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 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 2002 2001 2000 1999 1998
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Operating Results
(Fiscal 1999 and 1998 presented pro forma for
change in revenue recognition)
Product Sales ..................................... $ 128,528 $ 162,008 $ 151,371 $ 150,294 $ 142,206
Licensing revenues ................................ 30,770 1,420 1,876 1,474 2,046
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Total Revenues .................................... 159,298 163,428 153,247 151,768 144,252
Gross profit ...................................... 78,034 66,768 59,363 54,623 39,460
As a percentage of revenues ................... 49% 41% 39% 36% 27%
Research and development .......................... 31,178 32,580 24,365 17,437 14,298
As a percentage of revenues ................... 20% 20% 16% 11% 10%
Selling, general and administrative ............... 32,744 35,369 32,993 30,469 30,645
As a percentage of revenues ................... 21% 22% 22% 20% 21%
Restructuring costs ............................... 7,734 -- -- -- --
As a percentage of revenues ................... 5% -- -- -- --
Operating income (loss) ........................... 6,378 (1,181) 2,005 5,163 (5,483)
As a percentage of revenues ................... 4% -1% 1% 3% -4%
Income (loss) from continuing operations .......... 7,475 22,164 3,442 5,186 (4,255)
As a percentage of revenues ................... 5% 14% 2% 3% -3%
Net income (loss) ................................. 5,911 26,929 7,593 (13,362) (22,071)
As a percentage of revenues ................... 4% 16% 5% -9% -15%
Diluted net income (loss) per share
Income (loss) from continuing operations ......... $ 0.44 $ 1.29 $ 0.22 $ 0.32 $ (0.27)
Net income (loss) ................................ 0.35 1.57 0.48 (0.85) (1.42)
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Operating Results
(Fiscal 1999 and 1998 presented as previously reported)
Product Sales ..................................... $ 128,528 $ 162,008 $ 151,371 $ 154,352 $ 146,280
Licensing revenues ................................ 30,770 1,420 1,876 1,474 2,046
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Total Revenues .................................... 159,298 163,428 153,247 155,826 148,326
Gross profit ...................................... 78,034 66,768 59,363 55,980 44,463
Research and development .......................... 31,178 32,580 24,365 17,437 14,298
Selling, general and administrative ............... 32,744 35,369 32,993 30,550 30,726
Restructuring costs ............................... 7,734 -- -- -- --
Operating income (loss) ........................... 6,378 (1,181) 2,005 6,439 (561)
Income (loss) from continuing operations .......... $ 7,475 $ 22,164 $ 3,442 $ 6,003 $ (1,105)
Net loss from discontinued operations ............. (1,564) -- -- (5,255) (18,846)
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) -- --
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Net income (loss) ................................. $ 5,911 $ 26,929 $ 4,669 $ (12,545) $ (18,921)
Diluted net income (loss) per share
Income (loss) from continuing operations ......... $ 0.44 $ 1.29 $ 0.22 $ 0.38 $ (0.07)
Net income (loss) ................................ 0.35 1.57 0.29 (0.79) (1.22)
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Diluted weighted average common shares outstanding . 16,900 17,165 15,915 15,824 15,519
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Balance Sheet and Other Data
Cash and short-term investments ................... $ 126,660 $ 109,174 $ 75,405 $ 70,071 $ 55,758
Working capital ................................... 154,981 146,382 111,016 98,342 83,784
Capital expenditures .............................. 4,488 14,600 10,503 10,847 3,854
Depreciation and amortization ..................... 11,614 11,792 9,988 10,544 11,328
Total assets ...................................... 236,063 239,098 258,508 198,657 210,049
Long-term obligations ............................. 6,973 5,812 22,151 7,816 7,297
Shareholders' equity .............................. 193,453 194,315 201,792 158,434 172,377
Book value per common share ....................... 12.14 12.08 12.80 10.21 10.82
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
Description of Business
Standard Microsystems Corporation (the Company or SMSC) is a designer and
worldwide supplier of advanced digital and analog Input/Output (I/O) system and
connectivity solutions for a broad range of communications and computing
applications in the areas of Advanced I/O, Connectivity, Local Area Networking
and Embedded Control Systems. The Company is a fabless semiconductor supplier
whose products are manufactured by third party world-class semiconductor
foundries and assemblers. To insure the highest quality, the Company conducts a
significant portion of its final testing requirements in the Company's own
state-of-the-art testing operation.
The Company is prominent as the world's leading supplier of Advanced
Input/Output (I/O) integrated circuits for desktop and mobile personal
computers. Advanced I/O circuits contain a variety of individual functions and
unique I/O controllers delivered in a single package, including floppy disk
control, keyboard control and BIOS, parallel and serial port control, and often
flash memory, infrared communications support, a real time clock, system
management and power management.
The Company serves the USB connectivity market with its family of connectivity
products, which provide solutions using both USB 1.1 and USB 2.0 technologies.
Embedded Networking products are designed to serve a variety of
machine-to-machine communications applications, such as set-top boxes, home
gateway products, printers and wireless communication interfaces.
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, SMSC Japan.
Customers and Product Life Cycles
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.
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, personal computer motherboard and other high technology
manufacturing activity occurs in that region.
From time to time, several key customers can account for a significant portion
of the Company's revenues. During fiscal 2002, 2001 and 2000, the Company had
two customers whose purchases represented a significant portion of the Company's
revenues in certain fiscal years. Revenues from one customer represented 29.0%
in fiscal 2002, and 11.2% in fiscal 2001, of the Company's revenues for those
respective fiscal years. Revenues from a second customer represented 15.2% in
fiscal 2002, and 14.5% in fiscal 2000, of the Company's revenues for those
respective fiscal years. No other customer represented more than 10% of the
Company's revenues in those fiscal years. The Company expects that its key
customers will continue to account for a significant portion of its revenues in
fiscal 2003 and for the foreseeable future.
The evaluation, testing and design-in of the Company's products by customers
typically lasts several months or more, with an additional three to nine months
or more before a customer typically commences volume production of equipment
incorporating the products. In light of the recent significant economic slowdown
in the technology sector, it may now take significantly longer than three to
nine months before customers commence volume production of equipment
incorporating the Company's products. Due to this process, the Company can
experience significant delays between incurring expenses for research and
development, marketing, selling, administrative efforts, and investments in
inventory, and the corresponding generation of revenue, if any. As is typical in
the semiconductor industry, the Company's rate of new orders can vary
significantly from month to month. If anticipated revenues in any quarter do not
occur as expected, expenses and inventory levels could be disproportionately
high, and the Company's results of operations for that quarter, and potentially
for future quarters, could be adversely impacted.
Gross Profit
The Company's gross profit has been impacted in the past, and may continue to be
impacted in the future, by various factors, including:
o Product mix
o Position of products in their respective life cycles
o Competitive pricing strategies
o Manufacturing efficiencies and inefficiencies
o Semiconductor foundry manufacturing capacity
Advanced I/O products typically have short production life cycles, are sold in
high volume, and generally produce lower gross margins than products for
networking and embedded systems applications, which typically have longer
production life cycles and are shipped in lower unit volumes. In addition,
newly-introduced products generally command higher average selling prices and
gross margins, both of which typically decline over product life cycles, due to
competitive pressures and other factors. In order to offset declines in average
selling prices, the Company continually works to add additional functionality
and value to its products, and to reduce the costs of its products, through
product and manufacturing design changes, yield improvements, manufacturing
efficiencies and lower costs negotiated with subcontract manufacturers.
Business Restructuring
In November 2001, the Company's Board of Directors approved management's plan to
exit the PC chipset business, redirect the Company's resources, and increase its
focus on leveraging its core technologies toward higher growth, higher margin
businesses. As a result, the Company discontinued further investments in PC
chipset development activities. This restructuring was announced on December 3,
2001.
The decision to exit this business was based upon an assessment of the PC
chipset marketplace, and management's conclusions that the opportunities for
profitability in this marketplace had declined, and the costs of entry had
increased, to a point where further investments in PC chipset technology were
not justified. In addition to the changing market prospects for PC chipset
products, the current, unprecedented semiconductor market downturn had prevented
the Company from producing profits while continuing its significant investment
in PC chipset products.
