter of fiscal year 2006, the Company and Qualcomm Inc. (Qualcomm) entered into a settlement agreement resolving patent litigation that had been brought by Qualcomm against the Company. The settlement agreement resolved all legal claims between Qualcomm and the Company and their respective subsidiaries. In addition to the above, the

 

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Company has received notices from time to time that allege its products or processes may be infringing the intellectual property rights of others.

 

If one or more of the Company’s products or processes were determined to infringe any such intellectual property rights of a third party, a court might enjoin the Company from further manufacture and/or sale of the affected products. The Company would then need to obtain a license from the holders of the rights and/or to reengineer the Company’s products or processes in such a way as to avoid the alleged infringement. In any of those cases, there can be no assurance that the Company would be able to obtain any necessary license on commercially reasonable terms acceptable to the Company or at all 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 which could have a material adverse effect on the Company’s result of operations and financial condition.

 

Insurance

 

The Company has insurance contracts with independent insurance companies that provide certain of its employees with health (medical and dental) benefits, worker’s compensation coverage, long term disability income coverage, life insurance coverage, and fiduciary insurance coverage for employee and Company funds invested under the Employee Retirement Income and Security Act. The Company is self-insured with respect to medical benefits for most of its domestic (United States) employees. The Company has insurance contracts with independent insurance companies that provide coverage related to certain property insurance, worker’s compensation insurance, and automobile insurance. In addition, the Company has insurance contracts that provide officer and director liability coverage for the Company’s officers and directors. Other than the specific areas mentioned above, the Company is self-insured as it relates to most of its risks and exposures. Based on management’s assessment and judgment, the Company has determined that it is more cost effective to self-insure these risks than to incur the insurance premium costs. The risks and exposures the Company self insures include, but are not limited to, fire, property and casualty, natural disaster, product defects, political risk, general liability, theft, counterfeits, patent infringement, and some employment practice matters. Should there be catastrophic loss from events such as fires, explosions, or earthquakes, among many other risks, or adverse court or similar decisions in any area in which the Company is self-insured, the Company’s financial condition, results of operations, and liquidity may be materially adversely affected.

 

Customer Supply Agreements

 

The Company enters into contracts with certain customers whereby the Company commits to supply quantities of specified parts at a predetermined scheduled delivery date. The number of such arrangements increased during fiscal year 2005 as this practice becomes more commonplace. Should the Company be unable to supply the customer with the specific part at the quantity and product quality desired at the scheduled delivery date, the customer may incur additional production costs. In addition, the customer may incur lost revenues due to a delay in receiving the parts necessary to have the end product ready for sale to its customers or due to product quality issues which may arise. Under the customer supply agreements, the Company may be liable for direct additional production costs or lost revenues. The Company tries to limit such liabilities. However, if products were not shipped on time or were quality deficient, the Company may be liable for resulting damages. Such liability, should it arise, may have a material adverse impact on the Company’s results of operation and financial condition.

 

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 and Thailand. Approximately

 

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74% of the Company’s net revenues in fiscal year 2005 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 are routinely 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.

 

The Company is subject to U.S. Customs and Export Regulations, including U.S. International Traffic and Arms Regulations and similar laws, which collectively control import, export, and sale of technologies by U.S. companies. Failure to comply with such regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product, which could have a material adverse impact on the Company’s results of operations and financial condition.

 

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 business unit managers, and on its ability to continue to attract, retain, and motivate qualified personnel. The competition for such employees is 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.

 

The Company does not maintain any key person life insurance policies on any of its officers or employees.

 

Long Range Plan

 

The Company has developed a long-range plan, which it has publicly announced. The Company strives to operate its business with the goal of achieving its long-range plan. However, it may not be possible for the Company to meet its long-range plan due to a variety of factors, including, but not limited to, economic and environment changes, the Company’s failure to perform or execute, and other risks identified in this offer to exchange document and in other reports and documents that the Company files from time to time with the Securities and Exchange Commission. Therefore, the Company’s long-range plan should not be taken as a promise or a predictor of future results, but as a company goal or plan.

 

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THE OFFER

 

1. Eligibility.

 

You are an “eligible service provider” if you are an employee, other than an officer, of Maxim or any of its subsidiaries located in Austria, Canada, China, Finland, France, Germany, India, Israel, Japan, Korea, Malaysia, the Netherlands, the Philippines, Singapore, Spain, Switzerland, Taiwan, Thailand, the United Kingdom or the United States as of February 1, 2006, and you remain an employee of Maxim or any of its subsidiaries located in such countries, or a successor entity thereto, at all times up to and through the cancellation date. Employees of Maxim subsidiaries located in any country not specifically listed in this paragraph will not be eligible to participate in this offer. Our executive officers and directors are listed on Schedule A to this offer.

 

To receive a grant of restricted stock units, you must remain employed by Maxim or any of its subsidiaries located in Austria, Canada, China, Finland, France, Germany, India, Israel, Japan, Korea, Malaysia, the Netherlands, the Philippines, Singapore, Spain, Switzerland, Taiwan, Thailand, the United Kingdom or the United States, or a successor entity thereto, through the restricted stock unit grant date, which will be the same U.S. business day as the cancellation date. If you do not remain employed by Maxim or any of its subsidiaries located in one of the countries named in the preceding sentence, or a successor entity thereto, through the restricted stock unit grant date, you will keep your current eligible options and they will remain subject to their current terms and conditions. If we do not extend the offer, the restricted stock unit grant date will be March 1, 2006. Unless expressly provided otherwise by the applicable laws of a jurisdiction outside the United States, your employment with Maxim or any of its subsidiaries will remain “at-will” and can be terminated by you or us (or the subsidiary employing you) at any time, with or without cause or notice. In order to vest in your restricted stock units and receive the shares of Common Stock upon settlement thereof, you must remain in continual service to Maxim or any of its subsidiaries located in Austria, Canada, China, Finland, France, Germany, India, Israel, Japan, Korea, Malaysia, the Netherlands, the Philippines, Singapore, Spain, Switzerland, Taiwan, Thailand, the United Kingdom or the United States, or a successor entity thereto, through each relevant vesting date.

 

2. Number of options; expiration date.

 

Subject to the terms and conditions of this offer, we will accept for exchange outstanding, vested, and unexercised options with an exercise price greater than or equal to $35 granted under our Stock Option Plans that are held by eligible service providers and that are properly tendered for exchange, and are not validly withdrawn, before the expiration date. In order to be eligible, options must be vested and outstanding immediately prior to 5:00 p.m., Pacific Standard Time, on March 1, 2006.

 

If you decide to participate in this offer, you may elect to exchange all or any portion of your eligible options, and you may pick and choose between particular option grants, including option grants that you have partially exercised.

 

For example and except as otherwise described below, if you hold (1) an eligible option to purchase 1,000 shares, 700 of which you have already exercised, (2) an eligible option to purchase 1,000 shares, and (3) an eligible option grant to purchase 3,000 shares, you may either elect to exchange all, none, or any partial amount of such outstanding eligible options. You may elect, for example, to exchange your first option grant with respect to options to purchase only 150 shares (or any other partial amount) under that grant, or you may elect to exchange only the shares under the second and third option grants but not under the first option grant.

 

Where an eligible option is subject to a domestic relations order (or comparable legal document resulting from the end of a marriage) such that some portion thereof is beneficially owned by a person who is not an eligible service provider, that portion may not be exchanged in this offer (even if legal title to that portion of the eligible option is held by an eligible service provider). However, the portion beneficially owned by the eligible service provider may be tendered in the offer to exchange. For instance, if you have an eligible option to

 

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purchase 3,000 shares that is subject to a domestic relations order, 1,000 of which are beneficially owned by your former spouse, and you have exercised 500 of the remaining 2,000 shares, then you may elect to participate in the offer and exchange shares from the portion of the option grant that you beneficially own covering the outstanding 1,500 shares.

 

If you participate in this offer, you may, subject to the terms and conditions described herein, exchange any of your properly tendered eligible options for restricted stock units. The number of restricted stock units that you will receive depends on:

 

  (i) the exercise price and the date on which your eligible options were originally granted;

 

  (ii) the price of our Common Stock on the expiration date of this offer; and

 

  (iii) which set of exchange ratios applies to your eligible options—either the Standard Exchange Ratios or the Minimum Value Exchange Ratios.

 

To determine the number of restricted stock units you will receive upon exchange of your eligible options, please refer to Schedule C. Schedule C displays two alternative sets of exchange ratios. The first set of exchange ratios—entitled “Standard Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option unless the Minimum Value Exchange Ratios apply. All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

The second set of exchange ratios—entitled “Minimum Value Exchange Ratios”—shows the number of restricted stock units that you will be issued in exchange for any given eligible option, based on the original grant date of that eligible option and the price of our Common Stock on the expiration date, and will apply to a given eligible option only if you are eligible to use the Minimum Value Exchange Ratios for that eligible option, and you elect to do so. You are eligible to use the applicable Minimum Value Exchange Ratio for any given eligible option if and only if it is greater than the applicable Standard Exchange Ratio for that same eligible option. In that case, you have a choice with respect to that eligible option: you may elect to use the applicable Minimum Value Exchange Ratio (and receive a greater number of restricted stock units than you would if you had elected to use the Standard Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date, OR you may elect to use the applicable Standard Exchange Ratio (and receive a lesser number of restricted stock units than you would if you had elected to use the Minimum Value Exchange Ratio), in which case the restricted stock units issued in exchange for that eligible option will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date.

 

Please note that, regardless which set of exchange ratios applies in any given case, the exchange ratios shall not increase further if our Common Stock price exceeds $48.00 on the expiration date. Please also note that the exchange ratios apply to each of your option grants separately. This means that the various options you have received may be subject to different exchange ratios.

 

Schedule D, which is included solely for your reference, shows the approximate dollar value we have assigned to each of your eligible options based on the original grant date of those eligible options and the price of our Common Stock on the expiration date, and are set forth in two groups. The first group—entitled “Standard Exchange Ratio—Approximate Dollar Values”—shows the approximate dollar value we have assigned to an eligible option if the Standard Exchange Ratios apply. The second group—entitled “Minimum Value Exchange Ratio—Approximate Dollar Values”—shows the approximate dollar value we have assigned to an eligible option if the Minimum Value Exchange Ratios apply.

 

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The examples set forth below will assist you in determining the number of restricted stock units to which you will be entitled upon exchange of your eligible options. For purposes of this offer, including the exchange ratios, the term “option” generally refers to an option to purchase one share of our Common Stock. For purposes of applying the exchange ratios, fractional restricted stock units will be rounded up to the nearest whole restricted stock unit on a grant-by-grant basis.

 

Example 1—If our Common Stock price is $38.00 on the expiration date:

 

(a)    1,000 options granted on October 22, 1999 will be exchanged for 203 restricted stock units (based on an exchange ratio of .2025 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. Please note that the Minimum Value Ratio for this option (.1818) is less than the Standard Exchange Ratio (.2025); accordingly, only the Standard Exchange Ratio applies.

 

(b)    1,000 options granted on May 11, 2000 will, at your election, be subject to either the Standard Exchange Ratio or the Minimum Value Exchange Ratio. If you choose the Standard Exchange Ratio, then those 1,000 options will be exchanged for 83 restricted stock units (based on an exchange ratio of .0823 restricted stock units for every one (1) eligible option and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. If you choose the Minimum Value Exchange Ratio, then those 1,000 options will be exchanged for 182 restricted stock units (based on an exchange ratio of .1818 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date.

 

Example 2—If our Common Stock price is $48.00 or higher on the expiration date:

 

(a)    1,000 options granted on October 22, 1999 will be exchanged for 325 restricted stock units (based on an exchange ratio of .3246 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. Please note that the Minimum Value Ratio for this option (.1649) is less than the Standard Exchange Ratio (.3246); accordingly, only the Standard Exchange Ratio applies.

 

(b)    1,000 options granted on May 11, 2000 will, at your election, be subject to either the Standard Exchange Ratio or the Minimum Value Exchange Ratio. If you choose the Standard Exchange Ratio, then those 1,000 options will be exchanged for 119 restricted stock units (based on an exchange ratio of .1189 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. If you choose the Minimum Value Exchange Ratio, then those 1,000 options will be exchanged for 165 restricted stock units (based on an exchange ratio of .1649 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date.

 

Example 3—If our Common Stock price is $43.00 (the midpoint between $38.00 and $48.00) on the expiration date:

 

(a)     1,000 options granted on October 22, 1999 will be exchanged for 266 restricted stock units (based on an exchange ratio of .2657 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. Please note that the Minimum Value Ratio for this option (.1839) is less than the Standard Exchange Ratio (.2657); accordingly, only the Standard Exchange Ratio applies.

 

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(b)    1,000 options granted on May 11, 2000 will, at your election, be subject to either the Standard Exchange Ratio or the Minimum Value Exchange Ratio. If you choose the Standard Exchange Ratio, then those 1,000 options will be exchanged for 100 restricted stock units (based on an exchange ratio of .0999 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. If you choose the Minimum Value Exchange Ratio, then those 1,000 options will be exchanged for 184 restricted stock units (based on an exchange ratio of .1839 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit), which will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date.

 

All restricted stock units will be subject to the terms of our 1996 Stock Incentive Plan (and, if you live and work in France, of the French sub-plan to the 1996 Stock Incentive Plan), and to a restricted stock unit agreement entered into between you and Maxim. The current form of restricted stock unit agreement for eligible service providers in the U.S. under the 1996 Stock Incentive Plan is attached as an exhibit to the Schedule TO on file with the Securities and Exchange Commission. If you live and work in a country outside the United States, you may receive a restricted stock unit agreement that has additional and/or different terms than the restricted stock unit agreement for eligible service providers in the U.S. This offer to exchange document has also been filed as an exhibit to the Schedule TO.

 

Unless extended, the expiration date for this offer will be 5:00 p.m., Pacific Standard Time, on March 1, 2006. We may, in our discretion, extend the offer, in which event the expiration date shall refer to the latest time and date at which the extended offer expires. See Section 16 of this offer to exchange for a description of our rights to extend, terminate and amend the offer.

 

3. Purposes of the offer.

 

The primary purpose of this offer is to foster retention of our valuable employees and better align their interests with those of our stockholders to maximize stockholder value. We issued the currently outstanding options to attract and retain the best available personnel and to provide additional incentive to our employees. Some of those outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price for our Common Stock. These options are commonly referred to as being “underwater.” Due to their vesting schedules, the restricted stock units will have greater employee retention value than the exchanged options and therefore benefit Maxim in its efforts to retain valuable employees. For eligible service providers, this offer is a voluntary opportunity to exchange eligible options for restricted stock units, which are more certain to provide liquidity than the exchanged options.

 

Separately, one beneficial consequence of this offer will be to reduce our stock option overhang. Stock options represent potential future issuance of shares, which would create dilution and may put downward pressure on stock prices. The measure of stock option usage is called “overhang,” defined most simply as stock options granted as a percentage of the total shares outstanding. Using this definition, our stock option overhang was approximately 31.75% as of the close of business on December 24, 2005. The exchange ratios selected for this offer will decrease the total number of options outstanding and therefore benefit stockholders by reducing potential stockholder dilution, while still providing a substantial incentive to our service providers to exert maximum efforts to increase the value of Maxim’s business.

 

We chose to make this offer instead of simply exchanging new options for a number of reasons. First, we believe this restricted stock unit exchange program will be more effective than an option exchange program would be at providing incentives to, and retaining, our employees. In addition, granting new options in exchange for existing options would reduce our overhang, but not as effectively as restricted stock units. This is because the exchange ratios for restricted stock units are higher than they would be for options and no new options will be granted as a result of the offer. Accordingly, we believe this program better serves the interests of Maxim and our employees and stockholders.

