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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 JANUARY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 7, 1999: $1,000,691,770. For
purposes of this computation, all officers, directors and 10% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 10% beneficial owners are,
in fact, affiliates of the registrant.
Number of shares outstanding of the registrant's Common Stock as of
February 7, 1999: 28,388,419.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the
registrant's Annual Meeting of Stockholders to be held on May 20, 1999, and to
be filed not later than 120 days after the end of the fiscal year pursuant to
Regulation 14A are incorporated by reference herein into Part III.
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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. In addition, other written or oral
statements which constitute forward-looking statements may be made by or on
behalf of the Company. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict. Actual results
could differ materially from those projected in the forward-looking statements
as a result of factors set forth in this report, including, without limitation,
Item 1. "Business - The Semiconductor Industry and Competition," Item 1.
"Business - Year 2000 Readiness Disclosure," and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
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 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 fifteen-year history, Dallas Semiconductor has developed 326
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 relative size of the Company's main product
categories.
Communications Nonvolatile RAMs
System Extension Microcontrollers
Automatic Information Computer Timekeeping
Commercial Timekeeping Others
PRODUCT DEVELOPMENT
The Company developed 34 new proprietary base products during the 1998
fiscal year. The Company's research and development expenditures for fiscal 1998
were $47 million, compared to expenditures in 1997 and 1996 of $46 million and
$35 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
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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.
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. Battery Management
Products simplify the complex task of optimally using rechargeable battery packs
in portable equipment. 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.
AUTOMATIC INFORMATION. The Company has developed a family of Automatic
Information products, including iButtons(TM) 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 1-Wire(TM)
technology, a memory chip can be read or written with the touch of a probe.
iButton devices are packaged in a stainless steel MicroCan(TM) 16mm in diameter.
The cryptographic iButton with Java(TM) is a new product that enables a standard
PC using a Java powered browser to send secure communications across public
networks, such as the Internet, to facilitate electronic commerce or to send
private e-mail messages. This class of device is so secure that it is has been
certified to pass the U.S. Government's Federal Information Processing Standards
140 Level 2 rating.
The Automatic Information product category also includes a group of
parts referred to as 1-Wire chips. These devices provide a unique electronic
identity and often store pertinent information about the product of which they
are a component. The data can be accessed externally or by the product itself.
The 1-Wire technology has the advantage of requiring the addition of just a
single connection point to access this data. It might be used in a cell phone
battery pack to indicate to the charger how to charge properly or in a toner
cartridge to fine tune the copier's print quality. Multiple 1-Wire chips can all
communicate on the same single wire, allowing the interconnection of many
devices to form a miniature LAN (MicroLAN). 1-Wire chips can perform a variety
of functions such as monitor temperature, measure voltage, control an acutator,
or blink a light.
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. Digital cellular phones utilize Serial Timekeepers
to provide advanced features such as clock-calendar display, talk-time, re-dial
timing and power management. Phantom and Watchdog modules are used in data
communications network routers, hubs and bridges to monitor communications
traffic and store the extensive amounts of network configuration data. Serial
Timekeepers and Bytewide Watchdog Timekeepers provide solutions in industrial
control and medical equipment applications requiring extended functions
including Nonvolatile SRAM and A/D conversion and temperature measurement.
Many electronic systems gather and transmit time critical data. This
information ranges from banking transactions and internet data to remote sensing
and data logging. The time stamping of information between machines with
different Real Time Clocks ("RTC") can introduce errors between the systems.
Dallas Semiconductor has developed a 32 KHz Temperature Compensated Crystal
Oscillator ("TCXO"), which is used to drive the RTC crystal input. This TCXO
will enable the RTC to attain accuracies of +/-2PPM or 1 minutes/year over the
full temperature range of 0C to 40C. Previously, the best accuracy over the full
temperature range was +/-30 minutes per year. Higher frequency TCXO's to
address the accuracy requirements of markets like cellular phones, data logging
and T1/E1 telecom markets are in development.
Java(TM), is a registered trademark of Sun Microsystems, Inc.
ibutton(TM), Microcan(TM), and l-Wire(TM) are registered trademarks of Dallas
Semiconductor Corp.
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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.
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 highly competitive market is
extremely cost sensitive and has seen increased use of chip sets with integrated
clock functions. The Company has differentiated Computer Timekeeping products by
adding NV SRAM, energy conservation components and Year 2000 compliance to
provide solutions in applications requiring enhanced features with higher levels
of integration.
OTHERS. A description of some of the more significant categories
described as "Others" include the following.
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.
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.
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SILICON TIMED CIRCUITS. Electronic systems require exact timing to
control the transmission 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 high precision. Trimming to customer specifications
during the later stages of manufacturing provides precise accuracy and allows a
broad product mix without losing the economic 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. Recently a family of low cost oscillators has been introduced
which apply delay-line-derived technology to solve other system timing
requirements.
MANUFACTURING
The Company produces high performance CMOS integrated circuits with
sub-micron geometries at its own advanced wafer fabrication facility. 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. The
facility was physically expanded 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 23% in 1998 and by approximately 18% in 1997. During fiscal 1998,
all of the wafers used by the Company were processed at its own facility. In
1998, the Company began using an outside foundry for the development of certain
products. The foundry is producing wafers used for research and development
("R&D") purposes and none of these products has reached production levels. A
separate bump fabrication facility was opened in September 1998 and will be
fully functional in the first quarter of 1999. The new facility will package the
Company's new and proprietary 1-Wire chips in a Chip-Scale Package. Using
flip-chip technology, a wafer-level solder bumping process produces a finished
circuit no bigger than the silicon die itself, meeting industry needs for low
cost, reduced size and simplified mounting.
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 a large majority of the Company's
products in Dallas, Texas. In 1999, the Company plans to further leverage the
utilization of offshore contractors by implementing the testing and modular
assembly of certain products in the Philippines.
PRODUCT COMPONENTS
During fiscal 1998, 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 1998 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 26% 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 1998, sales to domestic distributors represented approximately 35%
of the Company's net sales, with the Company's largest domestic distributor,
Avnet, accounting for a total of approximately 13% of net sales.
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Export sales accounted for 42% of net sales in fiscal 1998, including
19% and 23% in Europe and the Far East, respectively. 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.
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 January 3, 1999, the Company's backlog was
approximately $71 million, as compared to approximately $80 million at December
28, 1997. 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. The Company's future operating results may also be
affected by economic conditions in the United States and international markets,
such as the recent economic downturn in Southeast Asia and the outcome and
impact of the Year 2000. 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, accelerated
declines in the average selling price of the Company's existing products,
changes in customer order patterns, market acceptance of the Company's new
products, distributor and sales representative performances, the ability of the
Company to continue diversifying its product line, accelerated growth of
inventory leading to excess inventory and salability and/or obsolescence
write-downs, excess production capacity, 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.
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PATENTS AND INTELLECTUAL PROPERTIES
Dallas Semiconductor has to date acquired or been granted 244 U.S.
patents and seven foreign patents. The expiration dates of the Company's patents
range from 1999 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.
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.
YEAR 2000 READINESS DISCLOSURE
In response to the "Year 2000 Information and Readiness Disclosure Act"
signed into law October 19, 1998, and the statement issued by the Securities and
Exchange Commission regarding "Disclosure of Year 2000 Issues and Consequences
by Public Companies, Investment Advisers, Investment Companies, and Municipal
Security Holders" in August 1998, the Company is making the following Year 2000
Readiness Disclosure:
The Company has undertaken an assessment of all mission critical
systems, including information systems as well as production and manufacturing
systems, which could be significantly affected by Year 2000 issues. The Company
has initiated various Year 2000 remediation projects, some of which include the
use of software purchased from third parties. Some of this third party provided
software was modified by the Company to be compatible with its internal systems.
The Company has already begun testing and implementing these remediation
projects and anticipates substantial completion by March 31, 1999. Similarly,
certain hardware, primarily used in production and manufacturing systems, is
being replaced in a systematic manner. Replacement of this hardware was
originally scheduled due to anticipated obsolescence and is expected to be
substantially complete by June 30, 1999. As of December 31, 1998, the Company
has incurred approximately $125,000 in Year 2000 remediation costs and expects
to incur approximately $75,000 in remaining costs to ensure functionality for
Year 2000 issues. The Company has not specifically set aside funds to cover the
remaining Year 2000 costs, but has adequate resources to cover these needs as
they arise.
None of the Company's systems interface directly with its third party
vendors. Also, the Company does not currently utilize electronic data
interchange (EDI) with any date sensitivity. In addition, the Company is
formally communicating by mailing letters to all of its significant third party
vendors (both domestic and international), requesting certifications and test
results to confirm their Year 2000 compliance. Where responses are not obtained
by letter, the Company is in the process of or will follow up to obtain this
information in an effort to limit the extent to which the Company may be
vulnerable to the failure of third parties to remediate their own Year 2000
issues. The Company also intends to mitigate this risk by ceasing to do business
with such companies as soon as feasible after it becomes aware of any
significant problems.
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The Company has two principal product lines containing products that
are date sensitive, Timekeeping and Microcontrollers.
Timekeeping Products (Clocks) made by the Company fall into two
categories:
o Clocks that are Year 2000 compatible
o Clocks that are Year 2000 compliant
Clocks that are Year 2000 compatible have a two-digit year counter.
They will maintain the correct time, date of the month, day of the week, month
and two-digit year with correct leap year compensation up to year 2099. The
two-digit year counter does not provide the century information; therefore
software intervention is required to determine if the century value is 19 or 20.
The following Clocks are Year 2000 compatible, requiring software
intervention to calculate the century: DS1202, DS1215, DS1216, DS1243, DS1244,
DS1248, DS1251, DS1283, DS1284, DS1285, DS1286, DS1287, DS12885, DS12887,
DS12887A, DS12B887, DS1302, DS1305, DS1306, DS1307, DS1308, DS1315, DS1384,
DS1385, DS1386, DS1387, DS1395, DS1397, DS14285, DS14287, DS1485, DS1486,
DS1488, DS1495, DS1497, DS1543, DS1544, DS1546, DS1547, DS1615, DS1642, DS1643,
DS1644, DS1646, DS1647, DS1670, and DS1673.
The Clocks that are Year 2000 compliant have a four-digit year counter.
The fully compliant clocks will maintain the correct time, date of the month,
day of the week, month and four-digit year with correct leap year compensation
up to year 2099.
The following Clocks are fully Year 2000 compliant: DS12C887, DS1501,
DS1511, DS1553, DS1554, DS1546, DS1557, DS1585, DS1587, DS1589, DS1685, DS1687,
DS1688, DS1689, DS1691, DS1693, Ds17285, DS17287, DS1742, DS1743, DS1744,
DS1746, DS1747, DS17485, DS17487, DS17885, and DS17887.
