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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year Ended February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File No. 0-7422
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STANDARD MICROSYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2234952
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Arkay Drive, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(516) 435-6000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on
None which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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(Title of Class)
Indicate by check mark 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 Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of April 30, 1997, 15,448,820 shares of the registrant's common stock
were outstanding and the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $132,242,000.
Documents Incorporated Reference
The documents incorporated by reference into this Form 10-K and the Parts
hereof into which such documents are incorporated are listed below:
Document Part
Those portions of the registrant's 1997 annual report to shareholders
(the Annual Report") which are specifically identified herein as
incorporated by reference into this Form 10-K. II
Those portions of the registrant's proxy statement for the registrant's
1997 Annual Meeting (the "Proxy Statement") which are specifically
identified herein as incorporated by reference into this Form 10-K. III
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PART I
Item 1. Business.
GENERAL
Standard Microsystems Corporation (the "Company", the "Registrant", or "SMC(R)")
is a Delaware corporation, organized in 1971. As used herein, the term "Company"
includes the Company's subsidiaries except where the context otherwise requires.
The address of the principal executive office of the Company is 80 Arkay Drive,
Hauppauge, New York 11788, and its telephone number at that address is
516-435-6000. Toyo Microsystems Corporation, a majority-owned subsidiary located
in Tokyo, Japan, markets and sells SMC products in Japan. Through wholly owned
subsidiaries listed below, SMC operates branch offices to market and sell its
products in the following locations:
Subsidiary Location
Standard Microsystems Corporation (Asia) Taipei, Taiwan
SMC Australia Pty. Ltd. Sydney, Australia
Standard Microsystems Corporation (Canada) Oakville, Ontario, Canada
Standard Microsystems (Europe) Ltd. London, England
SMC France, Inc. St. Germain-en-Laye, France
Standard Microsystems GmbH Munich, Germany
SMC Massachusetts, Inc. Andover, Massachusetts
SMC de Mexico SA de CV Mexico DF, Mexico
SMC North America, Inc. Various States
SMC Singapore, Inc. Singapore
SMC International Ltd. Christ Church, Barbados
BUSINESS AND PRODUCT DESCRIPTION
Standard Microsystems conducts its operations primarily through two divisions,
the System Products Division and the Component Products DIvision. The System
Products Division designs, produces and markets products that connect personal
computers (PCs) to, and allow communications over, local area networks (LANs).
The Component Products Division designs, produces and markets
very-large-scale-integrated (VLSI) circuits primarily for PC input/output (I/O)
control, computer and industrial network control. The Division also sells
non-semiconductor devices that are produced in the Company's own semiconductor
foundry. As a separate profit center, Toyo Microsystems Corporation (TMC), sells
the Company's component and system products into the Japanese market.
The Company's fiscal 1997 revenues increased to $354.1 million, from $341.9
million in fiscal 1996, after declining from $378.7 million in fiscal 1995. As a
percentage of consolidated revenues, system products declined to 44.5% in fiscal
1997 from 54.6% in fiscal 1996 and
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67.7% in fiscal 1995. In contrast, as a percentage of consolidated revenues,
component products' revenues increased to 50.6% from 40.5% and 29.2% and TMC's
revenues increased to 4.9% from 4.9% and 3.1%.
Revenues By Product Line ($millions)
For the years ended February 28 or 29, % change % change
1997 97/96 1996 96/95 1995
System products
Adapter revenues $120.3 -17% 144.5 -29% $204.9
Hub and switch revenues 37.2 -11 42.0 19 51.5
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Total system products revenues $157.5 -16% 186.5 -27% $256.4
% of revenues 44.5 % 54.6% 67.7%
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Component products
Integrated circuit revenues $164.3 34% 123.0 15% $106.9
Foundry device revenues 14.7 -6 15.6 320 3.7
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Revenues $179.0 29% 138.6 25% $110.6
% of revenues 50.6% 40.5% 29.2%
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Toyo Microsystems Corporation
Revenues $17.6 5% $16.8 44% $11.7
% of revenues 4.9% 4.9% 3.1%
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Standard Microsystems Corporation
Revenues $354.1 4% $341.9 -10% $378.7
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Business Acquisitions and Divestiture: In November 1996, the Company acquired
the Cardbus (PCMCIA) technology and product line of Databook, Inc. of Danvers,
Mass. This technology is used in portable and desktop PC's, and has possible new
markets such as set-top boxes with cable modems and slots for Ethernet and other
PCMCIA cards. Prior to this acquisition, SMC had been a licensee of Databook's
Cardbus technology and was a second source for Databook's first Cardbus product,
a Cardbus host controller chip with "no compromise" Zoom Video features, the
DB87114 "Patriot" chip . This device is now called the SMC34C90 Cardbus Host
controller.
In October 1996, the Company acquired a 19.9% equity interest in privately held
Accelerix Incorporated of Carp, Ontario, Canada. The Company and Accelerix also
entered into an agreement providing the Company with rights to market, second
source and enhance Accelerix' application specific memory technology.
In January 1996, SMC and SMC Enterprise Networks, Inc., a wholly-owned
subsidiary, sold substantially all the net assets and technology of the
Enterprise Networks Business Unit (ENBU) to Cabletron Systems, Inc., for $74.0
million in cash. ENBU had developed, manufactured and sold enterprise-wide
switching products for computer networks. The business unit, which was included
in SMC's operations for approximately ten months in
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fiscal 1996, accounted for approximately 4% of consolidated revenues in fiscal
1996 and 6% in fiscal 1995.
In February 1996, SMC acquired the assets and technology of EFAR Microsystems,
Inc. of Santa Clara, CA. The transaction was valued at $5.6 million based on the
issuance of 240,000 SMC common shares, the assumption of certain liabilities and
transaction fees. Nearly all of the purchase price represented purchased
in-process technology and was charged to SMC's operations in fiscal 1996. SMC
may issue to EFAR additional common stock with a market value of up to $20
million through February 1999, contingent on achieving certain operating
results.
BUSINESS AND PRODUCT DESCRIPTION: SYSTEM PRODUCTS DIVISION
The System Products Division sells LAN products that enable personal computers
to be connected to networks and permit communications among LAN users.
Connection to a LAN permits a PC user to send messages to and receive messages
from other LAN users and share common resources such as printers, disk drives,
files and programs. LANs offer individuals the advantages of working at their
own PCs and, at the same time, provide an organization with the benefits of
connectivity and productivity by allowing multiple users to communicate and
share resources. Internetworking, or connecting LANs to each other, allows users
to communicate and share resources over a wider sphere.
SMC's LAN products include network interface cards (adapters), wiring hubs and
switches, associated software and transceivers that operate over a variety of
media including, unshielded twisted pair, shielded twisted pair, coaxial, and
optical fiber cabling. The Company provides LAN products for major protocols or
technologies used for PC-based LANs: Ethernet, Fast Ethernet, Token Ring,
ARCNET(R) and PC Card. After the end of fiscal 1996, SMC introduced its first
high-speed asynchronous transfer mode (ATM) adapters. SMC's low-cost, workgroup
Ethernet switches accelerate bandwidth by segmenting the network into smaller
portions, each of which receives full network bandwidth.
LAN technologies combine hardware and software to control traffic signaling and
message passage between PCs and peripheral devices. End users differentiate LAN
technologies chiefly based upon speed and volume of data transmitted,
installation procedures and equipment cost.
Network Interface Cards (adapters): Installed in a personal computer or
workstation, an adapter is a printed circuit board that provides a connection to
a LAN over telephone -- unshielded twisted pair (UTP) or shielded twisted pair
(STP) -- wire, coaxial or fiber optic cables. The Company's adapters connect to
the communications links or buses internal to a PC. These buses, which allow for
transmission of signals in a computer, are known
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as industry standard architecture (ISA), extended industry standard architecture
(EISA), micro-channel architecture (MCA) and peripheral component interconnect
(PCI). An adapter provides a connector for a cable that plugs into a wall
outlet, much as a telephone cable connects to a wall outlet. For its Ethernet,
Fast Ethernet and Token Ring adapters, SMC provides software for communicating
over and diagnosing a network, installing an adapter and collecting data for
managing a network.
During fiscal 1997, SMC entered the ATM (Asynchronous Transfer Mode) market with
its 155 Mbps ATM Power155TM adapters. These adapters support PCI, SBus and EISA
Bus workstations and desktop computers.
In fiscal 1997, Ethernet (including PC Card and Fast Ethernet) adapters
accounted for approximately 93% of SMC's adapter revenues, compared to 92% in
fiscal 1996. Token Ring adapters fell to approximately 5% of adapter revenues in
fiscal 1997 from 6% in fiscal 1995. ARCNET adapters accounted for the remainder
of revenues.
Wiring Hubs and LAN Switches: LAN cables, beginning at the adapter connector,
are usually linked to a centrally located wiring hub. The hub passes along and
boosts signals from one computer or port on a LAN to one or more other ports.
Wiring hubs are called concentrators for Ethernet and Fast Ethernet,
multi-station access units (MAUs) for Token Ring and hubs for ARCNET. SMC hubs
are suited to workgroup or departmental LANs.
In addition to physical signaling, intelligent hubs incorporate software for
managing a network. SMC produces both conventional and intelligent hubs and the
software to support network management.
In fiscal 1997, hubs accounted for approximately 86% of SMC's hub and LAN switch
revenues, compared to 70% in fiscal 1996. Approximately 94% of SMC's hub
revenues were Ethernet (including Fast Ethernet) hubs, compared to 94% in fiscal
1996.
Supporting Software: The Company's products include supporting software drivers
which enable network hardware to communicate over a LAN by linking the network
protocol and the network operating system (NOS). The NOS suppliers regularly
update their software, requiring SMC to regularly alter its drivers. SMC also
upgrades drivers to improve performance over a network.
Design Criteria: SMC's System Products Division designs and develops critical
integrated circuits that control the operation of its Ethernet and Token Ring
adapters. The Company believes that this vertical integration provides an
advantage in terms of control over costs, performance, quality and
time-to-market, when compared to competitors who buy critical integrated
circuits from merchant semiconductor manufacturers.
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New Products: The following schedule summarizes new products recently introduced
by the System Products Division.
EtherPower II(TM) 10/100 - 10/100 Mbps Fast Ethernet Adapter Card. This adapter
card uses the 83C170/ (Epic/100) Fast Ethernet controller.
TigerStack(TM) 100 FamilyStackable Hubs - With 4 Segments of Fast Ethernet
Switching
TigerSwitch(TM) 100 Family - High performance, cost effective, Fast Ethernet
switch which offers 8 port.
10/100 LAN Extender FX(TM) - Two port Fast Ethernet Switch
SMC EZ Switch(TM) 8 - An 8 port Ethernet switch
SMC EZ HUB(TM) 100 - Fast Ethernet hub which can be used alone or in cascaded
pairs. TigerSwitch(TM) ATM workgroup switch - ATM workgroup switch
ATM Power25(TM) and Power155(TM) network cards - ATM network adapter cards
BUSINESS AND PRODUCT DESCRIPTION: COMPONENT PRODUCTS DIVISION
The Component Products Division (CPD) designs, develops and manufactures
very-large-scale-integrated (VLSI) circuitry. SMC maintains its SuperCell(TM)
library of complex circuit functions, shortening the design cycle for VLSI
circuits. Component products are focused on the personal computer input/output
(PC I/O) and networking markets. In fiscal 1997, approximately 89% of the
Division's revenues were from PC I/O devices, compared to approximately 80% in
fiscal 1996.
SMC's PC I/O controllers are integrated circuits with multiple functions for
controlling and interfacing various peripheral and communications functions in a
PC. Features include digital data separation, vertical or horizontal recording,
control of serial and parallel ports, interfaces with the game port and hard
disk drive, and other functions for floppy disk control.
PC I/O controllers first introduced by SMC during fiscal 1993 and 1994 are known
as super I/O devices. In a single package, these circuits combine many of the
connectivity functions listed above that have become required features for PCs.
SMC's super I/O class of devices are pin compatible, offering customers the
flexibility to design one circuit board layout, modifying characteristics by
inserting one or another of SMC's devices.
During fiscal 1997, 1996 and 1995, SMC announced PC I/O devices with enhanced
features including interfaces for infrared (IR) wireless communications, support
of PnP and low electrical power usage for laptop and handheld PCs. SMC also
announced and began to ship a class of PC I/O controllers known as ultra I/O. On
a single chip, these devices add keyboard and mouse control, system clock
generator and a real time clock to the super I/O level of functionality.
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Network circuits are sold to vendors of ARCNET, Ethernet and Fast Ethernet
equipment. Versions of ARCNET devices are optimized for use in industrial
control and transportation markets.
New Products: The following schedule summarizes new products recently introduced
by the Component Products Division.
83C170/ (EPIC/100) - A 10/100 Mbps Fast Ethernet controller
FDC37C957FR - With Fast IR (Infrared) communications and advanced power and
system management for portable PC applications.
FDC37C93xFR - With Fast IR (Infrared) communications and advanced power
management.
FDC37C669FR - Similar to the FDC37C957FR and FDC37C93xFR
without the integrated real-time clock or keyboard controller
FDC37C951 - With power and system management
capabilities for portable computer I/O (Input/ Output) applications
FDC37C67x
and the FDC37C68x - A pair of "Enhanced" Super I/O chips designed specifically
to work with Intel's Triton TX.
FDC37C93xAPM - ACPI-compliant PC I/O Controller
with advanced power management
The Foundry Business Unit, a business unit of the Component Products Division,
manufactures specialty silicon wafer-based products. In addition to volume
production of silicon devices for ink-jet print cartridges, it also manufactures
thin-film RC (resistor-capacitor) networks and MicroElectroMechanical Systems
(MEMS). Foundry devices accounted for approximately 4.2% of SMC's consolidated
revenues, and 8.2% of Component Products revenues, in fiscal 1997, compared to
approximately 4.5% and 11.3%, respectively, in fiscal 1996.
BUSINESS AND PRODUCT DESCRIPTION: WARRANTY POLICY
Depending upon the product, the Company generally warranties against defects in
material and workmanship for periods varying from one year to the lifetime of a
product. Estimated warranty costs are accrued when products are sold.
MARKETS AND COMPETITION
Network products of the System Products Division are used chiefly in conjunction
with personal computers which are connected to local area networks. Integrated
circuits of the Component Products Division are used primarily in personal
computers.
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Competition is characterized by rapid technological change and significant unit
price reductions which may not always correspond to a decrease in production
costs. Product line differentiation may be determined by breadth, diversity,
performance characteristics such as speed, quality and reliability and prices.
Among the competitors, important distinctions are timeliness of shipments, depth
of customer support and technical service. The principal methods SMC uses to
compete include new products, servicing customers and reducing manufacturing
costs. While past performance can be a guide, there is no assurance that the
Company can improve or maintain gross profit margins.
MARKETS AND COMPETITION: SYSTEM PRODUCTS DIVISION
The available worldwide market for the Company's LAN products is determined by
the installed base of PCs, sales of new PCs and the portion of PCs connected to
local area networks. SMC agrees with market analysts who believe that the number
of PCs shipped and the percentage of PCs connected to LANs has increased over
recent years. Competitors include domestic and foreign manufacturers, many of
whom possess substantially greater resources than SMC.
SMC's Ethernet, Fast Ethernet, Token Ring and ARCNET adapters accounted for 76%
of System Products Division (SPD) revenues, or 34% of Company revenues, during
fiscal 1997, compared to approximately 78% and 42%, respectively, in fiscal
1996.
Because many competitors sell products that perform similar functions, SPD's
strategy is to provide superior price/performance solutions for the PC LAN
market, along with a high level of customer support, technical service and
embedded software. SMC has combined its comprehensive product line with services
under its Buyer Assurance program that include 3-year to lifetime product
warranties, 7-day/24-hour phone technical support, cross-shipment product
replacement and 30-day money-back privileges. Market share for each competitor
is based on a combination of price, performance, service, promotional and
advertising activity and strength of the marketing channels.
Competition is provided by domestic and foreign manufacturers in U.S. and
international markets. Some companies concentrate on aggressive pricing as the
principal competitive tool. On the other hand, many leading manufacturers
supplement price strategies with performance, service and acceleration of new
product design cycles.
MARKETS AND COMPETITION: COMPONENT PRODUCTS DIVISION
The Division's strategy is to concentrate its product development, sales and
marketing resources into the PC I/O, networking and PC systems logic chipset
markets. These markets represent a small portion of the total semiconductor
market. Competitors include
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both domestic and foreign manufacturers, many of whom possess substantially
greater resources than SMC.
