Exhibit 13
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Portions of Annual Report to Shareholders
FINANCIAL TABLE OF CONTENTS
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Auditors
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 2004 2003 2002 2001 2000
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Operating Results
Product sales $ 191,969 $ 154,244 $ 128,528 $ 162,008 $ 151,371
Intellectual property revenues 23,904 1,273 30,770 1,420 1,876
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Total sales and revenues 215,873 155,517 159,298 163,428 153,247
Gross profit 109,637 69,424 78,034 66,768 59,363
Research and development 38,793 31,166 31,178 32,580 24,365
Selling, general and administrative 42,168 36,268 32,744 35,369 32,993
Amortization of intangible assets 1,311 1,167 - - -
Gains on real estate transactions (1,444) - - - -
Restructuring costs - (247) 7,734 - -
Operating income (loss) 28,809 1,070 6,378 (1,181) 2,005
Other income (expense) 985 (14,446) 4,308 34,293 3,415
Income (loss) from continuing operations $ 21,542 $ (6,971) $ 7,475 $ 22,164 $ 3,442
Net loss from discontinued operations (24) (500) (1,564) - -
Gain (loss) on sales of discontinued operations,
net of taxes - - - 4,765 4,151
Cumulative effect of change in accounting
principle, net of taxes - - - - (2,924)
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Net income (loss) 21,518 (7,471) 5,911 26,929 4,669
Gain on redemption of preferred stock of subsidiary 6,685 - - - -
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Net income (loss) applicable to common shareholders $ 28,203 $ (7,471) $ 5,911 $ 26,929 $ 4,669
Diluted net income (loss) per share
Income (loss) from continuing operations $ 1.17 $ (0.42) $ 0.44 $ 1.29 $ 0.22
Net income (loss) 1.16 (0.45) 0.35 1.57 0.29
Net income (loss) applicable to common shareholders 1.53 (0.45) 0.35 1.57 0.29
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Diluted weighted average common shares outstanding 18,479 16,538 16,900 17,165 15,915
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Balance Sheet and Other Data
Cash and liquid investments $ 173,897 $ 112,897 $ 126,660 $ 109,174 $ 75,405
Working capital 191,199 145,639 154,981 146,382 111,016
Capital expenditures 10,380 5,695 4,488 14,600 10,503
Depreciation and amortization 11,002 10,752 11,614 11,792 9,988
Total assets 310,025 252,607 236,063 239,098 258,508
Long-term obligations 12,104 12,037 6,973 5,812 22,151
Shareholders' equity 262,102 204,012 193,453 194,315 201,792
Book value per common share 14.27 12.17 12.14 12.08 12.80
This selected financial data should be read in conjunction with the Consolidated
Financial Statements and related notes, and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contained in this report.
The operating results presented above reflect:
- The receipts of $22.5 million and $29.6 million of special intellectual
property payments in fiscal 2004 and 2002, respectively, as more fully
described in Note 7 to the Consolidated Financial Statements included in
this report.
- Sales of real estate in fiscal 2004, as more fully described in Note 11.
- The Company's acqusition of Gain Technology Corporation in fiscal 2003, as
more fully described in Note 4.
- $16.3 million of investment impairment charges recorded in fiscal 2003, as
more fully described in Note 9.
- $9.0 million of business restructuring charges recorded in fiscal 2002, as
more fully descsribed in Note 6.
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 notes thereto contained in this report.
Portions of this report may contain forward-looking statements about expected
future events and financial and operating results that involve risks and
uncertainties. These include the timely development and market acceptance of new
products; the impact of competitive products and pricing; the effect of changing
economic conditions in domestic and international markets; changes in customer
order patterns, including loss of key customers, order cancellations or reduced
bookings; and excess or obsolete inventory and variations in inventory
valuation, among others. Words such as "believe," "expect," "anticipate" and
similar expressions identify forward-looking statements. Such statements are
qualified in their entirety by the inherent risks and uncertainties surrounding
future expectations and may not reflect the potential impact of any future
acquisitions, mergers or divestitures.
Standard Microsystems Corporation (the Company or SMSC) competes in the
semiconductor industry, which has historically been characterized by intense
competition, rapid technological change, cyclical market patterns, price erosion
and periods of mismatched supply and demand. In addition, sales of many of the
Company's products depend largely on sales of personal computers (PCs) and
peripheral devices, and reductions in the rate of growth of the PC and
peripheral device markets could adversely affect its operating results. SMSC
conducts business outside the United States and is subject to tariff and import
regulations and currency fluctuations, which may have an effect on its business.
All forward-looking statements speak only as of the date hereof and are based
upon the information available to SMSC at this time. Such information is subject
to change, and the Company may not necessarily inform, or be required to inform,
investors of such changes. These and other risks and uncertainties, including
potential liability resulting from pending or future litigation, are detailed
from time to time in the Company's reports filed with the Securities and
Exchange Commission (SEC). Investors are advised to read the Company's Annual
Report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC,
particularly those sections entitled Other Factors That May Affect Future
Operating Results, for a more complete discussion of these and other risks and
uncertainties.
OVERVIEW
Description of Business
SMSC provides semiconductor systems solutions for high-speed communication and
computing applications. Through the integration of its leading-edge digital,
mixed-signal and analog design capabilities and software expertise, SMSC
delivers complete solutions that monitor and manage computing systems and
connect peripherals to computers and to one another.
The Company addresses computing, communications and consumer electronics markets
through world-leading positions in Input/Output and non-PCI Ethernet products,
innovations in USB 2.0 and other high-speed serial solutions, and integrated
networking products employed in a broad range of applications.
SMSC is a fabless semiconductor supplier, whose products are manufactured by
world-class third-party semiconductor foundries and assemblers. To ensure the
highest product 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 based in Hauppauge, New York with operations in North America,
Taiwan, Japan, Korea, China and Europe. SMSC operates engineering design centers
in New York, Arizona and Texas.
FISCAL 2004 HIGHLIGHTS
Strategic Business Agreement 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, 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 then ongoing development
of Intel compatible chipset products. The Agreement provided, among other
things, for Intel to transfer certain intellectual property related to Intel
chipset architectures to SMSC, and provided SMSC the opportunity to supply Intel
chipset components along with its own chipset solutions. The Agreement also
limited SMSC's rights regarding Northbridges and Intel Architecture
Microprocessors under the 1987 agreement.
The Agreement included provisions for its termination under certain
circumstances. Under one such provision, SMSC could elect to terminate the
Agreement should SMSC not achieve certain minimum chipset revenue amounts set
forth in the Agreement, unless Intel paid SMSC an amount equal to the shortfall
between the minimum revenue amount and the actual revenue for that period. In
September 2001, pursuant to this provision, SMSC notified Intel of a chipset
revenue shortfall of approximately $29.6 million for the twelve months ended
September 21, 2001. In November 2001, the Company received a $29.6 million
payment from Intel, which is reported as intellectual property revenue on the
Company's Consolidated Statement of Operations for fiscal 2002. In September
2002, SMSC notified Intel of a chipset revenue shortfall for the 2002
twelve-month period. Intel did not make a payment to SMSC of that shortfall
within the time frame specified within the Agreement, and SMSC gave Intel notice
of termination of the Agreement in accordance with the terms thereof, and the
parties commenced discussions regarding their various corporate and intellectual
property relationships.
In September 2003, the Company and Intel announced that they had enhanced their
intellectual property and business relationship. The companies agreed to
collaborate on certain future I/O and sensor products, and Intel agreed to use
the Company's devices on certain current and future generations of Intel
products. In addition, the Company agreed to limit its rights under its 1987
patent cross-license with Intel to manufacture and sell Northbridge products and
Intel Architecture Microprocessors on behalf of third parties. The companies
also terminated an Investor Rights Agreement between them, which had been
entered into in connection with Intel's 1997 acquisition of 1,543,000 shares of
the Company's common stock. Under this agreement, Intel had certain information,
corporate governance and other rights with respect to the activities of the
Company.
In respect of this new relationship, Intel will pay to the Company an aggregate
amount of $75 million, of which $20 million and $2.5 million were paid and
recognized as intellectual property revenue in the third and fourth quarters of
the Company's fiscal 2004, respectively. Of the remaining amount, $7.5 million
will be paid during the balance of calendar year 2004, $10 million will be paid
in calendar year 2005, $11 million will be paid in calendar year 2006, and $12
million will be paid in each of calendar years 2007 and 2008. Such amounts are
payable in equal quarterly installments within each calendar year, and are
subject to possible reduction, in a manner and to an extent to be agreed by the
parties, based upon the companies' collaboration and sales, facilitated by
Intel, of certain future new products of the Company.
