ITEM 1. BUSINESS.
GENERAL
Standard Microsystems Corporation (the "Company", the "Registrant", or "SMCR") 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 SMC Enterprise Networks, Inc. Andover, Massachusetts Standard Microsystems (Europe) Ltd. London, England SMC France, Inc. St. Germain-en-Laye, France Standard Microsystems GmbH Munich, Germany SMC de Mexico SA de CV Mexico DF, Mexico SMC North America, Inc. Various states SMC Singapore Singapore
BUSINESS AND PRODUCT DESCRIPTION
Standard Microsystems conducts its operations primarily through two divisions, System Products and Component Products. 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 control of various personal computer functions, as well as specialized semiconductor-related products that are produced in SMC's own semiconductor foundry. As a separate profit center, Toyo Microsystems Corporation (TMC), sells the Company's component and system products in the Japanese market.
The Company's fiscal 1996 revenues declined to $341.9 million, from $378.7 million in fiscal 1995, after increasing from $322.6 million in fiscal 1994. As a percentage of consolidated revenues, system products declined to 54.6% in fiscal 1996 from 67.7% in fiscal 1995 and 81.6% in fiscal 1994. In contrast, as a percentage of consolidated revenues, component products' revenues increased to 40.5% from 29.2% and 16.7% and TMC's revenues increased to 4.9% from 3.1% and 1.7%.
REVENUES BY PRODUCT LINE ($MILLIONS)
BUSINESS DIVESTITURE AND ACQUISITION: 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 was included in SMC's system products operations for approximately ten months of fiscal 1996 and accounted for approximately 4% of consolidated revenues in fiscal 1996, 6% in fiscal 1995 and 2.5% in fiscal 1994.
In February 1996, SMC acquired the assets and technology of EFAR Microsystems of Santa Clara, CA. EFAR supplies core logic chipsets for use with x86-architecture and Pentium microprocessors. 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. Over the next three years, SMC may issue to EFAR additional common stock with a market value of up to $20 million, 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 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 LAN products include network interface cards (adapters), wiring hubs, 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, ARCNETR 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 improve network performance 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 within a computer, are known as industry standard architecture (ISA), extended industry standard architecture (EISA), micro-channel architecture (MCA) and peripheral component interconnect (PCI). Inserted in a PC, 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.
Based on an advanced single chip controller, the ETHEREZTM family of auto-configurable 16-bit Ethernet adapters was shipped in August 1994. EtherEZ supports Plug and Play (PnP), a protocol that allows a PC to analyze itself and automatically discover an adapter. When installed in a PC not supporting PnP, the EtherEZ set-up procedure is similar to but faster than that of the ETHERCARD ELITE ULTRATM adapters. Elite Ultra was SMC's first family of single-chip-based Ethernet controller adapters. For ISA bus installation, customers are increasingly purchasing the EtherEZ family as the Elite Ultra family is phased out as demand for it declines.
EtherEZ and Elite Ultra adapters feature SIMULTASKINGTM that improves data transmission speed. Simultasking technology forwards an information packet to the PC or cable before that packet has been fully received into the adapter's buffer memory.
Elite Ultras were shipped in July 1993. Based on SMC proprietary chips, a 32-bit EISA bus master version was shipped in February 1994. Bus mastering transfers data between the network adapter and workstation without intervention by the workstation's microprocessor.
Shipped in September 1994, the ETHERPOWERTM family of auto-configurable Ethernet adapters installs on the 32-bit PCI local bus. Serving as a high-speed interface between the processor and the adapter, the PCI bus eliminates bottlenecks by bypassing the traditional I/O bus (ISA), provides a wider data path and a faster data transfer rate.
Shipped in February 1995, the ETHERPOWER 10/100TM PCI bus and ETHER 10/100TM EISA bus auto-configurable Fast Ethernet adapters work with either 10Mbps or 100Mbps hubs. Both adapter families feature connectors for UTP and STP cabling. The STP connection allows Token Ring users to switch to Fast Ethernet by changing adapters and hubs, leaving the cabling intact.
