-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NextWt9hWnpE/FL4fmIVh/IHptMlpZjOAiG51gcPXd3S+03lGQln5POkYaYNxHPF vk1Sy5MgfenC7lW0EaHJKw== 0000950134-98-001657.txt : 19980304 0000950134-98-001657.hdr.sgml : 19980304 ACCESSION NUMBER: 0000950134-98-001657 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980302 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DALLAS SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000749420 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 751935715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10464 FILM NUMBER: 98554626 BUSINESS ADDRESS: STREET 1: 4401 S BELTWOOD PKWY CITY: DALLAS STATE: TX ZIP: 75244-3292 BUSINESS PHONE: 2144500400 MAIL ADDRESS: STREET 2: 4401 S BELTWOOD PKWY CITY: DALLAS STATE: TX ZIP: 75244-3292 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 28, 1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ..................... to ....................... COMMISSION FILE NUMBER: 1-10464 DALLAS SEMICONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-1935715 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4401 SOUTH BELTWOOD PARKWAY, DALLAS, TEXAS 75244-3292 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 371-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, $.02 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of the S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of February 1, 1998: $1,315,876,826. Number of shares outstanding of the registrant's Common Stock as of February 1, 1998: 27,849,245. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the registrant's Annual Meeting of Stockholders to be held on April 21, 1998, are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS Except for the historical information contained herein, matters discussed in the Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth in this report. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that such expectations will be achieved. Dallas Semiconductor Corporation (the "Company" or "Dallas Semiconductor") designs, manufactures and markets electronic chips and chip-based subsystems. Founded in 1984, the Company uses customer problems as an entry point to develop products with widespread applications. The Company is committed to new product development as a means to attempt to increase future revenues and diversify its markets, product offerings and customers. The Company uses its advanced technologies to gain a competitive edge over the traditional approaches to semiconductors. Combining lithium energy cells with low-power complimentary metal oxide silicon (CMOS) chips can power them for the useful life of the equipment. Direct laser writing can enhance chip capabilities with higher levels of precision and/or unique identities. Special packaging gives improved functionality to silicon chips. In its fourteen-year history, Dallas Semiconductor has developed 292 proprietary base products with over 2,000 variations shipped to more than 15,000 customers worldwide. A direct sales force and distribution network sell to original equipment manufacturers (OEMs) of personal computers and workstations, scientific and medical equipment, industrial controls, automatic identification, telecommunications, consumer electronics and other markets. The Company organizes its products into product categories sharing common technologies, markets or applications as shown below. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report for the 1997 growth rates and relative size of the Company's main product categories. Communications Automatic Information System Extension Microcontrollers Commercial Timekeeping Computer Timekeeping Nonvolatile RAMs Others PRODUCT DEVELOPMENT The Company developed 25 new proprietary base products during the 1997 fiscal year. The Company's research and development expenditures for fiscal 1997 were $46 million, compared to expenditures in 1996 and 1995 of $35 million and $29 million, respectively. Dallas Semiconductor intends to continue to commit substantial resources to the development of new products. There can be no assurance, however, that such products, if developed, will gain market acceptance. PRODUCTS Descriptions of the Company's product categories are as follows. COMMUNICATIONS. An emerging and rapidly growing market exists for high capacity voice, data and video transmission. High capacity digital links in North America and Europe/Asia are known as T1/E1 networks. A set of highly integrated chips developed by Dallas Semiconductor addresses the requirements of these protocols and provides one of the most cost-effective solutions available in the industry while minimizing board space and power requirements. Transmission line terminators, such as the SCSI (small computer system interface) Terminator, quiet transmission lines between computers and peripherals, such as disk drives, permitting high speed, high integrity data transmissions. -2- 3 SYSTEM EXTENSION. This product category provides complete solutions to common problems facing many systems designers. Nearly all of the products include both analog and digital circuitry on the same chip. Direct-to-Digital Temperature Sensors help manage the growing thermal problems facing designers as the inevitable march to put more power into shrinking form factors continues. Digital Potentiometers permit a digital microprocessor to easily control an analog parameter such as volume or display screen brightness. CPU Supervisors monitor the power supply voltages in a system and issue a warning to the system should any fall below a critical value. COMMERCIAL TIMEKEEPING. Accurate clock-calendar information remains in demand in the ever evolving communications, consumer, industrial and medical markets (CCIM). A comprehensive line-up of CCIM timekeepers from the Company, including more than 45 base products in both chip and module packaging are in production to meet this need. Serial Timekeepers provide advanced features including clock-calendar display, talk-time, re-dial timing and power management for digital cellular phones. Phantom and Watchdog modules are used in data communications network routers, hubs and bridges to monitor communications traffic and store the exhaustive amounts of network configuration data. Bytewide Watchdog Timekeepers are also required in industrial control and medical equipment with extended functions including Nonvolatile SRAM and A/D conversion. NONVOLATILE RAMS. Static random access memory(SRAM) chips which were first introduced over 20 years ago, are used for high speed storage and retrieval of data. SRAMs have always had the undesirable characteristic of data loss when power is disrupted. Dallas Semiconductor has combined its circuitry and understanding of ultra low power CMOS SRAMs with improvements in long life lithium power sources to develop a family of Nonvolatile SRAM products. Nonvolatile SRAMs integrate a lithium power source and intelligent control circuitry to retain data even in the absence of system power. The control circuit, by monitoring the level of system voltage available to the memory at all times, switches to the lithium power source when necessary, and also protects the memory contents against inadvertent changes during system power fluctuations. A lithium power source provides backup power for more than 10 years in the absence of system power. Recent additions to the product line have increased memory capacity, added features to the basic architecture, and offered a solution for surface mount systems. AUTOMATIC INFORMATION. The Company has developed a family of Automatic Information chips that can be attached to an object, or carried by a person, which identifies the user and holds relevant information. Unlike barcodes, users do not need to refer to a remote database to decipher the code - -- the information is available in the device itself. These read/write data carriers can also be updated via computer while affixed to an object. Automatic Information chips can facilitate automation by tracking a work piece as it travels along an assembly line; they can also be used to identify people for access to secure areas. Using Dallas Semiconductor's l-Wire(TM) technology, a memory chip can be read or written with the touch of a probe. iButton(TM) devices are packaged in a stainless steel MicroCan(TM) 16mm in diameter. The Automatic Information product category also includes Software Authorization products that provide security for intellectual property (e.g., software and data). In an information age, an increasing demand exists to provide security for intellectual property and data. Publishers of premium-priced personal computer software who have strong motivations to protect their products from unauthorized use is one example of this demand. Devices in this product category can also be used to control access to buildings and equipment. Cryptographic iButton(TM) is a new product that enables a standard PC to send secure communications across networks, such as the Internet, to facilitate electronic commerce or to send private e-mail messages. - 3 - 4 MICROCONTROLLERS. A microcontroller typically combines a central processing unit, data memory, program memory and input-output devices on a single chip in order to control a wide variety of electronic systems. Dallas Semiconductor offers two product categories of Microcontroller devices, both based on the popular 8051 instruction set. The first, the Secure Microcontroller category, is based on the concept of using battery-backed non-volatile SRAM to hold program and data information. Unlike rigid ROM (read only memory) or EPROM (electrically programmable ROM) based microcontrollers, all of Dallas Semiconductor's Secure Microcontrollers are designed for change. By using high-performance, read/write SRAM memory, software is easily modified and remains nonvolatile for more than 10 years. This memory is initially loaded via a serial port and can be dynamically allocated to fit program and data storage requirements of a particular task. Unique security features of this product line allow users to "lock" their software into the processor thereby protecting it from unauthorized access and protecting valuable intellectual property. The second product category of Microcontrollers is based on a completely redesigned 8051 core that executes the same instruction set up to three times faster with no hardware changes. With this improved execution efficiency and because these devices were designed to be pin-for-pin compatible, they offer users the unique ability to add features and improve performance of their system without a complete redesign. COMPUTER TIMEKEEPING. The personal computer has been the dominant target market for computer timekeeping. This market is extremely