SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7422
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STANDARD MICROSYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2234952
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 ARKAY DRIVE, HAUPPAUGE, NEW YORK 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-435-6000
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 ________
As of January 13, 2000 there were 15,581,236 shares of the registrant's
common stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
November 30, February 28,
1999 1999
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......................... $ 68,603 $ 68,071
Short-term investments ............................. 5,998 2,000
Accounts receivable, net of allowance for doubtful
accounts of $1,162 and $1,111, respectively ...... 19,172 22,608
Inventories ........................................ 22,215 13,785
Deferred tax benefits .............................. 7,229 8,154
Other current assets ............................... 10,614 9,142
--------- ---------
Total current assets ............................... 133,831 123,760
========= =========
Property, plant and equipment:
Land ............................................... 3,832 3,832
Buildings and improvements ......................... 30,879 29,846
Machinery and equipment ............................ 68,524 63,890
--------- ---------
103,235 97,568
Less: accumulated depreciation .................... 68,886 62,916
--------- ---------
Property, plant and equipment, net ................. 34,349 34,652
--------- ---------
Other assets ......................................... 63,439 38,219
Net assets of discontinued operation ................. - 5,336
--------- ---------
$ 231,619 $ 201,967
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ................................... $ 13,612 $ 8,873
Accrued expenses and other liabilities ............. 13,941 14,453
Current portion of obligations under capital leases. 906 852
--------- ---------
Total current liabilities .......................... 28,459 24,178
--------- ---------
Obligations under capital leases ..................... 2,331 3,017
Other liabilities .................................... 10,033 4,799
Minority interest in subsidiary ...................... 11,538 11,539
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 16,227,000 and 16,045,000
shares, respectively ............................. 1,623 1,605
Additional paid-in capital ......................... 110,070 108,665
Retained earnings .................................. 50,021 47,454
Treasury stock, 671,000 shares, at cost ............ (4,379) (2,957)
Accumulated other comprehensive income ............. 21,923 3,667
--------- ---------
Total shareholders' equity .......................... 179,258 158,434
--------- ---------
$ 231,619 $ 201,967
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
-------------------- --------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues .............................................. $ 41,027 $ 42,745 $114,724 $115,894
Cost of goods sold .................................... 24,320 27,135 69,541 73,321
-------- -------- -------- --------
Gross profit .......................................... 16,707 15,610 45,183 42,573
-------- -------- -------- --------
Operating expenses:
Research and development ............................ 6,232 4,863 17,793 12,808
Selling, general and administrative ................. 8,734 8,411 25,327 22,102
-------- -------- -------- --------
14,966 13,274 43,120 34,910
-------- -------- -------- --------
Income from operations ................................ 1,741 2,336 2,063 7,663
-------- -------- -------- --------
Other income (expense):
Interest income ..................................... 882 705 2,259 1,896
Interest expense .................................... (70) (77) (220) (198)
Other income (expense), net ......................... 55 (33) 4 (111)
-------- -------- -------- --------
867 595 2,043 1,587
-------- -------- -------- --------
Income before provision for income taxes
and minority interest ............................... 2,608 2,931 4,106 9,250
Provision for income taxes ............................ 974 1,009 1,540 3,320
Minority interest in net income (loss) of subsidiary .. - 36 (1) 53
-------- -------- -------- --------
Income from continuing operations ..................... 1,634 1,886 2,567 5,877
-------- -------- -------- --------
Loss from discontinued operation, (net of income
taxes of ($609) and ($2,262), respectively) ......... - (1,083) - (4,023)
-------- -------- -------- --------
Net income ............................................ $ 1,634 $ 803 $ 2,567 $ 1,854
======== ======== ======== ========
Basis and diluted net income per share:
Income from continuing operations ................... $ 0.10 $ 0.12 $ 0.16 $ 0.37
Loss from discontinued operation .................... - (0.07) - (0.25)
-------- -------- -------- --------
Basic and diluted net income per share ................ $ 0.10 $ 0.05 $ 0.16 $ 0.12
======== ======== ======== ========
Weighted average common shares outstanding
Basic 15,641 15,745 15,611 15,872
Diluted 15,887 15,748 15,732 15,915
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers ..................................... $118,849 $112,758
Cash paid to suppliers and employees ............................. (105,678) (103,920)
Interest received ................................................ 2,256 1,912
Interest paid .................................................... (220) (198)
Income taxes paid ................................................ (925) (259)
-------- --------