 

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Except as otherwise disclosed in this offer or in our SEC filings, we presently have no plans or proposals that relate to or would result in:

 

    Any extraordinary transaction, such as a merger, reorganization or liquidation involving Maxim;

 

    Any purchase, sale or transfer of a material amount of our assets;

 

    Any material change in our present dividend rate or policy, or our indebtedness or capitalization;

 

    Any change in our present board of directors or management, including a change in the number or term of directors or to fill any existing board vacancies or to change any executive officer’s material terms of employment;

 

    Any other material change in our corporate structure or business;

 

    Our Common Stock being de-listed from the Nasdaq National Market or not being authorized for quotation in an automated quotation system operated by a national securities association;

 

    Our Common Stock becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”);

 

    The suspension of our obligation to file reports pursuant to Section 15(d) of the Exchange Act;

 

    The acquisition by any person of an amount of our securities or the disposition of an amount of any of our securities; or

 

    Any change in our certificate of incorporation or bylaws, or any actions that may impede the acquisition of control of us by any person.

 

Neither we nor our board of directors makes any recommendation as to whether you should accept this offer, nor have we authorized any person to make any such recommendation. You should evaluate carefully all of the information in this offer and consult your own investment and tax advisors. You must make your own decision about whether to participate in this offer.

 

4. Procedures for electing to exchange options.

 

Proper Election to Exchange Options.

 

Participation in this offer is voluntary. To participate in this offer, you must, in accordance with the instructions of the election form, complete and sign the attached election form and deliver it by facsimile to Carl Jasper, our Chief Financial Officer, at fax number (408) 530-9176, or deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper at Stock Administration, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086 before 5:00 p.m., Pacific Standard Time, on March 1, 2006. Carl Jasper must receive the properly completed and signed election forms before the expiration date. Unless extended, the expiration date will be 5:00 p.m., Pacific Standard Time, on March 1, 2006.

 

If you participate in this offer, you may exchange your choice of eligible options. To help you identify your eligible options and to give you the tools to make an informed decision, we will distribute to you a summary of all your eligible options, broken down by grant date.

 

Your election to participate becomes irrevocable after 5:00 p.m., Pacific Standard Time, on March 1, 2006, unless the offer is extended past that time, in which case your election will become irrevocable after the new expiration date. The exception to this rule is that if we have not accepted your properly tendered eligible options by 5:00 p.m., Pacific Standard Time, on March 29, 2006, you may withdraw your options at any time thereafter. You may change your mind after you have submitted an election form and withdraw from the offer at any time before the expiration date, as described in Section 5. You may change your mind as many times as you wish, but

 

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you will be bound by the last properly-submitted election or withdrawal form we receive before the expiration date.

 

The delivery of all required documents, including election forms, is your sole responsibility. Delivery will be deemed made only when actually received by Maxim in one of the following ways: (1) you may fax the completed form to Carl Jasper, our Chief Financial Officer, at fax number (408) 530-9176, or (2) you may deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper, Stock Administration, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086. Responses submitted by any other means are not permitted. In all cases, you should allow sufficient time to ensure timely delivery. Only responses that are complete, signed and actually received by Carl Jasper by the deadline will be accepted.

 

We will strictly enforce the expiration date, subject only to an extension thereof that we may grant in our sole discretion. We reserve the right to reject any options tendered for exchange that we determine are not in appropriate form or that we determine are unlawful to accept. Subject to the terms and conditions of this offer, we will accept all properly tendered eligible options promptly after the expiration of this offer.

 

Our receipt of your election form does not, by itself, constitute our acceptance of your tendered options for exchange. Subject to our rights to terminate the offer, discussed in Section 16 of this offer to exchange document, we will accept promptly after the expiration date all properly tendered eligible options that are not validly withdrawn. We will give oral or written notice to our option holders generally that we have accepted such options for exchange, which notice may be delivered by press release, e-mail or other method of communication. Eligible options accepted for exchange will be cancelled on the cancellation date, which we presently expect will be March 1, 2006.

 

Determination of validity; rejection of options; waiver of defects; no obligation to give notice of defects.

 

We retain sole discretion to resolve all questions related to the validity, form, and eligibility (including time of receipt and acceptance) of any options. Our determination of these matters will be final and binding on all parties. We reserve the right to reject any election form or any options tendered for exchange that we determine are not in appropriate form or that we determine are unlawful to accept. We will accept all properly tendered options that are not validly withdrawn, subject to the terms of this offer. We also reserve the right to waive any of the conditions of the offer or any defect or irregularity in any tender of any particular options or for any particular option holder, provided that if we grant any such waiver, it will be granted with respect to all option holders and all tendered options. No tender of options will be deemed to have been properly made until all defects or irregularities have been cured or waived by us. Neither we nor any other person is obligated to give notice of any defects or irregularities in tenders, nor will anyone incur any liability for failure to give any notice.

 

Our acceptance constitutes an agreement.

 

Your election to exchange eligible options through the procedures described above constitutes your acceptance of the terms and conditions of this offer. Our acceptance of your eligible options for exchange will constitute a binding agreement between Maxim and you upon the terms and subject to the conditions of this offer.

 

5. Withdrawal rights and change of election.

 

You may withdraw all or any part of the options that you previously elected to exchange only in accordance with the provisions of this section.

 

To validly withdraw your previously-submitted election to exchange all or any part of your eligible options, you must sign, date and deliver a withdrawal form by facsimile to Carl Jasper, our Chief Financial Officer, at fax

 

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number (408) 530-9176, or deliver it by hand, interoffice mail, First Class United States Mail (or, for eligible service providers outside the U.S., an equivalent priority mail service), or private express mail (such as Federal Express, UPS or DHL) to Carl Jasper at Stock Administration, Maxim Integrated Products, Inc. 120 San Gabriel Drive, Sunnyvale, CA 94086 before 5:00 p.m., Pacific Standard Time, on March 1, 2006. If Maxim extends the expiration date, this withdrawal form must be received by Carl Jasper by the date and time of the extended expiration of the offer. You may change your mind as many times as you wish, but you will be bound by the last properly submitted election or withdrawal form we receive before the expiration date.

 

You may not rescind any withdrawal, and any eligible options withdrawn will be deemed not properly tendered for purposes of the offer, unless you properly re-elect to exchange those options before the expiration date. To re-elect to tender your previously-withdrawn options, you must, before the expiration date, submit a later-dated and signed election form with the required information form to Carl Jasper by following the procedures described in Section 4 of this offer to exchange document. Your new election form must include the required information regarding all of the eligible options you want to exchange, and must be signed and clearly dated after the date of your original election form and any withdrawal form you have submitted.

 

Neither we nor any other person is obligated to give you notice of any defects or irregularities in any withdrawal form or any new election form, nor will anyone incur any liability for failure to give any notice. We will determine, in our discretion, all questions as to the form and validity, including time of receipt, of withdrawal forms and new election forms. Our determination of these matters will be final and binding on all parties.

 

The delivery of all documents, including any withdrawal forms and any new election forms, is at your risk. Only responses that are complete, signed and actually received by Carl Jasper by the deadline will be accepted. Responses submitted by any means not specifically described in this Section 4 will not be accepted.

 

6. Acceptance of eligible options for exchange and issuance of restricted stock units.

 

Upon the terms and conditions of this offer and promptly following the expiration date, we will accept for exchange and cancel all eligible options properly tendered for exchange and not validly withdrawn before the expiration date. Once the options are cancelled, you will no longer have any rights with respect to those options. Subject to the terms and conditions of this offer, if your options are properly tendered for exchange and accepted by us, these options will be cancelled as of the cancellation date, which we anticipate to be March 1, 2006.

 

Subject to our rights to terminate the offer, discussed in Section 16 of this offer to exchange document, we will accept promptly after the expiration date all properly tendered eligible options that are not validly withdrawn. We will give oral or written notice to our option holders generally that we have accepted such options for exchange, which notice may be delivered by press release, e-mail or other method of communication.

 

We will grant the restricted stock units on the restricted stock unit grant date, which is the same U.S. business day as the cancellation date. We expect the restricted stock unit grant date to be March 1, 2006. All restricted stock units will be granted under our 1996 Stock Incentive Plan, as amended and restated, and will be subject to a restricted stock unit agreement between you and Maxim. The number of restricted stock units you will receive will be determined in accordance with the exchange ratios described in Section 2 of this offer to exchange document. Promptly after the expiration date, we will send you your restricted stock unit grant agreement. You will receive the shares of Common Stock issued upon settlement of your restricted stock units when and if your restricted stock units vest, in accordance with the vesting schedule described in Section 9 of this offer to exchange. If you live and work in France, a sale restriction may be imposed on the shares issued to you at vesting, in order to qualify for favorable tax treatment.

 

Options that we do not accept for exchange will remain outstanding and subject to their existing terms and conditions.

 

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7. Conditions of the offer.

 

Notwithstanding any other provision of this offer, we will not be required to accept any options tendered for exchange, and we may terminate the offer, or postpone our acceptance and cancellation of any options tendered for exchange, in each case subject to Rule 13e-4(f)(5) under the Exchange Act, if:

 

  (i) our Common Stock price is less than $38 on the expiration date; or

 

  (ii) at any time on or after the date this offer begins, and before the expiration date, any of the following events has occurred, or has been determined by us, in our reasonable judgment, to have occurred:

 

    There shall have been threatened or instituted or be pending any action, proceeding or litigation seeking to enjoin, make illegal or delay completion of the offer or otherwise relating in any manner, to the offer;

 

    Any order, stay, judgment or decree is issued by any court, government, governmental authority or other regulatory or administrative authority and is in effect, or any statute, rule, regulation, governmental order or injunction shall have been proposed, enacted, enforced or deemed applicable to the offer, any of which might restrain, prohibit or delay completion of the offer or impair the contemplated benefits of the offer to us (see Section 3 of this offer to exchange for a description of the contemplated benefits of the offer to us);

 

    There shall have occurred (i) any change, development, clarification or position taken in generally accepted accounting principles that could or would require us to record for financial reporting purposes compensation expense against our earnings in connection with the offer, other than as contemplated as of the commencement date of this offer, or (ii) any event or circumstance, including but not limited to increased volatility in the price of our common stock, that would require us to record for financial reporting purposes a compensation expense against our earnings in connection with the offer that is materially higher than that contemplated as of the commencement date of this offer (as described in Section 12);

 

    There shall have occurred:

 

    any general suspension of trading in, or limitation on prices for, our securities on any national securities exchange or in an over-the-counter market in the United States,

 

    the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States,

 

    any limitation, whether or not mandatory, by any governmental, regulatory or administrative agency or authority on, or any event that, in our reasonable judgment, might affect the extension of credit to us by banks or other lending institutions in the United States,

 

    in our reasonable judgment, any extraordinary or material adverse change in U.S. financial markets generally, including, a decline of at least 10% in either the Dow Jones Industrial Average, the Nasdaq Index or the Standard & Poor’s 500 Index from the date of commencement of the exchange offer,

 

    the commencement or continuation of a war or other national or international calamity directly or indirectly involving the United States, which could reasonably be expected to affect materially or adversely, or to delay materially, the completion of the exchange offer, or

 

    if any of the situations described above existed at the time of commencement of the exchange offer and that situation, in our reasonable judgment, deteriorates materially after commencement of the exchange offer;

 

    A tender or exchange offer, other than this exchange offer by us, for some or all of our shares of outstanding Common Stock, or a merger, acquisition or other business combination proposal involving us, shall have been proposed, announced or made by another person or entity or shall have been publicly disclosed or we shall have learned that:

 

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    any person, entity or “group” within the meaning of Section 13(d)(3) of the Exchange Act acquires more than 5% of our outstanding shares of Common Stock, other than a person, entity or group which had publicly disclosed such ownership with the SEC prior to the date of commencement of the exchange offer,

 

    any such person, entity or group which had publicly disclosed such ownership prior to such date shall acquire additional Common Stock constituting more than 1% of our outstanding shares, or

 

    any new group shall have been formed that beneficially owns more than 5% of our outstanding shares of Common Stock that in our judgment in any such case, and regardless of the circumstances, makes it inadvisable to proceed with the exchange offer or with such acceptance for exchange of eligible options;

 

    A tender or exchange offer, other than this exchange offer by us, for some or all of our shares of outstanding Common Stock, or a merger, acquisition or other business combination proposal involving us, shall have been proposed, announced or made by another person or entity or shall have been publicly disclosed;

 

    Any event or events occur that have resulted or is reasonably likely to result, in our reasonable judgment, in a material adverse change in our business or financial condition;

 

    Any event or events occur that have resulted or may result, in our reasonable judgment, in a material impairment of the contemplated benefits of the offer to us (see Section 3 of this offer to exchange for a description of the contemplated benefits of the offer to us); or

 

    Any rules or regulations by any governmental authority, the National Association of Securities Dealers, the Nasdaq National Market, or other regulatory or administrative authority or any national securities exchange have been enacted, enforced or deemed applicable to Maxim.

 

If any of the above events occur, we may:

 

    Terminate the exchange offer and promptly return all tendered eligible options to tendering holders;

 

    Complete and/or extend the exchange offer and, subject to your withdrawal rights, retain all tendered eligible options until the extended exchange offer expires;

 

    Amend the terms of the exchange offer; or

 

    Waive any unsatisfied condition and, subject to any requirement to extend the period of time during which the exchange offer is open, complete the exchange offer.

 

The conditions to this offer are for our benefit. We may assert them in our sole discretion regardless of the circumstances giving rise to them on or before the expiration date. We may waive any condition, in whole or in part, at any time and from time to time on or before the expiration date, in our sole discretion, whether or not we waive any other condition to the offer. Our failure at any time to exercise any of these rights will not be deemed a waiver of any such rights, but will be deemed a waiver of our ability to assert the condition that was triggered with respect to the particular circumstances under which we failed to exercise our rights. Any determination we make concerning the events described in this Section 7 will be final and binding upon all parties.

 

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8. Price range of shares underlying the options.

 

The Maxim Common Stock that underlies your options is traded on the Nasdaq National Market under the symbol “MXIM.” The following table shows, for the periods indicated, the high and low intraday sales price per share of our Common Stock as reported by the Nasdaq National Market.

 

     High

   Low

Fiscal Year Ending June 24, 2006

             

2nd Quarter

   $ 43.85    $ 33.28

1st Quarter

   $ 45.91    $ 37.82

Fiscal Year Ending June 25, 2005

             

4th Quarter

   $ 41.86    $ 36.60

3rd Quarter

   $ 44.40    $ 38.17

2nd Quarter

   $ 44.70    $ 40.87

1st Quarter

   $ 52.42    $ 39.27

Fiscal Year Ended June 26, 2004

             

4th Quarter

   $ 52.28    $ 45.25

3rd Quarter

   $ 55.99    $ 44.38

2nd Quarter

   $ 53.31    $ 39.39

1st Quarter

   $ 45.55    $ 34.10

Fiscal Year Ended June 28, 2003

             

4th Quarter

   $ 41.15    $ 33.85

3rd Quarter

   $ 40.51    $ 30.14

2nd Quarter

   $ 43.38    $ 21.35

1st Quarter

   $ 41.72    $ 23.54

 

On January 27, 2006, the closing price of our Common Stock as reported by the Nasdaq National Market was $42.26 per share.