cost sensitive and highly competitive. Cost pressures and competition are met by higher levels of integration and feature enhancement. The Company has differentiated Timekeeping products by adding features including NV SRAM, energy conservation components, and - most recently -Year 2000 compliance. OTHER. A description of some of the more significant categories described as "Other" include the following. OTHER: INTEGRATED BATTERY BACKUP. Nearly all electronic systems operate under the control of one or more microprocessors (uP). The instructions for these uPs or the data they use are subject to loss or corruption in the event of a power outage. Power outages can be inadvertent or intentional, but in either case an orderly transition to an alternate source of power is critical to retain instructions or data held in random access memory (RAM). The Nonvolatile Controller monitors the main power supply to the RAM in a system. In the event of a power failure it switches the RAM over to an alternate source of power and prevents any data loss or corruption. OTHER: INTELLIGENT SOCKETS. Often, after a system's design is complete, the manufacturer may desire to enhance functionality because of increased competition from newer products. Dallas Semiconductor has incorporated active electronics in sockets which can be soldered into a system board and add capabilities without requiring substantive changes in the existing system. For example, many systems manufacturers desire the capability to make SRAMs in existing systems nonvolatile. In this instance, they can replace the SRAM's socket in a system currently in use with a SmartSocket in the same place, and plug the memory circuit into the SmartSocket. A lithium battery and control circuit within the SmartSocket now allow the SRAM to retain data in the event of a loss of system power. Another example is a requirement in many existing systems to monitor and record time of day. The SmartWatch replaces standard SRAM sockets in existing systems and adds the ability to keep time of day to hundredths of a second while also making connected memory circuits nonvolatile. OTHER: SILICON TIMED CIRCUITS. Electronic systems require exact timing to control the trans-mission of data between their component parts. Timing requirements vary across systems. Historically, systems designers have not been able to use semiconductors as timing references because of their lack of precision; they consequently achieved the required accuracy by using, in combination or separately, quartz crystals and hybrid passive components, known as delay lines. Dallas Semiconductor's all-silicon delay lines offer single chip reliability, economy and significantly greater precision due to their laser-defined specifications. Direct laser writing provides precise accuracy and, because the products are defined in the final stage of manufacturing, a broad product mix is available without losing the economic - 4 - 5 benefits of standard integrated circuit production. Customers are provided maximum flexibility, as well as the option of purchasing tailor-made products at the approximate cost of standard, off-the-shelf solutions. These all-silicon products can be designed into new systems, as well as retrofitted into existing systems which otherwise utilize hybrid approaches. MANUFACTURING In March 1987 the Company began production at its advanced wafer fabrication facility, in which it is currently producing high performance CMOS integrated circuits with sub-micron geometries. This facility processes six-inch wafers and utilizes an automated modular process technology that provides substantial flexibility in the manufacturing process and significantly reduces the number of persons required for operation. Physical expansion of this facility was completed in 1989 and an additional wafer fabrication facility module was completed in 1994. Additional equipment is installed from time-to-time to support higher production volumes or advanced processing needs. The Company's wafer fabrication facility increased its wafer production by approximately 28% in 1996 and by approximately 18% in 1997. During fiscal 1997 all of the wafers used by the Company were processed at its own facility. After silicon wafers have been fabricated, the Company utilizes overseas assembly contractors to cut the wafers into individual chips and assemble them into integrated circuit packaging. The Company performs module assembly operations and final testing for substantially all of the Company's products in Dallas, Texas. PRODUCT COMPONENTS During fiscal 1997 the Company was able to obtain an adequate supply of static memory circuits from multiple suppliers. These circuits are used in a number of the Company's products. The Company anticipates that, at least for the short term, an adequate supply of these memory circuits will be available; however, given the historically unpredictable and undependable supply of these components, shortages may recur causing future sales of some Company products to be delayed or lost. If such shortages occur, future sales and earnings from products using these circuits, primarily Nonvolatile SRAMs, could be adversely affected. Additionally, any significant fluctuations in the purchase price for these components could impact the Company's gross margins. The Company continues to seek alternative sources for these components, including internal production of static memory circuits for use in its own products, primarily the Nonvolatile SRAMs. SALES Sales are made to distributors and to OEMs. For fiscal 1997 no OEM customer accounted for more than 5% of the Company's net sales, and the Company's top 25 OEM customers accounted for approximately 28% of net sales. The Company sells its products to customers by utilizing its own sales force and a global network of independent sales representative firms and distributors. During fiscal 1997 sales to domestic distributors represented approximately 34% of the Company's net sales, with the Company's largest domestic distributor, Avnet, accounting for a total of approximately 11.1% of net sales. The Company sells its products in a number of foreign countries, including a number of countries in Europe and the Far East. Export sales accounted for 43% of net sales in fiscal 1997. Export sales were 20% and 23% in Europe and the Far East, respectively, in fiscal 1997. The Company's export sales are billed in United States dollars and, therefore, the Company's results of operations are not subject to currency exchange adjustments. Although export sales are subject to government export regulations, the Company has not experienced any significant difficulties to date because of these regulations. The Company recognizes revenues from sales to distributors at the time of shipment to the distributor. As is common in the semiconductor industry, the Company grants price protection to distributors. Under this policy, distributors are granted credits for the difference between the price they were originally charged for products in inventory at the time of a price reduction and the reduced price which the Company subsequently charges distributors. From time-to-time, distributors are also granted credits on an individual basis for Company-approved price reductions to specific customers made to meet competition. The Company also grants distributors limited rights to return products. The Company maintains reserves against which these credits and returns are charged. - 5 - 6 BACKLOG The Company's backlog, although useful for scheduling production, does not represent actual sales and should not be used as a measure of future revenues. Backlog orders are generally subject to cancellation without penalty at the option of the purchaser and to changes in delivery schedules and do not reflect adjustments made for price decreases passed on to distributors or credits for returned products. As of December 28, 1997, the Company's backlog was approximately $80 million, as compared to approximately $72 million at December 29, 1996. The Company includes in its backlog all released purchase orders shippable within the next 12 months. THE SEMICONDUCTOR INDUSTRY AND COMPETITION The semiconductor industry is characterized by rapid technological change, intense competition from domestic and foreign competitors, cyclical market patterns, price erosion, occasional shortages of materials, variations in manufacturing yields and efficiencies and significant expenditures for capital equipment and product development. The industry has from time-to-time experienced severely depressed business conditions as well as short term softness and imbalances. While the Company's strategy is designed to reduce its exposure to these factors, fluctuations in operating results could occur due to one or more of these factors. The available supply of certain memory circuits used in a number of the Company's products has historically been unpredictable and undependable. Shortages in the supply of these circuits could limit the Company's future sales and earnings growth, and significant price fluctuations in the purchase price for these circuits could impact the Company's gross margins. See "Item 1. Business - Product Components." The Company faces competition from major domestic and international integrated circuit manufacturers, many of which have substantially greater manufacturing, financial, distributing and marketing resources than the Company, as well as from emerging companies attempting to obtain a share of the existing market. The Company competes principally on the basis of the quality, technical innovation, functionality and timeliness of introduction of its products, the adaptability of such products to specific applications, and price. The Company believes that the early recognition of market opportunities and its willingness to invest substantial time and capital in product development, coupled with product complexity and diversity, constitute an important competitive advantage. The Company's ability to compete successfully in the rapidly evolving semiconductor industry depends on numerous factors, some of which are within the Company's control and others of which are predominately outside of the Company's control. These factors include general economic conditions, changes in conditions affecting OEMs, competition, alternative technologies, the Company's success in developing new products and process technologies, market acceptance of new products, distributor and sales representative performances, the ability of the Company to continue diversifying its product line, manufacturing performance, subcontractor performance, availability and price fluctuations of components and other raw materials, and other factors. Any of these uncertainties