Using an internally developed chip set, the TOKENCARD ELITETM adapter line marked SMC's entry into the Token Ring market in October 1992. Shipped in June 1994, a 32-bit EISA version uses the same bus master chip as on the Ethernet bus master adapter.
In fiscal 1996, Ethernet (including PC Card and Fast Ethernet) adapters accounted for approximately 92% of SMC's adapter revenues, compared to 88% in fiscal 1995. Token Ring adapters fell to approximately 6% of adapter revenues in fiscal 1996 from 10% in fiscal 1995. ARCNET adapters accounted for the remainder of adapter revenues.
Ethernet adapters that address PCI and EISA high-speed buses, the PC Card bus for laptop PCs and Fast Ethernet and plug-and-play protocols accounted for approximately 57% of SMC's adapter revenues in fiscal 1996 compared to 12% in fiscal 1995. Most of these products were first shipped in high volume after mid-year fiscal 1995.
WIRING HUBS AND LAN SWITCHES: The 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 the physical signaling provided by conventional hubs, intelligent hubs incorporate software for managing a network. SMC produces both conventional and intelligent hubs and the software to support network management.
Among conventional Ethernet 10Mbps hubs, the newest and lowest cost SMC family is the ETHEREZTM line of 5, 8 and 16 10BaseT port models that began shipping in December 1995. Initially shipped in May 1994, the 6-member 3 to 12-port TIGERHUBTM unmanaged hub family utilizes a proprietary, integrated circuit that controls 7 hub ports. SMC's older ELITE 3512TM 12-port Ethernet concentrator is upgradable to an intelligent concentrator by installing a Network Management Module (NMM).
In May 1995 SMC entered the conventional Fast Ethernet hub market with shipment of the TIGERHUB 100TM family. Models include concentrators with 8 and 16 100BaseTX ports, 12 100BaseFX (optical fiber) ports and 15 100BaseTX ports and 1 100BaseFX port.
TIGERSTACK TM, SMC's newest intelligent stackable concentrator, stacks up to 8 hubs or 224 UTP, coax or fiber ports, segmentable up to 32 sectors per stack. The entire stack, whether one or 32 collision domains, is managed by a single NMM. Hub configurations range from 12 to 28 UTP ports. Other models support 50-pin telco, multiple coax or multiple fiber ports. SMC believes the TigerStack is the industry's most segmentable stackable hub line. The first TigerStack models were shipped in May 1995.
SMC's older ELITE 3812TM line allows stacking 8 concentrators or 96 UTP ports or 112 total ports, all controlled by a single NMM. SMC's Ring Management Module, when added to the ELITESTACKTM stackable MAUs, provides industry compliant SNMP network management for Token Ring.
Shipped in December 1995, SMC's EZSWITCHTM 6-port model was the first low priced switch that SMC introduced for workgroup switching. With dedicated 10Mbps links to hubs, file servers, print servers or workstations, EZSwitch boosts network bandwidth in client/server workgroups. Introduced in fiscal 1997 for connecting workgroups to a network backbone or server farm, the EZSWITCH PLUS provides six 10Mbps and two 100Mbps ports and the TigerSwitchTM XFE provides 16 10Mbps ports and one 100Mbps port. SMC has changed its focus to workgroup and departmental LAN switches from backbone switching products under the divested ENBU.
In fiscal 1996, hubs accounted for approximately 70% of SMC's hub and LAN switch revenues, compared to 59% in fiscal 1995. Approximately 94% of SMC's hub revenues were Ethernet (including Fast Ethernet) hubs, compared to 90% in fiscal 1995. Stackable Ethernet hubs rose to approximately 50% of SMC's Ethernet hub revenues from 34% in fiscal 1995.
