-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KnIdVvxjd8niZurJz+luwIG7+KWqXlhQQXkBnEJHjiNd3pOyYtW7FipDpSfEBRWA wHu1CIzsCpd16Rfmgf6d4A== 0000950168-97-001522.txt : 19970610 0000950168-97-001522.hdr.sgml : 19970610 ACCESSION NUMBER: 0000950168-97-001522 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970609 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MICROSYSTEMS CORP CENTRAL INDEX KEY: 0000093384 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 112234952 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07422 FILM NUMBER: 97620686 BUSINESS ADDRESS: STREET 1: 80 ARKAY DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11934 BUSINESS PHONE: 5164342904 MAIL ADDRESS: STREET 1: 80 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11934 10-K 1 STANDARD MICROSYSTEMS CORP. 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ---------------- [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Fiscal Year Ended February 28, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) Commission File No. 0-7422 --------------- 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) ------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each Exchange on None which registered ----------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) As of April 30, 1997, 15,448,820 shares of the registrant's common stock were outstanding and the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $132,242,000. Documents Incorporated Reference The documents incorporated by reference into this Form 10-K and the Parts hereof into which such documents are incorporated are listed below: Document Part Those portions of the registrant's 1997 annual report to shareholders (the Annual Report") which are specifically identified herein as incorporated by reference into this Form 10-K. II Those portions of the registrant's proxy statement for the registrant's 1997 Annual Meeting (the "Proxy Statement") which are specifically identified herein as incorporated by reference into this Form 10-K. III 1 PART I Item 1. Business. GENERAL Standard Microsystems Corporation (the "Company", the "Registrant", or "SMC(R)") is a Delaware corporation, organized in 1971. As used herein, the term "Company" includes the Company's subsidiaries except where the context otherwise requires. The address of the principal executive office of the Company is 80 Arkay Drive, Hauppauge, New York 11788, and its telephone number at that address is 516-435-6000. Toyo Microsystems Corporation, a majority-owned subsidiary located in Tokyo, Japan, markets and sells SMC products in Japan. Through wholly owned subsidiaries listed below, SMC operates branch offices to market and sell its products in the following locations: Subsidiary Location Standard Microsystems Corporation (Asia) Taipei, Taiwan SMC Australia Pty. Ltd. Sydney, Australia Standard Microsystems Corporation (Canada) Oakville, Ontario, Canada Standard Microsystems (Europe) Ltd. London, England SMC France, Inc. St. Germain-en-Laye, France Standard Microsystems GmbH Munich, Germany SMC Massachusetts, Inc. Andover, Massachusetts SMC de Mexico SA de CV Mexico DF, Mexico SMC North America, Inc. Various States SMC Singapore, Inc. Singapore SMC International Ltd. Christ Church, Barbados BUSINESS AND PRODUCT DESCRIPTION Standard Microsystems conducts its operations primarily through two divisions, the System Products Division and the Component Products DIvision. The System Products Division designs, produces and markets products that connect personal computers (PCs) to, and allow communications over, local area networks (LANs). The Component Products Division designs, produces and markets very-large-scale-integrated (VLSI) circuits primarily for PC input/output (I/O) control, computer and industrial network control. The Division also sells non-semiconductor devices that are produced in the Company's own semiconductor foundry. As a separate profit center, Toyo Microsystems Corporation (TMC), sells the Company's component and system products into the Japanese market. The Company's fiscal 1997 revenues increased to $354.1 million, from $341.9 million in fiscal 1996, after declining from $378.7 million in fiscal 1995. As a percentage of consolidated revenues, system products declined to 44.5% in fiscal 1997 from 54.6% in fiscal 1996 and 2 67.7% in fiscal 1995. In contrast, as a percentage of consolidated revenues, component products' revenues increased to 50.6% from 40.5% and 29.2% and TMC's revenues increased to 4.9% from 4.9% and 3.1%. Revenues By Product Line ($millions) For the years ended February 28 or 29, % change % change 1997 97/96 1996 96/95 1995 System products Adapter revenues $120.3 -17% 144.5 -29% $204.9 Hub and switch revenues 37.2 -11 42.0 19 51.5 - -------------------------------------------------------------------------------- Total system products revenues $157.5 -16% 186.5 -27% $256.4 % of revenues 44.5 % 54.6% 67.7% - -------------------------------------------------------------------------------- Component products Integrated circuit revenues $164.3 34% 123.0 15% $106.9 Foundry device revenues 14.7 -6 15.6 320 3.7 - -------------------------------------------------------------------------------- Revenues $179.0 29% 138.6 25% $110.6 % of revenues 50.6% 40.5% 29.2% - -------------------------------------------------------------------------------- Toyo Microsystems Corporation Revenues $17.6 5% $16.8 44% $11.7 % of revenues 4.9% 4.9% 3.1% - -------------------------------------------------------------------------------- Standard Microsystems Corporation Revenues $354.1 4% $341.9 -10% $378.7 - -------------------------------------------------------------------------------- Business Acquisitions and Divestiture: In November 1996, the Company acquired the Cardbus (PCMCIA) technology and product line of Databook, Inc. of Danvers, Mass. This technology is used in portable and desktop PC's, and has possible new markets such as set-top boxes with cable modems and slots for Ethernet and other PCMCIA cards. Prior to this acquisition, SMC had been a licensee of Databook's Cardbus technology and was a second source for Databook's first Cardbus product, a Cardbus host controller chip with "no compromise" Zoom Video features, the DB87114 "Patriot" chip . This device is now called the SMC34C90 Cardbus Host controller. In October 1996, the Company acquired a 19.9% equity interest in privately held Accelerix Incorporated of Carp, Ontario, Canada. The Company and Accelerix also entered into an agreement providing the Company with rights to market, second source and enhance Accelerix' application specific memory technology. In January 1996, SMC and SMC Enterprise Networks, Inc., a wholly-owned subsidiary, sold substantially all the net assets and technology of the Enterprise Networks Business Unit (ENBU) to Cabletron Systems, Inc., for $74.0 million in cash. ENBU had developed, manufactured and sold enterprise-wide switching products for computer networks. The business unit, which was included in SMC's operations for approximately ten months in 3 fiscal 1996, accounted for approximately 4% of consolidated revenues in fiscal 1996 and 6% in fiscal 1995. In February 1996, SMC acquired the assets and technology of EFAR Microsystems, Inc. of Santa Clara, CA. The transaction was valued at $5.6 million based on the issuance of 240,000 SMC common shares, the assumption of certain liabilities and transaction fees. Nearly all of the purchase price represented purchased in-process technology and was charged to SMC's operations in fiscal 1996. SMC may issue to EFAR additional common stock with a market value of up to $20 million through February 1999, contingent on achieving certain operating results. BUSINESS AND PRODUCT DESCRIPTION: SYSTEM PRODUCTS DIVISION The System Products Division sells LAN products that enable personal computers to be connected to networks and permit communications among LAN users. Connection to a LAN permits a PC user to send messages to and receive messages from other LAN users and share common resources such as printers, disk drives, files and programs. LANs offer individuals the advantages of working at their own PCs and, at the same time, provide an organization with the benefits of connectivity and productivity by allowing multiple users to communicate and share resources. Internetworking, or connecting LANs to each other, allows users to communicate and share resources over a wider sphere. SMC's LAN products include network interface cards (adapters), wiring hubs and switches, associated software and transceivers that operate over a variety of media including, unshielded twisted pair, shielded twisted pair, coaxial, and optical fiber cabling. The Company provides LAN products for major protocols or technologies used for PC-based LANs: Ethernet, Fast Ethernet, Token Ring, ARCNET(R) and PC Card. After the end of fiscal 1996, SMC introduced its first high-speed asynchronous transfer mode (ATM) adapters. SMC's low-cost, workgroup Ethernet switches accelerate bandwidth by segmenting the network into smaller portions, each of which receives full network bandwidth. LAN technologies combine hardware and software to control traffic signaling and message passage between PCs and peripheral devices. End users differentiate LAN technologies chiefly based upon speed and volume of data transmitted, installation procedures and equipment cost. Network Interface Cards (adapters): Installed in a personal computer or workstation, an adapter is a printed circuit board that provides a connection to a LAN over telephone -- unshielded twisted pair (UTP) or shielded twisted pair (STP) -- wire, coaxial or fiber optic cables. The Company's adapters connect to the communications links or buses internal to a PC. These buses, which allow for transmission of signals in a computer, are known 4 as industry standard architecture (ISA), extended industry standard architecture (EISA), micro-channel architecture (MCA) and peripheral component interconnect (PCI). An adapter provides a connector for a cable that plugs into a wall outlet, much as a telephone cable connects to a wall outlet. For its Ethernet, Fast Ethernet and Token Ring adapters, SMC provides software for communicating over and diagnosing a network, installing an adapter and collecting data for managing a network. During fiscal 1997, SMC entered the ATM (Asynchronous Transfer Mode) market with its 155 Mbps ATM Power155TM adapters. These adapters support PCI, SBus and EISA Bus workstations and desktop computers. In fiscal 1997, Ethernet (including PC Card and Fast Ethernet) adapters accounted for approximately 93% of SMC's adapter revenues, compared to 92% in fiscal 1996. Token Ring adapters fell to approximately 5% of adapter revenues in fiscal 1997 from 6% in fiscal 1995. ARCNET adapters accounted for the remainder of revenues. Wiring Hubs and LAN Switches: LAN cables, beginning at the adapter connector, are usually linked to a centrally located wiring hub. The hub passes along and boosts signals from one computer or port on a LAN to one or more other ports. Wiring hubs are called concentrators for Ethernet and Fast Ethernet, multi-station access units (MAUs) for Token Ring and hubs for ARCNET. SMC hubs are suited to workgroup or departmental LANs. In addition to physical signaling, intelligent hubs incorporate software for managing a network. SMC produces both conventional and intelligent hubs and the software to support network management. In fiscal 1997, hubs accounted for approximately 86% of SMC's hub and LAN switch revenues, compared to 70% in fiscal 1996. Approximately 94% of SMC's hub revenues were Ethernet (including Fast Ethernet) hubs, compared to 94% in fiscal 1996. Supporting Software: The Company's products include supporting software drivers which enable network hardware to communicate over a LAN by linking the network protocol and the network operating system (NOS). The NOS suppliers regularly update their software, requiring SMC to regularly alter its drivers. SMC also upgrades drivers to improve performance over a network. Design Criteria: SMC's System Products Division designs and develops critical integrated circuits that control the operation of its Ethernet and Token Ring adapters. The Company believes that this vertical integration provides an advantage in terms of control over costs, performance, quality and time-to-market, when compared to competitors who buy critical integrated circuits from merchant semiconductor manufacturers. 5 New Products: The following schedule summarizes new products recently introduced by the System Products Division. EtherPower II(TM) 10/100 - 10/100 Mbps Fast Ethernet Adapter Card. This adapter card uses the 83C170/ (Epic/100) Fast Ethernet controller. TigerStack(TM) 100 FamilyStackable Hubs - With 4 Segments of Fast Ethernet Switching TigerSwitch(TM) 100 Family - High performance, cost effective, Fast Ethernet switch which offers 8 port. 10/100 LAN Extender FX(TM) - Two port Fast Ethernet Switch SMC EZ Switch(TM) 8 - An 8 port Ethernet switch SMC EZ HUB(TM) 100 - Fast Ethernet hub which can be used alone or in cascaded pairs. TigerSwitch(TM) ATM workgroup switch - ATM workgroup switch ATM Power25(TM) and Power155(TM) network cards - ATM network adapter cards BUSINESS AND PRODUCT DESCRIPTION: COMPONENT PRODUCTS DIVISION The Component Products Division (CPD) designs, develops and manufactures very-large-scale-integrated (VLSI) circuitry. SMC maintains its SuperCell(TM) library of complex circuit functions, shortening the design cycle for VLSI circuits. Component products are focused on the personal computer input/output (PC I/O) and networking markets. In fiscal 1997, approximately 89% of the Division's revenues were from PC I/O devices, compared to approximately 80% in fiscal 1996. SMC's PC I/O controllers are integrated circuits with multiple functions for controlling and interfacing various peripheral and communications functions in a PC. Features include digital data separation, vertical or horizontal recording, control of serial and parallel ports, interfaces with the game port and hard disk drive, and other functions for floppy disk control. PC I/O controllers first introduced by SMC during fiscal 1993 and 1994 are known as super I/O devices. In a single package, these circuits combine many of the connectivity functions listed above that have become required features for PCs. SMC's super I/O class of devices are pin compatible, offering customers the flexibility to design one circuit board layout, modifying characteristics by inserting one or another of SMC's devices. During fiscal 1997, 1996 and 1995, SMC announced PC I/O devices with enhanced features including interfaces for infrared (IR) wireless communications, support of PnP and low electrical power usage for laptop and handheld PCs. SMC also announced and began to ship a class of PC I/O controllers known as ultra I/O. On a single chip, these devices add keyboard and mouse control, system clock generator and a real time clock to the super I/O level of functionality. 6 Network circuits are sold to vendors of ARCNET, Ethernet and Fast Ethernet equipment. Versions of ARCNET devices are optimized for use in industrial control and transportation markets. New Products: The following schedule summarizes new products recently introduced by the Component Products Division. 83C170/ (EPIC/100) - A 10/100 Mbps Fast Ethernet controller FDC37C957FR - With Fast IR (Infrared) communications and advanced power and system management for portable PC applications. FDC37C93xFR - With Fast IR (Infrared) communications and advanced power management. FDC37C669FR - Similar to the FDC37C957FR and FDC37C93xFR without the integrated real-time clock or keyboard controller FDC37C951 - With power and system management capabilities for portable computer I/O (Input/ Output) applications FDC37C67x and the FDC37C68x - A pair of "Enhanced" Super I/O chips designed specifically to work with Intel's Triton TX. FDC37C93xAPM - ACPI-compliant PC I/O Controller with advanced power management The Foundry Business Unit, a business unit of the Component Products Division, manufactures specialty silicon wafer-based products. In addition to volume production of silicon devices for ink-jet print cartridges, it also manufactures thin-film RC (resistor-capacitor) networks and MicroElectroMechanical Systems (MEMS). Foundry devices accounted for approximately 4.2% of SMC's consolidated revenues, and 8.2% of Component Products revenues, in fiscal 1997, compared to approximately 4.5% and 11.3%, respectively, in fiscal 1996. BUSINESS AND PRODUCT DESCRIPTION: WARRANTY POLICY Depending upon the product, the Company generally warranties against defects in material and workmanship for periods varying from one year to the lifetime of a product. Estimated warranty costs are accrued when products are sold. MARKETS AND COMPETITION Network products of the System Products Division are used chiefly in conjunction with personal computers which are connected to local area networks. Integrated circuits of the Component Products Division are used primarily in personal computers. 