Exhibit 13
PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS
FINANCIAL TABLE OF CONTENTS
Selected Financial Data
Management's Discussion and Analysis
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report on Management's Responsibilities
Report of Independent Public Accountants
Standard Microsystems Corporation and Subsidiaries
SELECTED FINANCIAL DATA
(In thousands, except per share data)
As of February 28 or 29, and for the years then ended 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Operating Results
(Fiscal 1999 and 1998 presented pro forma for
change in revenue recognition)
Revenues .......................................... $ 163,428 $ 153,247 $ 151,768 $ 144,252 *
Gross profit ...................................... 66,768 59,363 54,623 39,460 *
As a percentage of revenues .................. 41% 39% 36% 27%
Research and development .......................... 32,580 24,365 17,437 14,298 *
As a percentage of revenues .................. 20% 16% 11% 10%
Selling, general and administrative ............... 35,369 32,993 30,469 30,645 *
As a percentage of revenues .................. 22% 22% 20% 21%
Operating income (loss) ........................... (1,181) 2,005 5,163 (5,483) *
As a percentage of revenues .................. -1% 1% 3% -4%
Income (loss) from continuing operations .......... 22,164 3,442 5,186 (4,255) *
As a percentage of revenues .................. 14% 2% 3% -3%
Net income (loss) ................................. 26,929 7,593 (13,362) (22,071) *
As a percentage of revenues .................. 16% 5% -9% -15%
Diluted net income (loss) per share
Income (loss) from continuing operations ........ $ 1.29 $ 0.22 $ 0.32 $ (0.27) *
Net income (loss) ............................... 1.57 0.48 (0.85) (1.42) *
- --------------------------------------------------------------------------------------------------------------------
Operating Results
(Fiscal 1997 through fiscal 1999 presented
as previously reported)
Revenues .......................................... $ 163,428 $ 153,247 $ 155,826 $ 148,326 $ 180,918
Gross profit ...................................... 66,768 59,363 55,980 44,463 43,755
Research and development .......................... 32,580 24,365 17,437 14,298 12,808
Selling, general and administrative ............... 35,369 32,993 30,550 30,726 38,161
Operating income (loss) ........................... (1,181) 2,005 6,439 (561) (7,214)
Income (loss) from continuing operations .......... $ 22,164 $ 3,442 $ 6,003 $ (1,105) $ (4,613)
Net loss from discontinued operations ............. - - (5,255) (18,846) (16,684)
Gain (loss) on sales of discontinued
operations, net of taxes ......................... 4,765 4,151 (13,293) 1,030 -
Cumulative effect of change in
accounting principle, net of taxes ............... - (2,924) - - -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 26,929 $ 4,669 $ (12,545) $ (18,921) $ (21,297)
Diluted net income (loss) per share
Income (loss) from continuing operations ........ $ 1.29 $ 0.22 $ 0.38 $ (0.07) $ (0.33)
Net income (loss) ............................... 1.57 0.29 (0.79) (1.22) (1.54)
- -------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding .. 17,165 15,915 15,824 15,519 13,838
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet and Other Data
Cash and short-term investments ................... $ 109,174 $ 75,405 $ 70,071 $ 55,758 $ 8,382
Working capital ................................... 146,382 111,016 98,342 83,784 45,164
Capital expenditures .............................. 14,600 10,503 10,847 3,854 8,654
Depreciation and amortization ..................... 11,792 9,988 10,544 11,328 10,462
Earnings before interest, taxes, depreciation
and amortization ................................. 39,486 12,280 16,745 8,718 3,401
Total assets ...................................... 239,098 258,508 198,657 210,049 217,240
Long-term obligatons .............................. 5,812 22,151 7,816 7,297 11,584
Shareholders' equity .............................. 194,315 201,792 158,434 172,377 171,797
Book value per common share ....................... 12.08 12.80 10.21 10.82 12.38
* Data was not available in sufficient detail to provide pro forma information
for this fiscal year.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and footnotes thereto contained in this
report.
Overview
Standard Microsystems Corporation (the Company or SMSC) is a worldwide
designer and supplier of metal-oxide-semiconductor/very-large-scale-integrated
(MOS/VLSI) circuits for the personal computer (PC), peripherals and embedded
systems marketplaces. The Company is prominent as the world's leading supplier
of Advanced Input/Output (I/O) integrated circuits. I/O circuits perform many of
the basic input/output functions required in a personal computer or an embedded
application, including keyboard control and BIOS, floppy disk control and serial
and parallel port control. With changing technologies, the role of the I/O
circuit has expanded to include additional functions like infrared support,
system management (fan control or chassis intrusion, for example), and power
management. The Company also supplies integrated circuits for embedded control
systems, local area networking applications and connectivity applications. The
Company's products are manufactured by world-class semiconductor foundries and
assemblers. A significant portion of the Company's final testing requirements is
performed at the Company's own state-of-the-art testing operation.
In recent years, the majority of the Company's revenues have been derived from
supplying Advanced I/O circuits to the PC marketplace. In fiscal 2001, although
Advanced I/O products still represented the Company's largest product line, the
Company's revenues were produced by broader product offerings, with increased
revenue contributions provided by its embedded systems products. The Company
continues to invest in development programs to broaden its product line and
provide effective solutions in applications complementary to or outside of its
core Advanced I/O technology. During fiscal 2000 and fiscal 2001, the Company
made significant investments in the development of new embedded systems products
and advanced systems logic chipsets.
Systems logic chipsets are advanced integrated circuits used within a personal
computer or similar application to control the flow of information between the
microprocessor, memory modules, graphics controllers and peripheral devices. A
chipset is typically comprised of two primary devices - a memory controller
(sometimes referred to as a north bridge) and an I/O controller (sometimes
referred to as a south bridge).
The Company believes that its existing Advanced I/O technology portfolio, its
strong relationships with major PC suppliers, and its significant intellectual
property rights provide a solid foundation for its chipset development
initiatives. The Company also has a technology exchange agreement in effect with
Intel Corporation (Intel), the world's leading supplier of chipsets, intended to
accelerate the Company's development of value-added chipset solutions that
support Intel microprocessors in personal computer and embedded applications. As
part of this agreement, the Company has access to Intel's complete line of
current and future memory controllers and Firmware Hub devices. The Company's
strategy is to provide chipset products which will include complete solutions
comprised of Intel's leading performance memory controllers and SMSC's own
value-added Advanced I/O controllers, and in some applications, Super I/O
devices and Intel Firmware Hub devices.
Standard Microsystems Corporation sells its products to a worldwide customer
base, which includes most of the world's leading personal computer and personal
computer motherboard manufacturers. The Company's Advanced I/O circuits reside
on the motherboards of personal computer products sold by Compaq, Dell, Fujitsu,
Gateway, Hewlett-Packard, IBM, Intel, NEC, Sony, Toshiba and most other leading
manufacturers. The Company also sells its products through electronics
distributors, who provide value-added access to a broad base of smaller personal
computer suppliers, as well as to many customers who use the Company's products
in diverse embedded systems, networking and connectivity applications.
The Company's headquarters are in Hauppauge, New York, and SMSC operates design
and validation centers in New York, Austin, Texas and San Jose, California, and
has sales offices in the United States, Europe and Taiwan. The Company conducts
most of its business in the Japanese market through its majority-owned
subsidiary, Toyo Microsystems Corporation.
Results of Operations
Change in Revenue Recognition Policy
In fiscal 2000, the Company changed its accounting policy for the recognition of
revenue on product shipments to distributors. Recognition of revenue and related
gross profit on shipments to distributors is now deferred until the product is
resold by the distributors. This change was made with an effective date of March
1, 1999 (the beginning of fiscal 2000).
The cumulative effect of this change in accounting principle on all prior years
resulted in an after-tax charge of $2.9 million, or $0.19 per diluted share, in
fiscal 2000.
All prior period revenue and income or loss figures quoted in comparative
commentary in this discussion are stated as if the change in distributor revenue
recognition had been in effect in all periods discussed.
Revenues
The Company's revenues increased to $163.4 million in fiscal 2001, from $153.2
million in fiscal 2000. Overall unit shipments increased to approximately 56
million units in fiscal 2001, compared to approximately 50 million units shipped
in fiscal 2000. The impact of the unit volume growth was partially offset by
lower average selling prices.
During the latter part of fiscal 2000, the Company assigned specific resources
to increase its focus on pursuing opportunities for its embedded systems
products. As a result, during fiscal 2001, revenues from the Company's embedded
systems products increased to approximately 33% of total revenues, compared to
less than 25% in fiscal 2000.
Fiscal 2000 revenues were $153.2 million, compared to $151.8 million in fiscal
1999. The Company's unit volumes increased substantially in fiscal 2000, to
about 50 million units, compared to about 40 million units in fiscal 1999.
