SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7422
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STANDARD MICROSYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2234952
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 ARKAY DRIVE, HAUPPAUGE, NEW YORK, 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
631-435-6000
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 September 30, 2001, there were 16,071,444 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)
August 31, February 28,
2001 2001
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 104,465 $ 99,545
Short-term investments - 9,629
Accounts receivable, net of allowance for doubtful
accounts of $375 and $362, respectively 19,885 16,776
Inventories 26,366 31,999
Deferred income taxes 10,618 8,718
Other current assets 4,684 7,080
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Total current assets 166,018 173,747
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Property, plant and equipment, net 33,333 35,492
Investment in Chartered Semiconductor 11,907 13,001
Deferred income taxes 2,703 2,019
Other assets 13,940 14,839
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$ 227,901 $ 239,098
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Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 9,506 $ 11,721
Deferred income on shipments to distributors 5,619 6,672
Accrued expenses, income taxes and other liabilities 6,349 8,972
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Total current liabilities 21,474 27,365
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Other liabilities 5,486 5,812
Commitments and contingencies
Minority interest in subsidiary 11,655 11,606
Shareholders' equity:
Preferred stock, $.10 par value
authorized 1,000,000 shares, none outstanding - -
Common stock, $.10 par value
authorized 30,000,000 shares,
issued 17,178,000 and 17,082,000
shares, respectively 1,718 1,708
Additional paid-in capital 117,710 116,515
Retained earnings 76,007 79,052
Treasury stock, 1,108,000 and 998,000 shares,
respectively, at cost (9,963) (8,330)
Accumulated other comprehensive income 3,814 5,370
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Total shareholders' equity 189,286 194,315
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$ 227,901 $ 239,098
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See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
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August 31, August 31,
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2001 2000 2001 2000
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Revenues $ 30,389 $ 45,897 $ 61,225 $ 84,116
Cost of goods sold 18,206 27,324 37,266 49,804
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Gross profit 12,183 18,573 23,959 34,312
Operating expenses:
Research and development 7,565 8,160 16,007 15,370
Selling, general and administrative 7,657 9,085 15,503 17,490
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Income (loss) from operations (3,039) 1,328 (7,551) 1,452
Interest income 990 1,473 2,059 2,644
Other income (expense), net 548 24,954 1,612 27,509
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Income (loss) before provision for income taxes
and minority interest (1,501) 27,755 (3,880) 31,605
Provision for (benefit from) income taxes (651) 10,269 (1,436) 11,693
Minority interest in net income of subsidiary 19 32 49 40
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Income (loss) from continuing operations (869) 17,454 (2,493) 19,872
Gain on sale of (loss from) discontinued operations
(net of income taxes of ($164), ($296), and $2,799) (307) - (552) 4,765
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Net income (loss) $ (1,176) $ 17,454 $ (3,045) $ 24,637
==================================================================================================================
Basic net income (loss) per share:
Income (loss) from continuing operations $ (0.05) $ 1.10 $ (0.15) $ 1.26
Gain on sale of (loss from) discontinued operations (0.02) - (0.04) 0.30
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Basic net income (loss) per share $ (0.07) $ 1.10 $ (0.19) $ 1.56
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Diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.05) $ 1.03 $ (0.15) $ 1.18
Gain on sale of (loss from) discontinued operations (0.02) - (0.04) 0.28
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Diluted net income (loss) per share $ (0.07) $ 1.03 $ (0.19) $ 1.46
==================================================================================================================
Weighted average common shares outstanding:
Basic 16,107 15,878 16,098 15,840
Diluted 16,107 16,989 16,098 16,868
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended August 31,
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2001 2000
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Cash flows from operating activities:
Cash received from customers $ 56,103 $ 76,178
Cash paid to suppliers and employees (61,352) (66,711)
Interest received 2,996 2,085
Interest paid (77) (116)
Income taxes paid (514) (4,660)
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Net cash provided by (used for) operating activities (2,844) 6,776
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Cash flows from investing activities:
