-----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, Sy9EDaSNKywCsp8W+/jBOkzsWwl0auUFNTBuINC9n++mTjSqbRYd57LG6UVDDKEU 6BCUll2FLX+2iEOw6EPHiQ== 0000093384-00-000004.txt : 20000202 0000093384-00-000004.hdr.sgml : 20000202 ACCESSION NUMBER: 0000093384-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MICROSYSTEMS CORP CENTRAL INDEX KEY: 0000093384 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 112234952 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07422 FILM NUMBER: 506479 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-Q 1 STANDARD MICROSYSTEMS CORP. 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------------------------------------- FORM 10-Q ----------------------------------------------------------------- [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-7422 ----------------------------------------------------------------- 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) Registrant's telephone number, including area code: 516-435-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ____X____ No ________ As of January 13, 2000 there were 15,581,236 shares of the registrant's common stock outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
November 30, February 28, 1999 1999 Assets Current assets: Cash and cash equivalents .......................... $ 68,603 $ 68,071 Short-term investments ............................. 5,998 2,000 Accounts receivable, net of allowance for doubtful accounts of $1,162 and $1,111, respectively ...... 19,172 22,608 Inventories ........................................ 22,215 13,785 Deferred tax benefits .............................. 7,229 8,154 Other current assets ............................... 10,614 9,142 --------- --------- Total current assets ............................... 133,831 123,760 ========= ========= Property, plant and equipment: Land ............................................... 3,832 3,832 Buildings and improvements ......................... 30,879 29,846 Machinery and equipment ............................ 68,524 63,890 --------- --------- 103,235 97,568 Less: accumulated depreciation .................... 68,886 62,916 --------- --------- Property, plant and equipment, net ................. 34,349 34,652 --------- --------- Other assets ......................................... 63,439 38,219 Net assets of discontinued operation ................. - 5,336 --------- --------- $ 231,619 $ 201,967 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable ................................... $ 13,612 $ 8,873 Accrued expenses and other liabilities ............. 13,941 14,453 Current portion of obligations under capital leases. 906 852 --------- --------- Total current liabilities .......................... 28,459 24,178 --------- --------- Obligations under capital leases ..................... 2,331 3,017 Other liabilities .................................... 10,033 4,799 Minority interest in subsidiary ...................... 11,538 11,539 Shareholders' equity: Preferred stock, $.10 par value- Authorized 1,000,000 shares, none outstanding .... - - Common stock, $.10 par value- Authorized 30,000,000 shares, outstanding 16,227,000 and 16,045,000 shares, respectively ............................. 1,623 1,605 Additional paid-in capital ......................... 110,070 108,665 Retained earnings .................................. 50,021 47,454 Treasury stock, 671,000 shares, at cost ............ (4,379) (2,957) Accumulated other comprehensive income ............. 21,923 3,667 --------- --------- Total shareholders' equity .......................... 179,258 158,434 --------- --------- $ 231,619 $ 201,967 ========= ========= See Notes to Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended Nine Months Ended November 30, November 30, -------------------- -------------------- 1999 1998 1999 1998 Revenues .............................................. $ 41,027 $ 42,745 $114,724 $115,894 Cost of goods sold .................................... 24,320 27,135 69,541 73,321 -------- -------- -------- -------- Gross profit .......................................... 16,707 15,610 45,183 42,573 -------- -------- -------- -------- Operating expenses: Research and development ............................ 6,232 4,863 17,793 12,808 Selling, general and administrative ................. 8,734 8,411 25,327 22,102 -------- -------- -------- -------- 14,966 13,274 43,120 34,910 -------- -------- -------- -------- Income from operations ................................ 1,741 2,336 2,063 7,663 -------- -------- -------- -------- Other income (expense): Interest income ..................................... 882 705 2,259 1,896 Interest expense .................................... (70) (77) (220) (198) Other income (expense), net ......................... 55 (33) 4 (111) -------- -------- -------- -------- 867 595 2,043 1,587 -------- -------- -------- -------- Income before provision for income taxes and minority interest ............................... 2,608 2,931 4,106 9,250 Provision for income taxes ............................ 974 1,009 1,540 3,320 Minority interest in net income (loss) of subsidiary .. - 36 (1) 53 -------- -------- -------- -------- Income from continuing operations ..................... 1,634 1,886 2,567 5,877 -------- -------- -------- -------- Loss from discontinued operation, (net of income taxes of ($609) and ($2,262), respectively) ......... - (1,083) - (4,023) -------- -------- -------- -------- Net income ............................................ $ 1,634 $ 803 $ 2,567 $ 1,854 ======== ======== ======== ======== Basis and diluted net income per share: Income from continuing operations ................... $ 0.10 $ 0.12 $ 0.16 $ 0.37 Loss from discontinued operation .................... - (0.07) - (0.25) -------- -------- -------- -------- Basic and diluted net income per share ................ $ 0.10 $ 0.05 $ 0.16 $ 0.12 ======== ======== ======== ======== Weighted average common shares outstanding Basic 15,641 15,745 15,611 15,872 Diluted 15,887 15,748 15,732 15,915 See Notes to Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended November 30, ------------------------ 1999 1998 ---- ---- Cash flows from operating activities: Cash received from customers ..................................... $118,849 $112,758 Cash paid to suppliers and employees ............................. (105,678) (103,920) Interest received ................................................ 2,256 1,912 Interest paid .................................................... (220) (198) Income taxes paid ................................................ (925) (259) -------- -------- Net cash provided by operating activities ........................ 14,282 10,293 -------- -------- Cash flows from investing activities: Capital expenditures ............................................. (6,850) (6,305) Sales of machinery and equipment ................................. 661 6,263 Purchases of short-term investments .............................. (6,000) (3,002) Sales of short-term investments .................................. 2,002 9,605 Other ............................................................ (185) (523) -------- -------- Net cash provided by (used for) investing activities ............. (10,372) 6,038 -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock ........................... 716 322 Purchases of treasury stock ...................................... (1,422) (2,957) Repayments of obligations under capital leases ................... (632) (451) -------- -------- Net cash used for financing activities ........................... (1,338) (3,086) -------- -------- Effect of foreign exchange rate changes on cash and cash equivalents 980 129 -------- -------- Net cash provided by (used for) discontinued operations ............ (3,020) 8,923 -------- -------- Net increase in cash and cash equivalents .......................... 532 22,297 Cash and cash equivalents at beginning of period ................... 68,071 47,155 -------- -------- Cash and cash equivalents at end of period ......................... $ 68,603 $ 69,452 ======== ======== Reconciliation of income from continuing operations to net cash provided by operating activities: Income from continuing operations .................................. $ 2,567 $ 5,877 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization .................................. 7,286 8,558 Other adjustments, net ......................................... 608 612 Changes in operating assets and liabilities: Accounts receivable ............................................ 3,955 (3,417) Inventories .................................................... (8,203) (3,349) Accounts payable and accrued expenses and other liabilities .... 7,477 665 Other changes, net ............................................. 592 1,347 -------- -------- Net cash provided by operating activities .......................... $ 14,282 $ 10,293 ======== ======== Noncash investing and financing activities: During fiscal 1999, the Company financed certain capital expenditures totaling $1,446,000 through capital lease obligations. See Notes to Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited interim financial statements furnished reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary to present a fair statement of the Company's financial position and results of operations for the three and nine month periods ended November 30, 1999. The financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended February 28, 1999. Certain items shown have been reclassified to conform with the fiscal 2000 presentation. 2. Inventories Inventories are valued at the lower of first-in, first-out cost or market and consist of the following (in thousands): Nov. 30, 1999 Feb. 28, 1999 -------------------------------------------------------- Raw Materials $ 506 $ 475 Work in Process 14,340 9,310 Finished Goods 7,369 4,000 ------- ------- $22,215 $13,785 ======= ======= 3. Net Income Per Share Basic net income per share is based upon the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average common shares outstanding during the period plus the dilutive effect of shares issuable through stock options and warrants. The shares used in calculating basic and diluted net income per share are reconciled as follows (in thousands):
Three Months Ended Nine Months Ended November 30, November 30, ------------------ ----------------- 1999 1998 1999 1998 Average shares outstanding for basic net income per share .............. 15,641 15,745 15,611 15,872 Dilutive effect of stock options .......... 246 3 121 43 ------ ------ ------ ------ Average shares outstanding for diluted net income per share ............ 15,887 15,748 15,732 15,915 ====== ====== ====== ======