Microcontroller Products use one of three real-time clock circuits and
fall into one of two categories, compatible or compliant, as described above.
DS 1215-based Soft Microcontroller Modules: DS5000T and DS2250T.
The DS1215 is Year 2000 compatible, as it stores the year as a two-digit
value. The two-digit year counter does not provide the century information;
therefore software intervention is required to determine if the century
value is 19 or 20.
DS1283-based Soft Microcontroller Modules: DS2251T and DS22522T.
The DS1283 is Year 2000 compatible, as it stores the year as a two-digit
value. The two-digit year counter does not provide the century information;
therefore software intervention is required to determine if the century
value is 19 or 20.
DS87C530 High Speed Microcontroller with Real Time Clock.
The Clock in the DS87C530 incorporates a 16 bit day counter, rather than a
traditional day/month/year calendar, for maximum flexibility. As a result,
the device can be totally Year 2000 compatible via application software.
The following are other Dallas Semiconductor products that are date
sensitive:
The DS2404, DS1994, and DS1427, members of the Company's Automatic
Identification product category, contain simple binary counters and require
software intervention to interpret this raw data to be Year 2000 compliant.
The DS1629, a member of the Company's System Extension product
category, incorporates a DS1307 real-time clock that has a two-digit year
counter. The two-digit year counter does not provide the century information;
therefore, software intervention is required to determine if the century value
is 19 or 20.
All of the Company's products require the utilization of software
programs for the products to be of use to the end user. The Company does not
recommend or provide software for use in conjunction with any application for
the products it manufactures, including software solutions to Year 2000 issues.
However, to the extent practicable, purchasers of our Year 2000 compatible
products (which require software intervention) have been put on notice, via data
books and web page postings, of the need for such software intervention prior to
purchasing such products and further have been made aware of available Year 2000
alternatives (compliant products not requiring software intervention)
manufactured by the Company. Although the Company does not believe it has any
liability related to Year 2000 compatible products (those which require software
intervention), there is a risk of litigation associated with the manufacture and
sale of these products.
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<PAGE> 9
Management of the Company believes it has an effective program in place
to resolve Year 2000 issues and expects that all critical remediation projects
will be completed on schedule. As a result of its focus on ensuring that the
remediation projects are on schedule, the Company has not developed a
contingency plan to address alternative solutions in the event the Company is
unable to successfully make its critical systems Year 2000 compliant. However,
the Company continually evaluates its status towards completion to determine
whether such a plan is necessary. At this point, the Company is on schedule and
no contingency plan is deemed necessary. Additionally, the Company has no means
of ensuring that third parties, including those based outside of the United
States, will be Year 2000 compliant and the effect of non-compliance by third
parties is not determinable. In a worst case scenario, these unknown third party
variables could have a material adverse effect on the Company's ability to
produce its products and conduct its business. This worst case scenario,
however, is a risk of any company engaging in world-wide business into the next
millennium. To date, the Company is not aware of any third party with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. In addition, the Company is not currently aware
of any claims of breach of contract or warranty, potential product return issues
or impairment of assets relating to Year 2000 noncompliance that would
materially impact the Company's results of operations, liquidity, or capital
resources.
EMPLOYEES
At January 3, 1999 the Company had 1,530 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 1998, the Company
continued its practice of utilizing contract labor supplied by temporary
agencies, primarily in the manufacturing area. At January 3, 1999, the Company
was utilizing the services of 156 such temporary agency employees.
ITEM 2. PROPERTIES
The Company's headquarters are located in Dallas, Texas. As of January
3, 1999, 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. 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, Geneva, 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 subsidiaries, Dallas
Semiconductor Corporation Limited, Dallas Semiconductor Corporation (Taiwan) and
Dallas Semiconductor Corporation (Germany), lease office facilities in
Birmingham, England, Taipei, Taiwan, and Munich, Germany, respectively. 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.
-9-
<PAGE> 10
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as of March 1, 1999, is provided with respect
to each executive officer of the registrant pursuant to General Instruction G of
Form 10-K.
<TABLE>
<CAPTION>
NAME AGE CURRENT TITLE AND POSITION
---- --- --------------------------
<S> <C> <C>
C.V. Prothro 56 Chairman of the Board of Directors, President and Chief
Executive Officer
Chao C. Mai 63 Senior Vice President
Michael L. Bolan 52 Vice President - Marketing and Product Development
F.A. Scherpenberg 52 Vice President - Computer Products
Alan P. Hale 38 Vice President - Finance
Jack von Gillern 40 Vice President - Sales
</TABLE>
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 to
that 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. He is a CPA in the State
of Texas and has received an MBA degree from Southern Methodist University.
Mr. von Gillern joined the Company in 1990 and was appointed Vice
President of Sales in January of 1999. His prior positions with the Company
include Director of Sales, Central Area Sales Manager and Product Manager.
Previously he was involved in computer system sales for Cray Research and
Control Data Corporation.
-10-
<PAGE> 11
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 January 3, 1999, there were approximately 559
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 1998 and 1997 fiscal
years:
<TABLE>
<CAPTION>
1997 1998
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Prices:
High $ 27.00 $ 41.00 $ 42.50 $ 55.00 $ 50.00 $ 38.69 $ 35.38 $ 40.75
Low 22.75 25.63 32.81 35.50 33.19 28.69 26.13 23.25
End 26.13 37.19 41.81 37.38 35.00 30.25 29.25 40.75
</TABLE>
Total dividends paid in 1998 were $0.16 per share or $4,482,000. On
January 26, 1999, the Board of Directors increased its annual cash dividend on
the Company's common stock from $0.16 to $0.20 per share. The Board of Directors
also declared a quarterly cash dividend of $0.05 on each outstanding share of
its common stock, payable on March 1, 1999, to holders of record on February 15,
1999.
-11-
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SELECTED FINANCIAL DATA
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING SUMMARY:
Net sales $ 342,608 $ 368,212 $ 288,354 $ 233,274 $ 181,432
Costs and expenses:
Cost of sales 162,418 178,441 157,056 117,615 90,289
Research and development 47,452 46,078 34,974 28,602 22,651
Selling, general and administrative 56,523 53,838 42,175 35,483 26,584
--------- --------- --------- --------- ---------
Operating income 76,215 89,855 54,149 51,574 41,908
Interest income, net 5,115 4,681 2,937 3,366 3,165
--------- --------- --------- --------- ---------
Income before income taxes 81,330 94,536 57,086 54,940 45,073
Provision for income taxes 25,920 29,981 18,723 18,258 15,325
--------- --------- --------- --------- ---------
Net income $ 55,410 $ 64,555 $ 38,363 $ 36,682 $ 29,748
========= ========= ========= ========= =========
Net income per share, basic $ 1.98 $ 2.37 $ 1.45 $ 1.41 $ 1.17
Net income per share, diluted $ 1.85 $ 2.19 $ 1.37 $ 1.32 $ 1.09
Shares used to calculate net
income per share:
Basic 27,993 27,206 26,458 26,075 25,456
Diluted 29,957 29,457 27,990 27,762 27,288
Dividends declared per share $ 0.16 $ 0.14 $ 0.12 $ 0.10 --
FINANCIAL POSITION AT YEAR END:
Cash and short-term investments $ 127,996 $ 114,608 $ 70,274 $ 69,304 $ 64,520
Additions to property, plant and equipment 75,965 58,645 60,451 49,329 44,743
Depreciation and amortization 43,736 35,789 28,379 21,344 15,292
Total assets 461,038 417,142 313,863 272,425 221,227
Total liabilities 46,286 66,085 41,125 37,443 26,474
Stockholders' equity 414,752 351,057 272,738 234,982 194,753
Book value per weighted average
share, diluted 13.84 11.92 9.74 8.46 7.14
</TABLE>
-12-
<PAGE> 13
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 1998, 1997, and 1996 fiscal years.
<TABLE>
<CAPTION>
(Dollars in Millions)
-------------------------------------------------------------------
1998 % 1997 % 1996 %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 342.6 100.0 $ 368.2 100.0 $ 288.4 100.0
Cost of sales 162.4 47.4 178.4 48.5 157.1 54.5
Gross margin 180.2 52.6 189.8 51.5 131.3 45.5
Research and development 47.5 13.9 46.1 12.5 35.0 12.1
Selling, general and administrative 56.5 16.5 53.8 14.6 42.2 14.6
Operating income 76.2 22.2 89.9 24.4 54.1 18.8
Interest income, net 5.1 1.5 4.7 1.3 3.0 1.0
Provision for income taxes 25.9 7.6 30.0 8.2 18.7 6.5
Net income $ 55.4 16.1 $ 64.6 17.5 $ 38.4 13.3
</TABLE>
1998 Results of Operations Compared with 1997
Net sales in 1998 were $342.6 million, a decrease of 7% as compared
with $368.2 million in 1997. The Company's revenue by product category is shown
in the table below.
<TABLE>
<CAPTION>
(Dollars in Millions)
--------------------------------------------------
1996 1997 1998 '97-'98
Product Categories Net Sales Net Sales Net Sales Change
--------- --------- --------- ------
<S> <C> <C> <C> <C>
Communications $ 50.1 $ 82.6 $ 87.4 5.8%
System Extension 37.6 61.7 52.3 -15.2%
Automatic Information 19.4 38.8 48.7 25.5%
Commercial Timekeeping 35.6 50.9 43.9 -13.8%
NV RAMs 37.8 46.3 38.2 -17.5%
Microcontrollers 29.7 30.7 26.4 -14.0%
Computer Timekeeping 47.1 22.7 14.5 -36.1%
Others 31.1 34.5 31.2 -9.6%
------ ------ ------ ----
Company Total $288.4 $368.2 $342.6 -7.0%
====== ====== ====== ====
</TABLE>
Export sales accounted for 42% and 43% of total net sales in 1998 and
1997, respectively. Export sales to Europe and the Far East in 1998 were 19% and
23% of total sales, respectively.
Cost of sales were $162.4 and $178.4 million in 1998 and 1997,
respectively. Gross margins increased to 52.6% in 1998 from 51.5% in 1997. The
increase in gross margins resulted primarily from increased efficiency in
factory operations and a sales-mix shift toward higher margin products.
R&D expenses were $47.5 million and $46.1 million or 13.9% and 12.5% of
net sales in 1998 and 1997, 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 34 new base products in 1998 compared with 25 new base product
introductions in 1997. 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 326 at fiscal year end 1998.
Selling, general and administrative ("SG&A") expenses increased to
$56.5 million in 1998 from $53.8 million in 1997. SG&A expenses as a percent of
sales were 16.5% and 14.6% in 1998 and 1997, respectively. The increase is
primarily the result of increases in personnel costs due to increased headcount.