Declines in average selling prices offset most of the impact of this unit volume
growth. Fiscal 2000 revenues included increased revenue contributions from local
area networking, connectivity and embedded control devices, compared to fiscal
1999, partially offset by lower revenues from Advanced I/O products.
International shipments accounted for 76% of the Company's revenues in fiscal
2001, compared to 78% in fiscal 2000 and 83% in fiscal 1999. While the demand
for the Company's products is primarily driven by the worldwide demand for
personal computers, peripheral devices, and embedded systems applications sold
by U.S.-based suppliers, a significant portion of the Company's products are
sold to manufacturing subcontractors of those U.S.-based suppliers, located in
Asia and the Pacific Rim. The majority of the world's personal computer and
personal computer motherboard manufacturing activity occurs in that region. The
Company expects that international shipments, particularly to the Asia and
Pacific Rim region, will continue to represent a significant portion of its
revenues.
Gross Profit
Gross profit is affected by a variety of factors, including the volume of
products sold, product mix, manufacturing utilization and yields, and average
selling prices. Many of the Company's products experience declines in average
selling prices over their life cycles. In order to offset declines in average
selling prices, the Company continually works to reduce the costs of products
through product and manufacturing design changes, yield improvements,
manufacturing efficiencies and lower costs negotiated with subcontract
manufacturers. The Company's gross profit margin is also dependent on its
ability to introduce new, competitive products, which generally command higher
margins early in their life cycles.
The Company's gross profit percentage has increased in each of the past four
fiscal years, increasing to 40.9% in fiscal 2001 from 38.7% in fiscal 2000. This
gross profit improvement can be attributed to the combination of comprehensive
manufacturing cost reduction programs, higher yields, increased unit volumes and
the migration in product mix towards higher-margined products. Significant
progress made during fiscal 2000 in improving the Company's semiconductor test
manufacturing efficiencies was continued into fiscal 2001. The higher unit
volumes achieved in fiscal 2001 also enabled better utilization of manufacturing
support overhead.
The Company's gross profit margin increased from 36.0% in fiscal 1999 to 38.7%
in fiscal 2000. This improvement was driven primarily by improved semiconductor
test manufacturing efficiencies as well as higher unit volumes.
Research and Development Expenses
The Company's research and development (R&D) consists of circuit design,
development and validation, product engineering, software development and
related support activities. The Company's ongoing commitment to research and
development is essential to maintaining product leadership in existing product
lines and to providing innovative product offerings, which, in turn, drive the
Company's opportunities for future growth. The Company's investment in research
and development has increased significantly during the past three years, and is
expected to continue to increase in fiscal 2002. The Company expects fiscal 2002
R&D expenses to be between 20% and 25% of revenues.
Research and development expenses increased to $32.6 million in fiscal 2001, a
34% increase over $24.4 million in fiscal 2000. In fiscal 2000, R&D increased by
40% from $17.4 million in fiscal 1999. The increases in both periods reflect
increased engineering staff as well as increases in masks, prototype wafers and
other development costs. The majority of the increases in fiscal 2001 and fiscal
2000 reflect the Company's accelerated investment in chipset development
programs, at both its Austin, Texas and Hauppauge, New York design centers.
Development programs in embedded systems products also increased in fiscal 2001,
compared to fiscal 2000.
The Company's fiscal 2002 engineering efforts will continue to focus on chipset
design and validation activities, as well as in new product development and
continuing enhancements and cost reductions in its existing Advanced I/O and
embedded systems product lines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were approximately 22% of revenues
in each of the past two fiscal years, totaling $35.4 million in fiscal 2001 and
$33.0 million in fiscal 2000. In dollars, the fiscal 2001 increase primarily
resulted from increased legal fees associated with certain ongoing litigation,
as well as increased direct selling and marketing costs associated with higher
fiscal 2001 revenues.
Selling, general and administrative expenses were $33.0 million in fiscal 2000,
compared to $30.5 million in fiscal 1999. This increase was primarily the result
of the elimination of administrative support subsidies no longer being received
from SMC Networks, Inc. (SMCN), the Company's former local area networking
business. These subsidies ended in the middle of fiscal 1999 concurrently with
the bilateral termination of the Company's administrative support services for
SMCN. In addition, transitions in executive management resulted in an increase
in compensation costs in fiscal 2000.
Other Income and Expense
The increases in interest income in fiscal 2001 compared to fiscal 2000, and in
fiscal 2000 compared to fiscal 1999, are predominantly due to interest income
received on higher average balances of cash and cash equivalents available for
investment.
Other income (net), totaled $29.0 million in fiscal 2001, compared to nominal
amounts reported in both fiscal 2000 and fiscal 1999. The significant increase
in fiscal 2001 reflects 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. During fiscal 2001, the gains totaled $24.2
million, while proceeds from the sales of call options were $2.2 million. No
call options were exercised in fiscal 2001, and there are no outstanding call
options as of February 28, 2001.
Income Taxes
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.
The Company's effective income tax rate for fiscal 2001 was approximately 33%.
By comparison, the effective income tax rate was approximately 37% in fiscal
2000 and 30% in fiscal 1999. The fiscal 2001 effective tax rate primarily
reflects the federal statutory tax rate, partially reduced by the impact of tax
exempt income. The Company's higher effective income tax rate in fiscal 2000
primarily resulted from the impact of certain losses incurred in foreign tax
jurisdictions for which no corresponding tax benefit was recorded.
Discontinued Operations
In March 1999, the Company's Board of Directors approved a plan for the Company
to divest its Foundry Business Unit (FBU). The FBU had experienced significant
losses during its last several years of operations. The divestiture was
completed on June 1, 1999, with the sale of the assets of the Foundry Business
Unit to privately held Inertia Optical Technology Applications, Inc. (IOTA) of
Newark, New Jersey. The assets of the Foundry Business Unit were then combined
with the operations of IOTA, and the combined businesses began operating as
Standard MEMS, Inc. (SMI).
The transaction was effected through IOTA's purchase of the FBU's assets in
exchange for common stock of IOTA representing 38% of IOTA's outstanding capital
stock. As a result of this transaction, the Company recorded a charge of $13.3
million, net of $1.9 million of tax benefits, in the fourth quarter of fiscal
1999, covering write-downs of certain FBU assets, operating losses expected to
occur before completion of the transaction, and other costs associated with the
transaction. In the fourth quarter of fiscal 2000, the Company reduced this
charge by $0.7 million, net of $0.4 million of income taxes, reflecting lower
expected final disposition costs, and also recognized $3.4 million of previously
reserved tax benefits on the transaction.
The Company committed to reducing its 38% interest in SMI to 19% or less within
one year of the original transaction. In the first quarter of fiscal 2001, the
Company realized an after-tax gain of $4.8 million from the sale of most of its
ownership interest in SMI. This gain is reported as a Gain on the sale of
discontinued operations on the Consolidated Statement of Operations.
The Company's historical financial information reports the operating results,
net assets and cash flows of the Foundry Business Unit as a discontinued
operation for all periods presented in which the Company operated that business.
The discussions and analyses contained herein are of continuing operations, as
restated, unless otherwise noted.
Liquidity and Capital Resources
The Company's financial condition continues to be strong, with a current ratio
of 6 to 1 and no bank debt. In recent years, the Company has financed its
operating and capital requirements principally through cash flows from
operations, supplemented by cash generated from sales of discontinued businesses
and other investments.
The Company's cash, cash equivalents and short-term investments increased from
$75.4 million at the end of fiscal 2000 to $109.2 million at the end of fiscal
2001. Working capital increased from $111.0 million to $146.4 million during
this same period. Excluding the impact of income tax payments, most of which
were the result of gains on security sales, the Company's operating activities
generated $7.1 million of cash in fiscal 2001.
The Company generated $38.6 million of cash in fiscal 2001 through the sales of
investments in other companies. The majority of these sales consisted of a
portion of the Company's investment in Chartered Semiconductor, as well as the
sale of call options covering part of this investment. As of February 28, 2001,
the Company still holds 444,000 of its original 828,000 American Depository
Shares (ADSs) in Chartered. The Company's investment in Chartered was originally
acquired for $19.9 million during fiscal 1996. Under the terms of an agreement
related to this investment, the Company is allocated sub-micron wafer production
capacity for ten years in Chartered's wafer fabrication facilities.
During the first quarter of fiscal 2001, the Company received $12.4 million in
cash from the sale of a majority of its investment in Standard MEMS, Inc., which
is reported within Net cash provided by discontinued operations in the
Consolidated Statements of Cash Flows.