Purchase of Minority Interest in SMSC Japan
During the fourth quarter of fiscal 2004, SMSC purchased the minority interest
in SMSC Japan from Sumitomo Metal Industries, Ltd. (Sumitomo). Prior to this
purchase, Sumitomo owned 20% of the issued and outstanding common stock and all
of the non-cumulative, non-voting 6% preferred stock of SMSC Japan. The minority
interest, which was carried at $11.8 million on SMSC's Consolidated Balance
Sheet, was repurchased from Sumitomo for approximately $5.1 million. The excess
of the carrying value over the purchase price was recorded as a credit to
Additional paid-in capital, and is also presented as a component of Net income
applicable to common shareholders on the Company's Consolidated Statement of
Operations for fiscal 2004. As a result of this transaction, SMSC Japan is now a
wholly owned subsidiary of SMSC.
Resolution of Arbitration
SMSC, Accton Technology Corporation (Accton) and SMC Networks, Inc. (Networks)
had been involved in an arbitration related to claims associated with the
purchase of an 80.1% interest in Networks by Accton from SMSC in October 1997.
In September 2003, the arbitration panel issued its decision in this action,
which directed the release of an escrow account to SMSC and awarded certain
other payments among the parties. In December 2003, the parties reached a final
settlement of the award, resulting in SMSC receiving $2.7 million in cash,
including the escrow account, and realizing a pre-tax gain of $0.3 million,
which is included within Loss from discontinued operations.
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 sales and revenues and expenses during the reporting
period.
SMSC believes the following critical accounting policies and estimates 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.
Revenue Recognition
Sales and revenues and associated gross profit from shipments to the Company's
distributors, other than to distributors in Japan, are deferred until the
distributors resell the products. Shipments to distributors, other than to
distributors in Japan, are made under agreements allowing price protection and
limited rights to return unsold merchandise. In addition, SMSC's shipments to
its distributors may experience short-term fluctuations as distributors manage
their inventories to current levels of end-user demand. Therefore, SMSC
considers the 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 SMSC sells
through distribution channels and it better focuses the Company on end-user
demand. This policy is a common practice within the semiconductor industry. SMSC
relies upon its distributors to supply the Company with distribution sales and
inventory information regarding its products, and, although the information is
reviewed and verified for accuracy, any errors or omissions made by those
distributors and not detected by the Company, if material, could affect
operating results.
Shipments made by the Company's Japanese subsidiary to distributors in Japan are
made under agreements that permit limited or no stock return privileges and no
price protection or other sales price rebates. SMSC recognizes revenue from
product sales to distributors in Japan, and to original equipment manufacturers
(OEMs), 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.
Inventories
The Company's inventories are comprised of complex, high technology products
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 reviewed for product obsolescence and
impairment in value, based upon assumptions of future demand and market
conditions. When it is determined 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. While the Company endeavors to forecast customer
demand and stock commensurate levels of inventory, unanticipated inventory
write-downs in the future may be required.
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. However, the Company's customer base changes as its business
evolves, and past bad debt experience in not necessarily an indicator of future
customer payment performance.
Valuation of Long-Lived Assets
Long-lived assets, including property, plant and equipment, and intangible
assets, are monitored and reviewed for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. The determination of recoverability is based on an estimate
of undiscounted cash flows expected to result from the use of an asset and its
eventual disposition. The estimated cash flows are based upon, among other
things, certain assumptions about expected future operating performance, growth
rates and other factors. Estimates of undiscounted cash flows may differ from
actual cash flows due to factors such as technological changes, economic
conditions, and changes in the Company's business model or operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
below the carrying value, an impairment loss is recognized, measured as the
amount by which the carrying value exceeds the fair value of the asset.
Goodwill is tested for impairment in value annually, as well as when an event or
circumstance occurs indicating a possible impairment in value.
Marketable and non-marketable long-term equity investments are also monitored
for indications of impairment in value. The Company records an impairment charge
against these investments when the investment is judged to have experienced a
decline in value that is other than temporary. Judgments regarding the value of
non-marketable equity investments are subjective and dependent upon management's
assessment of the performance of the investee and its prospects for future
success. During the third quarter of fiscal 2003, impairment charges totaling
$16.3 million were recorded against two such investments, both of which were
subsequently sold during fiscal 2004. As of February 29, 2004, the Company has
no significant long-term equity investments.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax assets and liabilities using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. SFAS No. 109 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some or all
of the deferred tax assets will not be realized.
The Company regularly evaluates the realizability of its deferred tax assets by
assessing its forecasts of future taxable income and reviewing available tax
planning strategies that could be implemented to realize the deferred tax
assets. At February 29, 2004, the Company had $21.6 million of deferred tax
assets in excess of deferred tax liabilities, all of which are considered fully
realizable. Factors that may affect the Company's ability to achieve sufficient
future taxable income for purposes of realizing its deferred tax assets include
increased competition, a decline in sales and revenues or gross margins, loss of
market share, delays in product availability, and technological obsolescence.
Legal Contingencies
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 29, 2004, no estimate can be made of any possible
loss or possible range of loss associated with the resolution of any such
contingencies. If additional information becomes available indicating 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.
RESULTS OF OPERATIONS
Sales and Revenues
The Company's sales and revenues for fiscal 2004 were $215.9 million, including
$192.0 million of product sales and $23.9 million of intellectual property
revenues, compared to fiscal 2003 sales and revenues of $155.5 million,
including $154.2 million of product sales and $1.3 million of intellectual
property revenues. Fiscal 2002 sales and revenues were $159.3 million, including
$128.5 million of product sales and $30.8 million of intellectual property
revenues.
Intellectual property revenues include $22.5 million in fiscal 2004, and $29.6
million in fiscal 2002, respectively, received from Intel pursuant to
intellectual property and business relationship agreements. Further details
regarding these agreements appear within the Fiscal 2004 Highlights section of
this discussion, and within Note 7 to the Company's Consolidated Financial
Statements.
Product sales increased 24% in fiscal 2004 compared to fiscal 2003, following a
20% increase in fiscal 2003 compared to fiscal 2002. These increases reflect
higher product sales in all of SMSC's major product categories, in terms of both
units and dollars, compared to the corresponding prior year periods. New
design-wins and increased PC demand helped to drive growth in sales of PC I/O
products, which increased 14% in fiscal 2004, and 15% in fiscal 2003,
respectively, over the comparable year-earlier periods. The Company's non-PC I/O
products, which are focused in networking and USB connectivity applications,
achieved higher product sales from recent new product introductions, as well as
SMSC's ongoing focus on aggressively identifying and pursuing market
opportunities in these product lines. Sales of non-PC I/O products increased 55%
in fiscal 2004, and 35% in fiscal 2003, respectively, over the comparable
year-earlier periods. Non-PC I/O product sales have continued to grow as a
percentage of total product sales, increasing to almost 33% in fiscal 2004,
compared to 27% in fiscal 2003 and 24% in fiscal 2002.
Sales and revenues by geographic region for the past three fiscal years were as
follows: (in thousands):
For the years ended February 29 or 28, 2004 2003 2002
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North America $ 37,138 $ 14,712 $ 42,913
Asia and the Pacific Rim 168,380 131,903 106,123
Europe 10,335 8,823 10,157
Rest of World 20 79 105
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$ 215,873 $ 155,517 $ 159,298
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Intellectual property revenues received from Intel are included within North
America.
The Company expects that international shipments, particularly to Asia and the
Pacific Rim region, will continue to represent a significant portion of its
sales and revenues for the foreseeable future. A significant portion of the
world's high technology manufacturing and assembly activity occurs in Asia and
the Pacific Rim region, where many of the Company's significant customers
conduct business.
Gross Profit
Gross profit for fiscal 2004 was $109.6 million, or 50.8% of sales and revenues,
compared to $69.4 million, or 44.6% of sales and revenues, in fiscal 2003. Gross
profit in fiscal 2002 was $78.0 million, or 49.0% of sales and revenues.
Excluding the impact of intellectual property revenues, gross profit was 44.7%
of sales and revenues in fiscal 2004, compared to 44.2% in fiscal 2003 and 36.8%
in fiscal 2002.
The improvement in gross profit percentage in fiscal 2004, to 44.7% of sales and
revenues, as compared to 44.2% of sales and revenues achieved in fiscal 2003
(excluding intellectual property revenues in both periods), reflects the
combination of lower product costs, an increase in unit production, lower
inventory obsolescence charges, and the product mix shift towards non-PC I/O
products, which generally produce higher gross margins than PC I/O products. The
improvement in gross profit percentage in fiscal 2003, to 44.2% of sales and
revenues, as compared to 36.8% of sales and revenues achieved in fiscal 2002
(excluding intellectual property revenues in both periods), reflects the same
factors as the fiscal 2004 to fiscal 2003 comparison. In addition, gross profit
in fiscal 2002 was adversely impacted by $1.3 million of inventory charges
associated with the Company's fiscal 2002 restructuring.