SUPPORT SOFTWARE: Supporting software that accompanies SMC's Ethernet and Token Ring adapters is delivered on SUPERDISKTM which contains: (i) driver software for popular network operating systems, (ii) EZSTARTTM installation and test utility and (iii) PC
AGENT/SNMP. SMC believes extensive software support, supplied without charge, distinguishes its line of adapters.
Drivers 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.
Drivers are supplied for servers and workstations operating under network operating systems such as NovellR NetwareR 2.x, Novell Netware 3.x, Novell Netware 4.x, Novell Netware Lite, Novell Netware for SAA, MicrosoftR LAN Manager, Microsoft NT, IBMR LAN Server, SCO or ISC UNIX, Artisoft LANtasticR, BanyanR VinesR and the OSI consortium's GOSIP. SMC offers DRIVER ASSURANCE, insuring that drivers which work on new adapters are compatible with prior SMC generations. Installers also have the flexibility to choose either a fully software or hardware (jumper) configurable setup.
With a Windows-like user interface in a DOS environment, EZStart (i) automatically configures an adapter; (ii) loads the drivers of choice; (iii) diagnoses the adapter and tests communications along the network and (iv) installs PC Agent/SNMP. EZStart's macro function records mouse clicks or keystrokes to be saved and reused to automatically install a large number of adapters without installer intervention.
PC Agent/SNMP uses Simple Network Management Protocol (SNMP), an industry-standard protocol that facilitates network management. PC Agent/SNMP gathers status data about a computer in which an adapter resides. On request, that data is passed along to an SNMP-based network management program. PC Agent/SNMP for Ethernet, Fast Ethernet and Token-Ring allows SMC adapters to be polled for status data by SNMP compliant network management systems such as enterprise-wide packages offered by Hewlett-Packard, Sun Microsystems or Novell.
SNMP agents are provided as software embedded in flash, read only memory with SMC's intelligent hub platforms. The agents gather status data about the physical hardware on the segment of a LAN connected to that hub. Network management systems that utilize data gathered by PC Agent/SNMP also utilize data gathered by hub-based agents.
SMC offers ELITEVIEWTM, a family of SNMP-based software packages for managing workgroup, departmental or enterprise LANs. EliteView's capabilities have been regularly upgraded. EliteView 4.2 operates on a PC under a Windows environment and supports Ethernet and Token Ring networks. Features that improve upon prior releases include the ability to: (i) utilize dynamic data exchange (DDE) to share information with DDE-based applications such as Microsoft's Excel spreadsheet; (ii) create an inventory and a logical road map; (iii) graphically display the devices that are IP, IPX and SNMP auto-discoverable; and (iv) draw and customize hierarchical views of various network levels.
SMC provides an out-of-band network management utility with SMC's intelligent MAUs. Out-of-band management allows the utility to monitor the network even when the network is unable to operate. SMC also offers network management for ARCNET installations.
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. The single-chip 795 Ethernet controller is the key device on EtherEZ adapters. The single-chip 790 ULTRACHIPTM Ethernet controller is the key device on Elite Ultra adapters. The 571 EISA bus master chip is used on both Ethernet and Token Ring EISA adapters. SMC has also designed critical components for its hub products. The 710 chip supports up to seven 10Base-T Ethernet ports on TigerHub and TigerStack hubs.
BUSINESS AND PRODUCT DESCRIPTION: COMPONENT PRODUCTS DIVISION
The Component Products Division (CPD) designs, develops and manufactures very-large-scale-integrated (VLSI) circuits. SMC maintains its SUPERCELLTM 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 1996 approximately 80% of the Division's revenues were from PC I/O devices, compared to approximately 88% in fiscal 1995.
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 floppy disk control. CHIPROTECTTM circuitry prevents damage to the integrated circuit from inadvertent current overloads on the parallel port interface.
PC I/O controllers 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. Popular PC I/O devices support Enhanced Parallel Port (EPP) and Microsoft and Hewlett-Packard sponsored Extended Capabilities Port (ECP) protocols that provide very high speed communications through the parallel port between a PC and peripheral equipment.
