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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
For the Fiscal Year Ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
Preferred Stock Purchase Rights
- - -----------------------------------------------------------------------------
(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. (X)
As of May 20, 1998, 15,723,497 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 $167,062,000.
Documents Incorporated By 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 1998 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
1998 Annual Meeting (the "Proxy Statement") which are specifically
identified herein as incorporated by reference into this Form 10-K. III
<PAGE>
Standard Microsystems Corporation
Form 10-K
For the Fiscal Year Ended February 28, 1998
TABLE OF CONTENTS
PART I
ITEM
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
<PAGE>
PART I
Item 1. Business.
General Description of the Business
Standard Microsystems Corporation (the "Company", the "Registrant", or "SMSC")
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. The Company maintains offices in the United
States, Europe, and Asia. The Company conducts its business in the Japanese
market through its majority owned subsidiary, Toyo Microsystems Corporation.
SMSC operates branch offices and facilities for engineering, marketing and the
selling of its products in the following locations:
Subsidiary Location
Standard Microsystems Corporation (Asia) Taipei, Taiwan
Standard Microsystems GmbH Munich, Germany
SMC Massachusetts, Inc. Westborough, Massachusetts
SMC North America, Inc. Austin and Houston, Texas
Standard Microsystems Corporation is a worldwide supplier of
metal-oxide-semiconductor/very-large-scale-integrated (MOS/VLSI) circuits for
the personal computer (PC) industry. The Company's integrated circuits are
developed and sold for applications in PC input/output (I/O), PC connectivity,
Local Area Networking (LAN), PC systems logic, and embedded networking. The
Company also operates a wafer foundry that specializes in the production of
MicroElectroMechanical Systems (MEMS) devices.
The Company counts most of the world's leading personal computer and personal
computer motherboard manufacturers as customers for its I/O circuits. The
Company's I/O circuits reside on the motherboards of personal computer products
made by Compaq Computer Corporation, Dell Computer Corporation, IBM, Intel
Corporation, Hewlett-Packard Company and most other leading personal computer
manufacturers. The Company's wafer foundry is a producer of specialty
semiconductor products and works closely with its customers to develop and
customize processes specific to their devices.
Fiscal 1998 had several significant developments for the Company. With the
October 1997 divestiture of its local area networking hardware business (as
described in the next paragraph), the Company has refocused its business to the
design, development and supply of semiconductor products and solutions. The
Company has been a provider of semiconductor products since 1971, and has a
long history of product and technology innovation in this market.
During the third quarter of fiscal 1998, the Company reorganized its System
Products Division into a new corporation, SMC Networks, Inc. and then sold an
80.1% interest in SMC Networks, Inc. to Accton Technology Corporation of
Hsinchu, Taiwan. The System Products Division supplied hardware and software
products for the local area network (LAN) marketplace. In consideration for
the sale of stock, the Company received $40,237,000 in cash, of which
$2,012,000 was placed in an escrow account until January 2, 1999, to secure the
Company's indemnity obligations under the related agreement. As a result of
this transaction, the Company realized a pre-tax gain of $1,585,000, after
related costs, in the third quarter of fiscal 1998.
In March 1997, the Company and Intel entered into a Common Stock and Warrant
Purchase Agreement whereby Intel acquired approximately 1,543,000 newly issued
shares of the Company's common stock at $9.50 per share, 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, in June 1997, the Company and Intel entered into a separate
agreement whereby (i) Intel agreed to integrate the Company's current and
future devices into a specific number of Intel's motherboard designs, and
consider integrating such devices into additional motherboard designs, and
(ii) the Company granted Intel certain manufacturing rights should the Company
be unable to perform its obligations as a supplier of such devices.
<PAGE>
Financial Information About Industry Segments
The Company operates in one industry segment, the semiconductor industry. Its
primary business is developing and selling integrated circuit products used in
personal computers. The Company also operates a 2-micron wafer foundry, which
produces specialty semiconductor products.
The Company's I/O integrated circuits accounted for approximately 70% of total
revenue in fiscal 1998, 78% in fiscal 1997, and 71% in fiscal 1996. Foundry
revenues accounted for approximately 6% of total revenues in fiscal 1998, 7% in
fiscal 1997, and 10% in fiscal 1996.
In Japan, the Company sells its product through its majority owned subsidiary,
Toyo Microsystems Corporation. Toyo Microsystems Corporation also sells local
area networking products purchased from SMC Networks, Inc., of which SMSC
owns 19.9%.
Revenues
All of the Company's consolidated revenues are recorded by Standard
Microsystems Corporation in the United States, with the exception of revenues
from customers in Japan, which are recorded by Toyo Microsystems Corporation.
The following table presents the Company's revenues from continuing operations
for the three years ended February 28, 1998 (in millions):
Fiscal year ended February 28 or 29, 1998 1997 1996
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Standard Microsystems Corporation
Integrated circuit revenues $ 127.1 $ 164.3 $ 123.0
Foundry revenues 9.8 14.7 15.6
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136.9 179.0 138.6
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Toyo Microsystems Corporation
Integrated circuit revenues 14.7 12.8 11.1
Other revenues 4.1 4.7 5.7
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18.8 17.5 16.8
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Total revenues $ 155.7 $ 196.5 $ 155.4
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Combined integrated circuit revenues $ 141.8 $ 177.1 $ 134.1
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Intersegment transfers, which are eliminated in consolidation, were $9.9
million, $7.7 million and $4.5 million in fiscal 1998, fiscal 1997 and fiscal
1996, respectively.
<PAGE>
Principle Markets and Products of the Company
PC I/O CONTROLLERS are integrated circuits with multiple functions for
controlling and interfacing various peripheral and communications functions in
a PC, including floppy disk control, serial and parallel port control, keyboard
and mouse control, and many other peripheral functions.
The Company has three families of PC I/O controllers; Super I/O (37C669),
Enhanced Super I/O (37C67x, 77x, 70x, 60x), and Ultra I/O (37C93x) devices that
offer serial port, ECP (Extended Capabilities Port) and EPP (Enhanced Parallel
Port) parallel port, general purpose input/output pins, and Plug-and-Play
functionality within an integrated chip. The feature sets of each PC I/O
product family are dictated according to the PC designer's system requirements
- - varying based on target application as well as the decisions made in the
selection of the remaining system components in the PC design. A major
advantage of designing-in these products is that one circuit board design can
accommodate any one of the devices within any specific product group.
This allows customers to easily upgrade to higher-performance products as
their end market changes, retaining investments in board design,
firmware development, and overall testing and reliability procedures. Devices
in this category are designed specifically for use in targeted application
areas such as commercial PCs, consumer PCs, as well as merchant market
motherboards.
The Company also offers two families of PC I/O devices (37N95x and 37N769)
targeting the PC notebook design environment. The 95x product family
incorporates an integrated 8051 microcontroller enabling support for both
internal keyboard scanning and control as well as very sophisticated Power
Management features - especially important in the mobile application
environment. The 769 family provides notebook PC I/O services for designs
where an external keyboard controller has already been selected, and where the
designer's interests in PC I/O are more generally focused on the support for
the floppy disk, parallel port, serial port, and general purpose input/output
pins. Both device families offer support for the Infrared Data Association
(IrDA) 1.0 and 1.1 protocol, enabling wireless communications support at speeds
of between 115 Kbps and 4 Mbps using this standard technique. The Company's
incremental enhancements include support for entertainment-style infrared
communications, such as that used for remote control applications for TVs,
VCRs, and home audio systems.
The Company has specifically designed its PC I/O devices to meet the systems
requirements driven by interface and feature requirements defined by the
suppliers of PC core logic chipsets. These devices also meet all system
requirements necessary to achieve defined design objectives for Microsoft PC
logo qualification. A highlight in all of these specifications for 1997 and
1998 is the support for the Advanced Configuration and Power Initiative (ACPI),
a technology of which SMSC has been a leader in supporting - even before these
requirements were mandated for PC design and qualification.
A unique feature of all of the Company's Super I/O and Ultra I/O devices is the
ChiProtect (TM) circuitry, which protects the parallel port from accidental
damage when external voltages are placed upon interface pins of the chip with
the rest of the system powered off.
<PAGE>
PC CONNECTIVITY products rely on new communications standards utilizing
Universal Serial Bus (USB) and IEEE1394 to enable enhanced communications
features for both the PC OEM and PC peripheral device customers serviced by the
Company worldwide. The USB97C100 expands the functionality of USB through the
use of patented technology originally developed and delivered in the Company's
10BASE-T LAN products. This technology enables the OEM community to exploit
the full bandwidth of USB, enabling its use in applications previously limited
to motherboard devices such as floppy disk interfaces, parallel port support,
and similar legacy input/output functions.
The Company is also in the process of defining similar connectivity products
(expected to be announced later in calendar year 1998) utilizing the
performance capabilities of IEEE1394. Originally developed by Apple Computer
under the name "Firewire", the IEEE1394 standard has become the established
mechanism for high speed communications of isochronous data such as audio and
video in entertainment applications. The use of this technology in the PC
environment enhances the trend towards the convergence of the PC and the
entertainment media such as TVs, VCRs, and camcorders. This technology is
also an excellent vehicle for use with high speed mass storage devices as a
future upgrade from parallel interfaces such as IDE and SCSI.
PC LAN products 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.
The Company's PC LAN product line includes the LAN9000, Feast, and EPIC
families of Ethernet and Fast Ethernet ICs, covering applications for desktop
and notebook PCs.
PC SYSTEMS LOGIC. As the PC market continues to expand, there is a greater
demand to merge the separate PC systems logic, PC I/O, and graphics controller
products into a single solution to offer motherboard designers new levels of
integration, space saving, and layout simplification. The Company is
developing a device class it calls "Megachip", combining advanced PC I/O
functions with parts of the PC systems logic.
The Company has defined development programs focusing on both the
central core logic services as well as advanced graphics requirements.
Initially, the Company's core logic development is targeted towards the Pentium
Socket 7 architecture, integrating functional services such as CPU, memory,
cache memory, and PCI bus control as well as I/O functions such as advanced
IDE, USB host controller, ISA bus, ACPI, SMBus, and I2C. Advanced
development programs will focus on Advanced Graphics Port, new memory
systems demands, and Pentium II requirements.
The Company has not previously offered PC Systems Logic products, and there can
be no assurance that the Company's products will compete successfully in the
PC Systems Logic marketplace.
EMBEDDED NETWORKING devices are used in machine to machine communications.
They are found in passenger elevator systems, locomotives, ATM machines, HVAC
control systems, factory automation, point-of-sale systems and a wide variety
of applications where reliability of communications between machines is of
paramount importance.
ARCNET protocol devices are used in, and have many characteristics that make
it ideal for, industrial and embedded networking environments. This is due to
the deterministic nature of ARCNET, its high reliability and fault tolerance,
and its adaptability to a wide variety of cabling media and configurations.
