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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, 1999
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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of May 24, 1999, 15,608,557 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 $116,796,000.
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 1999 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
1999 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, 1999
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.
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GENERAL DESCRIPTION OF THE BUSINESS
Standard Microsystems Corporation (the "Company", the "Registrant", or "SMSCR")
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,
(TMC). The Company operates branch offices and facilities for engineering,
marketing and the selling of its products in the following locations:
Subsidiary Location
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Standard Microsystems Corporation (Asia) Taipei, Taiwan
Standard Microsystems GmbH Munich, Germany
SMSC Massachusetts, Inc. Westborough, Massachusetts
SMSC 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) and related industries. 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.
SIGNIFICANT DEVELOPMENTS
In March 1999, the Company announced the appointment of Steven J. Bilodeau as
President and Chief Executive Officer. Mr. Bilodeau succeeds both the
Company's previous Chief Executive Officer, Paul Richman, who is continuing in
his capacity as the Company's Chairman of the Board, and its previous
President, Arthur Sidorsky, who is continuing in his role as Chief Operating
Officer until his retirement later this year.
Also in March 1999, the Company's Board of Directors approved a plan to divest
a majority interest in its Foundry Business Unit. The Foundry Business Unit
serves a different customer base than the Company's core integrated circuits
business, and generally has been managed as a separate operating unit with its
own identifiable assets. In April 1999, the Company signed a Letter of Intent
with Inertia Optical Technology Applications, Inc. (IOTA), a privately-held
company located in Newark, NJ, to combine the operations of its Foundry
Business Unit with IOTA's operations into a new company, Standard MEMS, Inc.
Standard MEMS, Inc. will specialize in MicroElectroMechanical Systems (MEMS),
which are specialty semiconductor-related products with mechanical properties
used in such applications as sensors, ink jet print heads, valves, thin film RC
networks, accelerometers and actuators. This operation will operate out of an
existing SMSC facility in Hauppauge, New York as well as in several IOTA
facilities in New Jersey, California, Massachusetts, Mexico and Germany.
Under the terms of the Letter of Intent, Standard MEMS, Inc. will be majority
owned by the shareholders of IOTA, with SMSC initially retaining a 38%
interest. The Company has committed to reducing its investment in Standard
MEMS, Inc. below 20% within one year. Completion of the transaction is subject
to executing definitive agreements and final approvals from both Companies'
Boards of Directors, and is expected to occur before the end of SMSC's second
quarter ending August 31, 1999.
The Company's historical financial information has been restated to report the
operating results, net assets and cash flows of the Foundry Business Unit and
the System Products Division (through September 1997) as discontinued
operations for all periods presented. All following discussions and analysis
focuses on the Company's continuing operations, as restated, unless otherwise
noted.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
OPERATING SEGMENT
The Company is organized and operates in one business segment, designing,
developing and marketing semiconductor integrated circuits for the personal
computer and related industries.
PRINCIPAL PRODUCTS OF THE COMPANY
The principal products of the Company are associated with logic control and
connectivity for personal computer systems. These products can be grouped into
several families, Personal Computer Input/Output controllers (I/O), Personal
Computer Connectivity Products, Personal Computer Local Area Networking (PC
LAN) devices, Personal Computer Systems Logic, and Embedded Products.
The Company's PC I/O integrated circuits accounted for approximately 80% of
total revenues in fiscal 1999, 82% in fiscal 1998 and 80% in fiscal 1997. No
other product family accounted for more then 10% of the Company's consolidated
revenues during the last three fiscal years.
PERSONAL COMPUTER INPUT/OUTPUT CONTROLLERS (I/O) 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.
SMSC has three families of pin-compatible I/O controllers: Super I/O (37C669),
Enhanced Super I/O (37C67x, 37B77x, 37M70x, 37B80x, 37M60x, 37B78x, 37B72x),
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.
For the PC notebook design environment, SMSC offers two families of PC I/O
devices, the FDC37N95x and FDC37N769/FDC37N869. The FDC37N95x product family
incorporates an integrated 8051 microcontroller enabling support for both
internal keyboard scanning and control as well as very sophisticated Power
Management features. The FDC37N769/FDC37N869 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.
PERSONAL COMPUTER CONNECTIVITY products rely on new communications standards
utilizing Universal Serial Bus (USB) and IEEE1394 to enable enhanced
communications features for both the PC Original Equipment Manufactures (OEM)
and PC peripheral device customers. 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 intends to introduce several new devices in this product family
this fiscal year, including an enhanced version of the USB97C100 that
incorporates a USB hub function and a single-chip USB Ethernet Solution.
The Company is in the process of defining similar connectivity products based
on a peripheral interface technology known as Device Bay, utilizing
the performance capabilities of IEEE 1394 in combination with the control
logic required to support the Device Bay environment. Originally developed by
Apple Computer under the name "Firewire", the IEEE 1394 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.
PERSONAL COMPUTER LOCAL AREA NETWORKING (PC LAN) devices 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 integrated circuits, covering
applications for desktop and notebook PCs.
One of the products the Company plans to introduce in fiscal 2000 is the MAC99
(LAN83Cxxx) which is the successor to both the LAN83C171 and the LAN83C175
devices. Both the LAN83C171 and the LAN83C175 are in the EPIC family of Fast
Ethernet controllers. The MAC99 will offer advanced Power Management features
providing the ideal solution for PCI, Cardbus, LAN on the Motherboard, and mini
PCI applications.
To complement the FEAST and the EPIC families, SMSC plans to also release a
10/100 Mbps PHY - a complete physical layer solution in a single chip. This
device, the LAN83C180, integrates the 10/100 Ethernet Transceiver with a full
MII Interface. This chip, with features like Auto Negotiate, Half and Full
Duplex, transceiver filters, low power mode, and flow control, is specifically
matched to SMSC MACs.
PC SYSTEMS LOGIC, also known as core logic, includes the circuits that
interface to the microprocessor (CPU) and control the major functions of the
PC. The primary PC systems logic components are the North Bridge, or System
Controller, and the South Bridge. The North Bridge, which connects directly to
the CPU, provides control of the memory and bridges the CPU to the PCI bus,
which provides a path between the CPU and all other elements of the PC. The
South Bridge resides on the PCI bus and creates the ISA, IDE, and the USB buses
as well as other functions like Power Management.
The Company's TeXas chipset includes the SLC90E42 North Bridge and the SLC90E46
South Bridge devices. These full-featured devices are designed to industry
standards and are compatible with the Intel Pentium as well as the AMD, Cyrix,
and IDT CPUs. This new product family was introduced during fiscal 1999.
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 devices which
combine advanced PC I/O functions with parts of the PC systems logic.
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.
GEOGRAPHIC INFORMATION
All of the Company's consolidated revenues are recorded by Standard
Microsystems in the United States, with the exception of revenues from
customers in Japan, which are recorded by Toyo Microsystems Corporation (TMC).
The Company conducts various sales and marketing operations outside of the
United States through its subsidiaries in Europe and Asia, and TMC in Japan.
The Company's long-lived assets include net property and equipment, and other
long-lived assets. The vast majority of the Company's net property and
equipment is located in the United States. Included within other long-lived
assets is an equity investment of $19,944,000 in Singapore-based Chartered
Semiconductor Manufacturing Ltd.
EXPORT SALES
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended February 28, 1999 1998 1997
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North America $26,041 $40,570 $57,028
Asia and Pacific Rim 115,146 98,128 113,369
Europe 14,467 9,311 10,060
Rest of World 172 317 461
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$155,826 $148,326 $180,918
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MAJOR CUSTOMERS
During fiscal 1999, one customer accounted for 11.8% of the Company's revenues.
In fiscal 1998, no customer accounted for more then 10% of the Company's
revenues. In fiscal 1997, one customer accounted for 13.9% of the Company's
revenues.
The Company sells its product into the Japanese marketplace 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%.
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 introduction of new
products and 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 its historical gross
profit margins.
RESEARCH AND DEVELOPMENT
During the fiscal year, which ended February 28, 1999, SMSC spent $17.4 million
on research and development ("R&D") activities. This compares with $14.3
million expended during fiscal 1998 and $12.8 million expended during fiscal
1997. The increases in both periods reflect increased engineering staff as well
as increases in other development costs. The Company's R&D efforts include new
product design, qualification, and a continuous migration to smaller geometries
and more advanced process technologies. The Company has been able to maintain
and increase its gross margins through these efforts while decreasing average
selling prices to meet the competition.
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 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.
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 means. 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.
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.
EMPLOYEES
As of February 28, 1999, of the Company's 538 employees, 426 were employed
within the Company's continuing integrated circuits business. Of these 426
employees, 100 were engaged in engineering, including research and development,
91 in marketing and sales, 104 in executive and administrative activities and
131 in manufacturing and manufacturing support. The Company's Foundry Business
Unit, now classified as a discontinued operation, had 112 employees as of
February 28, 1999, most of whom were engaged in manufacturing or
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.
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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.
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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, 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, 1999, the Company owned machinery and equipment, property
and leasehold improvements with an original cost of $97.6 million and
accumulated depreciation and amortization of $62.9 million.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
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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.
During fiscal 1998, the Company sold an 80.1% interest in SMC Networks, Inc., a
then-newly formed subsidiary comprised of its former local area networking
division, to an affiliate of Accton Technology Corporation (Accton) for
approximately $40,237,000 in cash, $2,012,000 of which was placed into an
escrow account.
In December 1998, Accton notified the Company and the escrow agent of Accton's
intention to seek indemnification and damages from the Company in excess of
$10,000,000 by reason of alleged misrepresentations and inadequate disclosures
relating to the transaction and other alleged breaches of covenants and
representations in the related agreements. Based upon those allegations, the
escrow account has not been released. In January 1999, the Company filed an
action against Accton, SMC Networks, Inc. and other parties in the Supreme
Court of the State of New York, seeking the release of the escrow account to
the Company on the grounds that Accton's allegations are without merit, and
seeking payment of approximately $1,685,000 (which is included within other
current assets on the Company's consolidated balance sheet) owed to the
Company by SMC Networks, Inc. as of February 28, 1999. This action is as yet
unresolved.
The Company is confident that it negotiated and fully performed the agreements
with Accton in good faith. While it is not possible at this time to assess the
likelihood of any liability being established, the Company considers these
claims to be without merit. The Company will vigorously defend itself against
these allegations and expects that the outcome will not be material to the
Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
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The following were the executive officers of Standard Microsystems Corporation
as of April 30, 1999, their ages as of April 30, 1999, their current titles and
positions held during the last five years:
Steven J. Bilodeau (age 40) was appointed as the Company's President and Chief
Executive Officer in March 1999. Prior to joining SMSC, Mr. Bilodeau held
various senior management positions during his 13 years of service with Robotic
Vision Systems Inc. (RVSI), most recently as President of RVSI's Semiconductor
Equipment Group from 1996 through 1998, and as a member of RVSI's board of
directors from 1997 through 1998.
Paul Richman (age 56) has served as the Company's Chairman of the Board since
1994. He also served as Chief Executive Officer of the Company from July 1995
to March 1999. Mr. Richman has been an officer of the Company since 1971.
Arthur Sidorsky (age 65) has served as the Company's Chief Operating Officer
since 1997, and he also served as its President from October 1997 to March
1999. Previously, he served as its Executive Vice President - Component
Products Division from 1994 to 1997. Mr. Sidorsky has been an officer of the
Company since 1980.
George W. Houseweart (age 57) has served as the Company's Senior Vice President
and General Counsel since January 1999. Previously, he served as Senior Vice
President - Law and Intellectual Property from 1997 to 1999 and as Vice
President - Law and Intellectual Property from 1994 to 1997. Mr. Houseweart has
been an officer of the Company since 1988.
Eric M. Nowling (age 42) has served as the Company's 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 1994 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.