Capital expenditures (2,630) (5,847)
Sales of property, plant and equipment 2,047 499
Sales of long-term investments and options 1,132 36,369
Purchases of short-term investments (4,000) (10,632)
Sales of short-term investments 13,629 3,003
Other (52) 435
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Net cash provided by investing activities 10,126 23,827
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Cash flows from financing activities:
Proceeds from issuance of common stock 675 1,304
Purchases of treasury stock (1,633) (2,735)
Repayments of obligations under capital leases (491) (452)
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Net cash used for financing activities (1,449) (1,883)
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Effect of foreign exchange rate changes on cash and cash equivalents (44) 132
Net cash provided by (used for) discontinued operation (869) 12,375
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Net increase in cash and cash equivalents 4,920 41,227
Cash and cash equivalents at beginning of period 99,545 73,405
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Cash and cash equivalents at end of period $ 104,465 $ 114,632
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Reconciliation of income (loss) from continuing operations to net
cash provided by (used for) operating activities:
Income (loss) from continuing operations $ (2,493) $ 19,872
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 6,005 5,908
Gains on sales of investments (1,689) (27,597)
Other adjustments, net 62 (172)
Changes in operating assets and liabilities:
Accounts receivable (3,194) (6,858)
Inventories 5,582 2,760
Accounts payable and accrued expenses and other liabilities (6,001) 5,606
Other changes, net (1,116) 7,257
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Net cash provided by (used for) operating activities $ (2,844) $ 6,776
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See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial information of
Standard Microsystems Corporation and subsidiaries, referred to herein as
"SMSC" or "the Company", has been prepared in accordance with generally
accepted accounting principles and reflects all adjustments, consisting
only of normal recurring adjustments, which in management's opinion are
necessary to state fairly the Company's financial position, results of
operations and cash flows as of and for the three and six months ended
August 31, 2001 and 2000. The February 28, 2001 Consolidated Balance Sheet
was derived from audited financial statements on that date.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from those
estimates, and such differences may be material to the financial
statements. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for
the year ended February 28, 2001 included in the Company's Annual Report on
Form 10-K, as filed on May 25, 2001 with the Securities and Exchange
Commission. The results of operations for the three and six months ended
August 31, 2001 are not necessarily indicative of the results to be
expected for any future periods.
Certain fiscal 2001 items have been reclassified to conform to the fiscal
2002 presentation.
2. Balance Sheet Data
Inventories are valued at the lower of first-in, first-out cost or market
and consist of the following (in thousands):
Aug. 31, 2001 Feb. 28, 2001
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Raw Materials $ 481 $ 558
Work in Process 15,286 22,859
Finished Goods 10,599 8,582
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$ 26,366 $ 31,999
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Property, plant and equipment consists of the following (in thousands):
Aug. 31, 2001 Feb. 28, 2001
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Land $ 3,434 $ 3,434
Buildings and Improvements 29,470 29,540
Machinery and Equipment 85,899 82,794
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118,803 115,768
Less: accumulated depreciation 85,470 80,276
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$ 33,333 $ 35,492
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3. Net Income (Loss) Per Share
Basic net income (loss) per share is based upon the weighted-average number
of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted-average common shares outstanding
during the period plus the dilutive effect of shares issuable through stock
options.
The shares used in calculating basic and diluted net income (loss) per
share are reconciled as follows (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
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2001 2000 2001 2000
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Average shares outstanding for
basic net income (loss) per share 16,107 15,878 16,098 15,840
Dilutive effect of stock options - 1,111 - 1,028
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Average shares outstanding for
diluted net income (loss) per share 16,107 16,989 16,098 16,868
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The Company reported a net loss from continuing operations in the three and
six month periods ended August 31, 2001, and accordingly, the effect of
stock options was anti-dilutive and therefore excluded from the calculation
of average shares outstanding used for diluted net income (loss) per share.