7 Competition is characterized by rapid technological change and significant unit price reductions which may not always correspond to a decrease in production costs. Product line differentiation may be determined by breadth, diversity, performance characteristics such as speed, quality and reliability and prices. Among the competitors, important distinctions are timeliness of shipments, depth of customer support and technical service. The principal methods SMC uses to compete include new products, servicing customers and reducing manufacturing costs. While past performance can be a guide, there is no assurance that the Company can improve or maintain gross profit margins. MARKETS AND COMPETITION: SYSTEM PRODUCTS DIVISION The available worldwide market for the Company's LAN products is determined by the installed base of PCs, sales of new PCs and the portion of PCs connected to local area networks. SMC agrees with market analysts who believe that the number of PCs shipped and the percentage of PCs connected to LANs has increased over recent years. Competitors include domestic and foreign manufacturers, many of whom possess substantially greater resources than SMC. SMC's Ethernet, Fast Ethernet, Token Ring and ARCNET adapters accounted for 76% of System Products Division (SPD) revenues, or 34% of Company revenues, during fiscal 1997, compared to approximately 78% and 42%, respectively, in fiscal 1996. Because many competitors sell products that perform similar functions, SPD's strategy is to provide superior price/performance solutions for the PC LAN market, along with a high level of customer support, technical service and embedded software. SMC has combined its comprehensive product line with services under its Buyer Assurance program that include 3-year to lifetime product warranties, 7-day/24-hour phone technical support, cross-shipment product replacement and 30-day money-back privileges. Market share for each competitor is based on a combination of price, performance, service, promotional and advertising activity and strength of the marketing channels. Competition is provided by domestic and foreign manufacturers in U.S. and international markets. Some companies concentrate on aggressive pricing as the principal competitive tool. On the other hand, many leading manufacturers supplement price strategies with performance, service and acceleration of new product design cycles. MARKETS AND COMPETITION: COMPONENT PRODUCTS DIVISION The Division's strategy is to concentrate its product development, sales and marketing resources into the PC I/O, networking and PC systems logic chipset markets. These markets represent a small portion of the total semiconductor market. Competitors include 8 both domestic and foreign manufacturers, many of whom possess substantially greater resources than SMC. Within the PC I/O market, SMC believes the variety of performance features and the design flexibility provided to customers has led to strong acceptance of its family of PC I/O devices and allowed SMC to become a market leader. The Division has continually added devices with enhanced features. Principal customers for PC I/O devices are most major producers of PCs. In the market for 10Mbps and 10/100Mbps single chip Ethernet control devices, the Division has emphasized LAN products for laptop computers. SMC's principal customers have been producers of PC Card-bus adapters. A family of low-cost industrial ARCNET controllers addresses industrial network solutions, characterized by long design-in cycles. A broad base of industrial companies apply these devices to their machine-to-machine networking applications. While many companies offer semiconductor foundry services worldwide, SMC has been willing to undertake engineering programs for prospective customers and deliver non-standard devices that require semiconductor fabrication techniques. The size of the contracts that SMC's foundry business undertakes might be considered too small to be economically viable by many wafer fabrication facilities that deliver high-volume, advanced technology VLSI circuits. SALES AND DISTRIBUTION SMC's system products are sold, worldwide, primarily to distributors of computer products as well as to system integrators and original equipment manufacturers (OEMs). Component products are sold, worldwide, primarily to OEMs and also to distributors of semiconductor devices. The Company maintains a reserve for anticipated product returns and price protection. SALES AND DISTRIBUTION: SYSTEM PRODUCTS DIVISION Standard Microsystems sells LAN products primarily through LAN and microcomputer distributors. The distributors sell products to thousands of resellers who offer products to end users. The Division provides service and support and promotional programs to encourage resellers to buy SMC products from distributors. In addition, the Company sells to strategic accounts, who may be PC producers who ship their PCs with SMC adapters, or system integrators, who include SMC adapters when bidding for government or commercial contracts. In accordance with industry practice, distributor inventory is protected with respect to price on inventories that the distributor may have on hand at the time of a change in the 9 published list price, and with respect to the rotation of slow moving inventory in exchange for other inventory of equal value. Distributor contracts may be terminated by written notice by either party. The contracts specify terms covering the return of inventories. Returns of product pursuant to termination of these agreements have not been material. Reserves are estimated based on information provided by distributors on sales to their customers and on their inventory levels. SALES AND DISTRIBUTION: COMPONENT PRODUCTS DIVISION Sales of component products are primarily to OEMs. Producers of PCs are the Division's largest customer group. In addition, some products are sold to electronic component distributors. In accordance with industry practice, distributor inventory is protected with respect to price on inventories which the distributor may have on hand at the time of a change in the published list price. Also, in accordance with industry practice, slow moving inventory may be exchanged for other inventory of equal value. Distributor contracts may be terminated by written notice by either party. The contracts specify the terms for the return of inventories. GEOGRAPHIC INFORMATION: The information below summarizes the Companies sales for fiscal 1997, 1996 and 1995, by geographic region. Export sales are made in United States dollars. Sales by Toyo Microsystems, which are not classified as export sales, are denominated in Japanese yen. SMC's competitive position in international markets may be impacted by currency fluctuations. For the years ended February 28 or 29, %change %change 1997 97/96 1996 96/95 1995 United States $159.9 7% $149.4 -26% $201.5 - -------------------------------------------------------------------------------- Export Asia and Pacific Rim 112.0 29 87.0 62 53.7 Europe 51.9 -25 69.3 -20 86.5 Canada 7.5 -31 10.8 -29 15.3 Other 5.2 -40 8.6 -13 9.9 - -------------------------------------------------------------------------------- Export revenues $176.6 1 $175.7 6 $165.5 Japan (TMC) 17.6 5 16.8 44 11.7 - -------------------------------------------------------------------------------- Revenues outside the U.S. 194.2 1 192.5 9 177.1 Total revenues $354.1 4% $341.9 -10% $378.7 ================================================================================ BACKLOG 10 The Company schedules production based upon a forecast of demand for its products. Sales are made primarily pursuant to purchase orders generally requiring delivery within one month. In light of industry practice and experience, the Company believes that backlog is not a particularly meaningful indicator of future sales. MANUFACTURING Products of the System Products Division are assembled by turnkey subcontractors at plants located in the United States and Ireland. Design and assembly of these products primarily utilize surface mount technology. SMC provides the subcontract manufacturer with detailed documentation necessary to build a board to required quality specifications. This documentation includes board schematics and drawings, bill of materials, quality specifications and packaging, handling and shipping details. The subcontract manufacturer is then responsible for component and printed circuit board procurement, incoming test of components, mounting components on a printed circuit board and the burn-in and final testing of the boards. SMC requires that assembled boards be manufactured to Interconnecting and Packaging and Electronic Circuit (IPC) standards. SMC utilizes semiconductor foundries and assembly contractors in the U.S., Southeast Asia and Western Europe to provide state-of-the-art integrated circuit manufacturing and assembly capacity. These foundries manufacture most of the integrated circuits required by the Component Products Division and proprietary circuits used by the System Products Division. During fiscal 1997, 92% of the revenues of the Component Products Division resulted from the sale of product manufactured by subcontractor foundries, compared to 89% in 1996. The Company has developed relationships with several suppliers who represent the primary source for certain components, raw material and finished product. Most components and other materials purchased by SMC and its subcontractors are generally available from multiple suppliers. However, certain components and other materials are available only from a single source. The inability to obtain certain components or materials could lead to an interruption in shipments of certain SMC products. SMC and its subcontract assemblers have generally been able to obtain both sole and multiple-sourced materials without interrupting production schedules. However, the inability to 11 obtain certain components, materials or finished products from a supplier or subcontractor could cause a temporary interruption in the sale of the Company's products. RESEARCH AND DEVELOPMENT The technology involved in designing and manufacturing SMC's products is complex and is constantly being refined. Accordingly, the Company is committed to a program of research and development oriented toward improving and refining its existing capabilities and developing new techniques, designs and technologies for producing component and system products. During the fiscal year which ended February 28, 1997, SMC spent $26.3 million on research and development, which equaled 7.4% of revenues. This compares with $31.7 million, or 9.3% of revenues, spent during fiscal 1996, and $28.3 million, or 7.5% of revenues, during fiscal 1995. Of these amounts, $9.8 million was spent by the divested Enterprise Networks Business Unit in fiscal 1996 compared to $7.6 million in fiscal 1995. Engineering groups, developing both system products and component products, utilize semiconductor design techniques to minimize chip area and utilize advanced wafer processing and packaging methods. The goal is to improve features, performance and reliability while minimizing integrated circuit manufacturing costs. PATENTS AND LICENSE AGREEMENTS The Company has received numerous United States patents, and the corresponding Foreign equivalents, relating to its technologies and additional patent applications are pending. The Company has entered into non-exclusive patent licensing and patent/technology licensing agreements which have entitled the licensees to utilize the Company's patents or technologies, in exchange for which the Company has received, in various combinations, lump-sum payments, royalty payments, the right to utilize other patents or technologies of the licensees or other consideration, including the right to manufacture, market and sell specific products designed by the licensees. These agreements have typically provided for bi-directional licenses under certain patents, utility models and design patents, existing at the effective date of the particular agreement and patent applications filed within a specified period of years after the effective date of the agreement. The licenses usually continue for the life of the particular patent. The Company has, from time to time, been informed of claims that it may be infringing patents owned by others. When the Company deems it appropriate, the Company may seek licenses under certain of such patents. However, no assurance can be given that satisfactory license agreements will be obtained if sought by the Company or that failure to obtain any such licenses would not adversely affect the Company's future operations. 12 ENVIRONMENTAL REGULATION Federal, state and local regulations impose various controls on the discharge of certain chemicals and gases used in semiconductor processing. The Company's facilities have been designed to comply with these regulations. However, increasing public attention has focused on the environmental impact of electronics manufacturing operations and, accordingly, there is no assurance that future regulations will not impose significant costs on the Company. EMPLOYEES As of February 28, 1997, of the Company's 793 employees, 179 were engaged in engineering, including research and development, 196 in marketing and sales, 165 in executive and administrative activities and 253 in manufacturing and manufacturing support. This compared to February 29, 1996, when, of the Company's 864 employees, 168 were engaged in engineering, including research and development, 287 in marketing and sales, 165 in executive and administrative activities and 244 in manufacturing and manufacturing support Many employees are highly skilled and SMC's success depends upon its ability to retain and attract such employees. The Company has never had a work stoppage. No employees are represented by a labor organization and the Company considers its employee relations to be satisfactory. - ------------------------------------------------------------------------ SMC and Standard Microsystems are registered trademarks of Standard Microsystems Corporation. Product names and company names are the trademarks of their respective holders. 13 Item 2. Properties. The Company owns five facilities, totaling approximately 249,000 square feet of plant and office space, located on approximately 28 acres in Hauppauge, New York, where research, development, manufacturing, product testing, warehousing, shipping, marketing, selling and administrative functions are conducted. The Company occupies a 50,000 square foot facility in Irvine, California, where SMC's System Products Division conducts most of the research, development and marketing for adapter products. The lease expires in 2002. In addition, the Company maintains offices in leased facilities in: San Jose, California; Boca Raton, Bradenton and Miami, Florida; Atlanta, Georgia; Oakbrook Terrace, Illinois; Andover and Danvers, Massachusetts; Kettering, Ohio; Austin, Dallas and Houston, Texas; Falls Church, Virginia; Melbourne and Sydney, Australia; Oakville, Ontario, Canada; London, England; St. Germain-en-Laye, France; Munich, Germany; Tokyo, Japan; Singapore; Johannesburg, South Africa and Taipei, Taiwan. As of February 28, 1997, the Company owned machinery and equipment, property and leasehold improvements with an original cost of $157.7 million and accumulated depreciation and amortization of $94.9 million. 14 Item 3. Legal Proceedings. In June 1995, several actions were filed against the Company and certain of its officers and directors. These complaints have been consolidated into a class action on behalf of the purchasers of the Company's common stock between September 19, 1994, and June 2, 1995. The consolidated complaint asserts claims under federal securities laws and alleges that the price of the Company's common stock was artificially inflated during the class action period by false and misleading statements and the failure to disclose certain information. While it is not possible to assess the likelihood of any liability being established, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has answered the consolidated complaint, has accrued the estimated cost of legal fees to defend against these claims, and intends to defend against these claims vigorously. In May 1997, Cabletron Systems, Inc. and Cabletron Systems Acquisition, Inc. (together, Cabletron) commenced legal action in the Superior Court for the Commonwealth of Massachusetts, against the Company claiming violation of the non-competition clause included in the January 1996 Asset Purchase Agreement among the Company and Cabletron. Such clause prohibits the Company from competing with Cabletron in a particular segment of the local area networking marketplace through January 1999, following the January 1996 sale of the Company's Enterprise Networks Business Unit to Cabletron. The action seeks an injunction and unspecified damages. The Company firmly believes that this claim is without merit and intends to vigorously defend against it. 15 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Executive Officers of the Registrant The executive officers of the registrant as of April 30, 1997, are as follows: Served as an Name Position Age officer since Paul Richman Chairman and 54 1971 Chief Executive Officer Arthur Sidorsky Executive Vice President 63 1980 Component Products Division Lance Murrah Senior Vice President and 41 1994 General Manager System Products Division Eric Nowling Vice President and Controller 40 1995 All officers serve at the pleasure of the Company's Board of Directors. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information captioned "Market price" and the last two paragraphs appearing in the Annual Report under the heading "Quarterly Financial Data" are incorporated herein by this reference. Except as specifically set forth herein and elsewhere in this Form 10-K, no information appearing in the Annual Report is incorporated by reference into this report nor is the Annual Report deemed to be filed, as part of this report or otherwise, pursuant to the Securities Exchange Act of 1934. Item 6. Selected Financial Data. The information appearing in the Annual Report under the caption "Selected Financial Data" is incorporated herein by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information appearing in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by this reference. Item 8. Financial Statements and Supplementary Data. The financial statements, notes thereto, Report of Independent Public Accountants thereon and quarterly financial data appearing in the Annual Report are incorporated herein by this reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Inapplicable. 17 PART III Item 10. Directors and Executive Officers of the Registrant. The information appearing in the Proxy Statement under the caption "Election of Directors" is incorporated herein by this reference. Item 11. Executive Compensation. The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information appearing in the Proxy Statement under the captions "Election of Directors" and "Voting Securities of Certain Beneficial Owners and Management" is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions. The information appearing in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by this reference. 18 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements The following consolidated financial statements of the Company and its subsidiaries have been incorporated by reference from the Annual Report pursuant to Part II, Item 8: Consolidated Statements of Income for the three years ended February 28, 1997 Consolidated Balance Sheets, February 28, 1997 and February 29, 1996 Consolidated Statements of Shareholders' Equity for the three years ended February 28, 1997 Consolidated Statements of Cash Flows for the three years ended February 28, 1997 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. Financial Statement Schedules Schedules are omitted because of the absence of conditions requiring them or because the required information is shown on the consolidated financial statements or the notes thereto. 3. Exhibits, which are listed on the Exhibit Index, are filed as part of this report and such Exhibit Index is incorporated by reference. Exhibits 10(a) through 10(m) listed on the accompanying Exhibit Index identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference. (b) No report on Form 8-K was filed during the last quarter of the period covered by this report. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MICROSYSTEMS CORPORATION (Registrant) By S/ERIC M. NOWLING ERIC M. NOWLING Vice President and Controller (Principal Financial and Accounting Officer) Date: May 23, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature and Title Date PAUL RICHMAN May 23, 1997 Paul Richman, Chairman, Chief Executive Officer and Director (Principal Executive Officer) EVELYN BEREZIN May 23, 1997 Evelyn Berezin Director 20 JAMES R. BERRETT May 23, 1997 James R. Berrett Director ROBERT M. BRILL May 23, 1997 Robert M. Brill Director PETER F. DICKS May 23, 1997 Peter F. Dicks Director KATHLEEN B. EARLEY May 23, 1997 Kathleen B. Earley Director HERMAN FIALKOV May 23, 1997 Herman Fialkov Director IVAN T. FRISCH May 23, 1997 Ivan T. Frisch Director 21 EXHIBIT INDEX Incorporated By Exhibit Reference To: No. Exhibit Exhibit 3(a) [9] 3.1 Restated Certificate of Incorporation * 3.2 By-Laws as amended Exhibit 1 [5] 3.3 Rights Agreement dated January 7, 1988, with Securities Trust Company as Rights Agent Exhibit 3 [6] 3.4 Amendment No. 1 to Rights Agreement Exhibit 10.1[14] 10.1 Employment Agreement dated March 1, 1995, with Paul Richman Exhibit 10.2 [16] 10.2 Amendment thereto dated July 10, 1995 * 10.3 Employment Agreement dated March 1, 1996, with Arthur Sidorsky Registrant's Proxy 10.4 1984 Stock Option Plan for Officers Statement dated May and Key Employees 16, 1984, Exhibit A Exhibit 10(g) [4] 10.5 Amendment to 1984 Stock Option Plan for Officers and Key Employees Registrant's Proxy 10.6 1986 Stock Option Plan for Statement dated May Officers and Key Employees 22, 1986, Exhibit A Exhibit 10(i) [4] 10.7 Amendment to 1986 Stock Option Plan for Officers and Key Employees Exhibit 10(m) [1] 10.8 Amendment to 1986 Stock Option Plan for Officers and Key Employees dated March 29, 1990 Registrant's Proxy 10.9 1989 Stock Option Plan Statement dated June 6, 1989, Exhibit A Registrant's Proxy 10.10 1991 Restricted Stock Bonus Plan Statement dated July 17, 1991, Exhibit A Registrant's Proxy 10.11 Director Stock Option Plan Statement dated May 29, 1990, Exhibit A Registrant's Proxy 10.12 1994 Director Stock Option Plan Statement dated May 31, 1995, Exhibit A Exhibit 10(m) [11] 10.13 Resolutions adopted February 18, 1992, amending Director Stock Option Plan, 1991 Restricted Stock Bonus Plan, 1989 Stock Option Plan, 1986 Stock Option Plan and 1984 Stock Option Plan Exhibit 10.14 [14] 10.14 Retirement Plan for Directors Registrant's Proxy 10.15 1993 Stock Option Plan for Officers Statement dated May and Key Employees 25, 1993, Exhibit A Exhibit 10(x) [13] 10.16 Executive Retirement Plan Registrant's Proxy 10.17 1994 Stock Option Plan for Officers Statement dated May and Key Employees 26, 1994, Exhibit A Exhibit 10.18 [14] 10.18 Resolutions adopted October 31, 1994, amending the Retirement Plan for Directors and the Executive Retirement Plan Exhibit 10.19 [14] 10.19 Resolutions adopted January 3, 1995, amending the 1994, 1993, 1989, 1986, and 1984 Stock Option Plans and the 1991 Restricted Stock Plan Exhibit 10.2 [2] 10.20 Patent and Trade Secrets Agreement dated March 12, 1983, with Paul Richman Exhibit 10.22 [14] 10.21 Consulting Agreement dated March 1, 1995, with Herman Fialkov Exhibit 10(t) [7] 10.22 Form of Severance Pay Agreement (renewed annually through December 31, 1996) Exhibit 2(b) [10] 10.23 Technology Transfer Agreement between SMC and Western Digital Corporation dated September 27, 1991 Exhibit 2(c) [10] 10.24 Noncompetition Agreement between SMC and Western Digital Corporation dated September 27, 1991 Exhibit 10.27 [14] 10.25 Credit Agreement dated January 13, 1995 Exhibit 10.26 [16] 10.26 First Amendment dated March 28, 1995 Exhibit 10.27 [16] 10.27 Second Amendment dated October 13, 1995 Exhibit 10.28 [16] 10.28 Third Amendment dated March 28, 1996 Exhibit 2 [15] 10.29 Asset Purchase Agreement dated January 9, 1996, among Cabletron Systems, Inc., and SMC Enterprise Networks, Inc Exhibit 10.30 [16] 10.30 Agreement for Purchase and Sale of Assets among SMC, EFAR Microsystems, Inc., and the Key Officers identified therein dated February 26, 1996 Registrant's Proxy 10.31 1996 Stock Option Plan for Officers Statement dated July and Key Employees 22, 1996, Exhibit A Item 7, Exhibit 1[17] 10.32 Common Stock and Warrant Purchase Agreement, among SMC and Intel Corporation, dated March 18, 1997 Item 7, Exhibit 2[17] 10.33 Warrant to Purchase Shares of Common Stock of Standard Microsystems Corporation, among SMC and Intel Corporation, dated March 18, 1997 Item 7, Exhibit 3[17] 10.34 Investor Rights Agreement, among SMC and Intel Corporation, dated March 18, 1997 * 13 Portions of Annual Report to Stockholders for year ended February 28, 1997, incorporated by reference * 21 Subsidiaries of the registrant * 23 Consent of Arthur Andersen LLP * 27 Financial Data Schedule - ------------------------- * Filed herewith. [1] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1990. [2] Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 1983. [3] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1985. [4] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1987. [5] Registrant's Registration on Form 8-A dated January 11, 1988. [6] Registrant's Amendment No. 2 on Form 8 dated April 14, 1988 to Registration on Form 8-A. [7] Registrant's Annual Report on Form 10-K for fiscal year ended February 29, 1988. [8] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1989. [9] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1991. [10] Registrant's Current Report on Form 8-K filed October 31, 1991. [11] Registrant's Annual Report on Form 10-K for fiscal year ended February 29, 1992. [12] Registrant's Current Report on Form 8-K filed January 13, 1993. [13] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1994. [14] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1995. [15] Registrant's Current Report on Form 8-K dated January 26, 1996. [16] Registrant's Annual Report on Form 10-K for fiscal year ended February 29, 1996. [17] Schedule 13D filed by Intel Corporation, dated March 27, 1997. EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 BY-LAWS OF STANDARD MICROSYSTEMS CORPORATION 1. STOCKHOLDERS 1.1 Place of Stockholders' Meetings. All meetings of the stockholders of the Corporation shall be held at such place or places, within or outside the state of incorporation, as may be fixed by the Board of Directors from time to time or as shall be specified in the respective notices thereof. 1.2 Date and Hour of Annual Meetings of Stockholders. An annual meeting of stockholders shall be held each year on the third Tuesday of July, unless said date is a legal holiday, in which case the meeting shall be held on the next day thereafter which is not a legal holiday, at 10:00 A.M., or on such other date and at such other times as may be designated by the Board of Directors. Each such meeting shall be held at ten o'clock in the morning, local time in effect at the place where the meeting is held, unless the Board of Directors shall fix another hour which shall be stated in the notice of the meeting. 1.3 Purposes of Annual Meeting. The annual meeting of the stockholders shall be held for the purpose of electing directors and transacting such other business as may properly come before the meeting. 1.4 Special Meetings of Stockholders. Special meetings of the stockholders or of any class or series thereof entitled to vote may be called by the Chairman or by the President or by the Board of Directors, or at the request in writing by stockholders of record owning a majority of the issued and outstanding shares of the Corporation entitled to vote at such meeting. 1.5 Notice of Meetings of Stockholders. Except as otherwise expressly required or permitted by the laws or the state of incorporation, not less than ten days nor more than fifty days before the date of every stockholders meeting the Secretary shall give to each stockholder of record entitled to vote at such meeting, written notice stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Such notice, if mailed, shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address for notices to such stockholder as it appears on the records of the Corporation. 1.6 Quorum of Stockholders. (a) Unless otherwise provided by the laws of Delaware, at any meeting of the stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum. (b) At any meeting of the stockholders at which a quorum shall be present, a majority of those present in person or by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting. In the absence of a quorum, the officer presiding thereat shall have power to adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting, other than announcement at the meeting, shall not be required to be given, except as provided in paragraph (d) below and except where expressly required by law. (c) At any adjourned session at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof, unless a new record date is fixed by the Board of Directors. (d) If an adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 1.7 Chairman and Secretary of Meeting. The Chairman or the Vice-Chairman or the President shall preside at meetings of the stockholders. The Secretary shall act as secretary of the meeting, or in his absence, the Assistant Secretary shall act, or if neither is present, then the presiding officer may appoint a person to act as secretary of the meeting. 1.8 Voting by Stockholders. Except as may be otherwise provided by these By-laws, at every meeting of the stockholders, each stockholder shall, unless otherwise provided, be entitled to one vote for each share of stock standing in his name on the books of the Corporation on the record date for the meeting. All elections and questions shall be decided by the vote of a majority in interest of the stockholders present in person or represented by proxy and entitled to vote at the meeting, except as otherwise permitted or required by the laws of Delaware, the certificate of incorporation or these By-laws. 1.9 Proxies. Any stockholder entitled to vote at any meeting of stockholders may vote either in person or by his attorney-in-fact. Every proxy shall be in writing, subscribed by the stockholder or his duly authorized attorney-in-fact, but need not be dated, sealed, witnessed or acknowledged. 1.10 Inspectors. The election of Directors and any other vote by ballot at any meeting of the stockholders shall be supervised by at least two inspectors. Such inspectors may be appointed by the Chairman or President before or at the meeting; or if one or both inspectors so appointed shall refuse to serve or shall not be present, such appointment shall be made by the officer presiding at the meeting. 1.11 List of Stockholders. (a) At least ten days before every meeting of stockholders, the Secretary shall prepare and make a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. (b) During ordinary business hours, for a period of at least ten days prior to the meeting, such list shall be open to examination by any stockholder for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. (c) The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting and it may be inspected by any stockholder who is present. (d) The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section 1.11 or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 1.12 Procedure at Stockholders' Meetings. The order of business and all other matters of procedure at every meeting of stockholders may be determined by the presiding officer. Not less than 15 minutes following the presentation of any resolution to any meeting of stockholders, the presiding officer may announce that further discussion on such resolution shall be limited to not more than three persons who favor and not more than three persons who oppose such resolution, each of whom shall be designated by the presiding officer and shall thereupon be entitled to speak thereon for not more than five minutes. After such person, or such a lesser number thereof as shall advise the presiding officer of their desire so to speak, shall have spoken on such resolution, the presiding officer may direct a vote on such resolution without further discussion thereon at the meeting. Except where otherwise provided by the certificate of incorporation, law or these By-laws, every question that shall come before a meeting shall be decided by a majority of the votes cast thereon and any such majority vote shall be the act of the stockholders. 2. DIRECTORS 2.1 Powers of Directors. The property, business and affairs of the Corporation shall be managed by its Board of Directors which may exercise all the powers of the Corporation except such as are by law or the certificate of incorporation or these By-laws required to be exercised or done by the stockholders. 2.2 Number, Method of Election, Terms of Office of Directors. The number of directors which shall constitute the whole Board of Directors shall not be less than three, nor more than fifteen, the exact number of directors to be such number as may be fixed from time to time within such limits by resolution adopted by affirmative vote of a majority of the whole Board of Directors. No decrease in the number of directors shall shorten the term of any incumbent director. Directors need not be stockholders. 2.2.1 (A) Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. (B) Such nominations, if not made by the Board of Directors, shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, by a stockholder to the Secretary of the Corporation not less than 14 days nor more than 60 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting for election of directors is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. Each such notice shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, and (iv) a statement that such nominee is qualified to serve as a director of the Corporation or, if not so qualified, the basis for such nominee's failure to so qualify, all in reasonable detail so that such information may be independently verified. Such notice shall be accompanied by the certificate of the stockholder proposing to make such nomination that the statements made in such notice are true, accurate, and complete in all respects. (C) Notice of nominations which are proposed by the Board of Directors shall be given on behalf of the Board, at or prior to the meeting of stockholders at which such nominations are to be voted upon, by the chairman of the meeting. (D) The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the By-laws, and if he should so determine, he shall so declare to the meeting, whereupon the defective nomination shall be disregarded. 2.3 Vacancies on Board of Directors. (a) Any Director may resign his office at any time by delivering his resignation in writing to the Chairman or the President or the Secretary. It will take effect at the time specified therein, or, if no time is specified, it will be effective at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. (b) Any vacancy occurring in the Board of Directors caused by death, resignation, or removal, and any newly created directorship resulting from an increase in the number of directors, may be filled by a majority of the directors in office, although less than a quorum, or by a sole remaining director. Each director chosen to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen, and until his successor shall be elected and qualified, or until his death, or until he shall have resigned, or have been removed. 2.4 Meetings of the Board of Directors. (a) The Board of Directors may hold their meetings, both regular and special, either within or outside the state of incorporation. (b) Regular meetings of the Board of Directors may be held at such time and place as shall from time to time be determined by resolution of the Board of Directors. No notice of such regular meetings shall be required. If the date designated for any regular meeting be a legal holiday, then the meeting shall be held on the next day which is not a legal holiday. (c) Immediately following the annual meeting of the stockholders, a regular annual meeting of the Board of Directors shall be held for the election of officers and the transaction of such other business as may come before it. If such meeting is held at the place of the stockholders meeting, no notice thereof shall be required. (d) Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman or the President or at the written request of two directors. (e) The Secretary shall give notice to each director of any special meeting of the Board of Directors by mailing the same at least two days before the meeting or by telegraphing or delivering the same not later than the day before the meeting. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Any and all business may be transacted at any meeting of the Board of Directors. No notice of any adjourned meeting need be given. No notice to or waiver by any Director shall be required with respect to any meeting at which such Director is present. 2.5 Quorum and Action. One-half of the total number of directors, but not less than two directors, shall constitute a quorum for the transaction of business; but if there shall be less than a quorum at any meeting of the Board, a majority of those present may adjourn the meeting from time to time. Except where otherwise provided by the By-laws, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 2.6 Presiding Officer and Secretary of Meeting. The Chairman, or, in his absence, the Chairman of the Corporate Governance Committee, or, in his absence, the Vice-Chairman, or in his absence, the President, or, in their absence, a member of the Board of Directors selected by the members present, shall preside at meetings of the Board. The Secretary shall act as secretary of the meeting, but in his absence, the presiding officer may appoint a secretary of the meeting. 2.7 Action by Consent without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes or proceedings of the Board or committee. 2.8 Executive Committee. The Board of Directors may appoint from among its members and, from time to time, may fill vacancies in an Executive Committee of two or more to serve during the pleasure of the Board. During the intervals between the meetings of the Board, the Executive Committee shall possess and may exercise all of the powers of the Board in the management of the business and affairs of the Corporation conferred by these By-laws or otherwise. The Committee shall keep a record of all its proceedings and report the same to the Board. A majority of the members of the Committee shall constitute a quorum. The vote of a majority of the members of the Committee present at any meeting at which a quorum is present shall be the act of the Committee. 2.9 Compensation Committee. The Board of Directors may appoint from among its members and, from time to time, may fill vacancies in, a Compensation Committee of two or more to serve during the pleasure of the Board. Such Committee shall have the power and authority vested in the Committee referred to in any Stock Option Plan of the Corporation, and shall have power with respect to the salaries and other compensation of all employees of the Corporation or its subsidiaries who are directors or whose salaries are at a rate of $25,000 or more per year. The members of such Committee shall not be eligible to receive any compensation from the Corporation or any subsidiary of the Corporation except as provided in Section 2.11. Such Committee shall keep a record of all its proceedings and report the same to the Board. A majority of the members of such Committee shall constitute a quorum. The vote of a majority of the members of such Committee present at any meeting at which a quorum is present shall be the act of the Committee. 