Within the PC I/O market, SMC believes the variety of performance features and
the design flexibility provided to customers has led to strong acceptance of its
family of PC I/O devices and allowed SMC to become a market leader. The Division
has continually added devices with enhanced features. Principal customers for PC
I/O devices are most major producers of PCs.
In the market for 10Mbps and 10/100Mbps single chip Ethernet control devices,
the Division has emphasized LAN products for laptop computers. SMC's principal
customers have been producers of PC Card-bus adapters. A family of low-cost
industrial ARCNET controllers addresses industrial network solutions,
characterized by long design-in cycles. A broad base of industrial companies
apply these devices to their machine-to-machine networking applications.
While many companies offer semiconductor foundry services worldwide, SMC has
been willing to undertake engineering programs for prospective customers and
deliver non-standard devices that require semiconductor fabrication techniques.
The size of the contracts that SMC's foundry business undertakes might be
considered too small to be economically viable by many wafer fabrication
facilities that deliver high-volume, advanced technology VLSI circuits.
SALES AND DISTRIBUTION
SMC's system products are sold, worldwide, primarily to distributors of computer
products as well as to system integrators and original equipment manufacturers
(OEMs). Component products are sold, worldwide, primarily to OEMs and also to
distributors of semiconductor devices. The Company maintains a reserve for
anticipated product returns and price protection.
SALES AND DISTRIBUTION: SYSTEM PRODUCTS DIVISION
Standard Microsystems sells LAN products primarily through LAN and microcomputer
distributors. The distributors sell products to thousands of resellers who offer
products to end users. The Division provides service and support and promotional
programs to encourage resellers to buy SMC products from distributors. In
addition, the Company sells to strategic accounts, who may be PC producers who
ship their PCs with SMC adapters, or system integrators, who include SMC
adapters when bidding for government or commercial contracts.
In accordance with industry practice, distributor inventory is protected with
respect to price on inventories that the distributor may have on hand at the
time of a change in the
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published list price, and with respect to the rotation of slow moving inventory
in exchange for other inventory of equal value. Distributor contracts may be
terminated by written notice by either party. The contracts specify terms
covering the return of inventories. Returns of product pursuant to termination
of these agreements have not been material. Reserves are estimated based on
information provided by distributors on sales to their customers and on their
inventory levels.
SALES AND DISTRIBUTION: COMPONENT PRODUCTS DIVISION
Sales of component products are primarily to OEMs. Producers of PCs are the
Division's largest customer group. In addition, some products are sold to
electronic component distributors. In accordance with industry practice,
distributor inventory is protected with respect to price on inventories which
the distributor may have on hand at the time of a change in the published list
price. Also, in accordance with industry practice, slow moving inventory may be
exchanged for other inventory of equal value. Distributor contracts may be
terminated by written notice by either party. The contracts specify the terms
for the return of inventories.
GEOGRAPHIC INFORMATION:
The information below summarizes the Companies sales for fiscal 1997, 1996 and
1995, by geographic region. Export sales are made in United States dollars.
Sales by Toyo Microsystems, which are not classified as export sales, are
denominated in Japanese yen. SMC's competitive position in international markets
may be impacted by currency fluctuations.
For the years ended February 28 or 29, %change %change
1997 97/96 1996 96/95 1995
United States $159.9 7% $149.4 -26% $201.5
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Export
Asia and Pacific Rim 112.0 29 87.0 62 53.7
Europe 51.9 -25 69.3 -20 86.5
Canada 7.5 -31 10.8 -29 15.3
Other 5.2 -40 8.6 -13 9.9
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Export revenues $176.6 1 $175.7 6 $165.5
Japan (TMC) 17.6 5 16.8 44 11.7
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Revenues outside the U.S. 194.2 1 192.5 9 177.1
Total revenues $354.1 4% $341.9 -10% $378.7
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BACKLOG
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The Company schedules production based upon a forecast of demand for its
products. Sales are made primarily pursuant to purchase orders generally
requiring delivery within one month. In light of industry practice and
experience, the Company believes that backlog is not a particularly meaningful
indicator of future sales.
MANUFACTURING
Products of the System Products Division are assembled by turnkey subcontractors
at plants located in the United States and Ireland. Design and assembly of these
products primarily utilize surface mount technology. SMC provides the
subcontract manufacturer with detailed documentation necessary to build a board
to required quality specifications. This documentation includes board schematics
and drawings, bill of materials, quality specifications and packaging, handling
and shipping details.
The subcontract manufacturer is then responsible for component and printed
circuit board procurement, incoming test of components, mounting components on a
printed circuit board and the burn-in and final testing of the boards. SMC
requires that assembled boards be manufactured to Interconnecting and Packaging
and Electronic Circuit (IPC) standards.
SMC utilizes semiconductor foundries and assembly contractors in the U.S.,
Southeast Asia and Western Europe to provide state-of-the-art integrated circuit
manufacturing and assembly capacity. These foundries manufacture most of the
integrated circuits required by the Component Products Division and proprietary
circuits used by the System Products Division. During fiscal 1997, 92% of the
revenues of the Component Products Division resulted from the sale of product
manufactured by subcontractor foundries, compared to 89% in 1996.
The Company has developed relationships with several suppliers who represent the
primary source for certain components, raw material and finished product. Most
components and other materials purchased by SMC and its subcontractors are
generally available from multiple suppliers. However, certain components and
other materials are available only from a single source. The inability to obtain
certain components or materials could lead to an interruption in shipments of
certain SMC products. SMC and its subcontract assemblers have generally been
able to obtain both sole and multiple-sourced materials without interrupting
production schedules. However, the inability to
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obtain certain components, materials or finished products from a supplier or
subcontractor could cause a temporary interruption in the sale of the Company's
products.
RESEARCH AND DEVELOPMENT
The technology involved in designing and manufacturing SMC's products is complex
and is constantly being refined. Accordingly, the Company is committed to a
program of research and development oriented toward improving and refining its
existing capabilities and developing new techniques, designs and technologies
for producing component and system products.
During the fiscal year which ended February 28, 1997, SMC spent $26.3 million on
research and development, which equaled 7.4% of revenues. This compares with
$31.7 million, or 9.3% of revenues, spent during fiscal 1996, and $28.3 million,
or 7.5% of revenues, during fiscal 1995. Of these amounts, $9.8 million was
spent by the divested Enterprise Networks Business Unit in fiscal 1996 compared
to $7.6 million in fiscal 1995.
Engineering groups, developing both system products and component products,
utilize semiconductor design techniques to minimize chip area and utilize
advanced wafer processing and packaging methods. The goal is to improve
features, performance and reliability while minimizing integrated circuit
manufacturing costs.
PATENTS AND LICENSE AGREEMENTS
The Company has received numerous United States patents, and the corresponding
Foreign equivalents, relating to its technologies and additional patent
applications are pending.
The Company has entered into non-exclusive patent licensing and
patent/technology licensing agreements which have entitled the licensees to
utilize the Company's patents or technologies, in exchange for which the Company
has received, in various combinations, lump-sum payments, royalty payments, the
right to utilize other patents or technologies of the licensees or other
consideration, including the right to manufacture, market and sell specific
products designed by the licensees. These agreements have typically provided for
bi-directional licenses under certain patents, utility models and design
patents, existing at the effective date of the particular agreement and patent
applications filed within a specified period of years after the effective date
of the agreement. The licenses usually continue for the life of the particular
patent.
The Company has, from time to time, been informed of claims that it may be
infringing patents owned by others. When the Company deems it appropriate, the
Company may seek licenses under certain of such patents. However, no assurance
can be given that satisfactory license agreements will be obtained if sought by
the Company or that failure to obtain any such licenses would not adversely
affect the Company's future operations.
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ENVIRONMENTAL REGULATION
Federal, state and local regulations impose various controls on the discharge of
certain chemicals and gases used in semiconductor processing. The Company's
facilities have been designed to comply with these regulations. However,
increasing public attention has focused on the environmental impact of
electronics manufacturing operations and, accordingly, there is no assurance
that future regulations will not impose significant costs on the Company.
EMPLOYEES
As of February 28, 1997, of the Company's 793 employees, 179 were engaged in
engineering, including research and development, 196 in marketing and sales, 165
in executive and administrative activities and 253 in manufacturing and
manufacturing support. This compared to February 29, 1996, when, of the
Company's 864 employees, 168 were engaged in engineering, including research and
development, 287 in marketing and sales, 165 in executive and administrative
activities and 244 in manufacturing and manufacturing support
Many employees are highly skilled and SMC's success depends upon its ability to
retain and attract such employees. The Company has never had a work stoppage. No
employees are represented by a labor organization and the Company considers its
employee relations to be satisfactory.
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SMC and Standard Microsystems are registered trademarks of Standard Microsystems
Corporation. Product names and company names are the trademarks of their
respective holders.
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Item 2. Properties.
The Company owns five facilities, totaling approximately 249,000 square feet of
plant and office space, located on approximately 28 acres in Hauppauge, New
York, where research, development, manufacturing, product testing, warehousing,
shipping, marketing, selling and administrative functions are conducted.
The Company occupies a 50,000 square foot facility in Irvine, California, where
SMC's System Products Division conducts most of the research, development and
marketing for adapter products. The lease expires in 2002.
In addition, the Company maintains offices in leased facilities in: San Jose,
California; Boca Raton, Bradenton and Miami, Florida; Atlanta, Georgia; Oakbrook
Terrace, Illinois; Andover and Danvers, Massachusetts; Kettering, Ohio; Austin,
Dallas and Houston, Texas; Falls Church, Virginia; Melbourne and Sydney,
Australia; Oakville, Ontario, Canada; London, England; St. Germain-en-Laye,
France; Munich, Germany; Tokyo, Japan; Singapore; Johannesburg, South Africa and
Taipei, Taiwan.
As of February 28, 1997, the Company owned machinery and equipment, property and
leasehold improvements with an original cost of $157.7 million and accumulated
depreciation and amortization of $94.9 million.
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Item 3. Legal Proceedings.
In June 1995, several actions were filed against the Company and certain of its
officers and directors. These complaints have been consolidated into a class
action on behalf of the purchasers of the Company's common stock between
September 19, 1994, and June 2, 1995. The consolidated complaint asserts claims
under federal securities laws and alleges that the price of the Company's common
stock was artificially inflated during the class action period by false and
misleading statements and the failure to disclose certain information. While it
is not possible to assess the likelihood of any liability being established, nor
predict the amount of damages that might be awarded in the event of a successful
claim, the Company has answered the consolidated complaint, has accrued the
estimated cost of legal fees to defend against these claims, and intends to
defend against these claims vigorously.
In May 1997, Cabletron Systems, Inc. and Cabletron Systems Acquisition, Inc.
(together, Cabletron) commenced legal action in the Superior Court for the
Commonwealth of Massachusetts, against the Company claiming violation of the
non-competition clause included in the January 1996 Asset Purchase Agreement
among the Company and Cabletron. Such clause prohibits the Company from
competing with Cabletron in a particular segment of the local
area networking marketplace through January 1999, following the
January 1996 sale of the Company's Enterprise Networks Business Unit to
Cabletron. The action seeks an injunction and unspecified damages. The Company
firmly believes that this claim is without merit and intends to vigorously
defend against it.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
The executive officers of the registrant as of April 30, 1997, are as follows:
Served as an
Name Position Age officer since
Paul Richman Chairman and 54 1971
Chief Executive Officer
Arthur Sidorsky Executive Vice President 63 1980
Component Products Division
Lance Murrah Senior Vice President and 41 1994
General Manager System
Products Division
Eric Nowling Vice President and Controller 40 1995
All officers serve at the pleasure of the Company's Board of Directors.
16
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
The information captioned "Market price" and the last two paragraphs appearing
in the Annual Report under the heading "Quarterly Financial Data" are
incorporated herein by this reference. Except as specifically set forth herein
and elsewhere in this Form 10-K, no information appearing in the Annual Report
is incorporated by reference into this report nor is the Annual Report deemed to
be filed, as part of this report or otherwise, pursuant to the Securities
Exchange Act of 1934.
Item 6. Selected Financial Data.
The information appearing in the Annual Report under the caption "Selected
Financial Data" is incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The information appearing in the Annual Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements, notes thereto, Report of Independent Public
Accountants thereon and quarterly financial data appearing in the Annual Report
are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Inapplicable.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information appearing in the Proxy Statement under the caption "Election of
Directors" is incorporated herein by this reference.
Item 11. Executive Compensation.
The information appearing in the Proxy Statement under the caption "Executive
Compensation" is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management.
The information appearing in the Proxy Statement under the captions "Election of
Directors" and "Voting Securities of Certain Beneficial Owners and Management"
is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
The information appearing in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by this
reference.
18
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of the Company
and its subsidiaries have been incorporated by reference from
the Annual Report pursuant to Part II, Item 8:
Consolidated Statements of Income for the three years
ended February 28, 1997
Consolidated Balance Sheets, February 28, 1997 and
February 29, 1996
Consolidated Statements of Shareholders' Equity for the
three years ended February 28, 1997
Consolidated Statements of Cash Flows for the three years
ended February 28, 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
Schedules are omitted because of the absence of conditions
requiring them or because the required information is shown on
the consolidated financial statements or the notes thereto.
3. Exhibits, which are listed on the Exhibit Index, are filed as
part of this report and such Exhibit Index is incorporated by
reference. Exhibits 10(a) through 10(m) listed on the
accompanying Exhibit Index identify management contracts or
compensatory plans or arrangements required to be filed as
exhibits to this report, and such listing is incorporated
herein by reference.
(b) No report on Form 8-K was filed during the last quarter of the period
covered by this report.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STANDARD MICROSYSTEMS CORPORATION
(Registrant)
By S/ERIC M. NOWLING
ERIC M. NOWLING
Vice President and Controller
(Principal Financial and Accounting Officer)
Date: May 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature and Title Date
PAUL RICHMAN May 23, 1997
Paul Richman, Chairman,
Chief Executive Officer and Director
(Principal Executive Officer)
EVELYN BEREZIN May 23, 1997
Evelyn Berezin
Director
20
<PAGE>
JAMES R. BERRETT May 23, 1997
James R. Berrett
Director
ROBERT M. BRILL May 23, 1997
Robert M. Brill
Director
PETER F. DICKS May 23, 1997
Peter F. Dicks
Director
KATHLEEN B. EARLEY May 23, 1997
Kathleen B. Earley
Director
HERMAN FIALKOV May 23, 1997
Herman Fialkov
Director
IVAN T. FRISCH May 23, 1997
Ivan T. Frisch
Director
21
<PAGE>
EXHIBIT INDEX
Incorporated By Exhibit
Reference To: No. Exhibit
Exhibit 3(a) [9] 3.1 Restated Certificate of Incorporation
* 3.2 By-Laws as amended
Exhibit 1 [5] 3.3 Rights Agreement dated January 7,
1988, with Securities Trust Company as
Rights Agent
Exhibit 3 [6] 3.4 Amendment No. 1 to Rights Agreement
Exhibit 10.1[14] 10.1 Employment Agreement dated
March 1, 1995, with Paul Richman
Exhibit 10.2 [16] 10.2 Amendment thereto dated July 10, 1995
* 10.3 Employment Agreement dated
March 1, 1996, with Arthur Sidorsky
Registrant's Proxy 10.4 1984 Stock Option Plan for Officers
Statement dated May and Key Employees
16, 1984, Exhibit A
Exhibit 10(g) [4] 10.5 Amendment to 1984 Stock Option Plan for
Officers and Key Employees
Registrant's Proxy 10.6 1986 Stock Option Plan for
Statement dated May Officers and Key Employees
22, 1986, Exhibit A
Exhibit 10(i) [4] 10.7 Amendment to 1986 Stock Option Plan for
Officers and Key Employees
Exhibit 10(m) [1] 10.8 Amendment to 1986 Stock Option Plan
for Officers and Key Employees dated
March 29, 1990
Registrant's Proxy 10.9 1989 Stock Option Plan
Statement dated June
6, 1989, Exhibit A
<PAGE>
Registrant's Proxy 10.10 1991 Restricted Stock Bonus Plan
Statement dated July
17, 1991, Exhibit A
Registrant's Proxy 10.11 Director Stock Option Plan
Statement dated May
29, 1990, Exhibit A
Registrant's Proxy 10.12 1994 Director Stock Option Plan
Statement dated May
31, 1995, Exhibit A
Exhibit 10(m) [11] 10.13 Resolutions adopted February 18, 1992,
amending Director Stock Option Plan,
1991 Restricted Stock Bonus Plan,
1989 Stock Option Plan,
1986 Stock Option Plan and
1984 Stock Option Plan
Exhibit 10.14 [14] 10.14 Retirement Plan for Directors
Registrant's Proxy 10.15 1993 Stock Option Plan for Officers
Statement dated May and Key Employees
25, 1993, Exhibit A
Exhibit 10(x) [13] 10.16 Executive Retirement Plan
Registrant's Proxy 10.17 1994 Stock Option Plan for Officers
Statement dated May and Key Employees
26, 1994, Exhibit A
Exhibit 10.18 [14] 10.18 Resolutions adopted October 31, 1994,
amending the Retirement Plan for
Directors and the Executive Retirement
Plan
Exhibit 10.19 [14] 10.19 Resolutions adopted January 3, 1995,
amending the 1994, 1993, 1989, 1986, and
1984 Stock Option Plans and the
1991 Restricted Stock Plan
Exhibit 10.2 [2] 10.20 Patent and Trade Secrets Agreement
dated March 12, 1983, with Paul
Richman
Exhibit 10.22 [14] 10.21 Consulting Agreement dated
March 1, 1995, with Herman Fialkov
<PAGE>
Exhibit 10(t) [7] 10.22 Form of Severance Pay Agreement
(renewed annually through
December 31, 1996)
Exhibit 2(b) [10] 10.23 Technology Transfer Agreement
between SMC and Western Digital
Corporation dated September 27, 1991
Exhibit 2(c) [10] 10.24 Noncompetition Agreement between
SMC and Western Digital Corporation
dated September 27, 1991
Exhibit 10.27 [14] 10.25 Credit Agreement dated
January 13, 1995
Exhibit 10.26 [16] 10.26 First Amendment dated March 28, 1995
Exhibit 10.27 [16] 10.27 Second Amendment dated
October 13, 1995
Exhibit 10.28 [16] 10.28 Third Amendment dated
March 28, 1996
Exhibit 2 [15] 10.29 Asset Purchase Agreement dated
January 9, 1996, among Cabletron
Systems, Inc., and SMC Enterprise
Networks, Inc
Exhibit 10.30 [16] 10.30 Agreement for Purchase and Sale of
Assets among SMC, EFAR
Microsystems, Inc., and the Key Officers
identified therein dated
February 26, 1996
Registrant's Proxy 10.31 1996 Stock Option Plan for Officers
Statement dated July and Key Employees
22, 1996, Exhibit A
Item 7, Exhibit 1[17] 10.32 Common Stock and Warrant Purchase
Agreement, among SMC and Intel
Corporation, dated March 18, 1997
Item 7, Exhibit 2[17] 10.33 Warrant to Purchase Shares of Common
Stock of Standard Microsystems
Corporation, among SMC and Intel
Corporation, dated March 18, 1997
<PAGE>
Item 7, Exhibit 3[17] 10.34 Investor Rights Agreement, among SMC
and Intel Corporation, dated March 18, 1997
* 13 Portions of Annual Report to
Stockholders for year ended February 28,
1997, incorporated by reference
* 21 Subsidiaries of the registrant
* 23 Consent of Arthur Andersen LLP
* 27 Financial Data Schedule
- -------------------------
* Filed herewith.