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The information captioned "Market Price" and the last two paragraphs appearing
in the Company's 1999 Annual Report to Shareholders (the "1999 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 1999 Annual Report is incorporated by
reference into this report nor is the 1999 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.
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The information appearing in the 1999 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.
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The information appearing in the 1999 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.
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The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company does not use
derivative financial instruments for speculative or trading purposes.
INTEREST RATE RISK
As of February 28, 1999, the Company's short-term investments of $2 million
consisted primarily of investments in U.S. treasury, corporate and municipal
obligations with maturities of between three and twelve months. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at February 28, 1999, the fair value of these short-term investments
would decline by an immaterial amount. The Company generally expects to have
the ability to hold its fixed income investments until maturity and therefore
would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates
on short-term investments.
FOREIGN CURRENCY EXCHANGE RISK
The Company has international sales and expenditures and is, therefore, subject
to certain foreign currency rate exposure. The Company conducts a significant
amount of its business in Asia. In order to reduce the risk from fluctuation
in foreign exchange rates, most of the Company's product sales and all of its
arrangements with its foundry, test and assembly vendors are denominated in
U.S. dollars. Transactions in the Japanese market made by the Company's
majority owned subsidiary, Toyo Microsystems Corporation (TMC), are denominated
in Japanese yen. The Company has never received a cash dividend (repatriation
of cash) from TMC nor does it have plans to do so in the near future. The
Company has not entered into any currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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The financial statements, notes thereto, Report of Independent Public
Accountants thereon and quarterly financial data appearing in the 1999 Annual
Report are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
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Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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The information appearing in the Company's Proxy Statement related to the 1999
Annual Meeting of Stockholders (the "1999 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 1999 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 1999 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 1999 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 1999 Annual Report
pursuant to Part II, Item 8:
Consolidated Statements of Operations for the three years ended
February 28, 1999
Consolidated Balance Sheets as of February 28, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the three years ended
February 28, 1999
Consolidated Statements of Cash Flows for the three years ended
February 28, 1999
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 10.19 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 27, 1999
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 27, 1999
-----------------
Paul Richman, Chairman of the Board
And Director
/s/ STEVEN J. BILODEAU May 27, 1999
-----------------------
Steven J. Bilodeau, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ EVELYN BEREZIN May 27, 1999
------------------
Evelyn Berezin
Director
/s/ JAMES R. BERRETT May 27, 1999
--------------------
James R. Berrett
Director
/s/ ROBERT M. BRILL May 27, 1999
-------------------
Robert M. Brill
Director
/s/ PETER F. DICKS May 27, 1999
------------------
Peter F. Dicks
Director
/s/ KATHLEEN B. EARLEY May 27, 1999
----------------------
Kathleen B. Earley
Director
/s/ IVAN T. FRISCH May 27, 1999
------------------
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.
Exhibit 10.3 [15] 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.
* 10.5 Employment Agreement with Steven
J. Bilodeau dated
March 18, 1999.
Registrant's Proxy Statement dated 10.6 1989 Stock Option Plan.
June 6, 1989, Exhibit A
Registrant's Proxy Statement dated 10.7 1991 Restricted Stock Bonus
June 21, 1991, Exhibit A Plan.
Registrant's Proxy Statement dated 10.8 Director Stock Option Plan.
May 29, 1990, Exhibit A
Registrant's Proxy Statement dated 10.9 1994 Director Stock Option Plan.
May 31, 1995, Exhibit A
Exhibit 10 (m) [4] 10.10 Resolutions adopted February 18,
1992, amending Director Stock
Option Plan, 1991 Restricted
Stock Bonus Plan and 1989
Stock Option Plan.
Registrant's Proxy Statement dated 10.11 Amendment adopted July 14, 1998,
June 1, 1998, Page 11. amending the Director Stock
Option Plan.
Exhibit 10.14 [6] 10.12 Retirement Plan for Directors.
Registrant's Proxy Statement dated 10.13 1993 Stock Option Plan for
May 25, 1993, Exhibit A Officers and Key Employees.
Exhibit 10(x) [5] 10.14 Executive Retirement Plan.
Registrant's Proxy Statement dated 10.15 1994 Stock Option Plan for
May 26, 1994, Exhibit A Officers and Key Employees.
Exhibit 10.18 [6] 10.16 Resolutions adopted October 31,
1994, amending the Retirement
Plan for Directors and the
Executive Retirement Plan.
Exhibit 10.19 [6] 10.17 Resolutions adopted January 3,
1995, amending the 1994, 1993
and 1989 Stock Option Plans and
the 1991 Restricted Stock Plan.
[14] 10.18 1996 Restricted Stock Bonus
Plan.
Registrant's Proxy Statement dated 10.19 1998 Stock Option Plan for
June 1, 1998, Exhibit A Officers and Key Employees.
Exhibit 10.2 [1] 10.20 Patent and Trade Secrets
Agreement dated March 12, 1983,
with Paul Richman.
Exhibit 2 [7] 10.21 Asset Purchase Agreement dated
January 9, 1996, among Cabletron
Systems, Inc., and SMC Enterprise
Networks, Inc.
Exhibit 10.30 [8] 10.22 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 10.23 1996 Stock Option Plan for
July 22, 1996, Exhibit A Officers and Key Employees.
Item 7, Exhibit 1 [9] 10.24 Common Stock and Warrant Purchase
Agreement, among SMSC and
Intel Corporation, dated
March 18, 1997.
Item 7, Exhibit 2 [9] 10.25 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] 10.26 Investor Rights Agreement, among
SMSC and Intel Corporation, dated
March 18, 1997.
Exhibit 10.1 [10] 10.27 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] 10.28 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] 10.29 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] 10.30 Transition Services Agreement,
dated October 7, 1997, between
AJJA Inc. and Standard
Microsystems Corporation.
Exhibit 10.4 [11] 10.31 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, 1999, 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 Statement 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.
[15] Registrant's Annual Report on Form 10-K for fiscal year ended February 28,
1998.
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
Agreement made as of 18 March 1999 between Standard Microsystems Corporation, a
Delaware corporation having an office at 80 Arkay Drive, P.O. Box 18047,
Hauppauge, New York 11788 ("Company"), and Steven J. Bilodeau, residing at 9
Merriman Point Road, Center Sandwich, NH 03227 ("Executive").
W I T N E S S E T H:
WHEREAS, Company desires to employ Executive as Company's President and Chief
Executive Officer, upon the terms and conditions hereinafter in this Agreement
set forth, and Executive desires to be so employed;
Now, therefore, in consideration of the premises and the mutual covenants and
conditions contained herein, the parties hereto agree as follows:
1. Employment.
The Company hereby agrees to employ the Executive, and
the Executive hereby accepts such employment, upon the
terms and conditions hereinafter set forth.
2. Title and Duties.
Company shall employ Executive as Company's President and
Chief Executive Officer, effective as of the date of execution hereof.
Executive will render his services faithfully and to the best of his
ability and devote his full business time and attention to the
services to be rendered by him hereunder. As quickly as reasonably
possible, but in any event not later than 1 January 2000, Executive
shall establish a residence in Long Island, New York, but Executive
shall not thereafter be required to relocate outside of Long Island,
New York. Company shall use best efforts to cause Executive's
election and re-election as a director of Company during the
Employment Term.
3. Term; Severance; Change in Control.
a. The term of employment under this Agreement (the "Employment Term")
shall commence as of the date hereof and shall continue through
18 March 2002. Thereafter, the Employment Term shall be automatically
extended for one-year periods, unless either party shall give notice
("Contrary Notice"), at least six months prior to the end of the
Employment Term, that the Employment Term shall not be so extended.
b. Notwithstanding Section 3.a, the Employment Term shall terminate
prior to any date otherwise specified in Section 3.a, upon:
(i) Executive's death or disability ("disability" shall mean the
physical or mental incapacity of the Executive which prevents
Executive from performing the Executive's duties as herein provided
for a continuous period of 60 days or an aggregate period of 90 days
during any consecutive six-month period, and disability shall be
deemed to have occurred as of the end of the applicable period);
(ii) notice by Company of termination for cause, which shall mean
Executive's (w) material dishonesty in the course of employment, (x)
willful and material failure to perform his duties hereunder,
following delivery of written notice thereof and a reasonable period,
not to exceed 30 days from delivery of notice, to cure such failure,
or (z) conduct, regardless of whether in the course of employment,
constituting a felony or any crime involving moral turpitude;
(iii) notice by Company of termination other than for cause. Reduction
of compensation or duties, or requirement to relocate outside of Long
Island or other breach hereof and failure to cure within 30 days
following delivery of written notice thereof by Executive to Company
shall be considered notice of termination under this subsection.
Contract nonrenewal by Company shall also be considered notice of
termination under this subsection;
(iv) notice of voluntary termination by Executive within six months
after a change in control of Company (for purposes hereof, a "change
in control of Company" shall mean an event that Company would be
required to report as such pursuant to Securities and Exchange
Commission ("SEC") Form 8-K); or
(v) notice of voluntary termination by Executive within six months
after Company's shareholders fail to elect Executive as a member of
the Company's Board of Directors.
c. Should Company terminate the Employment Term pursuant to clauses
(i) or (iii) of Section 3.b: (i) Company shall pay Executive, in lump
sum on the day of termination, an amount equal to one year's Base
Salary, any vested or unvested stock grants, any deferred compensation
(if any deferred compensation plan shall be adopted in the future),
any accrued, unused vacation and unreimbursed business expenses
(including automobile and relocation expense, and tax gross up on such
automobile and relocation expenses); (ii) Company shall pay any
accrued, unpaid Bonus, as hereinafter defined, (i.e., a pro-rated
amount of the Bonus that Executive would have earned if Executive
remained employed through the then current fiscal year of Company, to
be based on the number of weeks employed during the then current
fiscal year), payable at the same time such Bonus would have been
paid for such fiscal year; (iii) Company shall continue to provide
paid coverage for life insurance, and all group health insurance plans
under COBRA, provided by Company to Executive as of the date of
such termination, for a period of 18 months from the date of
termination of the Employment Term, or until Executive shall have
sooner obtained full-time employment; (iv) insofar as any stock option
granted by Company to Executive would have, but for such termination,
become exercisable in accordance with its terms within 13 months of
the date of such termination, such option shall become exercisable as
of such termination date, remain exercisable during such 13 month
period, and expire at the end of such 13 month period. This Section
3.c sets forth Company's entire obligation to Executive in case of
termination of the Employment Term on any basis referred to in this
Section 3.c.
d. Should Company terminate the Employment Term pursuant to clause 3.b
(ii), Company's obligations hereunder shall be fully satisfied upon
payment by the Company to the Executive of any unpaid Base Salary,
accrued, unused vacation time and unreimbursed business expenses
through the date of termination, provided, however, that such payment
shall not prevent the Company from seeking relief respecting any claim
it might have against the Executive hereunder or otherwise.
e. In the event of either a change in control of Company or the
Company's shareholders' failing to elect Executive as a member of the
Board of Directors or removing Executive as a Director once elected,
all stock options, all stock grants and deferred compensation (if any
deferred compensation plan shall be adopted in the future) shall
immediately vest, and, should Executive terminate the Employment Term
pursuant to clause 3.b.(iv) or (v), Executive shall be entitled to
the payments and insurance coverage referred to in clauses
3.c(i), (ii) and (iii).