2.10 Other Committees. The Board of Directors may also appoint from among its members such other committees of two or more directors as it may from time to time deem desirable and may delegate to such committees such powers of the Board as it may consider appropriate. 2.11 Compensation of Directors. Directors shall receive such reasonable compensation for their service on the Board of Directors or any committees thereof, whether in the form of salary or a fixed fee for attendance at meetings, or both, with expenses, if any, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any Director from serving in any other capacity and receiving compensation therefor. 2.12 Removal of Directors. A director may be removed only for cause. 3. OFFICERS 3.1 Officers, Title, Elections, Terms. (a) The Corporation shall have a Chairman, Vice-Chairman, President, a Treasurer and a Secretary, who shall be elected by the Board of Directors at its annual meeting following the annual meeting of the stockholders, to serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election and until their successors are elected and qualify. (b) The Board of Directors may elect at any time, and from time to time, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, a Controller, one or more Associate Treasurers, one or more Assistant Treasurers, one or more Assistant Secretaries and one or more Assistant Controllers and may elect or appoint such other officers or agents with such duties as it may deem necessary or desirable. Such additional officers shall serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election or appointment. Two or more offices may be held by the same person. (c) Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. (d) Any officer or agent elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the entire Board of Directors. (e) Any officer may resign his office at any time. Such resignation shall be made in writing and shall take effect at the time specified therein or, if no time be specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. (f) The salaries of all officers of the Corporation shall be fixed by the Board of Directors. 3.2 Powers and Duties of Chairman. The Chairman shall have such specific powers and responsibilities as may be conferred upon him by the Board of Directors and shall report directly to the Board of Directors. He shall be the chief policy officer of the Corporation. He shall, when present, preside at meetings of the stockholders, the Board of Directors and the Executive Committee. 3.3 Powers and Duties of Vice-Chairman. The Vice-Chairman shall have such specific powers and responsibilities as may be conferred upon him by the Board of Directors. He shall report directly to the Chairman. In the event of the absence of the Chairman, or his incapacity or inability to act, then the Vice-Chairman shall preside at all meetings of the stockholders, the Board of Directors and the Executive Committee. 3.4 Powers and Duties of President. (a) Except in such instances as the Board may confer powers in particular transactions upon the Chairman or any other officer, and subject to the control and direction of the Board of Directors, the President shall supervise, manage and direct the business of the Corporation and shall communicate to the Board of Directors and any committee thereof reports, proposals and recommendations for their respective consideration or action. In the event of the absence of the Chairman and the Vice-Chairman, or their incapacity or inability to act, then the President shall preside at all meetings of the stockholders, the Board of Directors and the Executive Committee. (b) The President shall act for or on behalf of the Corporation in all matters in which action by the President as such is required by law, and he may do and perform all other acts and things incident to the position of President, including the signing of contracts and other documents in the name of the Corporation, except as may be otherwise provided in these By-laws or ordered by the Board of Directors. 3.5 Powers and Duties of Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board of Directors or the President may from time to time prescribe, and shall perform such other duties as may be prescribed in these By-laws. 3.6 Powers and Duties of Treasurer, Associate Treasurers and Assistant Treasurers. (a) The Treasurer shall have the care and custody of all the funds and securities of the Corporation except as may be otherwise ordered by the Board of Directors, and shall cause such funds to be deposited to the credit of the Corporation in such banks or depositories as may be designated by the Board of Directors, and shall cause such securities to be placed in safekeeping in such manner as may be designated by the Board of Directors. (b) The Treasurer, or an Associate Treasurer, or an Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board of Directors, may endorse in the name and on behalf of the corporation all instruments for the payment of money, bills of lading, warehouse receipts, insurance policies and other commercial documents requiring such endorsement. (c) The Treasurer, or an Associate Treasurer, or an Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board of Directors may sign all receipts and vouchers for payments made to the Corporation; he shall render a statement of the cash account of the Corporation to the Board of Directors as often as it shall require the same; he shall enter regularly in books to be kept by him for that purpose, full and accurate account of all moneys received and paid by him on account of the Corporation, and of all securities received and delivered by the Corporation. (d) The Treasurer shall perform such other duties as may be prescribed in these By-laws or assigned to him and all other acts incident to the position of Treasurer. Each Associate Treasurer and each Assistant Treasurer shall perform such duties as may from time to time be assigned to him by the Treasurer or by the Board of Directors. In the event of the absence of the Treasurer or his incapacity or inability to act, then any Associate Treasurer or any Assistant Treasurer may perform any of the duties and may exercise any of the powers of the Treasurer. 3.7 Powers and Duties of Secretary and Assistant Secretaries. (a) The Secretary shall keep the minutes of all proceedings of the stockholders, the Board of Directors, the Executive Committee and any other committees of the Board in proper books provided for that purpose. The Secretary shall attend to the giving and serving of all notices of the Corporation, in accordance with the provisions of these By-laws and as required by law. The Secretary shall be the custodian of the seal of the Corporation. The Secretary may, with the President, an Executive Vice President, a Senior Vice President, a Vice President or other authorized officer, sign all contracts and other documents in the name of the Corporation, and shall affix or cause to be affixed the seal of the Corporation to such contracts and other documents requiring the seal of the Corporation, and when so affixed, may attest the same. He shall perform such other duties as may be prescribed in these By-laws or assigned to him and all other acts incident to the position of Secretary. (b) Each Assistant Secretary shall perform such duties as may from time to time be assigned to him by the Secretary or by the Board of Directors. In the event of the absence of the Secretary or his incapacity or inability to act, then any Assistant Secretary may perform any of the duties and may exercise any of the powers of the Secretary. (c) The Secretary shall prepare and have custody of the list of stockholders at each meeting of the stockholders as required by Section 1.11 of these By-laws. The Secretary shall have custody of all stock books and of all unissued stock certificates. 3.8 Powers and Duties of Controller and Assistant Controllers. (a) The Controller shall be responsible for the maintenance of adequate accounting records of all assets, liabilities and transactions of the Corporation. The Controller shall prepare and render such balance sheets, budgets and other financial reports as the Board of Directors, the Chairman or the President may require; and he shall perform such other duties as may be prescribed in these By-laws or assigned to him and all other acts incident to the position of Controller. (b) Each Assistant Controller shall perform such duties as from time to time may be assigned to him by the Controller or by the Board of Directors. In the event of the absence of the Controller or his incapacity or inability to act, then any Assistant Controller may perform any of the duties and may exercise any of the powers of the Controller. 4. INDEMNIFICATION (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) or (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) or (b) may be made as ordered by a court or as authorized by the Corporation (i) in any specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b), or (ii) in any other lawful manner. Without limiting the next preceding sentence, such determination may be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders, or (4) in any other lawful manner. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Section 4. (f) The indemnification provided by this Section 4 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section 4. (h) For the purpose of this Section 4, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. (i) The Board of Directors shall have power to indemnify any person included within any category described in Section 4 (a) against any loss, liability or expense (including attorneys' fees, fines, judgments and amounts paid in settlement) arising out of his service in any such category, unless such indemnity is prohibited by law applicable to the Corporation, and shall have such power regardless of whether such indemnity is authorized by Section 145 of the General Corporation Law. 5. CAPITAL STOCK 5.1 Stock Certificates (a) Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of, the Corporation by the Chairman or the Vice-Chairman, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares owned by him. (b) If such certificate is countersigned by a transfer agent other than the Corporation or its employee, or by a registrar other than the Corporation or its employee, the signatures of the officers of the Corporation may be facsimiles, and, if permitted by law, any other signature may be a facsimile. (c) In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. (d) Certificates of stock shall be issued in such form not inconsistent with the Certificate of Incorporation as shall be approved by the Board of Directors. They shall be numbered and registered in the order in which they are issued. (e) All certificates surrendered to the Corporation shall be cancelled with the date of cancellation, and shall be retained by the Secretary, together with the powers of attorney to transfer and the assignments of the shares represented by such certificates, for such period of time as shall be prescribed from time to time by resolution of the Board of Directors. 5.2 Record Ownership. A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to treat the holder of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by law. 5.3 Transfer of Record Ownership. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or his attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so. 5.4 Lost, Stolen or Destroyed Certificates. Certificates representing shares of the stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed in such manner and on such terms and conditions as the Board of Directors from time to time may authorize. 5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The Corporation shall maintain one or more transfer offices or agencies where stock of the Corporation shall be transferable. The Corporation shall also maintain one or more registry offices where such stock shall be registered. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates. 5.6 Fixing Record Date for Determination of Stockholders of Record. The Board of Directors may fix in advance a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of the stockholders or any adjournment thereof, or the stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or to express consent to corporate action in writing without a meeting, or in order to make a determination of the stockholders for the purpose of any other lawful action. Such record date in any case shall not be more than sixty days nor less than ten days before the date of a meeting of the stockholders, nor more than sixty days prior to any other action requiring such determination of the stockholders. A determination of stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6. SECURITIES HELD BY THE CORPORATION 6.1 Voting. Unless the Board of Directors shall otherwise order, the Chairman, the Vice-Chairman, the President, any Vice President, the Secretary or the Treasurer shall have full power and authority, on behalf of the Corporation, to attend, act and vote at any meeting of the stockholders of any corporation in which the Corporation may hold stock and at such meeting to exercise any or all rights and powers incident to the ownership of such stock, and to execute on behalf of the Corporation a proxy or proxies empowering another or others to act as aforesaid. The Board of Directors from time to time may confer like powers upon any other person or persons. 6.2 General Authorization to Transfer Securities Held By the Corporation. (a) Any of the following officers, to wit: the Chairman, the Vice-Chairman, the President, any Vice President, the Treasurer, the Controller, any Associate Treasurer, Assistant Treasurer or Assistant Controller of the Corporation shall be, and they hereby are, authorized and empowered to transfer, convert, endorse, sell, assign, set over and deliver any and all shares of stock, bonds, debentures, notes, subscription warrants, stock purchase warrants, evidences of indebtedness, or other securities now or hereafter standing in the name of or owned by the Corporation, and to make, execute and deliver, under the seal of the Corporation, any and all written instruments of assignment and transfer necessary or proper to effectuate the authority hereby conferred. (b) Whenever there shall be annexed to any instrument of assignment and transfer executed pursuant to and in accordance with the foregoing paragraph (a), a certificate of the Secretary or an Assistant Secretary of the Corporation in office at the date of such certificate setting forth the provisions of this Section 6.2 and stating that they are in full force and effect and setting forth the names of persons who are then officers of the Corporation, then all persons to whom such instrument and annexed certificate shall thereafter come shall be entitled, without further inquiry or investigation and regardless of the date of such certificate, to assume and to act in reliance upon the assumption that the shares of stock or other securities named in such instrument were theretofore duly and properly transferred, endorsed, sold, assigned, set over and delivered by the Corporation, and that with respect to such securities, the authority of these provisions of the By-laws and of such officers is still in full force and effect. 7. SIGNATORIES All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 8. SEAL The seal of the Corporation shall be in such form and shall have such content as the Board of Directors shall from time to time determine. 9. FISCAL YEAR The fiscal year of the Corporation shall be determined by the Board of Directors. 10. WAIVER OF OR DISPENSING WITH NOTICE (a) Whenever any notice of the time, place or purpose of any meeting of the stockholders, directors or a committee is required to be given by law, the Certificate of Incorporation or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the holding thereof, or actual attendance at the meeting in person or, in the case of any stockholder, by his attorney-in-fact, shall be deemed equivalent to the giving of such notice to such persons. (b) No notice need be given to any person with whom communication is made unlawful by any law of the United States or any rule, regulation, proclamation or executive order issued under any such law. 11. AMENDMENT OF BY-LAWS 11.1 By Board of Directors. The By-laws of the Corporation may be altered, amended or repealed or new By-laws may be made or adopted by the affirmative vote of a majority of the whole Board at any regular or special meeting of the Board. No notice of any such meeting shall be required unless required otherwise than under this Section 11 and no such notice need in any event make any reference to any proposed change in the By-laws. 11.2 By Stockholders. The By-laws of the Corporation may also be altered, amended or repealed or new By-laws may be made or adopted by the vote of a majority in interest of the stockholders represented and entitled to vote upon the election of directors, at any meeting at which a quorum is present. EX-10.3 3 EXHIBIT 10.3 Exhibit 10.3 EMPLOYMENT AGREEMENT AGREEMENT made as of the 1st day of March, 1996 (the "Commencement Date") between STANDARD MICROSYSTEMS CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware and having an office at 80 Arkay Drive, Hauppauge, Long Island, New York 11788, hereinafter referred to as "SMC" and ARTHUR SIDORSKY, residing at Seven Harborpoint Drive, Northport, New York 11768, hereinafter referred to as the "Employee". WITNESSETH: WHEREAS, SMC is engaged, among other things, in the business of developing, manufacturing, and selling integrated circuits and board-level products for use in the electronics industry and principally in connecting personal computers over local area networks; and WHEREAS, SMC has for many years employed the Employee and desires to continue to employ him in an executive, research and/or engineering capacity, upon the terms and conditions hereinafter in this Agreement set forth, and the Employee is desirous of being so employed; and WHEREAS, SMC controls various corporations and other enterprises, the corporations and other enterprises from time to time controlled by SMC being referred to in this Agreement as "SMC Affiliates"; and WHEREAS, the Employee is, on the Commencement Date, employed as an Executive Vice President of SMC, NOW, THEREFORE, in consideration of the premises, and the mutual covenants and conditions herein contained, the parties hereto agree as follows: FIRST: SMC agrees to employ the Employee and the Employee agrees to be employed pursuant to this Agreement for a period commencing on the Commencement Date and ending on the day preceding the third anniversary of the Commencement