SMSC introduced its first ARCNET LAN protocol device, the COM9026, in 1981 and
has been a market leader in ARCNET devices ever since.
<PAGE>
INK JET PRINT HEADS, THIN FILM RC NETWORKS AND MICROELECTROMECHANICAL SYSTEMS
(MEMS) DEVICES. The Company's wafer foundry provides ink jet print head
manufacturers with reliable active and passive print head wafers. High-density
print head designs are processed on equipment dedicated to producing print head
wafers. The foundry also manufactures thin-film RC (resistor-capacitor)
networks using advanced thin film technology, as well as MEMS. Applications for
MEMS are widely diverse. Included among MEMS applications are pressure
sensors, accelerometers, microrelays, fluid valves, optical mirrors, and
gyroscopes. These devices are used in products such as cars, computers,
printers, medical equipment, displays, factories and consumer products.
Industry
The Company competes in the semiconductor industry, which has historically been
characterized by intense competition, rapid technological change, cyclical
market patterns, price erosion, and periods of mismatched supply and demand.
The semiconductor industry has experienced significant economic downturns at
various times in the past, characterized by diminished product demand and
accelerated erosion of selling prices. In addition, many of the Company's
competitors in the semiconductor industry are larger and have significantly
greater financial and other resources than the Company.
Historically, average selling prices in the semiconductor industry generally,
and for the Company's products in particular, have declined significantly over
the life of each product. While the Company expects to reduce the average
selling prices of its products over time as it achieves manufacturing cost
reductions, competitive pressures may require the reduction of selling prices
more quickly than such cost reductions can be achieved. In addition, the
Company sometimes approves price reductions on specific sales opportunities to
meet competition. If not offset by reductions in manufacturing costs or by a
shift in the mix of products sold toward higher-margined products, declines in
the average selling prices can reduce gross margins.
Sales of most of the Company's products depend largely on sales of personal
computers. Changes 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 often experiences a greater magnitude of
demand fluctuation than its customers themselves experience. Also, some of the
Company's products are used in PCs for the consumer market, which, in recent
years, has tended to be a more volatile market than other segments of the PC
marketplace.
The principal methods SMSC uses to compete include new products, added
features, price, performance, 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.
Research and Development
During the fiscal year which ended February 28, 1998, SMSC spent $14.4 million
on research and development ("R&D") activities. This compares with $11.6
million expended during fiscal 1997 and $8.5 million expended during fiscal
1996. The increases in both periods reflect increased engineering staff as
well as increases in other development costs. During this three year period,
the Company expanded its R&D resources 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 Westborough, Massachusetts,
and the expansion of its Austin, Texas design center. In fiscal 1999, the
Company expects to continue to allocate increasing resources to R&D in an
effort to accelerate new product development programs. The Company's fiscal
1999 engineering efforts will focus on continuing enhancements and cost
reductions to its flagship I/O product line and also on continued expansion
into new personal computer, and other, technologies.
<PAGE>
The Company has in the past considered and will in the future continue to
consider the acquisition of other companies or the products and technologies
of other companies. Such acquisitions carry additional risks such as a lack of
integration with existing products and corporate culture, the potential for
large write-offs and the diversion of management attention. There can be no
assurance that the Company will be able to respond effectively to new
competitive product offering and technological shifts in the future.
Manufacturing
While many of the Company's competitors operate their own semiconductor
manufacturing plants, the vast majority of the Company's products are
manufactured, assembled and tested by independent foundries and subcontract
manufacturers. The Company's reliance upon foundries and subcontractors
involves certain risks, including potential lack of manufacturing availability,
reduced control over delivery schedules, the availability of advanced
process technologies, changes in manufacturing yields, and potential cost
fluctuations. The semiconductor industry has at times experienced shortages of
manufacturing capacity which has adversely affected the Company's ability to
meet the demand for its products.
SMSC utilizes semiconductor foundries and assembly contractors in the US,
Southeast Asia and Western Europe to provide state-of-the-art integrated
circuit manufacturing and assembly capacity. During fiscal 1998, 91.1% of
the revenues resulted from the sale of product manufactured by subcontractor
foundries, compared to 90.1% in fiscal 1997, and 86.3% in fiscal 1996.
The Company generally must order inventory to be built by its foundries and
subcontract manufacturers well in advance of product shipments. Production is
often based upon either internal or customer-supplied forecasts of demand,
which can be highly unpredictable and subject to substantial fluctuations.
Because of the volatility in the Company's markets, there is risk that the
Company may forecast incorrectly and produce excess or insufficient
inventories. This inventory risk is increasing, as customers continue to
place orders with increasingly shorter lead times.
Intellectual Property
The Company believes that intellectual property is a valuable asset that has
been and will continue to be important to the Company's success. The Company
has received numerous United States patents relating to its technologies and
additional patent applications are pending. It is the Company's policy to
protect these assets through reasonable measures. To protect these assets, the
Company relies upon nondisclosure agreements, contractual provisions, and
patent and copyright laws. However, no assurance can be given that the steps
taken by the Company will adequately protect its proprietary rights.
The Company has patent cross-licensing agreements with more than thirty
companies, including such semiconductor manufacturers as Texas Instruments,
Intel, IBM, Hitachi and AT&T. Almost all of these cross-licensing agreements
give SMSC the right to use, royalty-free, the patented intellectual property
of the other companies. In situations where SMSC needs to acquire strategic
intellectual property not covered by cross-licenses, the Company enters into
purchase agreements with the companies that own the required intellectual
property.
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.
Sales and Distribution
The Company sells the largest portion of its products to original equipment
manufacturers (OEMs), of which producers of personal computers are the largest
customer group. In addition, products are also sold to distributors of
electronic components. 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, again 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. Returns of product pursuant to
termination of these agreements have not been material.
Backlog
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, and at times, several months. In light of
industry practice and experience, the Company believes that backlog is not a
particularly meaningful indicator of future sales.
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.
<PAGE>
Employees
As of February 28, 1998, of the Company's 481 employees, 93 were engaged in
engineering, including research and development, 79 in marketing and sales, 109
in executive and administrative activities and 200 in manufacturing and
manufacturing support.
Many employees are highly skilled and SMSC'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.
Financial Information About Foreign And Domestic Operations And Export Sales
Export Sales
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended
February 28 or 29, 1998 1997 1996
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United States $ 45,357 $ 70,792 $ 45,518
Export
Asia and Pacific Rim 96,496 111,599 96,089
Europe 9,710 10,320 9,937
Canada 2,072 549 2,467
Other 2,112 3,283 1,376
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$155,747 $196,543 $155,387
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Major Customers
During fiscal 1998, no single customer accounted for more than 10% of the
Company's revenues.
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SMSC and Standard Microsystems are registered trademarks of Standard
Microsystems Corporation. Product names and company names are the trademarks
of their respective holders.
<PAGE>
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.
In addition, the Company maintains offices in leased facilities in San Jose,
California; Westborough, Massachusetts; Austin and Houston, Texas; Munich,
Germany; Tokyo, Japan and Taipei, Taiwan.
As of February 28, 1998, the Company owned machinery and equipment, property
and leasehold improvements with an original cost of $131.8 million and
accumulated depreciation and amortization of $84.4 million.
Item 3. Legal Proceedings.
The Company is subject to various lawsuits and claims in the ordinary course
of business. While the outcome of these matters can not be determined,
management believes that the ultimate resolution of these matters will not
have a material effect on the Company's operations or financial position.
As of February 28, 1998 there were no material pending legal proceedings
against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
The following were the executive officers of Standard Microsystems Corporation
as of April 30, 1998, their ages as of April 30, 1998, their current titles
and positions held during the last five years:
Paul Richman (age 55) has served as Chairman and Chief Executive Officer of the
Company since 1995, and from 1993 to 1995, as Chairman of the Board. Mr.
Richman has been an officer of the Company since 1971.
Arthur Sidorsky (age 64) has served as President and Chief Operating Officer
since 1997, and as Executive Vice President - Component Products Division
from 1993 to 1997. Mr. Sidorsky has been an officer of the Company since 1980.
George W. Houseweart (Age 56) has served as Senior Vice President - Law
and Intellectual Property since 1997 and as Vice President - Law and
Intellectual Property since 1993. Mr. Houseweart has been an officer of the
Company since 1988.
Eric M. Nowling (age 41) has served as Vice President - Finance and Chief
Financial Officer since September 1997; as Vice President and Controller (and
acting Chief Financial Officer) from February 1997 to September 1997; as
Vice President and Controller from 1995 to 1997; and as Controller from 1993 to
1995. Mr. Nowling has been an officer of the Company since 1995.
All officers serve at the pleasure of the Company's Board of Directors.
<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 Company's 1998 Annual Report to Shareholders (the "1998 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 1998 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 1998 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 1998 Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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 1998
Annual Report are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information appearing in the Company's Proxy Statement related to the 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement") under the caption
"Election of Directors" is incorporated herein by this reference, and reference
is made to the information under the heading "Executive Officers of the
Registrant" in Part I hereof.
Item 11. Executive Compensation.
The information appearing in the 1998 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 1998 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 1998 Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein
by this reference.
<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 1998 Annual
Report pursuant to Part II, Item 8:
Consolidated Statements of Income for the three years ended February 28, 1998
Consolidated Balance Sheets as of February 28, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the three years
ended February 28, 1998
Consolidated Statements of Cash Flows for the three years
ended February 28, 1998
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
Exhibits, which are listed on the Exhibit Index, are filed as part of this
report and such Exhibit Index is incorporated by reference. Exhibits 10.1
through 10.16 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) Reports on Form 8-K
No report on Form 8-K was filed during the last quarter of the period covered
by this report.
<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 - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 26, 1998
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
/s/ PAUL RICHMAN May 26, 1998
----------------
Paul Richman, Chairman,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ EVELYN BEREZIN May 26, 1998
------------------
Evelyn Berezin
Director
/s/ JAMES R. BERRETT May 26, 1998
--------------------
James R. Berrett
Director
/s/ ROBERT M. BRILL May 26, 1998
--------------------
Robert M. Brill
Director
/s/ PETER F. DICKS May 26, 1998
------------------
Peter F. Dicks
Director
/s/ KATHLEEN B. EARLEY May 26, 1998
----------------------
Kathleen B. Earley
Director
/s/ IVAN T. FRISCH May 26, 1998
------------------
Ivan T. Frisch
Director
<PAGE>
EXHIBIT INDEX
Incorporated By Reference To: Exhibit No. Exhibit
Exhibit 3 (a) [3] 3.1 Restated Certificate of
Incorporation.
Exhibit 3 (b) [12] 3.2 By-Laws, as amended.
Exhibit 1 [13] 4.1 Rights Agreement dated January
7,1998, with ChaseMellon
Shareholder Services L.L.C., as
Rights Agent.
Exhibit 10.1[6] 10.1 Employment Agreement with Paul
Richman, dated March 1, 1995.