During fiscal 1995 and 1996, 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. New PC I/O features in fiscal 1997 include support of the 4.4Mbps IrDA Fast IR standard.
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. CPD's most advanced single-chip Ethernet controller integrates memory management, PC Card-bus interface logic, 4.6kb RAM and optional Simultasking. In fiscal 1995, the Division entered the Fast Ethernet market with the 10Base-T/100Base-T FEASTTM controller device.
The technologies received from the February 1996 EFAR acquisition focus on the PCI bus. SuperCell designs include controllers for memory, cache memory, PCI bus, IDE disk drives and DMA and power management technology. These designs are expected to be incorporated into future SMC integrated circuits. EFAR's principal product is the ULTRACORETM logic chipset for high-speed PCI-bus PCs.
SMC's fastest growing business in fiscal 1996 was foundry products that employ semiconductor fabrication techniques in the Company's own wafer production facility. By far, the most important contributor to SMC's foundry revenues was a heater device for the ink cartridge used on a customer's line of ink jet printers. Foundry devices accounted for approximately 4.5% of SMC's revenues and 11% of divisional revenues in fiscal 1996 compared to approximately 1% and 3%, respectively, in fiscal 1995.
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.
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 78% of System Products Division (SPD) revenues, or 42% of Company revenues, during fiscal 1996. SMC addresses over 95% of the available market for network interface cards in terms of units sold. The coverage statistics are based upon estimates of the worldwide adapter market for calendar 1995 made by market research firms. According to the market research estimates, during 1995, approximately 29 million adapters were shipped compared to 23 million adapters in calendar 1994. The Company shipped 2.3 million adapters in fiscal 1996 and 2.6 million adapters in fiscal 1995, the fiscal years most comparable to calendar 1994 and 1995.
SMC's Ethernet, Fast Ethernet Token Ring and ARCNET conventional and intelligent wiring hubs and low port-count Ethernet switches accounted for 22% of divisional revenues, and 12% of Company revenues, during fiscal 1996. With the importance of increasing messaging speed and network management in workgroup and departmental networks, SMC believes hub and switch products will become a larger portion of networking revenues. The baseline for this expectation excludes revenues from the internetworking LAN switch product line that was divested in January 1996.
According to a market research estimate, during calendar 1995, approximately 38 million shared media hub ports were shipped for connecting computers and computer peripheral equipment to LANs. This compares to an estimate of 26 million hub ports for calendar 1994. The Company shipped over 1.2 million hub ports in fiscal 1996 and over 0.9 million hub ports in fiscal 1995, the fiscal years most comparable to calendar 1994 and 1995.
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 includes 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 US and international markets. Some companies concentrate on aggressive pricing as the principal competitive tool. On the other hand, many manufacturers differentiate themselves by supplementing price strategies with performance, service and acceleration of new product design cycles.
The Company has generally been able to lower production costs through manufacturing efficiencies and pass along cost savings through reduced selling prices, while providing new product features and technology. In most cases, product improvements are derived from SMC's semiconductor, board design, production, testing and software capabilities. Most system products competitors lack the depth of SMC's semiconductor design capability and commitment. SMC believes its breadth and timeliness of driver support provides an advantage over most other adapter suppliers.
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 core logic chipset markets. These markets represent a small portion of the total semiconductor market. Competitors include 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.
Entry into the competitive chipset market, through the EFAR acquisition, concentrates on devices for the high speed PCI-bus. Incorporating EFAR's technology into future SMC devices is expected to be the primary benefit to the Company.
In the market for single-chip Ethernet control devices, the Division has emphasized 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, usually characterized by long design-in cycles and low volume. Customers use these devices in 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 processes that SMC's foundry business undertakes might be considered too specialized 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 and networking products and also 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.
No customer accounted for as much as 10% of revenues in fiscal 1996.
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 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 are primarily to OEMs. Producers of PCs are the Division's largest customer group. In addition, a small percentage of 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. Returns of product pursuant to termination of these agreements have not been material.