Operating income in 1998 was $76.2 million, down 15.2% from $89.9
million in 1997. Operating income as a percentage of net sales (operating
margin) decreased to 22.2% in 1998 from 24.4% in 1997. The decrease resulted
primarily from the decrease in net sales and increased spending.
Net interest income was $5.1 and $4.7 million in 1998 and 1997,
respectively. Net interest income increased primarily due to higher average cash
balances in 1998. Any substantial change in the Company's cash and short-term
investments and changes in interest rates will continue to affect net interest
income.
-13-
<PAGE> 14
The provision for income taxes was $25.9 million in 1998 and $30.0
million in 1997. The provision for income taxes consisted of estimated federal
and state income taxes at statutory rates and a deferred tax benefit of $1.0
million in 1998 and $6.2 million in 1997. The Company's effective tax rate
increased to 31.9% in 1998 from 31.7% in 1997 as a result of anticipated
differences between income for financial statement purposes and taxable income
for the two periods.
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, accelerated declines in the average selling price of the
Company's existing products, changes in customer order patterns, market
acceptance of the Company's new products, distributor and sales representative
performances, the ability of the Company to continue diversifying its product
line, accelerated growth of inventory leading to excess inventory and salability
and/or obsolescence write-downs, excess production capacity, 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. Also, see the Company's Year
2000 Readiness Disclosure in Part 1 of this document.
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.
Export sales accounted for 43% and 45% of total net sales in 1997 and
1996, respectively. Export sales to Europe and the Far East in 1997 were 20% and
23% of total sales, respectively.
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.
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. The cumulative number of base products introduced by the
Company totaled 292 at fiscal year end 1997.
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%.
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.
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.
-14-
<PAGE> 15
Financial Condition
The Company's cash and short-term investments totaled $128.0 million at
January 3, 1999, compared to $114.6 million at December 28, 1997. The increase
in cash and short-term investments was primarily the result of net cash provided
from operations of $87.8 million, offset by investments in property, plant and
equipment of $76.0 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 1998 increased to 5.7, compared
with 3.8 at fiscal year end 1997. The Company expects to fund its 1999 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 1998
totaled $76.0 million, compared with $58.6 million in 1997. As of January 3,
1999, the Company owned approximately 632,000 square feet of building space and
40 acres of land in Dallas. Capital additions in 1998 included $27.2 million in
capital expenditures for wafer fabrication ("fab") equipment and $20.0 million
for manufacturing and test equipment.
Capital expenditures in 1999 are anticipated to be $50 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. In December 1998, the Board of Directors increased this number by
an additional 500,000 shares. As of January 3, 1999, 232,800 shares at a
cumulative average price of $17.54, totaling $4,085,000, have been purchased
pursuant to this stock repurchase program and recorded using the cost method.
Total dividends paid in 1998 were $0.16 per share or $4,482,000. On
January 26, 1999 the Board of Directors increased its annual cash dividend on
the Company's common stock from $0.16 to $0.20 per share. The board also
declared a quarterly cash dividend of $0.05 on each outstanding share of its
common stock, payable on March 1, 1999 to holders of record on February 15,
1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net sales $ 342,608 $ 368,212 $ 288,354
Operating costs and expenses:
Cost of sales 162,418 178,441 157,056
Research and development 47,452 46,078 34,974
Selling, general, and administrative 56,523 53,838 42,175
--------- --------- ---------
Operating income 76,215 89,855 54,149
Interest income, net 5,115 4,681 2,937
--------- --------- ---------
Income before income taxes 81,330 94,536 57,086
Provision for income taxes 25,920 29,981 18,723
--------- --------- ---------
Net income $ 55,410 $ 64,555 $ 38,363
========= ========= =========
Net income per common share, basic $ 1.98 $ 2.37 $ 1.45
Net income per common share, diluted $ 1.85 $ 2.19 $ 1.37
--------- --------- ---------
Shares used to calculate net income
per share:
Basic 27,993 27,206 26,458
Diluted 29,957 29,457 27,990
--------- --------- ---------
Dividends declared per share $ 0.16 $ 0.14 $ 0.12
--------- --------- ---------
</TABLE>
See accompanying notes.
-15-
<PAGE> 16
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 127,996 $ 114,608
Accounts receivable, less allowance for doubtful accounts of
$430 and $380 at fiscal year end 1998 and 1997, respectively 45,933 62,337
Inventories 72,390 59,131
Deferred tax assets, net 10,691 9,689
Other current assets 7,349 4,475
---------- ----------
Total current assets 264,359 250,240
Property, plant and equipment, at cost: 396,960 330,591
Less accumulated depreciation (205,826) (168,836)
---------- ----------
Property, plant and equipment, net 191,134 161,755
Other assets 5,545 5,147
---------- ----------
$ 461,038 $ 417,142
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 15,435 29,711
Accrued salaries and benefits 9,395 19,979
Accrued taxes other than income 4,030 3,678
Other accrued liabilities 12,613 10,345
Income taxes payable 4,813 2,372
---------- ----------
Total current liabilities 46,286 66,085
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:
28,333,261 shares issued at January 3, 1999, and
27,639,784 shares issued at December 28, 1997 567 553
Additional paid-in capital 119,553 106,161
Retained earnings 296,889 245,961
Treasury stock shares at cost:
108,425 shares at January 3, 1999 and
91,525 at December 28, 1997 (2,257) (1,618)
---------- ----------
Total stockholders' equity 414,752 351,057
---------- ----------
$ 461,038 $ 417,142
========== ==========
</TABLE>
See accompanying notes.
-16-
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 55,410 $ 64,555 $ 38,363
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 43,736 35,789 28,379
Deferred tax benefit (1,002) (6,232) (683)
Changes in operating assets and liabilities:
Accounts receivable 16,404 (19,525) (6,110)
Inventories (13,259) (9,502) (1,339)
Other current assets (2,874) (684) 425
Accounts payable (14,276) 7,236 2,057
Accrued salaries and benefits (10,584) 11,338 97
Accrued taxes other than income 352 2,847 (1,506)
Other accrued liabilities 4,868 4,521 2,020
Income taxes payable 9,039 6,895 1,900
---------- ---------- ----------
Net cash provided by operating activities 87,814 97,238 63,603
---------- ---------- ----------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (75,965) (58,645) (60,451)
Proceeds from disposition of assets 250 -- --
Increase in other assets (398) (146) (689)
---------- ---------- ----------
Net cash used in investing activities (76,113) (58,791) (61,140)
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock upon exercise of
stock options and other 6,808 9,702 1,820
Purchase of treasury stock (639) -- (137)
Dividends paid to shareholders (4,482) (3,815) (3,176)
---------- ---------- ----------
Net cash provided by (used in) financing activities 1,687 5,887 (1,493)
---------- ---------- ----------
Net increase in cash and short-term investments 13,388 44,334 970
Cash and short-term investments at beginning of year 114,608 70,274 69,304
---------- ---------- ----------
Cash and short-term investments at end of year $ 127,996 $ 114,608 $ 70,274
========== ========== ==========
Cash payments for income taxes $ 17,883 $ 29,318 $ 17,505
Disposition of assets $ -- $ 2,326 $ --
</TABLE>
See accompanying notes.
-17-
<PAGE> 18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Years Ended January 3, 1999
(Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Treasury
------------------- Paid-in Retained Stock
Shares Amount Capital Earnings at Cost Total
------ --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock 694 14 6,794 -- -- 6,808
Treasury stock (17) -- -- -- (639) (639)
Tax benefit from stock option
exercises -- -- 6,598 -- -- 6,598
Dividends declared -- -- -- (4,482) -- (4,482)
Net income -- -- -- 55,410 -- 55,410
------ --------- ---------- --------- --------- ---------
Balance at January 3, 1999 28,225 $ 567 $ 119,553 $ 296,889 $ (2,257) $ 414,752
====== ========= ========== ========= ========= =========
</TABLE>
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 42%, 43%, and 45% of net sales in 1998, 1997, and 1996
respectively. Sales to domestic distributors comprised approximately 35%, 34%,
and 31% of net sales in 1998, 1997, and 1996 respectively. In 1998, 1997 and
1996 one distributor accounted for $43,006,000 or 13%, $41,041,000 or 11%,
30,889,000 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.
-18-
<PAGE> 19
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 1998, a 53-week year,
ended January 3, 1999. Fiscal years 1997 and 1996 ended December 28, 1997 and
December 29, 1996, 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.
Cash and short-term investments. The Company classifies its cash
equivalents and short-term investments as current. Cash and short-term
investments consist of municipal bonds and money market funds and corporate
notes. At January 3, 1999 and December 28, 1997 cash and short-term investments
which had a maturity of greater than 90 days when purchased were $123,779,000
and $107,214,000, respectively. At January 3, 1999, $8,918,000 of the total
short-term investments is scheduled to mature within one year. 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.
Property, plant and equipment. Property, plant and equipment are stated
at cost. 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 nine 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.
Income taxes. Taxes are reported under SFAS 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. Effective January 1, 1996, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires pro forma disclosure of net income and net income
per share as if the SFAS No. 123 fair value method had been applied. As
permitted by SFAS No. 123, the Company continues to measure and recognize
compensation costs under the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees".
Segments. In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for reporting information in interim and annual financial statements
and is effective for fiscal years beginning after December 15, 1997. As the
Company operates predominantly in one industry segment, management believes it
is in compliance with the standards established by SFAS 131.
Use of Estimates. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
-19-
<PAGE> 20
3. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
(Thousands) Fiscal Years Ended
--------------------------------
January 3, December 28,
1999 1997
---------- ------------
<S> <C> <C>
Inventories:
Raw materials $ 7,181 $ 8,761
Work-in-process 49,883 31,187
Finished goods 15,326 19,183
--------- ---------
$ 72,390 $ 59,131
========= =========
Property, plant and equipment:
Land and land improvements $ 8,770 $ 8,757
Building and improvements 74,890 52,067
Machinery and equipment 313,300 269,767
--------- ---------
$ 396,960 $ 330,591
========= =========
Accrued salaries and benefits:
Salaries, benefits and other $ 2,951 $ 14,672
Sales commissions 6,444 5,307
--------- ---------
$ 9,395 $ 19,979
========= =========
Accrued taxes other than income:
Ad Valorem taxes $ 3,530 $ 3,212
Other 500 466
--------- ---------
$ 4,030 $ 3,678
========= =========
</TABLE>
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 5,947,339 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, 266,053, 275,483 and 282,248 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 on the date of grant. As
of January 3, 1999, the 1984 Plan had options outstanding at $6.25 with an
expiration date of January 21, 2001.