Net cash provided by operating activities ........................ 14,282 10,293
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................. (6,850) (6,305)
Sales of machinery and equipment ................................. 661 6,263
Purchases of short-term investments .............................. (6,000) (3,002)
Sales of short-term investments .................................. 2,002 9,605
Other ............................................................ (185) (523)
-------- --------
Net cash provided by (used for) investing activities ............. (10,372) 6,038
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................... 716 322
Purchases of treasury stock ...................................... (1,422) (2,957)
Repayments of obligations under capital leases ................... (632) (451)
-------- --------
Net cash used for financing activities ........................... (1,338) (3,086)
-------- --------
Effect of foreign exchange rate changes on cash and cash equivalents 980 129
-------- --------
Net cash provided by (used for) discontinued operations ............ (3,020) 8,923
-------- --------
Net increase in cash and cash equivalents .......................... 532 22,297
Cash and cash equivalents at beginning of period ................... 68,071 47,155
-------- --------
Cash and cash equivalents at end of period ......................... $ 68,603 $ 69,452
======== ========
Reconciliation of income from continuing operations
to net cash provided by operating activities:
Income from continuing operations .................................. $ 2,567 $ 5,877
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization .................................. 7,286 8,558
Other adjustments, net ......................................... 608 612
Changes in operating assets and liabilities:
Accounts receivable ............................................ 3,955 (3,417)
Inventories .................................................... (8,203) (3,349)
Accounts payable and accrued expenses and other liabilities .... 7,477 665
Other changes, net ............................................. 592 1,347
-------- --------
Net cash provided by operating activities .......................... $ 14,282 $ 10,293
======== ========
Noncash investing and financing activities:
During fiscal 1999, the Company financed certain capital expenditures totaling
$1,446,000 through capital lease obligations.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited interim financial statements furnished reflect all
adjustments (consisting of only normal and recurring adjustments) which
are, in the opinion of management, necessary to present a fair
statement of the Company's financial position and results of operations
for the three and nine month periods ended November 30, 1999. The
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial
statements included in the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended
February 28, 1999.
Certain items shown have been reclassified to conform with the fiscal
2000 presentation.
2. Inventories
Inventories are valued at the lower of first-in, first-out cost or
market and consist of the following (in thousands):
Nov. 30, 1999 Feb. 28, 1999
--------------------------------------------------------
Raw Materials $ 506 $ 475
Work in Process 14,340 9,310
Finished Goods 7,369 4,000
------- -------
$22,215 $13,785
======= =======
3. Net Income Per Share
Basic net income per share is based upon the weighted-average number of
common shares outstanding during the period. Diluted net income per
share is computed using the weighted-average common shares outstanding
during the period plus the dilutive effect of shares issuable through
stock options and warrants. The shares used in calculating basic and
diluted net income per share are reconciled as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
------------------ -----------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average shares outstanding for
basic net income per share .............. 15,641 15,745 15,611 15,872
Dilutive effect of stock options .......... 246 3 121 43
------ ------ ------ ------
Average shares outstanding for
diluted net income per share ............ 15,887 15,748 15,732 15,915
====== ====== ====== ======
</TABLE>
<PAGE>
4. Comprehensive 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 long-term equity investments. The components of the
Company's comprehensive income for the three and nine month
periods ended November 30, 1999 and 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
------------------ ------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income ................................ $ 1,634 $ 803 $ 2,567 $1,854
Other comprehensive income (loss):
Currency translation adjustment ......... 741 1,227 1,703 275
Unrealized gain (loss) on investments ... 16,205 (12) 16,553 (470)
------- ------ ------- ------
Total comprehensive income ................ $18,580 $2,018 $20,823 $1,659
======= ====== ======= ======
</TABLE>
5. Investments
The Company has an equity interest in Singapore-based Chartered
Semiconductor Manufacturing Ltd. (Chartered), acquired in fiscal 1996
at a cost of $19.9 million. In October 1999, shares of Chartered began
trading publicly on the Singapore stock exchange, and also began
trading on the NASDAQ stock exchange as American Depository Shares, or
ADSs. This investment is considered available-for-sale, and therefore,
in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," is reported at its estimated market value
of $44.1 million within "Other assets" on the Company's November 30,
1999 Consolidated Balance Sheet. This investment was reported at cost
in prior reporting periods.