could cause a severe near-term impact on the Company's order growth, net sales growth or results of operations. PATENTS AND INTELLECTUAL PROPERTIES Dallas Semiconductor has to date acquired or been granted 211 U.S. patents and seven foreign patents. The expiration dates of the Company's patents range from 1998 to 2015. None of the patents individually is considered material to the Company's business. The Company has a number of patent applications pending, although no assurance can be given that patents will ever be issued from such applications or that any patents, if issued, will be determined to be valid. The Company has also registered a number of its trademarks, as well as the mask works for certain products, and has sought copyright protection for its software and product literature. No assurance can be given, however, that such protection will give the Company any material competitive advantage in the semiconductor industry, due to the possibility of rapid technological obsolescence of such patented products, trademarks, copyrights and registered mask works, and the inherent limitations of the protection afforded under such laws. - 6 - 7 The Company has been notified that it may be infringing certain patents held by others. These notices are in various stages of evaluation. In the event infringement is claimed and the Company believes that a license is necessary or desirable, a license may be sought. The Company believes that if sought, a license could be obtained on commercially reasonable terms, although no assurance can be given in this regard. ENVIRONMENTAL REGULATION The Company is subject to a variety of local, state and federal governmental regulations in connection with emissions, the discharge of certain chemicals during its manufacturing process and the handling and disposal of various substances used in manufacturing. Failure to comply with present or future regulations could result in the suspension or cessation of the Company's operations. In addition, such regulations could in the future restrict the Company's ability to expand at its present location or could require the Company to acquire significant equipment or incur other substantial expenses. EMPLOYEES At December 28, 1997 the Company had 1,497 employees. The Company believes that its future success is dependent upon its ability to employ and retain qualified technical and management personnel, particularly the highly skilled design engineers involved in the development of new products. The competition for such personnel is intense. During fiscal 1997, the Company continued its practice of utilizing contract labor supplied by temporary agencies, primarily in the manufacturing area. At December 28, 1997, the Company was utilizing the services of 406 such temporary agency employees. ITEM 2. PROPERTIES The Company's headquarters are located in Dallas, Texas. As of December 28, 1997 the Company owned approximately 40 acres of land that includes approximately 632,000 square feet of building space. The Company's property provides space for administrative and engineering personnel, as well as wafer fabrication, test and surface mount production areas, warehousing, distribution facilities and assembly operations. In 1997, the Company purchased an additional five acres that included an additional 70,000 square feet of building space. A portion of this space is currently subject to certain existing leases. The Company currently leases a total of 48,000 square feet of nearby building space for additional warehousing. The Company currently leases small office facilities for its sales staff in Irvine, California, Sunnyvale, California, Woodland Hills, California, Chelmsford, Massachusetts, Marlton, New Jersey, Hoffman Estates, Illinois, Akron, Ohio and Dallas, Texas, under short term leases. The Company leases a small office facility in Beaverton, Oregon for design engineering. The Company's subsidiary, Dallas Semiconductor Corporation Limited, leases an office facility in Birmingham, England. The Company's subsidiary, Dallas Semiconductor Corporation (Taiwan), leases an office facility in Taipei, Taiwan. The Company established a new subsidiary in November 1997, Dallas Semiconductor Corporation (Germany), which leases an office facility in Munich, Germany. The Company's foreign sales corporation operates out of Bridgetown, Barbados, W.I. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. - 7 - 8 EXECUTIVE OFFICERS OF THE REGISTRANT The following information as of March 2, 1998, is provided with respect to each executive officer of the registrant pursuant to General Instruction G of Form 10-K.
NAME AGE CURRENT TITLE AND POSITION ---- --- -------------------------- C.V. Prothro 55 Chairman of the Board of Directors, President and Chief Executive Officer Chao C. Mai 62 Senior Vice President Michael L. Bolan 51 Vice President - Marketing and Product Development F.A. Scherpenberg 51 Vice President - Computer Products Alan P. Hale 37 Vice President - Finance
Mr. Prothro has been Chairman of the Board since February 1984 and served as acting President of the Company from February 1984 to November 1985. Mr. Prothro was named Chief Executive Officer of the Company in January 1989 and President of the Company in October 1989. Since August 1983, Mr. Prothro has been a general partner of Southwest Enterprise Associates, L.P., a venture capital fund. Previously, he served as Chief Executive Officer of Mostek Corporation, a semiconductor manufacturer, during 1981-82, and as its President and Chief Operating Officer from 1977 to 1981. Dr. Mai joined the Company as Vice President - Engineering in February 1984. He served in such capacity until he became Vice President - Manufacturing in November 1985 and as Vice President - Wafer Fabrication and Technology Development from June 1988 until January 1993. Dr. Mai was named Senior Vice President in January 1993. Previously he was employed in various capacities by Mostek Corporation for over 13 years including the position of Vice President of Process Research and Development beginning in 1980. Mr. Bolan joined the Company as Director of Marketing in June 1984. He served in that capacity until his election as Vice President - Marketing and Product Development in November 1985. He was employed as an analyst for Southwest Enterprise Associates, L.P. from November 1983 to June 1984. Prior thereto he was employed by Mostek Corporation from November 1978 to October 1983 in various capacities in technical planning, product planning and marketing. Mr. Scherpenberg was a Product Manager for the Company from May 1984 to March 1989 and Director of Sales from March 1989 to July 1989. He served as Vice President - Sales from July 1989 to July 1990, and became Vice President - Computer Products in July 1990. Prior to his employment with the Company, Mr. Scherpenberg was employed by Mostek Corporation for approximately five years in various capacities, including Field Applications Engineer and Strategic Marketing and Applications Engineer. Mr. Hale joined the Company in 1987 and has been Vice President of Finance since 1992. Mr. Hale's prior positions with the Company include Controller, Treasurer and Accounting Manager. Previously, he spent five years as an auditor with the Dallas office of Ernst & Young LLP, where his primary client base included Texas Instruments and other electronics manufacturers. He is a CPA in the State of Texas and has received an MBA degree from Southern Methodist University. - 8 - 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Dallas Semiconductor's common stock is traded on the New York Stock Exchange under the symbol DS. At December 28, 1997, there were approximately 573 holders of record of the Company's common stock. Set forth below are the high, low and quarter-end closing prices for the Company's common stock as reported by The Wall Street Journal during each quarterly period of the 1996 and 1997 fiscal years:
1996 1997 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH ------ ------ ------ ------ ------ ------ ------ ------ Stock Prices: High $22.75 $22.00 $19.38 $23.63 $27.00 $41.00 $42.50 $55.00 Low 18.00 17.75 17.38 17.75 22.75 25.63 32.81 35.50 End 18.38 18.13 18.25 22.25 26.13 37.19 41.81 37.38
In January 1995, the Board of Directors authorized the initiation of a quarterly dividend program. Total dividends paid in 1997 were $0.14 per share or $3,815,000. On January 20, 1998 the Board of Directors increased its annual cash dividend on the Company's common stock from $0.14 to $0.16 per share. The board also declared a quarterly cash dividend of $0.04 on each outstanding share of its common stock, payable on March 2, 1998 to holders of record on February 13, 1998. - 9 - 10 ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED SELECTED FINANCIAL DATA (Dollars in Thousands, Except per Share Amounts)
Fiscal Years -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- OPERATING SUMMARY: Net sales $ 368,212 $ 288,354 $ 233,274 $ 181,432 $ 156,869 Costs and expenses: Cost of sales 178,441 157,056 117,615 90,289 78,051 Research and development 46,078 34,974 28,602 22,651 19,402 Selling, general and administrative 53,838 42,175 35,483 26,584 22,588 ---------- ---------- ---------- ---------- ---------- Operating income 89,855 54,149 51,574 41,908 36,828 Interest income, net 4,681 2,937 3,366 3,165 2,825 ---------- ---------- ---------- ---------- ---------- Income before income taxes 94,536 57,086 54,940 45,073 39,653 Provision for income taxes 29,981 18,723 18,258 15,325 14,062 ---------- ---------- ---------- ---------- ---------- Net income $ 64,555 $ 38,363 $ 36,682 $ 29,748 $ 25,591 ========== ========== ========== ========== ========== Net income per share, basic $ 2.37 $ 1.45 $ 1.41 $ 1.17 $ 1.02 Net income per share, diluted $ 2.19 $ 1.37 $ 1.32 $ 1.09 $ 0.95 Shares used to calculate net income per share: Basic 27,206 26,458 26,075 25,456 25,071 Diluted 29,457 27,990 27,762 27,288 26,949 Dividends declared per share $ 0.14 $ 0.12 $ 0.10 -- -- FINANCIAL POSITION AT YEAR END: Cash and short-term investments $ 114,608 $ 70,274 $ 69,304 $ 64,520 $ 76,273 Additions to property, plant and equipment 58,645 60,451 49,329 44,743 21,091 Depreciation and amortization 35,789 28,379 21,344 15,292 13,922 Total assets 417,142 313,863 272,425 221,227 186,544 Total liabilities 66,085 41,125 37,443 26,474 21,006 Stockholders' equity 351,057 272,738 234,982 194,753 165,538 Book value per weighted average share, diluted 11.92 9.74 8.46 7.14 6.14
- 10 - 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table contains certain amounts, and the amounts as a percentage of net sales, reflected in the Company's consolidated statements of operations for the 1997, 1996, and 1995 fiscal years.