The Company's accounts receivable reflects its standard credit terms, and
contains minimal delinquencies at February 28, 2001. There were no material bad
debt losses in either fiscal 2001 or fiscal 2000.
During fiscal 2001, the Company's inventories increased by approximately $11.9
million to $32.0 million as of February 28, 2001. This increase in inventory is
primarily due to the Company increasing minimum stock levels, at the processed
wafer manufacturing stage, on certain high-volume products to be more responsive
to customers' non-forecasted product demands. Also, during the middle of fiscal
2001, the Company decided to build up inventory of key products from its
foundries due to forecasted tight wafer manufacturing capacity, which was
followed by lower than forecasted demand during the fourth quarter of fiscal
2001. Typically, the Company requires several months to respond to unanticipated
declines in demand and bring its inventories in line with current demand
forecasts. The Company believes that it is well-positioned to meet customer
demand.
In October 1998, the Company's Board of Directors authorized the repurchase of
up to one million shares of its common stock on the open market or in private
transactions. In July 2001, the authorization from the Company's Board was
expanded from one million shares to two million shares. As of February 28, 2001,
the Company has repurchased a total of 998,000 shares, at a cost of $8.3
million, under this program. Of that total, 328,000 shares, including 200,000
shares purchased from Intel Corporation as more fully described in Note 8, were
repurchased for $4.0 million during fiscal 2001.
The majority of the $14.6 million and $10.5 million of capital expenditures
incurred in fiscal 2001 and fiscal 2000, respectively, were for expanding the
Company's semiconductor test operation and acquiring intellectual property used
in the design of the Company's products. There were no material commitments for
capital expenditures as of February 28, 2001.
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 may also consider utilizing
cash to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. From time to time, in the ordinary
course of business, the Company may evaluate potential acquisitions of or
investment in such businesses, products or technologies owned by third parties.
The Company expects that its cash, cash equivalents, short-term investments,
cash flows from operations and its borrowing capacity will be sufficient to
finance the Company's operating and capital requirements through the end of
fiscal 2002.
Financial Market Risks
As of February 28, 2001, the Company's $9.6 million of short-term investments
consisted primarily of investments in municipal obligations with maturities of
between three and twelve months. If market interest rates were to increase
immediately and uniformly by 10 percent from levels at February 28, 2001, the
fair value of these short-term investments would decline by an immaterial
amount. The Company generally expects 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 on short-term investments.
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 the Company's majority
owned subsidiary, Toyo Microsystems Corporation (TMC), 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 currency hedging activities.
Other Factors That May Affect Future Operating Results
As a supplier of semiconductors, the Company competes in a challenging business
environment which is characterized by intense competition, rapid technological
change and cyclical business patterns. Except for the historical information
contained herein, the matters discussed in this report are forward-looking
statements. The Company faces a variety of risks and uncertainties in conducting
its business, some of which are out of its control, and any of which, were they
to occur, could impair the Company's operating performance. For a more detailed
discussion of risk factors, please refer to the Company's report on Form 10-K
filed with the Securities and Exchange Commission.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended February 28 or 29, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Revenues ............................................................. $163,428 $153,247 $155,826
Cost of goods sold ................................................... 96,660 93,884 99,846
-------- ------- -------
Gross profit ......................................................... 66,768 59,363 55,980
Operating expenses:
Research and development ........................................... 32,580 24,365 17,437
Selling, general and administrative ................................ 35,369 32,993 30,550
Write-down of investment ........................................... -- -- 1,554
-------- ------- -------
Income (loss) from operations ........................................ (1,181) 2,005 6,439
Other income (expense):
Interest income .................................................... 5,534 3,442 2,667
Interest expense ................................................... (212) (285) (279)
Other income (expense), net ........................................ 28,971 258 (167)
------- ------- -------
Income before income taxes and minority interest ..................... 33,112 5,420 8,660
Provision for income taxes ........................................... 10,852 2,007 2,586
Minority interest in net income (loss) of subsidiary ................. 96 (29) 71
-------- ------- -------
Income from continuing operations .................................... 22,164 3,442 6,003
Discontinued operations:
Loss from discontinued operations (net of income tax benefits
of $2,956) ..................................................... -- -- (5,255)
Gain (loss) on sales of discontinued operations (net of income taxes
of $2,799, ($2,980), and ($1,908)) ............................. 4,765 4,151 (13,293)
-------- ------- -------
Income (loss) before cumulative effect of change in
accounting principle ............................................... 26,929 7,593 (12,545)
Cumulative effect of change in accounting principle (net of
income tax benefits of $1,716) ..................................... -- (2,924) --
-------- -------- --------
Net income (loss) .................................................... $ 26,929 $ 4,669 $(12,545)
======= ======= ========
Basic net income (loss) per share:
Income from continuing operations .................................. $ 1.39 $ 0.22 $ 0.38
Loss from discontinued operations .................................. -- -- (0.33)
Gain (loss) on sales of discontinued operations .................... 0.30 0.27 (0.84)
Cumulative effect of change in accounting principle ................ -- (0.19) --
-------- -------- --------
Basic net income (loss) per share .................................... $ 1.69 $ 0.30 $ (0.79)
======== ======== ========
Diluted net income (loss) per share:
Income from continuing operations .................................. $ 1.29 $ 0.22 $ 0.38
Loss from discontinued operations .................................. -- - (0.33)
Gain (loss) on sales of discontinued operations .................... 0.28 0.26 (0.84)
Cumulative effect of change in accounting principle ................ -- (0.19) --
-------- -------- --------
Diluted net income (loss) per share .................................. $ 1.57 $ 0.29 $ (0.79)
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
As of February 28 or 29, 2001 2000
- ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents ........................... $ 99,545 $ 73,405
Short-term investments .............................. 9,629 2,000
Accounts receivable, net of allowance for doubtful
accounts of $362 and $480, respectively ........... 16,776 16,559
Inventories ......................................... 31,999 20,051
Deferred income taxes ............................... 8,718 12,779
Other current assets ................................ 7,080 9,277
------- -------
Total current assets ................................ 173,747 134,071
Property, plant and equipment, net .................... 35,492 32,137
Investment in Chartered Semiconductor ................. 13,001 73,104
Deferred income taxes ................................. 2,019 --
Other assets .......................................... 14,839 19,196
------- -------
$ 239,098 $ 258,508
======= =======
Liabilities and shareholders' equity
Current liabilities:
Accounts payable .................................... $ 11,721 $ 9,575
Deferred income on shipments to distributors ........ 6,672 5,958
Accrued expenses and other liabilities .............. 8,972 7,522
------- -------
Total current liabilities ........................... 27,365 23,055
------- -------
Deferred income taxes ................................. -- 15,387
Other liabilities ..................................... 5,812 6,764
Commitments and contingencies
Minority interest in subsidiary ....................... 11,606 11,510
Shareholders' equity:
Preferred stock, $.10 par value
authorized 1,000,000 shares, none issued .......... -- --
Common stock, $.10 par value authorized
30,000,000 shares, issued 17,082,000
and 16,431,000 shares, respectively 1,708 1,643
Additional paid-in capital .......................... 116,515 112,297
Retained earnings ................................... 79,052 52,123
Treasury stock, 998,000 and 671,000 shares,
respectively, at cost ............................ (8,330) (4,379)
Accumulated other comprehensive income .............. 5,370 40,108
------- -------
Total shareholders' equity .......................... 194,315 201,792
------- -------
$ 239,098 $ 258,508
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Additional Other
Common Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Shares Amount Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 ................... 15,926 $ 1,593 $ 107,306 $ 59,999 - - $ 3,479 $ 172,377
Comprehensive loss:
Net loss ..................................... - - - (12,545) - - - (12,545)
Other comprehensive income (loss)
Change in unrealized gain on investments .. - - - - - - (334) (334)
Foreign currency translation adjustment ... - - - - - - 522 522
---------
Total other comprehensive income ............. 188
---------
Total comprehensive loss ..................... (12,357)
Shares issued under Incentive Savings
and Retirement Plan ......................... 95 10 778 - - - - 788
Stock options exercised ...................... 23 2 184 - - - - 186
Tax effect of employee stock plans ........... - - 16 - - - - 16
Stock grants to employees, net ............... 1 - 381 - - - - 381
Purchases of treasury stock .................. - - - - (521) (2,957) - (2,957)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1999 ................... 16,045 1,605 108,665 47,454 (521) (2,957) 3,667 158,434
Comprehensive income:
Net income ................................... - - - 4,669 - - - 4,669
Other comprehensive income
Change in unrealized gain on investments .. - - - - - - 35,737 35,737
Foreign currency translation adjustment ... - - - - - - 704 704
---------