Exhibit 10.2 [8] 10.2 Amendment to Employment
Agreement with Paul Richman
dated July 10, 1995.
* 10.3 Amendment Number Two to
Employment Agreement with Paul
Richman dated January 19,1998.
Exhibit 10.3 [12] 10.4 Employment Agreement with Arthur
Sidorsky, dated March 1, 1996.
Registrant's Proxy Statement dated 10.5 1989 Stock Option Plan.
June 6, 1989, Exhibit A
Registrant's Proxy Statement dated 10.6 1991 Restricted Stock Bonus
July 17, 1991, Exhibit A Plan.
Registrant's Proxy Statement dated 10.7 Director Stock Option Plan.
May 29, 1990, Exhibit A
Registrant's Proxy Statement dated 10.8 1994 Director Stock Option Plan.
May 31, 1995, Exhibit A
Exhibit 10 (m) [4] 10.9 Resolutions adopted February 18,
1992, amending Director Stock
Option Plan, 1991 Restricted
Stock Bonus Plan and 1989
Stock Option Plan.
Exhibit 10.14 [6] 10.10 Retirement Plan for Directors.
Registrant's Proxy Statement dated 10.11 1993 Stock Option Plan for
May 25, 1993, Exhibit A Officers and Key Employees.
Exhibit 10(x) [5] 10.12 Executive Retirement Plan.
Registrant's Proxy Statement dated 10.13 1994 Stock Option Plan for
May 26, 1994, Exhibit A Officers and Key Employees.
Exhibit 10.18 [6] 10.14 Resolutions adopted October 31,
1994, amending the Retirement
Plan for Directors and the
Executive Retirement Plan.
Exhibit 10.19 [6] 10.15 Resolutions adopted January 3,
1995, amending the 1994, 1993
and 1989 Stock Option Plans and
the 1991 Restricted Stock Plan.
[14] 10.16 1996 Restricted Stock Bonus
Plan.
Exhibit 10.2 [1] 10.17 Patent and Trade Secrets
Agreement dated March 12, 1983,
with Paul Richman.
Exhibit 2 [7] 10.18 Asset Purchase Agreement dated
January 9, 1996, among Cabletron
Systems, Inc., and SMC Enterprise
Networks, Inc.
Exhibit 10.30 [8] 10.19 Agreement for Purchase and Sale
of Assets among SMSC, EFAR
Microsystems, Inc., and the Key
Officers identified therein dated
February 26, 1996.
Registrant's Proxy Statement dated 10.20 1996 Stock Option Plan for
July 22, 1996, Exhibit A Officers and Key Employees.
Item 7, Exhibit 1 [9] 10.21 Common Stock and Warrant Purchase
Agreement, among SMSC and
Intel Corporation, dated
March 18, 1997.
Item 7, Exhibit 2 [9] 10.22 Warrant to Purchase Shares of
Common Stock of Standard
Microsystems Corporation, among
SMSC and Intel Corporation, dated
March 18, 1997.
Item 7, Exhibit 3 [9] 10.23 Investor Rights Agreement, among
SMSC and Intel Corporation, dated
March 18, 1997.
Exhibit 10.1 [10] 10.24 Amended and Restated Credit
Agreement, dated as of May 23,
1997; Subsidiaries Security
Agreement, dated as of May 23,
1997; Amended and Restated
Guarantee, dated as of May 23,
1997; and Borrower Security
Agreement, dated as of
May 23, 1997.
Exhibit 10.1 [11] 10.25 Stock Purchase Agreement, dated
September 30, 1997, among Accton
Technology Corporation, Global
Business Investments (B.V.I.)
Corp., Standard Microsystems
Corporation, the Seller
Subsidiaries, and AJJA Inc.
Exhibit 10.2 [11] 10.26 Stockholders Agreement, dated
October 7, 1997, among Standard
Microsystems Corporation, Accton
Technology Corporation, Global
Business Investments (B.V.I.)
Corp., and AJJA Inc.
Exhibit 10.3 [11] 10.27 Transition Services Agreement,
dated October 7, 1997, between
AJJA Inc. and Standard
Microsystems Corporation.
Exhibit 10.4 [11] 10.28 Intellectual Property License
Agreement, dated October 7, 1997,
between Standard Microsystems
Corporation and AJJA Inc.
* 13 Portions of Annual Report to
Stockholders for year ended
February 28, 1998, incorporated
by reference.
* 21 Subsidiaries of the Registrant
* 23 Consent of Arthur Andersen LLP
* 27 Financial Data Schedule
* Filed herewith.
[1] Registrant's Quarterly Report on Form 10-Q for the quarter ended
August 31, 1983.
[2] Registrant's Annual Report on Form 10-K for fiscal year ended
February 29, 1988.
[3] Registrant's Annual Report on Form 10-K for fiscal year ended
February 28, 1991
[4] Registrant's Annual Report on Form 10-K for fiscal year ended
February 29, 1992.
[5] Registrant's Annual Report on Form 10-K for fiscal year ended
February 28, 1994.
[6] Registrant's Annual Report on Form 10-K for fiscal year ended
February 28, 1995.
[7] Registrant's Current Report on Form 8-K dated January 26, 1996.
[8] Registrant's Annual Report on Form 10-K for fiscal year ended
February 29, 1996.
[9] Schedule 13D filed by Intel Corporation, dated March 27, 1997.
[10] Registrant's Quarterly Report on Form 10-Q for quarter ended May 31, 1997.
[11] Registrant's Current Report on Form 8-K dated October 7, 1997.
[12] Registrant's Annual Report on Form 10-K for fiscal year ended
February 28, 1997.
[13] Registrant's Registration on Form 8-A dated January 15, 1998.
[14] Registrant's Board of Directors resolution dated November 26, 1996,
authorizing the Registrant to grant awards of up to 350,000 shares of
common stock to employees, similar to those awards provided by the 1991
Restricted Stock Bonus Plan.
<PAGE>
Exhibit 10.3
Amendment Number Two to Employment Agreement Dated March 1, 1995
Between Standard Microsystems Corporation and Paul Richman
The agreement made as of the first day of March, 1995 between the
undersigned, Standard Microsystems Corporation and Paul Richman (the
"AGREEMENT") is hereby amended as follows, effective January 19, 1998:
1. In a number of instances in the AGREEMENT, reference is made to
consultation services that may be provided by Mr. Richman to
SMSC in the future, which consultation services may be provided by Mr.
Richman "...on terms acceptable to SMSC." Effective immediately, as
used in the context of the AGREEMENT, the words "...on terms acceptable
to SMSC..." shall mean the following:
HOURLY RATE: During the calendar year 1998, $300.00 per hour,
during the calendar year 1999, $325.00 per hour,
during the calendar year 2000, $350.00 per hour and
thereafter, until February 28, 2005, $375.00 per hour.
MINIMUM NUMBER OF HOURS OF CONSULTATION TO BE PROVIDED BY MR. RICHMAN PER MONTH
During the calendar year 1998, 64 hours,
during the calendar year 1999, 48 hours,
during the calendar year 2000, 32 hours and
thereafter, until February 28, 2005, 16 hours.
MAXIMUM NUMBER OF HOURS OF CONSULTATION TO BE PROVIDED BY MR. RICHMAN PER MONTH
The maximum number of hours per week shall not exceed 40.
2. The AGREEMENT is amended only to the extent specified above. It is not
intended to extend or renew any other provision of the AGREEMENT that
would not continue if the Amendment had not been effected.
IN WITNESS HEREOF, SMSC has caused the Amendment to the AGREEMENT to be
executed on its behalf by its representative(s), thereunto duly authorized, and
Paul Richman has executed the Amendment to the Agreement as of
January 19, 1998.
/s/ PAUL RICHMAN
- ----------------
Paul Richman
STANDARD MICROSYSTEMS CORPORATION
/s/ JAMES R. BERRETT
- --------------------
James R. Berrett
Director
/s/ IVAN T. FRISCH
- ------------------
Ivan T. Frisch
Director
WITNESS
/s/ HERMAN FIALKOV
- ------------------
Herman Fialkov
<PAGE>
Exhibit 13
PAGE 11:
FINANCIAL REVIEW
Selected Financial Data 12
Management's Discussion and Analysis 13
Consolidated Balance Sheets 20
Consolidated Statements of Income 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Report on Management's Responsibilities 37
Report of Independent Public Accountants 37
<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) 1998 1997 1996 1995 1994
Operating Results
Revenues $ 155,747 $ 196,543 $ 155,387 $ 122,250 $ 59,277
Operating income (loss) (5,826) (7,012) 14,215 16,158 (6,784)
=========================================================================================================================
Net income (loss) from continuing operations $ (4,527) $ (4,483) $ 8,404 $ 10,188 $ (5,048)
Net income (loss) from discontinued operation (15,424) (16,814) 3,197 14,979 24,959
Gain on sale of discontinued operation 1,030 -- -- -- --
Extraordinary item -- -- -- (944) --
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (18,921) $ (21,297) $ 11,601 $ 24,223 $ 19,911
========================================================================================================================
Basic net income (loss) per share
Continuing operations $ (0.29) $ (0.32) $ 0.63 $ 0.78 $ (0.40)
Discontinued operation (0.93) (1.22) 0.24 1.15 1.96
Extraordinary item -- -- -- (0.07) --
- ------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ (1.22) $ (1.54) $ 0.87 $ 1.86 $ 1.56
========================================================================================================================
Diluted net income (loss) per share
Continuing operations $ (0.29) $ (0.32) $ 0.62 $ 0.77 $ (0.40)
Discontinued operation (0.93) (1.22) 0.24 1.12 1.96
Extraordinary item -- -- -- (0.07) --
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ (1.22) $ (1.54) $ 0.86 $ 1.82 $ 1.56
========================================================================================================================
Weighted average common shares outstanding
Basic net income (loss) per share 15,519 13,838 13,372 13,032 12,739
Diluted net income (loss) per share 15,519 13,838 13,515 13,305 12,739
========================================================================================================================
Balance Sheet Data
Cash and short-term investments $ 55,758 $ 8,382 $ 18,459 $ 29,478 $ 32,115
Working capital 88,959 47,916 38,120 50,736 43,821
Total assets 210,790 219,268 244,825 200,855 177,807
Long-term obligations
(excluding current obligations) 7,297 11,584 4,593 915 9,637
Shareholders' equity 172,377 171,797 193,502 173,983 143,812
</TABLE>
<PAGE>
PAGES 13 through 19:
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Standard Microsystems Corporation (the Company) is a worldwide supplier of
MOS/VLSI integrated circuits (ICs) for the personal computer industry and is
also a foundry supplier of MicroElectroMechanical Systems (MEMS) devices. The
Company is most prominent as one of the world's leading suppliers of
input/output (I/O) circuits for personal computers. I/O circuits perform many
of the basic input/output functions required in every personal computer,
including floppy disk control, keyboard control and BIOS, parallel port control
and serial port control. The Company also supplies ICs for local area network
applications, connectivity applications and embedded control systems. While
most of the Company's IC products are manufactured by world-class semiconductor
foundries and assemblers, the Company's MEMS devices are produced in the
Company's own wafer foundry, which specializes in MEMS manufacturing.