 

You should evaluate current market quotes for our Common Stock, among other factors, before deciding whether or not to accept this offer.

 

9. Source and amount of consideration; terms of restricted stock units .

 

Consideration.

 

We will issue restricted stock units in exchange for eligible options tendered by you and accepted by us for such exchange. Restricted stock units are awards under which Maxim promises to issue shares of Common Stock in the future, provided the vesting criteria are satisfied. Subject to the terms and conditions of this offer, upon our acceptance of your properly tendered eligible options, you will be entitled to receive restricted stock units based on exchange ratios described in Section 2 of this offer to exchange document and fractional restricted stock units will be rounded up to the nearest whole restricted stock unit on a grant-by-grant basis.

 

If we receive and accept tenders from eligible service providers of all options eligible to be tendered and our Common Stock price is $38.00 on the expiration date, then, subject to the terms and conditions of this offer, we will grant restricted stock units which could result in the issuance of a total of approximately 3,860,291 shares of our Common Stock, or approximately 1.2% of the total shares of our Common Stock outstanding as of the close of business on December 24, 2005. If we receive and accept tenders from eligible service providers of all options eligible to be tendered and our Common Stock price is $48.00 on the expiration date, then, subject to the terms and conditions of this offer, we will grant restricted stock units which could result in the issuance of a total of approximately 5,040,476 shares of our Common Stock, or approximately 1.6% of the total shares of our Common Stock outstanding as of the close of business on December 24, 2005.

 

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General Terms of Restricted Stock Units.

 

Restricted stock units will be granted under our 1996 Stock Incentive Plan, as amended and restated. All restricted stock units will be subject to the terms of the 1996 Stock Incentive Plan (and, if you live and work in France, of the French sub-plan to the 1996 Stock Incentive Plan) and to a restricted stock unit agreement between you and Maxim. Your execution of the restricted stock unit agreement is a condition to receiving any restricted stock units. The terms and conditions of the restricted stock units may vary from the terms and conditions of the eligible options that you tendered for exchange.

 

The following description summarizes the material terms of our 1996 Stock Incentive Plan, as amended and restated. Our statements in this offer to exchange document concerning the plan and the restricted stock units are merely summaries and do not purport to be complete. The statements are subject to, and are qualified in their entirety by reference to, the 1996 Stock Incentive Plan, as amended and restated, and the forms of restricted stock unit agreement under that plan, which have been filed as exhibits to the Schedule TO of which this offer to exchange document is a part. Please contact us at Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, CA 94086, U.S.A., Attention: Carl Jasper (telephone: (408) 737-7600, ext. 4192), to receive a copy of the plan and/or the forms of restricted stock unit agreement thereunder. We will promptly furnish you copies of these documents upon request at our expense.

 

1996 Stock Incentive Plan.

 

The 1996 Stock Incentive Plan, as amended and restated, permits the granting of incentive stock options, nonstatutory stock options, restricted stock, or restricted stock units. As of the close of business on December 24, 2005, the maximum number of common shares subject to options currently outstanding under all of our Stock Option Plans, including our 1996 Stock Incentive Plan, is approximately 101,780,500 shares. The 1996 Stock Incentive Plan is administered by our board of directors or a committee appointed by our board of directors, which we refer to as the administrator. Subject to the other provisions of the plan, the administrator has the power to determine the terms, conditions and restrictions of the restricted stock units granted, including the number of restricted stock units, the form of payout and the vesting criteria.

 

Exercise Price.

 

The purchase price, if any, of a restricted stock unit granted under our 1996 Stock Incentive Plan generally is determined by the Administrator. The purchase price of a restricted stock unit granted under this offer will be the par value of our Common Stock which is equal to one tenth of one cent ($.001) and the par value shall be deemed paid by your past services rendered to Maxim (or its subsidiaries). As a result, you do not have to make any cash payment to Maxim to receive your restricted stock units.

 

Vesting.

 

The vesting applicable to a restricted stock unit granted under the 1996 Stock Incentive Plan generally is determined by the Administrator in accordance with the terms of the plan. The material vesting terms governing the restricted stock units to be granted in this offer are as follows:

 

    No portion of the restricted stock units will be vested on the restricted stock unit grant date.

 

    All restricted stock units issued in accordance with the Standard Exchange Ratios will vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/4th of the restricted stock units will vest on May 15, 2006, another 1/4th will vest on August 15, 2006, another 1/4th will vest on November 15, 2006, and the final 1/4th will vest on February 15, 2007. If you live or work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details.

 

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    All restricted stock units issued in accordance with the Minimum Value Exchange Ratios will vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date. In that case, if the restricted stock unit grant date is March 1, 2006 as expected, the first 1/6th of the restricted stock units will vest on May 15, 2006, another 1/6th will vest on August 15, 2006, another 1/6th will vest on November 15, 2006, another 1/6th will vest on February 15, 2007, another 1/6th will vest on May 15, 2007, and the final 1/6th will vest on August 15, 2007. If you live or work in France, the vesting of your restricted stock units may be different. Please refer to Schedule E for more details.

 

    Vesting of the restricted stock units is subject to your continuing to be employed by, or provide services to, Maxim or one of its subsidiaries through each relevant vesting date.

 

    Restricted stock units which do not vest will be forfeited to Maxim, and you will have no further rights with respect thereto.

 

    After the restricted stock units vest, continued service to us is not required to retain the shares of Common Stock issued upon settlement the restricted stock units.

 

    We will make minor modifications to the vesting schedule of any restricted stock units to eliminate fractional vesting (such that a whole number of restricted stock units will vest on each vesting date); this will be done by rounding down to the nearest whole number of restricted stock units that will vest on a particular vesting date. Fractional shares that do not vest on a particular date as a result of such rounding will be carried forward to the next scheduled vesting date.

 

Example 1: Suppose you tender for exchange 1,000 eligible options that were granted to you on May 11, 2000 and our Common Stock price is $38.00 on the expiration date. If you elect to use the Standard Exchange Ratio, you will be issued 83 restricted stock units (based on an exchange ratio of .0823 restricted stock units for every one (1) eligible option). Those 83 restricted stock units would vest in four equal quarterly installments over the approximate twelve (12) month period following the restricted stock unit grant date, subject to your continued service through each relevant vesting date, as follows:

 

    25% (approximately 20 restricted stock units, rounding down to the nearest whole restricted stock unit) would vest on May 15, 2006;

 

    25% (approximately 21 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on August 15, 2006;

 

    25% (approximately 21 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on November 15, 2006; and

 

    25% (approximately 21 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date) would vest on February 15, 2007.

 

Example 2: Suppose you tender for exchange 1,000 eligible options granted on May 11, 2000 and our Common Stock price is $38.00 on the expiration date. If you elect to use the Minimum Value Exchange Ratio, you will be issued 182 restricted stock units (based on an exchange ratio of .1818 restricted stock units for every one (1) eligible option, and rounding up to the nearest whole restricted stock unit). Those 182 restricted stock units would vest in six equal quarterly installments over the approximate eighteen (18) month period following the restricted stock unit grant date, subject to your continued service through each relevant vesting date, as follows:

 

    16 2/3% (approximately 30 restricted stock units, rounding down to the nearest whole restricted stock unit) would vest on May 15, 2006;

 

    16 2/3% (approximately 30 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on August 15, 2006;

 

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    16 2/3% (approximately 31 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting dates) would vest on November 15, 2006;

 

    16 2/3% (approximately 30 restricted stock units, rounding down to the nearest whole restricted stock unit) would vest on February 15, 2007;

 

    16 2/3% (approximately 30 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting date, and rounding down to the nearest whole restricted stock unit) would vest on May 15, 2007; and

 

    16 2/3% (approximately 31 restricted stock units, after taking account of the fractional restricted stock units carried forward from the previous vesting dates) would vest on August 15, 2007.

 

Form of Payout.

 

The administrator of the 1996 Stock Incentive Plan generally determines the form of payout of restricted stock units granted thereunder, which may be in cash, shares of Common Stock or a combination of the two. Restricted stock units granted under this offer and subsequently earned by a recipient will be paid out in shares of our Common Stock. Maxim may, in its discretion, withhold a portion of the vested restricted stock units that have an aggregate market value sufficient to pay the minimum federal, state, foreign and local income, employment and any other applicable taxes and/or social security contributions required to be withheld by us. Although not obligated to do so, Maxim intends to automatically withhold a sufficient number of otherwise distributable shares of Common Stock when restricted stock units vest to satisfy the applicable tax and social security withholding obligations.

 

Adjustments Upon Certain Events.

 

Events Occurring before the Restricted Stock Unit Grant Date. Although we are not anticipating any such merger or acquisition, if we merge or consolidate with or are acquired by another entity, prior to the expiration of the offer, you may choose to withdraw any options which you tendered for exchange and your options will be treated in accordance with the option plan under which they were granted and your option agreement. Further, if Maxim is acquired prior to the expiration of the offer, we reserve the right to withdraw the offer, in which case your options and your rights under them will remain intact and exercisable for the time period set forth in your option agreement and you will receive no restricted stock units in exchange for them. If Maxim is acquired prior to the expiration of the offer but does not withdraw the offer, we (or the successor entity) will notify you of any material changes to the terms of the offer or the new restricted stock units, including any adjustments to the purchase price and number of shares that will be subject to the restricted stock units. Under such circumstances, the type of security and the number of shares covered by your restricted stock unit award would be adjusted based on the consideration per share given to holders of our Common Stock in connection with the acquisition. As a result of this adjustment, you may receive restricted stock units covering more or fewer shares of the acquiror’s Common Stock than the number of shares subject to the eligible options that you tendered for exchange or than the number you would have received pursuant to the restricted stock units if no acquisition had occurred.

 

A transaction involving us, such as a merger or other acquisition, could have a substantial effect on our stock price, including significantly increasing the price of our Common Stock. Depending on the structure and terms of this type of transaction, option holders who elect to participate in the offer might be deprived of the benefit of the appreciation in the price of our Common Stock resulting from the merger or acquisition. This could result in a greater financial benefit for those option holders who did not participate in this offer and retained their original options.

 

Finally, if another company acquires us, that company may, as part of the transaction or otherwise, decide to terminate some or all of our employees before the completion of this option exchange program. Termination of your employment for this or any other reason before the restricted stock unit grant date means that the tender of

 

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your eligible options will not be accepted, you will keep your tendered options in accordance with their original terms, and you will not receive any restricted stock units or other benefit for your tendered options.

 

Events Occurring after the Restricted Stock Unit Grant Date. If a change in our capitalization, such as a stock split, reverse stock split, stock dividend, combination or reclassification or other similar event, occurs after the restricted stock unit grant date, an appropriate adjustment will be made to the number and purchase price of shares subject to each restricted stock unit, without any change in the aggregate purchase price.

 

Our 1996 Stock Incentive Plan provides that if we merge or if our property or stock is acquired by another corporation, each restricted stock unit may be assumed by the successor corporation or an equivalent restricted stock right may be substituted for the restricted stock right by the successor corporation.

 

Transferability of Restricted Stock Units.

 

Restricted stock units generally may not be transferred, other than by will or the laws of descent and distribution, unless the administrator indicates otherwise in your restricted stock unit agreement. In the event of your death, any person who acquires the right to exercise the restricted stock units by bequest or inheritance may be issued shares of Common Stock upon settlement of vested restricted stock units.

 

Registration of Shares Underlying Restricted Stock Units.

 

All shares of Common Stock issuable upon settlement of restricted stock units have been registered under the Securities Act of 1933, as amended (the “Securities Act”), on registration statements on Form S-8 filed with the SEC. Unless you are a service provider who is considered an affiliate of Maxim for purposes of the Securities Act, you will be able to sell the shares issuable upon exercise of your restricted stock units free of any transfer restrictions under applicable U.S. securities laws. Please note that, if you are a service provider in France, a sale restriction may be imposed on the shares issued to you at vesting, in order to qualify for favorable tax treatment.

 

U.S. Federal Income Tax Consequences.

 

You should refer to Section 14 of this offer to exchange document for a discussion of the U.S. federal income tax consequences of the restricted stock units and exchanged options, as well as the consequences of accepting or rejecting this offer. If you are a citizen or resident of the United States, but are also subject to the tax laws of another non-U.S. jurisdiction, you should be aware that there might be other tax and social insurance consequences in more than one country that may apply to you. If you are a tax resident of a country outside the United States, please refer to Schedule E for a discussion of the tax consequences and other considerations applicable to the exchange and your restricted stock units. We strongly recommend that you consult with your own advisors to discuss the consequences to you of this transaction.

 

Income Tax Consequences Outside the United States.

 

If you are a resident of, or are otherwise subject to, the tax laws in a country outside the United States, you should refer to Schedule E of this offer to exchange for a discussion of the income tax consequences of the restricted stock units and exchanged options, as well as the consequences of accepting or rejecting this offer. If you are subject to the tax laws of one of these countries, but also are subject to the tax laws of another country, you should be aware that there may be other tax and social insurance consequences for more than one country which may apply to you. We strongly recommend that you consult with your own advisors to discuss the consequences to you of this transaction.

 

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10. Information concerning Maxim.

 

Our principal executive offices are located at 120 San Gabriel Drive, Sunnyvale, CA 94086 U.S.A., and our telephone number is (408) 737-7600. Questions regarding this option exchange should be directed to Tim Ruehle, our Corporate Treasurer, at (408) 737-7600, ext. 7126.

 

We design, develop, and manufacture linear and mixed-signal integrated circuits (ICs). Maxim designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits for use in a variety of electronic products. Maxim circuits “connect” the real world and the digital world by detecting, measuring, amplifying, and converting real world and communication signals, such as temperature, pressure, sound, voice, or light into the digital signals necessary for computer and DSP processing. Our products are used in a wide variety of microprocessor-based electronics equipment, including personal computers and peripherals, process control, instrumentation, test equipment, handheld devices, wireless and fiber communications, and video displays.

 

The financial information included in our annual report on Form 10-K for the fiscal year ended June 25, 2005 and our quarterly report on Form 10-Q for the fiscal quarter ended September 24, 2005 is incorporated herein by reference. Please see Section 18 of this offer to exchange entitled, “Additional Information,” for instructions on how you can obtain copies of our SEC filings, including filings that contain our financial statements.

 

We had a book value per outstanding share of $8.22 as of the close of business on September 24, 2005. We have no fixed charges.

 

11. Interests of executive officers and directors; transactions and arrangements concerning the options.

 

A list of our executive officers and directors is attached to this offer to exchange document as Schedule A. As of the close of business on January 25, 2006, our executive officers and directors (17 persons) as a group held options unexercised and outstanding under our Stock Option Plans to purchase a total of 17,256,950 of our shares of Common Stock, which represented approximately 16.39% of the shares of Common Stock subject to all options outstanding under our Stock Option Plans as of that date.

 

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The following tables below sets forth the beneficial ownership of each of our executive officers and directors of options outstanding as of the close of business on January 25, 2006 issued under our Stock Option Plans. The percentages in the tables below are based on the total number of outstanding options (i.e., whether or not eligible for exchange) to purchase shares of our Common Stock under our Stock Option Plans, which was 107,133,574 as of the close of business on January 25, 2006.