In October 1998, 249,500 outstanding options from the 1987 Plan, with
exercise prices in excess of $23.75, were canceled and regranted at the then
market price of $23.75 per share. The new options maintain the vesting schedule
of the canceled options, except that these options cannot be exercised within
the following twelve months. As of January 3, 1999, the 1987 Plan had options
outstanding ranging from $4.50 to $23.75 with a weighted average exercise price
of $13.80 and expiration dates ranging from October 4, 1999 to December 15,
2008.
Options generally are nontransferable and expire no later than ten
years 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.
-20-
<PAGE> 21
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 3,895,141 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, 266,053, 275,483 and 282,248 shares were reserved for
issuance on January 1st, 1996, 1997, and 1998, respectively. These shares are
reflected in the outstanding options table below in the year authorized. Under
the 1993 Plan, as of January 3, 1999, 3,023,450 options were outstanding ranging
from $14.75 to $23.75 with a weighted average exercise price of $17.62 and
expiration dates ranging from July 9, 2003 to October 5, 2008.
Total shares reserved for future issuance upon exercise of options are
6,243,520. Additional information with respect to stock options under the 1984,
1987, and 1993 Plans is as follows.
<TABLE>
<CAPTION>
Outstanding Options
Options ----------------------------
Available Number of Aggregate
for Grant Shares Price
--------- --------- -----------
<S> <C> <C> <C>
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
Options authorized 564,496 -- --
Options granted (1,476,050) 1,476,050 35,820,375
Options exercised -- (693,477) (6,808,432)
Options canceled 321,561 (321,561) (11,469,956)
--------- --------- -----------
January 3, 1999 587,142 5,656,378 $89,557,649
========= ========= ===========
</TABLE>
Under SFAS No. 123, the Company is required to estimate the fair value
of each option on the date of the grant. The Company believes that the value of
unvested options is indeterminable by reason of the vagaries of the stock market
and other factors and opposes any requirement to place a value on an option
grant. However, to comply with the disclosure provisions of SFAS No. 123, the
Company used the Black-Scholes option pricing model to estimate the fair value
of each option at the date of grant. The following weighted-average assumptions
were used for 1998, 1997 and 1996: dividend yields of 0.40%, risk-free interest
rate of 6%, expected volatility of 40%, and expected lives of 6 years. The
weighted-average fair value per stock option granted in 1998, 1997 and 1996, as
defined by SFAS No. 123, was $12.01, $16.82 and $8.11, respectively. As of
January 3, 1999, the weighted average remaining contractual life of the options
is 5.8 years.
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years, since it is applicable only to options granted subsequent to December 31,
1995. If compensation cost for the Company's stock-based compensation plans had
been determined in accordance with SFAS No. 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts shown in
the following table.
-21-
<PAGE> 22
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Net income As reported 55,410 64,555 38,363
Pro forma 52,813 62,906 37,819
Net income per share of common stock:
Basic As reported 1.98 2.37 1.45
Pro forma 1.89 2.31 1.43
Diluted As reported 1.85 2.19 1.37
Pro forma 1.77 2.15 1.36
</TABLE>
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. In December 1998, the Board of Directors increased this number by
an additional 500,000 shares. As of January 3, 1999, 232,800 shares at a
cumulative average price of $17.54, totaling $4,084,682 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).
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Provision at statutory rate $28,466 $33,088 $19,980
State taxes, net of federal benefit 1,249 1,335 1,015
Tax exempt foreign sales corporation income (1,290) (1,998) (1,442)
Research and Development tax credit (1,475) (1,344) (668)
Tax exempt income (1,351) (1,031) (535)
Other 321 (69) 373
------- ------- -------
Provision for income taxes $25,920 $29,981 $18,723
======= ======= =======
</TABLE>
The components of the provision for income taxes are as follows (in
thousands).
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Current provision $26,922 $36,213 $19,406
Deferred benefit (1,002) (6,232) (683)
------- ------- -------
Provision for income taxes $25,920 $29,981 $18,723
======= ======= =======
</TABLE>
Current state amounts included in the provision for income taxes
include $2,050,000, $2,590,000, and $1,700,000 for the years ended 1998, 1997,
and 1996, respectively.
-22-
<PAGE> 23
The components of the net deferred tax assets are as follows (in
thousands).
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------
January 3, December 28,
1999 1997
---------- ------------
<S> <C> <C>
Sales and inventory reserves $ 12,852 $ 11,022
Accrued expenses and other 8,011 8,547
Valuation allowance (3,973) (3,973)
-------- --------
Deferred tax assets 16,890 15,596
Deferred tax liability (6,199) (5,907)
-------- --------
Net deferred tax asset $ 10,691 $ 9,689
======== ========
</TABLE>
6. NET INCOME PER SHARE
For fiscal years ended December 29, 1996, December 28, 1997 and January
3, 1999, "Net income per share, basic" and "Net income per share, diluted" are
calculated as follows (in thousands).
<TABLE>
<CAPTION>
Per Share
Net Income Shares Amounts
---------- ------ ---------
<S> <C> <C> <C>
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
======== ====== ======
As of January 3, 1999:
Net income per share, basic $ 55,410 27,993 $ 1.98
======
Dilutive effect of stock options -- 1,964
-------- ------
Net income per share, diluted $ 55,410 29,957 $ 1.85
======== ====== ======
</TABLE>
-23-
<PAGE> 24
================================================================================
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 and subsidiaries as of January 3, 1999 and December
28, 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
January 3, 1999. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated 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 and subsidiaries as of January 3, 1999 and
December 28, 1997, and the consolidated results of its operations and its cash
flows for each of the three fiscal years in the period ended January 3, 1999, 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 13, 1999
-24-
<PAGE> 25
SUPPLEMENTARY FINANCIAL DATA
(Unaudited) (Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Years
1997 and 1998 by Fiscal Quarter
--------------------------------------------------------------------------------------
1997 1998
----------------------------------------- -----------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Summary:
Net sales $88,704 $91,040 $93,069 $95,399 $87,448 $87,029 $83,099 $85,032
Cost of sales 44,767 44,627 44,710 44,337 41,498 41,338 39,433 40,149
Operating income 20,302 21,491 23,311 24,751 18,734 19,314 18,553 19,614
Income before
income taxes 21,216 22,616 24,598 26,106 19,871 20,611 19,682 21,166
Net income 14,374 15,322 16,911 17,948 13,512 14,015 13,384 14,499
Net income per share,
basic $ 0.54 $ 0.56 $ 0.62 $ 0.65 $ 0.49 $ 0.50 $ 0.48 $ 0.51
Net income per share,
diluted $ 0.50 $ 0.52 $ 0.57 $ 0.60 $ 0.45 $ 0.47 $ 0.45 $ 0.48
</TABLE>
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 May 20, 1999, and to be filed not later than 120 days after the end of
the fiscal year pursuant to Regulation 14A, 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 May 20, 1999, and to be filed not
later than 120 days after the end of the fiscal year pursuant to Regulation 14A,
(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 May 20, 1999, and to be filed not later than
120 days after the end of the fiscal year pursuant to Regulation 14A, 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 May
20, 1999, and to be filed not later than 120 days after the end of the fiscal
year pursuant to Regulation 14A, is incorporated herein by reference.
-25-
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedule
Index to Consolidated Financial Statements and Consolidated Financial Statement
Schedule
<TABLE>
<CAPTION>
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
--------------------
<S> <C>
Consolidated Statements of Income
for each of the three fiscal years in the period ended January 3, 1999....................................... 15
Consolidated Balance Sheets at January 3, 1999 and December 28, 1997........................................... 16
Consolidated Statements of Cash Flows
for each of the three fiscal years in the period ended January 3, 1999....................................... 17
Consolidated Statements of Stockholders' Equity
for each of the three fiscal years in the period ended January 3, 1999....................................... 18
Notes to Consolidated Financial Statements..................................................................... 18 - 23
Report of Ernst & Young LLP, Independent Auditors.............................................................. 24
</TABLE>
The following consolidated financial statement schedule of Dallas Semiconductor
Corporation is included on the page set forth below.
<TABLE>
<CAPTION>
Page in this Annual
Report on Form 10-K
-------------------
<S> <C>
Schedule II. Valuation Qualifying Accounts ................................................. S-1
</TABLE>
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
<TABLE>
<CAPTION>
Previously Filed*
--------------------------------
Exhibit With File Number As Exhibit Description
- ------- ---------------- ---------- -----------
<S> <C> <C> <C>
3(a)-1 33-16924 3(a)-3 Restated Certificate of Incorporation of the Registrant
3(a)-2 Amdt. No. 2 to Form 10 3(a)-4 Amendment to Restated Certificate of Incorporation of the Registrant
0-16170
3(b) Amdt. No. 2 to Form 10 3(b)-1 Bylaws of the Registrant, as amended
0-16170
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
</TABLE>
-26-
<PAGE> 27
<TABLE>
<CAPTION>
Previously Filed*
----------------------------------
Exhibit With File Number As Exhibit Description
- ------- ---------------- ---------- -----------
<S> <C> <C> <C>
**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(h) Form of Indemnification Agreement between the Registrant and its officers and
directors
10(i) 1992 10-K 1-10464 10(i) Lease Agreement by and between O.B. English, as Landlord, and the Registrant,
as Tenant, dated November 3, 1992 (4352 North Beltwood Parkway)
+ **10(j) Executive Deferred Compensation Plan
+ **10(k) Executive Deferred Compensation Plan Trust
21 1990 10-K 1-10464 22 Subsidiaries of the Registrant
+23 Consent of Independent Auditors
+27 Financial Data Schedule
</TABLE>
--------------
*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, 1997 10-K is the Registrant's annual Report on
Form 10-K for the fiscal year ended December 28, 1997, 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).
-27-
<PAGE> 28
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 1, 1999
DALLAS SEMICONDUCTOR CORPORATION
<TABLE>
<S> <C>
By: /s/ C.V. Prothro
------------------------------------------------------
C.V. Prothro, Chairman of the Board of Directors,
President and Chief Executive Officer
</TABLE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C.V. Prothro Chairman of the Board of Directors, March 1, 1999
- ------------------------------------------ President and Chief Executive Officer
C.V. Prothro
/s/ Alan P. Hale Vice President - Finance March 1, 1999
- ------------------------------------------
Alan P. Hale
/s/ Chao C. Mai Senior Vice President and Director March 1, 1999
- ------------------------------------------
Chao C. Mai
/s/ Michael L. Bolan Vice President - Marketing and Product March 1, 1999
- ------------------------------------------ Development and Director
Michael L. Bolan
/s/ Richard L. King Director March 1, 1999
- ------------------------------------------
Richard L. King
/s/ M.D. Sampels Director March 1, 1999
- ------------------------------------------
M.D. Sampels
/s/ Carmelo J. Santoro Director March 1, 1999
- ------------------------------------------
Carmelo J. Santoro
/s/ Elmo R. Zumwalt, Jr. Director March 1, 1999
- ------------------------------------------
Elmo R. Zumwalt, Jr.