Standard Microsystems Corporation sells its ICs worldwide and counts most of
the world's leading personal computer and personal computer motherboard
manufacturers as customers for its I/O circuits. The Company's I/O circuits
reside on the motherboards of personal computer products made by Compaq
Computer Corporation, Dell Computer Corporation, IBM, Intel Corporation,
Hewlett-Packard Company and most other leading personal computer manufacturers.
The Company is based in Hauppauge, New York and maintains offices in the United
States, Europe and Asia. The Company conducts its business in the Japanese
market through its majority owned subsidiary, Toyo Microsystems Corporation.
Discontinued Operation
Over the past several fiscal years, the Company's System Products Division,
which designed, produced and marketed products used in the local area
networking of personal computers, had experienced reduced revenues and
significant operating losses. During the third quarter of fiscal 1998, the
Company reorganized the System Products Division into a new corporation called
SMC Networks, Inc. Concurrent with this reorganization, the Company sold an
80.1% interest in the new corporation to Accton Technology Corporation (Accton)
of Hsinchu, Taiwan, for $40.2 million in cash, resulting in a pre-tax gain of
$1.6 million. The Company retained a 19.9% ownership interest in SMC Networks,
Inc., and carries this investment at cost on its consolidated balance sheet.
The Company is continuing to provide certain administrative support for SMC
Networks, Inc., including finance and information services, at fair value,
until such time as either party elects to terminate such services, with notice
as defined in the related agreement.
The foundation of the Company's business since its establishment in 1971 has
been semiconductor integrated circuit technology. The decision to exit the
local area networking hardware business in fiscal 1998 has again positioned the
Company exclusively as a supplier of semiconductor and semiconductor-related
products.
The Company's historical financial information has been restated to report the
System Products Division's operating results, net assets and cash flow as a
discontinued operation for all periods presented. The following discussion and
analysis focuses on the continuing operation, as restated, unless otherwise
noted.
Revenues
All of the Company's consolidated revenues are recorded by Standard
Microsystems Corporation in the United States, with the exception of revenues
from customers in Japan, which are recorded by Toyo Microsystems Corporation.
The following table presents the Company's revenues from continuing operations
for the three years ended February 28, 1998 (in millions):
Fiscal year ended February 28 or 29, 1998 1997 1996
- ----------------------------------------------------------------------
Standard Microsystems Corporation
Integrated circuit revenues $ 127.1 $ 164.3 $ 123.0
Foundry revenues 9.8 14.7 15.6
- ----------------------------------------------------------------------
136.9 179.0 138.6
- ----------------------------------------------------------------------
Toyo Microsystems Corporation
Integrated circuit revenues 14.7 12.8 11.1
Other revenues 4.1 4.7 5.7
- ----------------------------------------------------------------------
18.8 17.5 16.8
- ----------------------------------------------------------------------
Total revenues $ 155.7 $ 196.5 $ 155.4
======================================================================
Combined integrated circuit revenues $ 141.8 $ 177.1 $ 134.1
======================================================================
Despite a 1% increase in the number of integrated circuits shipped in fiscal
1998 compared to fiscal 1997, a significant decline in average selling prices
resulted in a 20% decline in consolidated integrated circuit revenues in fiscal
1998. During the second half of fiscal 1997, average selling prices for many of
the Company's I/O circuits experienced unusually large declines, primarily
because of significant market price reductions implemented by several of the
Company's competitors. Excess semiconductor manufacturing capacity in the
Pacific Rim during this period resulted in several competitors' producing I/O
circuits which the Company believed 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. Despite the resolution of
the licensing issues with certain competitors in early fiscal 1998 (which
included certain competitive devices being withdrawn from the market), average
selling prices, while stabilized, generally did not recover to previous levels.
Approximately 90% of integrated circuit revenues in each of the three years
ended February 28, 1998, were provided by shipments of I/O circuits.
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
I/O circuits which, by then, were being broadly used by most of the world's
leading personal computer manufacturers. Fiscal 1996 shipments had been
restrained by a then industry-wide lack of sufficient wafer fabrication
capacity.
The decline in foundry revenues in fiscal 1998 compared to fiscal 1997, and in
fiscal 1997 compared to fiscal 1996, resulted from a decline in orders from
the foundry's largest customer. However, during fiscal 1998, the Company has
pursued new foundry opportunities and is currently in a variety of development
projects with new MEMS customers. The Company expects fiscal 1999 foundry
revenues to exceed fiscal 1998 foundry revenues.
International shipments accounted for 71% of the Company's revenues in fiscal
1998, compared to 64% in fiscal 1997 and 71% in fiscal 1996. While the demand
for the Company's products is primarily driven by the worldwide demand for
personal computers, Asia and the Pacific Rim was by far the most significant
international market for the Company's products during each of these periods,
primarily reflecting the high concentration of the world's personal computer
and personal computer motherboard manufacturing activity in this region. At
this time, the Company has not determined the impact on its business, if any,
caused by the recent turmoil in the Asian financial markets.
Gross Profit
The Company's gross profit margin increased from 23.1% in fiscal 1997 to 26.9%
in fiscal 1998. Fiscal 1997 gross profit was adversely impacted by sharply
reduced selling prices on I/O devices, particularly during the second half of
the fiscal year, which were only partially offset by reductions in
manufacturing costs. In addition, unexpected reductions in order input and the
accelerated selling price reductions during that period resulted in excessive
inventory and market price reductions of certain parts below cost. As a result,
a $4.9 million charge to cost of goods sold was recorded during the fourth
quarter of fiscal 1997 to reduce the carrying value of certain inventory to
net realizable value. Additionally, the lower fiscal 1997 foundry revenues
resulted in an increase in underutilized wafer foundry manufacturing overhead,
further restraining the fiscal 1997 gross profit margin. The gross profit
margin improvement in fiscal 1998 reflects stabilized market conditions (as
compared to the second half of fiscal 1997) which moderated the rate of decline
in average selling prices, sales of new, higher-margined products, and
manufacturing cost reductions.
The gross profit margin of 41.6% in fiscal 1996 reflected significantly higher
average selling prices for I/O devices. During this period, an industry-wide
shortage in wafer manufacturing capacity, combined with accelerating demand for
personal computers, supported higher average selling prices for I/O circuits
compared to both fiscal 1997 and fiscal 1998. Higher foundry revenues in
fiscal 1996 also allowed for more efficient utilization of wafer foundry
manufacturing overhead.
Research and Development Expenses
Research and development (R&D) expenses increased to $14.4 million in fiscal
1998, a 24% increase over $11.6 million of R&D expenses in fiscal 1997, after a
37% increase in fiscal 1997 from $8.5 million of R&D expenses in fiscal 1996.
The increases in both periods reflect increased engineering staff as well as
increases in other development costs. During this three year period, the
Company expanded its R&D resources 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 Westborough, Massachusetts,
and the expansion of its Austin, Texas design center. In fiscal 1999, the
Company expects to continue to allocate increasing resources to R&D in an
effort to accelerate new product development programs. The Company's fiscal
1999 engineering efforts will focus on continuing enhancements and cost
reductions to its flagship I/O product line and also on continued expansion
into new personal computer, and other, technologies.
Selling, General and Administrative Expenses
Fiscal 1998 selling, general and administrative expenses of $33.3 million
declined 18% from $40.7 million in fiscal 1997. This decline reflects lower
direct selling expenses, including sales commissions, associated with the lower
fiscal 1998 revenues, as well as lower general and administrative expenses. In
addition, the Company's decision to exit the local area networking business,
culminating in the October 1997 discontinuance of the System Products Division,
resulted in a reduction in administrative overhead, accomplished primarily
through staff attrition and reductions in professional services and other
general administrative expenses.
Selling, general and administrative expenses of $40.7 million in fiscal 1997
were 12% higher than comparable fiscal 1996 expenses of $36.5 million. This
increase was driven primarily by higher revenues in fiscal 1997 compared to
fiscal 1996, and the resulting increase in direct selling expenses, as well as
costs associated with an 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 fiscal 1996.
Purchased In-Process Technology
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 Expenses
The increase in interest income in fiscal 1998 compared to fiscal 1997 resulted
from higher average cash balances available for investment during the period.
The Company's cash position improved significantly in fiscal 1998, as discussed
elsewhere herein.
Interest expense in all three fiscal years presented resulted principally from
borrowings under the Company's revolving line of credit. The Company's improved
cash position in fiscal 1998 permitted reduced borrowings during the period,
compared to borrowings in both fiscal 1997 and fiscal 1996, thus reducing
interest expense incurred in fiscal 1998.
During the second quarter of fiscal 1998, a $2.0 million net charge was
recorded for the settlement of a class action litigation initiated against the
Company and certain of its officers and directors in 1995. Please refer to
Note 9 included within the Notes to Consolidated Financial Statements for
additional details.
Income Taxes
The Company's effective income tax benefit rates were 35.1% and 35.5% in fiscal
1998 and fiscal 1997, respectively. Income taxes were incurred at an effective
rate of 36.6% in fiscal 1996. The Company's effective income tax rate includes
the federal and state statutory tax rates, the impact of certain permanent
differences between the book and tax accounting treatment of certain expenses,
and various tax credits. The fiscal 1998 and fiscal 1997 benefit rates include
relatively low benefit rates for state income taxes as several states in which
the Company operates do not allow net operating loss carrybacks.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments increased from
$8.4 million at the end of fiscal 1997 to $55.8 million at the end of fiscal
1998. Three significant transactions occurred during fiscal 1998 which
favorably impacted the Company's liquidity: (1) an equity investment into the
Company by Intel Corporation (Intel), (2) the sale of a majority interest in
the Company's former System Products Division to Accton Technology Corporation,
and (3) the release to the Company from escrow of the remaining proceeds
from its fiscal 1996 sale of a business unit.
In March 1997, Intel acquired 1.5 million newly issued shares of the Company's
common stock for $9.50 per share, or $14.7 million, resulting in an ownership
interest in the Company of slightly below 10%. Intel was also issued a
three-year warrant to purchase an additional 1.5 million shares at prices which
increase annually during the term of the warrant.
The Company's October 1997 sale of an 80.1% interest in its former System
Products Division provided $36.8 million of cash, after related expenses. Of
these proceeds, $2.0 million were placed into an escrow account, with release
scheduled for January 1999. Partially offsetting these proceeds was $10.9
million of net cash consumed by the operation of the System Products Division
in fiscal 1998 prior to its October 1997 sale.