Newly introduced products generally command higher average selling prices, 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 incorporate 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.
Research and Development Expenses
The semiconductor industry, and the individual markets in which the Company
currently competes, are highly competitive, and the Company believes that
continued investment in research and development (R&D) is essential to
maintaining and improving its competitive position, and to driving its
opportunities for future growth. By striving to design innovative solutions and
more functionality and features into its products, the Company continues to
increase the value of its products for its customers and helps these customers
speed their own products to market.
The Company's R&D activities are performed by a team of highly-skilled and
experienced engineers and technicians, and are primarily directed towards the
design of new integrated circuits, the development of new software design tools
and blocks of logic, as well as ongoing cost reductions and performance
improvements in existing products.
R&D expenses for fiscal 2004 were $38.8 million, compared to $31.2 million for
both fiscal 2003 and fiscal 2002. The increase in fiscal 2004 reflects the
impact of engineering staff additions, investments in advanced design tools and
costs associated with development programs in increasingly complex technologies.
Fiscal 2003 R&D expenses include increased expenses driven by the Company's June
2002 acquisition of Gain Technology Corporation (Gain), offset by reduced
expenditures for PC chipset development activities resulting from the Company's
November 2001 restructuring.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $42.2 million, or
approximately 20% of sales and revenues, for fiscal 2004, compared to $36.3
million, or approximately 23% of sales and revenues, for fiscal 2003. Fiscal
2002 selling, general and administrative expenses were $32.7 million, or 21% of
sales and revenues. The dollar increases reflect the impact of additional staff
added to expand the Company's sales and marketing capabilities, as well as
incremental selling costs, primarily sales commissions and incentives,
associated with higher product sales.
Fiscal 2003 expenses include the impact of the June 2002 acquisition of Gain,
partially offset by reduced expenditures resulting from the Company's November
2001 restructuring.
Amortization of Intangible Assets
Amortization expense of $1.3 million and $1.2 million in fiscal 2004 and fiscal
2003, respectively, represent the amortization of intangible assets associated
with the Company's June 2002 acquisition of Gain.
Gains on Real Estate Transactions
During the first quarter of fiscal 2004, the Company sold certain portions of
its Hauppauge, New York real estate holdings, for aggregate proceeds of $7.0
million, net of transaction costs. These transactions resulted in an aggregate
gain of $1.7 million, $1.4 million of which related to property in which the
Company has no continued interest and was recognized within the Company's fiscal
2004 first quarter operating results, and $0.3 million of which related to
property that the Company has leased back from the purchaser and has therefore
been deferred. This deferred gain is being recognized within the Company's
operating results as a reduction in rent expense on a straight-line basis over a
30-month period beginning in June 2003, consistent with the term of the lease.
The Company's remaining rent obligation over the term of this lease is
approximately $0.6 million.
Other Income and Expense
The decline in interest income, from $3.5 million in fiscal 2002 to $2.0 million
in both fiscal 2003 and fiscal 2004, reflects a decline in interest rates on
investments over these periods, partially offset by higher levels of
investments.
During fiscal 2004, the Company sold its remaining equity investment in
Chartered Semiconductor Manufacturing, Ltd. (Chartered), realizing losses of
$0.7 million, which are included within Other income (expense), net. Other
income (expense), net was nominal in fiscal 2003, and totaled $1.7 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.
Provision for Income Taxes
Generally, the Company's income tax rate is a function of the federal, state and
foreign statutory tax rates, the impact of certain permanent differences between
the book and tax treatment of certain expenses, and the impact of tax-exempt
income and various tax credits. The Company's effective income tax rate on
income from continuing operations for fiscal 2004 was approximately 27%. By
comparison, the effective income tax benefit rate was approximately 48% in
fiscal 2003, and the effective income tax rate for fiscal 2002 was approximately
30%.
The provision for income taxes for fiscal 2004 includes the impact of tax
credits and tax benefits associated with qualified export sales, as well as a
benefit of $0.8 million for better than anticipated settlements of previously
open tax audits.
The provisions for, or benefits from, income taxes from continuing operations
have not been reduced for approximately $7.8 million, $1.8 million and $0.6
million of tax benefits in fiscal 2004, 2003 and 2002 respectively, derived from
activity in stock-based compensation plans. These tax benefits have been
credited to Additional paid-in capital.
Discontinued Operations
The Company had been involved in certain 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 within Loss from discontinued operations on the
Consolidated Statements of Operations. These costs totaled $0.3 million, $0.8
million and $2.5 million, before applicable income tax benefits, in fiscal 2004,
2003 and 2002, respectively. As of February 29, 2004, each of these actions has
been resolved.
Under one such action, the Company was involved in an arbitration with Accton
Technology Corporation (Accton) and SMC Networks, Inc. (Networks) related to
claims associated with the purchase of an 80.1% interest in Networks by Accton
from SMSC in October 1997. In September 2003, the arbitration panel issued its
decision in this action, which directed the release of an escrow account to SMSC
and awarded certain other payments among the parties. In December 2003, the
parties reached a final settlement of the award, resulting in SMSC receiving
$2.7 million in cash, including the escrow account, and realizing a pre-tax gain
of $0.3 million, which is included within Loss from discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations through a combination of existing
resources and cash generated by operations. The Company had no bank debt during
fiscal 2004, 2003 or 2002.
The Company's cash, cash equivalents and liquid investments (including
investments in marketable securities with maturities in excess of one year)
increased to $173.9 million at February 29, 2004, compared to $112.9 million at
February 28, 2003, an increase of $61.0 million. This increase reflects, among
other items, the receipt of $22.5 million in intellectual property payments from
Intel, $18.9 million of proceeds from exercises of stock options, $7.0 million
provided by sales of real estate and $2.1 million provided by sales of the
Company's investment in Chartered.
Operating activities generated $46.4 million of cash in fiscal 2004, including
the $22.5 million of intellectual property payments noted in the previous
paragraph. Investing activities consumed $22.0 million of cash for the same
period, due principally to a net increase of $15.9 million in short-term and
long-term investments, and $5.2 million used to purchase the minority interest
in SMSC Japan. Financing activities provided $17.3 million of cash during fiscal
2004, including $18.9 million of proceeds from exercises of stock options. In
fiscal 2003, operating activities generated $14.9 million of cash. Investing
activities consumed $15.3 million of cash for the same period, including $15.7
million used for the acquisition of Gain and $5.7 million of capital
expenditures, partially offset by $5.9 million for maturities, net of purchases,
of short-term investments. Financing activities consumed $7.8 million of cash
during fiscal 2003, including $10.4 million for purchases of treasury stock and
$2.6 million for payments of obligations under capital leases and notes payable,
partially offset by $5.2 million generated from the issuance of common stock
through exercises of stock options.
The Company's inventories were $23.1 million at February 29, 2004, compared to
$17.6 million at February 28, 2003, commensurate with expected demand for the
Company's products.
Accounts receivable decreased from $22.7 million at February 28, 2003 to $21.9
million at February 29, 2004, due to strong collections. Reserves for customer
credits and allowances are shown as reductions of accounts receivable. The
Company's accounts receivable portfolio remains almost entirely current.
Accounts payable increased from $9.1 million at February 28, 2003 to $14.7
million at February 29, 2004, reflecting normal operating purchases for
inventory, property, plant and equipment, and engineering tools occurring
primarily during February 2004.
Capital expenditures for fiscal 2004 were $14.3 million, of which $10.4 million
was paid in cash. The current year's capital investments include an expenditure
of $3.9 million for advanced design tools, which is being financed by the
supplier with payment terms extending through December 2006. During fiscal 2003,
the Company acquired $1.9 million of advanced design tools under a similar
agreement, which also provided for extended payments. Capital expenditures in
fiscal 2004 were higher than the previous two fiscal years, reflecting, among
other things, adverse general economic conditions during fiscal 2003 and fiscal
2002, and were predominantly for production test equipment and advanced design
tools. Capital expenditures were $5.7 million and $4.5 million for fiscal 2003
and 2002, respectively.
The Company anticipates that capital expenditures in fiscal 2005 will exceed
those in fiscal 2004, due in part to the Company's plan to begin construction of
an addition to its primary facility in Hauppauge, NY, during fiscal 2005. The
current plan is to expand the facility from its current 80,000 square feet to
approximately 200,000 square feet, allowing consolidation of the Company's
Hauppauge operations into a single facility during fiscal 2006. There were no
material commitments for capital expenditures as of February 29, 2004.
For income tax purposes, the Company has $12.4 million of federal net operating
loss carryforwards as of February 29, 2004, which are available to offset
ordinary taxable income generated in fiscal 2005 and beyond. In addition,
several capital losses realized during fiscal 2004 will be carried back to
offset capital gains realized in previous fiscal years, which is expected to
result in claims for approximately $5.3 million of federal income tax refunds
during fiscal 2005.