As a result of this restructuring, the Company recorded a charge of $9.0 million
in fiscal 2002, of which $7.7 million is classified within operating expenses
and $1.3 million is classified within cost of goods sold on the Consolidated
Statements of Operations. The restructuring charge included $5.3 million for
impairments in asset values, $1.3 million for excess and obsolete inventory,
$1.9 million for long-term, non-cancelable lease obligations, $0.3 million for a
workforce reduction of 55 people, and $0.2 million in other costs.
The Company completed its restructuring program during the fourth quarter of
fiscal 2002. Substantially all of the $0.3 million in cash payments related to
the workforce reduction were made in that period. Payments related to the
non-cancelable lease obligations will be paid over their respective terms,
through August 2008. Substantially all of the remaining restructuring costs were
non-cash.
By virtue of this restructuring, the Company has redeployed certain resources
previously devoted to chipset marketing and development programs back to its
core technologies in high-speed communications and computing applications. The
restructuring also reduced the Company's annual operating expenses by
approximately $7 million, but had minimal impact on current product sales, as
the Company had yet to achieve significant product sales of PC chipset products.
Results of Operations
Revenues
The Company's revenues for fiscal 2002 were $159.3 million, including $128.5
million of product sales and $30.8 million of licensing revenues, compared to
fiscal 2001 revenues of $163.4 million, which included $162.0 million of product
sales and $1.4 million of licensing revenues. Fiscal 2000 revenues were $153.2
million, including $151.4 million in product sales and $1.9 million in licensing
revenues.
Licensing revenues in fiscal 2002 include a $29.6 million payment received from
Intel Corporation in the third fiscal quarter, more details regarding which
appear within the section of this discussion titled Technology and Patent
License Agreements with Intel Corporation. The decline in product revenue in
fiscal 2002, as compared to fiscal 2001, resulted primarily from a decrease in
unit volumes, reflecting the continued unfavorable economic conditions in the
semiconductor industry. Many of the Company's customers faced slowing demand for
their products and needed to work down significant inventory balances throughout
fiscal 2002. Despite this ongoing economic slowdown in the technology sector,
the Company's 21% decline in product sales in fiscal 2002 was lower than the 30%
- - 35% calendar 2001 revenue decline experienced by the overall semiconductor
industry, as estimated by most market research sources. The Company believes
that it gained market share in the Advanced I/O market in fiscal 2002, on the
strength of several key desktop PC design wins.
Fiscal 2001 product sales increased by $10.6 million as compared to fiscal 2000,
due to increased unit volume in fiscal 2001, 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
networking, connectivity and embedded control systems products. Revenues from
these products increased to approximately 33% of total revenues in fiscal 2001,
compared to less than 25% in fiscal 2000.
Revenues from customers outside of North America accounted for 73% of the
Company's revenues in fiscal 2002, compared to 77% in fiscal 2001 and 79% in
fiscal 2000. 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 for fiscal 2002 was $78.0 million, or 49.0% of revenues, compared
to $66.8 million, or 40.9% of revenues reported for fiscal 2001. Gross profit in
fiscal 2000 was $59.4 million, or 38.7% of revenues. Excluding the impact of the
licensing payment received from Intel Corporation and charges associated with
the Company's fiscal 2002 restructuring, the gross profit percentage in fiscal
2002 was 38.3% of revenues.
The decrease in gross profit percentage in fiscal 2002, to 38.3% of revenues, as
adjusted, reflects a decrease in unit shipments, which resulted in lower fixed
overhead absorption. The fiscal 2002 gross profit percentage was also adversely
impacted by a product mix shift away from embedded systems, networking, and
connectivity products, which traditionally contribute higher gross margins than
Advanced I/O products.
The increase in gross profit percentage in fiscal 2001, as compared to fiscal
2000, reflected higher unit volumes, which enabled better utilization of fixed
overhead, as well as improved semiconductor test operation efficiencies and a
shift in product mix towards higher margined embedded systems, networking and
connectivity products.
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.
Research and development expenses decreased to $31.2 million in fiscal 2002,
compared to $32.6 million in fiscal 2001. This decrease reflects the impact of
the Company's November 2001 business restructuring, which reduced annual R&D
expenses by approximately $5.0 million, including $2.9 million in compensation
and benefit costs. These cost reductions impacted R&D expenses in the fourth
quarter of fiscal 2002.
Research and development spending in fiscal 2001 was $32.6 million, compared to
$24.4 million in fiscal 2000. This increase reflected increased engineering
staff, prototype costs and other development costs driven primarily by the
Company's then-accelerated investment in PC chipset development programs during
that period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $32.7 million, or
approximately 21% of revenues, in fiscal 2002, compared to $35.4 million, or
approximately 22% of revenues in fiscal 2001. Fiscal 2000 selling, general and
administrative expenses were $33.0 million, or approximately 22% of revenues.
Contributing to the decrease in fiscal 2002, as compared to fiscal 2001, were
lower variable selling expenses associated with reduced product sales in fiscal
2002. In addition, the Company's November 2001 business restructuring reduced
annual selling, general and administrative expenses by approximately $0.9
million, which impacted expenses in the fourth quarter of fiscal 2002. Cost
containment efforts in travel expenses and other administrative costs, driven by
the recent economic slowdown, also contributed to the decline in fiscal 2002.
Partially offsetting these lower costs were a $0.3 million litigation settlement
in fiscal 2002, and $0.7 million of non-recurring professional fees.
The increase in fiscal 2001 selling, general and administrative expenses, as
compared to fiscal 2000, reflected increased selling and marketing costs
associated with higher revenues in fiscal 2001.
Other Income and Expense
Interest income of $3.5 million in fiscal 2002 declined from $5.5 million
reported in fiscal 2001, reflecting lower interest rates on short-term
investments over this period. Interest income of $5.5 million in fiscal 2001 was
higher than $3.4 million reported in fiscal 2000 due to higher average cash,
cash equivalents and short-term investment balances available for investment in
fiscal 2001, compared to fiscal 2000.
Other income (expense), net, totaled $1.0 million in fiscal 2002, including
gains of $0.6 million realized from the sale of two underutilized facilities and
gains of $1.1 million realized on sales of a portion of an equity investment,
partially offset by write-downs of $0.7 million on two cost-basis investments in
privately held companies. Management concluded that these cost-basis investments
had experienced permanent impairments in value and recorded impairment charges
to reduce their carrying amounts to net realizable values.
In fiscal 2001, the Company realized significant gains on the sale of a portion
of its 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. The
Company also realized gains of $2.5 million on other equity investment sales in
fiscal 2001. In fiscal 2000, Other income (expense), net of $0.3 million was
provided by gains realized on equity investment sales.
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 treatment of certain expenses, the impact of tax-exempt income and
various tax credits.
The Company's effective income tax rate for fiscal 2002 was approximately 30%.
By comparison, the effective income tax rate was approximately 33% in fiscal
2001 and 37% in fiscal 2000. The lower effective income tax rate for fiscal 2002
primarily reflects an increased impact of tax-exempt income as compared to
fiscal 2001. The 33% effective income tax rate for 2001 also reflects the impact
of tax-exempt income, but to a lesser extent than in fiscal 2002. The effective
income tax rate for fiscal 2000 was adversely impacted by 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). This divestiture was completed on
June 1, 1999, with the Company 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
have since operated as Standard MEMS, Inc. (SMI).
In fiscal 2000, the Company recorded a $4.2 million 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 fiscal 2001, the Company sold the majority of its
ownership interest in SMI and realized an after-tax gain of $4.8 million. This
sale of SMI stock in fiscal 2001 reduced the Company's ownership interest in SMI
below 5%.
The Company has been involved in several legal actions relating to past
divestitures of divisions and business units. These divestitures were accounted
for as discontinued operations, and accordingly, costs associated with these
actions are reported as a Loss from discontinued operations on the Consolidated
Statements of Operations. These costs totaled $2.5 million, before applicable
income tax benefits of $0.9 million, in fiscal 2002.
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).
Management considers the current policy of deferring revenue on shipments to
distributors to be a more meaningful presentation of the Company's operating
results. It allows investors to better understand end-user demand for the
products that the Company sells through distribution channels and it better
focuses the Company on end-user demand. This policy is also a common practice
within the semiconductor industry.
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.
Technology and Patent License Agreements with Intel Corporation
In 1987, the Company and Intel Corporation (Intel) entered into an agreement
providing for, among other things, a broad, worldwide, non-exclusive patent
cross-license between the two companies, covering manufacturing processes and
products, thereby providing each company access to the other's current and
future patent portfolios.