</TABLE>
-28-
<PAGE> 29
SCHEDULE II
DALLAS SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Fiscal Years Ended
December 29, 1996, December 28, 1997 and January 3, 1999
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Classification of Period Expenses Deductions of Period
- -------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1996 $ 375,000 $ 19,000 $ 21,000 $ 373,000
1997 $ 373,000 $ 8,600 $ 1,600 $ 380,000
1998 $ 380,000 $ 1,805,000 $ 1,755,000 $ 430,000
Distributor returns and allowances:
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
1998 $17,083,000 $61,417,000 $63,262,000 $15,248,000
Inventory Reserves:
1996 $ 8,098,000 $ 3,480,000 $ 50,000 $11,528,000
1997 $11,528,000 $ 6,788,000 $ 130,000 $18,186,000
1998 $18,186,000 $11,235,000 $ 857,000 $28,564,000
</TABLE>
-S1-
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Previously Filed*
--------------------------------
Exhibit With File Number As Exhibit Description
- ------- ---------------- ---------- -----------
<S> <C> <C> <C>
3(a)-1 33-16924 3(a)-3 Restated Certificate of Incorporation of the Registrant
3(a)-2 Amdt. No. 2 to Form 10 3(a)-4 Amendment to Restated Certificate of Incorporation of the Registrant
0-16170
3(b) Amdt. No. 2 to Form 10 3(b)-1 Bylaws of the Registrant, as amended
0-16170
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
**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(h) Form of Indemnification Agreement between the Registrant and its officers and
directors
10(i) 1992 10-K 1-10464 10(i) Lease Agreement by and between O.B. English, as Landlord, and the Registrant,
as Tenant, dated November 3, 1992 (4352 North Beltwood Parkway)
+ **10(j) Executive Deferred Compensation Plan
+ **10(k) Executive Deferred Compensation Plan Trust
21 1990 10-K 1-10464 22 Subsidiaries of the Registrant
+23 Consent of Independent Auditors
+27 Financial Data Schedule
</TABLE>
--------------
*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, 1997 10-K is the Registrant's annual Report on
Form 10-K for the fiscal year ended December 28, 1997, 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).
<PAGE> 1
EXHIBIT 10(j)
DALLAS SEMICONDUCTOR CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Paragraph 1. Definitions 1
1.1. "Account" 1
1.2. "Beneficiary" 1
1.3. "Board" 1
1.4. "Change in Control" 1
1.5. "Committee" 1
1.6. "Company" 1
1.7. "Contribution" 2
1.8. "Dividend" 2
1.9. "Effective Date" 2
1.10. "Participant" 2
1.11. "Plan" 2
1.12. "Realization Date" 2
1.13. "Severance Distribution" 2
1.14. "Stock" 2
1.15. "Terminates" or "Termination" 2
1.16. "Trust" 2
1.17. "Trust Agreement" 2
1.18. "Trustee" 2
1.19. "Unit(s)" 2
1.20. "Year" 2
Paragraph 2. Plan Administration 3
2.1. Plan Administrator. 3
2.2. Compensated Expenses of the Plan Administrator. 3
2.3. Agents of the Plan Administrator. 3
2.4. Authority of Plan Administrator. 3
2.5. Other Rules and Regulations. 3
2.6. Duties of Administrative Personnel. 3
2.7. Employment of Advisors. 4
2.8. Claims Procedures. 4
2.9. Review Procedures. 4
Paragraph 3. Eligibility 5
3.1. Designation of Participants. 5
3.2. Effect on Other Compensation Arrangements. 5
Paragraph 4. Allocation to Accounts 5
4.1. Accounts. 5
4.2. Investment of Accounts 5
4.3. Dividends on Stock 5
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Paragraph 5. Units. 5
5.1. Allocation of Units. 5
5.2. Vesting of Units. 5
5.3. Adjustment Upon Changes in Outstanding Shares of Stock. 6
Paragraph 6. Distribution of Accounts 6
6.1. Payment of Distribution. 6
6.2. Amount Distributable. 6
6.3. Form of Distribution 7
6.4. Timing of Distribution 7
6.5. Forfeitures 7
Paragraph 7. Beneficiaries 7
7.1. Beneficiary Designation. 7
7.2. Absence of Beneficiary Designation. 7
Paragraph 8. Funding 7
8.1. In General 7
8.2. Trust Assets. 7
Paragraph 9. Amendment and Termination 8
9.1. Amendment of the Plan. 8
9.2. Company Action. 8
9.3. Termination of the Plan. 8
Paragraph 10. Miscellaneous 8
10.1. Rights Against the Company. 8
10.2. Expenses of Administration. 8
10.3. Notice to the Company. 8
10.4. Applicable Law. 8
10.5. Provisions for Sole Benefit of Parties. 8
10.6. Paragraph Headings. 8
10.7. Severability. 9
10.8. Binding Arbitration. 9
10.9. No Assignment. 9
</TABLE>
<PAGE> 4
DALLAS SEMICONDUCTOR CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
The purpose of this Plan is to advance the interests of Dallas
Semiconductor Corporation by providing an additional incentive in the form of
deferred compensation to retain the qualified and competent employees upon whose
efforts and judgment its success is largely dependent, by allowing them to share
in the prosperity of the Company.
1 DEFINITIONS. As used herein, the following terms shall have the meaning
indicated. Except when otherwise indicated by the context, any
masculine terminology when used in the Plan shall also include the
feminine gender, and the definition of any term in the singular shall
also include the plural.
1.1 "ACCOUNT" means the account established for a
Participant pursuant to PARAGRAPH 4.1.
1.2 "BENEFICIARY" means the person designated by a
Participant under PARAGRAPH 7.1 to receive any payments to
which such Participant is entitled under the terms of the Plan
in the event Participant dies prior to receiving the full
amount of such payments.
1.3 "BOARD" means the Board of Directors of the Company.
1.4 "CHANGE IN CONTROL" means: (i) any time at which any
"person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended on the date of
adoption of the Plan), other than the Company, a subsidiary of
the Company or any savings, pension, or other benefit plan for
the benefit of employees of the Company or its subsidiaries,
acquires or otherwise becomes the beneficial owner of shares
of Stock (or any other voting securities of the Company, or
options, warrants or other securities or rights convertible
into, exchangeable for or exercisable for Stock or any other
voting securities of the Company) in a transaction or series
of transactions that results in such person, directly or
indirectly, owning more than twenty percent (20%) of the
outstanding shares of Stock (including, for this purpose, all
other securities having the right to vote generally in the
election of directors); (ii) in connection with or as a result
of any cash tender offer, merger or other business
combination, sale of assets or contested election (by proxy or
otherwise), resignation of director(s), or any combination of
the foregoing transactions (a "Transaction"), such time as the
persons who were non-employee directors before the Transaction
shall cease to constitute at least a majority of the
non-employee directors on the Board of Directors of the
Company or any successor to the Company; or (iii) the election
of any person other than C. V. Prothro as chairman and chief
executive officer of the Company.
1.5 "COMMITTEE" means the Compensation Committee of the
Board and for convenience of reference, all references herein
to administration shall be to the
<PAGE> 5
Committee, but shall be understood to refer to the Board if
the Committee is not appointed at the time of reference.
1.6 "COMPANY" means Dallas Semiconductor Corporation, a
Delaware corporation, and its successors or assigns.
1.7 "CONTRIBUTION" means the Two Million Two Hundred Forty
Thousand Dollars ($2,240,000) deposited by the Company with
the Trustee.
1.8 "DIVIDEND" means the aggregate amount declared as a
dividend on a share of Stock.
1.9 "EFFECTIVE DATE" means December 28, 1997.
1.10 "PARTICIPANT" means an employee selected pursuant to
PARAGRAPH 3.1 to participate in the Plan.
1.11 "PLAN" means the Dallas Semiconductor Corporation
Executive Deferred Compensation Plan, as amended.
1.12 "REALIZATION DATE" means December 31, 2004; provided,
however, that notwithstanding the foregoing, in the event a
Change of Control occurs, the date on which the Change of
Control occurs shall be the Realization Date.
1.13 "SEVERANCE DISTRIBUTION" means a distribution to a
Participant who Terminates prior to the Realization Date
pursuant to the second paragraph of PARAGRAPH 6.2.
1.14 "STOCK" means shares of the common stock of Dallas
Semiconductor Corporation, par value $0.02 per share.
1.15 "TERMINATES" or "TERMINATION" means a Participant's
termination of employment with the Company for any reason
other than retirement from the Company.
1.16 "TRUST" means one or more trusts which may be
1.17 established by the Company for the purpose of meeting its
obligations under the Plan, but subject to the claims of
general creditors of the Company upon the Company's bankruptcy
or insolvency.
1.18 "TRUST AGREEMENT" means any agreement in the nature of
a trust (or in the nature of a custodial agreement) between
the Company and the Trustee that may be established to form
part of the Plan to receive, hold, invest, and dispose of
Trust assets.
<PAGE> 6
1.19 "TRUSTEE" means the entity acting as trustee or
custodian under any Trust Agreement at any time of reference.
Where there is more than one Trustee serving at any time, the
term "Trustee" shall mean all such Trustees. The Trustee shall
be a fiduciary under the Trust Agreement.
1.20 "UNIT(S)" means the units granted to a Participant
pursuant to PARAGRAPH 5.1. For purposes of allocations under
this Plan, the "VALUE" of one Unit shall be One Dollar
($1.00). For purposes of distributions under this Plan, the
"VALUE" of one Unit shall be determined under PARAGRAPH 6.2.
1.21 "YEAR" means the calendar year.
2 PLAN ADMINISTRATION
2.1 PLAN ADMINISTRATOR. The Board has appointed the
Committee as the Plan Administrator. Any member of the
Committee may resign as Plan Administrator by delivery of its
written resignation to the Board, and the Board may remove any
person or group from the status of, or appoint any person to
act as, Plan Administrator. The Plan Administrator shall have
the sole power, duty and responsibility for directing the
administration of the Plan in accordance with its provisions
and shall carry out the duties specified herein.
2.2 COMPENSATED EXPENSES OF THE PLAN ADMINISTRATOR. The
Plan Administrator shall serve without compensation for its
services as such, but the reasonable and necessary expenses of
the Plan Administrator shall be paid by the Company.
2.3 AGENTS OF THE PLAN ADMINISTRATOR. The Plan Administrator
may employ such agents and such clerical and other
administrative personnel as may reasonably be required for the
purpose of administering the Plan. Such administrative
personnel shall carry out the duties and responsibilities
assigned to them by the Plan Administrator. Expenses
necessarily incurred for such purpose shall be paid by the
Company.