(Dollars in Millions) ---------------------------------------------------------- 1997 % 1996 % 1995 % ------- ----- ------- ----- ------- ----- Net sales $ 368.2 100.0 $ 288.4 100.0 $ 233.3 100.0 Cost of sales 178.4 48.5 157.1 54.5 117.6 50.4 Gross margin 189.8 51.5 131.3 45.5 115.7 49.6 Research and development 46.1 12.5 35.0 12.1 28.6 12.3 Selling, general and administrative 53.8 14.6 42.2 14.6 35.5 15.2 Operating income 89.9 24.4 54.1 18.8 51.6 22.1 Interest income, net 4.7 1.3 3.0 1.0 3.4 1.4 Provision for income taxes 30.0 8.2 18.7 6.5 18.3 7.8 Net income $ 64.6 17.5 $ 38.4 13.3 $ 36.7 15.7
1997 Results of Operations Compared with 1996 Net sales in 1997 were $368.2 million, up 28% compared with $288.4 million in 1996. Net sales increases resulted from higher unit sales of new and/or existing products in several product categories as shown in the table below.
(Dollars in Millions) ------------------------------------------ 1995 1996 1997 '96-'97 Net Sales Net Sales Net Sales Growth --------- --------- --------- --------- Product Categories ------------------ Communications $ 32.6 $ 50.1 $ 82.6 65% System Extension 27.6 37.6 61.7 64% Commercial Timekeeping 28.7 35.6 50.9 43% NV RAMs 32.6 37.8 46.3 22% Automatic Information 17.6 19.4 38.8 100% Microcontrollers 20.2 29.7 30.7 3% Computer Timekeeping 37.6 47.1 22.7 (52)% Others 36.4 31.1 34.5 11% -------- -------- -------- -------- Company Total $ 233.3 $ 288.4 $ 368.2 28% ======== ======== ======== ========
Export sales accounted for 43% and 45% of total net sales in 1997 and 1996, respectively. Export sales were 20% and 23% in Europe and the Far East, respectively. During 1997, the Company continued its policy of generally not selling or licensing manufacturing or marketing rights to its products or the underlying proprietary technologies. Cost of sales were $178.4 and $157.1 million in 1997 and 1996, respectively. Gross margins increased to 51.5% in 1997 from 45.5% in 1996. The increase in gross margins resulted primarily from increased efficiency in factory operations and a sales-mix shift toward higher margin products. Research and development ("R&D") expenses were $46.1 million and $35.0 million or 12.5% and 12.1% of net sales in 1997 and 1996, respectively. Higher R&D expenses resulted primarily from increased salaries and benefits. Increased R&D spending reflects the Company's commitment to new product development as a means to increase future revenues and to further diversify the Company's product offerings. The Company introduced 25 new base products in 1997 compared with 21 new base product introductions in 1996. Product introduction occurs when sample quantities of product are shipped to one or more customers. The cumulative number of base products introduced by the Company totaled 292 at fiscal year end 1997. Selling, general and administrative ("SG&A") expenses increased to $53.8 million in 1997 from $42.2 million in 1996. SG&A expenses as a percent of sales remained constant at 14.6%. The increase consisted primarily of increased sales commissions to support higher net sales and increased personnel costs. Operating income in 1997 was $89.9 million, up 66% from $54.1 million in 1996. Operating income as a percentage of net sales (operating margin) increased to 24.4% in 1997 from 18.8% in 1996. The increase resulted primarily from the gross margin increase of 6.0%. - 11 - 12 Net interest income was $4.7 and $3.0 million in 1997 and 1996, respectively. Net interest income increased primarily due to higher average cash balances in 1997. Changes in interest rates will continue to affect net interest income as will any substantial change in the Company's cash and short-term investments or any substantial change in borrowings. The provision for income taxes was $30.0 million in 1997 and $18.7 million in 1996. The provision for income taxes consisted of estimated federal and state income taxes at statutory rates and a deferred tax benefit of $6.2 million in 1997 and $0.7 million in 1996. The Company's effective tax rate decreased to 31.7% in 1997 from 32.8% in 1996 as a result of the extension of the federal research and development tax credit by the Taxpayer Relief Act of 1997 and anticipated differences between income for financial statement purposes and taxable income for the two periods. The Company has undertaken a preliminary evaluation of its mission critical systems and believes that any cost that may arise to ensure functionality in the year 2000 would be insignificant. A number of uncertainties exist that may influence the Company's future operating decisions and results, including general economic conditions, changes in conditions affecting original equipment manufacturers, competition, alternative technologies, the Company's success in developing new products and process technologies, market acceptance of the Company's new products, distributor and sales representative performances, the ability of the Company to continue diversifying its product line, manufacturing performance, subcontractor performance, availability and price fluctuations of raw materials, and other factors. Any of these uncertainties could cause a severe near-term impact on the Company's order growth, net sales growth or results of operations. 1996 Results of Operations Compared with 1995 Net sales in 1996 were $288.4 million, up 24% compared with $233.3 million in 1995. Net sales increases resulted from higher unit sales of new and/or existing products in several product families. Export sales accounted for 45% and 39% of total net sales in 1996 and 1995, respectively. Export sales were 18% and 27% in Europe and the Far East, respectively. Cost of sales were $157.1 and $117.6 million in 1996 and 1995, respectively. Gross margins declined to 45.5% in 1996 from 49.6% in 1995. R&D expenses were $35.0 million and $28.6 million or 12.1% and 12.3% of net sales in 1996 and 1995, respectively. Higher R&D expenses resulted primarily from increased salaries and benefits. The Company introduced 21 new base products in 1996 compared with 31 new base product introductions in 1995. The cumulative number of base products introduced by the Company totaled 267 at fiscal year end 1996. SG&A expenses increased to $42.2 million from $35.5 million or 14.6% and 15.2% of net sales in 1996 and 1995, respectively. The increase consisted primarily of increased sales commissions to support higher net sales and increased personnel costs. Operating income in 1996 was $54.1 million, up 5% from $51.6 million in 1995. Operating income as a percentage of net sales (operating margin) decreased to 18.8% in 1996 from 22.1% in 1995. The decrease resulted primarily from the gross margin decline of 4.1%. Net interest income was $3.0 and $3.4 million in 1996 and 1995, respectively. Net interest income declined primarily due to lower average cash balances in 1996. The provision for income taxes was $18.7 million in 1996 and $18.3 million in 1995. The provision for income taxes consisted of estimated federal and state income taxes at statutory rates and a deferred tax benefit of $0.7 million in 1996 and $0.2 million in 1995. The Company's effective tax rate decreased to 32.8% in 1996 from 33.2% in 1995 as a result of the reinstatement and modification of the federal research and development tax credit by the Small Business Jobs Protection Act of 1996, partially offset by changes in anticipated differences between income for financial statement purposes and taxable income for the two periods. Financial Condition The Company's cash and short-term investments totaled $114.6 million at December 28, 1997, - 12 - 13 compared with $70.3 million at December 29, 1996. The increase in cash and short-term investments was primarily the result of net cash provided from operations of $97.2 million, offset by investments in property, plant and equipment of $58.6 million. The Company continues to invest in financial instruments having maturities in excess of one year to obtain yields higher than those available in the short-term market. The current ratio at fiscal year end 1997 decreased slightly to 3.8, compared with 4.1 at fiscal