In September 1999, the two companies announced a technology exchange agreement
(the Agreement) that would allow SMSC to accelerate its ongoing development of
Intel-compatible chipset products. Chipset products are integrated circuits that
communicate with the microprocessor (CPU) and assist in controlling the flow of
information within a personal computer or similar application. The Agreement
provides, among other things, for Intel to transfer certain intellectual
property related to Intel chipset architectures to SMSC, and provides SMSC the
opportunity to supply Intel chipset components along with its own chipset
solutions. The Agreement also limits SMSC's rights regarding Northbridges and
Intel Architecture Microprocessors under the 1987 agreement.
The Agreement includes provisions for its termination under certain
circumstances. Under one such provision, beginning in the third year of the
Agreement and annually thereafter, SMSC can elect to terminate the Agreement
should SMSC not achieve certain minimum chipset revenue amounts set forth in the
Agreement, unless Intel pays SMSC an amount equal to the shortfall between the
minimum revenue amount and the actual revenue for that period. Should the
Agreement terminate under this provision, the limitations imposed by the
Agreement on the Northbridge rights under the 1987 agreement terminate
immediately, and the limitations imposed by the Agreement on the microprocessor
rights under the 1987 agreement terminate 12 months later. Should Intel elect to
make the revenue amount shortfall payment, the provisions of the Agreement will
remain in force for the subsequent 12-month period, for which another minimum
revenue amount will be applicable, and at the end of which a similar termination
event may arise. Minimum chipset revenue amounts are $30 million, $45 million,
and $60 million for the 12 months ending September 21, 2001, 2002, and 2003,
respectively, and increase by 10% for each succeeding 12-month period following
2003, until expiration of the Agreement in July 2007.
In September 2001, SMSC notified Intel of a chipset revenue shortfall of
approximately $29.6 million for the 12 months ended September 21, 2001. In
November 2001, the Company received a $29.6 million payment from Intel, which is
reported as licensing revenue on the Company's Consolidated Statements of
Operations for the year ended February 28, 2002. There can be no assurance
whatsoever that Intel will elect to pay any future revenue shortfalls to SMSC
under the Agreement.
Liquidity and Capital Resources
The Company currently finances its operations through a combination of existing
resources and cash generated by operations.
The Company's cash, cash equivalents and short-term investments increased to
$126.7 million as of February 28, 2002, an increase of $17.5 million compared to
$109.2 million at February 28, 2001. The Company had $155.0 of working capital,
and a current ratio of 7.5 to 1, at February 28, 2002, compared to $146.4
million and 6.3 to 1, respectively, at February 28, 2001. The Company had no
bank debt at February 28, 2002 or February 28, 2001.
Operating activities generated $29.0 million of cash in fiscal 2002, including
the $29.6 million licensing payment from Intel Corporation, and after $5.3
million of income tax payments. Fiscal 2002 operating cash flow benefited from a
decline in inventories of approximately $14.2 million, reflecting close
management of inventories and alignment of inventory balances with current
demand during the recent economic slowdown. This was partially offset by a $5.7
million increase in accounts receivable, and a $1.5 million decrease in accounts
payable, accrued expenses and other liabilities.
Reflecting the adverse business conditions, capital spending was significantly
restrained in fiscal 2002, and totaled approximately $4.5 million, compared to
$14.6 million in fiscal 2001. Capital expenditures in fiscal 2003 are expected
to exceed those incurred in fiscal 2002, but will depend upon, among other
factors, the level of economic recovery, if any, in the high technology sector.
Capital expenditures are typically incurred to support the Company's
semiconductor test operation and to acquire hardware, software and other tools
used in the design of the Company's products. There were no material commitments
for capital expenditures as of February 28, 2002.
The Company used $4.2 million of cash in its net financing activities in fiscal
2002, including purchases of treasury stock under its common stock repurchase
program. During fiscal 2002, 340,000 shares of treasury stock were acquired in
open market transactions at a cost of $5.5 million, $0.8 million of which
settled in early March 2002 and is carried within Accounts payable on the
Consolidated Balance Sheet at February 28, 2002. As of February 28, 2002, the
Company holds 1,338,000 shares of treasury stock, at a cost of $13.9 million.
The Company's payment obligations and commitments as of February 28, 2002 are as
follows (in thousands):
Payment Obligations by Period
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Within 1 Between
Total year 1 and 3 years Thereafter
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Capital leases ............ $ 1,145 $ 940 $ 205 $ --
Operating leases .......... 3,187 1,171 1,318 698
Purchase commitments ...... 9,043 9,043 -- --
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Total ..................... $ 13,375 $ 11,154 $ 1,523 $ 698
================================================================================
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 2003.
Critical Accounting Policies and 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 and to the extent that they are
material, future results of operation will be affected.
The Company believes the following critical accounting policies are important to
the portrayal of the Company's financial condition and operating results, and
require critical management judgments and estimates about matters that are
inherently uncertain. Although management believes that its judgments and
estimates are appropriate and reasonable, actual future results may differ from
these estimates, and to the extent that such differences are material, future
reported operating results may be affected.
o Revenue Recognition
Revenues and associated gross profit from shipments to the Company's
distributors are deferred until the distributors resell the products. Shipments
to distributors are made under agreements allowing price protection and limited
rights to return unsold merchandise. In addition, the Company's shipments to its
distributors may experience short-term variations as distributors manage their
inventories to current levels of end-user demand. Therefore, the Company
considers the policy of deferring revenue on shipments to distributors to be a
more meaningful presentation of the Company's operating results. It better
allows investors to understand end-user demand for the products that the Company
sells through distribution channels and it better focuses the Company on
end-user demand. This policy is also a common practice within the semiconductor
industry. The Company relies on its distributors to supply the Company with
distribution sales and inventory information regarding its products, and any
errors or omissions made by those distributors, if material, could affect
operating results.
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. For these revenues, the Company
must make assumptions and estimates of future product returns and sales
allowances, and any differences between those estimates and actual results, if
material, could affect that period's operating results.
o Inventories
The Company's inventories represent high-technology parts that may be subject to
rapid technological obsolescence and which are sold in a highly competitive
industry. Inventories are valued at the lower of first-in, first-out cost or
market, and are actively reviewed for product obsolescence and impaired values,
based upon assumptions of future demand and market conditions. When it is
determine that inventory is stated at a higher value than that which can be
recovered, the Company writes this inventory down to its estimated realizable
value.
o Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. These
estimated losses are based upon historical bad debts, specific customer
creditworthiness and current economic trends. If the financial condition of a
customer deteriorates, resulting in the customer's inability to make payments
within approved credit terms, additional allowances may be required. The Company
performs credit evaluations of its customers' financial condition on a regular
basis, and has not experienced any material bad debt losses during the past
three fiscal years.
o Valuation of Long Term Equity Investments.
The Company holds minority equity interests in several publicly and privately
owned companies, some of which operate in the semiconductor industry and are
subject to many of the same business risks faced by SMSC. The Company records an
impairment charge when an investment is judged to have experienced a decline in
value that is other than temporary. Judgments of the value of privately owned
companies is subjective and is dependent upon management's assessment of the
performance of the company and its prospect for future success. Adverse changes
in market conditions or poor operating results of these equity investments could
result in future impairment charges. The recorded value of the Company's equity
investments at February 28, 2002 is $18.5 million.
o Litigation
From time to time, the Company is involved in legal actions arising in the
ordinary course of business. There can be no assurance that any third party
assertions against the Company will be resolved without costly litigation, in a
manner that is not adverse to its financial position, results of operations or
cash flows. As of February 28, 2002, no estimate can be made of any possible
loss or possible range of loss associated with the resolution any such
contingencies. If additional information becomes available which indicates that
a loss, or range of losses, is probable, the Company would then record a charge
for the minimum estimated liability, which could materially impact operating
results and financial condition.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting for all business combinations initiated after
June 30, 2001, thereby eliminating use of the pooling-of-interests method. SFAS
No.142 requires goodwill and certain other intangible assets to be tested for
impairment at least annually and written down only when impaired, replacing the
previous accounting practice of ratably amortizing these items. Intangible
assets other than goodwill that have finite lives are amortized over their
useful lives. This statement applies to existing goodwill and intangible assets,
beginning with fiscal years beginning after December 15, 2001. These
pronouncements did not materially impact the Company's results of operations or
financial condition.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 25, 2002. The
Company currently does not expect this pronouncement to have any impact on its
results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This statement establishes a single accounting
model, based upon the framework established in SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, for
long-lived assets to be disposed of by sale and addressed significant
implementation issues. This statement is effective for fiscal years beginning
after December 15, 2001. This pronouncement did not materially impact the
Company's results of operations or financial condition.