 

Name

  Position

 

Number of Shares

Covered by Our

Stock Option

Plans


 

Percentage
of Total
Outstanding

Options

Under Our

Stock Option

Plans


John F. Gifford   President, Chief Executive Officer and
Chairman of the Board of Directors
  5,278,726   4.93%
Pirooz Parvarandeh   Group President   1,685,449   1.57%
Tunc Doluca   Group President   1,761,420   1.64%
Vijay Ullal   Senior Vice President   1,844,211   1.72%
Richard C. Hood   Vice President   1,129,387   1.05%
Nasrollah Navid   Vice President   1,198,000   1.12%
Carl W. Jasper   Vice President, Chief Financial
Officer, and Principal Accounting Officer
  803,000   0.75%
Rob B. Georges   Vice President   622,459   0.58%
Jennifer E. Gilbert   Vice President   639,493   0.60%
Kenneth J. Huening   Vice President   636,159   0.59%
Charles G. Rigg   Vice President   663,291   0.62%
Viktor Zekeriya   Vice President   585,355   0.55%
James R. Bergman   Director   84,000   0.08%
Michael J. Byrd   Director   78,000   0.07%
Peter de Roetth   Director   72,000   0.07%
B. Kipling Hagopian   Director   84,000   0.08%
A. R. Frank Wazzan   Director   92,000   0.09%

 

Except as otherwise set forth in the bullet points below, neither we, nor, to the best of our knowledge, any of our executive officers or directors, nor any affiliates of ours, were engaged in transactions involving options to purchase our Common Stock or a restricted stock grant or purchase under the Stock Option Plans, or in transactions involving our Common Stock during the past 60 days before and including February 1, 2006.

 

    On December 8, 2005, the Bergman Family Foundation, a family foundation of James R. Bergman, sold 4,000 shares of Common Stock at $39.285 per share.

 

    On December 28, 2005, Richard C. Hood exercised an option to purchase 7,110 shares of Common Stock at $14.06 per share, and then immediately resold those same 7,110 shares on the same day at $37.30 per share.

 

    On January 10, 2006, John F. Gifford exercised an option to purchase 200,000 shares of Common Stock at $14.53 per share.

 

12. Status of options acquired by us in the offer; accounting consequences of the offer.

 

Options that we acquire through this exchange offer and that were granted under our Stock Option Plans will be cancelled and the shares subject to those options will be returned to the pool of shares available for grants of new awards under our 1996 Stock Incentive Plan. To the extent shares returning to this plan are not fully reserved for issuance upon exercise of the restricted stock units to be granted in connection with the offer, the shares will be available for future awards to employees and other eligible plan participants, without further

 

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stockholder action, except as required by applicable law or the rules of the Nasdaq National Market or any other securities quotation system or any stock exchange on which our shares are then quoted or listed. Under the terms of the 1996 Stock Incentive Plan, every share of Common Stock subject to a restricted stock unit will count as two shares of Common Stock for purposes of calculating the number of shares available for grant under the 1996 Stock Incentive Plan.

 

We will be required to reflect an accounting charge in our income statements as a result of this exchange program only if restricted stock units are issued in accordance with the Minimum Value Exchange Ratios, in which case the charge will be spread evenly over a period of approximately six (6) quarters. For example, if our Common Stock price is $40.00 on the expiration date, and all eligible options are tendered in exchange for restricted stock units using the Minimum Value Exchange Ratios, we expect that an aggregate charge of $20,000,000 will result. Assuming that all of the restricted stock units remain outstanding and continue to vest, this charge will be spread evenly over the six-quarter vesting period of the restricted stock units. However, various factors could result in a larger accounting charge, such as increased volatility in our Common Stock price. These factors are out of our control and difficult to predict at this time.

 

Notwithstanding any other provision of this offer, we will not be required to accept any options tendered for exchange, and we may terminate the offer, or postpone our acceptance and cancellation of any options tendered for exchange, in each case, subject to Rule 13e-4(f)(5) under the Exchange Act, if at any time on or after the date this offer begins, and before the expiration date, either of the following events has occurred, or has been determined by us, in our reasonable judgment, to have occurred: (i) any change, development, clarification or position taken in generally accepted accounting principles that could or would require us to record for financial reporting purposes compensation expense against our earnings in connection with the offer, other than as contemplated as of the commencement date of this offer, or (ii) any event or circumstance, including but not limited to increased volatility in the price of our common stock, that would require us to record for financial reporting purposes a compensation expense against our earnings in connection with the offer that is materially higher than that contemplated as of the commencement date of this offer.

 

13. Legal matters; regulatory approvals.

 

We are not aware of any license or regulatory permit that appears to be material to our business that might be adversely affected by our exchange of options and issuance of restricted stock units as contemplated by the offer, or of any approval or other action by any government or governmental, administrative or regulatory authority or agency or any Nasdaq listing requirements that would be required for the acquisition or ownership of our options as contemplated herein, except for certain exemption or notice filings that may be required in certain countries outside the United States. Should any additional approval, exemptive filing, notice filing or other action be required, we presently contemplate that we will seek such approval, make such filing or take such other action. We cannot assure you that any such approval, filing or other action, if needed, could be obtained or what the conditions imposed in connection with such approvals or filings would entail or whether the failure to obtain any such approval, make such filings or other action would result in adverse consequences to our business. Our obligation under the offer to accept tendered options for exchange and to issue restricted stock units for tendered options is subject to the conditions described in Section 7 of this offer to exchange.

 

If we are prohibited by applicable laws or regulations from granting restricted stock units or required to obtain a license or regulatory permit or make any other filing before granting restricted stock units on the restricted stock unit grant date, we will not grant any restricted stock units unless we obtain the necessary license or make the requisite filing. We are unaware of any such prohibition at this time which cannot be satisfied by obtaining a license or permit or making a filing, and we will use reasonable efforts to effect the grant, but if the grant is prohibited on the restricted stock unit grant date we will not grant any restricted stock units and you will not receive any other benefit for the options you tendered and your eligible options will not be accepted for exchange.

 

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14. Material U.S. federal income tax consequences.

 

The following is a summary of the material U.S. federal income tax consequences of the exchange of eligible options for restricted stock units pursuant to the offer for those eligible service providers subject to U.S. federal income tax. This discussion is based on the Internal Revenue Code, its legislative history, treasury regulations thereunder and administrative and judicial interpretations as of the date of this offering circular, all of which are subject to change, possibly on a retroactive basis. This summary does not discuss all of the tax consequences that may be relevant to you in light of your particular circumstances, nor is it intended to be applicable in all respects to all categories of option holders. If you are a citizen or a resident of the United States, but are also subject to the tax laws of another country, you should be aware that there might be other tax and social security consequences in more than one country that may apply to you.

 

We recommend that you consult your own tax advisor with respect to the United States federal, state and local tax consequences of participating in the offer, as the tax consequences to you are dependent on your individual tax situation.

 

Option holders who exchange outstanding options for restricted stock units generally will not be required to recognize income for U.S. federal income tax purposes at the time of the exchange. We believe that the exchange will be treated as a non-taxable exchange.

 

Restricted Stock Units.

 

You generally will not have taxable income at the time you are granted a restricted stock unit. Instead, you will recognize ordinary income when the restricted stock unit vests and no longer can be forfeited, at which time Maxim will also generally have a tax withholding obligation. The amount of ordinary income you recognize will equal the fair market value of the shares on the vesting date, less the amount, if any, you paid for the shares. Although not obligated to do so, Maxim intends to automatically withhold a sufficient number of otherwise distributable shares of Common Stock when restricted stock units vest to satisfy all tax withholding obligations.

 

We recommend that you consult your own tax advisor with respect to the federal, state and local tax consequences of participating in the offer.

 

In addition, if you are a resident of more than one country, you should be aware that there might be tax and social insurance consequences for more than one country that may apply to you. We strongly recommend that you consult with your own advisors to discuss the consequences to you of this transaction.

 

Stock Options.

 

If you participate in this offer, your eligible options will be exchanged for restricted stock units. So that you are able to compare the tax consequences of new restricted stock units to that of your eligible options, we have included the following summary as a reminder of the tax consequences generally applicable to options under U.S. federal tax law.

 

Incentive Stock Options.

 

Under current U.S. tax law, an option holder will not realize taxable income upon the grant of an incentive stock option. In addition, an option holder generally will not realize taxable income upon the exercise of an incentive stock option. However, an option holder’s alternative minimum taxable income will be increased by the amount that the aggregate fair market value of the shares underlying the option, which is generally determined as of the date of exercise, exceeds the aggregate exercise price of the option. Except in the case of an option holder’s death or disability, if an option is exercised more than three (3) months after the option holder’s termination of employment, the option ceases to be treated as an incentive stock option and is subject to taxation under the rules that apply to nonstatutory stock options.

 

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If an option holder sells the option shares acquired upon exercise of an incentive stock option, the tax consequences of the disposition depend upon whether the disposition is qualifying or disqualifying. The disposition of the option shares is qualifying if it is made:

 

    more than 2 years after the date the incentive stock option was granted (the new option grant date); and

 

    more than 1 year after the date the incentive stock option was exercised.

 

If the disposition of the option shares is qualifying, any excess of the sale price of the option shares over the exercise price of the option will be treated as long-term capital gain taxable to the option holder at the time of the sale. Any such capital gain will be taxed at the long-term capital gain rate in effect at the time of sale.

 

If the disposition is not qualifying, which we refer to as a “disqualifying disposition,” the excess of the fair market value of the option shares on the date the option was exercised (or, if less, the amount realized on the disposition of the shares) over the exercise price will be taxable income to the option holder at the time of the disposition.

 

Of that income, the amount up to the excess of the fair market value of the shares at the time the option was exercised over the exercise price will be ordinary income for income tax purposes and the balance, if any, will be long-term or short-term capital gain, depending upon whether or not the shares were sold more than 1 year after the option was exercised.

 

Unless an option holder engages in a disqualifying disposition, we will not be entitled to a deduction with respect to an incentive stock option. If an option holder engages in a disqualifying disposition, we will be entitled to a deduction equal to the amount of compensation income taxable to the option holder.

 

Nonstatutory Stock Options.

 

Under current law, an option holder generally will not realize taxable income upon the grant of a nonstatutory stock option granted with an exercise price equal to the fair market value of the underlying stock on the date of grant. However, when an option holder exercises the option, the difference between the exercise price of the option, and the fair market value of the shares subject to the option on the date of exercise will be compensation income taxable to the option holder.

 

We will be entitled to a deduction equal to the amount of compensation income taxable to the option holder if we comply with eligible reporting requirements.

 

Upon disposition of the shares, any gain or loss is treated as capital gain or loss. If you were an employee at the time of the grant of the option, any income recognized upon exercise of a nonstatutory stock option generally will constitute wages for which tax withholding will be required.

 

Note that as a result of the American Jobs Creation Act of 2004, options amended in a certain manner or granted with an exercise price that was lower than the fair market value of the underlying shares at the time of grant may be taxable to you before you exercise your option. As of the date of this offer, how such options will be taxed is unclear.

 

15. Material income tax consequences and certain other considerations for employees who reside outside

the United States,

 

Attached hereto as Schedule E are short summaries of the general tax consequences of the offer to exchange and certain other considerations in countries outside the United States where residents are eligible to participate in the offer to exchange. If you are subject to the tax laws in any of these countries, please see Schedule E attached hereto for information regarding the tax and social security consequences to you of participating in the

 

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offer to exchange. You should review the information carefully and consult your own tax advisor regarding your personal situation before deciding whether or not to participate in the offer.

 

If you are subject to the tax laws in more than one country, you should be aware that there may be other tax and social insurance consequences in more than one country that may apply to you.

 

We recommend that you consult your own tax or other legal advisor to discuss the tax, social insurance and other consequences of this transaction.

 

16. Extension of offer; termination; amendment.

 

We reserve the right, in our sole discretion, at any time and regardless of whether or not any event listed in Section 7 of this offer to exchange has occurred or is deemed by us to have occurred, to extend the period of time during which the offer is open and delay the acceptance for exchange of any eligible options. If we elect to extend the period of time during which this offer is open, we will give you oral or written notice of the extension and delay, as described below. If we extend the expiration date, we will also extend your right to withdraw tenders of eligible options until such extended expiration date. In the case of an extension, we will issue a press release, e-mail or other form of communication no later than 6:00 a.m., Pacific Standard Time, on the next U.S. business day after the previously-scheduled expiration date.

 

We also reserve the right, in our reasonable judgment, before the expiration date to terminate or amend the offer and to postpone our acceptance and cancellation of any eligible options tendered for exchange if any of the events listed in Section 7 of this offer to exchange occurs, by giving oral or written notice of the termination or postponement to you or by making a public announcement of the termination. Our reservation of the right to delay our acceptance and cancellation of options elected to be exchanged is limited by Rule 13e-4(f)(5) under the Exchange Act which requires that we must pay the consideration offered, or return the tendered options, promptly after termination or withdrawal of a tender offer.

 

Subject to compliance with applicable law, we further reserve the right, before the expiration date, in our discretion, and regardless of whether any event listed in Section 7 of this offer to exchange has occurred or is deemed by us to have occurred, to amend the offer in any respect, including by decreasing or increasing the consideration offered in this offer to option holders or by decreasing or increasing the number of options being sought in this offer. As a reminder, if a particular option grant expires after commencement, but before cancellation under the offer, that particular option grant is not eligible for exchange. Therefore, if we extend the offer for any reason and if a particular option that was tendered before the originally-scheduled expiration of the offer expires after such originally-scheduled expiration date but before the actual cancellation date under the extended offer, that option would not be eligible for exchange in connection with this offer.

 

The minimum period during which the offer will remain open following material changes in the terms of the offer or in the information concerning the offer, other than a change in the consideration being offered by us or a change in amount of existing options sought, will depend on the facts and circumstances of such change, including the relative materiality of the terms or information changes. If we modify the number of eligible options being sought in this offer or the consideration being offered by us for the eligible options in this offer, the offer will remain open for at least ten (10) U.S. business days from the date of notice of such modification. If any term of the offer is amended in a manner that we determine constitutes a material change adversely affecting any holder of eligible options, we will promptly disclose the amendments in a manner reasonably calculated to inform holders of eligible options of such amendment, and we will extend the offer’s period so that at least five (5) U.S. business days, or such longer period as may be required by the tender offer rules, remain after such change.

 

For purposes of the offer, a “business day” means any day other than a Saturday, Sunday or a U.S. federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, Eastern Standard Time.

 

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Table of Contents
17. Fees and expenses.

 

We will not pay any fees or commissions to any broker, dealer or other person for soliciting options to be exchanged through this offer.

 

18. Additional information.

 

This offer to exchange document is part of a Tender Offer Statement on Schedule TO that we have filed with the SEC. This offer to exchange document does not contain all of the information contained in the Schedule TO or the exhibits to the Schedule TO. We recommend that you review the Schedule TO, including its exhibits, and the following materials that we have filed with the SEC before making a decision on whether to elect to exchange your options:

 

  1. Our quarterly report on Form 10-Q for our fiscal quarter ended September 24, 2005, filed with the SEC on November 3, 2005;

 

  2. Our definitive proxy statement on Schedule 14A for our 2005 annual meeting of stockholders, filed with the SEC on October 7, 2005;

 

  3. Our annual report on Form 10-K for our fiscal year ended June 25, 2005, filed with the SEC on September 8, 2005;

 

  4. Our current reports on Form 8-K filed with the SEC on December 20, 2004, February 1, 2005, February 9, 2005, May 3, 2005, August 1, 2005, August 25, 2005, October 12, 2005, October 27, 2005, November 3, 2005, and January 25, 2006; and

 

  5. The description of our Common Stock contained in our registration statement on Form 8-A filed with the SEC on February 11, 1988, and any further amendment or report filed thereafter for the purpose of updating such description.