SMSC maintains a common stock repurchase program, as approved by its Board of
Directors, which authorizes the Company to repurchase up to three million shares
of its common stock on the open market or in private transactions. As of
February 29, 2004, the Company had repurchased approximately 1.8 million shares
of common stock at a cost of $23.5 million under this program. No shares were
repurchased under this program during fiscal 2004.
As noted previously, the Company completed its acquisition of Gain in June 2002
for total consideration of $36.1 million, consisting of $17.9 million of common
stock, $16.6 million of cash and $1.6 million of acquisition costs.
The Company's contractual payment obligations and purchase commitments as of
February 29, 2004 were as follows (in thousands):
Payment Obligations by Period
- --------------------------------------------------------------------------------
Between Between
Within 1 1 and 3 3 and 5 Thereafter
Total year years years
- --------------------------------------------------------------------------------
Operating leases $ 4,092 $ 2,282 $ 1,810 $ - $ -
Other obligations 15,775 3,671 6,823 1,546 3,735
Purchase commitments 19,278 18,062 1,216 - -
- --------------------------------------------------------------------------------
Total $ 39,145 $ 24,015 $ 9,849 $ 1,546 $ 3,735
================================================================================
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
investments in such businesses, products or technologies owned by third parties.
The Company expects that its cash, cash equivalents, liquid 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 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which was amended in December 2003.
FIN 46 requires an investor with a majority of the variable interests (primary
beneficiary) in a variable interest entity (VIE) to consolidate the entity and
also requires majority and significant variable interest investors to provide
certain disclosures. A VIE is an entity in which the voting equity investors do
not have a controlling financial interest or the equity investment at risk is
insufficient to finance the entity's activities without receiving additional
subordinated financial support from the other parties. The provisions of FIN 46
were effective immediately for all arrangements entered into with new VIEs
created after January 31, 2003. For arrangements entered into with VIEs created
before January 31, 2003, the provisions of FIN 46 are effective at the end of
the first reporting period ending after March 15, 2004. The Company has no
interests in VIEs, and therefore does not expect the adoption of FIN 46 to have
a material impact on its financial position or results of operations.
In December 2003, the Staff of the Securities and Exchange Commission (SEC or
the Staff) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supercedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104's primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of Emerging Issues Task Force Issue No.
00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
Deliverables. While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. EITF 00-21 was effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of this standard did not have a material impact on the Company's
financial condition or results of operations.
FINANCIAL MARKET RISKS
Interest Rate Risk - The Company's exposure to interest rate risk relates
primarily to its investment portfolio. The primary objective of SMSC's
investment portfolio management is to invest available cash while preserving
principal and meeting liquidity needs. In accordance with the Company's
investment policy, investments are placed with high credit-quality issuers and
the amount of credit exposure to any one issuer is limited.
As of February 29, 2004, the Company's $38.7 million of short-term and long-term
investments consisted primarily of investments in corporate, government and
municipal obligations with maturities of between three months and two years at
acquisition.
If market interest rates were to increase immediately and uniformly by 10% from
levels at February 29, 2004, the Company estimates that the fair values of these
short-term and long-term investments would decline by an immaterial amount. The
Company generally expects to hold these investments until maturity and,
therefore, would not expect operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market interest
rates.
Equity Price Risk - The Company is not exposed to any significant equity price
risks at February 29, 2004.
Foreign Currency Risk - The Company has international sales and expenditures and
is, therefore, subject to certain foreign currency rate exposure. The Company
conducts a significant amount of its business in Asia and the Pacific Rim
region. In order to reduce the risk from fluctuations 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. Most
transactions in the Japanese market made by the Company's subsidiary, SMSC
Japan, are denominated in Japanese yen. SMSC Japan purchases a significant
amount of its products for resale from SMSC in U.S. dollars, and from time to
time has entered into forward exchange contracts to hedge against currency
fluctuations associated with these product purchases. During fiscal 2003, 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. No such contracts were executed during fiscal 2004, and there are
no obligations under any such contracts as of February 29, 2004.
The Company has never received a cash dividend (repatriation of cash) from SMSC
Japan.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
As of February 29 or 28, 2004 2003
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 135,161 $ 90,025
Short-term investments 23,136 22,872
Accounts receivable, net of allowance for doubtful
accounts of $438 and $460, respectively 21,946 22,738
Inventories 23,162 17,644
Deferred income taxes 15,064 8,545
Other current assets 8,549 8,710
- --------------------------------------------------------------------------------
Total current assets 227,018 170,534
Property, plant and equipment, net 23,430 22,257
Long-term investments 15,600 -
Goodwill 29,595 29,773
Intangible assets, net 4,697 6,008
Deferred income taxes 6,493 16,437
Other assets 3,192 7,598
- --------------------------------------------------------------------------------
$ 310,025 $ 252,607
================================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 14,679 $ 9,114
Deferred income on shipments to distributors 7,972 5,943
Accrued expenses, income taxes and other liabilities 13,168 9,838
- --------------------------------------------------------------------------------
Total current liabilities 35,819 24,895
- --------------------------------------------------------------------------------
Other liabilities 12,104 12,037
Commitments and contingencies
Minority interest in subsidiary - 11,663
Shareholders' equity:
Preferred stock, $0.10 par value,
authorized 1,000 shares, none issued - -
Common stock, $0.10 par value,
authorized 30,000 shares, issued 20,191 and
18,590 shares, respectively 2,019 1,859
Additional paid-in capital 181,830 147,655
Retained earnings 99,010 77,492
Treasury stock, 1,820 shares, at cost (23,454) (23,454)
Deferred stock-based compensation (1,962) (2,102)
Accumulated other comprehensive income 4,659 2,562
- --------------------------------------------------------------------------------
Total shareholders' equity 262,102 204,012
- --------------------------------------------------------------------------------
$ 310,025 $ 252,607
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended February 29 or 28, 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Product sales $ 191,969 $ 154,244 $ 128,528
Intellectual property revenues 23,904 1,273 30,770
- ------------------------------------------------------------------------------------------------------------------------
215,873 155,517 159,298
Cost of goods sold 106,236 86,093 81,264
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 109,637 69,424 78,034
Operating expenses (income):
Research and development 38,793 31,166 31,178
Selling, general and administrative 42,168 36,268 32,744
Amortization of intangible assets 1,311 1,167 -
Gains on real estate transactions (1,444) - -
Restructuring costs - (247) 7,734
- ------------------------------------------------------------------------------------------------------------------------
Income from operations 28,809 1,070 6,378
Other income (expense):
Interest income 1,918 2,069 3,450
Interest expense (112) (166) (133)
Impairments of investments - (16,306) (669)
Other income (expense), net (821) (43) 1,660
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest 29,794 (13,376) 10,686
Provision for (benefit from) income taxes 8,051 (6,422) 3,171
Minority interest in net income of subsidiary 201 17 40
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 21,542 (6,971) 7,475
Loss from discontinued operations (net of
income tax benefits of $14, $281, and $918) (24) (500) (1,564)
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) 21,518 (7,471) 5,911
Gain on redemption of preferred stock of subsidiary 6,685 - -
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders $ 28,203 $ (7,471) $ 5,911
========================================================================================================================
Basic net income (loss) per share:
Income (loss) from continuing operations $ 1.25 $ (0.42) $ 0.47
Loss from discontinued operations - (0.03) (0.10)
- ------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share 1.25 (0.45) 0.37
Gain on redemption of preferred stock of subsidiary 0.39 - -
- ------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) applicable to common shareholders $ 1.64 $ (0.45) $ 0.37
========================================================================================================================
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 1.17 $ (0.42) $ 0.44
Loss from discontinued operations - (0.03) (0.09)
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share 1.16 (0.45) 0.35
Gain on redemption of preferred stock of subsidiary 0.36 - -
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) applicable to common shareholders $ 1.53 $ (0.45) $ 0.35
========================================================================================================================
The sum of the income (loss) per share amounts may not total due to rounding.