4. Comprehensive Income The Company's other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, and unrealized gains and losses on long-term equity investments. The components of the Company's comprehensive income for the three and nine month periods ended November 30, 1999 and 1998 were as follows (in thousands):
Three Months Ended Nine Months Ended November 30, November 30, ------------------ ------------------ 1999 1998 1999 1998 Net income ................................ $ 1,634 $ 803 $ 2,567 $1,854 Other comprehensive income (loss): Currency translation adjustment ......... 741 1,227 1,703 275 Unrealized gain (loss) on investments ... 16,205 (12) 16,553 (470) ------- ------ ------- ------ Total comprehensive income ................ $18,580 $2,018 $20,823 $1,659 ======= ====== ======= ======
5. Investments The Company has an equity interest in Singapore-based Chartered Semiconductor Manufacturing Ltd. (Chartered), acquired in fiscal 1996 at a cost of $19.9 million. In October 1999, shares of Chartered began trading publicly on the Singapore stock exchange, and also began trading on the NASDAQ stock exchange as American Depository Shares, or ADSs. This investment is considered available-for-sale, and therefore, in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," is reported at its estimated market value of $44.1 million within "Other assets" on the Company's November 30, 1999 Consolidated Balance Sheet. This investment was reported at cost in prior reporting periods. This investment is subject to a six-month "lock-up," or no trade period, through April 26, 2000, and is subject to normal open market valuation fluctuations. 6. Common Stock Repurchase Program In October 1998, the Company's Board of Directors authorized the Company to repurchase up to one million shares of its common stock on the open market or in private transactions. Under this program, the Company repurchased 150,000 shares of its common stock at a cost of $1.4 million during the third quarter of fiscal 2000. The Company currently holds repurchased shares as treasury stock. As of November 30, 1999, the Company has repurchased a total of 671,000 shares of its common stock, at a cost of $4.4 million under this program. 7. Contingencies In fiscal 1998, the Company sold an 80.1% interest in SMC Networks, Inc., a then-newly formed subsidiary comprised of its former local area networking division, to an affiliate of Accton Technology Corporation (Accton) for approximately $40.2 million in cash, $2.0 million of which was placed into an escrow account as security for the Company's indemnity obligations under the related agreement. In December 1998, Accton notified the Company and the escrow agent of Accton's intention to seek indemnification and damages from the Company in excess of $10 million by reason of alleged misrepresentations and inadequate disclosures relating to the transaction and other alleged breaches of covenants and representations in the related agreements. Based upon those allegations, the escrow account was not released to the Company as scheduled in early January 1999. In January 1999, the Company filed an action in the Supreme Court of New York (the "Action") against Accton, SMC Networks, Inc. and other parties, seeking the release of the escrow account to the Company on the grounds that Accton's allegations are without merit, and seeking payment of approximately $1.6 million owed to the Company by SMC Networks, Inc. In November 1999, the Court issued an order staying the Action and directed the parties to proceed to arbitration under the arbitration provisions of the original transaction agreements. The Company has filed an appeal from the order. Moreover, because many of the claims made by Accton against the Company are non-arbitrable, the Company has filed a motion requesting that the Court stay arbitration of those claims. The Company is confident that it negotiated and fully performed the agreements with Accton in good faith. While it is not possible at this time to assess the likelihood of any liability being established, the Company considers these claims to be without merit. The Company will vigorously defend itself against these allegations and expects that the outcome will not be material to the Company. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Standard Microsystems Corporation (the "Company") is a worldwide supplier of metal-oxide-semiconductor/very-large-scale-integrated (MOS/VLSI) circuits for the personal computer (PC) and related industries. The Company's integrated circuits are developed and sold for applications in PC input/output (I/O), PC connectivity, Local Area Networking (LAN), PC systems logic, and embedded networking. Standard Microsystems Corporation operates in one industry segment in which it designs, develops and markets integrated circuits for the personal computer and related industries. RESULTS OF OPERATIONS REVENUES Revenues for the three and nine month periods ended November 30, 1999 were $41.0 million and $114.7 million, respectively, compared to revenues of $42.7 million and $115.9 million, respectively, for the corresponding year-earlier periods. The Company typically experiences its highest demand during its third fiscal quarter, consistent with the general demand cycle in the personal computer industry. The Company has experienced significant year-over-year increases in unit shipments. For the three and nine month periods ended November 30, 1999, the Company shipped 14.0 million and 36.9 million units, respectively, compared to 11.2 million and 28.8 