4. Annual compensation.
a. In consideration of the services to be rendered by Executive
hereunder, the Company shall pay to the Executive:
(i) an annual base salary of $350,000, which may be increased, but not
decreased without Executive's consent, from time to time, by Company's
Board of Directors, based upon Compensation Committee review and
recommendation ("Base Salary"); and
(ii) a management incentive bonus ("Bonus"), with respect to fiscal
year 2000 equal to 80 percent of Base Salary, i.e., $280,000 (the
"Guaranteed Bonus"), payable in cash immediately upon execution hereof
or at the time requested by Executive, and any additional earned Bonus
for fiscal year 2000 (under the plan described below) and a Bonus with
respect to each succeeding fiscal year, determined in accordance with
Company's EVC Plan payable within 75 days following the end of such
fiscal year. Should Company terminate the Employment Term for cause,
or should Executive terminate the Employment Term voluntarily (other
than on account of Company's material breach hereof or pursuant to
clauses (iv) or (v) of Section 3.b), in either case prior to 1 March
2000, Executive shall pay to Company, on the date of such termination,
as liquidated damages, and not as penalty, an amount equal to the
product obtained by multiplying the Guaranteed Bonus (insofar as paid
to Executive) by a fraction, the numerator of which shall be the
number of whole calendar days remaining in Company's fiscal year 2000,
and the denominator of which shall be 365 (such fraction, the
"Forfeiture Fraction.").
The Bonus plan is defined by the Board of Directors for each fiscal
year, and, during the Company's fiscal year 2000, it shall be based on
the Company achieving specific changes in economic profit generated or
Economic Value Contributed ("EVC"). The fiscal year 2000 EVC plan for
the Company will be provided in a separate document. However, some of
the major provisions of the plan provide for an EVC target, indexing
Company EVC performance to the market, and additional bonus payment
for over target EVC performance not to exceed 75% of the at-plan Bonus
amount, i.e., for fiscal year 2000 not to exceed $210,000 over the
Bonus amount of $280,000 specified in 4.a. (ii). The target Bonus for
Executive will remain at 80% of Base Salary for the Company's fiscal
years 2001 and 2002; however, the basis on which Bonus is earned may
be modified by the Board of Directors. Any Bonus plan approved by the
Board of Directors for Executive will be consistent with the
management incentive bonus plan for other Company executives.
b. Any Bonus payable respecting fiscal year 2001 shall be paid 75% in
cash, and the balance shall be paid in shares of Company common stock
having a total Market Value, as hereinafter defined, equal to 25% of
the amount of such Bonus. Any Bonus payable respecting any subsequent
fiscal year shall be paid 50% in cash, and the balance shall be paid
in shares of Company common stock having a total Market Value equal to
50% of the amount of such Bonus. All common stock so issued shall be
subject to the same transfer restrictions and forfeiture under the
same conditions as shall apply generally to Company bonus awards of
Company common stock, except as otherwise provided herein in
paragraphs 3 and 6. Executive shall have the right to demand
registration for all vested stock and Company shall use best effort
to cause such registration at Company expense to be effective.
c. For purposes hereof, Market Value of a share of Company common
stock shall mean the closing sale price of such a share on the date
that Company's independent accountants shall have completed the audit
for the fiscal year respecting which the Bonus shall be paid.
5. Benefits; Expenses.
Executive shall be entitled to such benefits as are provided generally
to Company's senior executive officers. In addition, Executive shall
receive a $1,200 per month car allowance, plus all expenses, including
insurance, repairs and maintenance, fuel and normal travel expenses
(i.e. tolls, parking, etc.). All the preceding expenses are fully tax
protected. On or about 1 January 2000, Executive will be provided
with a Company-leased car (STS or similar), at which time the $1,200
per month car allowance will cease, but the other expenses will
continue to be reimbursed and any reportable income associated with
the use or expense of the leased car will be fully tax protected.
Company shall furnish Executive with individual supplemental life
insurance coverage in the amount of $312,500 and individual disability
income coverage. Company shall furnish and maintain continuously
directors and officers liability insurance coverage during employment,
and will continue to indemnify and advance legal expenses on behalf of
Executive, during Employment Term and after termination for actions
occurring during the Employment Term to the extent permitted by law.
Executive shall accrue vacation time at a rate of twenty days per
year. Company will grant Executive, effective the date hereof,
options to purchase 280,000 shares of Company Common Stock with
four-year (25% per year) vesting and ten-year expiration. Executive's
benefit under the Executive Retirement Plan shall vest 50% after five
years of service and pro-ratably over the next five years as to the
remaining 50%.
6. Relocation Assistance.
Company shall reimburse travel and living expenses in the Hauppauge,
NY area for Executive through 31 December 1999 and pay packing
and moving expenses incident to relocation of Executive's household to
the Hauppauge area. Any tax ramifications of the above travel, living,
packing or moving expenses will be reimbursed. On execution hereof,
Company shall issue to Executive 20,000 shares of Company common
stock, and use best efforts to register the shares for resale by
30 June 1999. Should Company terminate the Employment Term for cause,
or should Executive terminate the Employment Term voluntarily (other
than on account of Company's material breach hereof or pursuant to
3.b.(iv) or 3.b.(v)), in either case prior to 1 March 2000 or upon
purchase of a home on Long Island, whichever is earlier, Executive
shall, as liquidated damages, and not as penalty, transfer to Company
a number of shares of Company common stock equal to 20,000 multiplied
by the Forfeiture Fraction, or an amount equal to the product obtained
by multiplying 20,000 by the Forfeiture Fraction and multiplying that
amount by the mean of the closing sale prices of the Company common
stock on the first ten trading days following effectiveness of the
registration of the shares for resale. At Executive's request prior
to 1 January 2000, Company shall lend Executive up to $60,000, on an
unsecured basis, and up to an additional $100,000, secured by the
common stock referred to in the second preceding sentence, to defray
relocation costs. Any such loan(s) shall be repayable five years from
issuance and bear the same interest as is earned on Company cash
deposits in its bank accounts, payable quarterly.
7. Other Considerations.
Company shall provide up to ten days off for Executive to participate
in Robotic Vision Systems, Inc.'s pending patent suit litigation.
Company shall permit Executive to hold up to two outside directorships
with companies not competing with Company.
8. Intellectual Property.
a. Assignment of Inventions.
(i) Subject to paragraph (a)(ii) below, Executive hereby assigns and
agrees to assign to Company, or to any business concern controlled by
or under common control with Company ( "Company Affiliate") as Company
shall specify, all of Executive's right, title and interest in and to
any inventions, formulas, techniques, processes, ideas, algorithms,
discoveries, designs, developments and improvements which Executive
may make, reduce to practice, conceive, invent, discover, design or
otherwise acquire during Executive's employment by Company or any
Company Affiliate, whether or not made during regular working hours,
relating to the actual or anticipated business, products, research or
development of Company or any Company Affiliate (collectively,
"Inventions").
(ii) The foregoing shall not apply to, and Executive shall not be
required to assign any of Executive's rights in, an invention that
Executive developed entirely on Executive's own time without using any
equipment, supplies, facilities, computer programs, or trade secret(s)
and/or other proprietary and/or confidential information of Company or
any Company Affiliate, except for those inventions that either:
(1) relate directly or indirectly at the time of
conception or reduction to practice of the
invention, to the business of Company or any Company
Affiliate, or to the actual or contemplated
products, research or development of Company or any
Company Affiliate, or
(2) result from any work performed by Executive for
Company or any Company Affiliate.
b. Trade Secrets.
Executive shall regard and preserve as confidential:
(x) all trade secrets and/or other proprietary and/or
confidential information belonging to Company or any Company
Affiliate; and (y) all trade secrets and/or other proprietary and/or
confidential information belonging to a third party which have been
confidentially disclosed to Company or any Company Affiliate, which
trade secrets and/or other proprietary and/or confidential information
described in (x) and (y) above (collectively, "Confidential
Information") have been or may be developed or obtained by or
disclosed to Executive by reason of Executive's employment. Executive
shall not, without written authority from Company to do so, use for
Executive's own benefit or purposes, or the benefit or purpose of any
person or entity other than Company or any Company Affiliate, nor
disclose to others, either during Executive's employment with Company
or thereafter, except as required in the course of employment with
Company or any Company Affiliate, or except as required by law, any
Confidential Information (Executive, as CEO, shall have the usual and
customary discretion to determine when disclosure is required for the
benefit of Company). This provision shall not apply to Confidential
Information that has been voluntarily disclosed to the public by
Company or any Company Affiliate, or otherwise entered the public
domain through lawful means. Confidential Information shall include,
but not be limited to, all nonpublic information relating to any of
the following regarding Company or any Company Affiliate: (1)
business, research, development and marketing plans, strategies and
forecasts; (2) business; (3) products (whether existing, in
development, or being contemplated); (4) customers' identities,
usages, and requirements; (5) reports; (6) formulas;
(7) specifications; (8) designs, software and other technology;
(9) research and development programs; and (10) terms of contracts.
c. Works of Authorship.
Executive agrees that any original works of authorship, including,
without limitation, all documents, blueprints, drawings, mask works
and computer programs (including, without limitation, all software,
firmware, object code, source code, documentation, specifications,
revisions, supplements, modules, and upgrades), conceived, created,
performed or produced during the term of Executive's employment with
Company or any Company Affiliate, and all foreign and domestic,
registered and unregistered, copyrights and mask work rights and
applications for registrations therefor related to any such work
of authorship, in each case, whether or not made during regular
working hours, relating to the actual or anticipated business,
products, research or development of Company or any Company Affiliate
(collectively, "Works of Authorship") shall be the exclusive property
of Company or any Company Affiliate as Company shall specify. To the
extent that Executive has or obtains any right, title or interest in
or to any Works of Authorship, Executive hereby assigns and agrees to
assign to Company or any Company Affiliate as Company shall specify,
all of such right, title and interest therein and thereto. This
paragraph does not include any publicly available materials, unless
such materials shall have become public in violation of this
Agreement.
d. Disclosure.
Executive shall promptly and fully disclose any and all Inventions
and Works of Authorship to Company's General Counsel or other official
as Company's Board of Directors may designate for such purpose.
e. Further Assistance.
Executive shall, during Executive's employment with Company or any
Company Affiliate and at any time thereafter, upon the request of and
at the expense of Company or such Company Affiliate, but at no
additional compensation to Executive: do all acts and things
including, but not limited to, making and executing documents,
applications and instruments and giving information and testimony, in
each case, deemed by Company from time to time, in its sole
discretion, to be necessary or appropriate (1) to vest, secure,
defend, protect or evidence the right, title and interest of Company
in and to any and all Inventions, Works of Authorship and Confidential
Information; and (2) to obtain for Company, in relation to all such,
letters patent, design registrations, copyright registrations and/or
mask work registrations, in the United States and any foreign
countries, and/or any reissues, renewals and/or extensions thereof.
f. Previous Obligations.
Executive represents and warrants to Company that Executive has no
continuing obligation with respect to assignment of inventions,
developments or improvements to any previous employer(s), other than
Robotic Vision Systems, Inc. respecting any invention, development,
or improvement made prior to 1 March 1999, nor does Executive claim
any existing title in any previous unpatented inventions, developments
or improvements within the scope of this Section 8. except as may be
set forth on an Exhibit hereto acknowledged on the face thereof as an
Exhibit hereto by an authorized representative of Company.
g. Return of Documents.
All media on which any Inventions, Works of Authorship or Confidential
Information may be recorded or located, including, without limitation,
documents, samples, models, blueprints, photocopies, photographs,
drawings, descriptions, reproductions, cards, tapes, discs and other
storage facilities (collectively, "Documentation") made by Executive
or that come into Executive's possession by reason of Executive's
employment are the property of Company and shall be returned to
Company by Executive upon termination of employment. Executive will
not deliver, reproduce, or in any way allow any Documentation to be
delivered or used by any third party without the written direction or
consent of a duly authorized representative of Company.