Date; provided that SMC may terminate such employment on any earlier date by giving the Employee notice of the effective date of such termination, which notice shall be accompanied by SMC's check for an amount equal to one year's compensation at the then current rate fixed pursuant to Paragraph THIRD (a) (less appropriate tax deductions) payable to the Employee. The Employee shall serve as an officer of SMC in such offices to which he may be elected or appointed, and shall perform such other duties for SMC and SMC Affiliates as shall be assigned to him from time to time during the continuance of this Agreement by the Board of Directors, the Chairman or the President of SMC. The Employee agrees to apply his experience and skill to such problems as shall be presented to him from time to time in connection with the business of SMC and SMC Affiliates. The Employee may be required to spend a significant portion of his business time traveling on behalf of SMC. However, if the Employee is assigned, as provided in this paragraph, to conduct his principal activities or have his headquarters at a location outside the Hauppauge, Long Island area (hereby defined to include all points within fifty miles of Hauppauge, Long Island, New York), the Employee may, within ninety days thereafter, terminate this Agreement by notice given to SMC, in which event SMC shall pay the Employee an amount equal to one year's compensation at the then current rate fixed pursuant to Paragraph THIRD (a). SECOND: The Employee shall give his full time, attention, best efforts and skill to SMC and the SMC Affiliates, shall accept willingly and carry out the duties assigned to him in the furtherance of the business of SMC and the SMC Affiliates and shall not engage in any activity in conflict with the best interests of SMC and the SMC Affiliates. In addition to the compensation set forth in paragraph THIRD and in consideration for his services to SMC, SMC agrees to make available to the Employee the benefits and privileges regularly granted to other senior executives of SMC. THIRD: (a) SMC shall pay to the Employee, and the Employee agrees to accept as compensation for and in consideration of the work to be performed hereunder by the Employee, a weekly salary at the rate of $296,300 per annum during the term of this Agreement. The rate of compensation shall be subject to annual increase, but not reduction, in the discretion of the Board of Directors, after review and recommendation by the Compensation Committee of the Board. Any such increase shall be effective as of the first day of the fiscal year for which such increase is approved, unless otherwise determined by the Board. (b) In addition, as bonus compensation to the Employee, SMC shall pay to the Employee, not later than 120 days after the end of each fiscal year of SMC included in the term of this Agreement, such amount (if any), related to consolidated net income of SMC, and/or a specified division of SMC for such year, before deduction of federal and state income taxes and incentive compensation to employees, as shall be determined in its discretion by the Compensation Committee of the Board of Directors of SMC or, if there be no such Compensation Committee, then by the Board of Directors of SMC. In determining consolidated net income for the purpose of the preceding sentence, such additions and subtractions from such income (as determined by SMC's independent accountants or by SMC) shall be given effect as such Compensation Committee or Board shall from time to time in its discretion prescribe. FOURTH: The Employee has executed a Patent and Trade Secrets Agreement with SMC of even date herewith, the provisions of which shall be deemed to be incorporated as part of this Agreement. FIFTH: The Employee has executed a Severance Pay Agreement with SMC dated January 20, 1988 and several extensions thereof of which the latest is of even date herewith, the provisions of which shall be deemed to be incorporated as part of this Agreement. The rights and remedies under such Severance Pay Agreement are in addition to, and not in limitation of, any rights or remedies which the Employee may have under this Agreement, provided that in no event shall the damages payable to the Employee under this Agreement and the severance payments to which the Employee may be entitled under SectionE4.3(B) and 4.4(B) of such Severance Pay Agreement exceed the greater of (i) the balance (if any) of remuneration which would have been payable to the Employee under this Agreement, if all such remuneration were paid to the Employee under this Agreement as and when due, or (ii) the severance payments to which the Employee may be entitled under Section 4.3(B) or 4.4(B), as may be applicable, of such Severance Pay Agreement; provided further that in the event that Section 4.7 of such Severance Pay Agreement shall be applicable, such damages and payment shall be so reduced as may be required under such Section 4.7. SIXTH: Any notice or other communication given under this Agreement to either party shall be in writing and shall be delivered at or mailed to such party at the address of such party appearing at the head of this Agreement; provided that either party may by notice designate a changed address for such party. Any such notice shall be deemed given (a)Eif mailed properly addressed, postage prepaid, certified mail, return receipt requested, on the third business day after mailing in Northport, New York or Hauppauge, New York, or (b)Eif delivered otherwise than pursuant to (a), at the time of actual delivery. IN WITNESS WHEREOF, SMC has caused this Agreement to be executed on its behalf by its representative, thereunto duly authorized, and the Employee has executed this Agreement as of the day and year first above written. STANDARD MICROSYSTEMS CORPORATION By:______________________________ Paul Richman, Chairman Arthur Sidorsky, Employee EX-13 4 EXHIBIT 13 Exhibit 13 PAGE 11: FINANCIAL REVIEW Selected Financial Data 12 Management's Discussion and Analysis 13 Consolidated Balance Sheets 17 Consolidated Statements of Income 18 Consolidated Statements of Shareholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21 Report on Management's Responsibilities 32 Report of Independent Public Accountants 32
Standard Microsystems Corporation and Subsidiaries Page 12 SELECTED FINANCIAL DATA As of February 28 or 29, and for the years then ended (In thousands, except per share data) 1997 1996 1995 1994 1993 Operating Results Revenues $ 354,138 $ 341,926 $ 378,671 $ 322,575 $ 250,495 Cost of goods sold and operating expenses 383,152 370,835 338,049 287,139 219,712 Income (loss) from operations (29,014) (28,909) 40,622 35,436 30,783 Other income (expense), net (3,988) 48,913 670 (1,964) (2,865) Income (loss) before minority interest, provision for income taxes and extraordinary item (33,002) 20,004 41,292 33,472 27,918 Minority interest in net income (loss) of subsidiary 21 202 185 (209) (430) Income (loss) before provision for income taxes and extraordinary item (33,023) 19,802 41,107 33,681 28,348 Provision for (benefit from) income taxes (11,726) 8,201 15,940 13,770 12,510 Income (loss) before extraordinary item (21,297) 11,601 25,167 19,911 15,838 Extraordinary item -- -- (944) -- -- Net income (loss) $ (21,297) $ 11,601 $ 24,223 $ 19,911 $ 15,838 Weighted average common and common equivalent shares 13,838 13,515 13,305 13,090 12,469 Per Share Data Income (loss) before extraordinary item $ (1.54) $ 0.86 $ 1.89 $ 1.52 $ 1.27 Extraordinary item -- -- (0.07) -- -- Net income (loss) $ (1.54) $ 0.86 $ 1.82 $ 1.52 $ 1.27 Shareholders' equity at year end $ 12.38 $ 14.11 $ 13.16 $ 11.18 $ 9.50 Market price at year end 8.50 15.63 26.50 19.13 18.75 Balance Sheet Data Current assets $ 130,141 $ 148,884 $ 162,776 $ 140,393 $ 111,326 Current liabilities 39,278 51,188 42,506 41,395 40,649 Working capital $ 90,863 $ 97,696 $ 120,270 $ 98,998 $ 70,677 Property, plant and equipment, net $ 62,794 $ 60,208 $ 34,908 $ 30,600 $ 30,775 Total assets 234,056 260,659 228,578 205,833 183,926 Long-term debt 7,000 -- -- 9,190 12,135 Other liabilities 4,584 4,593 915 447 313 Minority interest in subsidiary 11,397 11,376 11,174 10,989 11,198 Shareholders' equity 171,797 193,502 173,983 143,812 119,631
PAGES 13 through 16: Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Standard Microsystems Corporation conducts its operations primarily through its Component Products and System Products Divisions. The Component Products Division (CPD) designs, produces and markets very-large-scale-integrated circuits, mainly for control of various personal computer functions, as well as specialized semiconductor-related products that are produced in the Company's own foundry. The System Products Division (SPD) designs, produces and markets products that connect personal computers to, and allow communications over, local area networks (LANs). As a separate profit center, the Company's subsidiary, Toyo Microsystems Corporation (TMC), sells component and system products into the Japanese market. The Company reported reduced revenues and a significant operating loss for the fourth quarter of fiscal 1997, the result of difficulties experienced by both its CPD and SPD, as discussed herein. Revenues The following table presents the Company's revenues by division and product line, for the three years ended February 28, 1997 (in millions): Fiscal years ended February 28 or 29, 1997 1996 1995 Component Products Integrated circuit revenues $ 164.3 $ 123.0 $ 106.9 Foundry device revenues 14.7 15.6 3.7 Total component products revenues $ 179.0 $ 138.6 $ 110.6 System Products Adapter revenues $ 120.3 $ 144.5 $ 204.9 Hub and switch revenues 37.2 42.0 51.5 Total system products revenues $ 157.5 $ 186.5 $ 256.4 Toyo Microsystems Corporation $ 17.6 $ 16.8 $ 11.7 Total Revenues $ 354.1 $ 341.9 $ 378.7 The increase in integrated circuit revenues in fiscal 1997, compared to fiscal 1996, was the result of an increase of approximately 31% in unit shipments of personal computer input/output (PC I/O) integrated circuits, which are now broadly used by most of the world's leading personal computer manufacturers. However, during the second half of the fiscal year, and particularly in the fourth quarter, integrated circuit revenues declined, largely because of significant PC I/O market price reductions by several of the CPD's competitors. Excess semiconductor manufacturing capacity in the Pacific Rim during this period resulted in several competitors producing PC I/O circuits which the Company believes violated the terms of these competitors' licenses under the Company's patents. These circuits were aggressively priced and marketed during the second half of fiscal 1997. The resolution of this licensing issue with several of these competitors, concluded after the close of the fiscal year, may relieve some of the PC I/O pricing pressures and encourage PC motherboard producers to standardize on the Company's PC I/O architectures. The increase in component products revenues in fiscal 1996, compared to fiscal 1995, resulted from continued broad acceptance of the division's PC I/O circuits, partially fueled by the worldwide growth in demand for personal computers, as well as relief from a shortage of manufacturing capacity which had plagued the semiconductor industry for much of fiscal 1995. Sales of the division's foundry devices to a particular customer also grew significantly in fiscal 1996. Revenues from the System Products Division declined by almost 16% in fiscal 1997, following a 27% decline in fiscal 1996. The declines in adapter revenues reflect reduced unit shipments to distributors, the division's principal customers for its products. Declining sales of older Ethernet adapters, as well as significant reductions in prices for Fast Ethernet adapters during the fourth quarter, contributed to the fiscal 1997 revenue decline. The fiscal 1997 reduction in hub and switch revenues reflects the January 1996 sale of the division's Enterprise Networks Business Unit (ENBU), which was responsible for enterprise-wide switching products, to Cabletron Systems, Inc. After adjusting fiscal 1996 results for this divestiture, hub and switch revenues actually increased modestly in fiscal 1997. The decline in fiscal 1996 hub and switch revenues, compared to fiscal 1995, resulted from reduced shipments of the ENBU's switching products. International shipments accounted for about 55% of the Company's revenues in fiscal 1997, compared to 56% in fiscal 1996 and 47% in fiscal 1995. Increased shipments during these periods to Asia and the Pacific Rim, primarily reflecting the corresponding growth in integrated circuit revenues, have been offset by reduced shipments to Europe and to the rest of the world. Lower overall SPD shipments have, in turn, resulted in lower shipments to Europe. Gross Profit The Company's gross profit has declined from 43.4% in fiscal 1995 to 35.9% in fiscal 1996 and to 26.9% in fiscal 1997. One significant reason for this trend has been the shift in product mix from system products to component products. System products contributed 68% of consolidated revenues in fiscal 1995, compared to 44% in fiscal 1997, while component products' contribution to consolidated revenues increased from 29% in fiscal 1995 to 51% in fiscal 1997. Component products have historically produced lower margins than system products, resulting in lower consolidated gross profit as this shift occurred. Also during this period, selling price declines on system products have exceeded cost reductions, resulting in a downward trend in system products' margins. Certain integrated circuits introduced by the Company during the first half of fiscal 1997 experienced lower than expected manufacturing yields, restraining the division's gross profit during the period. These yields increased to acceptable levels during the second half of the fiscal year. During the fourth quarter of fiscal 1997, the Company recorded charges of $9.9 million to write down certain component and system products inventories to net realizable value, in response to significant market price reductions, in some cases below cost, for various PC I/O, Ethernet and Fast Ethernet products, as well as to recognize excess inventory of older and discontinued products. The reduction in order input and shipments during the fourth quarter led to these excess inventory balances. In the second quarter of fiscal 1996, an $11.8 million charge was recorded to reduce the carrying value of certain system products inventory reflecting the disappointing reception of a new product introduction, lower than projected demand for several older product lines, and a decision to reduce the variety of networking products that perform similar functions. Research and Development Expenses Research and development (R&D) expenses decreased 17% in fiscal 1997 compared to fiscal 1996, primarily the result of the January 1996 divestiture of the ENBU, partially offset by increased R&D expenditures by the Component Products Division. The R&D expenses of the divested ENBU totaled almost $9.8 million during fiscal 1996. Fiscal 1997 research and development expenditures of the CPD increased by almost $3.5 million compared to fiscal 1996, as the division expanded its resources in this area through the February 1996 acquisition of the assets and staff of San Jose, California-based EFAR Microsystems, Inc., the October 1996 establishment of a design center in Massachusetts, and the expansion of its Austin, Texas design center. Fiscal 1998 CPD engineering efforts are expected to focus on continuing enhancements and cost reductions to its flagship PC I/O product line and also on expanding into new PC technologies. The System Products Division's fiscal 1998 R&D is expected to focus on development of leading-edge products in emerging LAN technologies, primarily Fast Ethernet and, to a lesser extent, ATM. Fiscal 1996 R&D expenditures were $3.4 million, or 12%, higher than comparable fiscal 1995 figures. During the first half of fiscal 1996, the SPD was continuing to expand its development efforts in enterprise-wide switching products, and thus $2.2 million of the fiscal 1996 increase reflects growth in ENBU expenditures. In addition, fiscal 1996 expenditures for component product development were modestly higher than in fiscal 1995. Selling, General and Administrative Expenses Fiscal 1997 selling, general and administrative expenses of $93.1 million declined 13% from $106.3 million in fiscal 1996. This decline includes an $11.3 million reduction in sales and marketing expenses incurred by the SPD, resulting from both the sale of the ENBU and lower fiscal 1997 revenues, partially offset by a $3.8 million increase in such expenditures for the CPD. The increased expenditures for the CPD were driven primarily by its increased fiscal 1997 revenues, and include direct selling expenses such as commissions and royalties, as well as costs associated with increased sales and marketing staff. The Company's fiscal 1997 general corporate expenses increased by approximately $1.1 million compared to fiscal 1996, reflecting costs of implementing a new client/server information system, partially offset by the impact of executive severance charges incurred during the prior fiscal year. Selling, general and administrative expenses increased 18% to $106.3 million in fiscal 1996, from $90.0 million in fiscal 1995. Fiscal 1996 operating expenses included $2.5 million of executive severance charges, as well as higher selling and marketing expenses for LAN switching and hub products. Fiscal 1996 expenses also include higher marketing and selling costs associated with higher revenues in the Component Products Division. Other Operating Expenses The reduction in amortization of intangible assets in fiscal 1997 resulted from the sale of the ENBU and its related goodwill, as well as the impact of a $2.4 million write-down of an acquired LAN technology to its net realizable value in fiscal 1996. This write-down also accounts for the fiscal 1996 increase in such amortization compared to fiscal 1995. The $5.4 million charge for purchased in-process technology reported in fiscal 1996 resulted from the Company's February 1996 acquisition of the assets of EFAR Microsystems, Inc., for 240,000 shares of the Company's common stock. Other Income and Expense The decline in interest income in both fiscal 1997 and fiscal 1996 reflects lower average cash balances available for investment during both periods. Interest expense in all three fiscal years presented resulted principally from borrowings under the Company's revolving line of credit. In September 1996, the Company settled an ongoing litigation with Penril Datacomm Networks, Inc. (Penril) related to technology and product agreements between Penril and Sigma Network Systems, Inc. (Sigma). These agreements were executed before the Company's purchase of Sigma in December 1992. This business was reorganized to operate as the Company's ENBU, focusing on enterprise-wide switching products, and was subsequently