SALES AND DISTRIBUTION: INTERNATIONAL SALES
As a percentage of total revenues, the Company's sales to customers located outside the United States (mainly in Europe, Asia and the Pacific Rim and Canada) has increased. The principal shift occurred in sales to Asia and the Pacific Rim, caused primarily by a trend of component products' domestic branded customers to produce a greater proportion of their PCs in offshore factories.
The European market was relatively more stable than North American markets, which incurred a higher portion of the adjustments made in networking products distribution inventory during fiscal 1996 and fiscal 1995. The decline in revenues in the US and Canada primarily reflected a reduction of distributor inventory to levels that were considered appropriate for the rate of sales of SMC's networking products by distributors to their reseller customers during fiscal 1996. The improvement in Japan, reflected in TMC's progress, resulted principally from selling more PC I/O devices in fiscal 1996 and selling more networking products in fiscal 1995.
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 affected by currency fluctuations.
BACKLOG
The Company schedules production based upon a forecast of demand for its products. Sales of networking products 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 of networking products.
Sales of component products are made primarily pursuant to purchase orders generally requiring delivery within six months. Customers do cancel and extend the delivery time for products on order. Nevertheless, in light of industry practice and experience, the Company believes that backlog can be a meaningful indicator of future sales of component products.
At the end of fiscal 1996, SMC's backlog was $86.3 million, compared to $28.2 million at the end of fiscal 1995.
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, bills 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.
SPD's manufacturing support, customer support, and sales operations have been ISO-9002 certified since September 1995. In January 1996, the adapter products operation was recommended for ISO-9001 registration. ISO-9000 is an international quality system standard. Internal procedures and business process changes implemented as part of an effort to obtain ISO-9000 certification have contributed to reducing internal costs, increasing efficiency and establishing baseline quality measurements through documented work processes. ISO procedures have been integrated into SMC's total quality management program.
SMC utilizes semiconductor foundries and assembly contractors in the US, 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 1996, 89% of the revenues of the Component Products Division resulted from the sale of product manufactured by subcontractor foundries, compared to 92% in 1995.
In fiscal 1996, SMC purchased $16.0 million of wafer fabrication equipment for a semiconductor plant in Madrid, Spain, owned by AT&T Corp.'s Microelectronics Business Unit. This investment was made pursuant to an October 1994 cooperative wafer fabrication agreement between SMC and AT&T that is intended to provide SMC with wafers for five years beginning in March 1996. The Madrid facility is capable of producing device geometries of 0.9 to 0.45 microns (millionths of a meter).
In fiscal 1996, SMC purchased a minority equity interest in Singapore-based Chartered Semiconductor Pte Ltd. for $19.9 million. This transaction is intended to provide SMC with wafers for ten years from an advanced facility that will be capable of producing device geometries of 0.6 to 0.2 microns. This arrangement, along with the AT&T agreement, is intended to provide a portion of the Company's long-term production requirements for state-of-the-art integrated circuits.
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 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.
High levels of production by PC manufacturers led to an industry-wide shortage of silicon wafer fabrication capacity in fiscal 1996 and fiscal 1995. As a result, SMC believes that, in both years, it was unable to produce all the integrated circuits it was capable of selling. Although the shortage of silicon wafer fabrication capacity eased during the fourth quarter of fiscal 1996, difficulty in securing additional capacity could reemerge and impact revenue and profit growth in the future.
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 29, 1996, SMC spent $31.7 million on research and development, which equaled 9.3% of revenues. This compares with $28.3
million, or 7.5% of revenue, spent during fiscal 1995 and $24.0 million, or 7.4% of revenues, during fiscal 1994. 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.
NEW PRODUCTS: Networking products introduced by the System Products Division during fiscal 1996 included cost reduced and enhanced Ethernet adapters, a flexible Ethernet stackable hub family, low cost, unmanaged Ethernet and Fast Ethernet concentrators and a low cost workgroup Ethernet switch.