[1] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1990.
[2] Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31,
1983.
[3] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1985.
[4] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1987.
[5] Registrant's Registration on Form 8-A dated January 11, 1988.
[6] Registrant's Amendment No. 2 on Form 8 dated April 14, 1988 to Registration
on Form 8-A.
[7] Registrant's Annual Report on Form 10-K for fiscal year ended February 29,
1988.
[8] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1989.
[9] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1991.
[10] Registrant's Current Report on Form 8-K filed October 31, 1991.
[11] Registrant's Annual Report on Form 10-K for fiscal year ended February 29,
1992.
[12] Registrant's Current Report on Form 8-K filed January 13, 1993.
[13] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1994.
<PAGE>
[14] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1995.
[15] Registrant's Current Report on Form 8-K dated January 26, 1996.
[16] Registrant's Annual Report on Form 10-K for fiscal year ended February 29,
1996.
[17] Schedule 13D filed by Intel Corporation, dated March 27, 1997.
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
STANDARD MICROSYSTEMS CORPORATION
1. STOCKHOLDERS
1.1 Place of Stockholders' Meetings. All meetings of
the stockholders of the Corporation shall be held at such place or
places, within or outside the state of incorporation, as may be fixed
by the Board of Directors from time to time or as shall be specified in
the respective notices thereof.
1.2 Date and Hour of Annual Meetings of Stockholders.
An annual meeting of stockholders shall be held each year on the third
Tuesday of July, unless said date is a legal holiday, in which case the
meeting shall be held on the next day thereafter which is not a legal
holiday, at 10:00 A.M., or on such other date and at such other times
as may be designated by the Board of Directors. Each such meeting shall
be held at ten o'clock in the morning, local time in effect at the
place where the meeting is held, unless the Board of Directors shall
fix another hour which shall be stated in the notice of the meeting.
1.3 Purposes of Annual Meeting. The annual meeting of
the stockholders shall be held for the purpose of electing directors
and transacting such other business as may properly come before the
meeting.
1.4 Special Meetings of Stockholders. Special
meetings of the stockholders or of any class or series thereof entitled
to vote may be called by the Chairman or by the President or by the
Board of Directors, or at the request in writing by stockholders of
record owning a majority of the issued and outstanding shares of the
Corporation entitled to vote at such meeting.
1.5 Notice of Meetings of Stockholders. Except as
otherwise expressly required or permitted by the laws or the state of
incorporation, not less than ten days nor more than fifty days before
the date of every stockholders meeting the
<PAGE>
Secretary shall give to each stockholder of record entitled to vote at
such meeting, written notice stating the place, date and hour of the
meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called. Such notice, if mailed, shall be
deemed to be given when deposited in the United States mail, postage
prepaid, directed to the stockholder at his address for notices to such
stockholder as it appears on the records of the Corporation.
1.6 Quorum of Stockholders.
(a) Unless otherwise provided by the laws of
Delaware, at any meeting of the stockholders, the presence in person or
by proxy of stockholders entitled to cast a majority of the votes
thereat shall constitute a quorum.
(b) At any meeting of the stockholders at
which a quorum shall be present, a majority of those present in person
or by proxy may adjourn the meeting from time to time without notice
other than announcement at the meeting. In the absence of a quorum, the
officer presiding thereat shall have power to adjourn the meeting from
time to time until a quorum shall be present. Notice of any adjourned
meeting, other than announcement at the meeting, shall not be required
to be given, except as provided in paragraph (d) below and except where
expressly required by law.
(c) At any adjourned session at which a
quorum shall be present, any business may be transacted which might
have been transacted at the meeting originally called but only those
stockholders entitled to vote at the meeting as originally noticed
shall be entitled to vote at any adjournment or adjournments thereof,
unless a new record date is fixed by the Board of Directors.
(d) If an adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.
1.7 Chairman and Secretary of Meeting. The Chairman
or the Vice-Chairman or the President shall preside at meetings of the
stockholders. The Secretary shall act as secretary of the meeting, or
in his absence, the Assistant Secretary shall act, or if neither is
present, then the
<PAGE>
presiding officer may appoint a person to act as secretary of the
meeting.
1.8 Voting by Stockholders. Except as may be
otherwise provided by these By-laws, at every meeting of the
stockholders, each stockholder shall, unless otherwise provided, be
entitled to one vote for each share of stock standing in his name on
the books of the Corporation on the record date for the meeting. All
elections and questions shall be decided by the vote of a majority in
interest of the stockholders present in person or represented by proxy
and entitled to vote at the meeting, except as otherwise permitted or
required by the laws of Delaware, the certificate of incorporation or
these By-laws.
1.9 Proxies. Any stockholder entitled to vote at any
meeting of stockholders may vote either in person or by his
attorney-in-fact. Every proxy shall be in writing, subscribed by the
stockholder or his duly authorized attorney-in-fact, but need not be
dated, sealed, witnessed or acknowledged.
1.10 Inspectors. The election of Directors and any
other vote by ballot at any meeting of the stockholders shall be
supervised by at least two inspectors. Such inspectors may be appointed
by the Chairman or President before or at the meeting; or if one or
both inspectors so appointed shall refuse to serve or shall not be
present, such appointment shall be made by the officer presiding at the
meeting.
1.11 List of Stockholders.
(a) At least ten days before every meeting
of stockholders, the Secretary shall prepare and make a complete list
of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder.
(b) During ordinary business hours, for a
period of at least ten days prior to the meeting, such list shall be
open to examination by any stockholder for any purpose germane to the
meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or
if not so specified, at the place where the meeting is to be held.
<PAGE>
(c) The list shall also be produced and kept
at the time and place of the meeting during the whole time of the
meeting and it may be inspected by any stockholder who is present.
(d) The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by this Section 1.11 or the books of the
Corporation, or to vote in person or by proxy at any meeting of
stockholders.
1.12 Procedure at Stockholders' Meetings. The order
of business and all other matters of procedure at every meeting of
stockholders may be determined by the presiding officer. Not less than
15 minutes following the presentation of any resolution to any meeting
of stockholders, the presiding officer may announce that further
discussion on such resolution shall be limited to not more than three
persons who favor and not more than three persons who oppose such
resolution, each of whom shall be designated by the presiding officer
and shall thereupon be entitled to speak thereon for not more than five
minutes. After such person, or such a lesser number thereof as shall
advise the presiding officer of their desire so to speak, shall have
spoken on such resolution, the presiding officer may direct a vote on
such resolution without further discussion thereon at the meeting.
Except where otherwise provided by the certificate of incorporation,
law or these By-laws, every question that shall come before a meeting
shall be decided by a majority of the votes cast thereon and any such
majority vote shall be the act of the stockholders.
2. DIRECTORS
2.1 Powers of Directors. The property, business and
affairs of the Corporation shall be managed by its Board of Directors
which may exercise all the powers of the Corporation except such as are
by law or the certificate of incorporation or these By-laws required to
be exercised or done by the stockholders.
2.2 Number, Method of Election, Terms of Office of
Directors. The number of directors which shall constitute the whole
Board of Directors shall not be less than three, nor more than fifteen,
the exact number of directors to be such number as may be fixed from
time to time within such
<PAGE>
limits by resolution adopted by affirmative vote of a majority of the
whole Board of Directors. No decrease in the number of directors shall
shorten the term of any incumbent director. Directors need not be
stockholders.
2.2.1 (A) Nominations for the election of directors
may be made by the Board of Directors or by any
stockholder entitled to vote for the election of
directors.
(B) Such nominations, if not made by the
Board of Directors, shall be made by notice in
writing, delivered or mailed by first class United
States mail, postage prepaid, by a stockholder to the
Secretary of the Corporation not less than 14 days
nor more than 60 days prior to any meeting of the
stockholders called for the election of directors;
provided, however, that if less than 21 days' notice
of the meeting for election of directors is given to
stockholders, such written notice shall be delivered
or mailed, as prescribed, to the Secretary of the
Corporation not later than the close of the seventh
day following the day on which notice of the meeting
was mailed to stockholders. Each such notice shall
set forth (i) the name, age, business address and, if
known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or
employment of each such nominee, (iii) the number of
shares of stock of the Corporation which are
beneficially owned by each such nominee, and (iv) a
statement that such nominee is qualified to serve as
a director of the Corporation or, if not so
qualified, the basis for such nominee's failure to so
qualify, all in reasonable detail so that such
information may be independently verified. Such
notice shall be accompanied by the certificate of the
stockholder proposing to make such nomination that
the statements made in such notice are true,
accurate, and complete in all respects.
(C) Notice of nominations which are
proposed by the Board of Directors shall be given on
behalf of the Board, at or prior to the meeting of
stockholders at which such nominations are to be
voted upon, by the chairman of the meeting.
<PAGE>
(D) The chairman of the meeting may, if
the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance
with the By-laws, and if he should so determine, he
shall so declare to the meeting, whereupon the
defective nomination shall be disregarded.
2.3 Vacancies on Board of Directors.
(a) Any Director may resign his office at
any time by delivering his resignation in writing to the Chairman or
the President or the Secretary. It will take effect at the time
specified therein, or, if no time is specified, it will be effective at
the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless
expressly so provided in the resignation.
(b) Any vacancy occurring in the Board of
Directors caused by death, resignation, or removal, and any newly
created directorship resulting from an increase in the number of
directors, may be filled by a majority of the directors in office,
although less than a quorum, or by a sole remaining director. Each
director chosen to fill a vacancy or newly created directorship shall
hold office until the next election of the class for which such
director shall have been chosen, and until his successor shall be
elected and qualified, or until his death, or until he shall have
resigned, or have been removed.
2.4 Meetings of the Board of Directors.
(a) The Board of Directors may hold their
meetings, both regular and special, either within or outside the state
of incorporation.
(b) Regular meetings of the Board of
Directors may be held at such time and place as shall from time to time
be determined by resolution of the Board of Directors. No notice of
such regular meetings shall be required. If the date designated for any
regular meeting be a legal holiday, then the meeting shall be held on
the next day which is not a legal holiday.
<PAGE>
(c) Immediately following the annual meeting
of the stockholders, a regular annual meeting of the Board of Directors
shall be held for the election of officers and the transaction of such
other business as may come before it. If such meeting is held at the
place of the stockholders meeting, no notice thereof shall be required.
(d) Special meetings of the Board of
Directors shall be held whenever called by direction of the Chairman or
the President or at the written request of two directors.
(e) The Secretary shall give notice to each
director of any special meeting of the Board of Directors by mailing
the same at least two days before the meeting or by telegraphing or
delivering the same not later than the day before the meeting. Such
notice need not include a statement of the business to be transacted
at, or the purpose of, any such meeting. Any and all business may be
transacted at any meeting of the Board of Directors. No notice of any
adjourned meeting need be given. No notice to or waiver by any Director
shall be required with respect to any meeting at which such Director is
present.
2.5 Quorum and Action. One-half of the total number
of directors, but not less than two directors, shall constitute a
quorum for the transaction of business; but if there shall be less than
a quorum at any meeting of the Board, a majority of those present may
adjourn the meeting from time to time. Except where otherwise provided
by the By-laws, the vote of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board of
Directors.
2.6 Presiding Officer and Secretary of Meeting. The
Chairman, or, in his absence, the Chairman of the Corporate Governance
Committee, or, in his absence, the Vice-Chairman, or in his absence,
the President, or, in their absence, a member of the Board of Directors
selected by the members present, shall preside at meetings of the
Board. The Secretary shall act as secretary of the meeting, but in his
absence, the presiding officer may appoint a secretary of the meeting.
2.7 Action by Consent without Meeting. Any action
required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken
<PAGE>
without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are
filed with the minutes or proceedings of the Board or committee.
2.8 Executive Committee. The Board of Directors may
appoint from among its members and, from time to time, may fill
vacancies in an Executive Committee of two or more to serve during the
pleasure of the Board. During the intervals between the meetings of the
Board, the Executive Committee shall possess and may exercise all of
the powers of the Board in the management of the business and affairs
of the Corporation conferred by these By-laws or otherwise. The
Committee shall keep a record of all its proceedings and report the
same to the Board. A majority of the members of the Committee shall
constitute a quorum. The vote of a majority of the members of the
Committee present at any meeting at which a quorum is present shall be
the act of the Committee.
2.9 Compensation Committee. The Board of Directors
may appoint from among its members and, from time to time, may fill
vacancies in, a Compensation Committee of two or more to serve during
the pleasure of the Board. Such Committee shall have the power and
authority vested in the Committee referred to in any Stock Option Plan
of the Corporation, and shall have power with respect to the salaries
and other compensation of all employees of the Corporation or its
subsidiaries who are directors or whose salaries are at a rate of
$25,000 or more per year. The members of such Committee shall not be
eligible to receive any compensation from the Corporation or any
subsidiary of the Corporation except as provided in Section 2.11. Such
Committee shall keep a record of all its proceedings and report the
same to the Board.
A majority of the members of such Committee shall constitute a quorum.
The vote of a majority of the members of such Committee present at any
meeting at which a quorum is present shall be the act of the Committee.
2.10 Other Committees. The Board of Directors may
also appoint from among its members such other committees of two or
more directors as it may from time to time deem desirable and may
delegate to such committees such powers of the Board as it may consider
appropriate.
<PAGE>
2.11 Compensation of Directors. Directors shall
receive such reasonable compensation for their service on the Board of
Directors or any committees thereof, whether in the form of salary or a
fixed fee for attendance at meetings, or both, with expenses, if any,
as the Board of Directors may from time to time determine. Nothing
herein contained shall be construed to preclude any Director from
serving in any other capacity and receiving compensation therefor.
2.12 Removal of Directors. A director may be removed
only for cause.