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Deferred Accumulated
Additional Stock- Other
Common Stock Paid-In Retained Treasury Stock based Comprehensive
Shares Amount Capital Earnings Shares Amount Compensation Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 2001 17,082 $ 1,708 $ 118,218 $ 79,052 (998) $ (8,330) $ (1,703) $ 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-based compensation 26 3 557 - - - (387) - 173
Amortization of deferred
stock-based compensa - - - - - - 682 - 682
Purchases of treasury stock - - - - (340) (5,531) - - (5,531)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 2002 17,277 1,728 120,913 84,963 (1,338) (13,861) (1,408) 1,118 193,453
Comprehensive loss:
Net loss - - - (7,471) - - - - (7,471)
Other comprehensive income
Change in unrealized gain
on investments - - - - - - - (283) (283)
Foreign currency translation
adjustment - - - - - - - 1,727 1,727
-----------
Total other comprehensive income 1,444
-----------
Total comprehensive loss (6,027)
Stock options exercised 489 49 5,139 - - - - - 5,188
Tax effect of employee stock plans - - 1,828 - - - - - 1,828
Stock-based compensation 75 7 1,919 - - - (1,617) - 309
Amortization of deferred
stock-based compensation - - - - - - 923 - 923
Issuance of common stock for
business acquisition 749 75 17,856 - - - - - 17,931
Purchases of treasury stock - - - - (482) (9,593) - - (9,593)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 2003 18,590 1,859 147,655 77,492 (1,820) (23,454) (2,102) 2,562 204,012
Comprehensive income:
Net income - - - 21,518 - - - - 21,518
Other comprehensive income
Change in unrealized gain
on investments - - - - - - - 709 709
Foreign currency translation
adjustment - - - - - - - 1,388 1,388
-----------
Total other comprehensive income 2,097
-----------
Total comprehensive income 23,615
Stock options exercised 1,539 154 18,758 - - - - - 18,912
Tax effect of employee stock
plans - - 7,778 - - - - - 7,778
Stock-based compensation 62 6 954 - - - (890) - 70
Amortization of deferred
stock-based compensation - - - - - - 1,030 - 1,030
Gain on redemption of preferred
stock of subidiary - - 6,685 - - - - - 6,685
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 2004 20,191 $ 2,019 $ 181,830 $ 99,010 (1,820) $(23,454) $ (1,962) $ 4,659 $ 262,102
- ------------------------------------------------------------------------------------------------------------------------------------
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 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers and licensees $ 218,127 $ 154,202 $ 152,884
Cash paid to suppliers and employees (173,559) (143,314) (122,655)
Interest received 1,777 2,279 4,208
Interest paid (112) (142) (133)
Income taxes received (paid) 174 1,888 (5,349)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 46,407 14,913 28,955
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (10,380) (5,695) (4,488)
Acquisition of Gain Technology Corporation,
net of cash acquired - (15,669) (2,500)
Purchase of minority interest in subsidiary (5,180) - -
Sales of property, plant and equipment 7,121 148 2,004
Purchases of short-term investments (30,074) (32,292) (32,595)
Maturities of short-term investments 29,810 38,204 13,629
Purchases of long-term investments (15,600) - -
Sales of long-term equity investments 2,114 78 1,064
Other 155 (38) (83)
- --------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (22,034) (15,264) (22,969)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 18,912 5,188 1,560
Purchases of treasury stock - (10,375) (4,750)
Repayments of obligations under capital
leases and notes payable (1,564) (2,617) (1,002)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 17,348 (7,804) (4,192)
- --------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and cash equivalents 829 1,038 (691)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) discontinued
operations 2,586 (923) (2,583)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 45,136 (8,040) (1,480)
Cash and cash equivalents at beginning of year 90,025 98,065 99,545
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 135,161 $ 90,025 $ 98,065
==============================================================================================================
Reconciliation of income (loss) from continuing
operations to net cash provided by operating activities:
Income (loss) from continuing operations $ 21,542 $ (6,971) $ 7,475
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities,
net of the effects of business acquisition:
Depreciation and amortization 11,002 10,752 11,614
Gains on sales of investments and property (696) (47) (1,639)
Asset impairments - 16,306 5,602
Tax benefits from employee stock plans 7,778 1,828 595
Other adjustments, net 213 (143) 80
Changes in operating assets and liabilities:
Accounts receivable 622 (1,411) (5,666)
Inventories (5,022) (184) 14,172
Accounts payable and accrued expenses and other
liabilities 9,130 753 (1,450)
Current and deferred income taxes 472 (3,622) (2,897)
Other changes, net 1,366 (2,348) 1,069
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 46,407 $ 14,913 $ 28,955
==============================================================================================================
The Company acquired $3,894 and $1,876 of design tools in fiscal 2004 and 2003,
respectively, through long-term financing provided by suppliers.
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 digital, mixed-signal and analog 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, networking and embedded
control systems. SMSC is the world's leading supplier of Advanced I/O integrated
circuits for desktop and mobile 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 2004 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. The
Company bases the estimates and assumptions on historical experience and on
various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates.
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, recognition of revenue and associated gross profit on shipments to
a majority of the Company's distributors is deferred until the distributors
resell the products. Shipments made by the Company's Japanese subsidiary to
distributors in Japan are made under agreements that permit limited or no stock
return privileges and no price protection or other sales price rebates. Revenue
for shipments to distributors in Japan is recognized upon shipment to the
distributor.
Revenue recognition for special intellectual property payments received in
fiscal 2004 and 2002 are discussed within Note 7. The Company recognizes its
other intellectual property revenues upon notification of sales of the licensed
technology by its licensees. The terms of the Company's licensing agreements
generally require licensees to give notification to the Company and to pay
royalties no later than 60 days after the end of the quarter during which the
sales take place.
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.
Investments
Short-term investments consist primarily of investments in corporate obligations
with maturities of between three and twelve months, at acquisition, and are
classified as available-for-sale. The cost of these short-term investments
approximates their market value as of February 29, 2004 and February 28, 2003.
The Company classifies all marketable debt and equity securities with remaining
maturities of greater than one year, at acquisition, as long-term investments.
As of February 29, 2004, long-term investments consisted primarily of
investments in corporate obligations and are classified as available-for-sale.
The cost of these long-term investments approximates their market value as of
February 29, 2004.
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 temporary losses on such
securities, net of taxes, are reported in Accumulated other comprehensive income
within Shareholders' equity. Impairment charges on these investments are
recorded if declines in value are deemed to be other than temporary.
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-Lived Assets
The Company assesses the recoverability of long-lived assets, including
property, plant and equipment and intangible assets, whenever events or changes
in circumstances indicate that future undiscounted cash flows expected to be
generated by an asset's disposition or use may not be sufficient to support its
carrying value. If such cash flows are not sufficient to support the asset's
recorded value, an impairment charge is recognized to reduce the carrying value
of the long-lived asset to its estimated fair value.
Goodwill and Purchased Intangible Assets
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires goodwill and certain other intangible assets to be
tested for impairment at least annually, as well as when an event indicating
possible impairment may have occurred. Intangible assets other than goodwill
that have finite lives are amortized over their estimated useful lives. The
Company adopted the provisions of SFAS No. 142 during fiscal 2003. Further
discussion of the Company's goodwill and intangible assets is provided within
Note 5.
Research and Development
Expenditures for research and development are expensed in the period incurred.
Stock-Based Compensation
The Company has in effect several stock-based compensation plans under which
incentive stock options, non-qualified stock options and restricted stock awards
are granted to employees and directors. All stock options are granted with
exercise prices equal to the fair value of the underlying shares on the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board (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 SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, are detailed below.
For purposes of pro forma disclosures, the estimated fair market value of the
Company's options is amortized as an expense over the options' vesting periods.
The fair value of each option grant, as defined by SFAS No. 123, is estimated on
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, that significantly differ
from the Company's stock option awards. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair value of
employee stock options.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, and has been calculated as if the Company has
accounted for its stock option plans under the fair value method of SFAS No.
123. The fair value of stock options issued has been estimated at the dates of
grant using a Black-Scholes option-pricing model with the following weighted
average assumptions:
For the years ended February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Dividend yield - - -
Expected volatility 62% 64% 63%
Risk-free interest rates 2.98% 2.50% 4.17%
Expected lives (in years) 4.7 4.9 4.0
- --------------------------------------------------------------------------------
The weighted average Black-Scholes per share values of options granted in fiscal
2004, 2003 and 2002 were $9.65, $11.69 and $7.57, respectively.
For purposes of pro forma disclosures, the estimated fair market value of the
Company's options is amortized as an expense over the options' vesting periods.
Had compensation expense been recorded under 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, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
Net income (loss) - as reported $ 21,518 $ (7,471) $ 5,911
Add: Stock-based compensation expense included in net
income (loss), net of taxes - as reported 845 627 444
Deduct: Stock-based compensation expense determined using
the fair value method for all awards, net of taxes (2,073) (7,419) (6,139)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) - pro forma $ 20,290 $ (14,263) $ 216
=========================================================================================================
Basic net income (loss) per share - as reported $ 1.25 $ (0.45) $ 0.37
=========================================================================================================
Diluted net income (loss) per share - as reported $ 1.16 $ (0.45) $ 0.35
=========================================================================================================
Basic net income (loss) per share - pro forma $ 1.18 $ (0.86) $ 0.01
=========================================================================================================
Diluted net income (loss) per share - pro forma $ 1.11 $ (0.86) $ 0.01
=========================================================================================================
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 they
are earned.