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
(loss) for the three and six month periods ended August 31, 2001 and 2000
were as follows (in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
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2001 2000 2001 2000
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Net income (loss) $(1,176) $ 17,454 $(3,045) $ 24,637
Other comprehensive income (loss):
Change in foreign currency translation
adjustment 141 83 (149) 257
Change in unrealized gain on investments
(1,154) (9,210) (1,407) (15,381)
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Total comprehensive income (loss) $(2,189) $ 8,327 $(4,601) $ 9,513
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5. Discontinued Operations
The Company is involved in several legal actions relating to past
divestitures of divisions and business units. These divestitures were
accounted for as discontinued operations, and accordingly, costs associated
with these actions are reported as a Loss from discontinued operations on
the Consolidated Statement of Operations. These costs totaled $471,000 and
$848,000, before applicable income tax benefits of $164,000 and $296,000,
for the three and six month periods ended August 31, 2001, respectively.
During the first quarter of fiscal 2001, the Company sold the majority of
its ownership interest in Standard MEMS, Inc. and realized an after-tax
gain of $4,765,000, which appears as a Gain on sale of discontinued
operations on the Consolidated Statement of Operations for the six months
ended August 31, 2000. Standard MEMS, Inc. was organized in June 1999, upon
the Company's sale of the assets of its former Foundry Business Unit to New
Jersey-based IOTA, Inc.
6. Sales of Facilities
During the first quarter of fiscal 2002, the Company sold two underutilized
facilities. Combined proceeds from these sales were $2,105,000, before
related expenses, and the sales resulted in a net pre-tax gain of
approximately $600,000, which is included within Other income (expense),
net.
7. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
the use of the purchase method of accounting for all business combinations
initiated after June 30, 2001, thereby eliminating use of the
pooling-of-interests method. SFAS No.142 requires goodwill and certain
other intangible assets to be tested for impairment at least annually and
written down only when impaired, replacing the current accounting practice
of ratably amortizing these items. Intangible assets other than goodwill
that have a finite life will be amortized over their useful lives. This
statement will apply to existing goodwill and intangible assets, beginning
with fiscal years starting after December 15, 2001. Early adoption of the
statement will be permitted for companies with fiscal years beginning after
March 15, 2001, for which first quarter financial statements have not been
issued. The Company currently does expect these pronouncements to have any
impact on its results of operations or financial position.
8. Technology and Patent License Agreements with Intel Corporation
In 1987, as previously announced, the Company and Intel Corporation (Intel)
entered into an agreement providing for, among other things, a broad,
worldwide, non-exclusive patent cross-license between the two companies,
covering manufacturing processes and products, thereby providing each
company access to the other's current and future patent portfolios.
In September 1999, as previously reported, the two companies announced a
technology exchange agreement (the Agreement) that would allow SMSC to
accelerate its ongoing development of Intel-compatible chipset products.
Chipset products are integrated circuits that communicate with the
microprocessor (CPU) and assist in controlling the flow of information
within a personal computer or similar application. The Agreement provides,
among other things, for Intel to transfer certain intellectual property
related to Intel chipset architectures to SMSC, and provides SMSC the
opportunity to supply Intel chipset components along with its own chipset
solutions. The Agreement also limits SMSC's rights regarding Northbridges
and Intel Architecture Microprocessors under the 1987 agreement.
The Agreement includes provisions for its termination under certain
circumstances. Under one such provision, beginning in the third year of the
Agreement and annually thereafter, SMSC can elect to terminate the
Agreement should SMSC not achieve certain minimum chipset revenue amounts
set forth in the Agreement, unless Intel pays SMSC an amount equal to the
shortfall between the minimum revenue amount and the actual revenue for
that period. Should the Agreement terminate under this provision, the
limitations imposed by the Agreement on the Northbridge rights under the
1987 agreement terminate immediately, and the limitations imposed by the
Agreement on the microprocessor rights under the 1987 agreement terminate
12 months later. Should Intel elect to make the revenue amount shortfall
payment, the provisions of the Agreement will remain in force for the
subsequent 12-month period, for which another minimum revenue amount will
be applicable, and at the end of which a similar termination event may
arise. Minimum chipset revenue amounts are $30 million, $45 million, and
$60 million for the 12 months ending September 21, 2001, 2002, and 2003,
respectively, and increase by 10% for each succeeding 12-month period
following 2003, until expiration of the Agreement in July 2007.