This investment is subject to a six-month "lock-up," or no trade
period, through April 26, 2000, and is subject to normal open market
valuation fluctuations.
6. Common Stock Repurchase Program
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. Under this program, the
Company repurchased 150,000 shares of its common stock at a cost of
$1.4 million during the third quarter of fiscal 2000. The Company
currently holds repurchased shares as treasury stock. As of
November 30, 1999, the Company has repurchased a total of 671,000
shares of its common stock, at a cost of $4.4 million under this
program.
7. Contingencies
In 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 $40.2 million in cash,
$2.0 million of which was placed into an escrow account as security
for the Company's indemnity obligations under the
related agreement.
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 million 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 was not released to
the Company as scheduled in early January 1999. In January 1999, the
Company filed an action in the Supreme Court of New York (the "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 $1.6 million owed to the Company by SMC Networks, Inc.
In November 1999, the Court issued an order staying the Action and
directed the parties to proceed to arbitration under the arbitration
provisions of the original transaction agreements. The Company has
filed an appeal from the order. Moreover, because many of the claims
made by Accton against the Company are non-arbitrable, the Company has
filed a motion requesting that the Court stay arbitration of those
claims.
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 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
Standard Microsystems Corporation (the "Company") 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.
Standard Microsystems Corporation operates in one industry segment in which it
designs, develops and markets integrated circuits for the personal computer and
related industries.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three and nine month periods ended November 30, 1999 were
$41.0 million and $114.7 million, respectively, compared to revenues of $42.7
million and $115.9 million, respectively, for the corresponding year-earlier
periods. The Company typically experiences its highest demand during its
third fiscal quarter, consistent with the general demand cycle in the personal
computer industry.
The Company has experienced significant year-over-year increases in unit
shipments. For the three and nine month periods ended November 30, 1999, the
Company shipped 14.0 million and 36.9 million units, respectively, compared to
11.2 million and 28.8 million units, respectively, for the corresponding prior
year periods, increases of 25% and 28%, respectively. The revenue associated
with this increased unit volume was offset by declining average selling prices,
particularly for input/output (I/O) products, and transitions to newer products
which generally have lower average selling prices.
GROSS PROFIT
The Company's gross profit percentage for the third quarter of fiscal 2000
increased to 40.7%, compared to 36.5% reported for the third quarter of fiscal
1999. The gross profit percentage for the nine-month period ended November 30,
1999 was 39.4%, compared to 36.7% for the year earlier nine-month period.
These gross profit improvements can be attributed to the Company's continuing
efforts to reduce product costs through aggressive manufacturing cost reduction
programs, higher yields, increasing unit volumes shipped, and the continuing
migration to new, higher margined products.
<PAGE>
OPERATING EXPENSES
Research and development expenses (R&D) increased to $6.2 million in the third
quarter of fiscal 2000, compared to $4.9 million in the third quarter of fiscal
1999. For the nine month period ended November 30, 1999, research and
development expenses increased to $17.8 million from $12.8 million for the year
earlier period. The Company's increased R&D spending reflects new product
development, particularly in value-added chipset products, as well as increased
spending in new test designs and validations.
For the three and nine month periods ended November 30, 1999, selling, general
and administrative expenses increased to $8.7 million and $25.3 million,
respectively, from $8.4 million and $22.1 million, respectively, for the
year-earlier periods. These increases are primarily associated with the
elimination of certain administrative cost subsidies received by the Company
related to the Company's 1997 sale of its former local area networking
business.