year end 1996. The Company expects to fund its 1998 capital needs primarily with cash flows from operations, supplemented where appropriate with existing cash and short-term investments or external financing. Gross capital additions to property, plant and equipment in 1997 totaled $58.6 million, compared with $60.5 million in 1996. The 1997 capital additions included $4.0 million in building purchases near its facilities in Dallas. As of December 28, 1997, the Company owned approximately 632,000 square feet of building space and 40 acres of land in Dallas. Capital additions in 1997 included $28.1 million in capital expenditures for wafer fabrication ("fab") equipment and $21.2 million for manufacturing and test equipment. Capital expenditures in 1998 are anticipated to be $80 million and will be used primarily for fabrication equipment, manufacturing and test equipment, and computer hardware and software. In August 1994, the Board of Directors authorized the purchase from time-to-time, depending on market conditions, of up to 500,000 shares of its common stock. As of December 28, 1997, 215,900 shares at a cumulative average price of $15.96, totaling $3,446,000, have been purchased pursuant to this stock repurchase plan. In January 1995 the Board of Directors authorized the initiation of a quarterly dividend program. Total dividends paid in 1997 were $0.14 per share or $3,815,000. On January 20, 1998 the Board of Directors increased the annual cash dividend on the Company's common stock from $0.14 to $0.16 per share. The board also declared a quarterly cash dividend of $0.04 on each outstanding share of its common stock, payable on March 2, 1998 to holders of record on February 13, 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF INCOME (Thousands, Except Per Share Amounts)
Fiscal Years Ended ------------------ December 28, December 29, December 31, 1997 1996 1995 ------------ ------------ ------------ Net sales $ 368,212 $ 288,354 $ 233,274 Operating costs and expenses: Cost of sales 178,441 157,056 117,615 Research and development 46,078 34,974 28,602 Selling, general, and administrative 53,838 42,175 35,483 ------------ ------------ ------------ Operating income 89,855 54,149 51,574 Interest income, net 4,681 2,937 3,366 ------------ ------------ ------------ Income before income taxes 94,536 57,086 54,940 Provision for income taxes 29,981 18,723 18,258 ------------ ------------ ------------ Net income $ 64,555 $ 38,363 $ 36,682 ============ ============ ============ Net income per common share, basic $ 2.37 $ 1.45 $ 1.41 Net income per common share, diluted $ 2.19 $ 1.37 $ 1.32 ------------ ------------ ------------ Shares used to calculate net income per share: Basic 27,206 26,458 26,075 Diluted 29,457 27,990 27,762 ------------ ------------ ------------ Dividends declared per share $ 0.14 $ 0.12 $ 0.10 ------------ ------------ ------------
See accompanying notes. - 13 - 14 CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts)
December 28, December 29, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and short-term investments $ 114,608 $ 70,274 Accounts receivable, less allowance for doubtful accounts of $380 and $373 at fiscal year end 1997 and 1996, respectively 62,337 42,812 Inventories 59,131 49,629 Deferred tax assets, net 9,689 3,457 Other current assets 4,475 3,791 ------------ ------------ Total current assets 250,240 169,963 Property, plant and equipment, at cost: 330,591 274,013 Less accumulated depreciation (168,836) (135,114) ------------ ------------ Property, plant and equipment, net 161,755 138,899 Other assets 5,147 5,001 ------------ ------------ $ 417,142 $ 313,863 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable 29,711 22,475 Accrued salaries and benefits 19,979 8,641 Accrued taxes other than income 3,678 831 Other accrued liabilities 10,345 5,824 Income taxes payable 2,372 3,354 ------------ ------------ Total current liabilities 66,085 41,125 Stockholders' equity: Preferred stock, $0.10 par value; 5,000,000 shares authorized; no shares issued and outstanding Common stock, $0.02 par value; 40,000,000 shares authorized; issued: 27,639,784 shares issued at December 28, 1997, and 26,696,807 shares issued at December 29, 1996 553 534 Additional paid-in capital 106,161 88,601 Retained earnings 245,961 185,221 Treasury stock shares at cost: 91,525 shares at both December 28, 1997 and December 29, 1996 (1,618) (1,618) ------------ ------------ Total stockholders' equity 351,057 272,738 ------------ ------------ $ 417,142 $ 313,863 ============ ============
See accompanying notes. - 14 - 15 CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
Fiscal Years Ended ------------------ December 28, December 29, December 31, 1997 1996 1995 ------------ ------------ ------------ Cash Flows from Operating Activities: Net income $ 64,555 $ 38,363 $ 36,682 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 35,789 28,379 21,344 Deferred tax benefit (6,232) (683) (213) Increase in accounts receivable (19,525) (6,110) (8,372) Increase in inventories (9,502) (1,339) (7,837) (Increase) decrease in other current assets (684) 425 (486) Increase in accounts payable 7,236 2,057 5,591 Increase in accrued salaries and benefits 11,338 97 3,216 Increase (decrease) in accrued taxes other than income 2,847 (1,506) (149) Increase in other accrued liabilities 4,521 2,020 1,092 Increase in income taxes payable 6,895 1,900 3,354 ------------ ------------ ------------ Net cash provided by operating activities 97,238 63,603 54,222 ------------ ------------ ------------ Cash Flows from Investing Activities: Additions to property, plant and equipment (58,645) (60,451) (49,329) Increase in other assets (146) (689) (1,521) ------------ ------------ ------------ Net cash used in investing activities (58,791) (61,140) (50,850) ------------ ------------ ------------ Cash Flows from Financing Activities: Proceeds from issuance of common stock upon exercise of stock options and other 9,702 1,820 5,048 Purchase of treasury stock -- (137) (1,026) Dividends paid to shareholders (3,815) (3,176) (2,610) ------------ ------------ ------------ Net cash provided by or used in financing activities 5,887 (1,493) 1,412 ------------ ------------ ------------ Net increase in cash and short-term investments 44,334 970 4,784 Cash and short-term investments at beginning of year 70,274 69,304 64,520 ------------ ------------ ------------ Cash and short-term investments at end of year $ 114,608 $ 70,274 $ 69,304 ============ ============ ============ Cash payments for income taxes $ 29,318 $ 17,505 $ 15,117 Disposition of assets $ 2,326 -- --
See accompanying notes. - 15 - 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Years Ended December 28, 1997 (Thousands)
Common Stock Additional Treasury ------------------------ Paid-in Retained Stock Shares Amount Capital Earnings at Cost Total ---------- ---------- ---------- ---------- ---------- ---------- Balance at January 1, 1995 25,422 $ 511 $ 80,562 $ 115,962 $ (2,282) $ 194,753 Issuance of common stock 987 18 3,203 -- 1,827 5,048 Treasury stock (54) -- -- -- (1,026) (1,026) Tax benefit from stock option exercises -- -- 2,135 -- -- 2,135 Dividends declared -- -- -- (2,610) -- (2,610) Net income -- -- -- 36,682 -- 36,682 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 26,355 529 85,900 150,034 (1,481) 234,982 Issuance of common stock 258 5 1,815 -- -- 1,820 Treasury stock (8) -- -- -- (137) (137) Tax benefit from stock option exercises -- -- 886 -- -- 886 Dividends declared -- -- -- (3,176) -- (3,176) Net income -- -- -- 38,363 -- 38,363 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 29, 1996 26,605 534 88,601 185,221 (1,618) 272,738 Issuance of common stock 943 19 9,683 -- -- 9,702 Tax benefit from stock option exercises -- -- 7,877 -- -- 7,877 Dividends declared -- -- -- (3,815) -- (3,815) Net income -- -- -- 64,555 -- 64,555 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 28, 1997 27,548 $ 553 $ 106,161 $ 245,961 $ (1,618) $ 351,057 ========== ========== ========== ========== ========== ==========