Financial Market Risks
As of February 28, 2002, the Company's $28.6 million of short-term investments
consisted primarily of investments in corporate, government and 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, 2002, 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, SMSC Japan, are denominated in Japanese yen. SMSC Japan
purchases a significant amount of its products for resale from Standard
Microsystems Corporation in U.S. dollars, and from time to time enters into
forward exchange contracts to hedge against currency fluctuations associated
with these product purchases. During fiscal 2002, SMSC Japan entered into a
contract with a Japanese financial institution to purchase U.S. dollars to meet
a portion of its U.S. dollar denominated product purchase requirements. Gains
and losses on this contract were not significant. The contract expired in
February 2002, and as of February 28, 2002, the Company has no open foreign
exchange contracts.
The Company has never received a cash dividend (repatriation of cash) from SMSC
Japan nor does it expect to receive such a dividend in the near future.
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, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Product sales ............................................... $ 128,528 $ 162,008 $ 151,371
Licensing revenues .......................................... 30,770 1,420 1,876
- ------------------------------------------------------------------------------------------------------------------
159,298 163,428 153,247
Cost of goods sold .......................................... 81,264 96,660 93,884
- ------------------------------------------------------------------------------------------------------------------
Gross profit ................................................ 78,034 66,768 59,363
Operating expenses:
Research and development ................................... 31,178 32,580 24,365
Selling, general and administrative ........................ 32,744 35,369 32,993
Restructuring costs ........................................ 7,734 -- --
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations ............................... 6,378 (1,181) 2,005
Other income (expense):
Interest income ............................................ 3,450 5,534 3,442
Interest expense ........................................... (133) (212) (285)
Other income (expense), net ................................ 991 28,971 258
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest ............ 10,686 33,112 5,420
Provision for income taxes .................................. 3,171 10,852 2,007
Minority interest in net income (loss) of subsidiary ........ 40 96 (29)
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations ........................... 7,475 22,164 3,442
Discontinued operations:
Gain on sales of (loss from) discontinued operations (net of
income taxes of ($918), $2,799, and ($2,980)) ............. (1,564) 4,765 4,151
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle ...................................... 5,911 26,929 7,593
Cumulative effect of change in accounting principle (net of
income tax benefits of $1,716) ............................ -- -- (2,924)
- ------------------------------------------------------------------------------------------------------------------
Net income .................................................. $ 5,911 $ 26,929 $ 4,669
==================================================================================================================
Basic net income (loss) per share:
Income from continuing operations ......................... $ 0.47 $ 1.39 $ 0.22
Gain on sales of (loss from) discontinued operations ...... (0.10) 0.30 0.27
Cumulative effect of change in accounting principle ....... -- -- (0.19)
- ------------------------------------------------------------------------------------------------------------------
Basic net income per share .................................. $ 0.37 $ 1.69 $ 0.30
==================================================================================================================
Diluted net income (loss) per share:
Income from continuing operations ......................... $ 0.44 $ 1.29 $ 0.22
Gain on sales of (loss from) discontinued operations ...... (0.09) 0.28 0.26
Cumulative effect of change in accounting principle ....... -- -- (0.19)
- ------------------------------------------------------------------------------------------------------------------
Diluted net income per share ................................ $ 0.35 $ 1.57 $ 0.29
==================================================================================================================
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, 2002 2001
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents ......................... $ 98,065 $ 99,545
Short-term investments ............................ 28,595 9,629
Accounts receivable, net of allowance for doubtful
accounts of $450 and $362, respectively .......... 21,828 16,776
Inventories ....................................... 17,585 31,999
Deferred income taxes ............................. 8,582 8,718
Other current assets .............................. 4,317 7,080
- --------------------------------------------------------------------------------
Total current assets .............................. 178,972 173,747
Property, plant and equipment, net .................. 24,170 35,492
Investment in Chartered Semiconductor ............... 9,992 13,001
Deferred income taxes ............................... 7,196 2,019
Other assets ........................................ 15,733 14,839
- --------------------------------------------------------------------------------
$ 236,063 $ 239,098
================================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable .................................. $ 8,477 $ 11,721
Deferred income on shipments to distributors ...... 6,225 6,672
Accrued expenses and other liabilities ............ 9,289 8,972
- --------------------------------------------------------------------------------
Total current liabilities ......................... 23,991 27,365
- --------------------------------------------------------------------------------
Other liabilities ................................... 6,973 5,812
Commitments and contingencies
Minority interest in subsidiary ..................... 11,646 11,606
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 17,277,000 and
17,082,000 shares, respectively .................. 1,728 1,708
Additional paid-in capital ........................ 119,505 116,515
Retained earnings ................................. 84,963 79,052
Treasury stock, 1,338,000 and 998,000 shares,
respectively, at cost ............................ (13,861) (8,330)
Accumulated other comprehensive income ............ 1,118 5,370
- --------------------------------------------------------------------------------
Total shareholders' equity ........................ 193,453 194,315
- --------------------------------------------------------------------------------
$ 236,063 $ 239,098
================================================================================
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, 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
Comprehensive income:
Net income ................................. -- -- -- 5,911 -- -- -- 5,911
Other comprehensive loss
Change in unrealized gain on investments .. -- -- -- -- -- -- (2,683) (2,683)
Foreign currency translation adjustment ... -- -- -- -- -- -- (1,569) (1,569)
----------
Total other comprehensive loss (4,252)
----------
Total comprehensive income 1,659
Stock options exercised .................... 169 17 1,543 -- -- -- -- 1,560
Tax effect of employee stock plans ......... -- -- 595 -- -- -- -- 595
Stock grants to employees, net ............. 26 3 645 -- -- -- -- 648
Stock-based compensation ................... -- -- 207 -- -- -- -- 207
Purchases of treasury stock ................ -- -- -- -- (340) (5,531) -- (5,531)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 2002 ................ 17,277 $ 1,728 $ 119,505 $ 84,963 (1,338) $(13,861) $ 1,118 $ 193,453
- ------------------------------------------------------------------------------------------------------------------------------------
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, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers and licensees ............... $ 152,884 $ 163,355 $ 163,468
Cash paid to suppliers and employees ..................... (122,655) (160,868) (148,099)
Interest received ........................................ 4,208 4,795 3,417
Interest paid ............................................ (133) (212) (285)
Income taxes paid ........................................ (5,349) (8,239) (796)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities .... 28,955 (1,169) 17,705
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures ..................................... (4,488) (14,600) (10,503)
Sales of property, plant and equipment ................... 2,004 891 863
Sales of equity investments .............................. 1,064 38,608 297
Purchases of short-term investments ...................... (32,595) (10,632) (8,000)
Sales of short-term investments .......................... 13,629 3,003 8,000
Other .................................................... (2,583) (140) (214)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ... (22,969) 17,130 (9,557)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock ................... 1,560 3,111 2,457
Purchases of treasury stock .............................. (4,750) (3,951) (1,422)
Repayments of obligations under capital leases ........... (1,002) (924) (853)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities ... (4,192) (1,764) 182
- ---------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents ............................................. (691) (424) 226
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) discontinued operations ... (2,583) 12,367 (3,222)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ...... (1,480) 26,140 5,334
Cash and cash equivalents at beginning of year ............ 99,545 73,405 68,071
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year .................. $ 98,065 $ 99,545 $ 73,405
===============================================================================================================
Reconciliation of income from continuing operations to
net cash provided by (used for) operating activities:
Income from continuing operations ......................... $ 7,475 $ 22,164 $ 3,442
Adjustments to reconcile income from continuing operations
to net cash provided by (used for) operating activities:
Depreciation and amortization ............................ 11,614 11,792 9,988
Gains on sales of investments ............................ (1,639) (28,935) (276)
Asset impairments ........................................ 5,602 -- --
Other adjustments, net ................................... 80 (221) 189
Changes in operating assets and liabilities:
Accounts receivable ..................................... (5,666) (44) 9,933
Inventories ............................................. 14,172 (12,139) (7,354)
Accounts payable and accrued expenses and
other liabilities ....................................... (1,450) 3,982 363
Other changes, net ...................................... (1,233) 2,232 1,420
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities ...... $ 28,955 $ (1,169) $ 17,705
===============================================================================================================
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 integrated circuits for a broad range of high-speed communication
and computing applications. The Company's products provide solutions in Advanced
Input/Output (I/O) technology, Environmental Monitoring and Control, USB
Connectivity, Local Area Networking, Embedded Control Systems and Systems Logic.