3. OFFICERS
3.1 Officers, Title, Elections, Terms.
(a) The Corporation shall have a Chairman,
Vice-Chairman, President, a Treasurer and a Secretary, who shall be
elected by the Board of Directors at its annual meeting following the
annual meeting of the stockholders, to serve at the pleasure of the
Board or otherwise as shall be specified by the Board at the time of
such election and until their successors are elected and qualify.
(b) The Board of Directors may elect at any
time, and from time to time, one or more Executive Vice Presidents, one
or more Senior Vice Presidents, one or more Vice Presidents, one or
more Assistant Vice Presidents, a Controller, one or more Associate
Treasurers, one or more Assistant Treasurers, one or more Assistant
Secretaries and one or more Assistant Controllers and may elect or
appoint such other officers or agents with such duties as it may deem
necessary or desirable. Such additional officers shall serve at the
pleasure of the Board or otherwise as shall be specified by the Board
at the time of such election or appointment. Two or more offices may be
held by the same person.
(c) Any vacancy in any office may be filled
for the unexpired portion of the term by the Board of Directors.
(d) Any officer or agent elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the entire Board of Directors.
<PAGE>
(e) Any officer may resign his office at any
time. Such resignation shall be made in writing and shall take effect
at the time specified therein or, if no time be specified, at the time
of its receipt by the Corporation. The acceptance of a resignation
shall not be necessary to make it effective, unless expressly so
provided in the resignation.
(f) The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
3.2 Powers and Duties of Chairman. The Chairman shall
have such specific powers and responsibilities as may be conferred upon
him by the Board of Directors and shall report directly to the Board of
Directors. He shall be the chief policy officer of the Corporation. He
shall, when present, preside at meetings of the stockholders, the Board
of Directors and the Executive Committee.
3.3 Powers and Duties of Vice-Chairman. The
Vice-Chairman shall have such specific powers and responsibilities as
may be conferred upon him by the Board of Directors. He shall report
directly to the Chairman. In the event of the absence of the Chairman,
or his incapacity or inability to act, then the Vice-Chairman shall
preside at all meetings of the stockholders, the Board of Directors and
the Executive Committee.
3.4 Powers and Duties of President.
(a) Except in such instances as the Board
may confer powers in particular transactions upon the Chairman or any
other officer, and subject to the control and direction of the Board of
Directors, the President shall supervise, manage and direct the
business of the Corporation and shall communicate to the Board of
Directors and any committee thereof reports, proposals and
recommendations for their respective consideration or action. In the
event of the absence of the Chairman and the Vice-Chairman, or their
incapacity or inability to act, then the President shall preside at all
meetings of the stockholders, the Board of Directors and the Executive
Committee.
(b) The President shall act for or on behalf
of the Corporation in all matters in which action by the President as
such is required by law, and he may do and
<PAGE>
perform all other acts and things incident to the position of
President, including the signing of contracts and other documents in
the name of the Corporation, except as may be otherwise provided in
these By-laws or ordered by the Board of Directors.
3.5 Powers and Duties of Executive Vice Presidents,
Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents.
Each Vice President shall have such powers and perform such duties as
the Board of Directors or the President may from time to time
prescribe, and shall perform such other duties as may be prescribed in
these By-laws.
3.6 Powers and Duties of Treasurer, Associate
Treasurers and Assistant Treasurers.
(a) The Treasurer shall have the care and
custody of all the funds and securities of the Corporation except as
may be otherwise ordered by the Board of Directors, and shall cause
such funds to be deposited to the credit of the Corporation in such
banks or depositories as may be designated by the Board of Directors,
and shall cause such securities to be placed in safekeeping in such
manner as may be designated by the Board of Directors.
(b) The Treasurer, or an Associate
Treasurer, or an Assistant Treasurer or such other person or persons as
may be designated for such purpose by the Board of Directors, may
endorse in the name and on behalf of the corporation all instruments
for the payment of money, bills of lading, warehouse receipts,
insurance policies and other commercial documents requiring such
endorsement.
(c) The Treasurer, or an Associate
Treasurer, or an Assistant Treasurer or such other person or persons as
may be designated for such purpose by the Board of Directors may sign
all receipts and vouchers for payments made to the Corporation; he
shall render a statement of the cash account of the Corporation to the
Board of Directors as often as it shall require the same; he shall
enter regularly in books to be kept by him for that purpose, full and
accurate account of all moneys received and paid by him on account of
the Corporation, and of all securities received and delivered by the
Corporation.
<PAGE>
(d) The Treasurer shall perform such other
duties as may be prescribed in these By-laws or assigned to him and all
other acts incident to the position of Treasurer. Each Associate
Treasurer and each Assistant Treasurer shall perform such duties as may
from time to time be assigned to him by the Treasurer or by the Board
of Directors. In the event of the absence of the Treasurer or his
incapacity or inability to act, then any Associate Treasurer or any
Assistant Treasurer may perform any of the duties and may exercise any
of the powers of the Treasurer.
3.7 Powers and Duties of Secretary and Assistant
Secretaries.
(a) The Secretary shall keep the minutes of
all proceedings of the stockholders, the Board of Directors, the
Executive Committee and any other committees of the Board in proper
books provided for that purpose. The Secretary shall attend to the
giving and serving of all notices of the Corporation, in accordance
with the provisions of these By-laws and as required by law. The
Secretary shall be the custodian of the seal of the Corporation. The
Secretary may, with the President, an Executive Vice President, a
Senior Vice President, a Vice President or other authorized officer,
sign all contracts and other documents in the name of the Corporation,
and shall affix or cause to be affixed the seal of the Corporation to
such contracts and other documents requiring the seal of the
Corporation, and when so affixed, may attest the same. He shall perform
such other duties as may be prescribed in these By-laws or assigned to
him and all other acts incident to the position of Secretary.
(b) Each Assistant Secretary shall perform
such duties as may from time to time be assigned to him by the
Secretary or by the Board of Directors. In the event of the absence of
the Secretary or his incapacity or inability to act, then any Assistant
Secretary may perform any of the duties and may exercise any of the
powers of the Secretary.
(c) The Secretary shall prepare and have
custody of the list of stockholders at each meeting of the stockholders
as required by Section 1.11 of these By-laws. The Secretary shall have
custody of all stock books and of all unissued stock certificates.
<PAGE>
3.8 Powers and Duties of Controller and Assistant
Controllers.
(a) The Controller shall be responsible for
the maintenance of adequate accounting records of all assets,
liabilities and transactions of the Corporation. The Controller shall
prepare and render such balance sheets, budgets and other financial
reports as the Board of Directors, the Chairman or the President may
require; and he shall perform such other duties as may be prescribed in
these By-laws or assigned to him and all other acts incident to the
position of Controller.
(b) Each Assistant Controller shall perform
such duties as from time to time may be assigned to him by the
Controller or by the Board of Directors. In the event of the absence of
the Controller or his incapacity or inability to act, then any
Assistant Controller may perform any of the duties and may exercise any
of the powers of the Controller.
4. INDEMNIFICATION
(a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any
<PAGE>
criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
(b) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation and except that
no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a director, officer,
employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to
in subsections (a) or (b), or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections
(a) or (b) may be made as ordered by a court or as authorized by the
Corporation (i) in any specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b), or (ii) in any other
lawful manner. Without limiting the next preceding sentence, such
determination may be made (1) by the Board of Directors
<PAGE>
by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable and a quorum of disinterested
directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders, or (4) in any other lawful manner.
(e) Expenses incurred in defending a civil
or criminal action, suit or proceeding shall be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding
as authorized by the Board of Directors in the specific case upon
receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Section 4.
(f) The indemnification provided by this
Section 4 shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any statute,
by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as to
a person who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(g) The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status
as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this
Section 4.
(h) For the purpose of this Section 4,
references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or
surviving corporation so that any person who is or was a director,
officer, employee or agent of such a constituent corporation or is or
was serving at the
<PAGE>
request of such constituent corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall stand in
the same position under the provisions of this Section with respect to
the resulting or surviving corporation as he would if he had served the
resulting or surviving corporation in the same capacity.
(i) The Board of Directors shall have power
to indemnify any person included within any category described in
Section 4 (a) against any loss, liability or expense (including
attorneys' fees, fines, judgments and amounts paid in settlement)
arising out of his service in any such category, unless such indemnity
is prohibited by law applicable to the Corporation, and shall have such
power regardless of whether such indemnity is authorized by Section 145
of the General Corporation Law.
5. CAPITAL STOCK
5.1 Stock Certificates
(a) Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of,
the Corporation by the Chairman or the Vice-Chairman, or the President
or a Vice President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, certifying the number of
shares owned by him.
(b) If such certificate is countersigned by
a transfer agent other than the Corporation or its employee, or by a
registrar other than the Corporation or its employee, the signatures of
the officers of the Corporation may be facsimiles, and, if permitted by
law, any other signature may be a facsimile.
(c) In case any officer who has signed or
whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer before such certificate is issued, it may be
issued by the Corporation with the same effect as if he were such
officer at the date of issue.
(d) Certificates of stock shall be issued in
such form not inconsistent with the Certificate of Incorporation as
shall be approved by the Board of
<PAGE>
Directors. They shall be numbered and registered in the order in which
they are issued.
(e) All certificates surrendered to the
Corporation shall be cancelled with the date of cancellation, and shall
be retained by the Secretary, together with the powers of attorney to
transfer and the assignments of the shares represented by such
certificates, for such period of time as shall be prescribed from time
to time by resolution of the Board of Directors.
5.2 Record Ownership. A record of the name and
address of the holder of each certificate, the number of shares
represented thereby and the date of issue thereof shall be made on the
Corporation's books. The Corporation shall be entitled to treat the
holder of any share of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person,
whether or not it shall have express or other notice thereof, except as
required by law.
5.3 Transfer of Record Ownership. Transfers of stock
shall be made on the books of the Corporation only by direction of the
person named in the certificate or his attorney, lawfully constituted
in writing, and only upon the surrender of the certificate therefor and
a written assignment of the shares evidenced thereby. Whenever any
transfer of stock shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer if,
when the certificates are presented to the Corporation for transfer,
both the transferor and transferee request the Corporation to do so.
5.4 Lost, Stolen or Destroyed Certificates.
Certificates representing shares of the stock of the Corporation shall
be issued in place of any certificate alleged to have been lost, stolen
or destroyed in such manner and on such terms and conditions as the
Board of Directors from time to time may authorize.
5.5 Transfer Agent; Registrar; Rules Respecting
Certificates. The Corporation shall maintain one or more transfer
offices or agencies where stock of the Corporation shall be
transferable. The Corporation shall also maintain one or more registry
offices where such stock shall be registered. The Board of Directors
may make such rules and
<PAGE>
regulations as it may deem expedient concerning the issue, transfer and
registration of stock certificates.
5.6 Fixing Record Date for Determination of
Stockholders of Record. The Board of Directors may fix in advance a
date as the record date for the purpose of determining stockholders
entitled to notice of, or to vote at, any meeting of the stockholders
or any adjournment thereof, or the stockholders entitled to receive
payment of any dividend or other distribution or the allotment of any
rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or to express consent to corporate
action in writing without a meeting, or in order to make a
determination of the stockholders for the purpose of any other lawful
action. Such record date in any case shall not be more than sixty days
nor less than ten days before the date of a meeting of the
stockholders, nor more than sixty days prior to any other action
requiring such determination of the stockholders. A determination of
stockholders of record entitled to notice or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned meeting.
6. SECURITIES HELD BY THE CORPORATION
6.1 Voting. Unless the Board of Directors shall
otherwise order, the Chairman, the Vice-Chairman, the President, any
Vice President, the Secretary or the Treasurer shall have full power
and authority, on behalf of the Corporation, to attend, act and vote at
any meeting of the stockholders of any corporation in which the
Corporation may hold stock and at such meeting to exercise any or all
rights and powers incident to the ownership of such stock, and to
execute on behalf of the Corporation a proxy or proxies empowering
another or others to act as aforesaid. The Board of Directors from time
to time may confer like powers upon any other person or persons.
6.2 General Authorization to Transfer Securities Held
By the Corporation.
(a) Any of the following officers, to wit:
the Chairman, the Vice-Chairman, the President, any Vice President, the
Treasurer, the Controller, any Associate Treasurer, Assistant Treasurer
or Assistant Controller of the Corporation shall be, and they hereby
are, authorized
<PAGE>
and empowered to transfer, convert, endorse, sell, assign, set over and
deliver any and all shares of stock, bonds, debentures, notes,
subscription warrants, stock purchase warrants, evidences of
indebtedness, or other securities now or hereafter standing in the name
of or owned by the Corporation, and to make, execute and deliver, under
the seal of the Corporation, any and all written instruments of
assignment and transfer necessary or proper to effectuate the authority
hereby conferred.
(b) Whenever there shall be annexed to any
instrument of assignment and transfer executed pursuant to and in
accordance with the foregoing paragraph (a), a certificate of the
Secretary or an Assistant Secretary of the Corporation in office at the
date of such certificate setting forth the provisions of this Section
6.2 and stating that they are in full force and effect and setting
forth the names of persons who are then officers of the Corporation,
then all persons to whom such instrument and annexed certificate shall
thereafter come shall be entitled, without further inquiry or
investigation and regardless of the date of such certificate, to assume
and to act in reliance upon the assumption that the shares of stock or
other securities named in such instrument were theretofore duly and
properly transferred, endorsed, sold, assigned, set over and delivered
by the Corporation, and that with respect to such securities, the
authority of these provisions of the By-laws and of such officers is
still in full force and effect.
7. SIGNATORIES
All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time
designate.
8. SEAL
The seal of the Corporation shall be in such form and
shall have such content as the Board of Directors shall from time to
time determine.
9. FISCAL YEAR
The fiscal year of the Corporation shall be
determined by the Board of Directors.
<PAGE>
10. WAIVER OF OR DISPENSING WITH NOTICE
(a) Whenever any notice of the time, place
or purpose of any meeting of the stockholders, directors or a committee
is required to be given by law, the Certificate of Incorporation or
these By-laws, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the holding
thereof, or actual attendance at the meeting in person or, in the case
of any stockholder, by his attorney-in-fact, shall be deemed equivalent
to the giving of such notice to such persons.
(b) No notice need be given to any person
with whom communication is made unlawful by any law of the United
States or any rule, regulation, proclamation or executive order issued
under any such law.
11. AMENDMENT OF BY-LAWS
11.1 By Board of Directors. The By-laws of the
Corporation may be altered, amended or repealed or new By-laws may be
made or adopted by the affirmative vote of a majority of the whole
Board at any regular or special meeting of the Board. No notice of any
such meeting shall be required unless required otherwise than under
this Section 11 and no such notice need in any event make any reference
to any proposed change in the By-laws.
11.2 By Stockholders. The By-laws of the Corporation
may also be altered, amended or repealed or new By-laws may be made or
adopted by the vote of a majority in interest of the stockholders
represented and entitled to vote upon the election of directors, at any
meeting at which a quorum is present.
Exhibit 10.3
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of March, 1996 (the
"Commencement Date") between STANDARD MICROSYSTEMS CORPORATION, a
corporation duly organized and existing under and by virtue of the laws
of the State of Delaware and having an office at 80 Arkay Drive,
Hauppauge, Long Island, New York 11788, hereinafter referred to as
"SMC" and ARTHUR SIDORSKY, residing at Seven Harborpoint Drive,
Northport, New York 11768, hereinafter referred to as the "Employee".
WITNESSETH:
WHEREAS, SMC is engaged, among other things, in the
business of developing, manufacturing, and selling integrated circuits
and board-level products for use in the electronics industry and
principally in connecting personal computers over local area networks;
and
WHEREAS, SMC has for many years employed the Employee
and desires to continue to employ him in an executive, research and/or
engineering capacity, upon the terms and conditions hereinafter in this
Agreement set forth, and the Employee is desirous of being so employed;
and
WHEREAS, SMC controls various corporations and other
enterprises, the corporations and other enterprises from time to time
controlled by SMC being referred to in this Agreement as "SMC
Affiliates"; and
WHEREAS, the Employee is, on the Commencement Date,
employed as an Executive Vice President of SMC,
NOW, THEREFORE, in consideration of the premises, and
the mutual covenants and conditions herein contained, the parties
hereto agree as follows:
FIRST: SMC agrees to employ the Employee and the
Employee agrees to be employed pursuant to this Agreement for a period
commencing on the Commencement Date and ending on the day preceding the
third anniversary of the Commencement Date; provided that SMC may
terminate such
<PAGE>
employment on any earlier date by giving the Employee notice of the
effective date of such termination, which notice shall be accompanied
by SMC's check for an amount equal to one year's compensation at the
then current rate fixed pursuant to Paragraph THIRD (a) (less
appropriate tax deductions) payable to the Employee. The Employee shall
serve as an officer of SMC in such offices to which he may be elected
or appointed, and shall perform such other duties for SMC and SMC
Affiliates as shall be assigned to him from time to time during the
continuance of this Agreement by the Board of Directors, the Chairman
or the President of SMC. The Employee agrees to apply his experience
and skill to such problems as shall be presented to him from time to
time in connection with the business of SMC and SMC Affiliates. The
Employee may be required to spend a significant portion of his business
time traveling on behalf of SMC. However, if the Employee is assigned,
as provided in this paragraph, to conduct his principal activities or
have his headquarters at a location outside the Hauppauge, Long Island
area (hereby defined to include all points within fifty miles of
Hauppauge, Long Island, New York), the Employee may, within ninety days
thereafter, terminate this Agreement by notice given to SMC, in which
event SMC shall pay the Employee an amount equal to one year's
compensation at the then current rate fixed pursuant to Paragraph THIRD
(a).