See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY Dallas Semiconductor Corporation (the "Company") was incorporated in Delaware in February 1984. The Company develops, manufactures and markets high-performance complementary metal oxide silicon (CMOS) integrated circuits and semiconductor-based systems that provide innovative and cost-effective solutions to electronic design problems in a wide range of existing and emerging markets. Export sales, principally to customers in Europe and the Far East, represented approximately 43%, 45%, and 39% of net sales in 1997, 1996, and 1995 respectively. Sales to domestic distributors comprised approximately 34%, 31%, and 34% of net sales in 1997, 1996, and 1995 respectively. In 1997, 1996 and 1995 one distributor accounted for $41,041,000 or 11%, $30,889,000 or 11%, and $26,081,000 or 11% of net sales, respectively. No other distributor or original equipment manufacturer ("OEM") customer accounted for 10% or more of net sales in the years presented. - 16 - 17 2. SIGNIFICANT ACCOUNTING POLICIES Fiscal year. The Company operates on a 52- or 53-week fiscal year ending on the Sunday nearest December 31. Fiscal year 1997, a 52-week year, ended December 28, 1997. Fiscal years 1996 and 1995 ended December 29, 1996 and December 31, 1995, respectively. Principles of consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of estimates from which actual results could vary. Cash and short-term investments. Since 1995, the Company has classified its cash equivalents and short-term investments as current. Cash and short-term investments consist of municipal bonds and money market funds, U.S. government agency obligations and corporate notes. At December 28, 1997 and December 29, 1996 cash and short-term investments which had a maturity of greater than 90 days when purchased were $107,214,000 and $69,483,000, respectively. Such investments are carried at amounts which approximate their fair market value based on quoted market prices. The Company places its investments only in high credit quality financial instruments, and limits the amount invested in any one institution or in one instrument. Inventories. Inventories are stated at the lower of standard cost, which approximates actual cost (first-in, first-out), or market. Depreciation. Depreciation is calculated based on the straight-line method over the estimated useful lives of the related assets, generally forty years for buildings, five to ten years on building improvements and two to seven years for computer hardware, software, and machinery and equipment. Revenue recognition. Sales are recognized upon shipment to distributors and to OEM customers. Sales to domestic distributors are made under distributor agreements which provide the distributor certain price reduction and return and allowance rights. Such sales are reduced for estimated future price reductions and returns. Research and development. Research and development costs are charged to operations when incurred. Net income per common share. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" effective for both interim and annual periods ending after December 15, 1997. FASB 128 replaced the previously required primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes the dilutive effect of stock options. Diluted earnings per share includes the dilutive effect of stock options and is equivalent to our historically reported net income per share amounts. In the 1997 Annual Report on Form 10-K basic earnings per share is referred to "Net income per share, basic," and diluted earnings per share is referred to "Net income per share, diluted." Income taxes. Taxes are reported under Statement of Financial Accounting Standards No. 109 and, accordingly, deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes. Concentration of credit risk. The Company markets its products for sale to OEMs and distributors primarily in the United States, Europe, and the Far East. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. Stock Options. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" effective for all stock-based compensation awarded after December 15, 1994. As allowed under this standard, the Company has elected not to recognize the effects of stock-based compensation in its financial statements. Pro forma effects on net income and earnings per share are not material for the fiscal years 1997, 1996 or 1995. - 17 - 18 3. BALANCE SHEET DETAIL (Thousands)
Fiscal Years Ended ------------------ December 28, December 29, 1997 1996 ------------ ------------ Inventories: Raw materials $ 8,761 $ 6,688 Work-in-process 31,187 32,309 Finished goods 19,183 10,632 ------------ ------------ $ 59,131 $ 49,629 ============ ============ Property, plant and equipment: Land and land improvements $ 8,757 $ 7,429 Building and improvements 52,067 43,145 Machinery and equipment 269,767 223,439 ------------ ------------ $ 330,591 $ 274,013 ============ ============ Accrued salaries and benefits: Salaries, benefits and other $ 14,672 $ 5,139 Sales commissions 5,307 3,502 ------------ ------------ $ 19,979 $ 8,641 ============ ============ Accrued taxes other than income: Ad Valorem taxes $ 3,212 $ 492 Other 466 339 ------------ ------------ $ 3,678 $ 831 ============ ============
4. STOCKHOLDERS' EQUITY Stock options. In August 1984, the Company adopted the 1984 Stock Option Plan (the "1984 Plan") under which, as amended, an aggregate of 2,220,919 shares of common stock has been reserved for issuance. In February 1987, the Company adopted the 1987 Stock Option Plan (the "1987 Plan") under which, as amended, an aggregate of 5,665,091 shares of common stock has been reserved for issuance. On April 23, 1996, the 1987 Plan was amended to provide for an annual increase, on and as of January 1st of each calendar year, of 1% of the number of shares of common stock outstanding on December 31st of the preceding year. Under this 1987 Plan provision, 263,555, 266,053 and 275,483 shares were reserved for issuance on January 1st 1996, 1997 and 1998, respectively. These shares are reflected in the option table on the next page. All options have been granted at no less than 100% of the fair market value of the stock at the date of grant. As of December 28, 1997, the 1984 Plan had options outstanding at $6.25 with an expiration date of January 21, 2001. As of December 28, 1997, the 1987 Plan had options outstanding ranging from $4.50 to $53.38 with a weighted average exercise price of $12.29 and expiration dates ranging from October 4, 1999 to December 16, 2007. The options generally are nontransferable and expire no later than ten years (for the 1984 Plan) and eleven years (for the 1987 Plan) from date of grant. Options generally are exercisable upon grant. Shares of common stock issuable and/or exercised under the 1984 Plan and the 1987 Plan vest based upon years of service, generally four years. Upon termination of a participant's employment, the Company reserves the right to repurchase the nonvested portion of the stock held by the employee, at the original option price. On April 26, 1994, the 1993 Officer and Director Stock Option Plan (the "1993 Plan") was approved by the stockholders under which, as amended, an aggregate of 3,612,893 shares of common stock has been reserved for issuance. The 1993 Plan provided for an annual increase, on and as of January 1st of each calendar year, of 1% of the number of shares of common stock outstanding on December 31st of the preceding year beginning on January 1st 1994. Under the 1993 Plan provision, 263,555, 266,053 and 275,483 shares were reserved for issuance on January 1st, 1996, 1997, and 1998, respectively. These shares are reflected in the outstanding options table on the next page in the year authorized. Under the 1993 Plan, as of December 28, 1997, 2,530,750 options were outstanding ranging from $14.75 to $17.88 with a weighted average exercise price of $15.55 and expiration dates ranging from July 9, 2003 to October 3, 2006. - 18 - 19 Total shares reserved for future issuance upon exercise of options are 6,372,501. Additional information with respect to stock options under the 1984, 1987, and 1993 Plans is as follows.