million units, respectively, for the corresponding prior year periods, increases of 25% and 28%, respectively. The revenue associated with this increased unit volume was offset by declining average selling prices, particularly for input/output (I/O) products, and transitions to newer products which generally have lower average selling prices. GROSS PROFIT The Company's gross profit percentage for the third quarter of fiscal 2000 increased to 40.7%, compared to 36.5% reported for the third quarter of fiscal 1999. The gross profit percentage for the nine-month period ended November 30, 1999 was 39.4%, compared to 36.7% for the year earlier nine-month period. These gross profit improvements can be attributed to the Company's continuing efforts to reduce product costs through aggressive manufacturing cost reduction programs, higher yields, increasing unit volumes shipped, and the continuing migration to new, higher margined products. OPERATING EXPENSES Research and development expenses (R&D) increased to $6.2 million in the third quarter of fiscal 2000, compared to $4.9 million in the third quarter of fiscal 1999. For the nine month period ended November 30, 1999, research and development expenses increased to $17.8 million from $12.8 million for the year earlier period. The Company's increased R&D spending reflects new product development, particularly in value-added chipset products, as well as increased spending in new test designs and validations. For the three and nine month periods ended November 30, 1999, selling, general and administrative expenses increased to $8.7 million and $25.3 million, respectively, from $8.4 million and $22.1 million, respectively, for the year-earlier periods. These increases are primarily associated with the elimination of certain administrative cost subsidies received by the Company related to the Company's 1997 sale of its former local area networking business. OTHER INCOME AND EXPENSE Other income and expense increased to $0.9 million in the third quarter of fiscal 2000, from $0.6 million for the year-earlier period, and for the nine month period ended November 30, 1999, increased to $2.0 million, from $1.6 million in the year-earlier period. These increases are predominately due to interest income received on higher average balances of cash and cash equivalents available for investment during the current year, and an investment portfolio mix change to taxable securities from tax-exempt securities. INCOME TAXES For the three and nine month periods ended November 30, 1999, income tax provisions have been provided at effective tax rates of 37.3% and 34.4%, respectively, compared to tax provisions recorded at effective rates of 37.5% and 35.9% for the corresponding year-earlier periods. The Company's effective income tax rate primarily reflects statutory tax rates, income tax credits, and the impact of certain non-deductible expenses and tax-exempt income. LIQUIDITY AND CAPITAL RESOURCES The Company's financial position remains strong. Cash, cash equivalents and short-term investments increased to $74.6 million at November 30, 1999, compared to $70.1 million at February 28, 1999, an increase of $4.5 million. Working capital increased to $105.4 million as of November 30, 1999, from $99.6 million at February 28, 1999, an increase of $5.8 million. The Company continues to maintain low levels of long-term debt. The Company's principle source of liquidity for the nine-month period ending November 30, 1999 was its operating activities, which provided $14.3 million of cash. Interest income accounted for $2.3 million of this operating income. The Company reduced its accounts receivable by $4.0 million and increased its accounts payable and other accrued expenses by $8.2 million, contributing $12.2 million of cash for the current nine-month period. Inventory increased to $22.2 million as of November 30, 1999 compared to $13.8 million at February 28, 1999. Inventory turns are approximately 4.2 times per year, as calculated at November 30, 1999. A portion of the increase in inventory has resulted from the decision to build stock on certain high-volume products in anticipation of tightening semiconductor manufacturing capacity. Indeed, several of the company's suppliers have recently reported minimal, if any, available capacity for additional demand. In addition, certain technology delays in the personal computer marketplace have resulted in delayed shipments of some of the Company's new products. In general, the Company's products are sold to leading personal computer manufacturers, who generally require short lead times and flexibility in ordering the Company's products, while the Company has manufacturing processes that require longer lead times. This leads to the risk of cyclical mismatching of forecasts to actual demand. To help minimize this risk, the Company has initiated new programs to increase forecast accuracy while continuing it's high level of service to its customers. The Company has used $6.9 million of cash for capital expenditures in fiscal 2000, predominantly for test equipment and tools for research and development. The Company plans to purchase additional testing equipment over the next 12 months as part of its ongoing product cost reduction initiatives. In October 1998, the Company's Board of Directors authorized the Company to repurchase up to one million shares of its common stock on the open market or in private transactions. Under