9. Competition.
Executive covenants and agrees that (a) for so long as he shall
be employed by Company or any Company affiliate, he shall not,
directly or indirectly, as principal, partner, agent, servant,
employee, stockholder, or otherwise, anywhere in the world (the
"Territory"), engage or attempt to engage in any business activity
competitive with the business being conducted or, to the knowledge of
Executive prior to Notice of Termination or actual termination,
whichever is earlier, being planned to be conducted by Company or any
Company affiliate, and (b) for one year after termination, Executive
shall not, in the Territory, so engage or attempt to engage in any
business activity competitive with any business conducted or planned
to be conducted by any of Company or any Company affiliate within one
year prior to termination. The foregoing shall not prohibit
Executive, his affiliates, spouse, and children from owning
beneficially any publicly traded security, so long as the beneficial
ownership by all of them, when combined with the beneficial ownership
of such publicly traded security by any person (as defined above) of
which any of them is a member, constitutes less than 5% of the class
of such publicly traded security. Executive recognizes that the
foregoing territorial and time limitations are reasonable and properly
required for the adequate protection of the business of Company and
that in the event that any such territorial or time limitation is
deemed to be unreasonable in any proceeding to enforce these
provisions or otherwise, Executive agrees to request, and to submit
to, the reduction of said territorial or time limitation to such an
area or period as shall be deemed reasonable by the relevant tribunal.
In the event that Executive shall be in violation of the foregoing
restrictive covenants, then the time limitation thereof shall be
extended for a period of time during which such breach or
breaches shall occur. The existence of any claim or cause of action by
Executive against Company, if any, whether predicated upon this
Agreement or otherwise, shall not constitute a defense to the
enforcement by Company of the foregoing restrictive covenants.
10. Miscellaneous.
a. Executive agrees that a remedy at law for any breach or proposed or
attempted breach of the provisions of Sections 8 or 9 shall be
inadequate and that Company shall be entitled to injunctive relief
with respect to such breach or proposed or attempted breach, in
addition to any other remedy it might have. The provisions of
Sections 8 and 9 shall be enforceable notwithstanding the existence of
any claim or cause of action of Executive against Company or any
Company Affiliate, whether predicated on such Section or otherwise.
b. Except as otherwise provided herein, the agreements, assignments
and appointments made by Executive hereunder and the obligations of
Executive herein shall survive the termination of Executive's
employment with Company, whether by Executive or Company.
c. This Agreement may be modified only by a written instrument duly
executed by the parties hereto. No term or provision of this
Agreement shall be deemed waived, and no breach excused, unless such
waiver or consent shall be in writing and signed by the parties
hereto. The failure of either party or any Company Affiliate at any
time to enforce performance of any provision of this Agreement shall
in no way affect such person's rights thereafter to enforce the
same, nor shall the waiver by any such person of any breach of any
provision hereof be deemed to be a waiver of any other breach of the
same or any other provision hereof.
d. If any provision of this Agreement, or the application of such
provision, is held invalid, the remainder of this Agreement and the
application of such provision to persons or circumstances other than
those as to which it is held invalid shall not be affected thereby.
e. Any notice authorized or required to be given hereunder shall be
deemed given or made, if in writing, upon personal delivery, by
telecopier on the date that transmission is confirmed electronically,
if such confirmation occurs by 4:00PM on such date and such date is a
business day, or otherwise, on the first business day thereafter, or
three days after mailing by certified or registered mail, return
receipt requested, to the Company, at the address set forth at the
top of the first page, to the attention of Mr. Paul Richman,
Chairman of the Board, or to the Executive at the address to which
this letter is addressed, as set forth above, or such other address
of which either party shall give notice to the other.
f. This agreement shall be governed by the laws of the state of New
York, applicable to an agreement negotiated, signed, and wholly to be
performed in such state.
g. Any dispute arising hereunder (including but not limited to
interpretation or performance) shall be resolved in New York, NY by
arbitration before a single arbitrator in accordance with the rules of
the American Arbitration Association, except that the arbitrator shall
be an active member of the New York bar specializing for at least 15
years in general corporate law and contracts practice, who shall
apply the terms of this agreement and make findings of fact and
conclusions of law in making the arbitration award.
IN WITNESS WHEREOF, the undersigned have executed this agreement on the dates
below as of the date first written above.
STANDARD MICROSYSTEMS
CORPORATION
/s/ Steven J. Bilodeau By: /s/ Paul Richman
- ---------------------- ---------------------
Steven J. Bilodeau Paul Richman
Chairman of the Board
Date: March 18, 1999 Date: March 18, 1999
<PAGE>
Exhibit 13
PAGE 11:
FINANCIAL REVIEW
Selected Financial Data 12
Management's Discussion and Analysis 13
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Report on Management's Responsibilities 38
Report of Independent Public Accountants 38
<PAGE>
<TABLE>
<CAPTION>
Standard Microsystems Corporation and Subsidiaries Page 12
SELECTED FINANCIAL DATA
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
As of February 28 or 29, and for the years then ended 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Operating Results
Revenues $ 155,826 $ 148,326 $ 180,918 $ 138,882 $ 117,415
Operating income (loss) 6,439 (561) (7,214) 6,632 17,593
=========================================================================================================================
Net income (loss) from continuing operations $ 6,003 $ (1,105) $ (4,613) $ 3,596 $ 11,066
Net income (loss) from discontinued operations (5,255) (18,846) (16,684) 8,005 14,101
Gain (loss) on sales of discontinued operations (13,293) 1,030 -- -- --
Extraordinary item -- -- -- -- (944)
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12,545) $ (18,921) $ (21,297) $ 11,601 $ 24,223
========================================================================================================================
Basic net income (loss) per share
Continuing operations $ 0.38 $ (0.07) $ (0.33) $ 0.27 $ 0.85
Discontinued operations (1.17) (1.15) (1.21) 0.60 1.08
Extraordinary item -- -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ (0.79) $ (1.22) $ (1.54) $ 0.87 $ 1.86
========================================================================================================================
Diluted net income (loss) per share
Continuing operations $ 0.38 $ (0.07) $ (0.33) $ 0.27 $ 0.83
Discontinued operations (1.17) (1.15) (1.21) 0.59 1.06
Extraordinary item -- -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ (0.79) $ (1.22) $ (1.54) $ 0.86 $ 1.82
========================================================================================================================
Weighted average common shares outstanding
Basic net income (loss) per share 15,789 15,519 13,838 13,372 13,032
Diluted net income (loss) per share 15,824 15,519 13,838 13,515 13,305
========================================================================================================================
Balance Sheet Data
Cash and short-term investments $ 70,071 $ 55,758 $ 8,382 $ 18,459 $ 29,478
Working capital 99,582 83,784 45,164 36,718 48,320
Total assets 201,967 210,049 217,240 244,228 200,699
Long-term obligations
(excluding current obligations) 7,816 7,297 11,584 4,593 915
Shareholders' equity 158,434 172,377 171,797 193,502 173,983
</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, peripherals and
embedded systems markets. 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 networking applications, connectivity applications and embedded
control systems. Most of the Company's IC products are manufactured by
world-class semiconductor foundries and assemblers.
Standard Microsystems Corporation sells its ICs to a worldwide customer base,
which includes most of the world's leading personal computer and personal
computer motherboard manufacturers. 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 OPERATIONS
Over the past several years, the Company has carefully reviewed its various
divisions and business units, evaluating each unit's opportunities for future
growth and success in the various markets in which that unit has participated.
This has resulted in a strategy of refocusing the Company's resources on its
core semiconductor integrated circuits business, which is where the Company
believes it has its most valuable assets and its best growth opportunities. In
this regard, the Company divested itself of its local area networking hardware
business in 1997, and, in April 1999, announced the intention to divest its
Foundry Business Unit.
In March 1999, the Company's Board of Directors approved a plan for the Company
to divest its Foundry Business Unit, which has been experiencing operating
losses over the past several years. In April 1999, the Company signed a Letter
of Intent to combine the operations of its Foundry Business Unit with the
operations of privately-held Inertia Optical Technology Applications, Inc.
(IOTA) of Newark, NJ. Both businesses specialize in MicroElectroMechanical
Systems (MEMS), which are specialty semiconductor-related products with
mechanical properties used in such applications as sensors, ink jet print
heads, valves, thin film RC networks, accelerometers and actuators. The
combined businesses, to be named Standard MEMS, Inc. (SMI), will focus on
leveraging the strengths of each business to create a broad supplier of MEMS,
and will operate out of an existing SMSC facility in Hauppauge, New York, as
well as in several IOTA facilities in New Jersey, California, Massachusetts,
Mexico and Germany. Under the terms of the Letter of Intent, SMI will be
majority owned by the shareholders of IOTA, with SMSC initially retaining a
38% interest. The Company has committed to reducing its investment in SMI
below 20% within one year. Completion of the transaction is subject to
executing definitive agreements and final approvals from both company's Boards
of Directors, and is expected to occur before the end of SMSC's second quarter
ending August 31, 1999.
Following several years of reduced revenues and significant operating losses,
during the third quarter of fiscal 1998, the Company reorganized its System
Products Division, which designed, produced and marketed products used in the
local area networking of personal computers, into a new corporation called SMC
Networks, Inc. Concurrent with this reorganization, the Company sold an 80.1%
interest in the new corporation to Taiwan-based Accton Technology Corporation
(Accton), 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 sheets. The
Company is currently involved in a dispute with Accton, an Accton affiliate,
and SMC Networks, Inc. regarding this transaction, as described in Note 11 of
the Notes to Consolidated Financial Statements.
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, and the recently
announced intention to divest its MEMS business, has positioned the Company
exclusively as a supplier of semiconductor integrated circuits and will allow
the Company to better devote management attention and resources to this core
business.
The Company's historical financial information has been restated to report the
operating results, net assets and cash flows of the Foundry Business Unit, and
the System Products Division through September 1997, as discontinued operations
for all periods presented. The following discussion and analysis focuses on
continuing operations, as restated, unless otherwise noted.
REVENUES
The Company's revenues increased 5% to $155.8 million in fiscal 1999, compared
to $148.3 million in fiscal 1998. The Company believes it gained market share,
and now considers itself to be the worldwide leader, in shipments of I/O
integrated circuits, as evidenced by a unit shipment increase of almost 30% in
fiscal 1999 to more than 36 million units. Declines in average selling prices
resulted in net revenue growth from I/O circuits of about 2%. Overall, revenues
from shipments of I/O circuits contributed about 80% and 82% of the Company's
revenues in fiscal 1999 and 1998, respectively. Combined revenues from local
area networking and embedded control devices were level in fiscal 1999,
compared to fiscal 1998. The Company introduced a line of connectivity products
during fiscal 1999, offering devices supporting new communications standards
for both personal computer and PC peripheral applications. Connectivity
products are expected to provide increasing revenues in fiscal 2000.
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 compared to fiscal 1997. 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.
International shipments accounted for 83% of the Company's revenues in fiscal
1999, compared to 73% in fiscal 1998 and 68% in fiscal 1997. While the demand
for the Company's products is primarily driven by the worldwide demand for
personal computers and peripheral devices, 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. The Company expects that international shipments,
particularly to the Asia and Pacific Rim region, will continue to represent a
significant portion of its revenues.
GROSS PROFIT
The Company's gross profit margin increased from 30.0% in fiscal 1998 to 35.9%
in fiscal 1999. This improvement was driven primarily by reduced product
material costs and a shift to higher-margined products, partially offset by
lower average selling prices. During fiscal 1999, the Company was able to
reduce product costs through lower foundry wafer prices, lower contract
assembly costs, the adoption of finer geometry fabrication processes and the
redesign of products to reduce die sizes. Partially offsetting these factors,
the Company recorded a $1.7 million charge to cost of goods sold during the
fourth quarter of fiscal 1999 to reduce the carrying value of certain
slow-moving and obsolete inventory to its net realizable value.
The Company's gross profit margin increased from 24.2% in fiscal 1997 to 30.0%
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. 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 Company's products generally experience declines in average selling prices
and gross margins over their life cycles. In order to offset declines in
average selling prices, the Company must continue to reduce the costs of
products through product and manufacturing design changes, volume discounts,
yield improvements and lower costs negotiated with subcontract manufacturers.