Translation of Foreign Currencies
The functional currencies of the Company's foreign subsidiaries are their
respective local 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
within 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 most of its sales to its customers in Japanese
yen. SMSC Japan purchases a significant amount of its products for resale from
SMSC in U.S. dollars and, from time to time, has entered into forward exchange
contracts to hedge against currency fluctuations associated with these product
purchases. Gains and losses on such contracts have not been significant. As of
February 29, 2004, there are no outstanding commitments under foreign exchange
contracts.
Other Comprehensive Income
The Company's other comprehensive income (loss) consists of foreign currency
translation adjustments and unrealized gains and losses on investments.
Recent Accounting Pronouncements
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
which was amended in December 2003. FIN 46 requires an investor with a majority
of the variable interests (primary beneficiary) in a variable interest entity
(VIE) to consolidate the entity and also requires majority and significant
variable interest investors to provide certain disclosures. A VIE is an entity
in which the voting equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from the other parties. The provisions of FIN 46 were effective immediately for
all arrangements entered into with new VIEs created after January 31, 2003. For
arrangements entered into with VIEs created before January 31, 2003, the
provisions of FIN 46 are effective at the end of the first reporting period
ending after March 15, 2004. The Company has no interests in VIEs, and therefore
does not expect the adoption of FIN 46 to have a material impact on its
financial position or results of operations.
In December 2003, the Staff of the Securities and Exchange Commission (SEC or
the Staff) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supercedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104's primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of Emerging Issues Task Force Issue No.
00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
Deliverables. While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. EITF 00-21 was effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of this standard did not have a material impact on the Company's
financial condition or results of operations.
3. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the sum of the weighted average common shares outstanding during the period plus
the dilutive effect of unvested restricted stock awards and shares issuable
through stock options. Shares used in calculating basic and diluted net income
(loss) per share are reconciled as follows (in thousands):
For the years ended February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Average shares outstanding for basic
net income (loss) per share 17,226 16,538 16,069
Dilutive effect of stock options and
unvested restricted stock awards 1,253 - 831
- --------------------------------------------------------------------------------
Average shares outstanding for diluted
net income (loss) per share 18,479 16,538 16,900
- --------------------------------------------------------------------------------
The Company reported a net loss from continuing operations in fiscal 2003, and
accordingly, the effect of stock options covering an average of 4,787,000 common
shares was antidilutive for that period and was excluded from average shares
outstanding used in the calculation of the fiscal 2003 net loss per share.
During fiscal 2004 and 2002, stock options covering 1,262,000 and 1,421,000
common shares, respectively, were excluded from the computation of diluted net
income per share, because their effects were anti-dilutive.
4. BUSINESS ACQUISITION
In June 2002, the Company acquired all of the outstanding common stock of Gain
Technology Corporation (Gain), a developer and supplier of high-speed,
high-performance analog and mixed-signal communications integrated circuits and
proprietary intellectual property cores, based in Tucson, Arizona. Through this
acquisition, the Company significantly enhanced its analog and mixed-signal
capabilities, by adding highly skilled engineers and designers to its staff,
acquiring several new products, and expanding its intellectual property
portfolio.
The Company acquired Gain for consideration of $36.1 million, consisting of
approximately 749,000 shares of SMSC common stock valued at $17.9 million, $16.6
million of cash (net of cash acquired), and $1.6 million of direct acquisition
costs, including legal, banking, accounting and valuation fees. The value of the
SMSC common stock was determined using the stock's market value for a reasonable
period before and after the date the terms of the acquisition were announced.
In accordance with the provisions of SFAS No. 141, Business Combinations, the
purchase price was allocated to the estimated fair values of assets acquired and
liabilities assumed, as set forth in the following table. During fiscal 2004,
the Company reduced the amount of goodwill relating to this transaction from
$29.8 million to $29.6 million, reflecting the resolution of certain
contingencies at amounts different than originally estimated.
(in thousands)
---------------------------------------------------------------------
Current assets $ 1,708
Property, plant and equipment 1,028
Deferred income taxes 1,086
Other assets 41
Goodwill 29,595
Existing technologies 6,179
Other intangible assets 908
---------------------------------------------------------------------
Total assets acquired 40,545
Current liabilities 3,355
Long-term obligations 1,177
---------------------------------------------------------------------
Total liabilities assumed 4,532
Net assets acquired 36,013
In-process research and development 87
---------------------------------------------------------------------
Total consideration $ 36,100
=====================================================================
The amounts allocated to current technologies are being amortized on a
straight-line basis over their estimated useful life of six years. Other
intangible assets are also being amortized on a straight-line basis over their
respective estimated useful lives, ranging from one to ten years. In accordance
with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the
$29.6 million assigned to goodwill is not being amortized. Further information
regarding goodwill and other intangible assets is provided within Note 5.
The amount assigned to in-process research and development related to those
ongoing projects that had not yet proven to be commercially feasible, and for
which no alternative future use existed for the related technology. This charge
is included within the Company's consolidated operating results for fiscal 2003.
The unaudited pro forma results of operations set forth in the following table
give effect to the acquisition of Gain as if it had occurred at the beginning of
fiscal 2003 and 2002, respectively. Pro forma data is subject to certain
assumptions and estimates, and is presented for informational purposes only.
This data does not purport to be indicative of the results that would have
actually occurred had the acquisition occurred on the basis described above, nor
do they purport to be indicative of future operating results.
For the years ended February 28, 2003 2002
---------------------------------------------------------------------------
(in thousands, except per share data)
Sales and revenues $ 156,755 $ 165,544
Net income (loss) (8,449) 3,317
===========================================================================
Basic net income (loss) per share $ (0.51) $ 0.20
Diluted net income (loss) per share (0.51) 0.19
===========================================================================
5. GOODWILL AND INTANGIBLE ASSETS
As discussed within Note 4, the Company's June 2002 acquisition of Gain
Technology Corporation included the acquisition of $7.1 million of finite-lived
intangible assets and $29.6 million of goodwill. In accordance with the
provisions of SFAS No. 142, this goodwill is not being amortized, but is tested
for impairment in value annually, as well as when an event or circumstance
occurs indicating a possible impairment in value.
The Company's finite-lived intangible assets consisted of the following (in
thousands):
As of February 28 or 29, 2004 2003
-----------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-----------------------------------------------------------------------------
Existing technologies $ 6,179 $ 1,802 $ 6,179 $ 772
Customer contracts 326 57 498 154
Non-compete agreements 410 359 410 153
-----------------------------------------------------------------------------
$ 6,915 $ 2,218 $ 7,087 $ 1,079
=============================================================================
All finite-lived intangible assets are being amortized on a straight-line basis
over their estimated useful lives. Existing technologies have been assigned an
estimated useful life of six years. Customer contracts have been assigned useful
lives of between one and ten years (with a weighted average life of
approximately seven years), and non-compete agreements have been assigned useful
lives of two years. The weighted average useful life of all intangible assets is
approximately six years.
Estimated future intangible asset amortization expense for the next five fiscal
years is as follows (in thousands):
Amortization of
Intangible Assets
-----------------------------------------
2005 $ 1,114
2006 1,062
2007 1,062
2008 1,062
2009 290
=========================================
6. 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 charges of $9.0 million
in fiscal 2002, of which $7.7 million was classified within operating expenses
and $1.3 million was classified within cost of goods sold on the Consolidated
Statement of Operations. In fiscal 2003, the Company reduced these charges by
$0.2 million, after reassessing its remaining obligations under this
restructuring plan.
A summary of the restructuring charge is as follows (in thousands):
Excess and Non-cancelable
Impairments Obsolete Workforce lease
of Assets Inventory Reduction obligations Other Charges Total
- -----------------------------------------------------------------------------------------------------------------------------
Charged to expense $ 5,340 $ 1,275 $ 309 $ 1,870 $ 215 $ 9,009
Non-cash charges (5,190) (1,275) - - (15) (6,480)
Cash payments - - (307) (99) (19) (425)
- -----------------------------------------------------------------------------------------------------------------------------
Business restructuring reserve at
February 28, 2002 150 - 2 1,771 181 2,104
Cash payments - - - (397) (21) (418)
Non-cash charges - - - - (20) (20)
Adjustment to expense (150) - (2) - (95) (247)
- -----------------------------------------------------------------------------------------------------------------------------
Business restructuring reserve at
February 28, 2003 - - - 1,374 45 1,419
Cash payments - - - (414) - (414)
Non-cash charges - - - - (45) (45)
- -----------------------------------------------------------------------------------------------------------------------------
Business restructuring reserve at
February 29, 2004 $ - $ - $ - $ 960 $ - $ 960
=============================================================================================================================
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 were disposed, which was
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 through cost of goods sold, accordingly.
Workforce Reduction
As a result of this restructuring, and in line with the sustained economic
difficulties of the semiconductor marketplace at the time, 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 included $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.