SMSC is the world's leading supplier of Advanced 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 2002 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, 2002, 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 costs of
these short-term investments approximates their market value as of February 28,
2002.
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 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 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 values of
these investments are not recognized unless they are sold, or an impairment in
value is deemed to be other than temporary.
Long-Term 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. The Company's terms of shipment are
customarily FOB shipping point.
Certain of the Company's products are sold to distributors under agreements
providing for 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 in Note 8 - Accounting Change - Recognition of Revenue on
Shipments to Distributors.
Research and Development
Expenditures for research and development are expensed in the period incurred.
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 Note 15 - Benefit and Incentive Plans.
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 certain aspects of APB Opinion No. 25, including
the definition of an employee, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The Company's accounting for stock-based compensation complies with
the provisions of FIN 44.
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, in management's judgment, 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.
Foreign Exchange Contracts
The Company purchases most of its materials and transacts most of its
international sales, with the exception of certain sales to customers in Japan,
in U.S. dollars. The Company's Japanese subsidiary, SMSC Japan, serves the
Japanese market and transacts sales to its customers in Japanese yen. SMSC Japan
purchases a significant amount of its products for resale from Standard
Microsystems Corporation in U.S. dollars and, from time to time, enters into
forward exchange contracts to hedge against currency fluctuations associated
with these product purchases. During fiscal 2002, SMSC Japan entered into a
contract with a Japanese financial institution to purchase U.S. dollars to meet
a portion of its U.S. dollar denominated product purchase requirements. Gains
and losses on this contract were not significant. The contract expired in
February 2002, and as of February 28, 2002, the Company has no open foreign
exchange contracts.
Comprehensive Income
The Company's other comprehensive income (loss) consists of foreign currency
translation adjustments for those subsidiaries not using the U.S. dollar as
their functional currency and unrealized gains and losses on investments.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting for all business combinations initiated after
June 30, 2001, thereby eliminating use of the pooling-of-interests method. SFAS
No.142 requires goodwill and certain other intangible assets to be tested for
impairment at least annually and written down only when impaired, replacing the
previous accounting practice of ratably amortizing these items. Intangible
assets other than goodwill that have a finite life are amortized over their
useful lives. This statement applies to existing goodwill and intangible assets,
beginning with fiscal years starting after December 15, 2001. The adoption of
these pronouncements in fiscal 2002 did not materially impact the Company's
results of operations or financial position.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 25, 2002. The
Company currently does not expect this pronouncement to have any impact on its
results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This statement establishes a single accounting
model, based upon the framework established in SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, for
long-lived assets to be disposed of by sale and addressed significant
implementation issues. This statement will be effective for fiscal years
beginning after December 15, 2001. The Company currently does not expect this
pronouncement to have any impact on its results of operations or financial
position.
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, 2002 2001 2000
- --------------------------------------------------------------------------------
Average shares outstanding for basic
net income (loss) per share .............. 16,069 15,925 15,620
Dilutive effect of stock options and
warrants ................................. 831 1,240 295
- --------------------------------------------------------------------------------
Average shares outstanding for diluted
net income (loss) per share .............. 16,900 17,165 15,915
================================================================================
Outstanding options covering 273,000 and 511,000 common shares were excluded
from the computation of diluted net income (loss) per share for the years ended
February 28, 2002 and 2001, respectively, because their effect was antidilutive.
4. BUSINESS RESTRUCTURING
In November 2001, the Company's Board of Directors approved management's plan to
exit the PC chipset business, redirect the Company's resources, and increase its
focus on leveraging its core technologies toward higher growth, higher margin
businesses. This restructuring was announced on December 3, 2001. The decision
to exit this business was based upon an assessment of the PC chipset
marketplace, and management's conclusions that the opportunities for
profitability in this marketplace had declined, and the costs of entry had
increased, to a point where further investments in PC chipset technology were
not justified.
As a result of this restructuring, the Company recorded a charge of $9.0 million
in fiscal 2002, of which $7.7 million is classified within operating expenses
and $1.3 million is classified within cost of goods sold on the Consolidated
Statement of Operations.
A summary of the restructuring charge is as follows (in thousands):
Business
Restructuring
Total Non-cash Cash Reserve As of
Charges Charges Payments February 28, 2002
- --------------------------------------------------------------------------------
Impairment of assets ....... $ 5,340 $ 5,340 $ $ --
Excess and obsolete
inventory ................. 1,275 1,275 -- --
Workforce reduction ........ 309 -- 307 2
Non-cancelable lease
obligations ............... 1,870 -- 99 1,771
Other charges .............. 215 15 19 181
- --------------------------------------------------------------------------------
$ 9,009 $ 6,630 $ 425 $ 1,954
================================================================================
Impairment of Assets
All assets identified as specifically utilized in the Company's PC chipset
development activities were evaluated for possible future use, and those assets
for which there was no alternative future use were written off. Most of these
assets consisted of software and intellectual property used in the design and
development of integrated circuits, many of which were acquired by
non-exclusive, non-transferable licenses. These assets are classified as held
for disposal, which will be effected through abandonment of their use. One
asset, which was originally acquired specifically to support the Company's PC
chipset activities, was determined to have alternative future use within the
Company's ongoing operations. An impairment charge of $1.9 million was recorded
on this asset, based upon an assessment of its fair value through comparison to
market values of assets providing functionality similar to the asset's future
use.
Excess and Obsolete Inventory
The Company's inventory of PC chipset products, built primarily in anticipation
of future design wins, was determined to have minimal net realizable value and
was written down accordingly.
Workforce Reduction
As a result of this restructuring, and in line with the sustained economic
difficulties of the semiconductor marketplace, the Company eliminated 55
positions, or 11% of its work force, during the third quarter of fiscal 2002.
Most of the positions eliminated were within the Company's engineering and
development staff. This workforce reduction resulted in a $0.3 million charge
for severance benefits.
Non-cancelable Lease Obligations
The workforce reduction created idle floor space at two of the Company's leased
facilities, both of which are subject to long-term, non-cancelable lease
obligations. The restructuring charge includes $1.9 million to cover the cost of
this idle space, which was based upon the ratio of idle floor space to total
floor space at each location.
The Company completed its restructuring program during the fourth quarter of
fiscal 2002. Substantially all of the cash payments related to the workforce
reduction were made in that period. Payments related to non-cancelable lease
obligations will be paid over their respective terms, through August 2008.
As a result of this restructuring, the Company reduced its annual operating
expenses by approximately $7.1 million, primarily affecting research and
development expenses. The restructuring had minimal impact on current product
sales, as the Company had yet to achieve significant product sales of PC chipset
products.
5. TECHNOLOGY AND PATENT LICENSE AGREEMENTS WITH INTEL CORPORATION
In 1987, the Company and Intel Corporation (Intel) entered into an agreement
providing for, among other things, a broad, worldwide, non-exclusive patent
cross-license between the two companies, covering manufacturing processes and
products, thereby providing each company access to the other's current and
future patent portfolios.
In September 1999, the two companies announced a technology exchange agreement
(the Agreement) that would allow SMSC to accelerate its ongoing development of
Intel-compatible chipset products. Chipset products are integrated circuits that
communicate with the microprocessor (CPU) and assist in controlling the flow of
information within a personal computer or similar application. The Agreement
provides, among other things, for Intel to transfer certain intellectual
property related to Intel chipset architectures to SMSC, and provides SMSC the
opportunity to supply Intel chipset components along with its own chipset
solutions. The Agreement also limits SMSC's rights regarding Northbridges and
Intel Architecture Microprocessors under the 1987 agreement.
The Agreement includes provisions for its termination under certain
circumstances. Under one such provision, beginning in the third year of the
Agreement and annually thereafter, SMSC can elect to terminate the Agreement
should SMSC not achieve certain minimum chipset revenue amounts set forth in the
Agreement, unless Intel pays SMSC an amount equal to the shortfall between the
minimum revenue amount and the actual revenue for that period. Should the
Agreement terminate under this provision, the limitations imposed by the
Agreement on the Northbridge rights under the 1987 agreement terminate
immediately, and the limitations imposed by the Agreement on the microprocessor
rights under the 1987 agreement terminate 12 months later. Should Intel elect to
make the revenue amount shortfall payment, the provisions of the Agreement will
remain in force for the subsequent 12-month period, for which another minimum
revenue amount will be applicable, and at the end of which a similar termination
event may arise. Minimum chipset revenue amounts are $30 million, $45 million,
and $60 million for the 12 months ending September 21, 2001, 2002, and 2003,
respectively, and increase by 10% for each succeeding 12-month period following
2003, until expiration of the Agreement in July 2007.