OTHER INCOME AND EXPENSE
Other income and expense increased to $0.9 million in the third quarter of
fiscal 2000, from $0.6 million for the year-earlier period, and for the nine
month period ended November 30, 1999, increased to $2.0 million, from $1.6
million in the year-earlier period. These increases are predominately due to
interest income received on higher average balances of cash and cash
equivalents available for investment during the current year, and an investment
portfolio mix change to taxable securities from tax-exempt securities.
INCOME TAXES
For the three and nine month periods ended November 30, 1999, income tax
provisions have been provided at effective tax rates of 37.3% and 34.4%,
respectively, compared to tax provisions recorded at effective rates of 37.5%
and 35.9% for the corresponding year-earlier periods. The Company's effective
income tax rate primarily reflects statutory tax rates, income tax credits, and
the impact of certain non-deductible expenses and tax-exempt income.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong. Cash, cash equivalents and
short-term investments increased to $74.6 million at November 30, 1999,
compared to $70.1 million at February 28, 1999, an increase of $4.5 million.
Working capital increased to $105.4 million as of November 30, 1999, from $99.6
million at February 28, 1999, an increase of $5.8 million. The Company
continues to maintain low levels of long-term debt.
The Company's principle source of liquidity for the nine-month period ending
November 30, 1999 was its operating activities, which provided $14.3 million of
cash. Interest income accounted for $2.3 million of this operating income.
The Company reduced its accounts receivable by $4.0 million and increased its
accounts payable and other accrued expenses by $8.2 million, contributing $12.2
million of cash for the current nine-month period.
Inventory increased to $22.2 million as of November 30, 1999 compared to $13.8
million at February 28, 1999. Inventory turns are approximately 4.2 times per
year, as calculated at November 30, 1999. A portion of the increase in
inventory has resulted from the decision to build stock on certain high-volume
products in anticipation of tightening semiconductor manufacturing capacity.
Indeed, several of the company's suppliers have recently reported minimal, if
any, available capacity for additional demand. In addition, certain technology
delays in the personal computer marketplace have resulted in delayed shipments
of some of the Company's new products. In general, the Company's products are
sold to leading personal computer manufacturers, who generally require short
lead times and flexibility in ordering the Company's products, while the
Company has manufacturing processes that require longer lead times. This leads
to the risk of cyclical mismatching of forecasts to actual demand. To help
minimize this risk, the Company has initiated new programs to increase forecast
accuracy while continuing it's high level of service to its customers.
The Company has used $6.9 million of cash for capital expenditures in fiscal
2000, predominantly for test equipment and tools for research and
development. The Company plans to purchase additional testing
equipment over the next 12 months as part of its ongoing product cost reduction
initiatives.
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. Under this program, SMSC repurchased 150,000 shares of
its common stock at a cost of $1.4 million during the third quarter of fiscal
2000. The Company currently holds repurchased shares as treasury stock. As of
November 30, 1999, the Company has repurchased a total of 671,000 shares of its
common stock, at a cost of $4.4 million, under this program.
The Company has an equity interest in Singapore-based Chartered
Semiconductor Manufacturing Ltd. (Chartered), acquired in fiscal 1996 at a cost
of $19.9 million. In October 1999, shares of Chartered began trading publicly
on the Singapore stock exchange, and also began trading on the NASDAQ stock
exchange as American Depository Shares, or ADSs. This investment is considered
available-for-sale, and therefore, in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," is reported at its
estimated market value of $44.1 million within "Other assets" on the Company's
November 30, 1999 Consolidated Balance Sheet. This investment was reported at
cost in prior reporting periods. This investment is subject to a six-month
"lock-up," or no trade period, through April 26, 2000, and is subject to normal
open market valuation fluctuations.
In June 1999, the Company completed the sale of a majority interest in its
Foundry Business Unit, which had been experiencing operating losses in recent
years. Operations of this business unit have been classified as a discontinued
operation, and consumed $3.0 million in cash during the nine month period ended
November 30, 1999, representing losses of the operation prior to its sale, and
related expenses.