Total other comprehensive income ............. 36,441
---------
Total comprehensive income ................... 41,110
Shares issued under Incentive Savings
and Retirement Plan ........................ 90 9 784 - - - - 793
Stock options exercised ...................... 223 22 1,938 - - - - 1,960
Tax effect of employee stock plans ........... - - 232 - - - - 232
Stock grants to employees, net ............... 73 7 678 - - - - 685
Purchases of treasury stock .................. - - - - (150) (1,422) - (1,422)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 2000 ................... 16,431 1,643 112,297 52,123 (671) (4,379) 40,108 201,792
Comprehensive loss:
Net income ................................... - - - 26,929 - - - 26,929
Other comprehensive loss
Change in unrealized gain on investments .. - - - - - - (33,778) (33,778)
Foreign currency translation adjustment ... - - - - - - (960) (960)
---------
Total other comprehensive loss ............... (34,738)
---------
Total comprehensive loss ..................... (7,809)
Shares issued under Incentive Savings
and Retirement Plan ........................ 23 2 317 - - - - 319
Stock options exercised ...................... 333 33 3,003 - - - - 3,036
Tax effect of employee stock plans ........... - - 567 - - - - 567
Stock grants to employees, net ............... 95 10 351 - - - - 361
Net exercise of stock warrants ............... 200 20 (20) - - - - -
Purchases of treasury stock .................. - - - - (327) (3,951) - (3,951)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 2001 ................... 17,082 $ 1,708 $ 116,515 $ 79,052 (998) $(8,330) $ 5,370 $ 194,315
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended February 28 or 29, 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers ............................ $ 163,355 $ 163,468 $ 151,998
Cash paid to suppliers and employees .................... (160,868) (148,099) (139,735)
Interest received ....................................... 4,795 3,417 2,737
Interest paid ........................................... (212) (285) (279)
Income taxes paid ....................................... (8,239) (796) (92)
--------- --------- ---------
Net cash provided by (used for) operating activities .. (1,169) 17,705 14,629
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................................... (14,600) (10,503) (10,847)
Sales of machinery and equipment ........................ 891 863 6,464
Sales of investments, principally Chartered Semiconductor 38,608 297 --
Purchases of short-term investments ..................... (10,632) (8,000) (5,002)
Sales of short-term investments ......................... 3,003 8,000 11,605
Other ................................................... (140) (214) (564)
--------- --------- ---------
Net cash provided by (used for) investing activities . 17,130 (9,557) 1,656
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock .................. 3,111 2,457 363
Purchases of treasury stock ............................. (3,951) (1,422) (2,957)
Repayments of obligations under capital leases .......... (924) (853) (654)
--------- --------- ---------
Net cash provided by (used for) financing activities .. (1,764) 182 (3,248)
--------- --------- ---------
Effect of foreign exchange rate changes on cash and cash
equivalents .......................................... (424) 226 170
--------- --------- ---------
Net cash provided by (used for) discontinued operations ... 12,367 (3,222) 7,709
--------- --------- ---------
Net increase in cash and cash equivalents ................. 26,140 5,334 20,916
--------- --------- ---------
Cash and cash equivalents at beginning of year ............ 73,405 68,071 47,155
--------- --------- ---------
Cash and cash equivalents at end of year .................. $ 99,545 $ 73,405 $ 68,071
========= ========= =========
Reconciliation of income from continuing operations
to net cash provided by (used for) operating activities:
Income from continuing operations ......................... $ 22,164 $ 3,442 $ 6,003
Adjustments to reconcile income from continuing
operations to net cash provided by (used for)
operating activities:
Depreciation and amortization ........................... 11,792 9,988 10,544
Gains on sales of investments ........................... (28,935) (276) --
Other adjustments, net .................................. (221) 189 2,340
Changes in operating assets and liabilities:
Accounts receivable ................................... (44) 9,933 (4,183)
Inventories ........................................... (12,139) (7,354) 3,171
Accounts payable and accrued expenses and
other liabilities..................................... 3,982 363 (4,868)
Other changes, net .................................... 2,232 1,420 1,622
--------- -------- ---------
Net cash provided by (used for) operating activities....... $ (1,169) $ 17,705 $ 14,629
========= ========= =========
Noncash investing and financing activities:
During fiscal 1999, the Company financed certain capital expenditures totaling
$1,447 through capital lease obligations.
During fiscal 1999, the Company sold certain equipment for $8,224, of which one
installment payment of $197 is receivable in fiscal 2002.
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Standard Microsystems Corporation (the Company or SMSC), a Delaware corporation
founded in 1971 and based in Hauppauge, New York, is a worldwide supplier of
leading-edge MOS/VLSI integrated circuits for the personal computer, peripherals
and embedded systems marketplaces. The Company's products provide solutions in
Advanced Input/Output (I/O) technology, Systems Logic, USB Connectivity, Local
Area Networking and Embedded Control Systems. SMSC is the world's leading
supplier of I/O integrated circuits for personal computers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company's fiscal year ends on the last day in February. The consolidated
financial statements include the accounts of the Company and its subsidiaries
after elimination of all significant intercompany accounts and transactions.
Reclassifications
Certain items in the prior years' consolidated financial statements have been
reclassified to conform to the fiscal 2001 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash in banks and highly liquid
debt instruments purchased with original maturities of three months or less.
Short-Term Investments
Marketable debt and equity securities are reported at fair value. Unrealized
gains and losses on short-term investments are either included within net income
for those securities classified as trading securities, or included as a separate
component of shareholders' equity for those securities classified as
available-for-sale. As of February 28, 2001, short-term investments consist
primarily of investments in corporate obligations with maturities of between
three and twelve months and are classified as available-for-sale. The cost of
these short-term investments approximates their market value as of February 28,
2001.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short-term maturities. The amounts presented
for other long-term liabilities also approximate their fair values.
Inventories
Inventories are valued at the lower of first-in, first-out cost or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful lives of the buildings (20 to 25
years) and machinery and equipment (3 to 7 years). Upon sale or retirement of
property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected currently.
Cost Basis Investments
Equity investments representing an ownership interest of less than 20% in
non-publicly traded companies are carried at cost. Changes in the value of these
investments are not recognized unless they are sold, or an impairment in value
is deemed to be other than temporary.
Investments in Equity Securities
Investments in publicly traded equity securities are classified as
available-for-sale and are carried at fair value on the accompanying
consolidated balance sheets. Unrealized gains and losses on such securities, net
of taxes, are reported in accumulated other comprehensive income within
shareholders' equity.
Long-Lived Assets
The Company reviews long-lived assets for impairment in value using a gross cash
flow basis and provides reserves for impairment whenever events or circumstances
indicate that the carrying amount of the assets may not be fully recoverable.
Revenue Recognition
The Company recognizes revenue from product sales to original equipment
manufacturers (OEMs) and end-users at the time of shipment, net of appropriate
reserves for product returns and allowances. Certain of the Company's sales are
made to distributors under agreements allowing price protection and rights to
return unsold merchandise. Accordingly, and pursuant to an accounting change
implemented in fiscal 2000, recognition of revenue and associated gross profit
on shipments to distributors is deferred until the distributors resell the
products. This accounting change is further explained within Note 6 - Accounting
Change - Recognition of Revenue on Shipments to Distributors.
Stock-Based Compensation
The Company grants stock options to employees with exercise prices equal to the
fair value of the shares at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees and accordingly, recognizes no compensation expense for the stock
option grants. Additional pro forma disclosures as required under Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, are presented within these Notes to Consolidated Financial
Statements.
Income Taxes
Deferred income taxes are provided on temporary differences that arise in the
recording of transactions for financial and tax reporting purposes and result in
deferred tax assets and liabilities. Deferred tax assets are reduced by an
appropriate valuation allowance if it is management's judgment that part of the
deferred tax asset will not be realized. Tax credits are accounted for as
reductions of the current provision for income taxes in the year in which the
related expenditures are incurred.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars
using the exchange rates in effect at the balance sheet date. Results of their
operations are translated using the average exchange rates during the period.
Resulting translation adjustments are recorded in accumulated other
comprehensive income within shareholders' equity.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, and for hedging activities. SFAS No. 133, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not presently make use of any significant derivative
instruments, and therefore this new accounting pronouncement is not expected to
have a material effect on its consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25 (FIN 44). FIN 44 clarifies the application of Opinion No. 25 for (a) the
definition of employee for purposes of applying Opinion No. 25, (b) the criteria
for determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of FIN 44, which
became effective July 1, 2000, did not have a material effect on the Company's
consolidated financial statements.