this program, SMSC repurchased 150,000 shares of its common stock at a cost of $1.4 million during the third quarter of fiscal 2000. The Company currently holds repurchased shares as treasury stock. As of November 30, 1999, the Company has repurchased a total of 671,000 shares of its common stock, at a cost of $4.4 million, under this program. The Company has an equity interest in Singapore-based Chartered Semiconductor Manufacturing Ltd. (Chartered), acquired in fiscal 1996 at a cost of $19.9 million. In October 1999, shares of Chartered began trading publicly on the Singapore stock exchange, and also began trading on the NASDAQ stock exchange as American Depository Shares, or ADSs. This investment is considered available-for-sale, and therefore, in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," is reported at its estimated market value of $44.1 million within "Other assets" on the Company's November 30, 1999 Consolidated Balance Sheet. This investment was reported at cost in prior reporting periods. This investment is subject to a six-month "lock-up," or no trade period, through April 26, 2000, and is subject to normal open market valuation fluctuations. In June 1999, the Company completed the sale of a majority interest in its Foundry Business Unit, which had been experiencing operating losses in recent years. Operations of this business unit have been classified as a discontinued operation, and consumed $3.0 million in cash during the nine month period ended November 30, 1999, representing losses of the operation prior to its sale, and related expenses. The Company's previous $10 million revolving line of credit expired in July 1999. There had been no borrowings under this credit line since October 1997. The expiration of this line of credit will save the Company approximately $70,000 in annual costs. The Company has in the past acquired or invested in complementary businesses and technologies, and has licensed the right to use intellectual property. The Company has also used equity investments in, prepayments to, or deposits with foundries to secure wafer-manufacturing capacity. The Company will consider similar arrangements in the future if the needs or opportunities arise. The Company believes that existing cash, cash equivalents, and short-term investments, together with cash from operations will be sufficient to meet its cash requirements for the foreseeable future. OTHER DEVELOPMENTS On September 23, 1999, the Company announced that it had signed a technology exchange agreement with Intel Corporation. This agreement should enable SMSC to accelerate its development of value-added chipset solutions, which will support Intel microprocessors for personal computer (PC) and embedded applications. Under the agreement, SMSC is developing application-specific chipset devices that are completely compatible with Intel's most advanced chipset interface technologies. On October 25, 1999, Mr. Paul Richman, Standard Microsystems Corporation's Chairman of the Board and one of the Company's founders, announced his plan to retire from the Company after 29 years of service, effective on February 11, 2000. Mr. Richman has served as an officer and director of the Company for most of its history, including Chairman of the Board since 1983, and he is considered one of the pioneers of semiconductor technology. The Company's Board of Directors has announced that Mr. Steven Bilodeau, the Company's President and Chief Executive Officer, will assume the additional responsibility of Chairman of the Board upon Mr. Richman's retirement. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Certain statements and information contained in this quarterly report constitute "forward-looking statements" within the meaning of the Federal Securities laws. These forward-looking statements involve risks and uncertainties, which may cause actual results and performance to be different from those expressed or implied in such statements. The Company's operating results are subject to general economic conditions and a variety of risks characteristic of the semiconductor and personal computer industries, including cyclical market patterns, price erosion, product development risks, technological change, business conditions and concentrations in Asia, reliance upon foundries and subcontractors, and forecasts of product demand, any of which could cause the Company's operating results to differ materially from past results. For a further discussion of such risks, see "Risk Factors" in Part 2, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" included within the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended February 28, 1999. The Company maintains several equity investments in non-public companies which operate in the semiconductor or personal computer industries, resulting from strategic business relationships or other investment opportunities, which were deemed beneficial to the Company. These companies are subject to many of the same risks and uncertainties faced by the Company. These investments, which are reported at cost on the Company's Consolidated Balance Sheet, are reviewed regularly for events and circumstances that may effect their current and future value, within the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." YEAR 2000 DISCUSSION Many computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When computations referencing the year 2000 are performed, these