In September 2001, SMSC notified Intel of a chipset revenue shortfall of
approximately $29.6 million for the 12 months ended September 21, 2001. In
November 2001, the Company received a $29.6 million payment from Intel, which is
reported as licensing revenue on the Company's Consolidated Statements of
Operations for the year ended February 28, 2002. There can be no assurance
whatsoever that Intel will elect to pay any future revenue shortfalls to SMSC
under the Agreement.
6. 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 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
have since operated as Standard MEMS, Inc. (SMI).
The Company reported the operating results, net assets and cash flows of the FBU
as a discontinued operation, and recorded a pre-tax charge of $15.2 million in
fiscal 1999, covering write-downs of certain assets, pre-closing operating
losses, and other costs associated with the transaction. In fiscal 2000, the
Company recorded a $4.2 million 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
fiscal 2001, the Company sold the majority of its ownership interest in SMI and
realized an after-tax gain of $4.8 million, 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%.
The Company has been involved in several legal actions relating to past
divestitures of divisions and business units. These divestitures were accounted
for as discontinued operations and, accordingly, costs associated with these
actions are reported as a Loss from discontinued operations on the Consolidated
Statements of Operations. These costs totaled $2.5 million, before applicable
income tax benefits of $0.9 million, for the year ended February 28, 2002.
7. 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 $19.9
million. 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 market as American
Depository Shares, or ADSs.
The significant increase in Other income (expense), 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 $24.2 million in fiscal 2001, while
proceeds from the sales of call options, none of which were exercised, were $2.2
million during the same period. No sales of this investment or related call
options were executed in fiscal 2002. As of February 28, 2002, the Company held
approximately 444,000 of its original 828,000 Chartered ADSs, which have an
original cost of $10.7 million and which are reported on the Consolidated
Balance Sheet at $10.0 million, based upon their closing price on the Nasdaq
stock market on that date.
Other Equity Investments
The Company has an equity investment of less than 1% in a publicly traded
company, portions of which have been sold during the past three fiscal years,
resulting in pre-tax gains of $1.1 million, $2.0 million and $0.3 million in
fiscal 2002, 2001 and 2000, respectively. This investment is carried at its fair
value of $0.1 million within Other assets on the Consolidated Balance Sheet as
of February 28, 2002.
During third and fourth quarters fiscal 2002, the Company recorded charges
totaling $0.7 million to write down two cost-basis investments in privately held
companies. Management concluded that these investments had experienced permanent
impairments in value. Both investments now carry no net book value.
All gains and losses related to these equity investments are included within
Other income (expense), net, on the Consolidated Statements of Operations.
8. 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).
Management considers the current policy of deferring revenue on shipments to
distributors to be a more meaningful presentation of the Company's operating
results. It allows investors to better understand end-user demand for the
products that the Company sells through distribution channels and it better
focuses the Company on end-user demand. This policy is also a common practice
within the semiconductor industry.
The cumulative effect of this change in accounting principle was a charge of
$2.9 million, net of $1.7 million of income tax benefits, or $0.19 per diluted
share, recorded in fiscal 2000. The estimated pro forma effect of the accounting
change on operating results for fiscal 2000, reflecting the change in accounting
principle applied retroactively, is presented below (in thousands, except per
share data):
For the year ended February 29, 2000 As Reported Pro Forma
- --------------------------------------------------------------------------------
Revenues ..................................... $ 153,247 $ 153,247
Income from continuing operations ............ 3,442 3,442
Net income ................................... 4,669 7,593
Basic net income per share
Income from continuing operations .......... $ 0.22 $ 0.22
Net income ................................. 0.30 0.49
Diluted net income per share
Income from continuing operations .......... $ 0.22 $ 0.22
Net income ................................. 0.29 0.48
================================================================================
9. OTHER BALANCE SHEET DATA
(In thousands)
As of February 28, 2002 2001
- --------------------------------------------------------------------------------
Inventories:
Raw materials ................................. $ 465 $ 558
Work-in-process ............................... 5,820 22,859
Finished goods ................................ 11,300 8,582
- --------------------------------------------------------------------------------
$ 17,585 $ 31,999
================================================================================
Property, plant and equipment:
Land .......................................... $ 3,434 $ 3,434
Buildings and improvements .................... 29,257 29,540
Machinery and equipment ....................... 76,121 82,794
- --------------------------------------------------------------------------------
108,812 115,768
Less: accumulated depreciation ................ 84,642 80,276
- --------------------------------------------------------------------------------
$ 24,170 $ 35,492
================================================================================
Other assets:
Common stock of SMC Networks, Inc. ............ $ 8,452 $ 8,452
Other ......................................... 7,281 6,387
- --------------------------------------------------------------------------------
$ 15,733 $ 14,839
================================================================================
Accrued expenses and other liabilities
Salaries and fringe benefits .................. $ 2,358 $ 2,839
Business restructuring obligations ............ 576 --
Other ......................................... 6,355 6,133
- --------------------------------------------------------------------------------
$ 9,289 $ 8,972
================================================================================
Other liabilities:
Retirement benefits ........................... $ 5,395 $ 4,722
Business restructuring obligations ............ 1,378 --
Other ......................................... 200 1,090
- --------------------------------------------------------------------------------
$ 6,973 $ 5,812
================================================================================
10. SALES OF FACILITIES
During the first quarter of fiscal 2002, the Company sold two underutilized
facilities. Combined proceeds from these sales were $2.1 million, before related
expenses, and the sales resulted in a net pre-tax gain of approximately $0.6
million, which is included within Other income (expense), net.
11. SHAREHOLDERS' EQUITY
Common Stock Repurchase Program
In October 1998, the Company's Board of Directors approved a common stock
repurchase program, allowing the Company to repurchase up to one million shares
of its common stock on the open market or in private transactions. In July 2000,
the authorization was expanded from one million shares to two million shares. As
of February 28, 2002, the Company had repurchased 1,338,000 shares of common
stock at a cost of $13.9 million under this program. Of that total, 340,000
shares were repurchased in fiscal 2002 at a cost of $5.5 million. The Company
currently holds repurchased shares as treasury stock, reported at cost.
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 the Board of
Directors in January 1998, replacing the Company's previous plan which had
expired on January 12, 1998, and was subsequently amended in December 2000 and
in April 2002. 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.
Citigroup, Inc.'s (Citigroup) ownership of the Company's common stock is
excluded 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 largest beneficial owner of the Company's common stock at
February 28, 2002.
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 $14.7 million. 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 $1.9 million
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 a right of first refusal upon certain corporate transactions,
including proposed sales of all or substantially all of the assets of the
Company, certain sales of common stock of the Company and certain other
transactions which would result in or relating to a change in control of the
Company. The Agreement also provides Intel certain other rights, including
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.
12. 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, 2002 2001 2000
- --------------------------------------------------------------------------------
Current
Federal ................................ $ 5,308 $ 7,684 $ (4,228)
Foreign ................................ 241 602 87
State .................................. 176 149 718
- --------------------------------------------------------------------------------
5,725 8,435 (3,423)
Deferred ................................. (3,472) 5,216 734
- --------------------------------------------------------------------------------
2,253 13,651 (2,689)
Less: tax provision for (benefit from)
discontinued operations ................ (918) 2,799 (2,980)
Less: tax benefits from change in
accounting Principle ................... -- -- (1,716)
- --------------------------------------------------------------------------------
$ 3,171 $ 10,852 $ 2,007
================================================================================
The tax provisions for and benefits from discontinued operations represent the
taxes resulting from gains and losses related to the Company's previous sale of
its former Foundry Business Unit and its former System Products Division, both
of which were accounted for as discontinued operations. These gains and losses
are further described in Note 6 - Discontinued Operations. The tax benefit from
discontinued operations in fiscal 2000 includes $3.4 million of previously
reserved tax benefits related to Foundry Business Unit sale.