3. NET INCOME (LOSS) PER SHARE
Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the sum of the
weighted-average common shares outstanding during the period plus the dilutive
effect of shares issuable through stock options and warrants. Shares used in
calculating basic and diluted net income (loss) per share are reconciled as
follows (in thousands):
For the years ended February 28 or 29, 2001 2000 1999
- -------------------------------------------------------------------------------
Average shares outstanding for basic
net income (loss) per share .......... 15,925 15,620 15,789
Dilutive effect of stock options
and warrants ......................... 1,240 295 35
- -------------------------------------------------------------------------------
Average shares outstanding for
diluted net income (loss) per share... 17,165 15,915 15,824
- -------------------------------------------------------------------------------
As of February 28, 2001, outstanding options covering 511,000 common shares were
excluded from the computation of diluted net income (loss) per share because
their effect was antidilutive.
4. DISCONTINUED OPERATIONS
In March 1999, the Company's Board of Directors approved a plan for the Company
to divest its Foundry Business Unit (FBU). This divestiture was completed on
June 1, 1999, with the Company signing an Asset Purchase Agreement, and related
agreements, selling the assets of the FBU to privately held Inertia Optical
Technology Applications, Inc. (IOTA) of Newark, New Jersey, in exchange for 38%
of IOTA's outstanding common stock. The combined businesses now operate as
Standard MEMS, Inc. (SMI).
The Company has reported the operating results, net assets and cash flows of the
FBU as a discontinued operation. Upon approval of the plan of disposition, the
Company recorded a pre-tax charge of $15,200,000 in the fourth quarter of fiscal
1999, covering write-downs of certain assets, pre-closing operating losses, and
other costs associated with the transaction.
In the fourth quarter of fiscal 2000, the Company recorded a $4,151,000
adjustment to reduce the loss on the disposition of this operation, primarily
reflecting a previously reserved income tax benefit, as well as an adjustment of
estimated final disposition costs.
During the first quarter of fiscal 2001, the Company sold the majority of its
ownership interest in SMI and realized an after-tax gain of $4,765,000, which
appears as a Gain on sale of discontinued operation on the Consolidated
Statement of Operations for the year ended February 28, 2001. This sale of SMI
stock reduced the Company's ownership interest in SMI below 5%, satisfying its
prior commitment to reduce its SMI ownership below 20%.
Summarized financial information for this discontinued operation is as follows
(in millions):
As of February 28, 1999 and for the year then ended
- ----------------------------------------------------
Revenues ........................ $ 10.3
Loss before income taxes......... (8.2)
Net loss ........................ (5.3)
Current assets .................. 5.1
Total assets .................... 6.6
Current liabilities ............. 1.3
Net assets ...................... 5.3
- -----------------------------------------------------
5. INVESTMENTS
Investment in Chartered Semiconductor
During fiscal 1996, the Company entered into an agreement with Singapore-based
Chartered Semiconductor Manufacturing Ltd. (Chartered), whereby the Company
acquired a minority equity interest of less than 2% in Chartered for
$19,944,000. Under the terms of this agreement, the Company is allocated
sub-micron wafer production capacity for ten years in Chartered's wafer
fabrication facilities.
In October 1999, shares of Chartered began trading publicly on the Singapore
stock exchange, and also began trading on the NASDAQ stock exchange as American
Depository Shares, or ADSs.
The significant increase in other income (net) in fiscal 2001 reflects gains
realized on sales of a portion of the Company's investment in Chartered, as well
as proceeds from sales of call options covering a portion of its Chartered stock
holdings. The gains totaled $24,239,000 in fiscal 2001, while proceeds from the
sales of call options were $2,220,000 during the same period. No call options
were exercised during fiscal 2001, and there are no outstanding call options as
of February 28, 2001. As of February 28, 2001, the Company held approximately
444,000 of its original 828,000 Chartered ADSs, which have an original cost of
$10,717,000 and which are reported on the Consolidated Balance Sheet at
$13,001,000, based upon their closing price on the Nasdaq stock market on that
date.
Investment in Accelerix Incorporated
During fiscal 1997 and fiscal 1998, the Company acquired an equity interest of
less than 20% in privately held Accelerix Incorporated of Ontario, Canada, for
$1,733,000. During the fourth quarter of fiscal 1999, the Company recorded a
$1,554,000 write-down of this investment to reflect its fair market value. The
investment was subsequently sold at approximately its written down value in
fiscal 2000.
6. ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON SHIPMENTS TO DISTRIBUTORS
In the fourth quarter of fiscal 2000, the Company changed its accounting method
for the recognition of revenue on shipments to distributors. Recognition of
revenue and related gross profit on shipments to distributors is deferred until
the distributor resells the product. This change was made with an effective date
of March 1, 1999 (the beginning of fiscal 2000).
The cumulative effect of this change in accounting principle was a charge of
$2,924,000, net of $1,716,000 of income tax benefits, or $0.19 per diluted
share, recorded in fiscal 2000. The estimated pro forma effects of the
accounting change on operating results for fiscal 2000 and fiscal 1999 are
presented below (in thousands, except per share data):
For the years ended February 29 or 28, 2000 1999
- -------------------------------------------------------------------------
As reported:
Revenues ............................... $153,247 $155,826
Income from continuing operations ...... 3,442 6,003
Net income (loss) ...................... 4,669 (12,545)
Basic net income (loss) per share
Income from continuing operations ... 0.22 0.38
Net income (loss) ................... 0.30 (0.79)
Diluted net income (loss) per share
Income from continuing operations ... 0.22 0.38
Net income (loss) ................... 0.29 (0.79)
- --------------------------------------------------------------------------
Unaudited pro forma amounts reflecting the change in accounting principle
applied retroactively:
Revenues ............................... $153,247 $151,768
Income from continuing operations ...... 3,442 5,186
Net income (loss) ...................... 7,593 (13,362)
Basic net income (loss) per share
Income from continuing operations ... 0.22 0.32
Net income (loss) ................... 0.49 (0.85)
Diluted net income (loss) per share
Income from continuing operations ... 0.22 0.32
Net income (loss) ................... 0.48 (0.85)
- --------------------------------------------------------------------------
7. OTHER BALANCE SHEET DATA
(In thousands)
As of February 28 or 29, 2001 2000
- -----------------------------------------------------------
Inventories:
Raw materials ........................ $ 558 $ 361
Work-in-process ...................... 22,859 11,146
Finished goods ....................... 8,582 8,544
- -----------------------------------------------------------
$ 31,999 $ 20,051
===========================================================
Property, plant and equipment:
Land ................................. $ 3,434 $ 3,434
Buildings and improvements ........... 29,540 28,097
Machinery and equipment .............. 82,794 70,193
- -----------------------------------------------------------
115,768 101,724
Less: accumulated depreciation ....... 80,276 69,587
- -----------------------------------------------------------
$ 35,492 $ 32,137
===========================================================
Other assets:
Common stock of SMC Networks, Inc. ... $ 8,452 $ 8,452
Other ................................ 6,387 10,744
- -----------------------------------------------------------
$ 14,839 $ 19,196
===========================================================
Accrued expenses and other liabilities
Salaries and fringe benefits ......... $ 2,839 $ 3,696
Other ................................ 6,133 3,826
- -----------------------------------------------------------
$ 8,972 $ 7,522
===========================================================
Other liabilities:
Retirement benefits .................. $ 4,722 $ 4,672
Obligations under capital leases ..... 1,090 2,092
- -----------------------------------------------------------
$ 5,812 $ 6,764
===========================================================
8. SHAREHOLDERS' EQUITY
Common Stock Repurchase Program
In October 1998, the Company's Board of Directors approved a common stock
repurchase program, allowing the repurchase of up to one million shares of its
common stock on the open market or in private transactions. In July 2000, the
authorization from the Company's Board was expanded from one million shares to
two million shares. As of February 28, 2001, the Company had repurchased 998,000
shares of common stock at a cost of $8,330,000, under this program. Of that
total, 328,000 shares, including the 200,000 shares purchased from Intel
Corporation as described below, were repurchased in fiscal 2001 at a cost of
$3,951,000. The Company currently holds repurchased shares as treasury stock,
reported at cost.
Investment by Intel Corporation
In March 1997, the Company and Intel Corporation (Intel) entered into a Common
Stock and Warrant Purchase Agreement (the Agreement) whereby Intel purchased
1,543,000 newly issued shares of the Company's common stock for $9.50 per share,
or $14,654,000. Intel also received a three-year warrant to purchase an
additional 1,543,000 shares. In March 2000, as provided for in the warrant,
Intel executed a "net exercise", whereby Intel was issued 200,000 shares of the
Company's common stock, which was equal in fair value to the excess of the
warrant's market value over its exercise value, as defined in the Agreement. The
Company immediately repurchased these 200,000 shares from Intel for $1,928,000
under its common stock repurchase program. This warrant is now fully exercised.