The Company's previous $10 million revolving line of credit expired in July
1999. There had been no borrowings under this credit line since October 1997.
The expiration of this line of credit will save the Company approximately
$70,000 in annual costs.
The Company has in the past acquired or invested in complementary businesses
and technologies, and has licensed the right to use intellectual property. The
Company has also used equity investments in, prepayments to, or deposits with
foundries to secure wafer-manufacturing capacity. The Company will consider
similar arrangements in the future if the needs or opportunities arise.
The Company believes that existing cash, cash equivalents, and short-term
investments, together with cash from operations will be sufficient to meet its
cash requirements for the foreseeable future.
OTHER DEVELOPMENTS
On September 23, 1999, the Company announced that it had signed a technology
exchange agreement with Intel Corporation. This agreement should enable SMSC to
accelerate its development of value-added chipset solutions, which will support
Intel microprocessors for personal computer (PC) and embedded applications.
Under the agreement, SMSC is developing application-specific chipset devices
that are completely compatible with Intel's most advanced chipset interface
technologies.
On October 25, 1999, Mr. Paul Richman, Standard Microsystems Corporation's
Chairman of the Board and one of the Company's founders, announced his plan to
retire from the Company after 29 years of service, effective on February 11,
2000. Mr. Richman has served as an officer and director of the Company for most
of its history, including Chairman of the Board since 1983, and he is
considered one of the pioneers of semiconductor technology. The Company's Board
of Directors has announced that Mr. Steven Bilodeau, the Company's President
and Chief Executive Officer, will assume the additional responsibility of
Chairman of the Board upon Mr. Richman's retirement.
<PAGE>
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain statements and information contained in this quarterly report
constitute "forward-looking statements" within the meaning of the Federal
Securities laws. These forward-looking statements involve risks and
uncertainties, which may cause actual results and performance to be different
from those expressed or implied in such statements.
The Company's operating results are subject to general economic conditions and
a variety of risks characteristic of the semiconductor and personal computer
industries, including cyclical market patterns, price erosion, product
development risks, technological change, business conditions and concentrations
in Asia, reliance upon foundries and subcontractors, and forecasts of product
demand, any of which could cause the Company's operating results to differ
materially from past results.
For a further discussion of such risks, see "Risk Factors" in Part 2, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included within the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended February 28,
1999.
The Company maintains several equity investments in non-public companies which
operate in the semiconductor or personal computer industries, resulting from
strategic business relationships or other investment opportunities, which were
deemed beneficial to the Company. These companies are subject to many of the
same risks and uncertainties faced by the Company. These investments, which are
reported at cost on the Company's Consolidated Balance Sheet, are reviewed
regularly for events and circumstances that may effect their current and future
value, within the provisions of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
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 has installed new information
systems and considers all internal information systems to be Year 2000
compliant. 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 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.
Through the first several days of 2000, the Company has not experienced any
significant Year 2000 issues within its information systems infrastructure. In
addition, none of the Company's vendors or service providers have reported
experiencing any significant Year 2000 issues.
Based solely upon information received from vendors and service providers, 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 information received from
these third parties is not accurate or happens to change, then there could be
an unforeseen material adverse impact on the Company's financial condition and
results of operations.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
about Market Risk, in the Registrant's Annual Report on Form 10-K for the year
ended February 28, 1999. The nature and scope of market risks addressed therein
have not materially changed.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In 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 $40.2 million in cash, $2.0 million of which was placed into an
escrow account as security for the Company's indemnity obligations under the
related agreement.
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
million 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 was not released to the Company as scheduled in early January
1999. In January 1999, the Company filed an action in the Supreme Court of New
York (the "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
$1.6 million owed to the Company by SMC Networks, Inc.
In November 1999, the Court issued an order staying the Action and directed the
parties to proceed to arbitration under the arbitration provisions of the
original transaction agreements. The Company has filed an appeal from the
order. Moreover, because many of the claims made by Accton against the Company
are non-arbitrable, the Company has filed a motion requesting that the Court
stay arbitration of those claims.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements 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)
DATE: January 13, 2000 /S/ Eric M. Nowling
---------------------------------
(Signature)
Eric M. Nowling
Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
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