2.4 AUTHORITY OF PLAN ADMINISTRATOR. The Plan Administrator
is authorized to take such actions as may be necessary to
carry out the provisions and purposes of the Plan and shall
have the discretionary authority to control and manage the
operation and administration of the Plan. In order to
effectuate the purposes of the Plan, the Plan Administrator
shall have the power and discretion to construe and interpret
the Plan, to supply any omissions therein, to reconcile and
correct any errors or inconsistencies, to decide any questions
in the administration and application of the Plan, and to make
equitable adjustments for any mistakes or errors made in the
administration of the Plan, and all such actions or
determinations made by the Plan Administrator, and the
application of rules and regulations to a particular case or
issue by the Plan Administrator, in good faith,
<PAGE> 7
shall not be subject to review by anyone, but shall be final,
binding and conclusive on all persons ever interested
hereunder.
2.5 OTHER RULES AND REGULATIONS. The Plan Administrator
shall have authority to make, and from time to time revise,
rules and regulations for the administration of the Plan and
shall apply such rules in a similar manner to Participants
similarly situated. Records of the Company (including, without
limitation, those relating to an employee's or Participant's
period of employment, Termination and the reason therefore,
leaves of absence, and re-employment) shall be conclusive on
all persons. Evidence required of anyone under the Plan may be
given by certificate, affidavit, document, or other
information which the person acting on it considers pertinent
and reliable, and signed, made or presented by the proper
party or parties.
2.6 DUTIES OF ADMINISTRATIVE PERSONNEL. Administrative
personnel appointed pursuant to PARAGRAPH 2.3 shall be
responsible for such matters as the Plan Administrator shall
delegate to them. Administrative personnel shall coordinate
matters related to the Plan with the appropriate departments
of the Company as the Plan Administrator directs.
2.7 EMPLOYMENT OF ADVISORS. The Plan Administrator may
appoint such accountants, counsel, and actuaries and other
advisors as its deems necessary or desirable in connection
with the administration of the Plan. Any person or firm so
employed may be a person or firm serving the Company in any
capacity. The Plan Administrator shall be entitled to rely
upon, and shall not be liable for any act or failure to act on
his part in such reliance on any opinion or reports, which
shall be furnished to it by any such accountant, with respect
to accounting matters, counsel, in respect to legal matters,
or actuary, in respect of actuarial matters.
2.8 CLAIMS PROCEDURES. A Participant or Beneficiary who
feels he is being denied any benefit or right provided under
the Plan must file a written claim with the Plan
Administrator. All such claims shall be submitted on a form
provided by the Plan Administrator which shall be signed by
the claimant and shall be considered filed on the date the
claim is received by the Plan Administrator. The claim will be
processed by the Plan Administrator in accordance with its
uniform policies. The Plan Administrator shall notify the
Participant or Beneficiary in writing, within ninety (90) days
of his written application for benefits, of his or her
eligibility or noneligibility for benefits under the Plan. If
the Plan Administrator determines that the Participant or
Beneficiary is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such
denial, (2) a specific reference to the provisions of the Plan
on which the denial is based, (3) a description of any
additional information or material necessary for the claimant
to perfect his claim, and a description of why it is needed,
and (4) an explanation of the Plan's claims review procedure
and other appropriate information as to the steps to be taken
if the beneficiary wishes to have the claim reviewed. If the
Plan Administrator determines that there are special
<PAGE> 8
circumstances requiring additional time to make a decision,
the Plan Administrator shall notify the Participant or
Beneficiary of the special circumstances and the date by which
a decision is expected to be made, and may extend the time for
up to an additional ninety-day (90) period.
2.9 REVIEW PROCEDURES. If the Participant or Beneficiary is
determined by the Plan Administrator not to be eligible for
benefits, or if the Participant or Beneficiary believes that
he or she is entitled to greater or different benefits, the
Participant or Beneficiary shall have the opportunity to have
such claim reviewed by the Plan Administrator by filing a
petition for review with the Plan Administrator within sixty
(60) days after receipt of the notice issued by the Plan
Administrator. Said petition shall state the specific reasons
which the Participant or Beneficiary believes entitle him or
her to benefits or to greater or different benefits. Within
sixty (60) days after receipt by the Plan Administrator of the
petition, the Plan Administrator shall afford the Participant
or Beneficiary (and counsel, if any) an opportunity to present
his or her position to the Plan Administrator orally or in
writing, and the Participant or Beneficiary (or counsel) shall
have the right to review the pertinent documents. The Plan
Administrator shall notify the Participant or Beneficiary of
its decision in writing within the sixty (60) day period,
stating specifically the basis of its decision, written in a
manner calculated to be understood by the Participant or
Beneficiary and the specific provisions of the Plan on which
the decision is based. If, because of the need for a hearing,
the sixty (60) day period is not sufficient, the decision may
be deferred for up to another sixty (60) day period at the
election of the Plan Administrator, with notice of this
deferral given to the Participant or Beneficiary.
3 ELIGIBILITY
3.1 DESIGNATION OF PARTICIPANTS. The Participants are those
employees of the Company designated, in writing, as a
Participant by the Committee as evidenced in Appendix A to the
Plan.
3.2 EFFECT ON OTHER COMPENSATION ARRANGEMENTS.
Participation in this Plan shall be in addition to regular
salaries, pension, life insurance and other benefits related
to Participant's service to the Company. The Plan shall not
confer upon any person any right to continuance of employment
by the Company, and nothing in this document shall be deemed
to limit the ability of the Company to enter into any other
compensation arrangements with any Participant.
4 ALLOCATION TO ACCOUNTS
4.1 ACCOUNTS. The Committee shall establish, for each
Participant under the Plan, a separate Account which shall be
initially credited with each Participant's Units as set forth
in Appendix A. A record of each Participant's share of the
Contribution as set forth in Appendix A shall be maintained
separately. The Company may, in its sole discretion, but only
after due consideration of the
<PAGE> 9
impact of section 162(m) of the Internal Revenue Code of 1986,
as amended ("Code") on the Company's ability to deduct such
subsequent contribution or contributions, make subsequent
contributions under the Plan to the Trust, which shall be
allocated as provided in PARAGRAPH 5.
4.2 INVESTMENT OF ACCOUNTS. Only Units may be credited to
a Participant's Account.
4.3 DIVIDENDS ON STOCK. Dividends received in cash by the
Trust shall be invested as provided in the Trust. Units equal
in number to the value of Dividends received shall be
allocated pro rata as of the date received among only the
Accounts of Participants employed by the Company on the date
the Dividend was received by multiplying (i) a fraction, the
numerator of which is each such Participant's Units allocated
to his Account and the denominator of which is all such
Participants' Units allocated to their Accounts by (ii) the
total Units representing the value of the Dividend received.
5 UNITS.
5.1 ALLOCATION OF UNITS. The number of Units initially
allocated to each Participant's Account shall be the Units
designated for that Participant on Appendix A. Subsequent
contributions by the Company after the Contribution shall be
allocated pro rata as of the date received among only the
Accounts of Participants employed on the date the subsequent
contribution was received by multiplying (i) the total Units
representing the contribution received by (ii) a fraction, the
numerator of which is each such Participant's Units allocated
to his Account and the denominator of which is all of the
Units allocated to all such Participants' Accounts.
5.2 VESTING OF UNITS. All Units held in a Participant's
Account shall be immediately vested.
5.3 ADJUSTMENT UPON CHANGES IN OUTSTANDING SHARES OF STOCK.
If at any time while the Plan is in effect or Units are
otherwise outstanding there shall be any increase or decrease
in the number of issued and outstanding shares of Stock
through the declaration of a stock dividend or through any
recapitalization resulting in a stock split-up, combination or
exchange of shares of Stock, an appropriate adjustment shall
be made in the number of each Participant's Units then
outstanding so that immediately after such event his Units
shall continue to bear the same proportionate relationship to
the shares of Stock then issued and outstanding as such Units
bore to the number of outstanding shares of Stock immediately
prior to such event; provided, however, that the issuance of
shares of Stock or of shares of the Company's capital stock of
any class, or securities convertible into shares of Stock or
shares of capital stock of any class, either in connection
with direct sale or upon the exercise of rights or warrants to
subscribe or upon conversion of shares or obligations
convertible into such shares or other
<PAGE> 10
securities, shall not affect, and no adjustment by reason of
such activity shall be made with respect to, the Units
outstanding on the date of such event(s). Without limiting the
generality of the foregoing, the existence of Units shall not
affect in any manner the right or power of the Company to
make, authorize or consummate (i) any or all adjustments,
recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (ii) any merger
or consolidation of the Company; (iii) any issue by the
Company of debt securities, or preferred or preference stock
which would rank above the shares of Stock; (iv) the
dissolution or liquidation of the Company, (v) any sale,
transfer or assignment of all or any part of the assets or
business of the Company; or (vi) any other corporate act or
proceeding, whether of a similar character or otherwise.
6 DISTRIBUTION OF ACCOUNTS
6.1 PAYMENT OF DISTRIBUTION. Subject to PARAGRAPH 6.4, each
Participant shall be entitled to receive a distribution of his
Account when the Realization Date occurs and not earlier. A
Participant entitled to a distribution under this Paragraph
shall be paid at the time designated in PARAGRAPH 6.4.
6.2 AMOUNT DISTRIBUTABLE. The amount distributable from his
Account to a Participant who was employed on the Realization
Date (or had retired from the Company prior to the Realization
Date) shall be the product of: (i) the fair market value of
the Stock held in the Trust on the Realization Date,
determined after subtracting the fair market value of any
remaining Units allocated to Participants who Terminated prior
to the Realization Date, multiplied by (ii) a fraction, where
the numerator is the number of Units in the Participant's
Account and the denominator is the total number of Units in
all Accounts of Participants who were employed on the
Realization Date (or had retired from the Company prior to the
Realization Date).
6.3 Notwithstanding the preceding, in the event a Participant
Terminates prior to the Realization Date, the Value of the
Units distributable to that Participant from his Account as
his Severance Distribution shall be the Participant's share of
the Contribution credited to his Account pursuant to Paragraph
4.1, reduced by his proportionate share of the net decline in
fair market value of the Stock held in the Trust between the
Effective Date and the date of his Termination, and shall in
no event exceed the Participant's share of the Contribution.
After a Severance Distribution, the Units held for such
Participant shall be canceled, and the excess shares of Stock
initially purchased in the Trust to measure the Plan's
obligation to the Participant shall be sold as provided in
PARAGRAPH 6.5.
6.4 FORM OF DISTRIBUTION. Distribution of a Participant's
Account shall be only in a single lump sum cash payment equal
to the Participant's amount distributable. The Committee may,
in its sole discretion, make payments under this Paragraph net
of applicable federal and state withholding taxes.