Outstanding Options ------------------- Options Available Number of Aggregate for Grant Shares Price ------------ ------------ ------------ January 1, 1995 646,214 6,226,678 $ 62,754,936 Options authorized 263,555 -- -- Options granted (173,000) 173,000 2,966,850 Options exercised -- (909,672) (4,188,069) Options canceled 202,499 (202,499) (2,935,700) ------------ ------------ ------------ December 31, 1995 939,268 5,287,507 58,598,017 Options authorized 795,661 -- -- Options granted (989,400) 989,400 17,847,586 Options exercised -- (257,924) (1,821,459) Options canceled 38,582 (38,582) (625,795) ------------ ------------ ------------ December 29, 1996 784,111 5,980,401 73,998,349 Options authorized 550,966 -- -- Options granted (269,350) 269,350 9,647,819 Options exercised -- (942,977) (9,700,388) Options canceled 111,408 (111,408) (1,930,118) ------------ ------------ ------------ December 28, 1997 1,177,135 5,195,366 $ 72,015,662 ============ ============ ============
In August 1994, the Board of Directors authorized the purchase, from time-to-time, depending on market conditions, of up to 500,000 shares of its common stock. As of December 28, 1997, 215,900 shares at a cumulative average price of $15.96, totaling $3,446,000 have been purchased pursuant to this stock repurchase program and recorded using the cost method. 5. INCOME TAXES The provision for income taxes differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes as follows (in thousands).
Fiscal Years Ended ------------------ December 28, December 29, December 31, 1997 1996 1995 ------------ ------------ ------------ Provision at statutory rate $ 33,088 $ 19,980 $ 19,229 State and environmental taxes, net of federal benefit 1,335 1,015 743 Tax exempt foreign sales corporation income (1,998) (1,442) (1,054) Research and Development tax credit (1,344) (668) -- Other (1,100) (162) (660) ------------ ------------ ------------ Provision for income taxes $ 29,981 $ 18,723 $ 18,258 ============ ============ ============
- 19 - 20 The components of the provision for income taxes are as follows (in thousands).
Fiscal Years Ended ------------------ December 28, December 29, December 31, 1997 1996 1995 ------------ ------------ ------------ Current provision $ 36,213 $ 19,406 $ 18,471 Deferred benefit (6,232) (683) (213) ------------ ------------ ------------ Provision for income taxes $ 29,981 $ 18,723 $ 18,258 ============ ============ ============
Current state amounts included in the provision for income taxes include $2,590,000, $1,700,000, and $1,200,000 for the years ended 1997, 1996, and 1995, respectively. The components of the net deferred tax assets are as follows (in thousands).
Fiscal Years Ended ------------------ December 28, December 29, 1997 1996 ------------ ------------ Sales and inventory reserves $ 11,022 $ 8,850 Accrued expenses and other 8,547 3,391 Valuation allowance (3,973) (3,973) ------------ ------------ Deferred tax assets 15,596 8,268 Deferred tax liability (5,907) (4,811) ------------ ------------ Net deferred tax asset $ 9,689 $ 3,457 ============ ============
6. NET INCOME PER SHARE For fiscal years ended December 31, 1995, December 29, 1996 and December 28, 1997, "Net income per share, basic" and "Net income per share, diluted" are calculated as follows (in thousands).
Per Share Net Income Shares Amounts ---------- -------- -------- As of December 31, 1995: Net income per share, basic $ 36,682 26,075 $ 1.41 ======== Dilutive effect of stock options -- 1,687 -------- -------- Net income per share, diluted $ 36,682 27,762 $ 1.32 ======== ======== ======== As of December 29, 1996: Net income per share, basic $ 38,363 26,458 $ 1.45 ======== Dilutive effect of stock options -- 1,532 -------- -------- Net income per share, diluted $ 38,363 27,990 $ 1.37 ======== ======== ======== As of December 28, 1997: Net income per share, basic $ 64,555 27,206 $ 2.37 ======== Dilutive effect of stock options -- 2,251 -------- -------- Net income per share, diluted $ 64,555 29,457 $ 2.19 ======== ======== ========
- 20 - 21 ================================================================================ REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Stockholders: We have audited the accompanying consolidated balance sheets of Dallas Semiconductor Corporation as of December 28, 1997 and December 29, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended December 28, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dallas Semiconductor Corporation as of December 28, 1997 and December 29, 1996, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Dallas, Texas January 7, 1998 - 21 - 22 SUPPLEMENTARY FINANCIAL DATA (Unaudited) (Thousands, Except per Share Amounts)
Fiscal Years 1996 and 1997 by Fiscal Quarter ------------------------------- 1996 1997 ----------------------------------------- ----------------------------------------- 1st 2nd 3rd 4th 1st 2nd 3rd 4th -------- -------- -------- -------- -------- -------- -------- -------- Operating Summary: Net sales $ 65,584 $ 70,362 $ 72,023 $ 80,385 $ 88,704 $ 91,040 $ 93,069 $ 95,399 Cost of sales 33,697 37,263 41,490 44,606 44,767 44,627 44,710 44,337 Operating income 14,218 14,263 10,941 14,727 20,302 21,491 23,311 24,751 Income before income taxes 15,018 15,011 11,649 15,408 21,216 22,616 24,598 26,106 Net income 10,062 10,057 7,805 10,439 14,374 15,322 16,911 17,948 Net income per share, basic $ 0.38 $ 0.38 $ 0.30 $ 0.39 $ 0.54 $ 0.56 $ 0.62 $ 0.65 Net income per share, diluted $ 0.36 $ 0.36 $ 0.28 $ 0.37 $ 0.50 $ 0.52 $ 0.57 $ 0.60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section entitled "Election of Directors" of the Company's definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held April 21, 1998, is incorporated herein by reference. Additional information with respect to executive officers of the Company is found in Part I hereof under the heading "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Director Compensation" and "Executive Compensation" of the Company's definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held April 21, 1998 (other than the subsections entitled "Report of Compensation Committee on Executive Compensation" and "Comparison of Five Year Cumulative Total Return Among the Company, S&P 500 Index and S&P Semiconductor Index"), are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections entitled "Certain Beneficial Owners" and "Election of Directors" of the Company's definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held April 21, 1998, are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The subsection entitled "Executive Compensation -- Compensation Committee Interlocks and Insider Participation" of the Company's definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held April 21, 1998, is incorporated herein by reference. - 22 - 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules
The following consolidated financial statements of Dallas Semiconductor Pages in this Annual Corporation are included in Item 8 of this Annual Report on Form 10-K. Report on Form 10-K ----------------------------------------------------------------------- ------------------- Consolidated Statements of Income for each of the three fiscal years in the period ended December 28, 1997 ...................................................................... 13 Consolidated Balance Sheets at December 28, 1997 and December 29, 1996 ....................... 14 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended December 28, 1997 ..................... 15 Consolidated Statements of Stockholders' Equity for each of the three fiscal years in the period ended December 28, 1997 ..................... 16 Notes to Consolidated Financial Statements .............................................. 16 - 20 Report of Ernst & Young LLP, Independent Auditors ............................................ 21
The following consolidated financial statement schedule of Dallas Semiconductor Corporation is included on the page set forth below.