programs may interpret "00" as the year 1900 and could either corrupt the date-related computations or not process them at all. As a result, many software and computer systems may need to be upgraded or replaced in order to comply with such year 2000 requirements. The Company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, products, operations and suppliers that are not Year 2000 compliant, and to develop, test and implement remediation and contingency plans to mitigate these risks. The Company's Year 2000 project is addressing risks in the areas of business application software, technical infrastructure, end-user computing, engineering and development tools, supplier and service provider compliance, manufacturing tools, facilities infrastructure and the Company's products. In addition, the Company provides its customers with information on its Year 2000 project and progress made towards Year 2000 compliance. Several years ago, the Company installed certain Year 2000 compliant information systems, and has moved a substantial portion of its core business applications to this platform. The Company has installed new information systems and considers all internal information systems to be Year 2000 compliant. The Company is also assessing the impact of the Year 2000 issue on its products, and has not identified, and does not expect to identify, any material issues in that regard. Because most of the Company's information systems achieved Year 2000 compliance with the transition to a new information system several years ago, the Company has not incurred any material expenditures to specifically address Year 2000 issues. Going forward, the Company is committed to expending the resources necessary to address this issue, but at this time, does not anticipate any material expenditures for the resolution of Year 2000 issues relating to either its own information systems or its products. Through the first several days of 2000, the Company has not experienced any significant Year 2000 issues within its information systems infrastructure. In addition, none of the Company's vendors or service providers have reported experiencing any significant Year 2000 issues. Based solely upon information received from vendors and service providers, the Company has no reason to believe that there will be any material adverse impact on the Company's financial condition or results of operations relating to any Year 2000 issues of such parties. However, if the information received from these third parties is not accurate or happens to change, then there could be an unforeseen material adverse impact on the Company's financial condition and results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in the Registrant's Annual Report on Form 10-K for the year ended February 28, 1999. The nature and scope of market risks addressed therein have not materially changed. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings In fiscal 1998, the Company sold an 80.1% interest in SMC Networks, Inc., a then-newly formed subsidiary comprised of its former local area networking division, to an affiliate of Accton Technology Corporation (Accton) for approximately $40.2 million in cash, $2.0 million of which was placed into an escrow account as security for the Company's indemnity obligations under the related agreement. In December 1998, Accton notified the Company and the escrow agent of Accton's intention to seek indemnification and damages from the Company in excess of $10 million by reason of alleged misrepresentations and inadequate disclosures relating to the transaction and other alleged breaches of covenants and representations in the related agreements. Based upon those allegations, the escrow account was not released to the Company as scheduled in early January 1999. In January 1999, the Company filed an action in the Supreme Court of New York (the "Action") against Accton, SMC Networks, Inc. and other parties, seeking the release of the escrow account to the Company on the grounds that Accton's allegations are without merit, and seeking payment of approximately $1.6 million owed to the Company by SMC Networks, Inc. In November 1999, the Court issued an order staying the Action and directed the parties to proceed to arbitration under the arbitration provisions of the original transaction agreements. The Company has filed an appeal from the order. Moreover, because many of the claims made by Accton against the Company are non-arbitrable, the Company has filed a motion requesting that the Court stay arbitration of those claims. The Company is confident that it negotiated and fully performed the agreements with Accton in good faith. While it is not possible at this time to assess the likelihood of any liability being established, the Company considers these claims to be without merit. The Company will vigorously defend itself against these allegations and expects that the outcome will not be material to the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STANDARD MICROSYSTEMS CORPORATION (Registrant) DATE: January 13, 2000 /S/ Eric M. Nowling --------------------------------- (Signature) Eric M. Nowling Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS FEB-29-2000 NOV-30-1999 68,603 5,998 19,172 1,162 22,215 133,831 103,235 68,886 231,619 28,459 0 0 0 1,623 177,635 231,619 114,724 114,724 69,541 69,541 43,120 100 220 4,106 1,540 2,567 0 0 0 2,567 0.16 0.16
-----END PRIVACY-ENHANCED MESSAGE-----