SECOND: The Employee shall give his full time,
attention, best efforts and skill to SMC and the SMC Affiliates, shall
accept willingly and carry out the duties assigned to him in the
furtherance of the business of SMC and the SMC Affiliates and shall not
engage in any activity in conflict with the best interests of SMC and
the SMC Affiliates. In addition to the compensation set forth in
paragraph THIRD and in consideration for his services to SMC, SMC
agrees to make available to the Employee the benefits and privileges
regularly granted to other senior executives of SMC.
THIRD: (a) SMC shall pay to the Employee, and the
Employee agrees to accept as compensation for and in consideration of
the work to be performed hereunder by the Employee, a weekly salary at
the rate of $296,300 per annum during the term of this Agreement. The
rate of compensation shall be subject to annual increase, but not
reduction, in the discretion of the Board of Directors, after review
and recommendation by the Compensation Committee of the Board. Any such
increase shall be effective as of the first day of
<PAGE>
the fiscal year for which such increase is approved, unless otherwise
determined by the Board.
(b) In addition, as bonus compensation to
the Employee, SMC shall pay to the Employee, not later than 120 days
after the end of each fiscal year of SMC included in the term of this
Agreement, such amount (if any), related to consolidated net income of
SMC, and/or a specified division of SMC for such year, before deduction
of federal and state income taxes and incentive compensation to
employees, as shall be determined in its discretion by the Compensation
Committee of the Board of Directors of SMC or, if there be no such
Compensation Committee, then by the Board of Directors of SMC. In
determining consolidated net income for the purpose of the preceding
sentence, such additions and subtractions from such income (as
determined by SMC's independent accountants or by SMC) shall be given
effect as such Compensation Committee or Board shall from time to time
in its discretion prescribe.
FOURTH: The Employee has executed a Patent and Trade
Secrets Agreement with SMC of even date herewith, the provisions of
which shall be deemed to be incorporated as part of this Agreement.
FIFTH: The Employee has executed a Severance Pay
Agreement with SMC dated January 20, 1988 and several extensions
thereof of which the latest is of even date herewith, the provisions of
which shall be deemed to be incorporated as part of this Agreement. The
rights and remedies under such Severance Pay Agreement are in addition
to, and not in limitation of, any rights or remedies which the Employee
may have under this Agreement, provided that in no event shall the
damages payable to the Employee under this Agreement and the severance
payments to which the Employee may be entitled under SectionE4.3(B) and
4.4(B) of such Severance Pay Agreement exceed the greater of (i) the
balance (if any) of remuneration which would have been payable to the
Employee under this Agreement, if all such remuneration were paid to
the Employee under this Agreement as and when due, or (ii) the
severance payments to which the Employee may be entitled under Section
4.3(B) or 4.4(B), as may be applicable, of such Severance Pay
Agreement; provided further that in the event that Section 4.7 of such
Severance Pay Agreement shall be applicable, such damages and payment
shall be so reduced as may be required under such Section 4.7.
<PAGE>
SIXTH: Any notice or other communication given under
this Agreement to either party shall be in writing and shall be
delivered at or mailed to such party at the address of such party
appearing at the head of this Agreement; provided that either party may
by notice designate a changed address for such party. Any such notice
shall be deemed given (a)Eif mailed properly addressed, postage
prepaid, certified mail, return receipt requested, on the third
business day after mailing in Northport, New York or Hauppauge, New
York, or (b)Eif delivered otherwise than pursuant to (a), at the time
of actual delivery.
IN WITNESS WHEREOF, SMC has caused this Agreement to
be executed on its behalf by its representative, thereunto duly
authorized, and the Employee has executed this Agreement as of the day
and year first above written.
STANDARD MICROSYSTEMS CORPORATION
By:______________________________
Paul Richman, Chairman
Arthur Sidorsky, Employee
<PAGE>
Exhibit 13
PAGE 11:
FINANCIAL REVIEW
Selected Financial Data 12
Management's Discussion and Analysis 13
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Report on Management's Responsibilities 32
Report of Independent Public Accountants 32
<PAGE>
<TABLE>
<CAPTION>
Standard Microsystems Corporation and Subsidiaries Page 12
SELECTED FINANCIAL DATA
As of February 28 or 29, and for the years then ended
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data) 1997 1996 1995 1994 1993
Operating Results
Revenues $ 354,138 $ 341,926 $ 378,671 $ 322,575 $ 250,495
Cost of goods sold and operating expenses 383,152 370,835 338,049 287,139 219,712
Income (loss) from operations (29,014) (28,909) 40,622 35,436 30,783
Other income (expense), net (3,988) 48,913 670 (1,964) (2,865)
Income (loss) before minority interest,
provision for income taxes and extraordinary item (33,002) 20,004 41,292 33,472 27,918
Minority interest in net income (loss)
of subsidiary 21 202 185 (209) (430)
Income (loss) before provision for income
taxes and extraordinary item (33,023) 19,802 41,107 33,681 28,348
Provision for (benefit from) income taxes (11,726) 8,201 15,940 13,770 12,510
Income (loss) before extraordinary item (21,297) 11,601 25,167 19,911 15,838
Extraordinary item -- -- (944) -- --
Net income (loss) $ (21,297) $ 11,601 $ 24,223 $ 19,911 $ 15,838
Weighted average common and
common equivalent shares 13,838 13,515 13,305 13,090 12,469
Per Share Data
Income (loss) before extraordinary item $ (1.54) $ 0.86 $ 1.89 $ 1.52 $ 1.27
Extraordinary item -- -- (0.07) -- --
Net income (loss) $ (1.54) $ 0.86 $ 1.82 $ 1.52 $ 1.27
Shareholders' equity at year end $ 12.38 $ 14.11 $ 13.16 $ 11.18 $ 9.50
Market price at year end 8.50 15.63 26.50 19.13 18.75
Balance Sheet Data
Current assets $ 130,141 $ 148,884 $ 162,776 $ 140,393 $ 111,326
Current liabilities 39,278 51,188 42,506 41,395 40,649
Working capital $ 90,863 $ 97,696 $ 120,270 $ 98,998 $ 70,677
Property, plant and equipment, net $ 62,794 $ 60,208 $ 34,908 $ 30,600 $ 30,775
Total assets 234,056 260,659 228,578 205,833 183,926
Long-term debt 7,000 -- -- 9,190 12,135
Other liabilities 4,584 4,593 915 447 313
<PAGE>
Minority interest in subsidiary 11,397 11,376 11,174 10,989 11,198
Shareholders' equity 171,797 193,502 173,983 143,812 119,631
</TABLE>
<PAGE>
PAGES 13 through 16:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Standard Microsystems Corporation conducts its operations primarily through its
Component Products and System Products Divisions. The Component Products
Division (CPD) designs, produces and markets very-large-scale-integrated
circuits, mainly for control of various personal computer functions, as well as
specialized semiconductor-related products that are produced in the Company's
own foundry. The System Products Division (SPD) designs, produces and markets
products that connect personal computers to, and allow communications over,
local area networks (LANs). As a separate profit center, the Company's
subsidiary, Toyo Microsystems Corporation (TMC), sells component and system
products into the Japanese market.
The Company reported reduced revenues and a significant operating loss for the
fourth quarter of fiscal 1997, the result of difficulties experienced by both
its CPD and SPD, as discussed herein.
Revenues
The following table presents the Company's revenues by division and product
line, for the three years ended February 28, 1997 (in millions):
Fiscal years ended February 28 or 29, 1997 1996 1995
Component Products
Integrated circuit revenues $ 164.3 $ 123.0 $ 106.9
Foundry device revenues 14.7 15.6 3.7
Total component products revenues $ 179.0 $ 138.6 $ 110.6
System Products
Adapter revenues $ 120.3 $ 144.5 $ 204.9
Hub and switch revenues 37.2 42.0 51.5
Total system products revenues $ 157.5 $ 186.5 $ 256.4
Toyo Microsystems Corporation $ 17.6 $ 16.8 $ 11.7
Total Revenues $ 354.1 $ 341.9 $ 378.7
The increase in integrated circuit revenues in fiscal 1997, compared to fiscal
1996, was the result of an increase of approximately 31% in unit shipments of
personal computer input/output (PC I/O) integrated circuits, which are now
broadly used by most of the world's leading personal computer manufacturers.
However, during the second half of the fiscal year, and particularly in the
fourth quarter, integrated circuit revenues declined, largely because of
significant PC I/O market price reductions by several of the CPD's competitors.
Excess semiconductor manufacturing capacity in the Pacific Rim during this
period resulted in several competitors producing PC I/O circuits which the
Company believes violated the terms of these competitors' licenses under the
Company's patents. These circuits were aggressively priced and marketed during
the second half of fiscal 1997. The resolution of this licensing issue with
several of these competitors, concluded after the close of the fiscal year, may
relieve some of the PC I/O pricing pressures and encourage PC motherboard
producers to standardize on the Company's PC I/O architectures.
The increase in component products revenues in fiscal 1996, compared to fiscal
1995, resulted from continued broad acceptance of the division's PC I/O
circuits, partially fueled by the worldwide growth in demand for personal
computers, as well as relief from a shortage of manufacturing capacity which had
plagued the semiconductor industry for much of fiscal 1995. Sales of the
division's foundry devices to a particular customer also grew significantly in
fiscal 1996.
<PAGE>
Revenues from the System Products Division declined by almost 16% in fiscal
1997, following a 27% decline in fiscal 1996. The declines in adapter revenues
reflect reduced unit shipments to distributors, the division's principal
customers for its products. Declining sales of older Ethernet adapters, as well
as significant reductions in prices for Fast Ethernet adapters during the fourth
quarter, contributed to the fiscal 1997 revenue decline. The fiscal 1997
reduction in hub and switch revenues reflects the January 1996 sale of the
division's Enterprise Networks Business Unit (ENBU), which was responsible for
enterprise-wide switching products, to Cabletron Systems, Inc. After adjusting
fiscal 1996 results for this divestiture, hub and switch revenues actually
increased modestly in fiscal 1997. The decline in fiscal 1996 hub and switch
revenues, compared to fiscal 1995, resulted from reduced shipments of the ENBU's
switching products.
International shipments accounted for about 55% of the Company's revenues in
fiscal 1997, compared to 56% in fiscal 1996 and 47% in fiscal 1995. Increased
shipments during these periods to Asia and the Pacific Rim, primarily reflecting
the corresponding growth in integrated circuit revenues, have been offset by
reduced shipments to Europe and to the rest of the world. Lower overall SPD
shipments have, in turn, resulted in lower shipments to Europe.
Gross Profit
The Company's gross profit has declined from 43.4% in fiscal 1995 to 35.9% in
fiscal 1996 and to 26.9% in fiscal 1997. One significant reason for this trend
has been the shift in product mix from system products to component products.
System products contributed 68% of consolidated revenues in fiscal 1995,
compared to 44% in fiscal 1997, while component products' contribution to
consolidated revenues increased from 29% in fiscal 1995 to 51% in fiscal 1997.
Component products have historically produced lower margins than system
products, resulting in lower consolidated gross profit as this shift occurred.
Also during this period, selling price declines on system products have exceeded
cost reductions, resulting in a downward trend in system products' margins.
Certain integrated circuits introduced by the Company during the first half of
fiscal 1997 experienced lower than expected manufacturing yields, restraining
the division's gross profit during the period. These yields increased to
acceptable levels during the second half of the fiscal year.
During the fourth quarter of fiscal 1997, the Company recorded charges of $9.9
million to write down certain component and system products inventories to net
realizable value, in response to significant market price reductions, in some
cases below cost, for various PC I/O, Ethernet and Fast Ethernet products, as
well as to recognize excess inventory of older and discontinued products. The
reduction in order input and shipments during the fourth quarter led to these
excess inventory balances.
In the second quarter of fiscal 1996, an $11.8 million charge was recorded to
reduce the carrying value of certain system products inventory reflecting the
disappointing reception of a new product introduction, lower than projected
demand for several older product lines, and a decision to reduce the variety of
networking products that perform similar functions.
Research and Development Expenses
Research and development (R&D) expenses decreased 17% in fiscal 1997 compared to
fiscal 1996, primarily the result of the January 1996 divestiture of the ENBU,
partially offset by increased R&D expenditures by the Component Products
Division. The R&D expenses of the divested ENBU totaled almost $9.8 million
during fiscal 1996. Fiscal 1997 research and development expenditures of the CPD
increased by almost $3.5 million compared to fiscal 1996, as the division
expanded its resources in this area through the February 1996 acquisition of the
assets and staff of San Jose, California-based EFAR Microsystems, Inc., the
October 1996 establishment of a design center in Massachusetts, and the
expansion of its Austin, Texas design center. Fiscal 1998 CPD engineering
efforts are expected to focus on continuing enhancements and cost reductions to
its flagship PC I/O product line and also on expanding into new PC technologies.
The System Products Division's fiscal 1998 R&D is expected to focus on
development of leading-edge products in emerging LAN technologies, primarily
Fast Ethernet and, to a lesser extent, ATM.
<PAGE>
Fiscal 1996 R&D expenditures were $3.4 million, or 12%, higher than comparable
fiscal 1995 figures. During the first half of fiscal 1996, the SPD was
continuing to expand its development efforts in enterprise-wide switching
products, and thus $2.2 million of the fiscal 1996 increase reflects growth in
ENBU expenditures. In addition, fiscal 1996 expenditures for component product
development were modestly higher than in fiscal 1995.
Selling, General and Administrative Expenses
Fiscal 1997 selling, general and administrative expenses of $93.1 million
declined 13% from $106.3 million in fiscal 1996. This decline includes an $11.3
million reduction in sales and marketing expenses incurred by the SPD, resulting
from both the sale of the ENBU and lower fiscal 1997 revenues, partially offset
by a $3.8 million increase in such expenditures for the CPD. The increased
expenditures for the CPD were driven primarily by its increased fiscal 1997
revenues, and include direct selling expenses such as commissions and royalties,
as well as costs associated with increased sales and marketing staff. The
Company's fiscal 1997 general corporate expenses increased by approximately $1.1
million compared to fiscal 1996, reflecting costs of implementing a new
client/server information system, partially offset by the impact of executive
severance charges incurred during the prior fiscal year.
Selling, general and administrative expenses increased 18% to $106.3 million in
fiscal 1996, from $90.0 million in fiscal 1995. Fiscal 1996 operating expenses
included $2.5 million of executive severance charges, as well as higher selling
and marketing expenses for LAN switching and hub products. Fiscal 1996 expenses
also include higher marketing and selling costs associated with higher revenues
in the Component Products Division.
Other Operating Expenses
The reduction in amortization of intangible assets in fiscal 1997 resulted from
the sale of the ENBU and its related goodwill, as well as the impact of a $2.4
million write-down of an acquired LAN technology to its net realizable value in
fiscal 1996. This write-down also accounts for the fiscal 1996 increase in such
amortization compared to fiscal 1995.
The $5.4 million charge for purchased in-process technology reported in fiscal
1996 resulted from the Company's February 1996 acquisition of the assets of EFAR
Microsystems, Inc., for 240,000 shares of the Company's common stock.
Other Income and Expense
The decline in interest income in both fiscal 1997 and fiscal 1996 reflects
lower average cash balances available for investment during both periods.
Interest expense in all three fiscal years presented resulted principally from
borrowings under the Company's revolving line of credit.
In September 1996, the Company settled an ongoing litigation with Penril
Datacomm Networks, Inc. (Penril) related to technology and product agreements
between Penril and Sigma Network Systems, Inc. (Sigma). These agreements were
executed before the Company's purchase of Sigma in December 1992. This business
was reorganized to operate as the Company's ENBU, focusing on enterprise-wide
switching products, and was subsequently sold to Cabletron Systems, Inc. in
January 1996. The Company and Penril agreed to a settlement of the disputes
whereby all claims of both parties were dismissed, resulting in the Company
recording a $4.1 million charge in the third quarter of fiscal 1997.