In December 1997, $7.1 million, which had been placed in escrow pursuant to the
Company's January 1996 sale of a business unit to Cabletron Systems, Inc., was
released to the Company. These funds were originally scheduled for release to
the Company in July 1997, but the release was delayed pending the resolution of
legal action initiated against the Company by Cabletron in May 1997. The
parties settled this legal action in December 1997, resulting in $0.5 million
of the escrow account being paid to Cabletron and the remainder being released
to the Company.
Despite incurring a $4.5 million net loss from continuing operations, operating
activities provided $11.8 million of cash during fiscal 1998, driven primarily
by $13.4 million of non-cash depreciation and amortization expense, and a net
decrease of $11.9 million in inventories. The Company's inventory levels were
unacceptably high at the end of fiscal 1997, the result of a significant order
input shortfall experienced during the second half of fiscal 1997. Inventory
turnover improved during fiscal 1998, resulting in the reduction in
inventories. Partially offsetting these factors was a $6.5 million increase in
accounts receivable, resulting from higher revenues in the fourth quarter of
fiscal 1998 than in the fourth quarter of fiscal 1997.
The Company also generated an additional $3.8 million of cash during fiscal
1998 through the issuance of its common stock under various employee benefit
plans.
The Company maintains a combined $25 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. In May 1997, in response to the
Company's fiscal 1997 violations of certain financial condition covenants under
the original agreement, 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 condition covenants
were also agreed upon. For the period through October 1997, the Company
borrowed periodically under this amended credit line. There have been no
borrowings since October 1997. The Company intends to either modify or extend
this existing credit line, or execute a new credit line, prior to the existing
line's July 1998 expiration.
The majority of the $9.1 million of capital expenditures incurred in fiscal
1998 were focused on expansion of the Company's semiconductor test operation.
There were no material commitments for capital expenditures as of February 28,
1998. Fiscal 1999 capital expenditures are expected to exceed fiscal 1998
capital expenditures with further expenditures planned in semiconductor test
equipment and with investments planned in manufacturing equipment at the
Company's wafer foundry and in engineering tools.
The net operating loss generated by the Company in fiscal 1998 (including the
loss generated by the discontinued operation) will be carried back for income
tax purposes to recover an estimated $18 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 1999, or, alternatively, be used to
pay potential tax liabilities generated in fiscal 1999.
The Company expects that its cash, cash equivalents and short-term investments,
cash flows from operations, and its borrowing capacity, will be sufficient to
finance the Company's operating and capital requirements through the end of
fiscal 1999.
Year 2000 Discussion
Many computer programs were designed to perform data computations on the last
two digits of the numerical value of a year. When computations referencing the
year 2000 are performed, these programs may interpret "00" as the year 1900 and
could either corrupt the date-related computations or not process them at all.
As a result, many software and computer systems may need to be upgraded or
replaced in order to comply with such year 2000 requirements.
The Company recently installed certain new year 2000 compliant information
systems, and has moved a substantial portion of its core business applications
to this platform. The Company is currently in the process of installing
additional new information systems and expects all internal information systems
to achieve year 2000 compliance during calendar year 1999. The Company is also
assessing the impact of the year 2000 issue on its products, and has not
currently identified any material issues in that regard. The Company is
committed to expending the resources necessary to address this issue on a
timely basis, but at this time, does not anticipate that it will incur material
expenditures for the resolution of any year 2000 issues relating to either its
own information systems or its products. However, the Company could be
adversely impacted by year 2000 issues faced by significant customers, vendors,
suppliers, and financial service organizations with whom the Company conducts
business. The Company is in the process of determining the impact, if any,
that third parties who are not year 2000 compliant may have on its operations.
Other Factors That May Affect Future Operating 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 Semiconductor Industry - The Company competes in the semiconductor
industry, which has historically been characterized by intense competition,
rapid technological change, cyclical market patterns, price erosion, and
periods of mismatched supply and demand. The semiconductor industry has
experienced significant economic downturns at various times in the past,
characterized by diminished product demand and accelerated erosion of selling
prices. In addition, many of the Company's competitors in the semiconductor
industry are larger and have significantly greater financial and other
resources than the Company.
The Personal Computer Industry - 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 often
experiences a greater magnitude of demand fluctuation than its customers
themselves experience. Also, some of the Company's products are used in PCs
for the consumer market, which, in recent years, has tended to be a more
volatile market than other segments of the PC marketplace.
Product Development and Technological Change - The Company's success is highly
dependent upon the successful development and timely introduction of new
products at competitive prices and performance levels. The success of new
products depends on various factors, including timely completion of product
development programs, market acceptance of the Company's and its customers'
new products, securing sufficient foundry capacity for volume manufacturing of
wafers, achieving acceptable wafer fabrication yields by the Company's
independent foundries and the Company's ability to offer new products at
competitive prices. In order to succeed in having the Company's products
incorporated into new products being designed by its customers, the Company
must anticipate market trends and meet performance, quality and functionality
requirements of such customers and must successfully develop and manufacture
products that adhere to these requirements. In addition, the Company must meet
the timing and price requirements of its customers and must make such products
available in sufficient quantities. In order to help accomplish these goals,
the Company has considered in the past and will continue to consider in the
future the acquisition of other companies or the products and technologies of
other companies. Such acquisitions carry additional risks such as a lack of
integration with existing products and corporate culture, the potential for
large write-offs and the diversion of management attention. There can be no
assurance that the Company will be able to identify market trends or new
product opportunities, develop and market new products, achieve design wins or
respond effectively to new technological changes or product announcements by
others.
Price Erosion - The semiconductor industry is characterized by intense
competition. Historically, average selling prices in the semiconductor
industry generally, and for the Company's products in particular, have declined
significantly over the life of each product. While the Company expects to
reduce the average selling prices of its products over time as it achieves
manufacturing cost reductions, competitive pressures may require the reduction
of selling prices more quickly than such cost reductions can be achieved. In
addition, the Company sometimes approves price reductions on specific sales
opportunities to meet competition. If not offset by reductions in
manufacturing costs or by a shift in the mix of products sold toward
higher-margined products, declines in the average selling prices can reduce
gross margins.
Reliance Upon Subcontract Manufacturing - 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, the availability of advanced process
technologies, changes in manufacturing yields, and potential cost fluctuations.
Forecasts of Product Demand - The Company generally must order inventory to be
built by its foundries and subcontract manufacturers well in advance of product
shipments. Production is often based upon either internal or customer-supplied
forecasts of demand, which can be highly unpredictable and subject to
substantial fluctuations. Because of the volatility in the Company's markets,
there is risk that the Company may forecast incorrectly and produce excess or
insufficient inventories. This inventory risk is increased by the trend for
customers to place orders with increasingly shorter lead times.
Business Concentration in Asia - 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 political environment within Asian communities.
Protection of Intellectual Property - The Company has historically devoted
significant resources to research and development activities and believes that
the intellectual property derived from such research and development is a
valuable asset that has been and will continue to be important to the Company's
success. The Company relies upon nondisclosure agreements, contractual
provisions, and patent and copyright laws to protect its proprietary rights. No
assurance can be given that the steps taken by the Company will adequately
protect its proprietary rights.
Customer Concentration - 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 of the Company's products and the overall financial condition
of the customer.
Dependence on Key Personnel - The success of the Company is dependent in large
part on the continued service of its key management, engineering, marketing,
sales, and support employees. Competition for qualified personnel is intense in
the semiconductor industry, and the loss of current key employees, or the
inability of the Company to attract other qualified personnel, could hinder the
Company's product development and ability to manufacture, market and sell its
products.
Volatility of Stock Price - The market price of the Company's common stock can
fluctuate significantly on the basis of such factors as the Company's or its
competitors' announcements of new products, quarterly fluctuations in the
Company's financial results or in the financial results of other semiconductor
companies, or general conditions in the semiconductor industry or in the
financial markets. In addition, stock markets in general have recently
experienced extreme price and volume volatility. This volatility has had a
significant impact on the stock prices of high technology companies, at times
for reasons unrelated to the performance of the specific companies.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 20
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
As of February 28, 1998 1997
- --------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 45,155 $ 8,382
Short-term investments 10,603 --
Accounts receivable, net of allowance for doubtful
accounts of $1,011 and $881, respectively 22,268 16,371
Inventories 19,471 31,460
Deferred tax benefits 6,226 5,412
Other current assets 4,884 10,781
- --------------------------------------------------------------------------
Total current assets 108,607 72,406
- --------------------------------------------------------------------------
Property, plant and equipment:
Land 3,832 3,832
Buildings and improvements 28,897 28,870
Machinery and equipment 99,087 93,500
- --------------------------------------------------------------------------
131,816 126,202
Less: accumulated depreciation 84,397 74,171
- --------------------------------------------------------------------------
Property, plant and equipment, net 47,419 52,031
- --------------------------------------------------------------------------
Other assets 37,688 29,024
Net assets of discontinued operation 17,076 65,807
- --------------------------------------------------------------------------
$210,790 $219,268
==========================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 10,637 $ 15,042
Accrued expenses and other liabilities 8,458 9,448
Current portion of obligations under capital leases 553 --
- --------------------------------------------------------------------------
Total current liabilities 19,648 24,490
- --------------------------------------------------------------------------
Long-term debt -- 7,000
Obligations under capital leases 2,524 --
Other liabilities 4,773 4,584
Commitments and contingencies
Minority interest in subsidiary 11,468 11,397
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 15,926,000 and 13,876,000
shares, respectively 1,593 1,388
Additional paid-in capital 107,306 87,095
Retained earnings 59,999 78,920
Unrealized gain on investment, net of tax 620 953
Foreign currency translation adjustment 2,859 3,441
- --------------------------------------------------------------------------
Total shareholders' equity 172,377 171,797
- --------------------------------------------------------------------------
$210,790 $219,268
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 21
CONSOLIDATED STATEMENTS OF INCOME
For the years ended February 28 or 29,
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C>
Revenues $ 155,747 $ 196,543 $ 155,387
Cost of goods sold 113,786 151,176 90,783
- --------------------------------------------------------------------------------------------
Gross profit 41,961 45,367 64,604
- --------------------------------------------------------------------------------------------
Operating expenses:
Research and development 14,443 11,635 8,473
Selling, general and administrative 33,344 40,744 36,462
Purchased in-process technology -- -- 5,454
- --------------------------------------------------------------------------------------------
47,787 52,379 50,389
- --------------------------------------------------------------------------------------------
Income (loss) from operations (5,826) (7,012) 14,215
- --------------------------------------------------------------------------------------------
Other income (expense):
Interest income 1,151 523 630
Interest expense (249) (619) (1,072)
Litigation settlement (2,000) -- --
Other income (expense), net 22 174 (308)
- --------------------------------------------------------------------------------------------
(1,076) 78 (750)
- --------------------------------------------------------------------------------------------