So long as Intel continues to hold its initial investment, the Agreement
provides Intel with certain rights, including a right of first refusal upon
certain proposed sales of common stock by the Company, demand registration
rights with respect to shares acquired under the Agreement, a right for Intel to
designate a representative to serve on the Company's Board of Directors, and
antidilution rights. The Agreement also imposes certain restrictions upon Intel,
including limitations, in certain circumstances, on Intel's ability to acquire
additional shares of the Company's common stock (referred to as a standstill
arrangement), and restrictions on the transfer of shares acquired pursuant to
the Agreement.
Shareholder Rights Plan
The Company maintains a Shareholder Rights Plan as part of its commitment to
ensure fair value to all shareholders in the event of an unsolicited takeover
offer. The Company's current Shareholder Rights Plan was adopted by its Board of
Directors in January 1998, replacing the Company's previous plan which had
expired on January 12, 1998. Under this plan, the Company's shareholders of
record on January 13, 1998 received a dividend distribution of one preferred
stock purchase right for each share of common stock then held. In the event of
certain efforts to acquire control of the Company, these rights allow
shareholders to purchase common stock of the Company at a discounted price. The
rights will expire in January 2008, unless previously redeemed by the Company at
$.01 per right. In December 2000, the Company amended this plan to exclude
Citigroup, Inc.'s (Citigroup) ownership of the Company's common stock from
requiring distribution of rights under the plan, so long as Citigroup remains a
passive investor and its ownership interest does not exceed 28%. Citigroup is
the Company's largest shareholder at February 28, 2001.
9. INCOME TAXES
The provision for income taxes included in the accompanying Consolidated
Statements of Operations consists of the following (in thousands):
For the years ended February 28 or 29, 2001 2000 1999
--------- --------- --------
Current
Federal .............................. $ 7,684 $ (4,228) $ 661
Foreign .............................. 602 87 140
State ................................ 149 718 68
--------- --------- --------
8,435 (3,423) 869
Deferred ................................. 5,216 734 (3,147)
--------- --------- --------
13,651 (2,689) (2,278)
Less: tax provision for (benefit from)
discontinued operations ............... 2,799 (2,980) (4,864)
Less: tax benefits from change in accounting
principle ............................. -- (1,716) --
--------- --------- --------
$10,852 $ 2,007 $ 2,586
--------- --------- --------
The tax provision for discontinued operations in fiscal 2001 results from the
gain realized on the sale of the Company's investment in Standard MEMS, Inc.
during the first quarter of fiscal 2001. The tax benefits from discontinued
operations in fiscal 2000 included $3,413,000 of previously reserved tax
benefits related to the Company's June 1999 sale of its former Foundry Business
Unit. This transaction is further described in Note 4 to these Consolidated
Financial Statements.
The provision for income taxes differs from the amount computed by applying the
U.S. Federal statutory tax rate as a result of the following:
For the years ended February 28 or 29, 2001 2000 1999
- ------------------------------------------------------------------------
Provision for income taxes
computed at U.S. federal statutory rate ..... 35.0% 35.0% 35.0%
State taxes, net of federal benefit .......... 0.2 1.0 1.3
Differences between foreign
and U.S. income tax rates .............. 0.7 8.1 (0.9)
Tax-exempt income ............................ (2.2) (5.7) (5.5)
Other ........................................ (0.9) (1.4) --
- ------------------------------------------------------------------------
32.8% 37.0% 29.9%
- ------------------------------------------------------------------------
The tax effects of temporary differences that result in deferred tax benefits
and liabilities are as follows (in thousands):
As of February 28 or 29, 2001 2000
- ------------------------------------------------------------------
Deferred tax assets:
Reserves and accruals not currently
deductible for income tax purposes ....... $ 3,771 $ 5,324
Net operating loss carryforwards ............ -- 3,750
Intangible asset amortization ............... 2,846 3,323
Inventory valuation ......................... 2,719 1,761
Purchased in-process technology ............. 1,485 1,614
Property, plant and equipment depreciation .. 900 779
Other ....................................... 225 238
- ------------------------------------------------------------------
Total deferred tax assets ............ 11,946 16,789
Deferred tax liabilities:
Unrealized gains on investments .............. (1,209) (19,397)
- ------------------------------------------------------------------
Total deferred tax liabilities ........ (1,209) (19,397)
- ------------------------------------------------------------------
Net deferred tax assets (liabilities) ....... $ 10,737 $(2,608)
- ------------------------------------------------------------------
Income before income taxes and minority interest includes foreign income of
$864,000, $474,000, and $363,000 for fiscal 2001, 2000, and 1999, respectively.
The Company has $1,942,000 of New York State tax credit carryforwards at the end
of fiscal 2001, of which $68,000 will expire in fiscal 2002. The remaining
$1,874,000 of credit carryforwards expire at various dates in fiscal 2003
through fiscal 2010.
A net operating loss reported by the Company in fiscal 1998, the majority of
which was generated by discontinued operations, was carried back against profits
reported in prior periods and resulted in an income tax refund of $18,092,000
received in fiscal 1999. This refund is included within Net cash provided by
(used for) discontinued operations in the Consolidated Statements of Cash Flows.
10. MINORITY INTEREST IN SUBSIDIARY
Sumitomo Metal Industries, Ltd. Of Osaka, Japan (Sumitomo) owns 20% of the
issued and outstanding common stock and all of the non-cumulative, non-voting 6%
preferred stock of the Company's subsidiary, Toyo Microsystems Corporation
(TMC). The Company and Sumitomo have agreed to declare a preferred dividend if
TMC should realize net income of at least five times the total amount of
preferred dividends which would be payable on all preferred stock then
outstanding. The annual preferred dividend would be equal to 6% of the
subscription price of 2.16 billion yen, or approximately $1,037,000 at an
exchange rate of 125 yen per dollar. No such dividends have as yet been
declared. In the event that a third party acquires a majority of the outstanding
common stock of the Company, Sumitomo has the option to require the Company to
purchase Sumitomo's interest in TMC.
11. COMMITMENTS AND CONTINGENCIES
Compensation
Certain executives and key employees are employed under separate agreements
terminating on various dates through fiscal 2003. These agreements provide,
among other things, for annual base salaries and guaranteed incentives totaling
$919,000 and $301,000 in fiscal 2002 and 2003, respectively.
Capital Leases
The Company leases certain equipment under long-term capital leases, some of
which include options to purchase the equipment for a nominal cost at the
termination of the lease.
Included within property and equipment are the following assets held under
capital leases (in thousands):
As of February 28 or 29, 2001 2000
- --------------------------------------------------------
Machinery and equipment ......... $ 4,676 $ 4,676
Less: Accumulated depreciation .. (2,509) (1,759)
- --------------------------------------------------------
$ 2,167 $ 2,917
========================================================
Future minimum lease payments for assets under capital leases for the next five
fiscal years are as follows (in thousands):
2002 ................................... $ 1,136
2003 ................................... 940
2004 ................................... 204
2005 ................................... --
2006 ................................... --
- -----------------------------------------------------
Total minimum lease payments ........... 2,280
Less: Amount representing interest .... 187
- -----------------------------------------------------
Present value of minimum lease payments. 2,093
Less: Current portion .................. 1,003
- -----------------------------------------------------
Long-term obligation $ 1,090
=====================================================
Operating Leases
The Company leases certain facilities, equipment and vehicles under operating
leases. Total rental expenses for all operating leases was $1,935,000,
$1,654,000 and $2,025,000 in fiscal 2001, 2000 and 1999, respectively.
The Company leases certain of its buildings and related improvements to outside
parties under noncancelable operating leases, including one such lease executed
in March 2000. At February 29, 2001, the cost and accumulated depreciation of
the leased buildings were $24,320,000 and $18,301,000, respectively.
Future minimum rental income and commitments under operating leases for the next
five fiscal years are as follows (in thousands):
Rental Rental
Income Commitments
- ----------------------------------------------------------------
2002 .............................. $ 791 $ 1,406
2003 .............................. 823 887
2004 .............................. 856 713
2005 .............................. 536 359
2006 .............................. 445 91
2007 and thereafter ............... 2,194 -
- -----------------------------------------------------------------
$ 5,645 $ 3,456
=================================================================
Litigation
The Company is subject to various lawsuits and claims in the ordinary course of
business. While the outcome of these matters cannot be determined, management
believes that their ultimate resolution will not have a material effect on the
Company's operations or financial position.
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). n
consideration for the sale, the Company received $40,237,000 in cash, of which
$2,012,000 was placed in an escrow account, scheduled for release in January
1999, to secure the Company's indemnity obligations under the agreement. The
Company's 19.9% minority interest in SMC Networks, Inc. is carried at a cost of
$8,452,000 within other assets on the accompanying Consolidated Balance Sheets.