<PAGE> 11
6.5 TIMING OF DISTRIBUTION. Distribution of a Participant's
Account shall occur on or after January 1, 2005 but not later
than March 15, 2005; provided, however, that (i) if a
Participant Terminates because of his death, distribution
shall occur as soon as reasonably possible after the
Participant died and his Beneficiary has been determined, and
(ii) if a Change of Control occurs where the Realization Date
becomes the date the Change of Control occurred, distribution
shall occur on the Realization Date.
6.6 FORFEITURES. In the event a Participant receives his
Severance Distribution, the balance in his Account after
deducting the value of the Severance Distribution shall be
immediately forfeited. Sufficient shares of Stock in the Trust
equal in value to the value of the forfeiture, if any, shall
be immediately sold, and the sale proceeds returned to the
Company immediately after sale.
7 BENEFICIARIES
7.1 BENEFICIARY DESIGNATION. Each Participant may
designate a Beneficiary or Beneficiaries to receive any
payments which such Participant is entitled to receive under
the terms of the Plan in the event he dies prior to receiving
the full amount of such payments. Such designation may be made
at any time by filing a Beneficiary designation form with the
Committee prior to the date of his death and may be changed by
filing a new Beneficiary designation form with the Committee
prior to the date of his death. If any Participant dies after
properly filing a Beneficiary designation form, all payments
shall be distributed as provided in such Beneficiary
designation form. All amounts to be paid to a Beneficiary
under this Paragraph shall be paid in the same manner as such
payments would have been paid to the Participant had he or she
survived.
7.2 ABSENCE OF BENEFICIARY DESIGNATION. If any Participant
dies without having properly filed a Beneficiary designation
form, or if the Participant does not, in the sole discretion
of the Committee, have a valid, proper Beneficiary
designation, all payments shall be made to his or her
surviving spouse, or in the absence of a surviving spouse,
then to his estate.
8 FUNDING
8.1 IN GENERAL. Any obligation of the Company to pay
benefits under the Plan shall be an unsecured promise, and any
right to enforce such obligation shall be solely as a general
creditor of the Company. For the convenience and benefit of
the Company and to the extent not inconsistent with the
foregoing sentence, the Company may establish one or more
revocable or irrevocable trusts to hold assets to meet its
obligations under the Plan to Participants.
8.2 TRUST ASSETS. The property comprising the assets of a
Trust established under PARAGRAPH 8.1 shall, at all times,
remain the property of the Trust. The Trustee shall distribute
the assets comprising the Trust in accordance with the
<PAGE> 12
provisions of the Plan and Trust as instructed by the
Committee, but in no event shall the Trustee distribute (i)
one or more shares of Stock or (ii) the assets of the Trust to
or for the benefit of the Company, except as provided in the
Trust in the case of insolvency or bankruptcy of the Company
or after satisfaction of all the Company's obligations under
the Plan to the Participants.
9 AMENDMENT AND TERMINATION
9.1 AMENDMENT OF THE PLAN. The Committee shall have the
power (and, without limitation, may delegate some or all of
such power to any officer) to amend the Plan, retroactively or
otherwise, in any manner in which it deems desirable.
9.2 COMPANY ACTION. Any action required of the Company
shall be evidenced by a resolution of the Board or shall be
taken by a person authorized to act by a duly adopted
resolution of the Board.
9.3 TERMINATION OF THE PLAN. The Committee reserves the
right at any time, in its sole discretion, to terminate this
Plan in whole or in part.
10 MISCELLANEOUS
10.1 RIGHTS AGAINST THE COMPANY. Neither the establishment
of the Plan nor any amendment of the Plan, nor the
participation in the Plan, nor the payment of any benefits
under the Plan, (i) shall be construed as giving to any
Participant or any other person any legal or equitable rights,
except as are set forth in the Plan, against the Company or
its officers or directors, as such, (ii) shall be construed as
giving any Participant the right to be retained as an employee
and (iii) shall prejudice the Company's rights to discharge or
discipline any employee for any reason.
10.2 EXPENSES OF ADMINISTRATION. All expenses incident to
the administration of the Plan shall be paid by the Company.
10.3 NOTICE TO THE COMPANY. Any notice, request, or demand,
which by any provision of this Plan is required or permitted
to be given or served to the Plan Administrator shall be
deemed to be sufficiently given and served for all purposes by
being personally delivered or sent by certified mail to the
place of business of the Company.
10.4 APPLICABLE LAW. The Plan will be construed and
enforced according to the laws of the State of Texas, and all
provisions of the Plan will be administered according to the
laws of the said state.
10.5 PROVISIONS FOR SOLE BENEFIT OF PARTIES. All of the
covenants, stipulations and agreements in this Plan contained
are, and shall be, for the sole and exclusive
<PAGE> 13
benefit of, and are binding upon, the parties to this Plan,
their successors and assigns, and the Participants in the
Plan.
10.6 PARAGRAPH HEADINGS. The titles or headings of the
respective Paragraphs in the Plan are inserted merely for
convenience and shall be given no legal effect.
10.7 SEVERABILITY. In the event any provision of the Plan
shall be held to be illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining
provisions of the Plan, but shall be fully severable, and the
Plan shall be construed and enforced as if the illegal or
invalid provision had never been included in the Plan.
10.8 BINDING ARBITRATION. In the event of any claim or
controversy arising out of or relating to this Plan, the
parties agree that all such claims or controversies shall be
resolved by final and binding arbitration in Dallas County,
Texas in accordance with the Commercial Arbitration Rules of
the American Arbitration Association in effect on the date
when the claim or controversy first arises. Either party must
communicate its request for arbitration under this Paragraph
in writing ("Arbitration Notice") to the other party within
one hundred twenty (120) days from the date the claim or
controversy first arises. Failure to communicate the
Arbitration Notice within one hundred twenty (120) days shall
constitute a waiver of any such claim or controversy. All
claims or controversies subject to arbitration under this
Paragraph shall be submitted to an arbitration hearing within
ninety (90) days from the date Arbitration Notice is
communicated by either party. All claims or controversies
submitted to arbitration under this Paragraph shall be
resolved by a panel of three (3) arbitrators who are licensed
to practice law in the State of Texas and who are experienced
in the arbitration of employment disputes. These arbitrators
shall be selected in accordance with the applicable Commercial
Arbitration Rules or by agreement of the parties. Either party
may request that the arbitration proceeding be
stenographically recorded by a Certified Shorthand Reporter.
The arbitrators shall issue a decision on any claim or
controversy within thirty (30) days from the date the
arbitration hearing is completed, and such decision shall be
final and binding on all parties. The parties shall have the
right to be represented by legal counsel at any arbitration
hearing. The costs of any arbitration hearing, including the
attorneys' fees incurred by both parties (including any costs,
expenses or attorneys' fees incurred in filing any lawsuit to
compel arbitration, if applicable), shall be paid by the
losing party or parties. The arbitration provisions in this
Paragraph are subject to the Federal Arbitration Act, 9 U.S.C.
Sections 1 et seq. (West 1994) (or any successor provisions)
and may be specifically enforced by any party, and submission
to arbitration proceedings may be compelled by any court of
competent jurisdiction. The decision of the arbitrators may be
specifically enforced by any party in any court of competent
jurisdiction.
10.9 NO ASSIGNMENT. The rights of a Participant to payment
under this Plan shall not be assigned, transferred, pledged or
encumbered, either voluntarily or by
<PAGE> 14
operation of law, except as provided in PARAGRAPH 7.1 with
respect to designation of Beneficiaries. If any person shall
attempt to assign, transfer, pledge or encumber any amount
payable under the Plan, or if by reason of his Bankruptcy or
other event happening at any time any such payment would be
made subject to his debts or liabilities or would otherwise
devolve upon anyone else and not be enjoyed by him or his
Beneficiary, the Plan Administrator may, in its sole
discretion, terminate such person's interest in any such
payment and direct that the same be held and applied to, or
for the benefit of, such person, his spouse or dependents, in
such manner as the Plan Administrator may deem proper.
IN WITNESS WHEREOF, this Plan has been executed by the Chairman of the
Board, President and Chief Executive Officer of the Company this 11th day June,
1998, but effective as of the Effective Date.
DALLAS SEMICONDUCTOR CORPORATION
BY:
----
ITS:
----
<PAGE> 15
APPENDIX A
TO THE DALLAS SEMICONDUCTOR CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
Share of
Name Units Contribution
- ---- ----- ------------
<S> <C> <C>
C.V. Prothro 400,000 400,000
Chao C. Mai 250,000 250,000
Michael L. Bolan 180,000 180,000
F.A. Scherpenberg 150,000 150,000
Alan P. Hale 130,000 130,000
Michael D. Smith 130,000 130,000
Robert D. Lee 130,000 130,000
Kenneth B. Molitor 130,000 130,000
Hal Kurkowski 130,000 130,000
Wendell Little 130,000 130,000
Jeff Hannon 80,000 80,000
Reynold W. Kelm 80,000 80,000
Joe Hundt 80,000 80,000
Don Dias 80,000 80,000
Tom Harrington 80,000 80,000
Steve Curry 80,000 80,000
TOTALS:
---------- ----------
2,240,000 $2,240,000
</TABLE>
A-1
<PAGE> 1
EXHIBIT 10(k)
DALLAS SEMICONDUCTOR CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN TRUST
This Agreement made this 11th day of June, 1998 by and between Dallas
Semiconductor Corporation ("Company") and Wells Fargo Bank, N.A. ("Trustee").
WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Dallas
Semiconductor Corporation Executive Deferred Compensation Plan ("Plan");
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement for tax purposes and shall not affect the
status of the Plan as an unfunded plan maintained for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees for purposes of Title I of the Employee Retirement Income Security
Act of 1974; and
WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist in the meeting of its
liabilities under the Plan.
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company hereby deposits with Trustee in trust Two Million Two
Hundred Forty Thousand Dollars ($2,240,000) (the "Contribution") which shall
become the principal of the Trust to be held, administered and disposed of by
Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is
the grantor, within the meaning of subpart E, part I, Subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively
for the uses and purposes of Plan participants and general creditors as herein
set forth. Plan participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against
Company. Any
<PAGE> 2
assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with Trustee
to augment the principal to be held, administered and disposed of by Trustee as
provided in this Trust Agreement. Neither Trustee nor any Plan participant or
beneficiary shall have any right to compel such additional deposits.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company shall deliver to Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), the form in which such amount is to
be paid (as provided for or available under the Plan), and the time of
commencement for payment of such amounts. Except as otherwise provided herein,
Trustee shall make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and
paid by Company. The Company shall provide the Trustee with such other
information as may be reasonably requested by the Trustee in order to allow the
Trustee to comply with all of its distribution, reporting and withholding
responsibilities hereunder.