In September 2001, SMSC notified Intel of a chipset revenue shortfall of
approximately $29.6 million for the 2001 12-month period. Intel's payment
of this amount, if so elected, must occur within 60 days of this
notification. There can be no assurance whatsoever that Intel will elect to
pay this revenue shortfall, or any future revenue shortfalls, to SMSC under
the Agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included in Item 1 of this
Quarterly Report, and the audited consolidated financial statements, related
notes and Management's Discussion and Analysis for the fiscal year ended
February 28, 2001, contained in the Company's 2001 Annual Report.
The following discussion and analysis may contain forward-looking statements.
These forward-looking statements are based upon information currently available
to management and are subject to certain risks and uncertainties. Actual future
results could differ significantly from those expressed or implied by these
forward-looking statements. These risks and uncertainties include, without
limitation, those described within this discussion, and also under the heading
"Other Factors That May Affect Future Operating Results" within the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
May 25, 2001.
Revenues
Revenues for the second quarter of fiscal 2002 were $30.4 million, compared to
$45.9 million for the corresponding year-earlier quarter. This decrease reflects
the impact of both lower unit shipments as well as lower selling prices. The
Company's fiscal 2002 results have been adversely impacted by a demand slowdown
in the markets served by the Company's products. The semiconductor industry in
general, which is historically a highly cyclical industry, began experiencing a
slowing of demand during the latter part of calendar 2000, as unfavorable
economic conditions in the U.S. began weakening demand for computers,
communications devices, and related equipment, all of which significantly impact
semiconductor demand. This economic downturn has spread more broadly during
calendar 2001.
Revenues for the six months ended August 31, 2001 were $61.2 million, compared
to $84.1 million reported for the six months ended August 31, 2000. Consistent
with the second quarter's revenue comparison, this revenue decrease resulted
from lower unit shipments and lower average selling prices.
International revenues represented approximately 91% and 75% of the Company's
revenues for the second quarters of fiscal 2002 and fiscal 2001, respectively.
Revenues from Asia and the Pacific Rim region were 77% of total revenues for the
second quarter of fiscal 2002, compared to 59% in the year-earlier quarter. Asia
and the Pacific Rim region continues to represent the dominant location for the
Company's shipments, reflecting the region's high concentration of the world's
electronic manufacturing and assembly activity.
Gross Profit
Gross profit was $12.2 million, or 40.1% of revenues, for the second quarter of
fiscal 2002, compared to $18.6 million, or 40.5% of revenues, for the
corresponding year-earlier quarter. For the six months ended August 31, 2001,
gross profit was $24.0 million, or 39.1% of revenues, compared to $34.3 million,
or 40.8% of revenues, in the prior year's first six months. The Company
implemented aggressive cost reduction programs in the second quarter of fiscal
2002 that helped gross margins remain comparable to gross margins for the
year-earlier period, despite lower average selling prices. For the first six
months of fiscal 2002, the slight decline in gross profit percentage compared to
the prior year period was attributable to reductions in average selling prices,
which were not fully offset by reductions in manufacturing costs, as well a
shift in product mix towards certain lower margined Advanced I/O devices.
Operating Expenses
Research and development spending was $7.6 million for the second quarter of
fiscal 2002, compared to $8.2 million for the corresponding year-earlier
quarter. For the six months ended August 31, 2001, research and development
expenses were $16.0 million compared to $15.4 million for the first six months
of the prior fiscal year. These fluctuations generally reflect the timing of
certain development expenditures including prototypes, masks and consulting
services.
Selling, general and administrative expenses were $7.7 million for the current
year's second quarter compared to $9.1 million for the prior year quarter.
Selling, general and administrative expenses for the current six-month period
were $15.5 million, compared to $17.5 million for the prior year six-month
period. The reductions in fiscal 2002, compared to fiscal 2001, reflect lower
commission and incentive costs associated with the lower revenues reported to
date in fiscal 2002.