Income (loss) before minority interest and provision for
income taxes (6,902) (6,934) 13,465
Minority interest in net income of subsidiary 71 21 202
- --------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (6,973) (6,955) 13,263
Provision for (benefit from) income taxes (2,446) (2,472) 4,859
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations (4,527) (4,483) 8,404
- --------------------------------------------------------------------------------------------
Discontinued operation:
Income (loss) from discontinued operation (net of
income taxes of ($8,270), ($9,254) and $3,342) (15,424) (16,814) 3,197
Gain on sale of discontinued operation
(net of income taxes of $555) 1,030 -- --
- --------------------------------------------------------------------------------------------
Net income (loss) $ (18,921) $ (21,297) $ 11,601
============================================================================================
Basic net income (loss) per share:
Income (loss) from continuing operations $ (0.29) $ (0.32) $ 0.63
Income (loss) from discontinued operation (0.99) (1.22) 0.24
Gain on sale of discontinued operation 0.06 -- --
- --------------------------------------------------------------------------------------------
Basic net income (loss) per share $ (1.22) $ (1.54) $ 0.87
============================================================================================
Diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.29) $ (0.32) $ 0.62
Income (loss) from discontinued operation (0.99) (1.22) 0.24
Gain on sale of discontinued operation 0.06 -- --
- --------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ (1.22) $ (1.54) $ 0.86
============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
As of February 28 or 29, and for the years then ended
<TABLE>
<CAPTION>
Foreign
Additional Unrealized Currency
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, 1995 13,222 $ 1,322 $ 77,319 $ 88,616 $ 718 $ 6,008
Shares issued under incentive savings and retirement 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 grants to employees, net 86 9 923 -- -- --
Change in unrealized gain on investment, net of taxes -- -- -- -- 1,508 --
Change in 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 incentive savings and retirement 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 -- -- --
Change in unrealized gain on investment, net of taxes -- -- -- -- (1,273) --
Change in 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
Shares issued under incentive savings and retirement plan 114 11 1,163 -- -- --
Stock options exercised 386 39 3,444 -- -- --
Tax effect of employee stock plans -- -- 709 -- -- --
Restricted stock grants to employees, net 7 1 426 -- -- --
Investment by Intel Corporation, net 1,543 154 14,469 -- -- --
Change in unrealized gain on investment, net of taxes -- -- -- -- (333) --
Change in foreign currency translation adjustment -- -- -- -- -- (582)
Net loss -- -- -- (18,921) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 15,926 $ 1,593 $107,306 $ 59,999 $ 620 $ 2,859
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 20:
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 28 or 29,
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 149,130 $ 205,441 $ 151,734
Cash paid to suppliers and employees (137,693) (206,053) (124,372)
Interest received 1,216 515 622
Interest paid (261) (634) (1,082)
Income taxes received (paid) 1,359 (286) (9,677)
Cash paid for litigation settlement (2,000) -- --
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 11,751 (1,017) 17,225
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,835) (14,712) (29,772)
Purchases of short-term investments (10,603) -- --
Acquisition of business -- -- (1,440)
Escrow investment (2,047) -- (7,050)
Release of escrow investment 7,110 -- --
Investment in Chartered Semiconductor Pte Ltd. -- -- (19,944)
Investment in Accelerix Incorporated (250) (1,483) --
Other 53 (477) 50
- ------------------------------------------------------------------------------------------------------
Net cash used for investing activities (11,572) (16,672) (58,156)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 18,405 431 1,573
Borrowings under line of credit agreements 33,960 47,731 34,000
Principal payments of long-term debt (40,960) (40,731) (34,000)
Principal payments of capital leases (152) -- --
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,253 7,431 1,573
- ------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents (544) (1,068) (773)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) discontinued operation (10,892) 1,249 29,112
- ------------------------------------------------------------------------------------------------------
Net cash provided by sale of discontinued operation 36,777 -- --
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 36,773 (10,077) (11,019)
Cash and cash equivalents at beginning of year 8,382 18,459 29,478
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 45,155 $ 8,382 $ 18,459
======================================================================================================
Reconciliation of net income (loss) from continuing operations
to net cash provided by (used for) operating activities:
Net income (loss) from continuing operations $ (4,527) $ (4,483) $ 8,404
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used for) operating activities:
Depreciation and amortization 13,413 12,240 5,104
Purchased in-process technology -- -- 5,454
Other adjustments, net 1,328 1,442 1,148
Changes in operating assets and liabilities, net of effects
of acquisition of business:
Accounts receivable (6,534) 8,835 (3,884)
Inventories 11,895 (5,732) (17,461)
Accounts payable and accrued expenses and other liabilities (3,832) (10,643) 24,538
Other changes, net 8 (2,676) (6,078)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities $ 11,751 $ (1,017) $ 17,225
======================================================================================================
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)
======================================================================================================
Noncash investing and financing activities:
During fiscal 1998, the Company financed certain capital expenditures totaling $3,229,000 through capital
lease obligations.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 24-37
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 (SMSC) and 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.
Short-Term Investments
Marketable debt and equity securities are reported at fair value. Unrealized
gains and losses on short-term investments are either included within net
income for those securities classified as trading securities, or included as a
separate component of shareholders' equity for those securities classified as
available-for-sale.
As of February 28, 1998, short-term investments consist primarily of
investments in U.S. Treasury, corporate and municipal obligations with
maturities of between three and twelve months and are classified as
available-for-sale. The cost of these short-term investments approximates
their market value as of February 28, 1998.
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 amounts
presented for long-term debt, obligations under capital leases and other
long-term liabilities also approximate fair value.
Inventories
Inventories are valued at the lower of first-in, first-out cost or market and
consist of the following:
(In thousands)
- ------------------------------------------------------------
As of February 28, 1998 1997
- ------------------------------------------------------------
Inventories:
Raw materials $ 1,269 $ 1,855
Work-in-process 11,879 23,618
Finished goods 6,323 5,987
- ------------------------------------------------------------
$19,471 $31,460
============================================================
During the second half of fiscal 1997, the Company experienced unexpected
reductions in order input and accelerated price competition. These adverse
business conditions resulted in excessive inventory balances and market price
reductions of certain parts below cost. Accordingly, the Company recorded a
charge of $4,900,000 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.
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, 1998 and 1997, an investment in a publicly traded equity
security, classified as available-for-sale, 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.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Sales to
distributors are generally subject to agreements allowing limited rights of
return and price protection with respect to unsold products held by the
distributor. Reserves for estimated returns and allowances are provided at the
time revenue is recognized. Such reserves are recorded based upon historical
rates of returns and allowances, distributor inventory levels and other
factors.
Stock-Based Compensation
The Company grants stock options to employees with exercise prices equal to the
fair value of the shares at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and accordingly, recognizes no compensation expense for
the stock option grants. Additional pro forma disclosures as required under
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" are presented within these Notes to Consolidated
Financial Statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income", which is effective for fiscal
years beginning after December 15, 1997. This statement establishes standards
for reporting and presenting information on comprehensive income and its
components (revenues, expenses, gains, losses and currency translation
adjustments) in the financial statements. Also in June 1997, the FASB issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which is effective beginning in fiscal 1999. This statement
revises standards for public companies to report financial and descriptive
information about reportable operating segments and certain other geographic
information. The Company is evaluating methods for adoption of these
statements, if necessary, and currently does not expect these new
pronouncements to have a material impact on its consolidated financial
statements.
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.
Translation of Foreign Currencies
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 Share
In February 1997, the Financial Accounting Standard Board issued SFAS No. 128
"Earnings per Share." This pronouncement requires the reporting of two net
income per share figures: basic net income per share and diluted net income
per share. Basic net income per share is calculated by dividing net income by
the weighted-average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income by the sum of
the weighted-average common shares outstanding during the period plus the
dilutive effect of shares issuable through stock options and warrants. All
prior period net income per share figures presented herein have been restated
in accordance with the provisions of SFAS No. 128.
Shares used in calculating basic and diluted net income (loss) per share are
reconciled as follows (in thousands):
1998 1997 1996
- ----------------------------------------------------------------------
Average shares outstanding for
basic net income (loss) per share 15,519 13,838 13,372
Dilutive effect of stock options -- -- 143
- ----------------------------------------------------------------------
Average shares outstanding for
diluted net income (loss) per share 15,519 13,838 13,515
- ----------------------------------------------------------------------
The Company reported a net loss in both fiscal 1998 and fiscal 1997, and
accordingly, the effect of stock options and warrants was anti-dilutive for
those periods and was therefore excluded from the calculation of average
common shares outstanding for diluted net income (loss) per share. In fiscal
1996, the effect of some stock options was anti-dilutive and was therefore
excluded from the calculation of average shares outstanding for diluted net
income per share for fiscal 1996.
Reclassifications
Certain items shown have been reclassified to conform with the fiscal 1998
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. DISCONTINUED OPERATION
In October 1997, the Company executed an agreement with Accton Technology
Corporation of Hsinchu, Taiwan (Accton) whereby the Company transferred
substantially all of the assets comprising its Systems Products Division to a
newly formed, wholly-owned subsidiary (originally organized as AJJA Inc., now
known as SMC Networks, Inc.) and then sold 80.1% of the subsidiary's
outstanding common stock to Global Business Investments (B.V.I.) Corp., a newly
formed, wholly-owned subsidiary of Accton. The System Products Division
supplied hardware and software products for the local area network (LAN)
marketplace. In consideration for the sale of stock, the Company received
$40,237,000 in cash, of which $2,012,000 was placed in an escrow account
until January 2, 1999, to secure the Company's indemnity obligations under the
agreement. As a result of this transaction, the Company realized a pre-tax
gain of $1,585,000, after related costs, in the third quarter of fiscal
1998. The Company's remaining minority interest in SMC Networks, Inc. is
carried at cost within other assets on the accompanying consolidated balance
sheet.
The Company is continuing to provide certain administrative support services
for SMC Networks, Inc., including finance and information services, at fair
value, until such time as either party elects to terminate such services,
with notice as required in the agreement.
The net assets, operating results and cash flows of the Systems Products
Division have been reclassified as a discontinued operation in the
accompanying consolidated financial statements for all periods presented.
Summarized financial information for the discontinued operation is as follows
(in millions):
As of February 28 or 29,
and for the years then ended 1998 1997 1996
- -----------------------------------------------------------------------
Revenues $65.5 $157.6 $186.5
- -----------------------------------------------------------------------
Income (loss) before income taxes (23.1) (26.1) 6.5
- -----------------------------------------------------------------------
Net income (loss) (15.4) (16.8) 3.2
- -----------------------------------------------------------------------
Current assets 19.1 57.7 74.3
- -----------------------------------------------------------------------
Total assets 19.1 80.6 99.7
- -----------------------------------------------------------------------
Current liabilities 2.0 14.8 15.8
- -----------------------------------------------------------------------
Net assets 17.1 65.8 83.9
=======================================================================
The net assets of the discontinued operation as of February 28, 1998 consist
primarily of income tax refunds attributable to the loss generated by the
discontinued operation in fiscal 1998.