In January 1996, the Company realized a $49.7 million gain on the sale of the
assets and technology of its ENBU to Cabletron Systems Inc. for $74.0 million.
Income Taxes
The Company's effective income tax benefit rate for fiscal 1997 was 35.5%. This
rate includes a relatively low benefit rate for state income taxes as several
states in which the Company operates do not allow net operating loss carrybacks.
<PAGE>
In fiscal 1996, income taxes were provided for at an effective rate of 41.4%,
higher than the 38.8% rate reported for fiscal 1995. The goodwill written off in
connection with the sale of the ENBU was not deductible for tax purposes,
raising the fiscal 1996 effective tax rate.
Liquidity and Capital Resources
The Company's working capital decreased from $97.7 million at February 29, 1996,
to $90.9 million at February 28, 1997, primarily as a result of the net loss
incurred by the Company during the second half of fiscal 1997. Cash generated by
operating activities in fiscal 1997 was $4.9 million, as the year's net loss was
effectively offset by depreciation expense and amortization. Investing
activities in fiscal 1997 included $19.4 million of capital expenditures and
$2.0 million of strategic investments in new semiconductor technologies by the
CPD. Fiscal 1997 capital expenditures were focused on improvements to the
Company's wafer fabrication plant, semiconductor test equipment, information
systems improvements and engineering design tools. There were no material
commitments for capital expenditures as of February 28, 1997, and fiscal 1998
capital expenditures are expected to be lower than fiscal 1997 capital
expenditures. Net borrowings of $7.0 million under the Company's revolving line
of credit partially financed fiscal 1997's investing requirements.
The Company maintains a combined $25.0 million revolving line of credit with two
banks, which permits the Company to borrow funds on a revolving basis, primarily
to finance working capital needs. The Company's disappointing financial
performance resulted in several violations of financial covenants during fiscal
1997, for which the appropriate bank waivers were obtained, allowing the Company
to continue to borrow, as necessary, pursuant to the original terms and
conditions of the credit line. In May 1997, the Company and its banks
renegotiated the terms of the credit line, extending the agreement through July
1998, adjusting the interest rate, and providing the banks with a general
security interest in the Company's trade accounts receivable and inventory.
Revised financial covenants were also agreed upon.
In July 1997, $7.1 million, plus interest, which was placed in escrow pursuant
to the January 1996 sale of the ENBU to Cabletron Systems, Inc., is scheduled to
be released to the Company. In April 1997, Cabletron filed a claim against the
escrow account, and in May 1997 filed a related lawsuit, alleging breach by the
Company of the non-competition clause of the Asset Purchase Agreement. The
lawsuit seeks an injunction and unspecified damages.
The Company firmly believes that this claim is without merit.
The net operating loss generated in fiscal 1997 will be carried back for income
tax purposes to recover approximately $8.0 million of taxes paid in prior
periods. While difficult to predict, a significant portion of these tax refunds
could be received before the end of fiscal 1998, or, alternatively, be applied
against potential tax liabilities generated in fiscal 1998.
In March 1997, Intel Corporation (Intel) acquired 1.5 million newly-issued
shares of the Company's common stock for $14.7 million, resulting in a slightly
below 10% ownership of the Company. Intel also received a three-year warrant to
purchase an additional 1.5 million shares, at various prices, pursuant to a
recently signed agreement between the Company and Intel. Note 10 of the Notes to
Consolidated Financial Statements included herein provides additional details of
this agreement and the related business arrangement.
The Company expects that its cash and cash equivalents, cash flows from
operations, borrowing capacity under its revolving line of credit and several
other of sources of cash (including the March 1997 equity investment by Intel)
will be sufficient to finance the Company's operating and capital requirements
through the end of fiscal 1998.
Factors That May Affect Future Results
Certain statements and information contained in this annual report constitute
"forward-looking statements" within the meaning of the Federal Securities laws.
These forward-looking statements involve risks and uncertainties which may cause
actual results and performance to be different from those expressed or implied
in such statements.
The Company competes in the personal computer semiconductor and local area
networking markets, both of which are characterized by intense competition,
rapid changes in technology and price erosion. Many of the
<PAGE>
competitors in these markets are larger and have significantly greater
financial and other resources than the Company.
The Company's quarterly and annual operating results may be influenced by many
factors, including, among others: the worldwide demand for personal computers,
the ability to introduce competitive products on a timely basis, constraints on
the availability and fluctuations in the cost of subcontracted manufacturing,
the ability to forecast market and customer demand, and new products and
technologies introduced by competitors.
Sales of most of the Company's products depend largely on sales of personal
computers. Reductions in the rate of growth in the PC market could adversely
affect the Company's operating results. In addition, as a component supplier to
PC manufacturers, the Company's Component Products Division often experiences a
greater magnitude of demand fluctuation than the Division's customers themselves
experience. Also, some of the Company's products are used in PCs for the
consumer market, which tends to be a more volatile market than other segments of
the PC marketplace.
The Company's success is highly dependent upon its ability to develop new
products, bring them to the market ahead of its competitors, and induce
customers to select its products for their needs. In an environment of
accelerating changes in technology and short product life cycles, these factors
have become increasingly challenging and important.
The vast majority of the Company's products are manufactured, assembled and
tested by independent foundries and subcontract manufacturers. This reliance
upon foundries and subcontractors involves certain risks, including potential
lack of manufacturing availability, reduced control over delivery schedules,
availability of advanced process technologies, changes in manufacturing yields,
and potential cost fluctuations. Most of the Company's LAN products are
currently manufactured by two separate subcontractors, increasing the potential
risk of interruptions in LAN manufacturing availability.
The Company generally must order inventory to be built by its foundries and
subcontract manufacturers well in advance of product shipments. Because the
Company's markets are volatile, there is risk that the Company may forecast
incorrectly and produce excess or insufficient inventories. This inventory risk
is increased by the recent trend for customers to place orders with increasingly
shorter lead times. Such inventory imbalances actually contributed significantly
to the Company's operating loss in the fourth quarter of fiscal 1997.
A significant number of the Company's foundries and subcontractors are located
in Asia. Many of the Company's customers also manufacture in Asia or subcontract
their manufacturing to Asian companies. This concentration of manufacturing and
selling activity in Asia poses risks that could affect demand for and supply of
the Company's products, including currency exchange rate fluctuations, economic
and trade policies, and the Asian political environment.
The Company's performance is inherently dependent upon hiring and retaining
employees with specific skills. The inability to hire and retain such employees
could hinder the Company's product development and ability to manufacture,
market and sell its products.
A limited number of customers account for a significant portion of the Company's
revenues. The Company's revenues from any one customer can fluctuate from period
to period depending upon market demand for that customer's products, the
customer's inventory management and the overall financial condition of the
customer.
Standard Microsystems Corporation and Subsidiaries Page 17
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and February 29, 1996
(In thousands, except share and per share data) 1997 1996
Assets
Current assets:
Cash and cash equivalents $ 8,382 $ 18,459
<PAGE>
Accounts receivable, net of allowance for doubtful
accounts of $1,761 and $1,369, respectively 31,182 55,976
Inventories 59,249 60,408
Deferred tax benefits 11,704 8,607
Other current assets 19,624 5,434
Total current assets 130,141 148,884
Property, plant and equipment:
Land 3,832 3,832
Buildings and improvements 28,870 26,839
Machinery and equipment 125,022 109,235
157,724 139,906
Less: accumulated depreciation 94,930 79,698
Property, plant and equipment, net 62,794 60,208
Other assets 41,121 51,567
$234,056 $260,659
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 24,753 $ 30,801
Accrued expenses and other liabilities 13,715 19,291
Income taxes payable 810 1,096
Total current liabilities 39,278 51,188
Long-term debt 7,000 --
Other liabilities 4,584 4,593
Commitments and contingencies
Minority interest in subsidiary 11,397 11,376
Shareholders' equity:
Preferred stock, $.10 par value
Authorized 1,000,000 shares, none outstanding -- --
Common stock, $.10 par value
Authorized 30,000,000 shares
Outstanding 13,876,000 and 13,711,000
shares, respectively 1,388 1,371
Additional paid-in capital 87,095 84,737
Retained earnings 78,920 100,217
Unrealized gain on investment, net of tax 953 2,226
Foreign currency translation adjustment 3,441 4,951
Total shareholders' equity 171,797 193,502
$234,056 $260,659
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries Page 18
CONSOLIDATED STATEMENTS OF INCOME
For the years ended February 28 or 29,
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997 1996 1995
<S> <C> <C> <C>
Revenues $ 354,138 $ 341,926 $ 378,671
Cost of goods sold 258,790 219,141 214,269
Gross profit 95,348 122,785 164,402
Operating expenses:
Research and development 26,340 31,666 28,286
Selling, general and administrative 93,123 106,337 90,005
Amortization of intangible assets 4,899 8,237 5,489
Purchased in-process technology -- 5,454 --
<PAGE>
124,362 151,694 123,780
Income (loss) from operations (29,014) (28,909) 40,622
Other income (expense):
Interest income 520 630 1,453
Interest expense (619) (1,072) (1,255)
Litigation settlement (4,057) -- --
Gain on sale of business unit -- 49,663 --
Other income (expense), net 168 (308) 472
(3,988) 48,913 670
Income (loss) before minority interest, provision for
income taxes and extraordinary item (33,002) 20,004 41,292
Minority interest in net income of subsidiary 21 202 185
Income (loss) before provision for income taxes and
extraordinary item (33,023) 19,802 41,107
Provision for (benefit from) income taxes (11,726) 8,201 15,940
Income (loss) before extraordinary item (21,297) 11,601 25,167
Extraordinary item
Loss on retirement of debt, net of applicable
income taxes of $600 -- -- 944
Net income (loss) $ (21,297) $ 11,601 $ 24,223
Income (loss) per common and common equivalent share:
Income (loss) before extraordinary item $ (1.54) $ 0.86 $ 1.89
Extraordinary item -- -- (0.07)
Net income (loss) per common and
common equivalent share $ (1.54) $ 0.86 $ 1.82
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries Page 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY As of February 28 or 29, and for
the years then ended
<TABLE>
<CAPTION>
Additional Unrealized Foreign
Common Stock Paid-In Retained Gain On Translation
(In thousands) Shares Amount Capital Earnings Investment Adjustment
<S> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1994 12,867 $ 1,287 $ 73,116 $ 64,393 $ -- $ 5,016
Shares issued under employee stock purchase plan 60 6 1,173 -- -- --
Stock options exercised 245 24 1,967 -- -- --
Tax effect of employee stock plans -- -- 707 -- -- --
Restricted stock grant to employees, net 50 5 356 -- -- --
Unrealized gain on investment, net of taxes -- -- -- -- 718 --
Foreign currency translation adjustment -- -- -- -- -- 992
Net income -- -- -- 24,223 -- --
Balance at February 28, 1995 13,222 1,322 77,319 88,616 718 6,008
<PAGE>
Shares issued under employee stock purchase plan 91 9 1,564 -- -- --
Stock options exercised 72 7 674 -- -- --
Tax effect of employee stock plans -- -- 377 -- -- --
Stock issued for business acquisition 240 24 3,880 -- -- --
Restricted stock grant to employees, net 86 9 923 -- -- --
Unrealized gain on investment, net of taxes -- -- -- -- 1,508 --
Foreign currency translation adjustment -- -- -- -- -- (1,057)
Net income -- -- -- 11,601 -- --
Balance at February 29, 1996 13,711 1,371 84,737 100,217 2,226 4,951
Shares issued under employee stock purchase plan 110 11 1,351 -- -- --
Stock options exercised 61 6 425 -- -- --
Tax effect of employee stock plans -- -- 42 -- -- --
Restricted stock grants to employees, net (6) -- 540 -- -- --
Unrealized gain on investment, net of taxes -- -- -- -- (1,273) --
Foreign currency translation adjustment -- -- -- -- -- (1,510)
Net loss -- -- -- (21,297) -- --
Balance at February 28, 1997 13,876 $ 1,388 $ 87,095 $ 78,920 $ 953 $ 3,441
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 20:
Standard Microsystems Corporation and Subsidiaries Page 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 28 or 29,
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 378,049 $ 361,215 $ 367,342
Cash paid to suppliers and employees (369,329) (357,981) (331,406)
Interest received 512 622 3,027
Interest paid (634) (1,082) (1,168)
Income taxes received (paid) 350 (17,670) (16,467)
Cash paid for litigation settlement (4,057) -- --
---------
Net cash provided by (used for) operating activities 4,891 (14,896) 21,328
---------
Cash flows from investing activities:
Capital expenditures (19,366) (39,012) (13,578)
Acquisition of business -- (1,440) --
Sale of business unit, net of related costs -- 70,473 --
Escrow investment -- (7,050) --
Investment in Chartered Semiconductor Pte Ltd. -- (19,944) --
Investment in Accelerix Incorporated (1,483) -- --
Other (482) 50 39
Net cash provided by (used for) investing activities (21,331) 3,077 (13,539)
Cash flows from financing activities:
Proceeds from issuance of common stock 431 1,573 1,991
Borrowings under line of credit agreements 47,731 34,000 927
<PAGE>
Principal payments of long-term debt (40,731) (34,000) (14,117)
Net cash provided by (used for) financing activities 7,431 1,573 (11,199)
Effect of foreign exchange rate changes on cash and cash
equivalents (1,068) (773) 773
Net decrease in cash and cash equivalents (10,077) (11,019) (2,637)
Cash and cash equivalents at beginning of year 18,459 29,478 32,115
Cash and cash equivalents at end of year $ 8,382 $ 18,459 $ 29,478
Reconciliation of net income (loss)
to net cash provided by (used for) operating activities:
Net income (loss) $ (21,297) $ 11,601 $ 24,223
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 22,249 18,976 14,813
Gain on sale of business unit -- (49,663) --
Purchased in-process technology -- 5,454 --
Other adjustments, net 1,796 1,423 2,168
Changes in operating assets and liabilities, net of effects
of acquisition and sale of businesses:
Accounts receivable 23,848 19,058 (11,027)
Inventories 969 (24,459) (11,608)
Accounts payable and accrued expenses and other liabilities (11,599) 13,425 4,714
Other changes, net (11,075) (10,711) (1,955)
Net cash provided by (used for) operating activities $ 4,891 $ (14,896) $ 21,328
Cash used for acquisition of business as reflected in the
consolidated statements of cash flows is summarized as
follows:
Net assets and technology acquired $ -- $ 5,554 $ --
Common stock issued -- (3,904) --
Liabilities assumed and created -- (210) --
Cash used for acquisition of business $ -- $ 1,440 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 21-32
Standard Microsystems Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Standard
Microsystems Corporation (SMC) and all its subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash in banks and highly liquid
debt instruments purchased with maturities of three months or less. These debt
instruments are categorized as available for sale and are recorded at fair value
which approximates cost.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short-term maturities. The amount presented
for long-term debt also approximates fair value.
Inventories Inventories are valued at the lower of first-in, first-out cost
or market and consist of the following (in thousands):
<PAGE>
As of February 28 or 29, 1997 1996
-------- --------
Inventories:
Raw material $10,161 $ 9,556
Work-in-process 33,356 34,622
Finished goods 15,732 16,230
---------- ---------
$59,249 $60,408
========= =========
During the fourth quarter of fiscal 1997, both the Company's Component Products
and System Products Divisions experienced unexpected reductions in order input
and accelerated price competition in their respective markets. These adverse
business conditions resulted in excessive inventory balances and market price
reductions of certain parts below cost. Accordingly, the Company recorded
charges of $9,900,000 to cost of goods sold during the fourth quarter of fiscal
1997 reflecting a reduction in net realizable value of certain inventory and
excess inventory of older and discontinued products.
During fiscal 1996, an $11,800,000 charge to cost of goods sold was recorded
to reduce the carrying value of certain system products inventory to estimated
net realizable value. The principal reasons for the write-down were the
disappointing reception of a new product and the reduction of its selling price,
lower than projected demand for several older product lines and a decision to
reduce the variety of networking products that perform the same function.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful lives of the buildings (20 to 25
years) and machinery and equipment (3 to 7 years). Upon sale or retirement of
property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected
currently.
Investment in Equity Securities
As of February 28, 1997 and February 29, 1996, an investment in a publicly
traded equity security is carried at fair value within Other assets on the
accompanying Consolidated Balance Sheets. A corresponding unrealized gain, net
of taxes, is reported as a separate component of Shareholders' equity.