Page in this Annual Report on Form 10-K ------------------- Schedule II. Valuation Qualifying Accounts................................................... S-1
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted as they are either not required, not applicable or the required information is included in the financial statements or notes thereto. (b) Reports on Form 8-K None. (c) Exhibits
Previously Filed* ------------------------------------------- Exhibit With File Number As Exhibit Description - ------- ---------------- ---------- ----------- 3(a)-1 33-16924 3(a)-3 Restated Certificate of Incorporation of the Registrant 3(a)-2 Amdt. No. 2 to Form 10 0-16170 3(a)-4 Amendment to Restated Certificate of Incorporation of the Registrant 3(b) Amdt. No. 2 to Form 10 0-16170 3(b)-1 Bylaws of the Registrant, as amended 4(a) 1989 10-K 1-10464 4(a) Specimen form of Certificate for Common Stock of the Registrant 4(b) 33-16924 4 Specimen form of Certificate for Common Stock of the Registrant **10(a)-1 33-16924 10(a) 1984 Stock Option Plan of the Registrant, as amended **10(a)-2 33-24372 4.3.1 Form of Incentive Stock Option Agreement relating to 1984 Stock Option Plan, as amended **10(a)-3 33-24372 4.3.2 Form of Non-Qualified Stock Option Agreement relating to 1984 Stock Option Plan, as amended **10(b)-1 1991 10-K 1-10464 10(b)-1 Amended and Restated 1987 Stock Option Plan of the Registrant
- 23 - 24
Previously Filed* ------------------------------------------- Exhibit With File Number As Exhibit Description - ------- ---------------- ---------- ----------- **10(b)-2 33-24372 4.4.1 Form of Incentive Stock Option Agreement relating to options granted to employees under the 1987 Stock Option Plan, as amended **10(b)-3 33-24372 4.4.2 Form of Non-Qualified Stock Option Agreement relating to options granted to employees under the 1987 Stock Option Plan, as amended **10(b)-4 1988 10-K 0-16170 10(b)-5 Form of Non-Qualified Stock Option Agreement relating to 1987 Stock Option Plan, as amended (as granted on October 20, 1988) **10(b)-5 1989 10-K 1-10464 10(b)-6 Forms of Non-Qualified Stock Option Agreements relating to options granted to employees under the 1987 Stock Option Plan (as approved by the Compensation Committee of the Board of Directors of the Registrant on March 27, 1989) **10(b)-6 1989 10-K 1-10464 10(b)-7 Forms of Non-Qualified Stock Option Agreements relating to options granted to director-level employees and officers of the Registrant under the 1987 Stock Option Plan (as approved by the Compensation Committee of the Board of Directors of the Registrant on March 27, 1989) **10(b)-7 1989 10-K 1-10464 10(b)-8 Forms of Incentive Stock Option Agreements relating to options granted to director-level employees and officers of the Registrant under the 1987 Stock Option Plan (as approved by the Compensation Committee of the Board of Directors of the Registrant on March 27, 1989) **10(c)-1 1989 10-K 1-10464 10(b)-9 Form of Special Option entered into by and between the Registrant and certain non-employee director optionees **10(d)-1 1988 10-K 0-16170 10(c)-2 Form of Shareholder's Agreement between the Registrant and employee stockholders **10(d)-2 1989 10-K 1-10464 10(c)-2 Forms of Shareholder's Agreement between the Registrant and employee stockholders **10(d)-3 1989 10-K 1-10464 10(c)-3 Form of Amendment to Shareholder's Agreement between the Registrant and employee stockholders **10(e) 1992 10-K 1-10464 10(e) Officer and Key Employee Compensation Plan **10(f)-1 1993 10-K 1-10464 10(f)-1 1993 Officer and Director Stock Option Plan of the Registrant **10(f)-2 1993 10-K 1-10464 10(f)-2 Form of Stock Option Agreement relating to options granted to non-employee directors of the Registrant under the 1993 Officer and Director Stock Option Plan **10(f)-3 1993 10-K 1-10464 10(f)-3 Form of Stock Option Agreement relating to options granted to officers and employee directors of the Registrant under the 1993 Officer and Director Stock Option Plan **10(g) 1993 10-K 1-10464 10(g) Executive Bonus Plan 10(h) 33-16924 10(n) Form of Indemnification Agreement between the Registrant and its officers and directors 10(i) 1992 10-K 1-10464 Lease Agreement by and between O.B. English, as Landlord, and the Registrant, as Tenant, dated November 3, 1992 (4352 North Beltwood Parkway) 21 1990 10-K 1-10464 22 Subsidiaries of the Registrant +23 Consent of Independent Auditors +27 Financial Data Schedule
- --------------- *Incorporated herein by reference. Abbreviations used are as follows: Admit. No. 2 to Form 10 is the Registrant's Amendment No. 2 on Form 8, dated May 9, 1988, to its Registration Statement on Form 10, File No. 0-16170; 7/3/88 10-Q is the Registrant's Quarterly Report on Form 10-Q for the period ended July 3, 1988, File No. 0-16170; 1988 10-K is the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1989, File No. 0-16170; 1989 10-K is the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-10464; 1990 10-K is the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1990, File No. 1-10464; 1991 10-K is the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1991, File No. 1-10464; 1992 10-K is the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1993, File No. 1-10464; 1993 10-K is the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1994, File No. 1-10464; 1994 10-K is the Registrant's annual Report on Form 10-K for the fiscal year ended January 1, 1995, File No. 1-10464; 1995 10-K is the Registrant's annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-10464; 1996 10-K is the Registrant's annual Report on Form 10-K for the fiscal year ended December 29, 1996, File No. 1-10464 +Filed herewith. **Management contract or compensation plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c). - 24 - 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 2, 1998 DALLAS SEMICONDUCTOR CORPORATION By: /s/ C.V. PROTHRO ----------------------------------------------- C.V. Prothro, Chairman of the Board of Directors, President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/C.V. Prothro Chairman of the Board of Directors, President and March 2, 1998 - ------------------------------------------- Chief Executive Officer C.V. Prothro /s/Alan P. Hale Vice President - Finance March 2, 1998 - ------------------------------------------- Alan P. Hale /s/Chao C. Mai Senior Vice President and Director March 2, 1998 - ------------------------------------------- Chao C. Mai /s/Michael L. Bolan Vice President - Marketing and Product Development March 2, 1998 - ------------------------------------------- and Director Michael L. Bolan /s/Richard L. King Director March 2, 1998 - ------------------------------------------- Richard L. King /s/M.D. Sampels Director March 2, 1998 - ------------------------------------------- M.D. Sampels /s/Carmelo J. Santoro Director March 2, 1998 - ------------------------------------------- Carmelo J. Santoro /s/Elmo R. Zumwalt, Jr. Director March 2, 1998 - ------------------------------------------- Elmo R. Zumwalt, Jr.
- 25 - 26 SCHEDULE II DALLAS SEMICONDUCTOR CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1995, December 29, 1996 and December 28, 1997
Additions Balance at Charged to Balance Beginning Costs and at End Classification of Period Expenses Deductions of Period - -------------- ------------ ------------ ------------ ------------ Allowance for doubtful accounts: 1995 $ 323,000 $ 60,500 $ 8,500 $ 375,000 1996 $ 375,000 $ 19,000 $ 21,000 $ 373,000 1997 $ 373,000 $ 8,600 $ 1,600 $ 380,000 Distributor returns and allowances: 1995 $ 8,528,000 $ 37,073,000 $ 35,618,000 $ 9,983,000 1996 $ 9,983,000 $ 50,171,000 $ 44,261,000 $ 15,893,000 1997 $ 15,893,000 $ 59,420,000 $ 58,230,000 $ 17,083,000 Inventory Reserves: 1995 $ 7,178,000 $ 1,821,000 $ 901,000 $ 8,098,000 1996 $ 8,098,000 $ 3,480,000 $ 50,000 $ 11,528,000 1997 $ 11,528,000 $ 2,861,000 $ 130,000 $ 14,259,000
- S1 - 27 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 23 Consent of Independent Auditor 27 Financial Data Schedule
EX-23 2 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (No. 33-24372, No. 33-36471, No. 33-40864, No. 33-48643, No. 33-68200, No. 33-80696 and No. 333-29247) on Form S-8 pertaining to the 1984 Stock Option Plan, the 1993 Officer and Director Stock Option Plan, the 1987 Stock Option Plan, the Director Warrant Program and certain Nonemployee Director Options of Dallas Semiconductor Corporation of our report dated January 7, 1998, with respect to the consolidated financial statements and schedule of Dallas Semiconductor Corporation included in the Annual Report (Form 10-K) for the fiscal year ended December 28, 1997. Dallas, Texas March 2, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-28-1997 DEC-28-1997 114,608 0 62,337 0 59,131 250,240 330,591 168,836 417,142 66,085 0 0 0 553 351,057 417,142 368,212 368,212 178,441 278,357 0 0 0 94,536 29,981 0 0 0 0 64,555 2.37 2.19
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