Integrated circuits introduced by the Component Products Division during fiscal 1996 included extensions to its PC I/O controller family, a single-chip Ethernet controller with a PC Card-bus interface, and an enhanced industrial ARCNET controller.
PRODUCTS INITIALLY SHIPPED IN FISCAL 1996
ETHERNET AND FAST ETHERNET ADAPTERS: ETHEREZTM: 8416 - Cost reduced models of 16-bit ISA PnP (auto-configurable) compliant, I/O or memory mapped adapters with 10Base-T connector, thin coax connector or a combination of 10Base-T and thin coax connectors; added model with a combination of 10Base-T, thin coax and AUI connectors
ETHERPOWERTM: 8432 - Cost reduced models of 32-bit PCI auto-configurable, bus master adapters with 10Base-T connector or a combination of 10Base-T and thin coax connectors; added model with a combination of 10Base-T, thin coax and AUI connectors ETHERPOWER2TM: 8434 - 32-bit PCI auto-configurable, dual channel bus master adapters with 10Base-T connector or a combination of 10Base-T and thin coax connectors
DRIVER SOFTWARE: Macintosh drivers for EtherPower, EtherPower2 and EtherPower 10/100 adapters for installation in PCI-bus Power Macintosh computers. AIX Version Four drivers for EtherPower, EtherPower2 and EtherPower 10/100 adapters for installation in PCI-bus Power PC based IBM Personal Computer series computers.
ETHERNET AND FAST ETHERNET HUBS: TIGERHUB 100TM: Family of four unmanaged 100 Mbps hubs, configured: 5116TX - 16 100Base-TX ports; 5116TFX - 16 100Base-TX ports, 1 100Base-FX port; 5112FX - 12 100Base-FX ports; 5108TX - 8 100Base-TX ports, desktop
TIGERSTACKTM: Family of nine segmentable, manageable stackable hubs, configured: 3312TC - 12 10Base-T ports, 1 BNC port, 1 AUI port; 3312TCI - 3312TC with NMM; 3314T - 14 10Base-T ports; 3326TC - 26 10Base-T ports, 1 BNC port, 1 AUI port; 3326TCI - 3326TC with NMM; 3328T - 28 10Base-T ports; 3328TELCO - 2 50-pin telco
ports, 4 RJ45 ports; 3306BC - 6 BNC ports, 1 AUI port, 1 10Base-T port; 3306FC - 6FL ports, 1 AUI port, 1 BNC port; 3300NMM -SNMP network management module ETHEREZ HUB TM: Family of three unmanaged hubs, configured: 3605T-EZ - 5 10Base-T ports; 3608TC-EZ - 8 10Base-T ports, 1 BNC port; 3616TC-EZ - 16 10Base-T ports, 1 BNC port, 1 AUI port
LAN SWITCHING PRODUCTS: EZ SWITCH TM: EZ006 - Six-port, low-cost Ethernet cut-through switch with 5 10Base-T ports and 1 AUI port, half duplex or full duplex
NETWORK MANAGEMENT SOFTWARE: ELITEVIEWTM V4.2: Windows based NMS supporting SNMP agents for SMC Ethernet and Token Ring adapters and intelligent hubs
NETWORK AND PC I/O CONTROLLERS: COM20023: ARCNET controller with CD interface to accept digital signal streams from data or audio CD drives and frequency-shift-keying encode/decode to maximize data transfer rate from ARCNET protocol
SMC91C94: 10Mbps Ethernet controller, with PC Card interface logic, 4.6kb RAM with optional Simultasking FDC37C669: ISA PnP compatible in addition to Super I/O features of 2.88 megabyte floppy disk control, serial port and parallel port control with chip protection and power down, EPP and ECP protocol support to interface with high speed peripherals
PATENTS AND LICENSE AGREEMENTS
The Company has received 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.
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 there is no assurance that future regulations will not impose significant costs on the Company.