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, 2002 2001 2000
- --------------------------------------------------------------------------------
Provision for income taxes computed
at U.S. federal statutory rate ............. 35.0% 35.0% 35.0%
State taxes, net of federal benefit .......... 1.0 0.2 1.0
Differences between foreign and
U.S. income tax rates ...................... (0.7) 0.7 8.1
Tax-exempt income ............................ (4.5) (2.2) (5.7)
Other ........................................ (1.1) (0.9) (1.4)
- --------------------------------------------------------------------------------
29.7% 32.8% 37.0%
================================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax benefits and liabilities are as follows (in thousands):
As of February 28, 2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserves and accruals not currently
deductible for income tax purposes .............. $ 5,186 $ 3,771
Inventory valuation ............................... 3,372 2,719
Intangible asset amortization ..................... 2,124 2,846
Restructuring costs ............................... 2,553 --
Purchased in-process technology ................... 1,179 1,485
Property, plant and equipment depreciation ........ 503 900
Other ............................................. 861 225
- --------------------------------------------------------------------------------
Total deferred tax assets .................. 15,778 11,946
Deferred tax liabilities:
Unrealized gains on investments ................... -- (1,209)
- --------------------------------------------------------------------------------
Total deferred tax liabilities ............. -- (1,209)
- --------------------------------------------------------------------------------
Net deferred tax assets ........................... $ 15,778 $ 10,737
================================================================================
Income before income taxes and minority interest includes foreign income of $0.7
million, $0.9 million and $0.5 million for fiscal 2002, 2001, and 2000,
respectively.
The Company has $1.9 million of New York State tax credit carryforwards at the
end of fiscal 2002, of which $0.1 million will expire in fiscal 2003. The
remaining $1.8 million of credit carryforwards expire at various dates in fiscal
2004 through fiscal 2011.
13. 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, SMSC Japan. This subsidiary,
formerly known as Toyo Microsystems Corporation, was renamed Standard
Microsystems K.K. in March 2002, and now doing business as SMSC Japan.
The Company and Sumitomo have agreed to declare a preferred dividend if SMSC
Japan 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 $1.0 million, at an
exchange rate of 130 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 SMSC Japan.
14. 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 totaling $0.7 million in fiscal
2003.
Leases
The Company and its subsidiaries lease certain facilities and equipment under
operating leases. The facility leases generally provide for the lessee to pay
taxes, maintenance, and certain other operating costs of the leased property.
The Company also 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.
At February 28, 2002 future minimum lease payments for non-cancelable lease
obligations are as follows: (in thousands):
Capital Operating
Leases Leases
- ----------------------------------------------------------------------
2003 ...................................... $ 940 $ 1,171
2004 ...................................... 205 789
2005 ...................................... -- 529
2006 ...................................... -- 261
2007 ...................................... -- 175
Thereafter ................................ -- 262
- ----------------------------------------------------------------------
Total minimum lease payments .............. 1,145 $ 3,187
========
Less: Amount representing interest ........ 55
- -----------------------------------------------------
Present value of minimum lease payments ... 1,090
Less: Current obligation .................. 890
- -----------------------------------------------------
Long-term obligation ...................... $ 200
=====================================================
Included within property and equipment are the following assets held under
capital leases (in thousands):
As of February 28 or 29, 2002 2001
- --------------------------------------------------------------------------
Machinery and equipment $ 4,709 $ 4,676
Less: Accumulated depreciation (3,265) (2,509)
- --------------------------------------------------------------------------
$ 1,444 $ 2,167
==========================================================================
Total rental expenses for all operating leases was $1.8 million, $1.9 million
and $1.7 million in fiscal 2002, 2001 and 2000, respectively.
The Company leases certain of its buildings and related improvements to outside
parties under noncancelable operating leases. At February 28, 2002, the cost and
accumulated depreciation of the leased buildings were $22.3 million and $19.1
million, respectively.
Future minimum rental income under operating leases for the next five fiscal
years, excluding $1.0 million of rental income through fiscal 2005 from one
party currently in default, for which future collection is uncertain, is as
follows (in thousands):
Rental
Income
- ------------------------------------------------
2003 $ 376
2004 398
2005 421
2006 445
2007 471
2008 and thereafter 1,723
- ------------------------------------------------
$ 3,834
================================================
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
alleged that some of the Company's products infringe one Philips patent, and was
seeking injunctive relief and unspecified damages.
In November 2001, the Company and Philips agreed to settle the dispute and to
file a joint motion to dismiss all claims. As part of the settlement, the
parties have entered into a nonexclusive licensing agreement under which SMSC is
a licensee of the previously disputed Philips' patent rights.
In October 1997, the Company sold an 80.1% interest in SMC Networks, Inc., a
then-newly formed subsidiary comprised of its former local area networking
division, to an affiliate of Accton Technology Corporation (Accton). In
consideration for the sale, the Company received $40.2 million in cash, of which
$2.0 million was placed in an escrow account, scheduled for release in January
1999, to secure the Company's indemnity obligations under the agreement. The
Company's 19.9% minority interest in SMC Networks, Inc. is carried at a cost of
$8.5 million 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
Sheets at February 28, 2002 and 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 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.
15. 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 makes
matching contributions to the Plan in the form of SMSC common stock. In fiscal
2002, the Company's matching contribution to the plan was increased to
two-thirds of the employee's contribution, up to 6% of the employee's earnings.
In prior fiscal years, the Company matched one-half of the employee's
contributions, up to 6% of the employee's earnings. The Company's matching
contributions to the Plan totaled $0.9 million, $0.7 million, and $0.6 million
in fiscal 2002, 2001,and 2000, respectively.
Since July 2000, common stock for the Company's matching contributions to the
Plan has been purchased in the open market. Previously, newly-issued common
stock was contributed to the Plan from authorized reserves. Since its inception,
1,279,000 shares of the Company's common stock have been contributed to the
Plan.
As of February 28, 2002, 294 of the 366 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 up to 5,381,000
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, 2002, 1,318,000, 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
2002 Average 2001 Average 2000 Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
- -----------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year ...... 3,500 $ 12.17 2,510 $ 9.10 1,370 $ 9.18
Granted ..................................... 1,138 13.95 1,581 16.11 1,767 8.95
Exercised ................................... (175) 9.49 (287) 8.98 (237) 8.92
Canceled or expired ......................... (400) 14.86 (304) 10.38 (390) 8.75
- -----------------------------------------------------------------------------------------------------------------
Options outstanding, end of year ............ 4,063 $ 12.52 3,500 $ 12.17 2,510 $ 9.10
- -----------------------------------------------------------------------------------------------------------------
Options exercisable ......................... 1,110 $ 11.40 565 $ 9.54 359 $ 9.27
=================================================================================================================
The following table summarizes information relating to currently outstanding and
exercisable options as of February 28, 2002 (shares in thousands):
Weighted Average
Range of Remaining Life Options Weighted Average Options Weighted Average
Exercise Prices (in years) Outstanding Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$6.250 - $8.750 7.04 910 $ 7.50 296 $ 7.62
$8.812 - $12.580 7.48 885 10.63 395 9.88
$12.625 - $14.093 8.28 1,013 13.79 262 13.83
$14.187 - $17.343 8.95 880 15.18 60 16.07
$17.375 - $25.125 8.63 375 19.43 97 19.67
- ---------------------------------------------------------------------------------------------------------------------------
4,063 1,110
===========================================================================================================================
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 recorded consistent with the provisions of SFAS No.
123, the Company's net income (loss) and net income (loss) per share would have
been the pro forma amounts indicated below (in thousands, except per share
data):
For the years ended February 29 or 28, 2002 2001 2000
- --------------------------------------------------------------------------------
Net income (loss):
As reported ............................. $ 5,911 $ 26,929 $ 4,669
Pro forma ............................... (142) 22,529 2,320
- --------------------------------------------------------------------------------
Diluted net income (loss) per share:
As reported ............................. $ .35 $ 1.57 $ 0.29
Pro forma ............................... $ (.01) $ 1.31 $ 0.15
================================================================================
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 29 or 28, 2002 2001 2000
- --------------------------------------------------------------------------------
Dividend yield ............................ -- -- --
Expected volatility ....................... 63% 64% 63%
Risk-free interest rates .................. 4.17% 4.62% 6.64%
Expected lives (in years) ................. 4 4 4
================================================================================
The weighted average Black-Scholes values of options granted in fiscal 2002,
2001, and 2000 were $7.57, $8.57, and $5.00, 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, 2002, the
expiration dates of the outstanding options range from July 6, 2002 to July 11,
2011, and the exercise prices range from $8.50 to $20.25 (average $12.61) per
share.