The restructuring had minimal impact on product sales, as the Company had yet to
achieve significant product sales of PC chipset products.
7. 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, 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 then ongoing development
of Intel compatible chipset products. The Agreement provided, among other
things, for Intel to transfer certain intellectual property related to Intel
chipset architectures to SMSC, and provided SMSC the opportunity to supply Intel
chipset components along with its own chipset solutions. The Agreement also
limited SMSC's rights regarding Northbridges and Intel Architecture
Microprocessors under the 1987 agreement.
The Agreement included provisions for its termination under certain
circumstances. Under one such provision, SMSC could elect to terminate the
Agreement should SMSC not achieve certain minimum chipset revenue amounts set
forth in the Agreement, unless Intel paid SMSC an amount equal to the shortfall
between the minimum revenue amount and the actual revenue for that period. In
September 2001, pursuant to this provision, SMSC notified Intel of a chipset
revenue shortfall of approximately $29.6 million for the twelve months ended
September 21, 2001. In November 2001, the Company received a $29.6 million
payment from Intel, which is reported as intellectual property revenue on the
Company's Consolidated Statement of Operations for fiscal 2002. In September
2002, SMSC notified Intel of a chipset revenue shortfall for the 2002
twelve-month period. Intel did not make a payment to SMSC of that shortfall
within the time frame specified within the Agreement, and SMSC gave Intel notice
of termination of the Agreement in accordance with the terms thereof, and the
parties commenced discussions regarding their various corporate and intellectual
property relationships.
In September 2003, the Company and Intel announced that they had enhanced their
intellectual property and business relationship. The companies agreed to
collaborate on certain future I/O and sensor products, and Intel agreed to use
the Company's devices on certain current and future generations of Intel
products. In addition, the Company agreed to limit its rights under its 1987
patent cross-license with Intel to manufacture and sell Northbridge products and
Intel Architecture Microprocessors on behalf of third parties. The companies
also terminated an Investor Rights Agreement between them, which had been
entered into in connection with Intel's 1997 acquisition of 1,543,000 shares of
the Company's common stock. Under this agreement, Intel had certain information,
corporate governance and other rights with respect to the activities of the
Company.
In respect of this new relationship, Intel will pay to the Company an aggregate
amount of $75 million, of which $20 million and $2.5 million were paid and
recognized as intellectual property revenue in the third and fourth quarters of
the Company's fiscal 2004, respectively. Of the remaining amount, $7.5 million
will be paid during the balance of calendar year 2004, $10 million will be paid
in calendar year 2005, $11 million will be paid in calendar year 2006, and $12
million will be paid in each of calendar years 2007 and 2008. Such amounts are
payable in equal quarterly installments within each calendar year, and are
subject to possible reduction, in a manner and to an extent to be agreed by the
parties, based upon the companies' collaboration and sales, facilitated by
Intel, of certain future new products of the Company.
8. DISCONTINUED OPERATIONS
The Company had been involved in certain 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 within Loss from discontinued operations on the
Consolidated Statements of Operations. These costs totaled $0.3 million, $0.8
million and $2.5 million, before applicable income tax benefits, in fiscal 2004,
2003 and 2002, respectively. As of February 29, 2004, each of these actions has
been resolved.
Under one such action, the Company was involved in an arbitration with Accton
Technology Corporation (Accton) and SMC Networks, Inc. (Networks) related to
claims associated with the purchase of an 80.1% interest in Networks by Accton
from SMSC in October 1997. In September 2003, the arbitration panel issued its
decision in this action, which directed the release of an escrow account to SMSC
and awarded certain other payments among the parties. In December 2003, the
parties reached a final settlement of the award, resulting in SMSC receiving
$2.7 million in cash, including the escrow account, and realizing a pre-tax gain
of $0.3 million, which is included within Loss from discontinued operations.
9. SALES AND IMPAIRMENTS OF INVESTMENTS
Investment in Chartered Semiconductor
During the third quarter of fiscal 2003, the Company recorded a $7.8 million
charge for a decline in value, considered to be other than temporary, of its
equity investment in Chartered Semiconductor Manufacturing Ltd. (Chartered),
based upon a sustained reduction in Chartered's stock price performance. During
the first quarter of fiscal 2004, the Company sold its remaining equity
investment in Chartered, realizing a loss of $0.7 million, which is included
within Other income (expense), net on the Consolidated Statements of Operations.
Investment in SMC Networks, Inc.
The Company's investment in SMC Networks, Inc. was a residual minority equity
interest in a non-public company sold by SMSC in 1997. Based upon a valuation
analysis performed by the Company with the assistance of a third party, this
investment, which carried an original cost of $8.5 million, was fully written
off in the third quarter of fiscal 2003. Subsequently, as part of the December
2003 arbitration settlement with Accton, discussed within Note 8, the Company
transferred this investment to Accton for a nominal value.
Other Long-Term Equity Investments
During 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 impairments in value considered
to be other than temporary. Both investments now carry no net book value.
10. OTHER BALANCE SHEET DATA
(In thousands)
As of February 29 or 28, 2004 2003
- --------------------------------------------------------------------------
Inventories:
Raw materials $ 910 $ 761
Work-in-process 13,202 7,686
Finished goods 9,050 9,197
- --------------------------------------------------------------------------
$ 23,162 $ 17,644
==========================================================================
Property, plant and equipment:
Land $ 1,570 $ 3,434
Buildings and improvements 20,842 29,927
Machinery and equipment 90,195 81,562
- --------------------------------------------------------------------------
112,607 114,923
Less: accumulated depreciation 89,177 92,666
- --------------------------------------------------------------------------
$ 23,430 $ 22,257
==========================================================================
Accrued expenses, income taxes
and other liabilities:
Salaries and fringe benefits $ 2,662 $ 2,322
Supplier financing - current portion 1,998 1,054
Other 8,508 6,462
- --------------------------------------------------------------------------
$ 13,168 $ 9,838
==========================================================================
Other liabilities:
Retirement benefits $ 6,152 $ 5,811
Supplier financing - long-term
portion 1,608 125
Other 4,344 6,101
- --------------------------------------------------------------------------
$ 12,104 $ 12,037
==========================================================================
11. REAL ESTATE TRANSACTIONS
During fiscal 2004, the Company sold certain portions of its Hauppauge, New York
real estate holdings, for aggregate proceeds of $7.0 million, net of transaction
costs. These transactions resulted in an aggregate gain of $1.7 million, $1.4
million of which related to property in which the Company has no continued
interest and was recognized within the Company's fiscal 2004 first quarter
operating results, and $0.3 million of which related to property that the
Company has leased back from the purchaser and has therefore been deferred. This
deferred gain is being recognized within the Company's operating results as a
reduction of rent expense on a straight-line basis over a 30-month period
beginning in June 2003, consistent with the term of the lease. As of February
29, 2004, the Company's remaining rent obligation over the term of this lease is
approximately $0.6 million.
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.
12. SHAREHOLDERS' EQUITY
Common Stock Repurchase Program
The Company maintains a common stock repurchase program, as approved by its
Board of Directors, which authorizes the Company to repurchase up to three
million shares of its common stock on the open market or in private
transactions. As of February 29, 2004, the Company had repurchased approximately
1.8 million shares of common stock at a cost of $23.5 million under this
program, including 482,000 shares repurchased in fiscal 2003 at a cost of $9.6
million and 340,000 shares repurchased in fiscal 2002 for $5.5 million. No
shares were repurchased during fiscal 2004. 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 that 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, and any new stock issued after the
record date contains the same rights. 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 $0.01 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%. As of December 31,
2003, Citigroup was the beneficial owner of approximately 15% of the Company's
common stock.
13. INCOME TAXES
The provision for (benefit from) income taxes included in the accompanying
Consolidated Statements of Operations consists of the following (in thousands):
For the years ended February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Current
Federal $ 5,647 $ (3,119) $ 5,308
Foreign 365 327 241
State 175 147 176
- --------------------------------------------------------------------------------
6,187 (2,645) 5,725
Deferred 1,850 (4,058) (3,472)
- --------------------------------------------------------------------------------
8,037 (6,703) 2,253
Less: tax benefits from discontinued
operations (14) (281) (918)
- --------------------------------------------------------------------------------
$ 8,051 $ (6,422) $ 3,171
- --------------------------------------------------------------------------------
The tax benefits from discontinued operations represent the taxes resulting from
net losses related to the Company's previous sale of former divisions, which
were accounted for as discontinued operations. These gains and losses are
further described in Note 8.