The Company implemented cost reduction and control measures in the second
quarter of fiscal 2002 that included certain one-time cost savings. While the
Company has implemented various on-going cost reduction and avoidance programs,
certain one-time cost reductions achieved in the second quarter will not repeat
in the third quarter.
Other Income and Expense
Interest income was $1.0 million and $2.1 million in the three and six-month
periods ended August 31, 2001, respectively, compared to $1.5 million and $2.6
million in the corresponding year-earlier periods. These decreases reflect lower
interest rates on cash and short-term cash equivalent investments held by the
Company.
Other income (net) totaled $0.5 million and $1.6 million in the three and
six-month periods ended August 31, 2001, respectively, compared to $25.0 million
and $27.5 million in the corresponding year-earlier periods. Other income (net)
for the three and six month periods ended August 31, 2001, includes gains on the
sale of long-term equity investments and, for the six month period, includes a
gain of $0.6 million on the sale of two underutilized facilities.
Other income (net) for the three and six month periods ending August 31, 2000
includes gains realized on sales of a portion of the Company's investment in
Singapore-based Chartered Semiconductor Manufacturing Ltd. (Chartered), as well
as proceeds from sales of call options covering a portion of its Chartered stock
holdings. The gains totaled $21.9 million and $24.2 million for the three and
six month periods ended August 31, 2000, respectively, while proceeds from sales
of call options were $1.8 million and $2.1 million for the same periods.
Income Taxes
The Company recorded tax benefits of $0.7 million and $1.4 million for the three
month and six month periods ending August 31, 2001, respectively, compared to
tax provisions of $10.3 million and $11.7 million in the comparable year-earlier
periods. Generally, the Company's income tax rate includes the federal, state
and foreign statutory tax rates, the impact of certain permanent differences
between the book and tax accounting treatment of certain expenses, the impact of
tax-exempt income and various tax credits.
Discontinued Operations
The Company is involved in several legal actions relating to past divestitures
of divisions and business units. These divestitures were accounted for as
discontinued operations, and accordingly, costs associated with these actions
totaling $0.3 million and $0.6 million, net of income taxes, for the three and
six-month periods ending August 31, 2001, respectively, are reported as a Loss
from discontinued operations on the Consolidated Statement of Operations.
During the six-month period ending August 31, 2000, the Company sold its
ownership interest in Standard MEMS, Inc. and realized an after-tax gain of $4.8
million. Standard MEMS, Inc. was organized in June 1999, upon the Company's sale
of the assets of its former Foundry Business Unit to New Jersey-based IOTA, Inc.
Technology and Patent License Agreements with Intel Corporation
In 1987, as previously announced, the Company and Intel Corporation (Intel)
entered into an agreement providing for, among other things, a broad, worldwide,
non-exclusive patent cross-license between the two companies, covering
manufacturing processes and products, thereby providing each company access to
the other's current and future patent portfolios.
In September 1999, as previously reported, the two companies announced a
technology exchange agreement (the Agreement) that would allow SMSC to
accelerate its ongoing development of Intel-compatible chipset products. Chipset
products are integrated circuits that communicate with the microprocessor (CPU)
and assist in controlling the flow of information within a personal computer or
similar application. The Agreement provides, among other things, for Intel to
transfer certain intellectual property related to Intel chipset architectures to
SMSC, and provides SMSC the opportunity to supply Intel chipset components along
with its own chipset solutions. The Agreement also limits SMSC's rights
regarding Northbridges and Intel Architecture Microprocessors under the 1987
agreement.
The Agreement includes provisions for its termination under certain
circumstances. Under one such provision, beginning in the third year of the
Agreement and annually thereafter, SMSC can elect to terminate the Agreement
should SMSC not achieve certain minimum chipset revenue amounts set forth in the
Agreement, unless Intel pays SMSC an amount equal to the shortfall between the
minimum revenue amount and the actual revenue for that period. Should the
Agreement terminate under this provision, the limitations imposed by the
Agreement on the Northbridge rights under the 1987 agreement terminate
immediately, and the limitations imposed by the Agreement on the microprocessor
rights under the 1987 agreement terminate 12 months later. Should Intel elect to
make the revenue amount shortfall payment, the provisions of the Agreement will
remain in force for the subsequent 12-month period, for which another minimum
revenue amount will be applicable, and at the end of which a similar termination
event may arise. Minimum chipset revenue amounts are $30 million, $45 million,
and $60 million for the 12 months ending September 21, 2001, 2002, and 2003,
respectively, and increase by 10% for each succeeding 12-month period following
2003, until expiration of the Agreement in July 2007.