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
$10.0 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. The parties are now proceeding with arbitration and, 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 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.
12. BENEFIT AND INCENTIVE PLANS
Incentive Savings and Retirement Plan
The Company maintains a defined contribution Incentive Savings and Retirement
Plan (the Plan) which, pursuant to Section 401(k) of the Internal Revenue Code,
permits employees to defer taxation on their pre-tax contributions to the Plan.
The Plan permits employees to contribute up to 15% of their earnings, through
payroll deductions, based on earnings reduction agreements. The Company's
contribution, which is equal to one-half of the employee's contribution up to
6%, is invested in the common stock of the Company and totaled $667,000,
$639,000 and $630,000 in fiscal 2001, 2000 and 1999, respectively.
Since July 2000, common stock for the Company's regular matching contributions
to the plan has been purchased on the open market, whereby previously,
newly-issued common stock was contributed to the plan from available authorized
reserves. Since its inception, 1,197,000 shares of the Company's common stock
have been contributed to the Plan.
As of February 28, 2001, 328 of the 368 employees who had satisfied the Plan's
eligibility requirements to participate were making contributions to the Plan.
Employee Stock Option Plans
Under the Company's stock option plans, the Compensation Committee of the Board
of Directors is authorized to grant stock options to purchase 4,059,000 shares
of common stock. The purpose of these plans is to promote the interests of the
Company and its shareholders by providing officers and key employees with
additional incentives and the opportunity, through stock ownership, to increase
their proprietary interest in the Company and their personal interest in its
continued success. Options are granted at prices not less than the fair market
value on the date of grant. As of February 28, 2001, 559,000 shares of common
stock were available for future grants.
Stock option plan activity is summarized below (shares in thousands):
Fiscal Weighted Fiscal Weighted Fiscal Weighted
2001 Average 2000 Average 1999 Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
------ -------- ------ -------- ------- --------
Options outstanding, beginning of year ..... 2,510 $ 9.10 1,370 $9.18 881 $ 10.38
Granted .................................... 1,581 16.11 1,767 8.95 719 9.04
Exercised .................................. (287) 8.98 (237) 8.92 (30) 9.00
Canceled or expired ........................ (304) 10.38 (390) 8.75 (200) 14.02
- --------------------------------------------- ------ -------- ------ -------- ------- --------
Options outstanding, end of year ........... 3,500 $12.17 2,510 $9.10 1,370 $ 9.18
- --------------------------------------------- ------ -------- ------ -------- ------- --------
Options exercisable ........................ 565 $9.54 359 $9.27 417 $ 9.14
- --------------------------------------------- ------ -------- ------ -------- ------- --------
The following table summarizes information relating to currently outstanding and
exercisable options as of February 28, 2001 (shares in thousands):
Weighted Average Weighted Average
Range of Remaining Life Options Weighted Average Options Exercise Price
Exercise Prices (in years) Outstanding Exercise Price Exercisable
- ------------------- ---------------- ----------- ---------------- ----------- ---------------
$6.25 - $7.38 8.08 757 $ 7.32 105 $ 7.26
$7.50 - $9.50 7.27 742 8.77 315 8.96
$9.75 - $14.09 8.94 1,254 13.33 138 12.29
$14.19 - $23.88 9.57 701 18.10 7 15.45
$24.00 - $25.75 9.71 46 24.77 -- --
- ------------------- ---------------- ----------- ---------------- ----------- ----------------
As allowed under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company applies APB Opinion No. 25 and related interpretations
to accounting for the stock options awarded under these plans. Accordingly, no
compensation cost has been recognized for these stock options. Had compensation
cost for these plans been determined consistent with SFAS No. 123, the Company's
net income (loss) and diluted net income (loss) per share would have been the
pro forma amounts indicated below (in thousands, except per share data):
For the years ended February 28 or 29, 2001 2000 1999
- --------------------------------------------------------------------
Net income (loss):
As reported ........................... $26,929 $4,669 $(12,545)
Pro forma ............................. 22,529 2,320 (14,731)
- --------------------------------------------------------------------
Diluted net income (loss) per share:
As reported ........................... $ 1.57 $ 0.29 $ (0.79)
Pro forma ............................. 1.31 0.15 (0.93)
- --------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
For the years ended February 28 or 29, 2001 2000 1999
- --------------------------------------------------------------------
Dividend yield ........................ -- -- --
Expected volatility ................... 64% 63% 65%
Risk-free interest rates .............. 4.62% 6.64% 5.37%
Expected lives (in years) ............. 4 4 4
- --------------------------------------------------------------------
The weighted average Black-Scholes values of options granted in fiscal 2001,
2000 and 1999 were $8.57, $5.00 and $4.84, respectively. The values produced by
this model are limited by the inclusion of highly subjective assumptions, which
greatly affect the calculated values.
Director Stock Option Plan
Under the Company's Director Stock Option Plan, non-qualified options to
purchase common stock may be granted to directors at prices not less than the
market price of the shares at the date of grant. At February 28, 2001, the
expiration dates of the outstanding options range from July 22, 2001 to July 18,
2010, and the exercise prices range from $8.50 to $17.88 (average $11.87) per
share.
The following is a summary of activity under the Director Stock Option Plan
during the past three fiscal years (in thousands):
For the years ended February 28 or 29, 2001 2000 1999
- ---------------------------------------------------------------------
Shares under option, beginning of year .......... 218 228 210
Options granted during the year ................. 50 67 33
Options canceled or terminated .................. -- (77) (15)
Options exercised ............................... (55) -- --
- --------------------------------------------------------------------
Shares under option, end of year ................ 213 218 228
- --------------------------------------------------------------------
Options exercisable, end of year ................ 188 168 212
- --------------------------------------------------------------------
Shares available for future grants, end of year . -- 32 91
- --------------------------------------------------------------------
Director Deferred Compensation Plan
The Company has a deferred compensation plan for its non-employee directors,
which permits eligible directors to defer 50% or 100% of their basic annual
compensation, which is otherwise paid in cash. During fiscal 2001, the plan was
modified to require deferral of at least 50% by all plan participants. Under
this plan, an unfunded account is established for each participating director,
which is credited with equivalent units of the Company's common stock on the
first day of each quarter. These equivalent units track the economic performance
of the underlying stock, but carry no voting rights. The deferred compensation
earned under this plan is payable when the participant leaves the Company's
Board of Directors, for any reason, and is paid in either common stock or an
equivalent amount of cash, at the election of the participant.
The following is a summary of the activity, in common stock equivalent units,
under this plan during the past three fiscal years (in thousands):
For the years ended February 28 or 29, 2001 2000 1999
- -------------------------------------------------------------------
Beginning of year ...................... 23 19 7
Earned during the year ................. 6 10 12
Distributed during the year ............ (4) (6) --
- -------------------------------------------------------------------
End of year ............................ 25 23 19
- -------------------------------------------------------------------
Available, end of year ................. 65 71 81
- -------------------------------------------------------------------
Restricted Stock Bonus Plan
The Company maintains a Restricted Stock Bonus Plan, which provides for common
stock awards to certain officers and key employees. Awards granted under the
plan are earned in 25%, 25% and 50% increments on the first, second and third
anniversaries of the award, respectively. The shares granted are distributed
provided the employee has remained employed by the Company through such
anniversary dates; otherwise the unearned shares are forfeited. The maximum
number of shares issuable under the plan is 350,000, of which 129,000, net of
cancellations, have been awarded as of February 28, 2001. The market value of
these shares at the date of award, net of cancellations, is recorded as
compensation expense ratably over the three-year periods from the respective
award dates. This compensation expense was $352,000, $257,000 and $354,000 in
fiscal 2001, 2000 and 1999, respectively.
Retirement Plans
In October 2000, the Board of Directors terminated all additional benefits for
active non-employee directors under its Directors Retirement Plan, other than
those benefits already earned, effective in January 2001. Affected directors
were offered the opportunity to retain their vested retirement benefit, or to
exchange that retirement benefit for a restricted stock grant. In January 2001,
a combined 28,000 shares of restricted common stock, valued at $576,000, were
granted to certain directors in exchange for their respective benefits under the
Directors Retirement Plan. Those directors who chose to retain their retirement
benefits, as well as all retired non-employee directors, will continue to
receive benefits under the terms of the original plan, as modified. The annual
retirement benefit is equal to the annual retainer in effect at the date of
retirement or December 31, 2000, which ever is earlier, for a period equal to
the lesser of the director's years of service through December 31, 2000 or ten
years. Following the completion of all payments to current participants, the
Directors Retirement Plan will terminate.