sold to Cabletron Systems, Inc. in January 1996. The Company and Penril agreed to a settlement of the disputes whereby all claims of both parties were dismissed, resulting in the Company recording a $4.1 million charge in the third quarter of fiscal 1997. In January 1996, the Company realized a $49.7 million gain on the sale of the assets and technology of its ENBU to Cabletron Systems Inc. for $74.0 million. Income Taxes The Company's effective income tax benefit rate for fiscal 1997 was 35.5%. This rate includes a relatively low benefit rate for state income taxes as several states in which the Company operates do not allow net operating loss carrybacks. In fiscal 1996, income taxes were provided for at an effective rate of 41.4%, higher than the 38.8% rate reported for fiscal 1995. The goodwill written off in connection with the sale of the ENBU was not deductible for tax purposes, raising the fiscal 1996 effective tax rate. Liquidity and Capital Resources The Company's working capital decreased from $97.7 million at February 29, 1996, to $90.9 million at February 28, 1997, primarily as a result of the net loss incurred by the Company during the second half of fiscal 1997. Cash generated by operating activities in fiscal 1997 was $4.9 million, as the year's net loss was effectively offset by depreciation expense and amortization. Investing activities in fiscal 1997 included $19.4 million of capital expenditures and $2.0 million of strategic investments in new semiconductor technologies by the CPD. Fiscal 1997 capital expenditures were focused on improvements to the Company's wafer fabrication plant, semiconductor test equipment, information systems improvements and engineering design tools. There were no material commitments for capital expenditures as of February 28, 1997, and fiscal 1998 capital expenditures are expected to be lower than fiscal 1997 capital expenditures. Net borrowings of $7.0 million under the Company's revolving line of credit partially financed fiscal 1997's investing requirements. The Company maintains a combined $25.0 million revolving line of credit with two banks, which permits the Company to borrow funds on a revolving basis, primarily to finance working capital needs. The Company's disappointing financial performance resulted in several violations of financial covenants during fiscal 1997, for which the appropriate bank waivers were obtained, allowing the Company to continue to borrow, as necessary, pursuant to the original terms and conditions of the credit line. In May 1997, the Company and its banks renegotiated the terms of the credit line, extending the agreement through July 1998, adjusting the interest rate, and providing the banks with a general security interest in the Company's trade accounts receivable and inventory. Revised financial covenants were also agreed upon. In July 1997, $7.1 million, plus interest, which was placed in escrow pursuant to the January 1996 sale of the ENBU to Cabletron Systems, Inc., is scheduled to be released to the Company. In April 1997, Cabletron filed a claim against the escrow account, and in May 1997 filed a related lawsuit, alleging breach by the Company of the non-competition clause of the Asset Purchase Agreement. The lawsuit seeks an injunction and unspecified damages. The Company firmly believes that this claim is without merit. The net operating loss generated in fiscal 1997 will be carried back for income tax purposes to recover approximately $8.0 million of taxes paid in prior periods. While difficult to predict, a significant portion of these tax refunds could be received before the end of fiscal 1998, or, alternatively, be applied against potential tax liabilities generated in fiscal 1998. In March 1997, Intel Corporation (Intel) acquired 1.5 million newly-issued shares of the Company's common stock for $14.7 million, resulting in a slightly below 10% ownership of the Company. Intel also received a three-year warrant to purchase an additional 1.5 million shares, at various prices, pursuant to a recently signed agreement between the Company and Intel. Note 10 of the Notes to Consolidated Financial Statements included herein provides additional details of this agreement and the related business arrangement. The Company expects that its cash and cash equivalents, cash flows from operations, borrowing capacity under its revolving line of credit and several other of sources of cash (including the March 1997 equity investment by Intel) will be sufficient to finance the Company's operating and capital requirements through the end of fiscal 1998. Factors That May Affect Future Results Certain statements and information contained in this annual report constitute "forward-looking statements" within the meaning of the Federal Securities laws. These forward-looking statements involve risks and uncertainties which may cause actual results and performance to be different from those expressed or implied in such statements. The Company competes in the personal computer semiconductor and local area networking markets, both of which are characterized by intense competition, rapid changes in technology and price erosion. Many of the competitors in these markets are larger and have significantly greater financial and other resources than the Company. The Company's quarterly and annual operating results may be influenced by many factors, including, among others: the worldwide demand for personal computers, the ability to introduce competitive products on a timely basis, constraints on the availability and fluctuations in the cost of subcontracted manufacturing, the ability to forecast market and customer demand, and new products and technologies introduced by competitors. Sales of most of the Company's products depend largely on sales of personal computers. Reductions in the rate of growth in the PC market could adversely affect the Company's operating results. In addition, as a component supplier to PC manufacturers, the Company's Component Products Division often experiences a greater magnitude of demand fluctuation than the Division's customers themselves experience. Also, some of the Company's products are used in PCs for the consumer market, which tends to be a more volatile market than other segments of the PC marketplace. The Company's success is highly dependent upon its ability to develop new products, bring them to the market ahead of its competitors, and induce customers to select its products for their needs. In an environment of accelerating changes in technology and short product life cycles, these factors have become increasingly challenging and important. The vast majority of the Company's products are manufactured, assembled and tested by independent foundries and subcontract manufacturers. This reliance upon foundries and subcontractors involves certain risks, including potential lack of manufacturing availability, reduced control over delivery schedules, availability of advanced process technologies, changes in manufacturing yields, and potential cost fluctuations. Most of the Company's LAN products are currently manufactured by two separate subcontractors, increasing the potential risk of interruptions in LAN manufacturing availability. The Company generally must order inventory to be built by its foundries and subcontract manufacturers well in advance of product shipments. Because the Company's markets are volatile, there is risk that the Company may forecast incorrectly and produce excess or insufficient inventories. This inventory risk is increased by the recent trend for customers to place orders with increasingly shorter lead times. Such inventory imbalances actually contributed significantly to the Company's operating loss in the fourth quarter of fiscal 1997. A significant number of the Company's foundries and subcontractors are located in Asia. Many of the Company's customers also manufacture in Asia or subcontract their manufacturing to Asian companies. This concentration of manufacturing and selling activity in Asia poses risks that could affect demand for and supply of the Company's products, including currency exchange rate fluctuations, economic and trade policies, and the Asian political environment. The Company's performance is inherently dependent upon hiring and retaining employees with specific skills. The inability to hire and retain such employees could hinder the Company's product development and ability to manufacture, market and sell its products. A limited number of customers account for a significant portion of the Company's revenues. The Company's revenues from any one customer can fluctuate from period to period depending upon market demand for that customer's products, the customer's inventory management and the overall financial condition of the customer. Standard Microsystems Corporation and Subsidiaries Page 17 CONSOLIDATED BALANCE SHEETS February 28, 1997 and February 29, 1996 (In thousands, except share and per share data) 1997 1996 Assets Current assets: Cash and cash equivalents $ 8,382 $ 18,459 Accounts receivable, net of allowance for doubtful accounts of $1,761 and $1,369, respectively 31,182 55,976 Inventories 59,249 60,408 Deferred tax benefits 11,704 8,607 Other current assets 19,624 5,434 Total current assets 130,141 148,884 Property, plant and equipment: Land 3,832 3,832 Buildings and improvements 28,870 26,839 Machinery and equipment 125,022 109,235 157,724 139,906 Less: accumulated depreciation 94,930 79,698 Property, plant and equipment, net 62,794 60,208 Other assets 41,121 51,567 $234,056 $260,659 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 24,753 $ 30,801 Accrued expenses and other liabilities 13,715 19,291 Income taxes payable 810 1,096 Total current liabilities 39,278 51,188 Long-term debt 7,000 -- Other liabilities 4,584 4,593 Commitments and contingencies Minority interest in subsidiary 11,397 11,376 Shareholders' equity: Preferred stock, $.10 par value Authorized 1,000,000 shares, none outstanding -- -- Common stock, $.10 par value Authorized 30,000,000 shares Outstanding 13,876,000 and 13,711,000 shares, respectively 1,388 1,371 Additional paid-in capital 87,095 84,737 Retained earnings 78,920 100,217 Unrealized gain on investment, net of tax 953 2,226 Foreign currency translation adjustment 3,441 4,951 Total shareholders' equity 171,797 193,502 $234,056 $260,659 The accompanying notes are an integral part of these consolidated financial statements. Standard Microsystems Corporation and Subsidiaries Page 18 CONSOLIDATED STATEMENTS OF INCOME For the years ended February 28 or 29,
(In thousands, except per share data) 1997 1996 1995 Revenues $ 354,138 $ 341,926 $ 378,671 Cost of goods sold 258,790 219,141 214,269 Gross profit 95,348 122,785 164,402 Operating expenses: Research and development 26,340 31,666 28,286 Selling, general and administrative 93,123 106,337 90,005 Amortization of intangible assets 4,899 8,237 5,489 Purchased in-process technology -- 5,454 -- 124,362 151,694 123,780 Income (loss) from operations (29,014) (28,909) 40,622 Other income (expense): Interest income 520 630 1,453 Interest expense (619) (1,072) (1,255) Litigation settlement (4,057) -- -- Gain on sale of business unit -- 49,663 -- Other income (expense), net 168 (308) 472 (3,988) 48,913 670 Income (loss) before minority interest, provision for income taxes and extraordinary item (33,002) 20,004 41,292 Minority interest in net income of subsidiary 21 202 185 Income (loss) before provision for income taxes and extraordinary item (33,023) 19,802 41,107 Provision for (benefit from) income taxes (11,726) 8,201 15,940 Income (loss) before extraordinary item (21,297) 11,601 25,167 Extraordinary item Loss on retirement of debt, net of applicable income taxes of $600 -- -- 944 Net income (loss) $ (21,297) $ 11,601 $ 24,223 Income (loss) per common and common equivalent share: Income (loss) before extraordinary item $ (1.54) $ 0.86 $ 1.89 Extraordinary item -- -- (0.07) Net income (loss) per common and common equivalent share $ (1.54) $ 0.86 $ 1.82
The accompanying notes are an integral part of these consolidated financial statements. Standard Microsystems Corporation and Subsidiaries Page 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY As of February 28 or 29, and for the years then ended
Additional Unrealized Foreign Common Stock Paid-In Retained Gain On Translation (In thousands) Shares Amount Capital Earnings Investment Adjustment Balance at February 28, 1994 12,867 $ 1,287 $ 73,116 $ 64,393 $ -- $ 5,016 Shares issued under employee stock purchase plan 60 6 1,173 -- -- -- Stock options exercised 245 24 1,967 -- -- -- Tax effect of employee stock plans -- -- 707 -- -- -- Restricted stock grant to employees, net 50 5 356 -- -- -- Unrealized gain on investment, net of taxes -- -- -- -- 718 -- Foreign currency translation adjustment -- -- -- -- -- 992 Net income -- -- -- 24,223 -- -- Balance at February 28, 1995 13,222 1,322 77,319 88,616 718 6,008 Shares issued under employee stock purchase plan 91 9 1,564 -- -- -- Stock options exercised 72 7 674 -- -- -- Tax effect of employee stock plans -- -- 377 -- -- -- Stock issued for business acquisition 240 24 3,880 -- -- -- Restricted stock grant to employees, net 86 9 923 -- -- -- Unrealized gain on investment, net of taxes -- -- -- -- 1,508 -- Foreign currency translation adjustment -- -- -- -- -- (1,057) Net income -- -- -- 11,601 -- -- Balance at February 29, 1996 13,711 1,371 84,737 100,217 2,226 4,951 Shares issued under employee stock purchase plan 110 11 1,351 -- -- -- Stock options exercised 61 6 425 -- -- -- Tax effect of employee stock plans -- -- 42 -- -- -- Restricted stock grants to employees, net (6) -- 540 -- -- -- Unrealized gain on investment, net of taxes -- -- -- -- (1,273) -- Foreign currency translation adjustment -- -- -- -- -- (1,510) Net loss -- -- -- (21,297) -- -- Balance at February 28, 1997 13,876 $ 1,388 $ 87,095 $ 78,920 $ 953 $ 3,441
The accompanying notes are an integral part of these consolidated financial statements. PAGE 20: Standard Microsystems Corporation and Subsidiaries Page 20 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended February 28 or 29,
(In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers $ 378,049 $ 361,215 $ 367,342 Cash paid to suppliers and employees (369,329) (357,981) (331,406) Interest received 512 622 3,027 Interest paid (634) (1,082) (1,168) Income taxes received (paid) 350 (17,670) (16,467) Cash paid for litigation settlement (4,057) -- -- --------- Net cash provided by (used for) operating activities 4,891 (14,896) 21,328 --------- Cash flows from investing activities: Capital expenditures (19,366) (39,012) (13,578) Acquisition of business -- (1,440) -- Sale of business unit, net of related costs -- 70,473 -- Escrow investment -- (7,050) -- Investment in Chartered Semiconductor Pte Ltd. -- (19,944) -- Investment in Accelerix Incorporated (1,483) -- -- Other (482) 50 39 Net cash provided by (used for) investing activities (21,331) 3,077 (13,539) Cash flows from financing activities: Proceeds from issuance of common stock 431 1,573 1,991 Borrowings under line of credit agreements 47,731 34,000 927 Principal payments of long-term debt (40,731) (34,000) (14,117) Net cash provided by (used for) financing activities 7,431 1,573 (11,199) Effect of foreign exchange rate changes on cash and cash equivalents (1,068) (773) 773 Net decrease in cash and cash equivalents (10,077) (11,019) (2,637) Cash and cash equivalents at beginning of year 18,459 29,478 32,115 Cash and cash equivalents at end of year $ 8,382 $ 18,459 $ 29,478 Reconciliation of net income (loss) to net cash provided by (used for) operating activities: Net income (loss) $ (21,297) $ 11,601 $ 24,223 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 22,249 18,976 14,813 Gain on sale of business unit -- (49,663) -- Purchased in-process technology -- 5,454 -- Other adjustments, net 1,796 1,423 2,168 Changes in operating assets and liabilities, net of effects of acquisition and sale of businesses: Accounts receivable 23,848 19,058 (11,027) Inventories 969 (24,459) (11,608) Accounts payable and accrued expenses and other liabilities (11,599) 13,425 4,714 Other changes, net (11,075) (10,711) (1,955) Net cash provided by (used for) operating activities $ 4,891 $ (14,896) $ 21,328 Cash used for acquisition of business as reflected in the consolidated statements of cash flows is summarized as follows: Net assets and technology acquired $ -- $ 5,554 $ -- Common stock issued -- (3,904) -- Liabilities assumed and created -- (210) -- Cash used for acquisition of business $ -- $ 1,440 $ --