 

These filings, our other annual, quarterly and current reports, our proxy statements and our other SEC filings may be examined, and copies may be obtained, at the SEC’s public reference room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public on the SEC’s Internet site at http://www.sec.gov.

 

Each person to whom a copy of this offer to exchange is delivered may obtain a copy of any or all of the documents to which we have referred you, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents, at no cost, by writing to us at Maxim Integrated Products, 120 San Gabriel Drive, Sunnyvale, CA 94086 U.S.A., Attention: Carl Jasper, or by telephoning Carl Jasper at (408) 737-7600, ext. 4192.

 

As you read the documents listed above, you may find some inconsistencies in information from one document to another. If you find inconsistencies between the documents, or between a document and this offer to exchange, you should rely on the statements made in the most recent document.

 

The information contained in this offer to exchange document about us should be read together with the information contained in the documents to which we have referred you, in making your decision as to whether or not to participate in this offer.

 

19. Financial statements.

 

Attached as Schedule B to this offer are our financial statements included in our annual report on Form 10-K for our fiscal year ended June 25, 2005, and in our quarterly report on Form 10-Q for our fiscal quarter ended September 24, 2005. More complete financial information may be obtained by accessing our public filings with the SEC by following the instructions in Section 18 of this offer to exchange.

 

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20. Miscellaneous.

 

We are not aware of any jurisdiction where the making of the offer is not in compliance with applicable law. If we become aware of any jurisdiction where the making of the offer is not in compliance with any valid applicable law, we will make a good faith effort to comply with such law. If, after such good faith effort, we cannot comply with such law, the offer will not be made to, nor will options be accepted from the option holders residing in such jurisdiction.

 

We have not authorized any person to make any recommendation on our behalf as to whether you should elect to exchange your options through the offer. You should rely only on the information in this document or documents to which we have referred you. We have not authorized anyone to give you any information or to make any representations in connection with the offer other than the information and representations contained in this offer to exchange and in the related option exchange program documents. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us.

 

Maxim Integrated Products, Inc.

February 1, 2006

 

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SCHEDULE A

 

INFORMATION CONCERNING THE EXECUTIVE OFFICERS AND DIRECTORS OF MAXIM INTEGRATED PRODUCTS, INC.

 


 

The directors and executive officers of Maxim Integrated Products, Inc. are set forth in the following table:

 

Name


  

Position and Offices Held


John F. Gifford

   President, Chief Executive Officer and Chairman of the Board of Directors

Pirooz Parvarandeh

   Group President

Tunc Doluca

   Group President

Vijay Ullal

   Senior Vice President

Richard C. Hood

   Vice President

Nasrollah Navid

   Vice President

Carl W. Jasper

   Vice President, Chief Financial Officer, and Principal Accounting Officer

Rob B. Georges

   Vice President

Jennifer E. Gilbert

   Vice President

Kenneth J. Huening

   Vice President

Charles G. Rigg

   Vice President

Viktor Zekeriya

   Vice President

James R. Bergman

   Director

Michael J. Byrd

   Director

Peter de Roetth

   Director

B. Kipling Hagopian

   Director

A. R. Frank Wazzan

   Director

 

The address of each executive officer and director is: c/o Maxim Integrated Products, Inc. 120 San Gabriel Drive, Sunnyvale, CA 94086 U.S.A.

 

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SCHEDULE B

 

FINANCIAL STATEMENTS OF MAXIM INTEGRATED PRODUCTS, INC.

 


 

AUDITED FINANCIAL STATEMENTS INCLUDED IN MAXIM’S FORM 10-K FOR FISCAL YEAR ENDING JUNE 25, 2005

 


CONSOLIDATED BALANCE SHEETS

 

     June 25,
2005


    June 26,
2004


 
     (Amounts in thousands,
except par value)
 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 185,551     $ 147,734  

Short-term investments

     1,289,141       948,879  
    


 


Total cash, cash equivalents and short-term investments

     1,474,692       1,096,613  
    


 


Accounts receivable, (net of allowances $14,007 in 2005 and $13,442 in 2004)

     192,345       197,158  

Inventories

     167,779       117,785  

Deferred tax assets

     128,766       153,694  

Other current assets

     10,184       12,864  
    


 


Total current assets

     1,973,766       1,578,114  
    


 


Property, plant and equipment, net

     1,001,465       942,186  

Other assets

     28,840       29,162  
    


 


TOTAL ASSETS

   $ 3,004,071     $ 2,549,462  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 56,266     $ 93,856  

Income taxes payable

     33,173       19,339  

Accrued salary and related expenses

     121,234       103,283  

Accrued expenses

     54,305       79,409  

Deferred income on shipments to distributors

     20,225       22,858  
    


 


Total current liabilities

     285,203       318,745  
    


 


Other liabilities

     —         4,000  

Deferred tax liabilities

     134,686       114,399  
    


 


Total liabilities

     419,889       437,144  
    


 


Commitments and contingencies (Note 8)

                

Stockholders’ equity:

                

Preferred stock, $0.001 par value

                

Authorized: 2,000 shares

                

Issued and outstanding: none

     —         —    

Common stock, $0.001 par value

                

Authorized: 960,000 shares

                

Issued and outstanding: 327,494 in 2005 and 324,444 in 2004

     327       325  

Additional paid-in capital

     134,671       80,137  

Retained earnings

     2,455,714       2,038,820  

Accumulated other comprehensive loss

     (6,530 )     (6,964 )
    


 


Total stockholders’ equity

     2,584,182       2,112,318  
    


 


TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 3,004,071     $ 2,549,462  
    


 


 

See accompanying Notes to Consolidated Financial Statements

 

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CONSOLIDATED STATEMENTS OF INCOME

 

     For the Years Ended

     June 25,
2005


   June 26,
2004


   June 28,
2003


     (Amounts in thousands, except per share data)

Net revenues

   $ 1,671,713    $ 1,439,263    $ 1,153,219

Cost of goods sold

     463,664      433,358      348,264
    

  

  

Gross margin

     1,208,049      1,005,905      804,955

Operating expenses:

                    

Research and development

     328,164      306,320      272,322

Selling, general and administrative

     98,513      93,550      85,597
    

  

  

Total operating expenses

     426,677      399,870      357,919
    

  

  

Operating income

     781,372      606,035      447,036

Interest income and other, net

     28,265      20,461      15,055
    

  

  

Income before provision for income taxes

     809,637      626,496      462,091

Provision for income taxes

     268,800      206,744      152,490
    

  

  

Net income

   $ 540,837    $ 419,752    $ 309,601
    

  

  

Earnings per share:

                    

Basic

   $ 1.66    $ 1.28    $ 0.96
    

  

  

Diluted

   $ 1.58    $ 1.20    $ 0.91
    

  

  

Shares used in the calculation of earnings per share:

                    

Basic

     326,239      326,731      322,106
    

  

  

Diluted

     342,843      350,575      341,253
    

  

  

Dividends declared per share

   $ 0.38    $ 0.32    $ 0.08
    

  

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

     Common Stock

   

Additional

Paid-In

Capital


    Retained
Earnings


   

Other
Accumulated
Comprehensive

(Loss) Income


   

Total
Stockholders’

Equity


 
     Shares

    Par Value

         
     (Amounts in thousands)  

Balance, June 29, 2002

   320,061     $ 320     $ 54,935     $ 1,686,816     $ (920 )   $ 1,741,151  

Components of comprehensive income:

                                              

Net income

   —         —         —         309,601       —         309,601  

Unrealized gain on forward-exchange contracts, net of tax

   —         —         —         —         1,383       1,383  

Unrealized gain on available-for-sale investments, net of tax

   —         —         —         —         961       961  
                                          


Total comprehensive income

                                           311,945  
                                          


Exercises under the Stock Option and Purchase Plans

   9,047       9       83,662       —         —         83,671  

Repurchase of common stock

   (4,471 )     (4 )     (139,898 )     (14,047 )     —         (153,949 )

Tax benefit on exercise of non-qualified stock options and disqualifying dispositions under stock plans

   —         —         113,473       —         —         113,473  

Dividends declared and paid

   —         —         —         (25,879 )     —         (25,879 )
    

 


 


 


 


 


Balance, June 28, 2003

   324,637       325       112,172       1,956,491       1,424       2,070,412  

Components of comprehensive income:

                                              

Net income

   —         —         —         419,752       —         419,752  

Unrealized loss on forward-exchange contracts, net of tax

   —         —         —         —         (329 )     (329 )

Unrealized loss on available-for-sale investments, net of tax

   —         —         —         —         (8,059 )     (8,059 )
                                          


Total comprehensive income

                                           411,364  
                                          


Exercises under the Stock Option and Purchase Plans

   12,224       12       183,844       —         —         183,856  

Repurchase of common stock

   (12,417 )     (12 )     (368,379 )     (232,853 )     —         (601,244 )

Tax benefit on exercise of non-qualified stock options and disqualifying dispositions under stock plans

   —         —         152,500       —         —         152,500  

Dividends declared and paid

   —         —         —         (104,570 )     —         (104,570 )
    

 


 


 


 


 


Balance, June 26, 2004

   324,444       325       80,137       2,038,820       (6,964 )     2,112,318  

Components of comprehensive income:

                                              

Net income

   —         —         —         540,837       —         540,837  

Unrealized gain on forward-exchange contracts, net of tax

   —         —         —         —         795       795  

Unrealized loss on available-for-sale investments, net of tax

   —         —         —         —         (361 )     (361 )
                                          


Total comprehensive income

                                           541,271  
                                          


Exercises under the Stock Option and Purchase Plans

   7,112       7       105,986       —         —         105,993  

Repurchase of common stock

   (4,062 )     (5 )     (168,452 )     —         —         (168,457 )

Tax benefit on exercise of non-qualified stock options and disqualifying dispositions under stock plans

   —         —         117,000       —         —         117,000  

Dividends declared and paid

   —         —         —         (123,943 )     —         (123,943 )
    

 


 


 


 


 


Balance, June 25, 2005

   327,494     $ 327     $ 134,671     $ 2,455,714     $ (6,530 )   $ 2,584,182  
    

 


 


 


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Years Ended

 
     June 25, 2005

    June 26, 2004

    June 28, 2003

 
     (Amounts in thousands)  

Cash flows from operating activities:

                        

Net income

   $ 540,837     $ 419,752     $ 309,601  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation, amortization, and other

     76,849       61,860       61,036  

Tax benefit related to stock based compensation plans

     117,000       152,500       113,473  

Changes in assets and liabilities:

                        

Accounts receivable

     4,813       (70,398 )     3,052  

Inventories

     (49,994 )     3,407       18,014  

Deferred taxes

     45,483       23,500       48,404  

Income tax refund receivable

     668       9,034       41,918  

Current assets

     946       (7,029 )     106  

Accounts payable

     (37,590 )     51,815       (3,243 )

Income tax payable

     13,834       8,439       267  

Deferred income on shipments to distributors

     (2,633 )     1,276       (5,601 )

All other accrued liabilities

     (11,153 )     41,298       (4,533 )
    


 


 


Net cash provided by operating activities

     699,060       695,454       582,494  
    


 


 


Cash flows from investing activities:

                        

Additions to property, plant and equipment

     (132,445 )     (231,618 )     (84,060 )

Other non-current assets

     (308 )     2,873       (5,148 )

Purchases of available-for-sale securities

     (1,150,968 )     (1,002,154 )     (1,620,085 )

Proceeds from sales/maturities of available-for-sale securities

     808,885       994,296       1,259,990  
    


 


 


Net cash used in investing activities

     (474,836 )     (236,603 )     (449,303 )
    


 


 


Cash flows from financing activities:

                        

Issuance of common stock

     105,993       183,856       83,671  

Repurchase of common stock

     (168,457 )     (601,244 )     (153,949 )

Dividends paid

     (123,943 )     (104,570 )     (25,879 )
    


 


 


Net cash used in financing activities

     (186,407 )     (521,958 )     (96,157 )
    


 


 


Net increase (decrease) in cash and cash equivalents

     37,817       (63,107 )     37,034  

Cash and cash equivalents:

                        

Beginning of year

     147,734       210,841       173,807  
    


 


 


End of year

   $ 185,551     $ 147,734     $ 210,841  
    


 


 


Supplemental disclosures of cash flow information:

                        

Cash paid (refunds received), net during the year for:

                        

Income taxes

   $ 93,622     $ 13,275     $ (51,562 )
    


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: NATURE OF OPERATIONS

 

Maxim Integrated Products, Inc. (the Company) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits and is incorporated in the state of Delaware. The Company’s products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, hot-swap controllers, sensors, voltage references and T/E transmission products. The Company is a global company with manufacturing facilities in the United States, testing facilities in the Philippines and Thailand, and sales offices throughout the world. The Company’s products are sold to customers in numerous markets, including automotive, communications, consumer, data processing, industrial control, instrumentation, and medical industries.

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. The Company has a 52-to-53-week fiscal year that ends on the last Saturday of June. Accordingly, every sixth or seventh year will be a 53-week fiscal year. Fiscal years 2005, 2004 and 2003 were 52-week years.

 

Certain prior-year amounts in the Notes to Consolidated Financial Statements have been reclassified to conform to the current year’s presentation.

 

Cash Equivalents and Short-term Investments

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of demand accounts, government securities, and money market funds. Short-term investments consist primarily of U.S. Treasury and Federal Agency debt securities with original maturities beyond three months.

 

The Company’s cash equivalents and short-term investments are considered available-for-sale. Such securities are carried at fair market value based on market quotes. Unrealized gains and losses, net of tax, on securities in this category are reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Interest earned on securities is included in “Interest income and other, net” in the Consolidated Statements of Income. Included in cash and cash equivalents at June 26, 2004 was $20.8 million of restricted cash.

 

Derivative Instruments

 

The Company transacts business in various non-U.S. currencies, primarily the Japanese Yen, British Pound, and the Euro. The Company is exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales in these foreign currencies and the net monetary assets and liabilities of the related foreign subsidiary. The Company has established risk management strategies designed to protect against reductions in value and volatility of future cash flows caused by changes in exchange rates. These strategies reduce, but do not always entirely eliminate, the impact of currency exchange movements.

 

The Company uses currency forward contracts to hedge exposure to variability in anticipated non-U.S.-dollar-denominated cash flows. These contracts are designated as cash flow hedges and recorded on the Consolidated Balance Sheets at their fair market value. The maturities of these instruments are generally less than 6 months.

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company had forward contracts to sell foreign currencies with a U.S. dollar equivalent of $53.2 million and $82.1 million at June 25, 2005 and June 26, 2004, respectively. For these derivatives, the effective portion of the gain or loss is reported as a component of other comprehensive (loss) income in stockholders’ equity and is reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in earnings, net during the period of change. The ineffective portion of the gains and losses on the derivatives has been immaterial in all periods presented. The net value of all contracts which hedge transactions that have affected earnings is classified within current assets. For contracts which hedge transactions that have not affected earnings (primarily backlog), a net gain is classified within current assets and a net loss is classified within current liabilities.

 

For currency forward contracts, effectiveness of the hedge is measured using forward rates to value the forward contract and the underlying hedged transaction. Any ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, are recognized currently in Interest and other income, net in the Consolidated Statements of Income. If a cash flow hedge were to be discontinued because it is probable that the original hedged transaction will not occur as anticipated, the unrealized gains or losses would be reclassified into earnings. Subsequent gains or losses on the related derivative instrument would be recognized in income in each period until the instrument matures, is terminated or is sold. In fiscal years 2005 and 2004, no cash flow hedges were discontinued as a result of forecasted transactions that did not occur. Fair value of the contracts is determined by reference to liquidation value.