The Company's gross profit margin is also dependent on its ability to introduce
new, competitive products, which generally command higher margins early in
their life cycles.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) expenses increased to $17.4 million in fiscal
1999, a 22% increase over $14.3 million of R&D expenses in fiscal 1998, after a
12% increase in fiscal 1998 from $12.8 million of R&D expenses in fiscal 1997.
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. The Company's fiscal
2000 engineering efforts will focus on continuing enhancements and cost
reductions to its I/O product line and also on expansion into microprocessor
chipset, and other, technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $30.6 million in fiscal 1999,
a slight decrease from $30.7 million reported in fiscal 1998. This decline is
primarily the result of lower administrative overhead accomplished primarily
through staff attrition and reductions in professional services and other
general administrative expenses, driven by the Company's October 1997 decision
to exit the local area networking business. These declines were partially
offset by higher direct selling and marketing expenses associated with higher
fiscal 1999 revenues.
Fiscal 1998 selling, general and administrative expenses of $30.7 million were
20% below the $38.2 million reported in fiscal 1997. Most of this decline
reflects lower direct selling expenses, including sales commissions, associated
with the lower fiscal 1998 revenues, as well as lower general and
administrative overhead.
WRITE-DOWN OF INVESTMENT
During fiscal 1997 and fiscal 1998, the Company acquired a minority equity
interest of less than 20% in privately held Accelerix Incorporated of Carp,
Ontario, Canada (Accelerix) for $1.7 million. Accelerix is a semiconductor
design company specializing in high performance graphics accelerators for
personal computers. During the fourth quarter of fiscal 1999, due to the
anticipated sale of this investment below cost, the Company concluded that this
investment was permanently impaired in value. Accordingly, the Company recorded
a $1.6 million write-down of this investment to reflect its fair market value
at February 28, 1999.
OTHER INCOME AND EXPENSE
The increase in interest income in fiscal 1999 compared to fiscal 1998, and in
fiscal 1998 compared to fiscal 1997, resulted from higher average cash and cash
equivalent balances available for investment during the respective periods.
During the second quarter of fiscal 1998, a net charge of $2.0 million 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 11 of Notes to Consolidated Financial Statements for additional details.
INCOME TAXES
The Company's effective income tax rate for fiscal 1999 was 30%. The effective
income tax benefit rates were 37% and 36% in fiscal 1998 and fiscal 1997,
respectively. The Company's reduced effective income tax rate in fiscal 1999
primarily reflects the impact of tax-exempt interest income earned on the
Company's short-term investments. Generally, the Company's 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 tax benefit
rates included 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
$55.8 million at the end of fiscal 1998 to $70.1 million at the end of fiscal
1999. Working capital increased to $99.6 million at February 28, 1999 from
$83.8 million at February 28, 1998.
Operating activities generated $14.6 million of cash in fiscal 1999, compared
to $16.2 million generated in fiscal 1998. A significant portion of the fiscal
1998 cash generated by operating activities was derived from a $12.7 million
reduction in inventories during that period.
In fiscal 1995, the Company entered into an agreement with Lucent Technologies,
Inc. (Lucent) whereby the Company purchased approximately $16.0 million of
wafer manufacturing equipment for installation at Lucent's Madrid, Spain,
facility. In September 1998, the Company and Lucent mutually terminated this
agreement, whereby Lucent purchased the wafer manufacturing equipment from the
Company for $8.2 million, the equipment's then net book value. Of these
proceeds, $6.2 million was paid in cash, with the remaining $2.0 million to be
paid in ten equal quarterly installments beginning in December 1998.
In October 1998, the Company's Board of Directors authorized the Company to
repurchase up to one million shares of its common stock on the open market or
in private transactions. During the third quarter of fiscal 1999, the Company
repurchased 521,000 shares of common stock at a cost of $3.0 million. These
shares are currently held as treasury stock.
Inventory turnover continued to improve during fiscal 1999, following similar
improvement in fiscal 1998, resulting in a decline in inventories to $13.8
million at February 28, 1999 from $16.9 million at February 28, 1998.
Inventories were $29.7 million at February 28, 1997.
The net operating loss generated by the Company in fiscal 1998 (most of which
was attributable to discontinued operations) was carried-back for income tax
purposes, resulting in fiscal 1999 refunds of $18.1 million of income taxes
paid in prior periods. Most of these refunds are included in "Net cash
provided by (used for) discontinued operations" on the accompanying
Consolidated Statements of Cash Flows.
During fiscal 1998, the Company's cash and short-term investments increased
significantly, from $8.4 million at February 28, 1997 to $55.8 million at
February 28, 1998. Several significant transactions contributed to this
increase, including a $14.7 million equity investment in the Company by Intel
Corporation, the sale of an 80.1% interest in the Company's former System
Products Division to Accton Technology Corporation for $36.8 million in cash,
after expenses, and the release from escrow of the remaining $7.1 million of
proceeds from a fiscal 1996 sale of a business unit.
As noted above, in March 1997, Intel Corporation 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 that increase annually during the term of the warrant.
Through February 28, 1999, Intel had not exercised this warrant.
The Company maintains a combined $10.0 million revolving line of credit with
two banks, which permits the Company to borrow funds on a revolving basis,
primarily to finance working capital needs. There have been no borrowings
under this credit line 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 1999 expiration.
The majority of the $10.8 million of capital expenditures incurred in fiscal
1999 were for expanding the Company's semiconductor test operation and
acquiring intellectual property used in the design of the Company's products.
There were no material commitments for capital expenditures as of February 28,
1999. Fiscal 2000 capital expenditures are expected to approximate fiscal 1999
capital expenditures with further expenditures planned for semiconductor test
equipment and engineering tools.
The Company has considered in the past, and will continue to consider, various
possible transactions to secure necessary foundry manufacturing capacity,
including equity investments in, prepayments to, or deposits with foundries, in
exchange for guaranteed capacity or other arrangements which address the
Company's manufacturing requirements.
The Company expects that its cash, cash equivalents, 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 2000.
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 has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and suppliers that are not Year 2000 compliant, and to develop, test and
implement remediation and contingency plans to mitigate these risks. The
Company's Year 2000 project is addressing risks in the areas of business
application software, technical infrastructure, end-user computing, engineering
and development tools, supplier and service provider compliance, manufacturing
tools, facilities infrastructure and the Company's products. In addition, the
Company provides its customers with information on its Year 2000 project and
progress made towards Year 2000 compliance.
Several years ago, the Company installed certain Year 2000 compliant
information systems, and has moved a substantial portion of its core business
applications to this platform. The Company is currently installing additional
new information systems and expects all internal information systems to achieve
Year 2000 compliance during the middle of calendar year 1999. The Company is
also assessing the impact of the Year 2000 issue on its products, and has not
identified, and does not expect to identify, any material issues in that
regard. Because most of the Company's information systems achieved Year 2000
compliance with the transition to a new information system several years ago,
the Company has not yet incurred any material expenditures to specifically
address Year 2000 issues. Going forward, the Company is committed to expending
the resources necessary to address this issue, but at this time, does not
anticipate any material expenditures for the resolution of 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
vendors, suppliers and service organizations with which the Company conducts
business. Based solely on responses received to date from these parties, the
Company has no reason to believe that there will be any material adverse impact
on the Company's financial condition or results of operations relating to any
Year 2000 issues of such parties. However, if the responses received from
these third parties are not accurate or happen to change, then there could be
an unforeseen material adverse impact on the Company's financial condition and
results of operations. The Company is continuing to reasonably assess the
impact, if any, that third parties which may not be Year 2000 compliant may
have on its operations, and expects to complete this assessment by the end of
June 1999.
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 that 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. According
to most generally available market research, worldwide semiconductor revenues
actually declined in calendar 1998 as compared to calendar 1997. 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 and peripheral devices. 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 greater 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 more
volatile than other segments of the PC marketplace.
Product Development and Technological Change - The Company's prospects are
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.
The Company's future growth will depend on, among other things, its ability to
continue to expand its product line. The Company's future product plans include
entering the microprocessor chipset marketplace, offering products for
applications that are presently served by other suppliers. Some of these
suppliers have well-established market positions and products that have already
been proven to be technologically and economically competitive. There can be
no assurance that the Company will be successful in displacing these suppliers
in the targeted applications. Moreover, functionality currently performed by
the Company's standalone input/output integrated circuits is increasingly being
integrated into microprocessor chipsets. This may not only impede the Company's
efforts to penetrate the microprocessor chipset market, but may also displace
the Company's products in the applications that they presently serve.
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 could 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.
Shipments to Distributors - Almost 35% of the Company's fiscal 1999 revenues
were made through distributors, the largest of which are located in the Far
East. The Company's distributors generally offer products of several different
suppliers, including products that may be competitive with the Company's
products. Accordingly, there is risk that these distributors may give higher
priority to products of other suppliers, thus reducing their efforts to sell
the Company's products. In addition, the Company's agreements with its
distributors are generally terminable at the distributor's option. No assurance
can be given that future sales by distributors will continue at current levels
or that the Company will be able to retain its current distributors on
acceptable terms. A reduction in sales efforts by one or more of the Company's
current distributors or a termination of any distributor's relationship with
the Company could have a materially adverse effect on the Company's operating
results.
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. The recent economic
conditions in this region have been characterized by idle production capacity,
unemployment, bank failures, reduced consumer spending and currency
devaluation. Any of these factors could reduce demand for the products in
which the Company's integrated circuits are used.