The Company maintains an unfunded Supplemental Executive Retirement Plan to
provide senior management with retirement, disability and death benefits. The
retirement benefits are based upon the participant's average base compensation
during the three-year period prior to retirement. The Company is the beneficiary
of life insurance policies that have been purchased as a method of partially
financing these benefits. Based on the latest available actuarial information,
the following table sets forth the components of the net periodic pension
expense, the funded status and the assumptions used in determining the present
value of benefit obligations (dollars in thousands):
For the years ended February 28 or 29, 2001 2000 1999
- --------------------------------------------------------------------------
Service cost - benefits earned
during the year ........................... $ 80 $ 31 $ 30
Interest cost on projected
benefit obligations ....................... 339 378 347
Net amortization and deferral .............. 244 245 245
- --------------------------------------------------------------------------
Net periodic pension expense ............... $ 663 $ 654 $ 622
- --------------------------------------------------------------------------
As of February 28 or 29, 2001 2000 1999
- --------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation .................. $ 3,975 $ 3,868 $ 3,789
Nonvested benefit obligation ............... 130 126 122
- --------------------------------------------------------------------------
Accumulated benefit obligation ............. 4,105 3,994 3,911
Effect of projected future salary increases. 809 803 1,360
- --------------------------------------------------------------------------
Projected benefit obligation ............... 4,914 4,797 5,271
Unrecognized net gain (loss) ............... 565 465 (308)
Unrecognized net transition asset .......... (1,961) (2,206) (2,451)
Additional minimum liability ............... 587 938 1,398
- --------------------------------------------------------------------------
Accrued pension cost ....................... $ 4,105 $ 3,994 $ 3,910
- --------------------------------------------------------------------------
Assumptions used in determining actuarial
present value of benefit obligations:
Discount rate .............................. 7.25% 7.25% 7.25%
Weighted-average rate of
compensation increase ..................... 7.00% 7.00% 7.00%
- --------------------------------------------------------------------------
Executive Incentives
The Company's Board of Directors has provided that certain executives receive
incentive compensation based upon certain revenues, earnings and other
performance measures. Incentive compensation of $903,000, $838,000 and $549,000
was earned in fiscal 2001, 2000 and 1999, respectively.
13. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Industry Segment
The Company operates predominantly in one industry segment in which it designs,
develops and markets semiconductor integrated circuits for the personal
computer, peripheral and embedded systems marketplaces.
Geographic Information
The Company's domestic operations include its worldwide revenues, exclusive of
its revenues from customers in Japan, and most of its operating expenses. The
majority of the Company's revenues and operating profits from customers in Japan
are recorded by TMC. The Company conducts various sales and marketing operations
outside of the United States through TMC in Japan, and through subsidiaries in
Europe and Asia.
The Company's long-lived assets include net property and equipment, and other
long-lived assets. The vast majority of the Company's net property and equipment
is located in the United States. Included within other long-lived assets is an
equity investment in Singapore-based Chartered Semiconductor Manufacturing Ltd.
valued at $13,001,000 as of February 28, 2001.
Export Sales
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended February 28 or 29, 2001 2000 1999
- --------------------------------------------------------------------------
North America ...................... $ 39,170 $ 33,371 $ 26,041
Asia and Pacific Rim ............... 99,619 99,013 115,146
Europe ............................. 24,240 20,383 14,467
Rest of World ..................... 399 480 172
- --------------------------------------------------------------------------
$ 163,428 $ 153,247 $ 155,826
- --------------------------------------------------------------------------
Major Customers
In fiscal 2001, one customer accounted for 11.2% of the Company's revenues. In
fiscal 2000, one customer accounted for 14.5% of the Company's revenues and in
fiscal 1999, one customer accounted for 11.8% of the Company's revenues.
Concentrations of Credit Risk
The Company sells its products to personal computer and electronic equipment
manufacturers and their subcontractors, and to electronic component
distributors, and maintains individually significant accounts receivable
balances from several of its larger customers. The Company performs credit
evaluations of its customers' financial condition on a regular basis and
although the Company generally requires no collateral, letters of credit may be
required from its customers in certain circumstances. Reserves for estimated
credit losses are maintained and actual losses have been insignificant for all
years presented.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
--------- --------- --------- --------
Fiscal 2001
Revenues $ 38,219 $ 45,897 $ 46,930 $ 32,382
Gross profit 15,739 18,573 19,428 13,028
Operating income (loss) 125 1,328 1,277 (3,911)
Income from continuing operations 2,419 17,454 2,212 79
Gain on sale of discontinued operation 4,765 -- -- --
Net income 7,184 17,454 2,212 79
======================================================================================================
Basic net income per share
Continuing operations $ 0.15 $ 1.10 $ 0.14 $ --
Gain on sale of discontinued operation 0.30 -- -- --
-------- -------- -------- --------
$ 0.45 $ 1.10 $ 0.14 $ --
======================================================================================================
Diluted net income per share
Continuing operations $ 0.14 $ 1.03 $ 0.13 $ --
Gain on sale of discontinued operation 0.29 -- -- --
--------- -------- --------- ---------
$ 0.43 $ 1.03 $ 0.13 $ --
======================================================================================================
Average shares outstanding
Basic net income per share 15,799 15,878 15,983 16,044
Diluted net income per share 16,668 16,989 17,574 17,485
Market price per share
High $ 15.75 $ 19.00 $ 27.88 $ 20.38
Low 11.81 12.75 17.81 14.00
======================================================================================================
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 29
-------- -------- -------- --------
Fiscal 2000
Revenues $ 38,146 $ 38,038 $ 43,163 $ 33,901
Gross profit 13,931 14,838 17,447 13,148
Operating income (loss) (63) 635 2,444 (1,011)
Income from continuing operations 329 764 2,084 265
Gain on sale of discontinued operation -- -- -- 4,151
Cumulative effect of change in accounting principle (2,924) -- -- --
Net income (loss) (2,595) 764 2,084 4,416
======================================================================================================
Basic net income (loss) per share
Continuing operations $ 0.02 $ 0.05 $ 0.13 $ 0.02
Gain on sale of discontinued operation -- -- -- 0.26
Cumulative effect of change in accounting principle (0.19) -- -- --
-------- -------- -------- --------
$ (0.17) $ 0.05 $ 0.13 $ 0.28
======================================================================================================
Diluted net income (loss) per share
Continuing operations $ 0.02 $ 0.05 $ 0.13 $ 0.02
Gain on sale of discontinued operation -- -- -- 0.25
Cumulative effect of change in accounting principle (0.19) -- -- --
--------- -------- -------- --------
$ (0.17) $ 0.05 $ 0.13 $ 0.27
======================================================================================================
Average shares outstanding
Basic net income (loss) per share 15,575 15,626 15,641 15,626
Diluted net income (loss) per share 15,601 15,680 15,887 16,420
Market price per share
High $ 8.63 $ 9.00 $ 13.38 $ 17.25
Low 7.13 7.00 7.75 10.44
======================================================================================================
The Company's common stock is traded in the over-the-counter market under the
Nasdaq symbol: SMSC. Trading is reported in the Nasdaq National Market. There
were approximately 730 holders of record of the Company's common stock at March
27, 2001.
The present policy of the Company is to retain earnings to provide funds for the
operation and expansion of its business. The Company has never paid a cash
dividend, and does not expect to pay cash dividends in the foreseeable future.
================================================================================
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The consolidated financial statements of Standard Microsystems Corporation and
its subsidiaries have been prepared under the direction of management in
conformity with generally accepted accounting principles, consistently applied.
The statements include amounts that reflect management's objective estimates and
judgments.
Standard Microsystems Corporation and its subsidiaries maintain accounting
systems and related internal accounting controls which, in the opinion of
management, provide reasonable assurance, at appropriate cost, that assets are
properly controlled and safeguarded and that transactions are executed in
accordance with management's authorization and are recorded and reported
properly.
The audit committee of the Board of Directors is composed solely of directors
who are not officers or employees of the Company. The committee meets
periodically with representatives of management and the independent public
accountants. The independent public accountants have free access to the
committee, without management present, to discuss the results of their audit
work, adequacy of internal financial controls and the quality of the financial
reporting. The committee also recommends to the directors the appointment of the
independent public accountants.
The independent public accountants provide an objective, independent review as
to management's discharge of its responsibilities as they relate to the
integrity of reported operating results and financial condition.
Arthur Andersen LLP, independent public accountants, has audited the
consolidated financial statements in this Annual Report.
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Standard Microsystems Corporation:
We have audited the accompanying consolidated balance sheets of Standard
Microsystems Corporation (a Delaware corporation) and subsidiaries as of
February 28, 2001 and February 29, 2000, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended February 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Standard Microsystems
Corporation and subsidiaries as of February 28, 2001 and February 29, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended February 28, 2001, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
March 27, 2001
New York, New York