 

Inventories

 

Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Because of the cyclical nature of the market, inventory levels, obsolescence of technology, and product life cycles, the Company generally writes down inventories to net realizable value based on 12 months forecasted product demand.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Depreciation is primarily computed on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years for machinery and equipment and up to 40 years for buildings and building improvements. Leasehold improvements are amortized over the lesser of their useful lives or the remaining term of the related lease.

 

The Company evaluates the recoverability of property, plant and equipment in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company performs periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values.

 

Income Taxes

 

The Company accounts for income taxes using an asset and liability approach as prescribed in SFAS No. 109, “Accounting for Income Taxes”. The Company records the amount of taxes payable or refundable for the current

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

 

Revenue Recognition and Accounts Receivables Allowances

 

The Company recognizes revenue for sales to direct customers and sales to international distributors upon shipment, provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collectibility of the resulting receivable is reasonably assured, there are no customer acceptance requirements and the Company does not have any significant post-shipment obligations. The Company estimates returns for sales to direct customers and international distributors based on historical returns rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.

 

Sales to U.S. distributors are made pursuant to agreements allowing the possibility of certain sales price rebates and for non-warranty product return privileges. The non-warranty product return privileges include allowing U.S. distributors to rotate a small portion of the Company’s products in their inventory based on their previous 90 days of purchases. Given the uncertainties associated with the levels of non-warranty product returns and sales price rebates that could be issued to U.S. distributors, the Company defers recognition of such revenue and related cost of goods sold until the product is sold by the U.S. distributors to their end customers. Accounts receivable from direct customers, domestic distributors and international distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal terms. In addition, the Company estimates returns for sales to domestic distributors based on historical return rates applied against current period gross revenues.

 

The Company makes estimates of potential future returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of returns and sales allowances. Estimates made by the Company may differ from actual returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. At June 25, 2005 and June 26, 2004, the Company had $10.1 million and $8.5 million accrued for returns and allowances, respectively. During fiscal year 2005, the Company recorded $61.5 million for estimated returns and allowances against revenues. This was offset by $59.9 million for actual returns and for allowances given during fiscal 2005. At June 25, 2005 and June 26, 2004, the Company had $3.9 million and $4.9 million accrued as allowance for doubtful accounts, respectively. To date, the Company has not experienced material write-offs of accounts receivable due to uncollectibility.

 

Accrued expenses

 

Included in accrued expenses on the Consolidated Balance Sheet at June 25, 2005 and June 26, 2004 were $22.3 million and $9.2 million of deferred license revenues, respectively.

 

Advertising

 

Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the Consolidated Statements of Income. Advertising expenses were $11.3 million, $11.1 million, and $13.2 million in fiscal years 2005, 2004, and 2003, respectively.

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Shipping Costs

 

Shipping costs are charged to cost of goods sold as incurred.

 

Foreign Currency Translation and Remeasurement

 

The U.S. dollar is the functional currency for the Company’s foreign operations. Using the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured at the year-end exchange rates. Certain non-monetary assets and liabilities are remeasured using historical rates. Statements of operations are remeasured at the average exchange rates during the year. Net gains and losses from foreign currency remeasurements have been minimal and are included in selling, general and administrative expenses.

 

Stock-Based Compensation

 

The Company accounts for its stock option and employee stock purchase plans using the intrinsic value method prescribed in Accounting Principles Board’s Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Accordingly, employee and director compensation expense is recognized only for those options whose price is less than fair market value at the measurement date. In addition, the Company discloses pro forma information related to its stock plans according to SFAS No. 123 “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.”

 

Under SFAS 148, the Company may elect to continue to account for the grant of stock options under APB Opinion 25, in which options granted with an exercise price equal to the fair market value on the date of grant do not require recognition of expense in the Company’s financial statements. Under SFAS 148, the Company is, however, required to provide pro forma disclosure regarding net income and earnings per share as if the Company had accounted for its employee stock options and employee stock purchase rights (including shares issued under 1996 Stock Incentive Plan, 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan) granted subsequent to June 30, 1995, under the methodology prescribed by that statement. Since the Company has elected to account for the grant of options under APB Opinion No. 25, the following information is for disclosure purposes only.

 

The valuation of options granted in fiscal years 2005, 2004, and 2003 reported below has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

     Stock Option Plans

  

Employee Stock

Participation Plan


     2005

   2004

   2003

   2005

   2004

   2003

Expected option holding period (in years)

   4.5    4.8    4.5    1.1    0.5    0.5

Risk-free interest rate

   3.3%    2.9%    2.7%    2.5%    1.2%    1.3%

Stock price volatility

   0.33    0.42    0.43    0.33    0.42    0.43

Dividend yield

   1.0%    .63%    .46%    1.0%    .63%    .46%

 

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate of value, in the opinion of management, the existing models

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

do not provide a reliable single measure of the value of the options. The following is a summary of weighted average grant values generated by application of the Black-Scholes model:

 

    

Weighted Average Grant Date Value

For the Years Ended


     June 25,
2005


   June 26,
2004


   June 28,
2003


Stock Option Plans

   $ 12.08    $ 15.63    $ 10.25

Employee Stock Participation Plans

   $ 11.99    $ 11.63    $ 6.23

 

As required under SFAS 148, the reported net income and earnings per share have been presented to reflect the impact had the Company been required to include the amortization of the Black-Scholes option value as an expense. The adjusted amounts are as follows:

 

 

     For the Years Ended

     June 25,
2005


   June 26,
2004


   June 28,
2003


Net income – as reported

   $ 540,837    $ 419,752    $ 309,601

Deduct: Total stock-based employee compensation expense

determined under the fair value method, net of tax

     155,904      134,734      139,684
    

  

  

Net income – pro forma

   $ 384,933    $ 285,018    $ 169,917
    

  

  

Basic earnings per share – pro forma

   $ 1.18    $ 0.87    $ 0.53
    

  

  

Diluted earnings per share – pro forma

   $ 1.13    $ 0.82    $ 0.50
    

  

  

 

Earnings Per Share

 

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options. The number of incremental shares from the assumed issuance of stock options is calculated applying the treasury stock method. See Note 3 “Earnings Per Share” of these Notes to Consolidated Financial Statements.

 

Product Warranty

 

The Company warrants its products to its customers generally for one year from the date of shipment, but in certain cases for longer periods. In certain other cases, the Company warrants products to include significant liability beyond the cost of replacing the product. If there is a material increase in the rate of customer claims or our estimates of probable losses relating to specifically identified warranty exposures are inaccurate, we may record a charge against future cost of sales. Warranty expense has historically been immaterial to our financial statements.

 

Self-Insurance Accruals

 

The Company is self-insured with respect to defective product claims, employment practice claims, workers’ compensation claims, and general liability. Accruals are primarily based on the actuarially estimated, undiscounted cost of claims, which includes incurred-but-not-reported claims. Amounts accrued for defective product claims, employment practice claims, workers’ compensation claims and general liability are included in accrued expenses.

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In addition to the above, the Company is primarily self-insured with respect to healthcare benefits for most of its domestic employees. Accruals are primarily based on estimated incurred-but-not-reported claims. Amounts accrued for employee healthcare claims are included in salary and salary related expenses.

 

New Accounting Pronouncements

 

In November 2004, the FASB issued SFAS 151, “Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4.” SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 will be effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS 151 and does not believe that its adoption will have a material impact on the Company’s financial condition, results of operations or liquidity.

 

In December 2004, the FASB issued SFAS 123 (R), “Share-Based Payment.” SFAS 123(R) replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock Issued to Employees,” and supersedes Accounting Principal Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in the consolidated financial statements. Compensation costs will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) is effective as of the first annual reporting period that begins after June 15, 2005. The Company has evaluated the impact of SFAS 123(R) on the Company’s financial condition and results of operations and believes the charge of SFAS 123(R) will reduce the Company’s quarterly earnings by $0.07 to $0.08 per share for the first quarter of fiscal year 2006.

 

In December 2004, the FASB issued SFAS 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” SFAS 153 is based on the principle that exchange of nonmonetary assets should be measured based on the fair market value of the assets exchanged. SFAS 153 eliminates the exception of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption SFAS 153 will have a material impact on the Company’s financial condition, results of operations or liquidity.

 

In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 in its fiscal year 2006. The Company does not believe the adoption of FIN 47 will not have a material impact on the Company’s financial condition, results of operations or liquidity.

 

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” SFAS 154 replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS 3, “Reporting Accounting

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Changes in Interim Financial Statements.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change, SFAS 154 requires application of the new accounting principle as of the earliest period for which retrospective application is practicable. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, SFAS 154 requires application as if the accounting principle were adopted prospectively from the earliest date practicable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that its adoption of SFAS 154 will have a material impact on the Company’s financial condition, results of operations or liquidity.

 

In June 2005, the FASB issued FASB Staff Position (FSP) FAS 143-1, “Accounting for Electronic Equipment Waste Obligations.” FAS 143-1 addresses the accounting for obligations associated with Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”) adopted by the European Union. FSP FAS 143-1 provides guidance for the effects of the Directive with respect to historical waste, waste associated with products placed on the market on or before August 13, 2005. FSP FAS 143-1 is required to be applied to the later of the first reporting period ending after June 8, 2005 or the date of the adoption of the law by the applicable European Union member country. The Company does not believe that its adoption of FAS 143-1 will have a material impact on the Company’s financial condition, results of operations or liquidity.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to the useful lives and fair value of fixed assets, allowances for doubtful accounts, customer returns and allowances, inventory valuation, reserves relating to litigation matters, accrued liabilities and reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future given available information. Actual results may differ from those estimates, and such differences may be material to the financial statements.

 

Concentration of Credit Risk

 

Due to the Company’s credit evaluation and collection process, bad debt expenses have not been significant. Credit risk with respect to trade receivables is limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the credit risk. While a significant portion of the Company’s revenues is made through domestic and international distributors, no single customer has accounted for more than 10% of net revenues in the last three fiscal years.

 

The Company maintains cash, cash equivalents, and short-term investments with various high credit quality financial institutions, limits the amount of credit exposure to any one financial institution or instrument, and is exposed to credit risk in the event of default by these institutions to the extent of amounts recorded at the balance sheet date. To date, the Company has not incurred losses related to these investments.

 

Concentration of Other Risks

 

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

general economic conditions, both in the United States and abroad; economic conditions specific to the semiconductor industry and to the analog and mixed signal portion of that industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the ability to manufacture efficiently; the availability of materials, supplies, machinery and equipment; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and, to a small extent, wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.

 

NOTE 3: EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per share:

 

     For the Years Ended

     June 25, 2005

   June 26, 2004

   June 28, 2003

     (Amounts in thousands, except per share data)

Numerator for basic earnings per share and diluted earnings per share

                    

Net income

   $ 540,837    $ 419,752    $ 309,601
    

  

  

Denominator for basic earning per share

     326,239      326,731      322,106

Effect of dilutive securities:

                    

Stock options

     16,604      23,844      19,147
    

  

  

Denominator for diluted earnings per share

     342,843      350,575      341,253
    

  

  

Earnings per share:

                    

Basic

   $ 1.66    $ 1.28    $ 0.96
    

  

  

Diluted

   $ 1.58    $ 1.20    $ 0.91
    

  

  

 

Approximately 24.0 million, 12.4 million, and 38.8 million of the Company’s stock options were excluded from the calculation of diluted earnings per share for fiscal years 2005, 2004, and 2003, respectively. These options were excluded, as they were antidilutive; however, such options could be dilutive in the future.

 

NOTE 4: FINANCIAL INSTRUMENTS

 

Investments

 

In accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” The Company recorded a net unrealized loss of $9.3 million and $7.5 million on available-for-sale investments at June 25, 2005 and June 26, 2004, respectively. There are 36 investments that are in a unrealized loss position at June 25, 2005. The unrealized loss resulted from an increase in interest rates that occurred during fiscal years 2005 and 2004. The Company believes the unrealized loss is temporary as most of the related available-for-sale investments will be held to maturity resulting in cash flow equal to face value. Fair market values are calculated based upon prevailing market quotes at the end of each fiscal year.

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Available-for-sale investments at June 25, 2005 were as follows:

 

    

Adjusted

Cost


  

Gross

Unrealized Gain


  

Gross

Unrealized Loss


    Estimated
Fair Value


     (Amounts in thousands)

U.S. Treasury securities

   $ 918,180    $ 166    $ (9,232 )   $ 909,114

Federal Agency Debt securities

     380,307      —        (280 )     380,027
    

  

  


 

Total available-for-sale investments

   $ 1,298,487    $ 166    $ (9,512 )   $ 1,289,141
    

  

  


 

 

The following table shows the gross unrealized losses and fair value of Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 25, 2005.

 

     Less Than 12 Months

    12 Months or Greater

    Total

 
    

Fair

Value


   Gross
Unrealized
Losses


   

Fair

Value


   Gross
Unrealized
Losses


   

Fair

Value


   Gross
Unrealized
Losses


 
     (Amounts in thousands)  

U.S. Treasury securities

   $ 516,822    $ (4,651 )   $ 368,957    $ (4,581 )   $ 885,779    $ (9,232 )

Federal Agency Debt securities

     380,027      (280 )     —        —         380,027      (280 )
    

  


 

  


 

  


     $ 896,849    $ (4,931 )   $ 368,957    $ (4,581 )   $ 1,265,806    $ (9,512 )
    

  


 

  


 

  


 

Available-for-sale investments at June 26, 2004 were as follows:

 

    

Adjusted

Cost


  

Gross

Unrealized
Gain


  

Gross

Unrealized
Loss


    Estimated
Fair Value


     (Amounts in thousands)

U.S. Treasury securities

   $ 936,502    $ 30    $ (7,395 )   $ 929,137

Federal Agency Debt securities

     19,903      —        (161 )     19,742
    

  

  


 

Total available-for-sale investments

   $ 956,405    $ 30    $ (7,556 )   $ 948,879
    

  

  


 

 

The Company realized no net gains or losses in fiscal year 2005. In fiscal years 2004 and 2003, the Company realized $0.1 million and $0.1 million of net gains, respectively. The Company’s portfolio of marketable securities by contractual maturity is as follows:

 

     June 25,
2005


   June 26,
2004


     (Amounts in thousands)

Due in one year or less

   $ 610,673    $ 19,874

Due after one year through three years

     678,468      929,005
    

  

Total

   $ 1,289,141    $ 948,879
    

  

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Foreign exchange contracts

 

At June 25, 2005, and June 26, 2004, the Company held forward exchange contracts, all having maturities of less than six months, to exchange various foreign currencies for U.S. dollars in the amount of $53.2 million and $82.1 million, respectively. The table below summarizes, by currency, the notional amounts of the Company’s forward exchange contracts and net unrealized gain or loss at the end of fiscal years 2005 and 2004. The net unrealized gain or loss approximates the fair market value of these contracts.

 

     June 25, 2005

   June 26, 2004

 
    

Notional

Amounts


  

Unrealized

Gain (Loss)


  

Notional

Amounts


  

Unrealized

Gain (Loss)


 
     (Amounts in thousands)  

Currency:

                             

Japanese Yen

   $ 33,243    $ 621    $ 45,726    $ (636 )

British Pound Sterling

     8,102      36      21,092      (439 )

Euro

     11,022      292      14,056      (440 )

Swiss Franc

     826      13      1,233      (15 )
    

  

  

  


     $ 53,193    $ 962    $ 82,107    $ (1,530 )
    

  

  

  


 

The net unrealized gain or loss, if any, is potentially subject to market and credit risk as it represents appreciation (decline) of the hedge position against the spot exchange rates at year-end. The Company attempts to control credit risk through credit approvals and monitoring procedures. The net realized and unrealized gains or losses from hedging foreign currency denominated assets and liabilities were immaterial in fiscal years 2005 and 2004.