(b) The entitlement of a Plan participant or his or her beneficiaries
to benefits under the Plan shall be determined by Company or such party as it
shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants
or their beneficiaries as they become due under the terms of the Plan. Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan, Company shall make the balance of each such payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
2
<PAGE> 3
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to
pay its debts as they become due, or (ii) Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges
in writing to Trustee that Company has become Insolvent, Trustee shall
determine whether Company is Insolvent and, pending such
determination, Trustee shall discontinue payment of benefits to Plan
participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's
Insolvency, or has received notice from Company or a person claiming
to be a creditor alleging that Company is Insolvent, Trustee shall
have no duty to inquire whether Company is Insolvent. Trustee may in
all events rely on such evidence concerning Company's solvency as may
be furnished to Trustee and that provides Trustee with a reasonable
basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan participants or
their beneficiaries and shall hold the assets of the Trust for the
benefit of Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Plan participants of
their beneficiaries to pursue their rights as general creditors of
Company with respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of
this Trust Agreement only after Trustee has determined that Company is
not Insolvent (or is no longer Insolvent).
(c) Provided that there were sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by Company in lieu of the payments provided
for hereunder during any such period of discontinuance.
3
<PAGE> 4
Section 4. Payments to Company.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return
to Company or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant
to the terms of the Plan.
Section 5. Investment Authority.
(a) Subject to Company's rights under Section 5(d), and subject
further to Section 5(e), Trustee shall invest all contributions solely in
Company's authorized common stock, $.02 par value ("Company Stock"), within ten
(10) trading days after receipt or, if necessary to prevent unusual
fluctuations in the Company Stock's price, as soon as reasonably possible after
receipt. Subject to Sections 5(d) and 5(e), Trustee shall hold the shares of
Company Stock so acquired until January 1, 2005. Company Stock shall be sold to
fund benefit payments under the Plan as needed and shall be sold only as needed
to fund benefit payments under the Plan or to return forfeitures to the Company
under the Plan. All purchases of Company Stock shall be made on the open market
at fair market value. Until invested in Company Stock, all contributions and
income that are not needed for current expenditures shall be held in
interest-bearing investments under Section 5(b)(4) pending the investment of
such funds in Company Stock.
(b) Subject to the provisions of Section 5(a), 5(d) and 5(e), Trustee
shall have the following investment powers:
(1) To invest in any properties, real or personal or mixed,
including but not limited to, common or preferred stocks (including
Company Stock or rights to acquire Company Stock), securities, or any
other interest in any corporation, interests in investment trusts and
mutual funds, bonds, notes or other evidences of indebtedness or
ownership, first mortgages, real property, leases on real property,
contracts to sell real property, contracts of sale of real property,
short-term cash equivalents having ready marketability, including but
not limited to U.S. Treasury bills, commercial paper, certificates of
deposit, savings shares or savings share accounts of savings and loan
associations, and similar type securities, and any other property of
any kind or nature whatsoever;
(2) To purchase or subscribe for property and to retain it as
a Trust asset; to sell any Trust asset at any time held by it at
either public or private sale for cash or other consideration or on
credit at such time or times and on such terms and conditions as may
be deemed appropriate; to exchange such Trust assets and to grant
options for the purchase or exchange thereof; and to convey,
partition, or otherwise dispose of,
4
<PAGE> 5
with or without covenants, including covenants of warranty of title,
any property free of all trusts;
(3) To register any property held by it hereunder in the name
of Trustee or in the names of nominees with or without the addition of
words indicating that such property is held in a fiduciary capacity,
to take and hold the same unregistered or in form permitting
transferability by delivery, to deposit or arrange for the deposit of
securities in a qualified central depository even though, when so
deposited, such property may be held in the name of the nominee of
such depository with other securities deposited therein by other
persons, or to deposit or to arrange for the deposit of any property
issued by the United States government, or any agency or
instrumentality thereof, with a Federal Reserve bank, provided that
the books and records of Trustee shall at all times disclose that all
such property is a Trust asset;
(4) To invest cash balances held by Trustee, from time to
time, in short-term cash equivalents having ready marketability,
including but not limited to money market mutual funds (including
those for which Trustee or its affiliate act as investment advisor),
U.S. Treasury bills, commercial paper, certificates of deposit,
savings shares or savings share accounts of savings and loan
associations, and similar type securities;
(5) Generally to do all such acts, to make, execute,
acknowledge, and deliver any and all deeds, leases, assignments, oil
and gas leases, documents of transfer, and conveyances, receipts,
releases, agreements, and without limitation by the foregoing, to
execute any and all other instruments, take all such proceedings and
exercise all such rights and powers with relation to any Trust asset
to the same extent as an individual might do with respect to his own
property; and
(6) To deposit all or any Trust assets with a custodian,
subject to the direction and control of the Trustee.
(c) Subject to Section 5(a) and Section 5(e), Trustee may invest in
securities (including stock or rights to acquire stock) or obligations issued
by Company. All rights associated with assets of the Trust shall be exercised
by Trustee or the person designated by Trustee, and shall in no event be
exercisable by or rest with Plan participants.
(d) Company shall have the right at anytime, and from time to time in
its sole discretion, to substitute assets of equal fair market value for any
asset held by the Trust. This right is exercisable by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
(e) Company shall have full investment responsibility for the
purchase, sale, retention, tender and voting of Company Stock and for any
insurance contracts, and Trustee shall act with respect to Company Stock and
any insurance contracts only as provided in this Section or as otherwise
directed by Company.
5
<PAGE> 6
Section 6. Disposition of Income.
During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested as provided in
Section 5.
Section 7. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within thirty (30) days following the close of each
calendar quarter and within thirty (30) days after the removal or resignation
of Trustee, Trustee shall deliver to Company a written account of its
administration of the Trust during such quarter or during the period from the
close of the last preceding quarter to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable being shown separately), and showing all
cash, securities and other property held in the Trust at the end of such
quarter or as of the date of such removal or resignation, as the case may be.
Section 8. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by Company which is contemplated by, and
in conformity with, the terms of this Trust and is given in writing by Company.
In the event of a dispute between Company and a party, Trustee may apply to a
court of competent jurisdiction to resolve the dispute. In the event of a
conflict between the terms of the Trust and the terms of the Plan solely with
respect to the Trustee's obligations, the terms of the Trust shall take
precedence to the extent consistent with applicable law.
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If Company does not pay such costs, expenses and liabilities in
a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein;
provided, however, that if an insurance policy is held as an asset of the
Trust, Trustee shall have no power to name a
6
<PAGE> 7
beneficiary of the policy other than the Trust, to assign the policy (as
distinct from conversion of the policy to a different form) other than to a
successor Trustee, or to loan to any person the proceeds of any borrowing
against such policy.
(d) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
Section 9. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses.
If not so paid, the fees and expenses shall be paid from the Trust.
Section 10. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective thirty (30) days after receipt of such notice unless Company
and Trustee agree otherwise.
(b) Trustee may be removed by Company on thirty (30) days notice or
upon shorter notice accepted by Trustee.
(c) If Trustee resigns or is removed within four (4) years of a Change
of Control, as defined herein, Company shall apply to a court of competent
jurisdiction for the appointment of a successor Trustee or for instructions.
(d) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within fifteen (15) days
after receipt of notice of resignation, removal or transfer, unless Company
extends the time limit, which extension Company will not unreasonably withhold.
(e) If Trustee resigns or is removed, a successor shall be appointed,
in accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraph (a) or (b) of this section. If no such appointment has
been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
7
<PAGE> 8
Section 11. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 10(a)
or (b) hereof, Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers under
state law, as a successor to replace Trustee upon resignation or removal. The
appointment shall be effective when accepted in writing by the new Trustee, who
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute any
instrument necessary or reasonably required by Company or the successor Trustee
to evidence the transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of
Section 10(c) hereof, the appointment of a successor Trustee shall be effective
when accepted in writing by the new Trustee. The new Trustee shall have all the
rights and powers of the former Trustee, including ownership rights in Trust
assets. The former Trustee shall execute any instrument necessary or reasonably
requested by the successor Trustee to evidence the transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 5, 7, and 8 hereof. The successor Trustee shall not be responsible for
and Company shall indemnity and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from
any other past event, or any condition existing at the time it becomes
successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the Trust
revocable after it has become irrevocable in accordance with Section 1(b)
hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits
pursuant to the terms of the Plan, unless sooner revoked in accordance with
Section 12(c) hereof. Upon termination of the Trust any assets remaining in the
Trust shall be returned to Company.
(c) Upon written approval of participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, Company may terminate
this Trust prior to the time all benefit payments under the Plan have been
made. All assets in the Trust at termination shall be returned to Company.
(d) Sections 1(b), 1(e), 4, 10(c), 12(a), 12(c), 12(d), and 13(d) of
this Trust Agreement may not be amended by Company for four (4) years following
a Change of Control, as defined herein.
8
<PAGE> 9
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or
in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) For purposes of this Trust, Change of Control shall mean: (i) any
time at which any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended on the date of adoption of the
Plan), other than the Company, a subsidiary of the Company or any savings,
pension, or other benefit plan for the benefit of employees of the Company or
its subsidiaries, acquires or otherwise becomes the beneficial owner of shares
of Company Stock (or any other voting securities of the Company, or options,
warrants or other securities or rights convertible into, exchangeable for or
exercisable for Company Stock or any other voting securities of the Company) in
a transaction or series of transactions that results in such person, directly
or indirectly, owning more than twenty percent (20%) of the outstanding shares
of Company Stock (including, for this purpose, all other securities having the
right to vote generally in the election of directors); (ii) in connection with
or as a result of any cash tender offer, merger or other business combination,
sale of assets or contested election (by proxy or otherwise), resignation of
director(s), or any combination of the foregoing transactions (a
"Transaction"), such time as the persons who were non-employee directors before
the Transaction shall cease to constitute at least a majority of the
non-employee directors on the Board of Directors of the Company or any
successor to the Company; or (iii) the election of any person other than C. V.
Prothro as chairman and chief executive officer of the Company. Company shall
immediately notify Trustee of any Change of Control. Trustee may conclusively
rely upon such notice and shall have no duty to determine whether a Change of
Control has occurred.
Section 14. Effective Date.
The effective date of this Trust Agreement shall be December 31, 1997.
DALLAS SEMICONDUCTOR CORPORATION
BY: C. V. PROTHRO
WELLS FARGO BANK, N.A.
BY: VARLEEN DOYLE
9
<PAGE> 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 13, 1999, with respect to
the consolidated financial statements and schedule of Dallas Semiconductor
Corporation included in the Annual Report (Form 10-K) for the year ended January
3, 1999.
Dallas, Texas
March 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
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567
0
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