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, changes in the expectations of market analysts or investors, 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 often had a significant impact on
the stock prices of high technology companies, at times for reasons that appear
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)
<TABLE>
<CAPTION>
As of February 28, 1999 1998
<S> <C> <C>
- --------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 68,071 $ 47,155
Short-term investments 2,000 8,603
Accounts receivable, net of allowance for doubtful
accounts of $1,111 and $1,011, respectively 22,608 18,126
Inventories 13,785 16,850
Deferred tax benefits 8,154 6,226
Other current assets 9,142 5,731
- --------------------------------------------------------------------------
Total current assets 123,760 102,691
- --------------------------------------------------------------------------
Property, plant and equipment:
Land 3,832 3,832
Buildings and improvements 29,846 28,879
Machinery and equipment 63,890 71,675
- --------------------------------------------------------------------------
97,568 104,386
Less: accumulated depreciation 62,916 64,122
- --------------------------------------------------------------------------
Property, plant and equipment, net 34,652 40,264
- --------------------------------------------------------------------------
Other assets 38,219 37,688
Net assets of discontinued operations 5,336 29,406
- --------------------------------------------------------------------------
$201,967 $210,049
==========================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 8,873 $ 10,288
Accrued expenses and other liabilities 14,453 8,066
Current portion of obligations under capital leases 852 553
- --------------------------------------------------------------------------
Total current liabilities 24,178 18,907
- --------------------------------------------------------------------------
Long-term debt -- --
Obligations under capital leases 3,017 2,524
Other liabilities 4,799 4,773
Commitments and contingencies
Minority interest in subsidiary 11,539 11,468
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 16,045,000 and 15,926,000
shares, respectively 1,605 1,593
Additional paid-in capital 108,665 107,306
Retained earnings 47,454 59,999
Treasury stock, 521,000 shares, at cost (2,957) --
Accumulated other comprehensive income 3,667 3,479
- --------------------------------------------------------------------------
Total shareholders' equity 158,434 172,377
- --------------------------------------------------------------------------
$201,967 $210,049
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 21
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended February 28, 1999 1998 1997
<S> <C> <C> <C>
Revenues $ 155,826 $ 148,326 $ 180,918
Cost of goods sold 99,846 103,863 137,163
- --------------------------------------------------------------------------------------------
Gross profit 55,980 44,463 43,755
- --------------------------------------------------------------------------------------------
Operating expenses:
Research and development 17,437 14,298 12,808
Selling, general and administrative 30,550 30,726 38,161
Write-down of investment 1,554 -- --
- --------------------------------------------------------------------------------------------
49,541 45,024 50,969
- --------------------------------------------------------------------------------------------
Income (loss) from operations 6,439 (561) (7,214)
- --------------------------------------------------------------------------------------------
Other income (expense):
Interest income 2,667 1,151 523
Interest expense (279) (249) (619)
Other income (expense), net (167) (1,978) 174
- --------------------------------------------------------------------------------------------
2,221 (1,076) 78
- --------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes and
minority interest 8,660 (1,637) (7,136)
Provision for (benefit from) income taxes 2,586 (603) (2,544)
Minority interest in net income of subsidiary 71 71 21
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations 6,003 (1,105) (4,613)
- --------------------------------------------------------------------------------------------
Discontinued operations:
Income (loss) from discontinued operations (net of
income tax benefits of $2,956, $10,113 and $9,182) (5,255) (18,846) (16,684)
Gain (loss) on sales of discontinued operations
(net of income taxes of ($1,908) and $555) (13,293) 1,030 --
- --------------------------------------------------------------------------------------------
Net loss $ (12,545) $ (18,921) $ (21,297)
============================================================================================
Basic and diluted net loss per share:
Income (loss) from continuing operations $ 0.38 $ (0.07) $ (0.33)
Loss from discontinued operations (0.33) (1.21) (1.21)
Gain (loss) on sales of discontinued operations (0.84) 0.06 --
- --------------------------------------------------------------------------------------------
Basic and diluted net loss per share $ (0.79) $ (1.22) $ (1.54)
============================================================================================
</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
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Paid-In Retained Treasury Stock Comprehensive Total
Shares Amount Capital Earnings Shares Amount Income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 1996 13,711 $1,371 $ 84,737 $100,217 -- $ -- $ 7,177 $193,502
Comprehensive loss:
Net loss -- -- -- (21,297) -- -- -- (21,297)
Other comprehensive loss
Unrealized loss on investment -- -- -- -- -- -- (1,273) (1,273)
Foreign currency translation adjustment -- -- -- -- -- -- (1,510) (1,510)
---------
Total other comprehensive loss (2,783)
---------
Total comprehensive loss (24,080)
Shares issued under incentive savings
and retirement plan 110 11 1,351 -- -- -- -- 1,362
Stock options exercised 61 6 425 -- -- -- -- 431
Tax effect of employee stock plans -- -- 42 -- -- -- -- 42
Restricted stock grants to employees, net (6) -- 540 -- -- -- -- 540
- --------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1997 13,876 1,388 87,095 78,920 -- -- 4,394 171,797
Comprehensive loss:
Net loss -- -- -- (18,921) -- -- -- (18,921)
Other comprehensive loss
Unrealized loss on investment -- -- -- -- -- -- (333) (333)
Foreign currency translation adjustment -- -- -- -- -- -- (582) (582)
---------
Total other comprehensive loss (915)
---------
Total comprehensive loss (19,836)
Shares issued under incentive savings
and retirement plan 114 11 1,163 -- -- -- -- 1,174
Stock options exercised 386 39 3,444 -- -- -- -- 3,483
Tax effect of employee stock plans -- -- 709 -- -- -- -- 709
Restricted stock grants to employees, net 7 1 426 -- -- -- -- 427
Investment by Intel Corporation, net 1,543 154 14,469 -- -- -- -- 14,623
- --------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 15,926 1,593 107,306 59,999 -- -- 3,479 172,377
Comprehensive loss:
Net loss -- -- -- (12,545) -- -- -- (12,545)
Other comprehensive income (loss)
Unrealized loss on investment -- -- -- -- -- -- (334) (334)
Foreign currency translation adjustment -- -- -- -- -- -- 522 522
---------
Total other comprehensive income 188
---------
Total comprehensive loss (12,357)
Shares issued under incentive savings
and retirement plan 95 10 778 -- -- -- -- 788
Stock options exercised 23 2 184 -- -- -- -- 186
Tax effect of employee stock plans -- -- 16 -- -- -- -- 16
Restricted stock grants to employees, net 1 -- 381 -- -- -- -- 381
Purchases of treasury stock -- -- -- -- (521) (2,957) -- (2,957)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1999 16,045 $1,605 $108,665 $ 47,454 (521) $(2,957) $ 3,667 $158,434
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended February 28, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 151,998 $ 143,884 $ 188,430
Cash paid to suppliers and employees (139,735) (128,039) (193,175)
Interest received 2,737 1,216 515
Interest paid (279) (261) (634)
Income taxes received (paid) (92) 1,360 (287)
Cash paid for litigation settlement -- (2,000) --
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 14,629 16,160 (5,151)
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (10,847) (3,854) (8,654)
Sales of machinery and equipment 6,464 53 54
Purchases of short-term investments (5,002) (8,603) --
Sales of short-term investments 11,605 -- --
Escrow investment (110) (2,047) --
Release of escrow investment -- 7,110 --
Investment in Accelerix Incorporated -- (250) (1,483)
Other (454) -- (531)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 1,656 (7,591) (10,614)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 363 18,405 431
Purchases of treasury stock (2,957) -- --
Borrowings under line of credit agreements -- 33,960 47,731
Repayments of borrowings under line of credit agreements -- (40,960) (40,731)
Repayments of obligations under capital leases (654) (152) --
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (3,248) 11,253 7,431
- ------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents 170 (544) (1,068)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) discontinued operations 7,709 (17,282) (675)
- ------------------------------------------------------------------------------------------------------
Net cash provided by sale of discontinued operation -- 36,777 --
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 20,916 38,773 (10,077)
Cash and cash equivalents at beginning of year 47,155 8,382 18,459
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 68,071 $ 47,155 $ 8,382
======================================================================================================
Reconciliation of income (loss) from continuing operations
to net cash provided by (used for) operating activities:
Income (loss) from continuing operations $ 6,003 $ (1,105) $ (4,613)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used for) operating activities:
Depreciation and amortization 10,544 11,328 10,462
Other adjustments, net 2,340 1,328 1,442
Changes in operating assets and liabilities:
Accounts receivable (4,183) (4,359) 7,449
Inventories 3,171 12,716 (6,392)
Accounts payable and accrued expenses and other liabilities (3,558) (3,740) (10,984)
Other changes, net 312 (8) (2,515)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities $ 14,629 $ 16,160 $ (5,151)
======================================================================================================
Noncash Investing and Financing Activities:
During fiscal 1999 and fiscal 1998, the Company financed certain capital
expenditures totaling $1,447,000 and $3,229,000, respectively, through capital
lease obligations. During fiscal 1999, the Company sold certain equipment for
$8,224,000, of which installment payments of $790,000 and $592,000 are
receivable in fiscal 2000 and 2001, respectively.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 24-38
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.
RECLASSIFICATIONS
Certain items shown have been reclassified to conform to the fiscal 1999
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of cash in banks and highly
liquid debt instruments purchased with original 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, 1999, 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, 1999.
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, 1999 1998
- ------------------------------------------------
Inventories:
Raw materials $ 475 $ 295
Work-in-process 9,310 10,240
Finished goods 4,000 6,315
- ------------------------------------------------
$ 13,785 $ 16,850
================================================
During the fourth quarter of fiscal 1999, the Company recorded a $1,750,000
charge to cost of goods sold to write-down certain slow-moving and obsolete
inventory to net realizable value.
<PAGE>
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.
COST BASIS INVESTMENTS
Equity investments of less than 20% in non-publicly traded companies are
carried at cost. Changes in the value of these investments are not recognized
unless an impairment in value is deemed to be other than temporary.
INVESTMENT IN EQUITY SECURITIES
As of February 28, 1999 and 1998, 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.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment in value using a gross
cash flow basis and will reserve for impairment whenever events or
circumstances indicate that the carrying amount of the assets may not be
fully recoverable.
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.
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.
<PAGE>
NET INCOME (LOSS) PER SHARE
The Company adopted the provisions of SFAS No. 128, Earnings per Share,
beginning with the consolidated financial statements for the fiscal year ended
February 28, 1998. 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 net income
(loss) 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):
1999 1998 1997
- ------------------------------------------------------------------------
Average shares outstanding for
basic net income (loss) per share 15,789 15,519 13,838
Dilutive effect of stock options 35 -- --
- ------------------------------------------------------------------------
Average shares outstanding for
diluted net income (loss) per share 15,824 15,519 13,838
========================================================================
The Company reported a net loss from continuing operations 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.
COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 separates comprehensive income
into two components: net income and other comprehensive income. Other
comprehensive income refers to revenues, expenses, gains and losses that, under
generally accepted accounting principles, are recorded as elements of
shareholders' equity and are excluded from net income. The Company's other
comprehensive income consists of foreign currency translation adjustments from
those subsidiaries not using the U.S. dollar as their functional currency,
and unrealized gains and losses on a long-term equity investment.
The changes in accumulated other comprehensive income for the three years ended
February 28, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Unrealized Foreign Currency Accumulated Other
Gain on Translation Comprehensive
Investment Adjustment Income
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Balance at February 29, 1996 $ 2,226 $ 4,951 $ 7,177
Period change (1,273) (1,510) (2,783)
- -------------------------------------------------------------------------------------
Balance at February 28, 1997 953 3,441 4,394
Period change (333) (582) (915)
- -------------------------------------------------------------------------------------
Balance at February 28, 1998 620 2,859 3,479
Period change (334) 522 188
- -------------------------------------------------------------------------------------
Balance at February 28, 1999 $ 286 $ 3,381 $ 3,667
=====================================================================================
</TABLE>
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 provides guidance on when costs related to
software developed or obtained for internal use should be capitalized or
expensed. SOP 98-1 is effective beginning in fiscal 2000, and the Company does
not expect this new statement to materially impact its consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and will not require retroactive
restatement of prior period financial statements. The Company does not
presently make use of derivative instruments.
2. DISCONTINUED OPERATIONS
In March 1999, the Company's Board of Directors approved a plan to divest a
majority interest in its Foundry Business Unit (FBU). This business unit
specializes in the production of MicroElectroMechanical Systems (MEMS), which
are specialty semiconductor-related products with mechanical properties used in
such applications as sensors, ink jet print heads, valves, thin film RC
networks, accelerometers and actuators. The FBU serves a different customer
base than the Company's integrated circuits business, and is generally
managed as a separate operating unit with its own identifiable assets. This
business unit has been experiencing operating losses over the past several
years, and this action is intended to enable both the Company and the Foundry
Business Unit, as reorganized, to better devote management attention and
resources to the core strategies of each business.
In April 1999, the Company signed a Letter of Intent with Inertia Optical
Technology Applications, Inc. (IOTA) of Newark, NJ, to combine the operations
of the Company's Foundry Business Unit with the operations of privately-held
IOTA into a new company, Standard MEMS, Inc. IOTA, like the Company's FBU,
specializes in MEMS devices. Standard MEMS, Inc. will operate out of an
existing SMSC facility in Hauppauge, New York as well as in several IOTA
facilities in New Jersey, California, Massachusetts, Mexico and Germany.
Under the terms of the Letter of Intent, Standard MEMS, Inc. will be majority
owned by the shareholders of IOTA, with SMSC initially retaining a 38%
interest. The Company has committed to reducing its investment in Standard
MEMS, Inc. below 20% within one year. Completion of the transaction is subject
to executing definitive agreements and final approvals from both Company's
Boards of Directors, and is expected to occur before the end of SMSC's
second quarter ending August 31, 1999.
As a result of this transaction, SMSC will report the operating results, net
assets and cash flows of the Foundry Business Unit as a discontinued operation
and has recorded a pre-tax charge of $15,200,000 in the fourth quarter ended
February 28, 1999. This charge covers write-downs of certain assets, operating
losses expected to occur before completion of the transaction, and other costs
associated with the transaction.