EMPLOYEES
As of February 29, 1996, 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. This compared to February 28, 1995, when, of the Company's 861 employees, 202 were engaged in engineering, including research and development, 301 in marketing and sales, 161 in executive and administrative activities and 197 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.
ITEM 2.
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 1997.
In addition, the Company maintains offices in leased facilities in: San Jose, California; Miami, Florida; Atlanta, Georgia; Oakbrook Terrace, Illinois; Andover, Massachusetts; Dayton, Ohio; Austin and Dallas, Texas; Falls Church, Virginia; Bellevue, Washington; Melbourne and Sydney, Australia; Oakville, Ontario, Canada; London, England; St. Germain-en-Laye, France; Munich, Germany; Tokyo, Japan; Mexico DF, Mexico; Singapore; Johannesburg, South Africa and Taipei, Taiwan.
As of February 29, 1996, the Company owned machinery and equipment, property and leasehold improvements with an original cost of $139.9 million and accumulated depreciation and amortization of $79.7 million.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In June 1993, Penril Datacom Networks, Inc., commenced an action against the Company, its wholly-owned subsidiary SMC Enterprise Networks, Inc. (successor by merger to Sigma Network Systems, Inc.), and two former officers of Sigma, alleging, among other items, breach of September 1991 and March 1990 agreements between Sigma and Penril and seeking $8.0 million. The Company counterclaimed against Penril, alleging breach of contract and sought damages in excess of $1.4 million. In November 1995, Penril filed a First Amended complaint seeking $50.0 million in damages and a trebling of those damages. Penril has filed further motions that the Company has opposed. While it is not possible to assess the likelihood of Penril establishing liability, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has accrued the estimated cost of legal fees to defend against these claims and intends to defend against these claims vigorously.
In June 1995, several actions were filed against the Company and certain of its officers and directors. The actions have been consolidated into one complaint. The consolidated claims purport to be 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.
ITEM 4.
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, 1996, are as follows:
All officers serve at the pleasure of the Board of Directors
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information captioned "Market price" and the last paragraph 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.
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.
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by this reference.
ITEM 12.
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.
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.
PART IV
ITEM 14.
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 29, 1996
Consolidated Balance Sheets, February 29, 1996 and February 28, 1995
Consolidated Statements of Shareholders' Equity for the three years ended February 29, 1996
Consolidated Statements of Cash Flows for the three years ended February 29, 1996
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 10.1 through 10.22 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) A report on Form 8-K dated January 12, 1996, was filed during the last quarter of the period covered by this report. The Form 8-K reported the sale of the assets of the Enterprise Networks Business Unit and contained the following financial statements pursuant to Item 7:
Unaudited Pro Forma Consolidated Condensed Balance Sheet at November 30, 1995
Unaudited Pro Forma Consolidated Condensed Statement of Income for the Nine Months Ended November 30, 1995
Unaudited Pro Forma Consolidated Condensed Statement of Income for the Fiscal Year Ended February 28, 1995
Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
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/ANTHONY M. D'AGOSTINO ANTHONY M. D'AGOSTINO Vice President Finance and Treasurer (Principal Financial and Accounting Officer)
Date: May 2_, 1996
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 25, 1996
Paul Richman, Chairman, Chief Executive Officer and Director (Principal Executive Officer)
ERIC M. NOWLING May 25, 1996
Eric M. Nowling Vice President and Controller (Principal Accounting Officer)
EVELYN BEREZIN May 25, 1996
Evelyn Berezin Director
ROBERT M. BRILL May 25, 1996
Robert M. Brill Director
PETER F. DICKS May 25, 1996
Peter F. Dicks Director
HERMAN FIALKOV May 25, 1996
Herman Fialkov Director
RAYMOND FRANKEL May 25, 1996
Raymond Frankel Director
IVAN T. FRISCH May 25, 1996
Ivan T. Frisch Director
EXHIBIT INDEX
* 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.