In September 2001, SMSC notified Intel of a chipset revenue shortfall of
approximately $29.6 million for the 2001 12-month period. Intel's payment of
this amount, if so elected, must occur within 60 days of this notification.
There can be no assurance whatsoever that Intel will elect to pay this revenue
shortfall, or any future revenue shortfalls, to SMSC under the Agreement.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments were $104.5
million as of August 31, 2001, compared to $109.2 million as of February 28,
2001.
During the first six months of fiscal 2002, operating activities used $2.8
million of cash, while investing activities provided $10.1 million, and
financing activities consumed $1.4 million. Discontinued operations consumed
$0.9 million of cash.
The cash consumed by operating activities primarily reflects the impact of the
operating loss incurred for the first six months of fiscal 2002. The cash
provided by investment activities includes $9.6 million (net) from the maturity
of short-term investments, as well as $2.1 million from the sale of
underutilized real estate and $1.1 million from sales of long-term equity
investments. Also during this six-month period, the Company purchased 110,000
shares of treasury stock for $1.6 million.
The purchases of capital equipment were $2.6 million for the first six months of
fiscal 2002. Total fiscal 2002 capital expenditures are now expected to be below
the $14.6 million of such expenditures incurred in fiscal 2001.
Accounts receivable increased to $19.9 million at August 31, 2001 compared to
$16.8 million at February 28, 2001. The Company's accounts receivable are
substantially all current as of August 31, 2001.
The Company's inventories decreased by approximately $5.6 million to $26.4
million during the first six months of fiscal 2002. This reduction reflects the
Company's continued realignment of inventories with current demand. The decline
in accounts payable, from $11.7 million at February 28, 2001 to $9.5 million at
August 31 2001, resulted from a lower volume of inventory purchases.
The Company has considered in the past, and will continue to consider, various
possible transactions to secure necessary foundry manufacturing capacity,
including equity investments in, prepayments to, or deposits with foundries, in
exchange for guaranteed capacity or other arrangements which address the
Company's manufacturing requirements.
The Company believes that its existing cash, cash equivalents and investments on
hand, together with cash that it expects to generate from its operations, will
be sufficient to meet future operating and capital needs for at least the next
twelve months.
Other Factors That May Affect Future Operating Results
The Company's operating results are subject to general economic conditions and a
variety of risks characteristic of the semiconductor and related industries. For
a further discussion of such risks, see "Other Factors That May Affect Future
Operating Results" included within Part I, Item 1 - "Business" in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission for
the fiscal year ended February 28, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - The Company's exposure to interest rate risk relates
primarily to its investment portfolio. The primary objective of the Company's
investment portfolio management is to invest available cash while preserving
principal and meeting liquidity needs. In accordance with the Company's
investment policy, investments are placed with high credit-quality issuers and
the amount of credit exposure to any one issuer is limited.
As of August 31, 2001, all of the Company's short-term investments have original
maturities of three months of less and are therefore classified as cash
equivalents. The Company periodically holds fixed-income investments in
corporate and municipal obligations with maturities of between three and twelve
months. These securities, like all fixed income instruments, are subject to
interest rate risk and will vary in value as market interest rates fluctuate. If
market interest rates were to increase immediately and uniformly by 10% the fair
value of these short-term investments would decline by an immaterial amount. The
Company has the ability to hold its fixed income investments until maturity and
therefore would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates.