Intangible Assets
Intangible assets are amortized primarily on a straight-line basis over their
respective estimated useful lives, ranging from three to ten years. During the
second quarter of fiscal 1996, the Company canceled certain product development
projects related to a particular LAN technology, resulting in a write-down of
$2,400,000 in the value of this acquired technology and an acceleration of its
amortization to reflect a reduction in its estimated useful life.
Long - Lived Assets
During fiscal 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS 121). SFAS No. 121 requires
the Company to review the recoverability of the carrying amount of its
long-lived assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
cash flows, undiscounted and without interest, is less than the carrying amount
of the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value. The adoption of SFAS No.
121 did not have a material effect on the Company's results of operations,
financial position or cash flow.
Revenue Recognition
The Company recognizes revenues from product sales and accrues for
estimated product returns and price protection and other sales allowances at the
time of shipment.
Product Warranty
The Company's products are generally under limited warranty against defects
in material and workmanship for periods ranging from one year to lifetime.
Estimated warranty costs are accrued when the products are sold.
<PAGE>
Software Development Expenses
Software development costs incurred after achieving technological
feasibility are not material and, therefore, are expensed as incurred.
Income Taxes
Deferred income taxes are provided on temporary differences that arise in the
recording of transactions for financial and tax reporting purposes and result in
deferred tax assets and liabilities. Deferred tax assets are reduced by an
appropriate valuation allowance if it is management's judgment that part of the
deferred tax asset will not be realized. Tax credits are accounted for as
reductions of the current provision for income taxes in the year in which the
related expenditures are incurred.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars using the exchange rates in effect at the balance sheet date. Results of
their operations are translated using the average exchange rates during the
period. Resulting translation adjustments are recorded as a separate component
of Shareholders' equity.
Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share has been computed based
on the weighted average number of shares outstanding during the year, including
the effect of common equivalent shares, if dilutive. The difference between
primary and fully diluted earnings per share is immaterial for all periods
presented.
Reclassifications
Certain items shown have been reclassified to conform with the fiscal 1997
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. BUSINESS ACQUISITIONS AND DIVESTITURE
In October 1996, the Company aquired a 19.9% equity interest in privately held
Accelerix Incorporated of Carp, Ontario, Canada, for $1,483,000. The Company and
Accelerix also entered into an agreement providing the Company with rights to
market, second source and enhance Accelerix' application specific memory
technology. This investment is carried at cost on the accompanying consolidated
balance sheet.
In February 1996, the Company acquired the assets and technology of EFAR
Microsystems, Inc., of Santa Clara, CA. Accounted for as a purchase, the
acquisition was valued at $5,554,000 based on the issuance of 240,000 shares of
the Company's common stock, the assumption of liabilities and transaction fees.
As a result of this acquisition, the Company recorded a $5,454,000 charge for
the purchase of in-process technology. The acquisition agreement also provides
for the issuance of up to $20,000,000 of additional common stock through
February 1999 to EFAR, contingent upon the acquired business achieving certain
operating results. Pro forma information for this acquisition would not differ
materially from historical results and is therefore not presented.
In January 1996, the Company and its wholly-owned subsidiary, SMC Enterprise
Networks, Inc., sold substantially all of the assets and technology associated
with the Company's Enterprise Networks Business Unit to Cabletron Systems, Inc.,
for $74,000,000 in cash, resulting in a gain of $49,663,000 before taxes. The
business unit, which originated through the Company's December 1992 purchase of
Massachusetts-based Sigma Network Systems, Inc., developed, manufactured and
sold enterprise-wide switching products for computer networks. As security for
the Company's indemnification obligations, $7,050,000 of the purchase price is
in an interest bearing escrow account until July 1997, to be used as a source
from which indemnifiable losses, if they occur, may be paid by the Company to
Cabletron. In April 1997, Cabletron filed a claim against the escrow account,
and in May 1997 filed a related lawsuit, alleging breach by the Company of the
non-competition clause of the Asset Purchase Agreement. The lawsuit seeks an
injunction and unspecified damages. The Company firmly believes that this claim
is without merit.
<PAGE>
3. LONG-TERM DEBT
The Company maintains a $25,000,000 line of credit with several banks, which
permits the Company to borrow funds on a revolving basis, primarily to finance
working capital needs. During fiscal 1997 and fiscal 1996, the Company violated
several financial condition covenants under the agreement, for which the
appropriate bank waivers were obtained, allowing the Company to continue to
borrow, as necessary, pursuant to the original terms and conditions of the
credit line. Borrowings during fiscal 1997 and 1996 were at interest rates
between 6.0% and 8.5%.
In May 1997, the Company and its banks renegotiated the terms of the credit
line, extending the agreement through July 1998, adjusting the interest rate on
borrowings to either the banks' prime rate or LIBOR plus 225 basis points
(depending on the maturity of the borrowing), and providing the banks with a
general security interest in the Company's trade accounts receivable and
inventory. Revised financial covenants covering net income, net worth and
various financial ratios were also agreed upon.
At February 28, 1997, the $7,000,000 of outstanding debt bears interest at
6.0625% and is due in fiscal 1999.
4. INCOME TAXES
The provision for (benefit from) income taxes included in the accompanying
consolidated statements of income consists of the following (in thousands):
For the years ended
February 28 or 29, 1997 1996 1995
------------- ------------- -------------
Current
Federal $(8,700) $12,950 $ 16,242
Foreign 877 619 345
State 507 580 2,281
------------ ------------- -------------
(7,316) 14,149 18,868
Deferred (4,410) (5,948) (2,928)
------------- ------------- -------------
$(11,726) $ 8,201 $ 15,940
============= ============= =============
The provision for (benefit from) taxes on income before extraordinary item
differs from the amount computed by applying the U.S. Federal statutory tax rate
as a result of the following:
For the years ended
February 28 or 29, 1997 1996 1995
------------- ------------- -------------
Provision for (benefit from) (35.0)% 35.0% 35.0%
income taxes computed at
the statutory rate
State taxes (0.5) 3.8 3.7
Foreign sales corporation (1.1) (1.0) (1.3)
Income tax credits (1.0) (2.9) (0.1)
Goodwill amortization .5 2.4 0.5
ENBU goodwill ----- 7.6 ---
Other 1.6 (3.5) 1.0
------------ -------------- -------------
(35.5)% 41.4% 38.8%
============ ============= ============
The tax effects of temporary differences that result in deferred tax benefits
are as follows (in thousands):
As of February 28 or 29, 1997 1996
------ -------
Reserves and accruals not $ 6,581 $ 3,143
currently deductible for
tax purposes
<PAGE>
Intangible asset amortization 4,905 3,832
Inventory valuation 5,665 3,046
Sale of Business Unit (1,925) ---
Purchased in-process technology 1,904 1,909
Depreciation 441 273
Other (180) (71)
--------- --------
$17,391 $12,131
========= ========
The federal income tax benefit of the net operating loss generated by the
Company in fiscal 1997 will be fully realized by carryback against prior taxble
income, and accordingly, $8,014,000 of income taxes receivable are included
within Other current assets on the consolidated balance sheet at February 28,
1997.
Goodwill associated with the Company's January 1996 sale of its Enterprise
Networks Business Unit was not deductible for tax purposes, raising the
Company's fiscal 1996 effective tax rate by 7.6 percentage points.
During fiscal 1995, the Company elected a fifteen-year amortization of certain
intangible assets related to the fiscal 1992 acquisition of a local area
networking business. This election allows the Company to take a tax deduction
for previously non-deductible goodwill.
Realization of tax benefits from NOL carryforwards created by the Company's
Japanese subsidiary is uncertain, and accordingly is fully reserved. At a
current foreign exchange rate, these carryforwards aggregated approximately
$3,074,000 as of February 28, 1997, and will expire in fiscal 1998 and fiscal
1999.
Income tax benefits of $42,000, $377,000 and $707,000 related to the Company's
stock option plans for fiscal 1997, 1996 and 1995, respectively, have been
credited to additional paid-in capital.
The Company has $1,575,000 of New York State tax credit carryforwards of which
$289,000 and $97,000 expire in fiscal 1998 and 1999, respectively. The remaining
$1,189,000 of credit carryforwards expire at various dates in fiscal 2000
through fiscal 2006.
5. OTHER BALANCE SHEET DATA
(In thousands) 1997 1996
As of February 28 or 29,
Other current assets:
Escrow deposit $ 7,353 $ --
Income taxes receivable 8,014 --
Other 4,257 5,434
$19,624 $ 5,434
------- -------
Other assets:
Intangible assets:
Covenant not to compete $15,100 $15,100
Acquired technologies 14,050 13,500
Excess of acquisition cost
over fair value of net assets
acquired (goodwill) 7,797 7,797
------- -------
36,947 36,397
------- -------
Less: accumulated amortization 27,287 22,388
------- -------
9,660 14,009
Common stock of
Chartered Semiconductor Pte Ltd. $19,944 $19,944
Deferred tax benefits 5,687 3,524
<PAGE>
Escrow deposit -- 7,050
Other assets 5,830 7,040
======= =======
$41,121 $51,567
======= =======
Accrued expenses and other liabilities:
Salaries and fringe benefits $ 5,091 $ 7,046
Advertising 1,200 1,587
Other 7,424 10,658
------- -------
$13,715 $19,291
======= =======
Other liabilities:
Retirement benefits $ 4,055 $ 3,987
Other 529 606
------- -------
$ 4,584 $ 4,593
======= =======
6. MINORITY INTEREST IN SUBSIDIARY
Sumitomo Metal Industries, Ltd. of Osaka, Japan (SMI) owns 20% of the issued and
outstanding common stock and all of the non-cumulative, non-voting 6% preferred
stock of the Company's subsidiary, Toyo Microsystems Corporation (TMC). The
Company and SMI have agreed to declare a preferred dividend if TMC should
realize net income of at least five times the total amount of preferred
dividends which would be payable on all preferred stock then outstanding. The
annual preferred dividend would be equal to 6% of the subscription price of 2.16
billion yen, or approximately $1,080,000 at an exchange rate of 120 yen per
dollar.
In the event that a third party acquires a majority of the outstanding common
stock of the Company, SMI has the option to require the Company to purchase
SMI's interest in TMC.
7. COMMITMENTS AND CONTINGENCIES
Compensation
Certain executives and key employees are employed under separate agreements
terminating on various dates through fiscal 2000. These agreements provide,
among other things, for annual base salaries totaling $1,501,000, $1,330,000 and
$746,000 in fiscal 1998, 1999 and 2000, respectively
Severance Agreements
The Company's System Products Division has experienced significant
operating losses over the past two years resulting in concern over the retention
of the Division's key employees. As a result, in March 1997, the Company
approved separate arrangements with approximately 150 System Products Division
employees, providing for severance benefits should the employee be involuntarily
terminated for reasons other than cause or performance through February 28,
1998. The maximum potential payments under these agreements total $5,060,000,
including $726,000 which would be paid under the Company's regular severance
policy.
Operating Leases
The Company leases certain vehicles, facilities and equipment. Minimum rentals
under these leases for each of the next five fiscal years are as follows (in
thousands):
1998 $1,593
1999 1,376
2000 903
2001 660
2002 628
Total rent expense was $2,229,000, $1,317,000 and $1,013,000 in fiscal 1997,
1996 and 1995, respectively.
Wafer Purchase Agreements
In September 1994, the Company entered into an agreement with Lucent
Technologies Inc.'s (formerly AT&T Corp.) Microelectronics Business Unit
(Lucent) whereby the Company purchased approximately $16,000,000 of wafer
manufacturing equipment for installation at Lucent's Madrid, Spain, facility.
The agreement provides that a portion of Lucent's wafer production capacity
during the five year period beginning in March 1996
<PAGE>
will be reserved for the Company's requirements at favorable pricing.
In March 1995, the Company entered into an agreement with Singapore-based
Chartered Semiconductor Pte Ltd., whereby the Company acquired a minority equity
interest in Chartered for $19,944,000 during fiscal 1996. This investment is
reported at cost on the accompanying consolidated balance sheet. Under this
agreement, the Company is to be allocated sub-micron wafer production capacity
for ten years in Chartered's recently constructed wafer fabrication facility.
Litigation
In September 1991, the Company and Texas Instruments Incorporated
(TI) agreed to settle, terminate and dismiss litigation between the two
companies. In addition to the settlement agreement, the parties entered into a
five year patent cross-licensing agreement covering the manufacturing of certain
semiconductor and local area network products, which license provided for
payments by the Company over the period ending December 31, 1996.
<PAGE>
In September 1996, the Company reached an agreement with Penril Datacomm
Networks, Inc. to settle a legal action initiated by Penril in June 1993. In
1990 and 1991, Penril had entered into technology and product agreements with
Sigma Networks Systems, Inc., which was subsequently acquired by the Company in
December 1992. Sigma became a wholly-owned subsidiary of the Company and was
renamed SMC Enterprise Networks, Inc. In January 1996, the Company sold this
business to Cabletron Systems Inc. The Company and Penril agreed to a settlement
whereby all claims of both parties were dismissed, resulting in the Company
recording a $4,057,000 pretax charge in the third quarter of fiscal 1997.
In June 1995, several actions were filed against the Company and certain of
its officers and directors. These complaints have been consolidated into a class
action on behalf of the purchasers of the Company's common stock between
September 19, 1994, and June 2, 1995. The consolidated complaint asserts claims
under federal securities laws and alleges that the price of the Company's common
stock was artificially inflated during the class action period by false and
misleading statements and the failure to disclose certain information. While it
is not possible to assess the likelihood of any liability being established, nor
predict the amount of damages that might be awarded in the event of a successful
claim, the Company has answered the consolidated complaint, has accrued the
estimated cost of legal fees to defend against these claims, and intends to
defend against these claims vigorously.
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's operations or financial
position.
8. BENEFIT AND INCENTIVE PLANS
Incentive Savings and Retirement Plan
The Company maintains a defined contribution Incentive Savings and Retirement
Plan (the Plan) which, pursuant to Section 401(k) of the Internal Revenue Code,
permits employees to defer taxation on their pre-tax earnings reduction
contributions to the Plan.
The Plan permits employees to contribute up to 15% of their earnings, through
payroll deductions, based on earnings reduction agreements. The Company's
contribution, which is equal to one-half of the employee's contribution up to
6%, is invested in the common stock of the Company and totaled $983,000,
$1,066,000 and $866,000 in fiscal 1997, 1996 and 1995, respectively.
The Company has authorized unissued common stock reserved for issuance to the
Plan. As of February 28, 1997, there were no unissued shares remaining in
reserve for this plan, however, it is anticipated that the Company's Board of
Directors will authorize reserve for additional shares in fiscal 1998. Since its
inception, 850,000 shares of the Company's common stock have been contributed to
the Plan.
As of February 28, 1997, 577 of the 776 employees who had satisfied the Plan's
eligibility requirements to participate were making salary deduction
contributions.
<PAGE>
Employee Stock Option Plans
Under the Company's stock option plans, the Compensation Committee of the Board
of Directors is authorized to grant stock options to purchase 2,274,000 shares
of common stock. The purpose of these plans is to promote the interests of the
Company and its shareholders by providing the officers and key employees with
additional incentives and the opportunity, through stock ownership, to increase
their proprietary interest in the Company and their personal interest in its
continued success. Options are granted at prices not less than the fair market
value on the date of grant. At February 28, 1997, 917,000 shares of common stock
were available for future grants.