3. OTHER BUSINESS ACQUISITIONS AND DIVESTITURES
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.
This 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. This business unit was part of the Company's System Products
Division and therefore the gain realized is included within the net income of
the discontinued operation in fiscal 1996.
In October 1996, the Company acquired a minority equity interest in privately
held Accelerix Incorporated of Carp, Ontario, Canada, (Accelerix) for
$1,483,000. The Company invested an additional $250,000 in Accelerix in
November 1997. The Company and Accelerix also entered into an agreement
providing the Company with rights to market, second source and enhance
Accelerix's application specific memory technology. The Company's ownership
interest in Accelerix is less than 20% and accordingly, this investment is
carried at cost within other assets 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, this
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 in fiscal 1996. 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.
4. 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, 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.
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. The unused portion of the
credit line bears an annual fee of 0.25%. Borrowings under this line of credit
during fiscal 1998 and 1997 were at interest rates between 8.5% and 6.0%.
As of February 28, 1998 there are no borrowings outstanding under this line
of credit.
5. SHAREHOLDERS' EQUITY
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. As of February 28, 1998, Intel had not exercised its
warrant. In addition, in June 1997, the Company and Intel entered into a
separate agreement whereby (i) Intel agreed to integrate the Company's current
and future devices into a specific number of Intel's motherboard designs,
and consider integrating such devices into additional motherboard designs,
and (ii) the Company granted Intel 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 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 upon 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.
6. 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, 1998 1997 1996
- --------------------------------------------------------------------------
Current
Federal $ ( 299) $ 32 $ 6,427
Foreign 6 (3) 307
State - (2) 288
- --------------------------------------------------------------------------
(293) 27 7,022
Deferred (2,153) (2,499) (2,163)
- --------------------------------------------------------------------------
$ (2,446) $ (2,472) $ 4,859
==========================================================================
The provision for (benefit from) income taxes 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, 1998 1997 1996
- ----------------------------------------------------------------
Provision for (benefit from)
income taxes computed at
the statutory rate (35.0)% (35.0)% 35.0 %
State taxes (2.1) (1.6) 3.1
Differences between foreign
and U.S. income tax rates 1.0 1.0 (1.0)
Other 1.0 0.1 (0.5)
- ----------------------------------------------------------------
(35.1)% (35.5)% 36.6 %
================================================================
The tax effects of temporary differences that result in deferred tax benefits
are as follows (in thousands):
As of February 28, 1998 1997
- ----------------------------------------------------------------------------
Reserves and accruals not currently
deductible for income tax purposes $ 3,164 $ 1,717
Intangible asset amortization 4,343 2,777
Inventory valuation 1,202 3,899
Installment sale -- (1,881)
Purchased in-process technology 1,949 1,860
Property, plant and equipment depreciation (367) 327
Other (185) (467)
- ----------------------------------------------------------------------------
$ 10,106 $ 8,232
============================================================================
Income (loss) before provision for income taxes includes foreign income of
$412,000, $214,000 and $931,000 for fiscal 1998, 1997 and 1996, respectively.
The net operating loss reported by the Company in fiscal 1997, the majority of
which was generated by the discontinued operation, was carried back against
profits reported in prior periods and resulted in income tax refunds of $8.0
million received during fiscal 1998. Most of these refunds are included within
the Net cash provided by (used for) discontinued operation caption on the
fiscal 1998 consolidated statement of cash flows. Similarly, the tax benefits
of the net operating loss reported by the Company in fiscal 1998, most of which
again was allocable to the discontinued operation, is fully realizable by
carryback against prior periods' taxable income. Most of these fiscal 1998
income tax benefits, which total approximately $18 million, are reported within
Net assets of discontinued operation on the February 28, 1998 consolidated
balance sheet.
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
$862,000 as of February 28, 1998, and will expire in fiscal 1999.
Income tax benefits of $709,000, $42,000 and $377,000 related to the Company's
stock option plans for fiscal 1998, 1997 and 1996, respectively, have been
credited to additional paid-in capital.
The Company has $1,602,000 of New York State tax credit carryforwards of which
$97,000 will expire in fiscal 1999. The remaining $1,505,000 of credit
carryforwards expire at various dates in fiscal 2000 through fiscal 2006.
7. OTHER BALANCE SHEET DATA
(In thousands)
- -----------------------------------------------------------
As of February 28, 1998 1997
- -----------------------------------------------------------
Other current assets:
Escrow deposits $ 2,048 $ 7,353
Other 2,836 3,428
- -----------------------------------------------------------
$ 4,884 $10,781
===========================================================
Other assets:
Common stock of Chartered
Semiconductor Mfg. Ltd. $19,944 $19,944
Common stock of
SMC Networks, Inc. 8,452 --
Deferred tax benefits 3,880 2,820
Other assets 5,412 6,260
- -----------------------------------------------------------
$37,688 $29,024
===========================================================
Accrued expenses and
other liabilities:
Salaries and fringe benefits $ 4,084 $ 4,109
Royalties 1,162 1,372
Professional fees 1,179 1,728
Other 2,033 2,239
- -----------------------------------------------------------
$ 8,458 $ 9,448
===========================================================
Other liabilities:
Retirement benefits $ 4,401 $ 4,055
Other 372 529
- -----------------------------------------------------------
$ 4,773 $ 4,584
===========================================================
8. 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 $1,029,000 at an exchange rate of 126 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.
9. COMMITMENTS AND CONTINGENCIES
Compensation
Certain executives and key employees are employed under separate agreements
terminating on various dates through fiscal 2001. These agreements provide,
among other things, for annual base salaries totaling $1,421,000, $1,125,000
and $625,000 in fiscal 1999, 2000 and 2001, respectively.
Capital Leases
The Company leases certain equipment under long-term capital leases which
include options to purchase the equipment for a nominal cost at the termination
of the lease.
Included within property and equipment are the following assets held under
capital leases (in thousands):
As of February 28, 1998 1997
- ------------------------------------------------------
Machinery and equipment $ 3,229 $ -
Less: accumulated depreciation (81) -
- ------------------------------------------------------
$ 3,148 $ -
======================================================
Future minimum lease payments for assets under capital leases for the
next five fiscal years are as follows (in thousands):
1999 $784
- -----------------------------------------------------
2000 784
- -----------------------------------------------------
2001 784
- -----------------------------------------------------
2002 784
- -----------------------------------------------------
2003 588
- -----------------------------------------------------
Total minimum lease payments 3,724
Less: amount representing interest 647
- -----------------------------------------------------
Present value of minimum lease payments 3,077
Less: current portion 553
- -----------------------------------------------------
Long-term obligation $ 2,524
=====================================================
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):
1999 $821
- -----------------------------------------------------
2000 379
- -----------------------------------------------------
2001 268
- -----------------------------------------------------
2002 235
- -----------------------------------------------------
2003 121
- -----------------------------------------------------
Total rent expense was $1,354,000, $908,000 and $179,000 in fiscal 1998, 1997
and 1996, 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 which began in March 1996 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 Manufacturing Ltd., whereby the Company acquired a
minority equity interest in Chartered for $19,944,000 during fiscal 1996. Under
this agreement, the Company is allocated sub-micron wafer production capacity
for ten years in Chartered's wafer fabrication facility. This investment is
reported at cost on the accompanying consolidated balance sheet.
Litigation and Settlements
The Company is subject to various lawsuits and claims in the ordinary course
of business. While the outcome of these matters can not be determined,
management believes that the ultimate resolution of these matters will not
have a material effect on the Company's operations or financial position.
In June 1995, several actions were filed against the Company and certain of
its officers and directors. These complaints were 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 asserted
claims under federal securities laws and alleged that the price of the
Company's common stock had been artificially inflated during the class action
period by false and misleading statements and the failure to disclose certain
information. The Company, its officers and its directors strongly denied all
of these allegations. On September 10, 1997, the Company and counsel for the
class action plaintiffs agreed to settle the consolidated action in its
entirety. Although the Company believes that the claims asserted in the class
action were without merit, management concluded that the best interests of its
shareholders were served by settling the action due to the continuing costs
of the defense, the distraction of management's attention and the uncertainties
inherent in any litigation. As a result of this settlement, the Company
recorded a net pre-tax charge of $2,000,000 in the second quarter of fiscal
1998.
In December 1997, the Company and Cabletron Systems, Inc. (Cabletron) settled
a lawsuit initiated in May 1997 by Cabletron. The action claimed violation
of the non-competition clause included in the January 1996 Asset Purchase
Agreement among the Company and Cabletron, and requested unspecified damages
and an injunction. As part of this settlement, the Company paid Cabletron
approximately $530,000 from an escrow account established for indemnification
obligations as part of the Agreement. The remaining $7,110,000 balance of the
escrow account was released to the Company.
In September 1996, the Company reached an agreement with Penril Datacomm
Networks, Inc. to settle 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. (Sigma), which was subsequently acquired by the Company
in December 1992. The Company reorganized Sigma as its Enterprise Networks
Business Unit, which was then sold to Cabletron Systems, Inc. in January 1996.
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. This charge is presented within
the net loss reported by the discontinued operation in fiscal 1997.
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.
10. 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 $804,000,
$983,000 and $1,066,000 in fiscal 1998, 1997 and 1996, respectively.
The Company has authorized unissued common stock reserved for issuance to the
Plan. As of February 28, 1998, there were 248,000 shares remaining in reserve
for this plan. Since its inception, 957,000 shares of the Company's common
stock have been contributed to the Plan.
As of February 28, 1998, 333 of the 414 employees who had satisfied the Plan's
eligibility requirements to participate were making salary deduction
contributions.
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 1,886,000 shares
of common stock. The purpose of these plans is to promote the interests of the
Company and its shareholders by providing 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, 1998, 1,005,000 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 Fiscal Weighted
1998 Average 1997 Average 1996 Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 1,357 $ 9.82 1,383 $17.53 848 $17.16
Granted 235 10.16 1,799 10.61 821 17.42
Exercised (386) 9.02 (61) 7.07 (69) 9.07
Canceled or expired (325) 9.63 (1,764) 16.76 (217) 18.34
- ---------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 881 $10.38 1,357 $ 9.82 1,383 $17.53
=================================================================================================================================
Options exercisable 395 $10.79 387 $10.62 409 $17.28
=================================================================================================================================
</TABLE>
The following table summarizes information relating to currently outstanding
and exercisable options as of February 28, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Range of Remaining Life Options Weighted Average Options Weighted Average
Exercise Prices (in years) Outstanding Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.50 - $8.88 9.4 50 $8.59 4 $8.50
$9.00 5.6 593 9.00 302 9.00
$9.13 - $17.19 7.4 161 12.34 40 15.90
$17.38 1.2 40 17.38 30 17.38
$18.69 2.2 37 18.69 19 18.69
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Effective March 1, 1996, the Company elected to disclose the pro forma effects
of SFAS 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 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 28 or 29, 1998 1997 1996
- --------------------------------------------------------------------
Net income (loss):
As reported $(18,921) $(21,297) $11,601
Pro forma (21,540) (23,295) 10,431
- --------------------------------------------------------------------
Diluted net income (loss) per share:
As reported $(1.22) $(1.54) $0.86
Pro forma (1.39) (1.68) 0.77
- --------------------------------------------------------------------
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 28 or 29, 1998 1997 1996
- ------------------------------------------------------------------------
Dividend yield - - -
Expected volatility 58% 57% 57%
Risk-free interest rates 5.70% 5.71%-6.27% 5.54%
Expected lives (in years) 4 1-4 4
- ------------------------------------------------------------------------
The weighted average Black-Scholes values of options granted in fiscal 1998,
1997 and 1996 were $5.18, $3.65 and $8.69, respectively. The values produced
by this model are limited by the inclusion of highly subjective assumptions
which greatly affect the 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 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 were 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 Plans
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, 1998, the
expiration dates of the outstanding options range from June 29, 1998, to July
15, 2002, and the exercise prices range from $10.38 to $16.00 (average $13.80)
per share.