The accompanying notes are an integral part of these consolidated financial statements. Page 21-32 Standard Microsystems Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Standard Microsystems Corporation (SMC) and all its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents consist principally of cash in banks and highly liquid debt instruments purchased with maturities of three months or less. These debt instruments are categorized as available for sale and are recorded at fair value which approximates cost. Fair Value of Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term maturities. The amount presented for long-term debt also approximates fair value. Inventories Inventories are valued at the lower of first-in, first-out cost or market and consist of the following (in thousands): As of February 28 or 29, 1997 1996 -------- -------- Inventories: Raw material $10,161 $ 9,556 Work-in-process 33,356 34,622 Finished goods 15,732 16,230 ---------- --------- $59,249 $60,408 ========= ========= During the fourth quarter of fiscal 1997, both the Company's Component Products and System Products Divisions experienced unexpected reductions in order input and accelerated price competition in their respective markets. These adverse business conditions resulted in excessive inventory balances and market price reductions of certain parts below cost. Accordingly, the Company recorded charges of $9,900,000 to cost of goods sold during the fourth quarter of fiscal 1997 reflecting a reduction in net realizable value of certain inventory and excess inventory of older and discontinued products. During fiscal 1996, an $11,800,000 charge to cost of goods sold was recorded to reduce the carrying value of certain system products inventory to estimated net realizable value. The principal reasons for the write-down were the disappointing reception of a new product and the reduction of its selling price, lower than projected demand for several older product lines and a decision to reduce the variety of networking products that perform the same function. Property, Plant and Equipment Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the buildings (20 to 25 years) and machinery and equipment (3 to 7 years). Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected currently. Investment in Equity Securities As of February 28, 1997 and February 29, 1996, an investment in a publicly traded equity security is carried at fair value within Other assets on the accompanying Consolidated Balance Sheets. A corresponding unrealized gain, net of taxes, is reported as a separate component of Shareholders' equity. Intangible Assets Intangible assets are amortized primarily on a straight-line basis over their respective estimated useful lives, ranging from three to ten years. During the second quarter of fiscal 1996, the Company canceled certain product development projects related to a particular LAN technology, resulting in a write-down of $2,400,000 in the value of this acquired technology and an acceleration of its amortization to reflect a reduction in its estimated useful life. Long - Lived Assets During fiscal 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). SFAS No. 121 requires the Company to review the recoverability of the carrying amount of its long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The adoption of SFAS No. 121 did not have a material effect on the Company's results of operations, financial position or cash flow. Revenue Recognition The Company recognizes revenues from product sales and accrues for estimated product returns and price protection and other sales allowances at the time of shipment. Product Warranty The Company's products are generally under limited warranty against defects in material and workmanship for periods ranging from one year to lifetime. Estimated warranty costs are accrued when the products are sold. Software Development Expenses Software development costs incurred after achieving technological feasibility are not material and, therefore, are expensed as incurred. Income Taxes Deferred income taxes are provided on temporary differences that arise in the recording of transactions for financial and tax reporting purposes and result in deferred tax assets and liabilities. Deferred tax assets are reduced by an appropriate valuation allowance if it is management's judgment that part of the deferred tax asset will not be realized. Tax credits are accounted for as reductions of the current provision for income taxes in the year in which the related expenditures are incurred. Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of their operations are translated using the average exchange rates during the period. Resulting translation adjustments are recorded as a separate component of Shareholders' equity. Net Income per Common and Common Equivalent Share Net income per common and common equivalent share has been computed based on the weighted average number of shares outstanding during the year, including the effect of common equivalent shares, if dilutive. The difference between primary and fully diluted earnings per share is immaterial for all periods presented. Reclassifications Certain items shown have been reclassified to conform with the fiscal 1997 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. BUSINESS ACQUISITIONS AND DIVESTITURE In October 1996, the Company aquired a 19.9% equity interest in privately held Accelerix Incorporated of Carp, Ontario, Canada, for $1,483,000. The Company and Accelerix also entered into an agreement providing the Company with rights to market, second source and enhance Accelerix' application specific memory technology. This investment is carried at cost on the accompanying consolidated balance sheet. In February 1996, the Company acquired the assets and technology of EFAR Microsystems, Inc., of Santa Clara, CA. Accounted for as a purchase, the acquisition was valued at $5,554,000 based on the issuance of 240,000 shares of the Company's common stock, the assumption of liabilities and transaction fees. As a result of this acquisition, the Company recorded a $5,454,000 charge for the purchase of in-process technology. The acquisition agreement also provides for the issuance of up to $20,000,000 of additional common stock through February 1999 to EFAR, contingent upon the acquired business achieving certain operating results. Pro forma information for this acquisition would not differ materially from historical results and is therefore not presented. In January 1996, the Company and its wholly-owned subsidiary, SMC Enterprise Networks, Inc., sold substantially all of the assets and technology associated with the Company's Enterprise Networks Business Unit to Cabletron Systems, Inc., for $74,000,000 in cash, resulting in a gain of $49,663,000 before taxes. The business unit, which originated through the Company's December 1992 purchase of Massachusetts-based Sigma Network Systems, Inc., developed, manufactured and sold enterprise-wide switching products for computer networks. As security for the Company's indemnification obligations, $7,050,000 of the purchase price is in an interest bearing escrow account until July 1997, to be used as a source from which indemnifiable losses, if they occur, may be paid by the Company to Cabletron. In April 1997, Cabletron filed a claim against the escrow account, and in May 1997 filed a related lawsuit, alleging breach by the Company of the non-competition clause of the Asset Purchase Agreement. The lawsuit seeks an injunction and unspecified damages. The Company firmly believes that this claim is without merit. 3. LONG-TERM DEBT The Company maintains a $25,000,000 line of credit with several banks, which permits the Company to borrow funds on a revolving basis, primarily to finance working capital needs. During fiscal 1997 and fiscal 1996, the Company violated several financial condition covenants under the agreement, for which the appropriate bank waivers were obtained, allowing the Company to continue to borrow, as necessary, pursuant to the original terms and conditions of the credit line. Borrowings during fiscal 1997 and 1996 were at interest rates between 6.0% and 8.5%. In May 1997, the Company and its banks renegotiated the terms of the credit line, extending the agreement through July 1998, adjusting the interest rate on borrowings to either the banks' prime rate or LIBOR plus 225 basis points (depending on the maturity of the borrowing), and providing the banks with a general security interest in the Company's trade accounts receivable and inventory. Revised financial covenants covering net income, net worth and various financial ratios were also agreed upon. At February 28, 1997, the $7,000,000 of outstanding debt bears interest at 6.0625% and is due in fiscal 1999. 4. INCOME TAXES The provision for (benefit from) income taxes included in the accompanying consolidated statements of income consists of the following (in thousands): For the years ended February 28 or 29, 1997 1996 1995 ------------- ------------- ------------- Current Federal $(8,700) $12,950 $ 16,242 Foreign 877 619 345 State 507 580 2,281 ------------ ------------- ------------- (7,316) 14,149 18,868 Deferred (4,410) (5,948) (2,928) ------------- ------------- ------------- $(11,726) $ 8,201 $ 15,940 ============= ============= ============= The provision for (benefit from) taxes on income before extraordinary item differs from the amount computed by applying the U.S. Federal statutory tax rate as a result of the following: For the years ended February 28 or 29, 1997 1996 1995 ------------- ------------- ------------- Provision for (benefit from) (35.0)% 35.0% 35.0% income taxes computed at the statutory rate State taxes (0.5) 3.8 3.7 Foreign sales corporation (1.1) (1.0) (1.3) Income tax credits (1.0) (2.9) (0.1) Goodwill amortization .5 2.4 0.5 ENBU goodwill ----- 7.6 --- Other 1.6 (3.5) 1.0 ------------ -------------- ------------- (35.5)% 41.4% 38.8% ============ ============= ============ The tax effects of temporary differences that result in deferred tax benefits are as follows (in thousands): As of February 28 or 29, 1997 1996 ------ ------- Reserves and accruals not $ 6,581 $ 3,143 currently deductible for tax purposes Intangible asset amortization 4,905 3,832 Inventory valuation 5,665 3,046 Sale of Business Unit (1,925) --- Purchased in-process technology 1,904 1,909 Depreciation 441 273 Other (180) (71) --------- -------- $17,391 $12,131 ========= ======== The federal income tax benefit of the net operating loss generated by the Company in fiscal 1997 will be fully realized by carryback against prior taxble income, and accordingly, $8,014,000 of income taxes receivable are included within Other current assets on the consolidated balance sheet at February 28, 1997. Goodwill associated with the Company's January 1996 sale of its Enterprise Networks Business Unit was not deductible for tax purposes, raising the Company's fiscal 1996 effective tax rate by 7.6 percentage points. During fiscal 1995, the Company elected a fifteen-year amortization of certain intangible assets related to the fiscal 1992 acquisition of a local area networking business. This election allows the Company to take a tax deduction for previously non-deductible goodwill. Realization of tax benefits from NOL carryforwards created by the Company's Japanese subsidiary is uncertain, and accordingly is fully reserved. At a current foreign exchange rate, these carryforwards aggregated approximately $3,074,000 as of February 28, 1997, and will expire in fiscal 1998 and fiscal 1999. Income tax benefits of $42,000, $377,000 and $707,000 related to the Company's stock option plans for fiscal 1997, 1996 and 1995, respectively, have been credited to additional paid-in capital. The Company has $1,575,000 of New York State tax credit carryforwards of which $289,000 and $97,000 expire in fiscal 1998 and 1999, respectively. The remaining $1,189,000 of credit carryforwards expire at various dates in fiscal 2000 through fiscal 2006. 5. OTHER BALANCE SHEET DATA (In thousands) 1997 1996 As of February 28 or 29, Other current assets: Escrow deposit $ 7,353 $ -- Income taxes receivable 8,014 -- Other 4,257 5,434 $19,624 $ 5,434 ------- ------- Other assets: Intangible assets: Covenant not to compete $15,100 $15,100 Acquired technologies 14,050 13,500 Excess of acquisition cost over fair value of net assets acquired (goodwill) 7,797 7,797 ------- ------- 36,947 36,397 ------- ------- Less: accumulated amortization 27,287 22,388 ------- ------- 9,660 14,009 Common stock of Chartered Semiconductor Pte Ltd. $19,944 $19,944 Deferred tax benefits 5,687 3,524 Escrow deposit -- 7,050 Other assets 5,830 7,040 ======= ======= $41,121 $51,567 ======= ======= Accrued expenses and other liabilities: Salaries and fringe benefits $ 5,091 $ 7,046 Advertising 1,200 1,587 Other 7,424 10,658 ------- ------- $13,715 $19,291 ======= ======= Other liabilities: Retirement benefits $ 4,055 $ 3,987 Other 529 606 ------- ------- $ 4,584 $ 4,593 ======= ======= 6. MINORITY INTEREST IN SUBSIDIARY Sumitomo Metal Industries, Ltd. of Osaka, Japan (SMI) owns 20% of the issued and outstanding common stock and all of the non-cumulative, non-voting 6% preferred stock of the Company's subsidiary, Toyo Microsystems Corporation (TMC). The Company and SMI have agreed to declare a preferred dividend if TMC should realize net income of at least five times the total amount of preferred dividends which would be payable on all preferred stock then outstanding. The annual preferred dividend would be equal to 6% of the subscription price of 2.16 billion yen, or approximately $1,080,000 at an exchange rate of 120 yen per dollar. In the event that a third party acquires a majority of the outstanding common stock of the Company, SMI has the option to require the Company to purchase SMI's interest in TMC. 7. COMMITMENTS AND CONTINGENCIES Compensation Certain executives and key employees are employed under separate agreements terminating on various dates through fiscal 2000. These agreements provide, among other things, for annual base salaries totaling $1,501,000, $1,330,000 and $746,000 in fiscal 1998, 1999 and 2000, respectively Severance Agreements The Company's System Products Division has experienced significant operating losses over the past two years resulting in concern over the retention of the Division's key employees. As a result, in March 1997, the Company approved separate arrangements with approximately 150 System Products Division employees, providing for severance benefits should the employee be involuntarily terminated for reasons other than cause or performance through February 28, 1998. The maximum potential payments under these agreements total $5,060,000, including $726,000 which would be paid under the Company's regular severance policy. Operating Leases The Company leases certain vehicles, facilities and equipment. Minimum rentals under these leases for each of the next five fiscal years are as follows (in thousands): 1998 $1,593 1999 1,376 2000 903 2001 660 2002 628 Total rent expense was $2,229,000, $1,317,000 and $1,013,000 in fiscal 1997, 1996 and 1995, respectively. Wafer Purchase Agreements In September 1994, the Company entered into an agreement with Lucent Technologies Inc.'s (formerly AT&T Corp.) Microelectronics Business Unit (Lucent) whereby the Company purchased approximately $16,000,000 of wafer manufacturing equipment for installation at Lucent's Madrid, Spain, facility. The agreement provides that a portion of Lucent's wafer production capacity during the five year period beginning in March 1996 will be reserved for the Company's requirements at favorable pricing. In March 1995, the Company entered into an agreement with Singapore-based Chartered Semiconductor Pte Ltd., whereby the Company acquired a minority equity interest in Chartered for $19,944,000 during fiscal 1996. This investment is reported at cost on the accompanying consolidated balance sheet. Under this agreement, the Company is to be allocated sub-micron wafer production capacity for ten years in Chartered's recently constructed wafer fabrication facility. Litigation In September 1991, the Company and Texas Instruments Incorporated (TI) agreed to settle, terminate and dismiss litigation between the two companies. In addition to the settlement agreement, the parties entered into a five year patent cross-licensing agreement covering the manufacturing of certain semiconductor and local area network products, which license provided for payments by the Company over the period ending December 31, 1996. In September 1996, the Company reached an agreement with Penril Datacomm Networks, Inc. to settle a legal action initiated by Penril in June 1993. In 1990 and 1991, Penril had entered into technology and product agreements with Sigma Networks Systems, Inc., which was subsequently acquired by the Company in December 1992. Sigma became a wholly-owned subsidiary of the Company and was renamed SMC Enterprise Networks, Inc. In January 1996, the Company sold this business to Cabletron Systems Inc. The Company and Penril agreed to a settlement whereby all claims of both parties were dismissed, resulting in the Company recording a $4,057,000 pretax charge in the third quarter of fiscal 1997. In June 1995, several actions were filed against the Company and certain of its officers and directors. These complaints have been consolidated into a class action on behalf of the purchasers of the Company's common stock between September 19, 1994, and June 2, 1995. The consolidated complaint asserts claims under federal securities laws and alleges that the price of the Company's common stock was artificially inflated during the class action period by false and misleading statements and the failure to disclose certain information. While it is not possible to assess the likelihood of any liability being established, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has answered the consolidated complaint, has accrued the estimated cost of legal fees to defend against these claims, and intends to defend against these claims vigorously. In the ordinary course of business, various lawsuits and claims are filed against the Company. While the outcome of these matters is currently not determinable, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's operations or financial position. 8. BENEFIT AND INCENTIVE PLANS Incentive Savings and Retirement Plan The Company maintains a defined contribution Incentive Savings and Retirement Plan (the Plan) which, pursuant to Section 401(k) of the Internal Revenue Code, permits employees to defer taxation on their pre-tax earnings reduction contributions to the Plan. The Plan permits employees to contribute up to 15% of their earnings, through payroll deductions, based on earnings reduction agreements. The Company's contribution, which is equal to one-half of the employee's contribution up to 6%, is invested in the common stock of the Company and totaled $983,000, $1,066,000 and $866,000 in fiscal 1997, 1996 and 1995, respectively. The Company has authorized unissued common stock reserved for issuance to the Plan. As of February 28, 1997, there were no unissued shares remaining in reserve for this plan, however, it is anticipated that the Company's Board of Directors will authorize reserve for additional shares in fiscal 1998. Since its inception, 850,000 shares of the Company's common stock have been contributed to the Plan. As of February 28, 1997, 577 of the 776 employees who had satisfied the Plan's eligibility requirements to participate were making salary deduction contributions. Employee Stock Option Plans Under the Company's stock option plans, the Compensation Committee of the Board of Directors is authorized to grant stock options to purchase 2,274,000 shares of common stock. The purpose of these plans is to promote the interests of the Company and its shareholders by providing the officers and key employees with additional incentives and the opportunity, through stock ownership, to increase their proprietary interest in the Company and their personal interest in its continued success. Options are granted at prices not less than the fair market value on the date of grant. At February 28, 1997, 917,000 shares of common stock were available for future grants. Stock option plan activity is summarized below (shares in thousands):
Fiscal Weighted Fiscal Weighted 1997 Average 1996 Average Shares Exercise Price Shares Exercise Price --------------- ---------------- ------------------- Options outstanding, March 1 1,383 $17.53 848 $17.16 Granted 1,799 $10.61 821 $17.42 Exercised (61) $ 7.07 (69) $ 9.07 Canceled or expired (1,764) $16.76 (217) $18.34 Options outstanding, February 28 or 29 1,357 $ 9.82 1,383 $17.53 Options exercisable 387 $10.62 409 $17.28 ------ ------ ------ ------
The following table summarizes information relating to currently outstanding and exercisable options as of February 28, 1997(sharesin thousands):
Weighted Remaining Average Weighted Average Range of Life Options Exercise Options Exercise Exercise Prices (in years) Outstanding Price Exercisable Price - ------------------------- ------------------ --------------- ------------------ --------------- ------------------ $8.50 - $9.00 6.9 1,213 $8.99 307 $9.00 $9.13 - $9.38 9.2 7 $9.15 1 $9.38 $15.50 - $16.25 2.1 51 $16.02 41 $16.03 $17.38 - $17.81 2.2 46 $17.38 26 $17.39 $18.69 - $20.63 3.2 40 $18.70 12 $18.74 ------------------ --------------- ------------------ --------------- ------------------