 

NOTE 5: INVENTORIES

 

The components of inventories consist of :

 

     June 25,
2005


   June 26,
2004


     (Amounts in thousands)

Raw material

   $ 14,432    $ 14,713

Work-in-process

     103,696      73,833

Finished goods

     49,651      29,239
    

  

     $ 167,779    $ 117,785
    

  

 

NOTE 6: PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, net consist of:

 

     June 25,
2005


    June 26,
2004


 
     (Amounts in thousands)  

Land

   $ 74,468     $ 71,709  

Buildings and building improvements

     320,206       345,700  

Machinery and equipment

     1,469,557       1,318,331  
    


 


       1,864,231       1,735,740  

Less accumulated depreciation

     (862,766 )     (793,554 )
    


 


     $ 1,001,465     $ 942,186  
    


 


 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company recorded $73.2 million, $59.3 million and $60.3 million of depreciation expense in fiscal years 2005, 2004 and 2003, respectively

 

NOTE 7: OTHER ASSETS

 

Included in other assets on the Consolidated Balance Sheet at June 25, 2005 was $7.8 million of intellectual property, net of $6.2 million of accumulated amortization and adjustments. Amortization expenses and adjustments for the intellectual property were $2.7 million, $2.9 million and $0.6 million for fiscal years 2005, 2004 and 2003, respectively. The gross carrying amount of the intellectual property is $14.0 million and it is being amortized over ten years, which is its estimated useful life. The intellectual property acquired by the Company is being used to design and develop new products as well as in some products currently in production. As required by Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company assesses the recoverability of the intellectual property whenever an indicator of impairment exists. There were no indicators of impairment as of June 25, 2005. Based on the carrying amount of identified assets recorded at June 25, 2005 and assuming no subsequent impairment of the underlying assets, the future amortization expense are expected to be as follows:

 

(In thousands)    2006

   2007

   2008

   2009

   2010

   2011

Intellectual property assets:

   1,400    1,400    1,400    1,400    1,400    753

 

Should it be determined in a future period that the projected remaining discounted cash flows attributable to products designed and developed with the acquired intellectual property are less than the net book value represented by the intellectual property, the Company’s results of operations could be adversely impacted in the period such determination is made.

 

Also included in other assets in the Consolidated Balance Sheet at June 25, 2005 and June 26, 2004 are loans to employees of approximately $9.9 million and $7.2 million, respectively. These loans are collateralized. To the extent such collateral is not sufficient to cover the amounts owed, there is risk of loss to the Company. To date, the Company has not experienced any material losses related to these employee loans. These loans are not made to officers of the Company nor to purchase and exercise stock options.

 

NOTE 8: COMMITMENTS AND CONTINGENCIES

 

Litigation

 

On December 12, 2002, Qualcomm Inc. (Qualcomm) filed and on February 4, 2003 served the Company with a complaint for patent infringement claiming that certain of the Company’s products infringe one or more of Qualcomm’s patents. Qualcomm seeks a preliminary and permanent injunction as well as unspecified actual and treble damages including costs, expenses and attorneys fees. Qualcomm withdrew one of its patents from the claim in June 2003 and another in May 2004, and has added three more related patents. The Company is presently reviewing these claims and does not believe that the products in question infringe upon Qualcomm patents. In May 2004, the Company won a motion for summary judgment on the issue of the inducement of infringement by its customers. In January, 2005, Qualcomm moved for a preliminary injunction to toll the Company’s production and sale of certain products for alleged misappropriation of Qualcomm’s trade secrets. The court denied this motion but enjoined the Company from receiving any of Qualcomm’s confidential information from third parties. This issue is on appeal. While no assurance can be given in this regard, the Company does not believe that the ultimate outcome of the action will have a material adverse effect on the financial condition or liquidity of the Company. However, were Qualcomm to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In the third quarter of fiscal year 2005, the Company and Linear Technology Corporation (LTC) settled their on-going patent litigation that was brought by LTC against Maxim and other unrelated parties concerning LTC’s United States Patent 5,481,178, which relates to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit. The settlement agreement resolved all legal claims between LTC and the Company and their respective subsidiaries, and it provided for the license of LTC’s United States Patent 5,481,178 to the Company for use in current and future products. Under the terms of the settlement agreement, the Company paid LTC $40 million in the fourth quarter of fiscal year 2005 and will pay LTC additional amounts in fiscal year 2006 through fiscal year 2013.

 

In addition to the above, the Company is subject to other legal proceedings and claims that arise in the normal course of its business. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position of the Company.

 

Commitments

 

The Company leases certain of its facilities under various operating leases that expire at various dates through fiscal year 2014. The lease agreements generally include renewal provisions and require the Company to pay property taxes, insurance, and maintenance costs.

 

Future annual minimum lease payments for all leased facilities are as follows:

 

Fiscal Year


   (Amounts in
thousands)


    2006

   $ 2,929

    2007

     1,733

    2008

     1,113

    2009

     564

    2010

     192

Thereafter

     121
    

     $ 6,652
    

 

Rental expense amounted to approximately $4.6 million, $3.6 million, and $3.2 million in fiscal years 2005, 2004, and 2003.

 

Other commitments as of June 25, 2005 totaled approximately $19.5 million and mainly consists of purchase obligations for certain materials and supplies.

 

Indemnifications

 

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Company’s indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. The Company also indemnifies its directors and executive officers to the maximum extent permitted under the laws of the State of Delaware. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. To date, the Company has not paid or been required to defend any indemnification claims, and

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

accordingly, the Company has not accrued any amounts for its indemnification obligations. However, there can be no assurances that the Company will not have any future financial exposure under those indemnification obligations.

 

NOTE 9: COMPREHENSIVE INCOME

 

Comprehensive income consists of net income and net unrealized gains (losses) on available-for-sale investments and forward exchange contracts. The components of comprehensive income and related tax effects were as follows:

 

     For the Years Ended

     June 25,
2005


    June 26,
2004


    June 28,
2003


     (Amounts in thousands)

Net income, as reported

   $ 540,837     $ 419,752     $ 309,601

Change in unrealized (losses) gains on investments, net of tax of $(691) in 2005, $(4,086) in 2004, and $416 in 2003

     (361 )     (8,059 )     961

Change in unrealized (losses) gains on forward exchange contracts, net of tax of $423 in 2005, $(162) in 2004, and $716 in 2003

     795       (329 )     1,383
    


 


 

Total comprehensive income

   $ 541,271     $ 411,364     $ 311,945
    


 


 

 

Accumulated other comprehensive gains (losses) presented in the Consolidated Balance Sheets at June 25, 2005 and June 26, 2004 consist of net unrealized losses on available-for-sale investments of $(5.4) million and $(5.0) million, respectively, net unrealized gains (losses) on forward exchange contracts of $0.4 million and $(0.5) million, respectively, and net foreign currency translation adjustments of $(1.5) million and $(1.5) million, respectively.

 

NOTE 10: EMPLOYEE STOCK AND BENEFIT PLANS

 

Stock option and purchase plans

 

At June 25, 2005, the Company has reserved a total of 107,022,787 of its common shares for issuance to employees and certain others under its 1996 Stock Incentive Plan, 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan. Under the above-mentioned stock option plans, options are granted at a price not less than fair market value as determined by the Board of Directors or Plan administrator at the date of grant. Options granted under the stock option plans described above generally vest within five years and expire from five to ten years from the date of the grant or such shorter term as may be provided in the agreement. Under the 1987 ESP Plan, employees of the Company could purchase shares of common stock at a price not less than the lesser of 85% of the fair market value of the stock on the date the purchase right is granted or the date the right is exercised. During fiscal year 2005, the Company recorded $117,000,000 of tax payable benefit on the exercise of nonqualified stock options and on disqualifying dispositions under stock plans ($152,500,000 in fiscal year 2004 and $113,473,000 in fiscal year 2003).

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Information with respect to activity under the stock option plans and ESP Plan is set forth below:

 

     Outstanding Options

    

Shares

Available

for Grant


    Numbers of
Shares


   

Weighted

Average
Exercise Price
Per Share


Balance, June 29, 2002

   2,039,534     94,256,025     $ 28.25

Shares reserved

   14,000,000     —         —  

Options granted

   (19,432,732 )   19,432,732     $ 28.32

Options cancelled

   6,132,895     (6,406,967 )   $ 37.94

Options exercised

   —       (9,046,911 )   $ 9.73
    

 

     

Balance, June 28, 2003

   2,739,697     98,234,879     $ 29.30

Shares reserved

   9,800,000     —         —  

Options granted

   (15,964,375 )   15,964,375     $ 42.15

Options cancelled

   5,195,039     (5,234,337 )   $ 45.61

Options exercised

   —       (12,223,936 )   $ 14.25
    

 

     

Balance, June 26, 2004

   1,770,361     96,740,981     $ 32.28

Shares reserved

   14,500,000     —         —  

Options granted

   (15,588,733 )   15,588,733     $ 40.48

Options cancelled

   3,314,738     (3,330,234 )   $ 38.74

Options exercised

   1,139,119     (7,112,178 )   $ 14.89
    

 

     

Balance, June 25, 2005

   5,135,485     101,887,302     $ 34.51
    

 

     

 

At June 25, 2005, 46,522,608 options to purchase shares of common stock were exercisable. Options exercisable at June 26, 2004 and June 28, 2003 were 40,982,928 and 40,797,090 respectively.

 

The following table summarizes information about options outstanding at June 25, 2005:

 

     Outstanding Options

   Options Exercisable

Range of Exercise Prices


  

Number

Outstanding
at

June 25,

2005


  

Weighted

Average

Remaining

Contractual

Life (Years)


  

Weighted

Average

Exercise

Price


  

Number

Exercisable
at

June 25,
2005


  

Weighted

Average

Exercise

Price


$  5.38 - $19.86

   15,425,087    2.1    $ 13.16    14,998,177    $ 13.16

$20.44 - $32.97

   16,031,767    5.8    $ 24.83    9,095,758    $ 25.21

$33.04 - $34.97

   16,458,794    7.0    $ 33.93    4,144,679    $ 34.18

$35.16 - $39.88

   15,617,058    7.4    $ 37.71    4,937,788    $ 37.82

$40.16 - $42.94

   17,204,562    8.0    $ 41.33    5,496,411    $ 41.41

$43.00 - $49.92

   13,408,033    7.7    $ 45.92    3,190,380    $ 46.49

$50.00 - $87.06

   7,742,001    5.6    $ 56.89    4,659,415    $ 57.58
    
              
      
     101,887,302    6.3    $ 34.51    46,522,608    $ 30.08
    
              
      

 

401(k) retirement plan

 

The Company sponsors a 401(k) retirement plan (401(k) Plan) through Fidelity Investments, under which full-time U.S. employees may contribute, on a pretax basis, between 1% and 20% of their total annual income from the Company, subject to a maximum aggregate annual contribution imposed by the Internal Revenue Code. The administration expenses charged by Fidelity Investments, which the Company pays, was immaterial for fiscal year 2005. Company contributions to the 401(k) Plan were $0.5 million, $0.9 million, and $0.7 million in fiscal years 2005, 2004 and 2003, respectively.

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11: INCOME TAXES

 

     For the Years Ended

     June 25, 2005

   June 26, 2004

   June 28, 2003

     (Amounts in thousands)

Federal

                    

Current

   $ 209,571    $ 169,021    $ 95,032

Deferred

     43,059      22,169      45,685

State

                    

Current

     12,309      9,400      5,000

Deferred

     477      1,326      2,710

Foreign

                    

Current

     3,384      4,828      4,063
    

  

  

     $ 268,800    $ 206,744    $ 152,490
    

  

  

 

Pretax income from foreign operations was approximately $14.3 million, $13.3 million and $9.2 million for the years ended June 25, 2005, June 26, 2004, and June 28, 2003, respectively.

 

The Company has tax holidays with respect to certain operations in Thailand and in prior years had tax holidays in the Philippines. The Thailand tax holiday will expire in fiscal year 2012. The impact of the tax holidays was to increase net income by approximately $0.5 million, $0 million and $0.2 million during fiscal years 2005, 2004, and 2003, respectively. As of June 25, 2005 the Company’s foreign subsidiaries have accumulated undistributed earnings of approximately $20.5 million that are intended to be indefinitely reinvested outside the U.S. and, accordingly, no provision for U.S. federal and state tax has been made for the distribution of these earnings. At June 25, 2005 the amount of unrecognized deferred tax liability on the indefinitely reinvested earnings was approximately $7.2 million.

 

The Company is continuing to evaluate the impact of the one-time favorable foreign dividend repatriation provisions enacted on October 22, 2004, as part of the American Jobs Creation Act of 2004. The Company may decide to repatriate earnings during its fiscal year 2006 to take advantage of these provisions, however, any such repatriations are not expected to have a material impact on the Company’s financial condition, results of operations and liquidity.

 

The provision for income taxes differs from the amount computed by applying the statutory rate as follows:

 

     For the Years Ended

 
     June 25, 2005

    June 26, 2004

    June 28, 2003

 

Federal statutory rate

   35.0 %   35.0 %   35.0 %

State tax, net of federal benefit

   1.0     1.3     1.3  

General business credits

   (0.4 )   (0.6 )   (1.1 )

Export sales benefit

   (2.5 )   (2.9 )   (2.5 )

Other

   0.1     0.2     0.3  
    

 

 

Income tax rate

   33.2 %   33.0 %   33.0 %
    

 

 

 

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MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:

 

    

June 25,

2005


   

June 26,

2004


 
     (Amounts in thousand)  

Deferred tax assets:

                

Inventory valuation and reserves

   $ 71,958     $ 67,246  

Distributor related accruals and sales return and allowance accruals

     13,312       19,687  

Deferred revenue

     8,158       3,224  

Accrued compensation

     32,325       27,042  

Net operating loss carryovers

     4,751       8,011  

Tax credit carryovers

     50,223       100,946  

Impairment charge

     6,916       9,694  

Other reserves and accruals not currently deductible for tax reporting

     9,890       21,006  

Other

     3,138       6,433  
    


 


Total deferred tax assets

     200,671       263,289  
    


 


Deferred tax liabilities:

                

Fixed assets cost recovery

     (147,482 )     (110,814 )

Other

     (4,345 )     (4,223 )
    


 


Net deferred tax assets before valuation allowance

     48,844       148,252  

Valuation allowance

     (52,959 )     (108,957 )
    


 


Net deferred tax assets (liabilities)

   $ (4,115 )   $ 39,295  
    


 


 

The decrease in the valuation allowance of $56.0 million in fiscal year 2005 is primarily due to the utilization and recognition of loss and credit carryovers attributable to stock option deductions, the benefit of which was credited to additional paid-in capital when recognized.

 

The valuation allowance of $53.0 million is primarily attributable to the tax benefits on gains realized from the exercise of stock options, and when realized, will be recorded as a credit to additional paid-in-capital.

 

As of June 25, 2005, the Company has $3.3 million of foreign net operating loss carryforwards expiring at various dates between fiscal year 2006 and fiscal year 2007, $0.7 million of foreign net operating loss carryforwards with no expiration date and $64.1 million of state net operating loss carryforwards expiring at various dates between fiscal year 2007 and 2022.