The following is a summary of activity under the Director Stock Option Plans
over the past three fiscal years (in thousands):
For the years ended February 28 or 29, 1998 1997 1996
- -------------------------------------------------------------------------
Shares under option, beginning of year 186 144 43
Options granted during the year 33 50 104
Options canceled or terminated (9) (8)
Options exercised:
1998 --- --- ---
1997 --- --- ---
1996 ($11.75 per share) --- --- (3)
- -------------------------------------------------------------------------
Shares under option, end of year 210 186 144
- -------------------------------------------------------------------------
Options exercisable, end of year 177 87 59
- -------------------------------------------------------------------------
Shares available for future grants,
end of year 109 133 175
- -------------------------------------------------------------------------
Director Deferred Compensation Plan
On March 4, 1997, the Company implemented a deferred compensation plan for its
non-employee directors effective following the Company's July 1997 annual
meeting of shareholders. The plan permits eligible directors to defer 50% or
100% of their basic annual compensation which is otherwise paid in cash. Under
this plan, an unfunded account is established for each participating director
which is credited with equivalent units of the Company's common stock on the
first day of such quarter. These equivalent units track the economic
performance of the underlying stock, but carry no voting rights. The deferred
compensation earned under this plan is payable when the participant leaves the
Company's Board of Directors, for any reason, and is paid in either common
stock or an equivalent amount of cash, at the election of the participant.
The following is a summary of the activity under this plan (units in thousands):
For the year ended February 28, 1998
- --------------------------------------------------------------------
Common stock equivalent units, beginning of year -
Common stock equivalent units earned during the year 7
- --------------------------------------------------------------------
Common stock equivalent units, end of year 7
- --------------------------------------------------------------------
Common stock equivalent units available, end of year 93
====================================================================
Range of common stock prices used to calculate
common stock equivalent units $8.63 - $15.63
====================================================================
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 anniversary 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 27,000, net of cancellations, have been awarded as of
February 28, 1998. No new shares will be issued from the 1991 Plan, and as of
February 28, 1998, 62,000 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 $363,000, $385,000 and
$761,000 in fiscal 1998, 1997 and 1996, respectively.
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 (dollars in thousands):
For the years ended February 28 or 29, 1998 1997 1996
- -------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 56 $ 76 $ 33
Interest cost on projected benefit obligations 361 275 298
Net amortization and deferral 258 245 245
- -------------------------------------------------------------------------------
Net periodic pension expense $ 675 $ 596 $ 576
===============================================================================
As of February 28 or 29, 1998 1997 1996
- -------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $3,158 $3,040 $2,868
Nonvested benefit obligation 449 377 503
- -------------------------------------------------------------------------------
Accumulated benefit obligation 3,607 3,417 3,371
Effect of projected future salary increases 1,227 1,612 1,903
- -------------------------------------------------------------------------------
Projected benefit obligation 4,834 5,029 5,274
Unrecognized net loss (156) (596) (1,042)
Unrecognized net transition asset (2,696) (2,941) (3,186)
Additional minimum liability 1,624 1,925 2,325
- -------------------------------------------------------------------------------
Accrued pension cost $3,606 $3,417 $3,371
===============================================================================
Assumptions used in determining actuarial
present value of benefit obligations:
Discount rate 7.25% 7.25% 7.25%
Weighted-average rate of compensation increase 7.00% 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 $118,000, $174,000 and $162,000
was accrued during fiscal 1998, 1997 and 1996, 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. $537,000, $560,000 and $1,483,000 of incentive
compensation was earned in fiscal 1998, 1997 and 1996, respectively.
11. SHAREHOLDER RIGHTS PLAN
In January 1998, the Company's Board of Directors adopted a new Shareholder
Rights Plan, replacing the Company's previous plan which expired on
January 12, 1998. Under the new plan, the Company's shareholders of record on
January 13, 1998 received a dividend distribution of one preferred stock
purchase right for each share of common stock then held. In the event of
certain efforts to acquire control of the Company, these rights allow
shareholders to purchase common stock of the Company at a discounted price.
The rights will expire in January 2008, unless previously redeemed by the
Company at $.01 per right. Like the previous plan, the new Shareholder Rights
Plan continues the Company's commitment to ensuring fair value to all
shareholders in the event of an unsolicited takeover offer.
12. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Industry Segment
The Company operates predominantly in one industry segment in which it designs,
develops and markets integrated circuits for the personal computer industry and
provides foundry services for MicroElectroMechanical Systems (MEMS).
Geographic Information
The Company's domestic operations include its worldwide revenues, exclusive of
its revenues from customers in Japan, and most of its operating expenses.
Revenues and operating profits from customers in Japan are recorded by TMC. The
Company conducts various sales and marketing operations outside of the United
States through TMC in Japan, and through subsidiaries in Europe and Asia.
Most of the Company's identifiable assets are located within the United States.
Significant identifiable assets located outside of the United States include
(i) $9,868,000 of equipment (net) installed at Lucent Technologies Inc.'s wafer
fabrication facility in Madrid, Spain, (ii) a $19,944,000 equity investment
in Singapore-based Chartered Semiconductor Manufacturing Ltd., and
(iii) $12,715,000 of assets associated with TMC's operation in Japan.
Export Sales
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended
February 28 or 29, 1998 1997 1996
- ---------------------------------------------------------------------------
United States $ 45,357 $ 70,792 $ 45,518
Export
Asia and Pacific Rim 96,496 111,599 96,089
Europe 9,710 10,320 9,937
Canada 2,072 549 2,467
Other 2,112 3,283 1,376
- ---------------------------------------------------------------------------
$155,747 $196,543 $155,387
===========================================================================
Major Customers
During fiscal 1998, no single customer accounted for more than 10% of the
Company's revenues. During fiscal 1997, one customer accounted for 12.8%, and
during fiscal 1996 two customers accounted for 11.7% and 10.0%, respectively,
of the Company's revenues.
Concentrations of Credit Risk
The Company sells its products to personal computer manufacturers and their
subcontractors and to distributors, and maintains individually significant
accounts receivable balances from several of its larger customers. The Company
performs credit evaluations of its customers' financial condition on a regular
basis and although the Company generally requires no collateral, letters of
credit may be required from its customers in certain circumstances. Reserves
for estimated credit losses are maintained and actual losses have been within
the Company's expectations.
<PAGE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
- -------------------------------------------------------------------------------
Fiscal 1998
Revenues $34,803 $41,184 $42,768 $36,992
Operating income (loss) (5,365) (1,150) 360 329
Net income (loss) from continuing operations (3,339) (2,069) 361 520
Net income (loss) from discontinued
operation (4,841) (7,170) (3,413) -
Gain on sale of discontinued operation - - 1,030 -
Net income (loss) (8,180) (9,239) (2,022) 520
===============================================================================
Basic net income (loss) per share
Continuing operations $ (0.22) $ (0.14) $0.02 $0.03
Discontinued operation (0.32) (0.46) (0.22) -
Gain on sale of discontinued operation - - 0.07 -
- -------------------------------------------------------------------------------
$ (0.54) $ (0.60) $ (0.13) $ 0.03
===============================================================================
Diluted net income (loss) per share
Continuing operations $ (0.22) $ (0.14) $ 0.02 $ 0.03
Discontinued operation (0.32) (0.46) (0.21) -
Gain on sale of discontinued operation - - 0.06 -
- -------------------------------------------------------------------------------
$ (0.54) $ (0.60) $ (0.13) $ 0.03
===============================================================================
Average shares outstanding
Basic net income (loss) per share 15,056 15,490 15,701 15,910
Diluted net income (loss) per share 15,056 15,490 16,165 15,979
Market price
High $ 10.75 $ 12.75 $ 18.13 $ 11.00
Low 8.25 8.50 10.13 8.00
===============================================================================
Fiscal 1997
Revenues $60,541 $53,687 $50,450 $31,865
Operating income (loss) 7,269 (713) 519 (14,087)
Net income (loss) from continuing operations 4,295 (370) 307 (8,715)
Net income (loss) from discontinued
operation (2,378) 512 (4,161) (10,787)
Net income (loss) 1,917 142 (3,854) (19,502)
===============================================================================
Basic net income (loss) per share
Continuing operations $ 0.31 $ (0.03) $ 0.02 $ (0.63)
Discontinued operation (0.17) 0.04 (0.30) (0.77)
- -------------------------------------------------------------------------------
$ 0.14 $ 0.01 $ (0.28) $ (1.40)
===============================================================================
Diluted net income (loss) per share
Continuing operations $ 0.31 $ (0.03) $ 0.02 $ (0.63)
Discontinued operation (0.17) 0.04 (0.30) (0.77)
- -------------------------------------------------------------------------------
$ 0.14 $ 0.01 $ (0.28) $ (1.40)
===============================================================================
Average shares outstanding
Basic net income (loss) per share 13,747 13,829 13,877 13,905
Diluted net income (loss) per share 13,806 13,829 13,888 13,905
Market price
High $ 18.75 $ 18.00 $ 15.25 $ 12.13
Low 14.38 10.25 8.38 8.38
===============================================================================
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 1,100 holders of record of the Company's common stock at
April 8, 1998.
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, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended February 28, 1998. 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
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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 1998, in conformity with generally accepted
accounting principles.
April 8, 1998 ARTHUR ANDERSEN LLP
New York, New York
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Subsidiary Jurisdiction of Incorporation
Standard Microsystems Corporation (Asia) State of Delaware
Standard Microsystems GmbH Munich, Germany
SMSC North America, Inc. State of Delaware
SMSC Massachusetts, Inc. State of Delaware
SMSC International Ltd. Barbados
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report 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, 33-45011, 33-69224, 33-83400 and 333-09271).
ARTHUR ANDERSEN LLP
May 26, 1998
New York, New York
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