Summarized financial information for this discontinued operation is as follows
(in millions):
As of February 28, and for the years then ended 1999 1998 1997
- ----------------------------------------------------------------------------
Revenues $10.3 $7.4 $15.6
- ----------------------------------------------------------------------------
Income (loss) before income taxes (8.2) (5.3) 0.2
- ----------------------------------------------------------------------------
Net income (loss) (5.3) (3.4) 0.1
- ----------------------------------------------------------------------------
Current assets 5.1 5.9 4.8
- ----------------------------------------------------------------------------
Total assets 6.6 13.0 13.2
- ----------------------------------------------------------------------------
Current liabilities 1.3 0.7 2.0
- ----------------------------------------------------------------------------
Net assets 5.3 12.3 11.2
============================================================================
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 System Products Division to a
newly formed, wholly-owned subsidiary, SMC Networks, Inc., and then sold 80.1%
of SMC Networks, Inc.'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, scheduled for release on 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 19.9% minority interest
in SMC Networks, Inc. is carried at a cost of $8,452,000 within other assets
on the accompanying consolidated balance sheets. The Company is currently
involved in a dispute with Accton, its affiliate and SMC Networks, Inc.
regarding this transaction, as described in Note 11 within these Notes to
Consolidated Financial Statements.
The net assets, operating results and cash flows of the System Products
Division are presented as a discontinued operation in the accompanying
consolidated financial statements for all periods presented.
Summarized financial information for this discontinued operation is as follows
(in millions):
As of February 28, and for the years then ended 1998 1997
- ------------------------------------------------------------------------
Revenues $65.5 $157.6
- ------------------------------------------------------------------------
Loss before income taxes (23.1) (26.1)
- ------------------------------------------------------------------------
Net loss (15.4) (16.8)
- ------------------------------------------------------------------------
Current assets 19.1 57.7
- ------------------------------------------------------------------------
Total assets 19.1 80.6
- ------------------------------------------------------------------------
Current liabilities 2.0 14.8
- ------------------------------------------------------------------------
Net assets 17.1 65.8
========================================================================
The net assets of the discontinued operation as of February 28, 1998 consisted
primarily of income tax refunds receivable attributable to the loss generated
by the discontinued operation in fiscal 1998, all of which were received
during fiscal 1999.
3. COST BASIS INVESTMENTS
INVESTMENT IN ACCELERIX INCORPORATED
During fiscal 1997 and fiscal 1998, the Company acquired a minority equity
interest of less than 20% in privately held Accelerix Incorporated of Carp,
Ontario, Canada, (Accelerix) for $1,733,000. Accelerix is a semiconductor
design company specializing in high performance graphics accelerators for
personal computers. The Company and Accelerix also entered into an agreement
providing the Company with rights to market, second source and enhance certain
of Accelerix's technology. During the fourth quarter of fiscal 1999, due to
the anticipated sale of this investment below cost, the Company concluded that
this investment was permanently impaired in value. Accordingly, the Company
has recorded a $1,554,000 write-down of this investment to reflect its fair
market value at February 28, 1999.
<PAGE>
INVESTMENT IN CHARTERED SEMICONDUCTOR MANUFACTURING LTD.
In March 1995, the Company entered into an agreement with Singapore-based
Chartered Semiconductor Manufacturing Ltd. (Chartered), whereby the Company
acquired a minority equity interest of less than 2% in Chartered for
$19,944,000 during fiscal 1996. Under the terms of 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 sheets. Changes in the value of this
investment are not recognized unless an impairment in its value is deemed to
be other than temporary.
4. SALE OF EQUIPMENT
In September 1994, the Company entered into an agreement with Lucent
Technologies, Inc. (Lucent) whereby the Company purchased approximately $16
million of wafer manufacturing equipment for installation at Lucent's Madrid,
Spain, facility. The agreement provided that a portion of Lucent's wafer
production capacity during the five year period which began in March 1996 would
be reserved for the Company's requirements at favorable pricing. In September
1998, the Company and Lucent mutually terminated this agreement, whereby Lucent
purchased the wafer manufacturing equipment from the Company for $8,224,000,
its then-current book value. Of these proceeds, $6,250,000 was paid in cash,
with the remaining $1,974,000 to be paid in ten equal quarterly installments
beginning in December 1998. No gain or loss was recognized by the Company on
this sale. While Lucent's wafer production and pricing obligations to the
Company have been terminated, the Company intends to continue using Lucent
as a supplier.
5. OTHER BALANCE SHEET DATA
(In thousands):
As of February 28, 1999 1998
- ---------------------------------------------------
Other current assets:
Escrow deposit $ 2,157 $ 2,048
Other 6,985 3,683
- ---------------------------------------------------
$ 9,142 $ 5,731
===================================================
Other assets:
Common stock of
Chartered Semiconductor
Mfg. Ltd. $19,944 $19,944
Common stock of
SMC Networks, Inc. 8,452 8,452
Deferred tax benefits 5,323 3,880
Other assets 4,500 5,412
- ---------------------------------------------------
$38,219 $37,688
===================================================
Accrued expenses and
other liabilities:
Salaries and fringe benefits $ 2,908 $ 3,697
Royalties 138 1,162
Professional fees 251 1,179
Income taxes payable 1,161 42
Disposition costs 8,260 52
Other 1,735 1,934
- ---------------------------------------------------
$14,453 $ 8,066
===================================================
Other liabilities:
Retirement benefits $ 4,682 $ 4,401
Other 117 372
- ---------------------------------------------------
$ 4,799 $ 4,773
===================================================
<PAGE>
6. OTHER INCOME (EXPENSE)
(In thousands):
For the years ended February 28, 1999 1998 1997
- --------------------------------------------------------------------
Litigation settlement $ -- $ (2,000) $ --
Other income (expense), net (167) 22 174
- --------------------------------------------------------------------
Total other income (expense), net $ (167) $(1,978) $ 174
====================================================================
7. LINE OF CREDIT
The Company maintains a $10,000,000 line of credit with several banks, which
permits the Company to borrow funds on a revolving basis, primarily to finance
working capital needs. This line of credit is secured by accounts receivable
with the interest rate on borrowings at either the banks' prime rate or LIBOR
plus 225 basis points (depending on the maturity of the borrowing). Any unused
portion of the credit line bears an annual fee of 0.375%. As of February 28,
1999 there are no borrowings outstanding under this line of credit, and there
have been no borrowings under this credit facility since October 1997. This
line of credit expires in July 1999.
8. SHAREHOLDERS' EQUITY
COMMON STOCK REPURCHASE PROGRAM
In October 1998, the Company's Board of Directors approved a common stock
repurchase program, allowing the Company to repurchase up to one million shares
of its common stock on the open market or in private transactions. During the
third quarter of fiscal 1999, the Company repurchased 521,000 shares of common
stock at a cost of $2,957,000. These shares are currently held as treasury
stock.
INVESTMENT BY INTEL CORPORATION
In March 1997, the Company and Intel Corporation (Intel) entered into a Common
Stock and Warrant Purchase Agreement (the Agreement) whereby Intel purchased
approximately 1,543,000 of newly issued shares of the Company's common stock
for $9.50 per share, or approximately $14,654,000. Intel also received a
three-year warrant to purchase an additional 1,543,000 shares at a price per
share which increased from $10.45, to $11.40, and then to $12.35 on
March 18, 1997, 1998 and 1999, respectively. As of February 28, 1999, Intel
had not exercised its warrant. The Agreement provides Intel with certain
rights, including a right of first refusal upon certain proposed sales of
common stock by the Company, demand 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.
<PAGE>
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 this 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.
9. INCOME TAXES
The provision for (benefit from) income taxes included in the accompanying
consolidated statements of operations consists of the following (in thousands):
For the years ended February 28, 1999 1998 1997
- ------------------------------------------------------------------------
Current
Federal $ 661 $(17,597) $(8,700)
Foreign 140 55 507
State 68 376 877
- ------------------------------------------------------------------------
869 (17,166) (7,316)
Deferred (3,147) 7,005 (4,410)
- ------------------------------------------------------------------------
(2,278) (10,161) (11,726)
- ------------------------------------------------------------------------
Less: tax benefits from discontinued
operations (4,864) (9,558) (9,182)
- ------------------------------------------------------------------------
$ 2,586 $ (603) $(2,544)
========================================================================
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, 1999 1998 1997
- ------------------------------------------------------------------------
Provision for (benefit from)
income taxes computed at
the statutory rate 35.0% (35.0)% (35.0)%
State taxes 1.3 (2.0) (1.9)
Differences between foreign and
U.S. income tax rates (0.9) 1.0 2.4
Tax exempt income (5.5) (2.0) (1.2)
Other - 1.2 0.1
- ------------------------------------------------------------------------
29.9% (36.8)% (35.6)%
========================================================================
<PAGE>
The tax effects of temporary differences that result in deferred tax benefits
are as follows (in thousands):
As of February 28, 1999 1998
- -----------------------------------------------------------------------
Reserves and accruals not currently
deductible for income tax purposes $ 5,868 $ 3,164
Intangible asset amortization 3,714 4,343
Inventory valuation 1,837 1,202
Purchased in-process technology 1,715 1,949
Property, plant and equipment depreciation 320 (367)
Other 23 (185)
- -----------------------------------------------------------------------
$ 13,477 $10,106
=======================================================================
Income (loss) before provision for income taxes includes foreign income of
$363,000, $412,000 and $214,000 for fiscal 1999, 1998 and 1997, respectively.
The net operating losses reported by the Company in fiscal 1998 and 1997, the
majority of which were generated by the discontinued operations, were carried
back against taxable profits reported in prior periods and resulted in income
tax refunds of $18,092,000 and $7,921,000 received in fiscal 1999 and 1998,
respectively. Most of the refunds received are included within the Net cash
provided by (used for) discontinued operations caption in the consolidated
statements of cash flows.
Income tax benefits of $16,000, $709,000 and $42,000 related to the Company's
stock option plans for fiscal 1999, 1998 and 1997, respectively, have been
credited to additional paid-in capital.
The Company has $2,120,000 of New York State tax credit carryforwards at the
end of fiscal 1999, of which $100,000 will expire in fiscal 2000. The
remaining $2,020,000 of credit carryforwards expire at various dates in fiscal
2001 through fiscal 2008.
10. 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 $1,089,000 at an exchange rate of 119 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.
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
COMPENSATION
Certain executives and key employees are employed under separate agreements
terminating on various dates through fiscal 2002. These agreements provide,
among other things, for annual base salaries and guaranteed incentives totaling
$1,892,000, $881,000 and $350,000 in fiscal 2000, 2001 and 2002, respectively.
CAPITAL LEASES
The Company leases certain equipment under long-term capital leases, some of
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, 1999 1998
- ---------------------------------------------------------
Machinery and equipment $ 4,676 $ 3,229
Less: accumulated depreciation (824) (81)
- ---------------------------------------------------------
$ 3,852 $ 3,148
=========================================================
Future minimum lease payments for assets under capital leases for the next five
fiscal years are as follows (in thousands):
2000 $ 1,136
- ---------------------------------------------------------
2001 1,136
- ---------------------------------------------------------
2002 1,136
- ---------------------------------------------------------
2003 940
- ---------------------------------------------------------
2004 204
- ---------------------------------------------------------
Total minimum lease payments 4,552
Less: amount representing interest 683
- ---------------------------------------------------------
Present value of minimum lease payments 3,869
Less: current portion 852
- ---------------------------------------------------------
Long-term obligation $ 3,017
=========================================================
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):
2000 $ 378
- ---------------------------------------------------------
2001 279
- ---------------------------------------------------------
2002 243
- ---------------------------------------------------------
2003 121
- ---------------------------------------------------------
2004 --
- ---------------------------------------------------------
Total rent expense was $1,335,000, $1,354,000 and $908,000 in fiscal 1999,
1998 and 1997, respectively.