Stock option plan activity is summarized below (shares in thousands):
<TABLE>
<CAPTION>
Fiscal Weighted Fiscal Weighted
1997 Average 1996 Average
Shares Exercise Price Shares Exercise Price
--------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Options outstanding, March 1 1,383 $17.53 848 $17.16
Granted 1,799 $10.61 821 $17.42
Exercised (61) $ 7.07 (69) $ 9.07
Canceled or expired (1,764) $16.76 (217) $18.34
Options outstanding, February 28 or 29 1,357 $ 9.82 1,383 $17.53
Options exercisable 387 $10.62 409 $17.28
------ ------ ------ ------
</TABLE>
The following table summarizes information relating to currently outstanding and
exercisable options as of February 28, 1997(sharesin thousands):
<TABLE>
<CAPTION>
Weighted
Remaining Average Weighted Average
Range of Life Options Exercise Options Exercise
Exercise Prices (in years) Outstanding Price Exercisable Price
- ------------------------- ------------------ --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C> <C>
$8.50 - $9.00 6.9 1,213 $8.99 307 $9.00
$9.13 - $9.38 9.2 7 $9.15 1 $9.38
$15.50 - $16.25 2.1 51 $16.02 41 $16.03
$17.38 - $17.81 2.2 46 $17.38 26 $17.39
$18.69 - $20.63 3.2 40 $18.70 12 $18.74
------------------ --------------- ------------------ --------------- ------------------
</TABLE>
Effective March 1, 1996, the Company has elected to disclose the pro forma
effects of SFAS statement No. 123, Accounting for Stock-Based Compensation. As
allowed under the provisions of this new statement, the Company will continue to
apply APB Opinion No. 25 and related interpretations to accounting for the stock
options awarded under these plans. Accordingly, no compensation cost has been
recognized for these stock options. Had compensation cost for these plans been
determined consistent with SFAS statement No. 123, the Company's net income
(loss) and net income (loss) per share would have been the pro forma amounts
indicated below (in thousands, except per share data):
For the years ended February 1997 1996
28 or 29,
- -------------------------------- ----------- --------------------
Net income(loss):
As reported $(21,297) $11,601
Pro forma (23,295) 10,431
-------------- ---------------
Net income (loss) per share:
As reported $(1.54) $.86
Pro forma (1.68) .77
------------ --------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the years ended February 1997 1996
28 or 29,
- -------------------------------- -------------------- --------------------
Dividend yield - -
Expected volatility 57% 57%
Risk-free interest rates 5.71%-6.27% 5.54%
Expected lives (in years) 1-4 4
------------ -------------
<PAGE>
The weighted average Black-Scholes value of options granted in fiscal 1997 and
1996 were $3.65 and $8.69, respectively. The values produced by this model are
limited by the inclusion of highly subjective assumptions which greatly affect
calculated values.
On January 27, 1997, the Compensation Committee of the Board of Directors
approved an exchange program for employees to surrender all outstanding options
for new options with an exercise price at the then current fair market value of
$9.00 per share. The new options issued will vest and expire on the same
schedule as the original options surrendered. Active employees were offered a
one-for-one exchange while corporate officers were offered three new options for
every four surrendered. As a condition of accepting this offer, no new options
are permitted to be exercised prior to August 1, 1997. Additional compensation
cost was recognized in the pro forma numbers presented above, and all of the
tables in this disclosure have been updated to reflect the effects of this
repricing.
Director Stock Option Plan
Under the Company's Director Stock Option Plan, non-qualified options to
purchase common stock may be granted to directors at prices not less than the
market price of the shares at the date of grant. At February 28, 1997, the
expiration dates of the outstanding options range from June 30, 1997, to July
22, 2001, and the exercise prices range from $11.38 to $16.00 (average $13.87)
per share.
The following is a summary of activity under the Director Stock Option Plan over
the past three fiscal years (in thousands):
For the years ended February 28 or 29, 1997 1996 1995
----- ------ ------
Shares under option, beginning of year 144 43 59
Options granted during the year 50 104 15
Options canceled or terminated (8)
Options exercised:
1997 -- -- --
1996 ($11.75) -- (3) --
1995 ($7.13 per share) -- -- (31)
---- ---- ----
Shares under option, end of year 186 144 43
---- ---- ----
Options exercisable, end of year 87 59 13
---- ---- ----
Shares available for future grants, end of year 133 175 30
---- ---- ----
Restricted Stock Bonus Plan
The Company maintains two Restricted Stock Bonus Plans. Each provides for common
stock awards to certain officers and key employees. The fair market value of
shares awarded under the 1991 Plan to an employee in any year is limited to 20%
of the employee's base salary, and are earned in equal installments on the
second, third and fourth anniversaries of the award. Awards granted under the
1996 plan are earned in 25%, 25%, and 50% increments on the first, second and
third anniversaries of the award, respectively. The shares granted under each
plan are distributed provided the employee has remained in the Company's employ
through such anniversary dates; otherwise the unearned shares are forfeited. The
maximum number of shares issuable under the 1996 Plan is 350,000, of which
10,000, net of cancellations, have been awarded as of February 28, 1997. No new
shares will be issued from the 1991 Plan, and as of February 28, 1997, 187,000
shares remain unearned under this plan. The market value of these shares at the
date of award, net of cancellations, is recorded as compensation expense ratably
over three or four year periods from the respective award dates. This
compensation expense was $385,000, $761,000 and $361,000 in fiscal 1997, 1996
and 1995, respectively.
<PAGE>
Retirement Plans
In March 1994, the Company adopted an unfunded Supplemental Executive Retirement
Plan to provide senior management with retirement, disability and death
benefits. The retirement benefits are based upon average compensation during the
three-year period prior to retirement. The Company is the beneficiary of life
insurance policies that have been purchased as a method of partially financing
these benefits. Based on the latest actuarial information available, the
following table sets forth the components of the net periodic pension expense,
the funded status and the assumptions used in determining the present value of
benefit obligations (in thousands):
For the years ended February 28 or 29, 1997 1996
----------- ----------
Service cost - benefits earned during the year $76 $33
Interest cost on projected benefit obligations 275 298
Net amortization and deferral 245 245
------- -------
Net periodic pension expense $596 $576
-------- -------
As of February 28 or 29, 1997 1996
---------- -------------
Actuarial present value of:
Vested benefit obligation $3,040 $2,868
Nonvested benefit obligation 377 503
---------- ---------
Accumulated benefit obligation 3,418 3,371
Effect of projected future salary increases 1,612 1,903
------------ ------------
Projected benefit obligation 5,029 5,274
Unrecognized net loss (596) (1,042)
Unrecognized net transition asset (2,941) (3,186)
Additional minimum liability 1,925 2,325
---------- -------------
Accrued pension cost $3,417 $3,371
---------- --------------
Assumptions used in determining actuarial present value of benefit obligations:
Discount rate 7.25% 7.25%
Weighted-average rate of compensation increase 7.00% 7.00%
------------ ------------
During fiscal 1993, the Company adopted an unfunded retirement plan for the
non-employee members of its Board of Directors. The plan provides for annual
benefit payments equal to the annual retainer in effect at the date of
retirement, for a period of years equal to the lesser of the director's years of
service or ten years. The cost of this plan is accrued over the directors'
estimated remaining years of service, of which $174,000, $162,000 and $264,000
was accrued during fiscal 1997, 1996 and 1995, respectively.
Executive Incentives
The Company's Board of Directors has provided that certain executives receive
incentive compensation based upon certain revenues, earnings and other
performance measures. During fiscal 1997, 1996 and 1995, $560,000, $1,483,000
and $1,506,000 of incentive compensation was earned, respectively.
9. STOCK PURCHASE RIGHTS PLAN
Under a stock purchase rights plan, shareholders may be entitled to purchase
common stock in the Company at a discounted price, in the event of certain
efforts to acquire control of the Company. The rights will expire in January
1998, unless previously redeemed by the Company at $.01 per right.
10. SUBSEQUENT EVENT
In March 1997, the Company and Intel Corporation (Intel) entered into a Common
Stock and Warrant Purchase Agreement (the Agreement) whereby Intel acquired
approximately 1,543,000 of newly-issued shares of the Company's common stock for
$9.50 per share, or approximately $14,654,000, and received a three-year warrant
to purchase an additional 1,543,000 shares at a price per share which increases
from $10.45, to $11.40, and then to $12.35 on March 18, 1997, 1998 and 1999,
respectively. In addition, the Company and Intel have signed a Letter of Intent
to enter into, and are currently negotiating, an agreement whereby (i) Intel
would agree to integrate the Company's current and future devices into a
specified number of Intel's motherboard designs, and consider integrating such
devices into additional motherboard designs, and (ii) the Company would grant
Intel
<PAGE>
certain manufacturing rights should the Company be unable to perform its
obligations as a supplier of such devices.
The Agreement provides Intel with certain rights, including a right of first
refusal upon certain proposed sales of common stock by the Company, demand and
other registration rights with respect to the shares acquired under the
Agreement, a right for Intel to designate a representative to serve on the
Company's board of directors, and anti-dilution rights.
The Agreement also imposes certain restrictions on Intel, including a limitation
on Intel's ability to acquire additional shares of the Company's common stock
(referred to as a standstill arrangement), and restrictions on the transfer of
shares acquired pursuant to the Agreement. The standstill arrangement would
terminate in the event of certain third-party tender offers for the Company's
common stock.
11. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in two principal industries: very-large-scale-integrated
circuits primarily used in personal computers for input/output and network
control (Component Products) and local area network products used to connect
personal computers (System Products). Although the Company's subsidiary, Toyo
Microsystems Corporation (TMC), sells component and system products in the
Japanese market, it operates as a separate profit center and is reported within
this disclosure as a separate segment of the Company's operations.
Income (loss) from operations by industry segment excludes general corporate
expenses, other income and expenses, and income taxes. Transfers between
industry segments are accounted for on an arm's length pricing basis. General
corporate assets include primarily cash and cash equivalents, assets associated
with general corporate activities, tax assets, and certain investments.
<TABLE>
<CAPTION>
Industry Segment Information General
(In thousands) Component System Corporate
Products Products TMC and Other Consolidated
----------- --------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1997
Total revenues $186,728 $160,276 $ 17,558 $ $ 364,562
--
Intersegment transfers (7,682) (2,742) - - (10,424)
--------- ---------- ----------- ------- --------
Revenues from unaffiliated customers $179,046 $ 17,558 $ $ 354 ,138
$157,534 --
Income (loss) from operations 12,240 (19,618) 22 (21,658) (29,014)
Identifiable assets
106,314 63,915 11,059 52,768 234,056
Depreciation and amortization
8,595 9,497 110 4,047 22,249
Capital expenditures
14,167 2,400 85 2,932 19,584
------------- ------------- ----- ----- ---------
Fiscal 1996
Total revenues $143,084 $190,097 $ 16,790 $ - $ 349,971
Intersegment transfers (4,487) (3,558) - - (8,045)
------------ ---------- ------------ ---------- ---------
Revenues from unaffiliated customers $138,597 $186,539 $ 16,790 $ $ -- $ 341,926
Income (loss) from operations 31,177 (40,543) 995 (20,538) (28,909)
Identifiable assets
101,878 93,405 12,634 52,742 260,659
Depreciation and amortization
2,522 14,708 112 1,634 18,976
Capital expenditures 23,999 5,671 132 9,445 39,247
------------ -------- ------------ ----------- ----------
Fiscal 1995
Total revenues $112,815 $259,499 $ 11,661 $ - $ 383,975
Intersegment transfers (2,226) (3,078) - - (5,304)
---------- ---------- --------- -------- ------------
Revenues from unaffiliated customers $110,589 $256,421 $ 11,661 $ - $ 378,671
Income (loss) from operations 29,676 25,862 656 (15,572) 40,622
Identifiable assets
39,267 137,769 11,486 40,056 228,578
Depreciation and amortization
2,308 11,005 120 1,380 14,813
Capital expenditures
2,560 8,114 59 2,533 13,266
======= ======= ======== ======= =========
</TABLE>
Geographic Information
<PAGE>
The Company's domestic operations include the worldwide revenues and operating
results of the Component Products and System Products business segments, and
corporate activities. The Component Products and System Products business
segments conduct their sales and marketing operations outside of the United
States through TMC in Japan, and through sales subsidiaries in Canada, Europe,
Asia and the Pacific Rim, Latin America, and South Africa. Revenues and
operating profits from customers in Japan are recorded by TMC.
Less than 10% of the combined Component Products business segment, System
Products business segment and general corporate identifiable assets are located
outside of the United States. Included within the identifiable assets of the
Component Products business segment is $13,157,000 of equipment (net) installed
at Lucent Technologies Inc.'s wafer fabrication facility in Madrid, Spain.
Export Sales
The information below summarizes sales to unaffiliated customers for the
Component Products and System Products business segments by geographic region
(in thousands):
For the years ended
February 28 or 29,
1997 1996 1995
---------- ---------- ---------
United States $159,937 $149,414 $201,539
Export
Asia and Pacific Rim 112,034 86,975 53,721
Europe 51,919 69,304 86,510
Canada 7,475 10,816 15,294
Other 5,215 8,627 9,946
---------- -------- ---------
$336,580 $325,136 $367,010
========== ======== =========
Major Customers
During fiscal 1997 and fiscal 1996, no single customer accounted for more
than 10% of the Company's revenues. In fiscal 1995, one customer accounted for
10.3% of revenues.
Concentrations of Credit Risk
The Company sells a significant amount of its products through several
distributors and PC producers and, as a result, maintains individually
significant accounts receivable balances from each of these customers. The
Company performs credit evaluations on a regular basis and generally requires no
collateral. Allowances for credit losses are maintained and actual losses have
been within the Company's expectations.
Distributors have the right to return slow-moving inventory in exchange for
other inventory of equal value. Distributors also have the right to protection
with respect to the price paid for inventories on and. The Company maintains a
reserve for anticipated product returns and price protection.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28/29
------- ----------- ------------ -----------
Fiscal 1997
Revenues $ 100,072 $ 99,217 $ 93,769 $ 61,080
Gross profit 36,876 29,950 28,348 174
Operating income (loss) 3,237 164 (2,174) (30,241)
Net income (loss) 1,917 142 (3,854) (19,502)
Per Share Data:
Net income (loss) $ 0.14 $ 0.01 $ (0.28) $ (1.40)
Market price
High 18.75 18.00 15.25 11.75
Low 14.38 10.25 8.38 8.38
========= ========= ========= =========
Fiscal 1996
<PAGE>
Revenues $ 72,209 $ 85,434 $ 90,570 $ 93,713
Gross profit 28,395 22,823 37,656 33,910
Operating income (loss) (4,718) (17,687) 867 (7,372)
Net income (loss) (3,001) (12,105) 303 26,404
Per Share Data:
Net income (loss) $ (0.22) $ (0.91) $ 0.02 $ 1.94
Market price
High 26.50 19.75 23.50 21.13
Low 15.38 12.50 15.25 15.25
========= ========= ========= =========
The Company's common stock is traded in the over-the-counter market under the
NASDAQ symbol: SMSC. Trading is reported in the NASDAQ National Market. There
were approximately 1,460 holders of record of the Company's common stock at
April 7, 1997.
The Company has never paid a cash dividend. The present policy of the Company
is to retain earnings to provide funds for the operation and expansion of its
business. The Company does not expect to pay cash dividends in the foreseeable
future.
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The consolidated financial statements of Standard Microsystems Corporation and
its subsidiaries have been prepared under the direction of management in
conformity with generally accepted accounting principles, consistently applied.
The statements include amounts that reflect management's objective estimates and
judgments.
Standard Microsystems Corporation and its subsidiaries maintain accounting
systems and related internal accounting controls which, in the opinion of
management, provide reasonable assurance, at appropriate cost, that assets are
properly controlled and safeguarded and that transactions are executed in
accordance with management's authorization and are recorded and reported
properly.
The audit committee of the Board of Directors is composed solely of directors
who are not officers or employees of the Company. The committee meets
periodically with representatives of management and the independent public
accountants. The independent public accountants have free access to the
committee, without management present, to discuss the results of their audit
work, adequacy of internal financial controls and the quality of the financial
reporting. The committee also recommends to the directors the appointment of the
independent public accountants.
The independent public accountants provide an objective, independent review as
to management's discharge of its responsibilities as they relate to the
integrity of reported operating results and financial condition.
The consolidated financial statements in this annual report have been audited by
Arthur Andersen LLP, independent public accountants.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Standard Microsystems Corporation:
We have audited the accompanying consolidated balance sheets of Standard
Microsystems Corporation (a Delaware corporation) and subsidiaries as of
February 28, 1997, and February 29, 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements are free of
<PAGE>
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Standard Microsystems
Corporation and subsidiaries as of February 28, 1997, and February 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended February 28, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
April 7, 1997 (except for Notes 2 and 3, as to which the date is May 23, 1997)
Washington, D.C.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Subsidiary Location
Standard Microsystems Corporation (Asia) Taipei, Taiwan
SMC Australia Pty. Ltd. Sydney, Australia
Standard Microsystems Corporation (Canada) Oakville, Ontario, Canada
Standard Microsystems (Europe) Ltd. London, England
SMC France, Inc. St. Germain-en-Laye, France
Standard Microsystems GmbH Munich, Germany
SMC Massachusetts, Inc. Andover, Massachusetts
SMC de Mexico SA de CV Mexico DF, Mexico
SMC North America, Inc. Various States
SMC Singapore, Inc. Singapore
SMC International Ltd. Christ Church, Barbados
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in or incorporated by reference in this Form 10-K into the
Company's previously filed Registration Statements on Form S-8 (Nos. 2-78324,
33-35590, 33-15965, 33-45011, 33-69224, and 33-83400).
ARTHUR ANDERSEN LLP
MAY 23, 1997
WASHINGTON. D.C.
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