The following is a summary of activity under the Director Stock Option Plan over
the past three fiscal years (in thousands):
For the years ended February 29 or 28, 2002 2001 2000
- --------------------------------------------------------------------------------
Shares under option, beginning of year ...... 213 218 228
Options granted during the year ............. 48 50 67
Options canceled or terminated .............. -- -- (77)
Options exercised ........................... -- (55) --
- --------------------------------------------------------------------------------
Shares under option, end of year ............ 261 213 218
- --------------------------------------------------------------------------------
Options exercisable, end of year ............ 247 188 168
- --------------------------------------------------------------------------------
Shares available for future grants,
end of year ............................... 194 -- 32
================================================================================
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 under this plan (units in thousands):
For the years ended February 29 or 28, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Common stock equivalent units, beginning of year ................ 25 23 19
Common stock equivalent units earned during the year ............ 6 6 10
Common stock distributed during the year ........................ -- (4) (6)
- -------------------------------------------------------------------------------------------------------------------------
Common stock equivalent units, end of year ...................... 31 25 23
- -------------------------------------------------------------------------------------------------------------------------
Common stock equivalent units available, end of year ............ 69 75 71
- -------------------------------------------------------------------------------------------------------------------------
Range of common stock prices used to calculate common
stock equivalent units .......................................... $ 9.73 - $17.10 $14.38 - $20.25 $ 7.25 - $11.13
=========================================================================================================================
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 typically 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 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. Through February 28, 2002, 161,000 shares, net of cancellations,
have been awarded under this plan, of which 100,000 remain unearned as of
February 28, 2002. Deferred compensation expense of $1.4 million associated with
these unearned shares is reported as a reduction of Additional paid-in capital
on the February 28, 2002 Consolidated Balance Sheet. Compensation expense for
this plan was $0.5 million, $0.4 million and $0.3 million in fiscal 2002, 2001,
and 2000, respectively.
Retirement Plans
In October 2000, the Board of Directors terminated all additional benefits for
active non-employee directors under its Director 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 $0.6 million 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, whichever is earlier, for a period equal to the
lessor 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
Plan's retirement benefits are based upon the participant's average compensation
during the three-year period prior to retirement. The Company is the beneficiary
of life insurance policies that have been purchased as a method of partially
financing these benefits. Based upon the latest available actuarial information,
the following table sets forth the components of the Plan's net periodic pension
expense, the Plan's funded status and the assumptions used in determining the
present value of benefit obligations (dollars in thousands):
For the years ended February 29 or 28, 2002 2001 2000
- --------------------------------------------------------------------------------
Service cost - benefits earned
during the year ......................... $ 71 $ 80 $ 31
Interest cost on projected
benefit obligations ..................... 346 339 378
Net amortization and deferral ............. 241 244 245
- --------------------------------------------------------------------------------
Net periodic pension expense .............. $ 658 $ 663 $ 654
================================================================================
As of February 29 or 28, 2002 2001 2000
- --------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation ............ $ 4,555 $ 3,975 $ 3,868
Nonvested benefit obligation ......... 287 130 126
- --------------------------------------------------------------------------------
Accumulated benefit obligation ............ 4,842 4,105 3,994
Effect of projected future salary
increases ............................... 1,228 809 803
- --------------------------------------------------------------------------------
Projected benefit obligation .............. 6,070 4,914 4,797
Unrecognized gain or (loss) ............... (379) 565 465
Unrecognized net transition asset ......... (1,715) (1,961) (2,206)
Additional minimum liability .............. 867 587 938
- --------------------------------------------------------------------------------
Accrued pension cost ...................... $ 4,843 $ 4,105 $ 3,994
================================================================================
Assumptions used in determining actuarial
present value of benefit obligations:
Discount rate ............................. 6.00% 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 $0.8 million, $0.9 million, and
$0.8 million was earned in fiscal 2002, 2001, and 2000, respectively.
16. INDUSTRY SEGMENT, GEOGRAPHIC, CUSTOMER AND SUPPLIER 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
some 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 SMSC Japan. The Company conducts various
sales and marketing operations outside of the United States through SMSC 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 $10.0 million as of February 28, 2002.
Export Sales
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended February 28 or 29, 2002 2001 2000
- --------------------------------------------------------------------------------
North America ......................... $ 42,913 $ 37,750 $ 31,495
Asia and Pacific Rim .................. 106,123 101,039 100,889
Europe ................................ 10,157 24,240 20,383
Rest of World ......................... 105 399 480
- --------------------------------------------------------------------------------
$ 159,298 $ 163,428 $ 153,247
================================================================================
Significant Customers
During fiscal 2002, 2001 and 2000, the Company had two customers whose purchases
represented a significant portion of the Company's revenues in certain fiscal
years. Revenues from one customer represented 29.0% in fiscal 2002 and 11.2% in
fiscal 2001 of the Company's revenues for those respective fiscal years.
Revenues from a second customer represented 15.2% in fiscal 2002 and 14.5% in
fiscal 2000 of the Company's revenues for those respective fiscal years. No
other customer represented more than 10% of the Company's revenues in these
fiscal years.
Significant Suppliers
The Company does not operate a wafer fabrication facility. Two independent
foundries in Asia currently supply substantially all of the Company's devices in
current production. In addition, substantially all of the Company's products are
assembled by one of four independent subcontractors in Asia.
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. One customer accounts for $7.5
million of the Company's accounts receivable as of February 28, 2002. The
Company performs credit evaluations of its customers' financial condition on a
regular basis and although the Company generally requires no collateral,
prepayments or letters of credit may be required from its customers in certain
circumstances. Reserves for estimated credit losses are maintained and actual
losses were not significant for all years presented.
The Company invests it cash, cash equivalents and short-term investments in a
variety of financial instruments and, by policy, seeks to limit the credit
exposure on these investments through diversification and by restricting the
investments to highly-rated securities.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
- --------------------------------------------------------------------------------
Fiscal 2002
Product sales ...................... $ 30,510 $ 30,120 $ 34,644 $ 33,254
Licensing revenues ................. 326 269 29,970 205
- --------------------------------------------------------------------------------
$ 30,836 $ 30,389 $ 64,614 $ 33,459
Gross profit ....................... 11,776 12,183 40,299 13,776
Operating income (loss) ............ (4,512) (3,039) 13,591 338
Income (loss) from continuing
operations ....................... (1,624) (869) 9,195 773
Loss from discontinued operations .. (245) (307) (116) (896)
Net income (loss) .................. (1,869) (1,176) 9,079 (123)
================================================================================
Basic net income (loss) per share
Income (loss)from continuing
operations ...................... $ (0.10) $ (0.05) $ 0.57 $ 0.05
Loss from discontinued
operations ...................... (0.02) (0.02) (0.01) (0.06)
- --------------------------------------------------------------------------------
$ (0.12) $ (0.07) $ 0.56 $ (0.01)
================================================================================
Diluted net income (loss) per share
Income (loss) from continuing
operations ...................... $ (0.10) $ (0.05) $ 0.56 $ 0.04
Loss from discontinued
operations ...................... (0.02) (0.02) (0.01) (0.05)
- --------------------------------------------------------------------------------
$ (0.12) $ (0.07) $ 0.55 $ (0.01)
================================================================================
Average shares outstanding
Basic net income (loss)
per share ....................... 16,102 16,107 16,071 16,018
Diluted net income (loss)
per share ....................... 16,102 16,107 16,525 17,070
Market price per share
High ............................ $ 17.00 $ 17.90 $ 13.82 $ 19.75
Low ............................. 12.06 11.79 8.50 12.94
===============================================================================
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
- --------------------------------------------------------------------------------
Fiscal 2001
Product sales ...................... $ 37,774 $ 45,440 $ 46,616 $ 32,178
Licensing revenues ................. 445 457 314 204
- --------------------------------------------------------------------------------
$ 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
Income from 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
Income from 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
================================================================================
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 781 holders of record of the Company's common stock at April
4, 2002.
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 OF INDEPENDENT PUBLIC ACCOUNTANTS
To Standard Microsystems Corporation:
We have audited the accompanying consolidated balance sheets of Standard
Microsystems Corporation (a Delaware corporation) and subsidiaries as of
February 28, 2002 and 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended February 28, 2002. 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 2002, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
New York, NY
April 4, 2002