Effective March 1, 1996, the Company has elected to disclose the pro forma effects of SFAS statement No. 123, Accounting for Stock-Based Compensation. As allowed under the provisions of this new statement, the Company will continue to apply APB Opinion No. 25 and related interpretations to accounting for the stock options awarded under these plans. Accordingly, no compensation cost has been recognized for these stock options. Had compensation cost for these plans been determined consistent with SFAS statement No. 123, the Company's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below (in thousands, except per share data): For the years ended February 1997 1996 28 or 29, - -------------------------------- ----------- -------------------- Net income(loss): As reported $(21,297) $11,601 Pro forma (23,295) 10,431 -------------- --------------- Net income (loss) per share: As reported $(1.54) $.86 Pro forma (1.68) .77 ------------ -------------- The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: For the years ended February 1997 1996 28 or 29, - -------------------------------- -------------------- -------------------- Dividend yield - - Expected volatility 57% 57% Risk-free interest rates 5.71%-6.27% 5.54% Expected lives (in years) 1-4 4 ------------ ------------- The weighted average Black-Scholes value of options granted in fiscal 1997 and 1996 were $3.65 and $8.69, respectively. The values produced by this model are limited by the inclusion of highly subjective assumptions which greatly affect calculated values. On January 27, 1997, the Compensation Committee of the Board of Directors approved an exchange program for employees to surrender all outstanding options for new options with an exercise price at the then current fair market value of $9.00 per share. The new options issued will vest and expire on the same schedule as the original options surrendered. Active employees were offered a one-for-one exchange while corporate officers were offered three new options for every four surrendered. As a condition of accepting this offer, no new options are permitted to be exercised prior to August 1, 1997. Additional compensation cost was recognized in the pro forma numbers presented above, and all of the tables in this disclosure have been updated to reflect the effects of this repricing. Director Stock Option Plan Under the Company's Director Stock Option Plan, non-qualified options to purchase common stock may be granted to directors at prices not less than the market price of the shares at the date of grant. At February 28, 1997, the expiration dates of the outstanding options range from June 30, 1997, to July 22, 2001, and the exercise prices range from $11.38 to $16.00 (average $13.87) per share. The following is a summary of activity under the Director Stock Option Plan over the past three fiscal years (in thousands): For the years ended February 28 or 29, 1997 1996 1995 ----- ------ ------ Shares under option, beginning of year 144 43 59 Options granted during the year 50 104 15 Options canceled or terminated (8) Options exercised: 1997 -- -- -- 1996 ($11.75) -- (3) -- 1995 ($7.13 per share) -- -- (31) ---- ---- ---- Shares under option, end of year 186 144 43 ---- ---- ---- Options exercisable, end of year 87 59 13 ---- ---- ---- Shares available for future grants, end of year 133 175 30 ---- ---- ---- Restricted Stock Bonus Plan The Company maintains two Restricted Stock Bonus Plans. Each provides for common stock awards to certain officers and key employees. The fair market value of shares awarded under the 1991 Plan to an employee in any year is limited to 20% of the employee's base salary, and are earned in equal installments on the second, third and fourth anniversaries of the award. Awards granted under the 1996 plan are earned in 25%, 25%, and 50% increments on the first, second and third anniversaries of the award, respectively. The shares granted under each plan are distributed provided the employee has remained in the Company's employ through such anniversary dates; otherwise the unearned shares are forfeited. The maximum number of shares issuable under the 1996 Plan is 350,000, of which 10,000, net of cancellations, have been awarded as of February 28, 1997. No new shares will be issued from the 1991 Plan, and as of February 28, 1997, 187,000 shares remain unearned under this plan. The market value of these shares at the date of award, net of cancellations, is recorded as compensation expense ratably over three or four year periods from the respective award dates. This compensation expense was $385,000, $761,000 and $361,000 in fiscal 1997, 1996 and 1995, respectively. Retirement Plans In March 1994, the Company adopted an unfunded Supplemental Executive Retirement Plan to provide senior management with retirement, disability and death benefits. The retirement benefits are based upon average compensation during the three-year period prior to retirement. The Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing these benefits. Based on the latest actuarial information available, the following table sets forth the components of the net periodic pension expense, the funded status and the assumptions used in determining the present value of benefit obligations (in thousands): For the years ended February 28 or 29, 1997 1996 ----------- ---------- Service cost - benefits earned during the year $76 $33 Interest cost on projected benefit obligations 275 298 Net amortization and deferral 245 245 ------- ------- Net periodic pension expense $596 $576 -------- ------- As of February 28 or 29, 1997 1996 ---------- ------------- Actuarial present value of: Vested benefit obligation $3,040 $2,868 Nonvested benefit obligation 377 503 ---------- --------- Accumulated benefit obligation 3,418 3,371 Effect of projected future salary increases 1,612 1,903 ------------ ------------ Projected benefit obligation 5,029 5,274 Unrecognized net loss (596) (1,042) Unrecognized net transition asset (2,941) (3,186) Additional minimum liability 1,925 2,325 ---------- ------------- Accrued pension cost $3,417 $3,371 ---------- -------------- Assumptions used in determining actuarial present value of benefit obligations: Discount rate 7.25% 7.25% Weighted-average rate of compensation increase 7.00% 7.00% ------------ ------------ During fiscal 1993, the Company adopted an unfunded retirement plan for the non-employee members of its Board of Directors. The plan provides for annual benefit payments equal to the annual retainer in effect at the date of retirement, for a period of years equal to the lesser of the director's years of service or ten years. The cost of this plan is accrued over the directors' estimated remaining years of service, of which $174,000, $162,000 and $264,000 was accrued during fiscal 1997, 1996 and 1995, respectively. Executive Incentives The Company's Board of Directors has provided that certain executives receive incentive compensation based upon certain revenues, earnings and other performance measures. During fiscal 1997, 1996 and 1995, $560,000, $1,483,000 and $1,506,000 of incentive compensation was earned, respectively. 9. STOCK PURCHASE RIGHTS PLAN Under a stock purchase rights plan, shareholders may be entitled to purchase common stock in the Company at a discounted price, in the event of certain efforts to acquire control of the Company. The rights will expire in January 1998, unless previously redeemed by the Company at $.01 per right. 10. SUBSEQUENT EVENT In March 1997, the Company and Intel Corporation (Intel) entered into a Common Stock and Warrant Purchase Agreement (the Agreement) whereby Intel acquired approximately 1,543,000 of newly-issued shares of the Company's common stock for $9.50 per share, or approximately $14,654,000, and received a three-year warrant to purchase an additional 1,543,000 shares at a price per share which increases from $10.45, to $11.40, and then to $12.35 on March 18, 1997, 1998 and 1999, respectively. In addition, the Company and Intel have signed a Letter of Intent to enter into, and are currently negotiating, an agreement whereby (i) Intel would agree to integrate the Company's current and future devices into a specified number of Intel's motherboard designs, and consider integrating such devices into additional motherboard designs, and (ii) the Company would grant Intel certain manufacturing rights should the Company be unable to perform its obligations as a supplier of such devices. The Agreement provides Intel with certain rights, including a right of first refusal upon certain proposed sales of common stock by the Company, demand and other registration rights with respect to the shares acquired under the Agreement, a right for Intel to designate a representative to serve on the Company's board of directors, and anti-dilution rights. The Agreement also imposes certain restrictions on Intel, including a limitation on Intel's ability to acquire additional shares of the Company's common stock (referred to as a standstill arrangement), and restrictions on the transfer of shares acquired pursuant to the Agreement. The standstill arrangement would terminate in the event of certain third-party tender offers for the Company's common stock. 11. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION The Company operates in two principal industries: very-large-scale-integrated circuits primarily used in personal computers for input/output and network control (Component Products) and local area network products used to connect personal computers (System Products). Although the Company's subsidiary, Toyo Microsystems Corporation (TMC), sells component and system products in the Japanese market, it operates as a separate profit center and is reported within this disclosure as a separate segment of the Company's operations. Income (loss) from operations by industry segment excludes general corporate expenses, other income and expenses, and income taxes. Transfers between industry segments are accounted for on an arm's length pricing basis. General corporate assets include primarily cash and cash equivalents, assets associated with general corporate activities, tax assets, and certain investments.
Industry Segment Information General (In thousands) Component System Corporate Products Products TMC and Other Consolidated ----------- --------- ------------- -------- ----------- Fiscal 1997 Total revenues $186,728 $160,276 $ 17,558 $ $ 364,562 -- Intersegment transfers (7,682) (2,742) - - (10,424) --------- ---------- ----------- ------- -------- Revenues from unaffiliated customers $179,046 $ 17,558 $ $ 354 ,138 $157,534 -- Income (loss) from operations 12,240 (19,618) 22 (21,658) (29,014) Identifiable assets 106,314 63,915 11,059 52,768 234,056 Depreciation and amortization 8,595 9,497 110 4,047 22,249 Capital expenditures 14,167 2,400 85 2,932 19,584 ------------- ------------- ----- ----- --------- Fiscal 1996 Total revenues $143,084 $190,097 $ 16,790 $ - $ 349,971 Intersegment transfers (4,487) (3,558) - - (8,045) ------------ ---------- ------------ ---------- --------- Revenues from unaffiliated customers $138,597 $186,539 $ 16,790 $ $ -- $ 341,926 Income (loss) from operations 31,177 (40,543) 995 (20,538) (28,909) Identifiable assets 101,878 93,405 12,634 52,742 260,659 Depreciation and amortization 2,522 14,708 112 1,634 18,976 Capital expenditures 23,999 5,671 132 9,445 39,247 ------------ -------- ------------ ----------- ---------- Fiscal 1995 Total revenues $112,815 $259,499 $ 11,661 $ - $ 383,975 Intersegment transfers (2,226) (3,078) - - (5,304) ---------- ---------- --------- -------- ------------ Revenues from unaffiliated customers $110,589 $256,421 $ 11,661 $ - $ 378,671 Income (loss) from operations 29,676 25,862 656 (15,572) 40,622 Identifiable assets 39,267 137,769 11,486 40,056 228,578 Depreciation and amortization 2,308 11,005 120 1,380 14,813 Capital expenditures 2,560 8,114 59 2,533 13,266 ======= ======= ======== ======= =========
Geographic Information The Company's domestic operations include the worldwide revenues and operating results of the Component Products and System Products business segments, and corporate activities. The Component Products and System Products business segments conduct their sales and marketing operations outside of the United States through TMC in Japan, and through sales subsidiaries in Canada, Europe, Asia and the Pacific Rim, Latin America, and South Africa. Revenues and operating profits from customers in Japan are recorded by TMC. Less than 10% of the combined Component Products business segment, System Products business segment and general corporate identifiable assets are located outside of the United States. Included within the identifiable assets of the Component Products business segment is $13,157,000 of equipment (net) installed at Lucent Technologies Inc.'s wafer fabrication facility in Madrid, Spain. Export Sales The information below summarizes sales to unaffiliated customers for the Component Products and System Products business segments by geographic region (in thousands): For the years ended February 28 or 29, 1997 1996 1995 ---------- ---------- --------- United States $159,937 $149,414 $201,539 Export Asia and Pacific Rim 112,034 86,975 53,721 Europe 51,919 69,304 86,510 Canada 7,475 10,816 15,294 Other 5,215 8,627 9,946 ---------- -------- --------- $336,580 $325,136 $367,010 ========== ======== ========= Major Customers During fiscal 1997 and fiscal 1996, no single customer accounted for more than 10% of the Company's revenues. In fiscal 1995, one customer accounted for 10.3% of revenues. Concentrations of Credit Risk The Company sells a significant amount of its products through several distributors and PC producers and, as a result, maintains individually significant accounts receivable balances from each of these customers. The Company performs credit evaluations on a regular basis and generally requires no collateral. Allowances for credit losses are maintained and actual losses have been within the Company's expectations. Distributors have the right to return slow-moving inventory in exchange for other inventory of equal value. Distributors also have the right to protection with respect to the price paid for inventories on and. The Company maintains a reserve for anticipated product returns and price protection. 12. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share data) Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28/29 ------- ----------- ------------ ----------- Fiscal 1997 Revenues $ 100,072 $ 99,217 $ 93,769 $ 61,080 Gross profit 36,876 29,950 28,348 174 Operating income (loss) 3,237 164 (2,174) (30,241) Net income (loss) 1,917 142 (3,854) (19,502) Per Share Data: Net income (loss) $ 0.14 $ 0.01 $ (0.28) $ (1.40) Market price High 18.75 18.00 15.25 11.75 Low 14.38 10.25 8.38 8.38 ========= ========= ========= ========= Fiscal 1996 Revenues $ 72,209 $ 85,434 $ 90,570 $ 93,713 Gross profit 28,395 22,823 37,656 33,910 Operating income (loss) (4,718) (17,687) 867 (7,372) Net income (loss) (3,001) (12,105) 303 26,404 Per Share Data: Net income (loss) $ (0.22) $ (0.91) $ 0.02 $ 1.94 Market price High 26.50 19.75 23.50 21.13 Low 15.38 12.50 15.25 15.25 ========= ========= ========= ========= The Company's common stock is traded in the over-the-counter market under the NASDAQ symbol: SMSC. Trading is reported in the NASDAQ National Market. There were approximately 1,460 holders of record of the Company's common stock at April 7, 1997. The Company has never paid a cash dividend. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. The Company does not expect to pay cash dividends in the foreseeable future. REPORT ON MANAGEMENT'S RESPONSIBILITIES The consolidated financial statements of Standard Microsystems Corporation and its subsidiaries have been prepared under the direction of management in conformity with generally accepted accounting principles, consistently applied. The statements include amounts that reflect management's objective estimates and judgments. Standard Microsystems Corporation and its subsidiaries maintain accounting systems and related internal accounting controls which, in the opinion of management, provide reasonable assurance, at appropriate cost, that assets are properly controlled and safeguarded and that transactions are executed in accordance with management's authorization and are recorded and reported properly. The audit committee of the Board of Directors is composed solely of directors who are not officers or employees of the Company. The committee meets periodically with representatives of management and the independent public accountants. The independent public accountants have free access to the committee, without management present, to discuss the results of their audit work, adequacy of internal financial controls and the quality of the financial reporting. The committee also recommends to the directors the appointment of the independent public accountants. The independent public accountants provide an objective, independent review as to management's discharge of its responsibilities as they relate to the integrity of reported operating results and financial condition. The consolidated financial statements in this annual report have been audited by Arthur Andersen LLP, independent public accountants. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Standard Microsystems Corporation: We have audited the accompanying consolidated balance sheets of Standard Microsystems Corporation (a Delaware corporation) and subsidiaries as of February 28, 1997, and February 29, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended February 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Standard Microsystems Corporation and subsidiaries as of February 28, 1997, and February 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP April 7, 1997 (except for Notes 2 and 3, as to which the date is May 23, 1997) Washington, D.C. EX-21 5 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE COMPANY Subsidiary Location Standard Microsystems Corporation (Asia) Taipei, Taiwan SMC Australia Pty. Ltd. Sydney, Australia Standard Microsystems Corporation (Canada) Oakville, Ontario, Canada Standard Microsystems (Europe) Ltd. London, England SMC France, Inc. St. Germain-en-Laye, France Standard Microsystems GmbH Munich, Germany SMC Massachusetts, Inc. Andover, Massachusetts SMC de Mexico SA de CV Mexico DF, Mexico SMC North America, Inc. Various States SMC Singapore, Inc. Singapore SMC International Ltd. Christ Church, Barbados EX-23 6 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (Nos. 2-78324, 33-35590, 33-15965, 33-45011, 33-69224, and 33-83400). ARTHUR ANDERSEN LLP MAY 23, 1997 WASHINGTON. D.C. EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR FEB-28-1997 FEB-28-1997 8,382 0 31,182 1,761 59,249 130,141 157,724 94,930 234,056 39,278 0 0 0 1,388 170,409 234,056 354,138 354,138 258,790 258,790 124,362 702 619 (33,002) 11,726 (21,297) 0 0 0 (21,297) (1.54) (1.54)
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