 

As of June 25, 2005, the Company has $60.5 million of state credit carryforwards with no expiration date and various other federal and state credit carryforwards with varying expiration dates.

 

NOTE 12: SEGMENT INFORMATION

 

The Company operates and tracks its results in one reportable segment. The Company designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Enterprise-wide information is provided in accordance with SFAS 131. During fiscal year 2005, the Company changed its methodology for accumulating geographical revenue information from that based on customers’ bill-to location to one based on customers’ ship-to location. Prior years amounts have been revised to reflect this methodology change. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each fiscal year.

 

Net revenues from unaffiliated customers by geographic region were as follows:

 

     For the Years Ended

    

June 25,

2005


  

June 26,

2004


  

June 28,

2003


     (Amounts in thousands)

United States

   $ 441,927    $ 380,846    $ 354,492

China

     373,890      272,917      155,796

Japan

     165,409      148,887      122,728

Rest of Asia

     329,305      317,911      263,762

Europe

     316,136      277,226      225,208

Rest of World

     45,046      41,476      31,233
    

  

  

     $ 1,671,713    $ 1,439,263    $ 1,153,219
    

  

  

 

Net long-lived assets by geographic region were as follows:

 

    

June 25,

2005


  

June 26,

2004


     (Amounts in thousands)

United States

   $ 755,557    $ 755,473

Philippines

     194,876      170,806

Rest of World

     51,032      15,907
    

  

     $ 1,001,465    $ 942,186
    

  

 

NOTE 13: COMMON STOCK REPURCHASES

 

In fiscal year 2002, the Board of Directors authorized the Company to repurchase up to 20 million shares of the Company’s common stock from time to time at the discretion of the Company’s management between the dates of such authorizations and the end of the Company’s fiscal year 2003. In May 2003, the Board of Directors extended the share repurchase authorization noted above to the end of the Company’s fiscal year 2004. In March 2004, the Board of Directors authorized the Company to repurchase an additional 10 million shares of the Company’s common stock; such share repurchase authorizations has no expiration date. During fiscal year 2004, the Company repurchased approximately 12.4 million shares of its common stock for $601.2 million. As of June 26, 2004, approximately 4.0 million shares remained available under such repurchase authorization.

 

In May 2005, the Board of Directors authorized the Company to repurchase an additional 10 million shares of the Company’s common stock. This share repurchase authorization has no expiration date. During fiscal year 2005, the Company repurchased approximately 4.1 million shares of its common stock for $168.5 million. As of June 25, 2005, approximately 10.0 million shares remained available under the repurchase authorization. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including the price of the Company’s common stock, general market and business conditions, and other factors. Common stock repurchased is retired and is not held as treasury stock.

 

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Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14: DEFERRED COMPENSATION

 

The Company and the Chief Executive Officer (CEO) have entered into a deferred compensation plan, pursuant to which the CEO defers receipt of a portion of his cash compensation. Deferred compensation bears interest at a rate equal to the interest rate that employees of the Company are required to pay the Company under the Company’s employee loan program. Compensation deferred on or prior to December 31, 2004, including interest, is payable (i) upon the CEO’s termination as an employee or service provider to the Company, in approximately equal quarterly installments over a five-year period, (ii) upon his death, to his designated beneficiary, in a lump sum payment as soon as administratively possible, or (iii) in the event of an unforeseeable emergency. Compensation deferred after December 31, 2004, including interest, is payable under the same terms and conditions as compensation deferred on or prior to December 31, 2004, except to the extent that those terms and conditions would cause a violation of Section 409A of the Internal Revenue Code, as supplemented by any guidance issued by the Internal Revenue Service thereunder. As of June 25, 2005 and June 26, 2004, the CEO’s deferred compensation balances, including interest thereon, totaled $24.1 million and $18.4 million, respectively, which is included in accrued salary and related expenses in the Consolidated Balance Sheets.

 

NOTE 15: SUBSEQUENT EVENT

 

During the first quarter of fiscal year 2006, the Board of Directors declared a cash dividend of $0.10 per share on the Company’s common stock payable on August 30, 2005 to stockholders of record on August 15, 2005.

 

NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)

 

     Quarter Ended

 

Fiscal Year 2005


   6/25/05

     3/26/05

     12/25/04

     9/25/04

 
    

Unaudited

(Amounts in thousands, except percentages and per share data)

 

Net revenues

   $ 400,397      $ 400,188      $ 436,061      $ 435,067  

Cost of goods sold

     112,079        111,896        119,437        120,252  
    


  


  


  


Gross margin

   $ 288,318      $ 288,292      $ 316,624      $ 314,815  

Gross margin %

     72.0 %      72.0 %      72.6 %      72.4 %
    


  


  


  


Operating income

   $ 180,013      $ 180,438      $ 210,265      $ 210,656  

% of net revenues

     45.0 %      45.1 %      48.2 %      48.4 %
    


  


  


  


Net income

   $ 126,140      $ 125,537      $ 144,615      $ 144,545  
    


  


  


  


Earnings per share

                                   

Basic

   $ 0.38      $ 0.38      $ 0.44      $ 0.45  
    


  


  


  


Diluted

   $ 0.37      $ 0.37      $ 0.42      $ 0.42  
    


  


  


  


Shares used in the calculation of earnings per share

                                   

Basic

     327,682        326,945        325,660        324,668  
    


  


  


  


Diluted

     340,552        342,720        343,226        344,875  
    


  


  


  


Dividends declared per share

   $ 0.10      $ 0.10      $ 0.10      $ 0.08  
    


  


  


  


 

Net income for the three months ended March 26, 2005 and June 25, 2005 include $5.0 million and $5.0 million recorded for discretionary employee bonuses, respectively.

 

B-22


Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Quarter Ended

 

Fiscal Year 2004


   6/26/04

     3/27/04

     12/27/03

     9/27/03

 
    

Unaudited

(Amounts in thousands, except percentages and per share data)

 

Net revenues

   $ 420,963      $ 370,023      $ 338,108      $ 310,169  

Cost of goods sold

     125,540        111,761        103,029        93,028  
    


  


  


  


Gross margin

   $ 295,423      $ 258,262      $ 235,079      $ 217,141  

Gross margin %

     70.2 %      69.8 %      69.5 %      70.0 %
    


  


  


  


Operating income

   $ 181,243      $ 157,461      $ 141,675      $ 125,656  

% of net revenues

     43.1 %      42.6 %      41.9 %      40.5 %
    


  


  


  


Net income

   $ 124,697      $ 109,163      $ 98,519      $ 87,373  
    


  


  


  


Earnings per share

                                   

Basic

   $ 0.39      $ 0.33      $ 0.30      $ 0.27  
    


  


  


  


Diluted

   $ 0.36      $ 0.31      $ 0.28      $ 0.25  
    


  


  


  


Shares used in the calculation of earnings per share

                                   

Basic

     323,240        328,247        329,188        326,247  
    


  


  


  


Diluted

     346,894        354,183        353,888        347,333  
    


  


  


  


Dividends declared per share

   $ 0.08      $ 0.08      $ 0.08      $ 0.08  
    


  


  


  


 

Net income for the three months ended June 26, 2004 includes $17.5 million of discretionary bonuses awarded to employees.

 

* * * * * * * * * * * * * *

 

B-23


Table of Contents

UNAUDITED FINANCIAL STATEMENTS INCLUDED IN MAXIM’S FORM 10-Q FOR FISCAL QUARTER ENDING SEPTEMBER 24, 2005

 


 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

MAXIM INTEGRATED PRODUCTS, INC.

 

(Amounts in thousands)

 

  

September 24,

2005


    June 25,
2005


 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 202,800     $ 185,551  

Short-term investments

     1,382,313       1,289,141  
    


 


Total cash, cash equivalents and short-term investments

     1,585,113       1,474,692  
    


 


Accounts receivable, net

     212,949       192,345  

Inventories

     183,243       167,779  

Deferred tax assets

     133,040       128,766  

Other current assets

     11,241       10,184  
    


 


Total current assets

     2,125,586       1,973,766  

Property, plant and equipment, net

     999,788       1,001,465  

Other assets

     28,850       28,840  
    


 


TOTAL ASSETS

   $ 3,154,224     $ 3,004,071  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 64,695     $ 56,266  

Income taxes payable

     52,701       33,173  

Accrued salary and related expenses

     128,927       121,234  

Accrued expenses

     62,702       54,305  

Deferred income on shipments to distributors

     19,247       20,225  
    


 


Total current liabilities

     328,272       285,203  

Deferred tax liabilities

     128,196       134,686  
    


 


Total liabilities

     456,468       419,889  
    


 


Commitments and contingencies (note 10)

                

Stockholders’ equity:

                

Preferred stock

     —         —    

Common stock

     328       327  

Additional paid-in capital

     177,715       134,671  

Retained earnings

     2,528,293       2,455,714  

Accumulated other comprehensive loss

     (8,580 )     (6,530 )
    


 


Total stockholders’ equity

     2,697,756       2,584,182  
    


 


TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 3,154,224     $ 3,004,071  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

B-24


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

MAXIM INTEGRATED PRODUCTS, INC.

 

     Three Months Ended

(Amounts in thousands, except per share data)

 

  

September 24,

2005


  

September 25,

2004


Net revenues

   $ 424,364    $ 435,067

Cost of goods sold(1)

     132,615      120,252
    

  

Gross margin

     291,749      314,815
    

  

Operating expenses:

             

Research and development(1)

     117,053      79,097

Selling, general and administrative(1)

     28,865      25,062
    

  

Total operating expenses

     145,918      104,159
    

  

Operating income

     145,831      210,656

Interest income and other, net

     10,967      5,729
    

  

Income before provision for income taxes

     156,798      216,385

Provision for income taxes

     51,430      71,840
    

  

Net income

   $ 105,368    $ 144,545
    

  

Earnings per share:

             

Basic

   $ 0.32    $ 0.45
    

  

Diluted

   $ 0.31    $ 0.42
    

  

Shares used in the calculation of earnings per share:

             

Basic

     327,959      324,668
    

  

Diluted

     344,860      344,875
    

  

Dividend declared per share

   $ 0.10    $ 0.08
    

  


(1)    Includes stock-based compensation charges as follow:

             

Cost of goods sold

   $ 10,454    $ —  

Research and development

     26,478      —  

Selling, general and administrative

     4,527      —  
    

  

Total stock-based compensation

   $ 41,459    $ —  
    

  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

MAXIM INTEGRATED PRODUCTS, INC.

 

     Three Months Ended

 

(Amounts in thousands)

 

   September 24,
2005


   

September 25,

2004


 

Cash flows from operating activities:

                

Net income

   $ 105,368     $ 144,545  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Stock based compensation

     41,459       —    

Depreciation, amortization and other

     20,568       18,685  

Tax benefit related to stock based compensation plans

     21,860       23,788  

Excess tax benefit related to stock based compensation plans

     (16,259 )     —    

Changes in assets and liabilities:

                

Accounts receivable

     (20,604 )     (3,333 )

Inventories

     (7,736 )     (18,033 )

Deferred taxes

     (9,562 )     4,041  

Income tax refund receivable

     —         (239 )

Other current assets

     (1,741 )     366  

Accounts payable

     8,429       (3,852 )

Income taxes payable

     19,528       25,511  

Deferred income on shipments to distributors

     (978 )     136  

All other accrued liabilities

     15,777       16,651  
    


 


Net cash provided by operating activities

     176,109       208,266  
    


 


Cash flows from investing activities:

                

Additions to property, plant and equipment

     (17,971 )     (66,344 )

Other non-current assets

     (238 )     (109 )

Purchases of available-for-sale securities

     (245,432 )     (278,936 )

Proceeds from sales/maturities of available-for-sale securities

     149,000       294,323  
    


 


Net cash used in investing activities

     (114,641 )     (51,066 )
    


 


Cash flows from financing activities:

                

Issuance of common stock

     53,620       25,907  

Excess tax benefit related to stock based compensation plans

     16,259       —    

Repurchase of common stock

     (81,309 )     (58,490 )

Dividends paid

     (32,789 )     (25,946 )
    


 


Net cash used in financing activities

     (44,219 )     (58,529 )
    


 


Net increase in cash and cash equivalents

     17,249       98,671  

Cash and cash equivalents:

                

Beginning of period

     185,551       147,734  
    


 


End of period

   $ 202,800     $ 246,405  
    


 


Supplemental disclosures of cash flow information:

                

Income tax paid

     19,911       18,738  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

B-26


Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1: BASIS OF PRESENTATION

 

The accompanying unaudited condensed interim consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for fair presentation have been included. The results of operations for the three months ended September 24, 2005 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 25, 2005.

 

The Company has a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every sixth or seventh fiscal year will be a 53-week fiscal year. Fiscal years 2006 and 2005 are 52-week fiscal years.

 

NOTE 2: STOCK-BASED COMPENSATION

 

Effective June 26, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company previously applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company elected to adopt the modified prospective application method as provided by SFAS 123(R), and, accordingly, the Company recorded compensation costs as the requisite service rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123(R).

 

At September 24, 2005 the Company had five stock option plans and one employee stock participation plan, including the Company’s 1996 Stock Incentive Plan (1996 Plan), 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan. The Company’s aggregate $41.5 million compensation cost for the three months ended September 24, 2005, was mainly generated by the Company’s 1996 Plan and the Company’s ESP Plan, which represented $37.7 million and $3.8 million in compensation cost, respectively. Total income tax benefit recognized in the income statement for the three months ended September 24, 2005 was $13.6 million for the Company’s 1996 Plan for share-based compensation arrangements. Compensation cost capitalized as part of inventory was $7.7 million for the three months ended September 24, 2005

 

1996 Stock Incentive Plan

 

The Company’s 1996 Plan, which was previously approved by the Company’s stockholders, permits the grant of up to 117.6 million shares. Under the 1996 Plan, options are granted with an exercise price not less than fair market value on the date of grant as determined by the Board of Directors or Plan administrator. Options granted under the 1996 Plan, as well as under the Company’s other stock plans described above, generally vest within five years and expire from five to ten years from the date of the grant or such shorter term as may be provided in the agreement.

 

B-27


Table of Contents

MAXIM INTEGRATED PRODUCTS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model. The Company estimates expected stock price volatility based on actual volatility observed in the historical record, and also on reported volatility data for the Company stock and traded options for which Company stock is the underlying asset. The Company uses historical data to estimate option exercises, expected option holding period and option termination. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield.

 

1987 Employee Stock Participation Plan

 

The Company’s ESP Plan, which was previously approved by the Company’s stockholders, permits the grant of up to 16.6 million shares. Under the ESP Plan, the Company offers stock purchase rights to purchase the Company stock at three to twenty-four month intervals at a price not less than the lesser of 85% of the fair market value of the stock on the date the purchase right is granted or the date the right is exercised. The Company’s ESP Plan does not permit employees to buy more than $25,000 worth of stock annually.

 

The fair value of stock purchase rights granted under the Company’s ESP Plan is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the implied volatilities from traded options on the Company’s stock. The Company uses historical data to estimate expected holding period and the U.S. Treasury yield for the risk-free interest rate.

 

The value of the Company’s stock options granted under its stock option plans during the three months ended September 24, 2005 and September 25, 2004 was estimated at the date of grant using the following weighted average assumptions:

 

     Three Months Ended

 
     Sept. 24, 2005

    Sept. 25, 2004

 

Expected option holding period (in years)

   4.5     4.3