Equity Price Risk - The Company is exposed to an equity price risk on its
investment in Chartered Semiconductor Manufacturing, Ltd. and other publicly
traded equity investments. For every 10% adverse change in the market value of
Chartered Semiconductor common stock, the Company would experience a decrease of
approximately $1.2 million to its August 31, 2001 investment value. The Company
has sold call options on this security in the past and may do so in the future
to reduce some of this market risk.
Foreign Currency Risk - The Company has international sales and expenditures and
is therefore subject to certain foreign currency rate exposure. The Company
conducts a significant amount of its business in Asia. In order to reduce the
risk from fluctuation in foreign exchange rates, most of the Company's product
sales and all of its arrangements with its foundry, test and assembly vendors
are denominated in U.S. dollars. Transactions in the Japanese market made by
Toyo Microsystems Corporation (TMC), the Company's majority owned subsidiary,
are denominated in Japanese yen. The Company has never received a cash dividend
(repatriation of cash) from TMC nor does it expect to receive such a dividend in
the near future. The Company has not entered into any significant foreign
currency hedging activities.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 2000, Standard Microsystems Corporation was named as a defendant,
along with several other semiconductor suppliers, in a patent infringement
lawsuit filed by U.S. Philips Corporation in the United States District Court
for the Southern District of New York (U.S. Philips Corporation v. Analog
Devices, Inc., et al, Case Number 00 CIV. 7426). The Complaint filed in the suit
alleges that some of the Company's products infringe one Philips patent, and
seeks injunctive relief and unspecified damages. The Company has reviewed and
investigated the allegations in the complaint and believes that the suit is
without merit. The Company has filed its answer in the Court and is contesting
these allegations vigorously.
In October 1997, 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). In
consideration for the sale, the Company received $40.2 million in cash, of which
$2.0 million was placed in an escrow account, scheduled for release in January
1999, to secure the Company's indemnity obligations under the 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 January 1999. In
January 1999, SMSC 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 (the majority
of which is included within other assets on the Company's Consolidated Balance
Sheet at February 28, 2001) owed to the Company by SMC Networks, Inc. In
November 1999, the Court issued an order staying the Action and directed the
parties to arbitration under the arbitration provisions of the original
transaction agreements. In July 2000, the Company asserted various claims
against Accton and its affiliates, including claims for fraud, improper transfer
of profits, mismanagement, breach of fiduciary duties and payment default. The
parties are now proceeding with arbitration of this dispute.
The Company remains confident that it negotiated and fully performed its
obligations under the Agreements with Accton in good faith and considers the
claims against it to be without merit. The Company is vigorously defending
itself against the allegations made by Accton and, although it is not possible
at this time to assess the likelihood of any liability being established,
expects that the outcome will not be material to the Company. Furthermore, the
Company is pursuing recovery of damages and other relief from Accton pursuant to
the Company's claims, but the likelihood of any such recovery also cannot
currently be established.
ITEM 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at the
registrant's annual meeting of shareholders which was held on July 11, 2001.
(1) The following were elected directors, each receiving the number of votes
set opposite their respective name:
Broker
For Withheld Non-Votes
--- -------- ---------
James R. Berrett 15,747,187 292,694 --
Andrew M. Caggia 15,740,231 299,650 --
Ivan T. Frisch 15,747,369 292,512 --
(2) Amendments to the Plan for Deferred Compensation in Common Stock for
Outside Directors was approved and adopted by the following vote:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
14,509,160 1,127,338 403,383 --
(3) The 2001 Director Stock Option Plan was approved and adopted by the
following vote:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
9,527,578 2,150,308 402,626 3,959,369
(4) The 2001 Stock Option and Restricted Stock Plan was approved and adopted by
the following vote:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
7,692,967 3,985,138 402,407 3,959,369
(5) The selection of Arthur Andersen LLP as the Company's auditors for the year
ended February 28, 2002 was ratified by the following vote:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
16,001,873 22,611 15,397 --
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(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
DATE: October 12, 2001 /S/ Andrew M. Caggia
------------------------
(Signature)
Andrew M. Caggia
Senior Vice President -
Finance (duly authorized
officer) and Chief Financial
Officer (principal financial
officer)