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.
As indicated in Note 2 to these Consolidated Financial Statements, during
fiscal 1998, the Company sold an 80.1% interest in SMC Networks, Inc., a
then-newly formed subsidiary comprised of its former local area networking
division, to an affiliate of Accton Technology Corporation (Accton) for
approximately $40,237,000 in cash, $2,012,000 of which was placed into an
escrow account.
<PAGE>
In December 1998, Accton notified the Company and the escrow agent of Accton's
intention to seek indemnification and damages from the Company in excess of
$10,000,000 by reason of alleged misrepresentations and inadequate disclosures
relating to the transaction and other alleged breaches of covenants and
representations in the related agreements. Based upon those allegations, the
escrow account has not been released. In January 1999, the Company filed an
action against Accton, SMC Networks, Inc. and other parties, seeking the
release of the escrow account to the Company on the grounds that Accton's
allegations are without merit, and seeking payment of approximately
$1,685,000 (which is included within other current assets on the Company's
consolidated balance sheets) owed to the Company by SMC Networks, Inc. as of
February 28, 1999.
The Company is confident that it negotiated and fully performed the agreements
with Accton in good faith. While it is not possible at this time to assess the
likelihood of any liability being established, the Company considers these
claims to be without merit. The Company will vigorously defend itself against
these allegations and expects that the outcome will not be material to the
Company.
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.
12. 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 $630,000,
$804,000 and $983,000 in fiscal 1999, 1998 and 1997, respectively.
The Company has authorized unissued common stock reserved for issuance to the
Plan. As of February 28, 1999, there were 142,000 shares remaining in reserve
for this plan. Since its inception, 1,056,000 shares of the Company's common
stock have been contributed to the Plan.
As of February 28, 1999, 331 of the 452 employees who had satisfied the Plan's
eligibility requirements to participate were making salary deduction
contributions.
<PAGE>
EMPLOYEE STOCK OPTION PLANS
Under the Company's stock option plans, the Compensation Committee of the Board
of Directors is authorized to grant stock options to purchase 2,856,000 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. As of February 28, 1999, 1,486,000 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
1999 Average 1998 Average 1997 Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 881 $10.38 1,357 $ 9.82 1,383 $17.53
Granted 719 9.04 235 10.16 1,799 10.61
Exercised (30) 9.00 (386) 9.02 (61) 7.07
Canceled or expired (200) 14.02 (325) 9.63 (1,764) 16.76
- ------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,370 $ 9.18 881 $10.38 1,357 $ 9.82
==================================================================================================================
Options exercisable 417 $ 9.14 395 $10.79 387 $10.62
==================================================================================================================
</TABLE>
The following table summarizes information relating to currently outstanding
and exercisable options as of February 28, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Life Options Average Options Average
Exercise Prices (in years) Outstanding Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.25 - $8.75 8.71 292 $ 8.24 13 $ 8.52
$8.81 - $8.88 7.38 25 8.84 2 8.88
$9.00 5.02 521 9.00 372 9.00
$9.13 7.92 2 9.13 1 9.13
$9.50 - $17.19 8.85 530 9.88 29 11.18
=====================================================================================================
</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 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, 1999 1998 1997
- -------------------------------------------------------------------------
Net loss:
As reported $(12,545) $(18,921) $(21,297)
Pro forma (14,731) (21,540) (23,295)
- -------------------------------------------------------------------------
Diluted net loss per share:
As reported $ (0.79) $ (1.22) $ (1.54)
Pro forma (0.93) (1.39) (1.68)
=========================================================================
<PAGE>
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, 1999 1998 1997
- ----------------------------------------------------------------------
Dividend yield - - -
Expected volatility 65% 58% 57%
Risk-free interest rates 5.37% 5.70% 5.71%-6.27%
Expected lives (in years) 4 4 1-4
======================================================================
The weighted average Black-Scholes values of options granted in fiscal 1999,
1998 and 1997 were $4.84, $5.18 and $3.65, respectively. The values produced
by this model are limited by the inclusion of highly subjective assumptions,
which greatly affect the calculated values.
DIRECTOR STOCK OPTION PLAN
Under the Company's Director Stock Option Plan, non-qualified options to
purchase common stock may be granted to directors at prices not less than the
market price of the shares at the date of grant. At February 28, 1999, the
expiration dates of the outstanding options range from July 7, 1999 to
July 14, 2008, and the exercise prices range from $8.75 to $14.88 (average
$12.65) per share.
The following is a summary of activity under the Director Stock Option Plan
over the past three fiscal years (in thousands):
For the years ended February 28, 1999 1998 1997
- --------------------------------------------------------------------------
Shares under option, beginning of year 210 186 144
Options granted during the year 33 33 50
Options canceled or terminated (15) (9) (8)
Options exercised -- -- --
- ---------------------------------------------------------------------------
Shares under option, end of year 228 210 186
===========================================================================
Options exercisable, end of year 212 177 87
===========================================================================
Shares available for future grants, end of year 91 109 133
===========================================================================
DIRECTOR DEFERRED COMPENSATION PLAN
In March 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.
<PAGE>
The following is a summary of the activity under this plan
(units in thousands):
<TABLE>
<CAPTION>
For the years ended February 28, 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock equivalent units, beginning of year 7 -
Common stock equivalent units earned during the year 12 7
- -------------------------------------------------------------------------------------------------
Common stock equivalent units, end of year 19 7
=================================================================================================
Common stock equivalent units available, end of year 81 93
=================================================================================================
Range of common stock prices used to calculate common
stock equivalent units $6.88 - $10.00 $8.63 - $15.63
=================================================================================================
</TABLE>
RESTRICTED STOCK BONUS PLANS
The Company maintains two Restricted Stock Bonus Plans. Each provides for
common stock awards to certain officers and key employees. The fair market
value of shares awarded under the 1991 Plan to an employee in any year is
limited to 20% of the employee's base salary, and are earned in equal
installments on the second, third and fourth anniversaries of the award. Awards
granted under the 1996 plan are earned in 25%, 25%, and 50% increments on the
first, second and third anniversaries of the award, respectively. The shares
granted under each plan are distributed provided the employee has remained
employed by the Company's 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 31,000, net of cancellations, have been awarded
as of February 28, 1999. No new shares can be issued under the 1991 Plan,
and as of February 28, 1999, 29,000 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 $354,000,
$363,000 and $385,000 in fiscal 1999, 1998 and 1997, respectively.
<PAGE>
RETIREMENT PLANS
In March 1994, the Company adopted an unfunded Supplemental Executive
Retirement Plan to provide senior management with retirement, disability and
death benefits. The retirement benefits are based upon the participant's
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
available actuarial information, 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, 1999 1998 1997
- ------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 30 $ 56 $ 76
Interest cost on projected benefit obligations 347 361 275
Net amortization and deferral 245 258 245
- ------------------------------------------------------------------------------
Net periodic pension expense $ 622 $ 675 $ 596
==============================================================================
As of February 28, 1999 1998 1997
- ------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $3,789 $3,158 $3,040
Nonvested benefit obligation 122 449 377
- ------------------------------------------------------------------------------
Accumulated benefit obligation 3,911 3,607 3,417
Effect of projected future salary increases 1,360 1,227 1,612
- ------------------------------------------------------------------------------
Projected benefit obligation 5,271 4,834 5,029
Unrecognized net loss (308) (156) (596)
Unrecognized net transition asset (2,451) (2,696) (2,941)
Additional minimum liability 1,398 1,624 1,925
- ------------------------------------------------------------------------------
Accrued pension cost $3,910 $3,606 $3,417
==============================================================================
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 $99,000, $118,000 and $174,000
was accrued during fiscal 1999, 1998 and 1997, 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. Incentive compensation of $549,000, $537,000 and
$560,000 was earned in fiscal 1999, 1998 and 1997, respectively.
<PAGE>
13. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
As of February 28, 1999, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas and
major customers.
INDUSTRY SEGMENT
The Company operates predominantly in one industry segment in which it designs,
develops and markets semiconductor integrated circuits for the personal
computer, peripheral and embedded systems markets.
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.
The Company's long-lived assets include net property and equipment, and other
long-lived assets. The vast majority of the Company's net property and
equipment is located in the United States. Included within other long-lived
assets is an equity investment of $19,944,000 in Singapore-based Chartered
Semiconductor Manufacturing Ltd.
EXPORT SALES
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended February 28, 1999 1998 1997
- -------------------------------------------------------------------------------
North America $ 26,041 $ 40,570 $ 57,028
Asia and Pacific Rim 115,146 98,128 113,369
Europe 14,467 9,311 10,060
Rest of World 172 317 461
- -------------------------------------------------------------------------------
$155,826 $148,326 $180,918
===============================================================================
MAJOR CUSTOMERS
During fiscal 1999, one customer accounted for 11.8% of the Company's revenues.
During fiscal 1998, no customer accounted for more then 10% of the Company's
revenues. During fiscal 1997, one customer accounted for 13.9% 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>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues $35,284 $37,865 $42,745 $39,932
Operating income (loss) 2,690 2,637 2,336 (1,224)
Net income from continuing operations 2,018 1,972 1,886 127
Net loss from discontinued operation (1,573) (1,367) (1,083) (1,232)
Loss on sale of discontinued operation - - - (13,293)
Net income (loss) 445 605 803 (14,398)
===============================================================================================
Basic net income (loss) per share
Continuing operations $ 0.13 $ 0.12 $ 0.12 $ 0.01
Discontinued operation (0.10) (0.08) (0.07) (0.08)
Loss on sale of discontinued operation - - - (0.86)
- -----------------------------------------------------------------------------------------------
$ 0.03 $ 0.04 $ 0.05 $ (0.93)
===============================================================================================
Diluted net income (loss) per share
Continuing operations $ 0.13 $ 0.12 $ 0.12 $ 0.01
Discontinued operation (0.10) (0.08) (0.07) (0.08)
Loss on sale of discontinued operation - - - (0.86)
- -----------------------------------------------------------------------------------------------
$ 0.03 $ 0.04 $ 0.05 $ (0.93)
===============================================================================================
Average shares outstanding
Basic net income (loss) per share 15,946 15,978 15,745 15,511
Diluted net income (loss) per share 16,034 16,031 15,748 15,519
Market price
High $ 11.88 $ 11.13 $ 8.00 $ 9.94
Low 8.63 6.25 4.63 6.00
===============================================================================================
Fiscal 1998
Revenues $34,101 $39,446 $40,668 $34,111
Operating income (loss) (3,784) (291) 1,911 1,603
Net income (loss) from continuing operations (2,312) (1,511) 1,370 1,348
Net loss from discontinued operations (5,868) (7,728) (4,422) (828)
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 $ (0.15) $ (0.10) $ 0.09 $ 0.08
Discontinued operations (0.39) (0.50) (0.28) (0.05)
Gain on sale of discontinued operation - - 0.06 -
- -----------------------------------------------------------------------------------------------
$ (0.54) $ (0.60) $ (0.13) $ 0.03
===============================================================================================
Diluted net income (loss) per share
Continuing operations $ (0.15) $ (0.10) $ 0.08 $ 0.08
Discontinued operations (0.39) (0.50) (0.27) (0.05)
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
===============================================================================================
</TABLE>
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 1,075 holders of record of the Company's common stock at
April 21, 1999. 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.
===============================================================================
<PAGE>
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.
Arthur Andersen LLP, independent public accountants, has audited the
consolidated financial statements in this annual report.
<PAGE>
===============================================================================
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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended February 28, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 1999, in conformity with generally accepted
accounting principles.
April 21, 1999 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 reports included in or incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statements on Form S-8 (File nos.
2-78324, 33-35590, 33-45011, 33-69224, 33-83400, 333-09271and 333-64043).
ARTHUR ANDERSEN LLP
May 27, 1999
New York, New York
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