The provision for (benefit from) income taxes related to continuing operations
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 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Provision for (benefit from) income taxes
computed at U.S. federal statutory rate 35.0% (35.0)% 35.0%
State taxes, net of federal benefit 0.7 (0.8) 1.0
Differences between foreign and U.S.
income tax rates (0.2) 1.5 (0.7)
Tax-exempt income (0.7) (1.7) (4.5)
Export sales benefit (2.8) (6.5) -
Adjustments to prior years' taxes (2.8) - -
Tax credits (1.8) (4.6) (1.9)
Other (0.4) (0.9) 0.8
- --------------------------------------------------------------------------------
27.0% (48.0)% 29.7%
- --------------------------------------------------------------------------------
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 income taxes are as follows (in thousands):
As of February 29 or 28, 2004 2003
- ------------------------------------------------------------------------
Deferred tax assets (liabilities):
Reserves and accruals not currently
deductible for income tax purposes $ 12,843 $ 9,965
Inventory valuation 1,498 2,416
Intangible asset amortization (1,358) 379
Restructuring costs 2,160 2,321
Purchased in-process technology 938 1,058
Property, plant and equipment depreciation (83) 347
Impairment charges on investments - 5,707
Net operating losses 4,349 1,449
Other, net 1,210 1,340
- ------------------------------------------------------------------------
Net deferred tax assets $ 21,557 $ 24,982
- ------------------------------------------------------------------------
Income (loss) before income taxes and minority interest includes foreign income
of $1.2 million, $0.2 million and $0.7 million for fiscal 2004, 2003 and 2002,
respectively.
At February 29, 2004, the Company had federal net operating loss carry forwards
totaling $12.4 million. Of this amount, $2.3 million is attributable to the June
2002 acquisition of Gain Technology Corporation and is subject to certain
limitations under Section 382 of the Internal Revenue Code. The remaining $10.1
million results from the Company's fiscal 2003 operating results, the tax effect
of which is reflected on the Consolidated Balance Sheet at February 29, 2004
within the current portion of Deferred income taxes. The Company also expects to
claim a tax refund in fiscal 2005 of approximately $5.3 million resulting from
the carryback of several capital losses incurred for tax purposes during fiscal
2004. The Company also has $2.2 million of New York State tax credit
carryforwards at February 29, 2004, of which $0.1 million will expire in fiscal
2005. The remaining $2.1 million of credit carry forwards expire at various
dates in fiscal 2006 through fiscal 2017.
14. MINORITY INTEREST IN SUBSIDIARY
The Company conducts its business in the Japanese market through its subsidiary,
SMSC Japan. SMSC Japan's original capitalization in fiscal 1987 included a
minority investment by Sumitomo Metal Industries, Ltd. of Osaka, Japan
(Sumitomo) totaling 2.1 billion yen, or approximately $12.7 million at
then-current exchange rates, in exchange for 20% of SMSC Japan's issued and
outstanding common stock and all of its non-cumulative, non-voting 6% preferred
stock.
In January 2004, SMSC Japan redeemed Sumitomo's common and preferred stock
investments for combined consideration of 551 million yen, or approximately $5.2
million, of which $3.0 million represented the redemption of the preferred stock
investment and $2.2 million was the estimated fair value of Sumitomo's 20%
common stock investment. The difference between the carrying value and the
redemption price of the preferred stock, totaling $6.7 million, was recorded as
a credit to Additional paid-in capital, and is also presented as a component of
Net income applicable to common shareholders in the Consolidated Statement of
Operations for fiscal 2004. The $2.2 million assigned to Sumitomo's common stock
investment in SMSC Japan was allocated to the underlying net assets acquired at
their respective fair values, which approximated their carrying values.
15. COMMITMENTS AND CONTINGENCIES
Compensation
Certain executives and key employees are employed under separate agreements
terminating on various dates through fiscal 2006. These agreements provide,
among other things, for annual base salaries totaling $1.4 million and $0.2
million in fiscal 2005 and 2006, respectively.
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.
At February 29, 2004, future minimum lease payments for non-cancelable lease
obligations are as follows (in thousands):
Minimum
Lease
Payments
- ----------------------------------------------------
2005 $ 2,282
2006 1,217
2007 370
2008 223
2009 and thereafter -
- ----------------------------------------------------
Total minimum lease payments $ 4,092
====================================================
Total rent expense for all operating leases was $2.6 million, $1.9 million and
$1.8 million in fiscal 2004, 2003 and 2002, respectively.
Supplier Financing
During fiscal 2004, the Company acquired $3.9 million of software and other
tools used in product design, for which the supplier provided payment terms of
varying quarterly amounts totaling $0.3 million, $2.0 million and $1.6 million
in fiscal 2004, 2005 and 2006, respectively. The Company's February 29, 2004
Consolidated Balance Sheet includes the current portion of this obligation
within Accrued expenses, income taxes and other liabilities, and the long-term
portion within Other liabilities.
Litigation
From time to time as a normal incidence of doing business, various claims and
litigation may be asserted or commenced against the Company. Due to
uncertainties inherent in litigation and other claims, the Company can give no
assurance that it will prevail in any such matters, but management believes that
their ultimate resolution is not likely to have a material adverse effect on the
Company's consolidated financial position. Nevertheless, an adverse outcome of
any significant matter could have a material adverse effect on the Company's
consolidated results of operations or cash flows in the quarter or annual period
in which one or more of these matters are resolved.
In June 2003, SMSC was named as a defendant in a patent infringement lawsuit
filed by Analog Devices, Inc. (ADI) in the United States District Court for the
District of Massachusetts (Analog Devices, Inc. v. Standard Microsystems
Corporation, Case Number 03 CIV 11216). The Complaint, as amended, alleges that
some of the Company's products infringe one or more of three of ADI's patents,
and seeks injunctive relief and unspecified damages. In September 2003, the
Company filed an Answer in the lawsuit, denying ADI's allegations and raising
affirmative defenses and counterclaims. The Company is vigorously defending the
lawsuit and collecting evidence to support its defenses to infringement and its
allegations of patent invalidity and unenforceability. Although it is premature
to assess the outcome of the litigation, the Company believes that the
allegations against it are without merit.
16. 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 a portion 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. The
Company's matching contribution to the plan is equal to two-thirds of the
employee's contribution, up to 6% of the employee's earnings. The Company's
matching contributions to the Plan totaled $1.1 million, $1.0 million and $0.9
million in fiscal 2004, 2003 and 2002, respectively.
Common stock for the Company's matching contributions to the Plan is purchased
in the open market. Since its inception, 1,412,000 shares of the Company's
common stock have been contributed to the Plan.
As of February 29, 2004, 366 of the 467 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 options to purchase 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 29, 2004, 494,000 shares of common stock were available
for future grants of stock options, of which 313,000 can also be issued as
restricted stock awards.
Stock option plan activity is summarized below (shares in thousands):
Weighted Weighted Weighted
Fiscal Average Fiscal Average Fiscal Average
2004 Exercise 2003 Exercise 2002 Exercise
Shares Prices Shares Prices Shares Prices
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 4,778 $14.87 4,063 $12.52 3,500 $12.17
Granted 1,146 17.94 1,732 21.71 1,138 13.95
Exercised (1,405) 12.01 (407) 10.79 (175) 9.49
Canceled or expired (264) 18.87 (610) 21.30 (400) 14.86
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 4,255 $16.40 4,778 $14.87 4,063 $12.52
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable 1,054 $14.16 1,594 $12.27 1,110 $11.40
- ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information relating to currently outstanding and
exercisable options as of February 29, 2004 (shares in thousands):
Weighted Average Weighted Weighted
Range of Remaining Lives Options Average Exercise Options Average Exercise
Exercise Prices (in years) Outstanding Prices Exercisable Prices
- ----------------------------------------------------------------------------------------------------------------------
$ 6.75 - $12.69 6.39 984 $10.11 325 $ 9.97
$12.75 - $14.49 6.97 943 14.05 390 13.98
$14.50 - $19.92 8.37 1,347 17.98 266 17.19
$20.00 - $24.40 8.16 853 22.37 69 22.52
$24.55 - $26.98 9.55 128 25.66 4 24.78
- ----------------------------------------------------------------------------------------------------------------------
4,255 1,054
- ----------------------------------------------------------------------------------------------------------------------
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 29, 2004, the
expiration dates of the outstanding options under this plan range from July 15,
2007 to January 15, 2014, and the exercise prices range from $8.50 to $30.12
(weighted average $16.41) per share.
The following is a summary of activity under the Director Stock Option Plan over
the past three fiscal years (shares in thousands):
Weighted Weighted Weighted
Fiscal Average Fiscal Average Fiscal Average
2004 Exercise 2003 Exercise 2002 Exercise
Shares Prices Shares Prices Shares Prices
- --------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 271 $15.03 261 $12.78 213 $12.27
Granted 129 20.52 102 17.29 48 15.02
Exercised (134) 15.33 (92) 11.11 - -
Canceled or expired (3) 20.25 - - - -
- --------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 263 $17.52 271 $15.03 261 $12.78
- --------------------------------------------------------------------------------------------------------------------
Options exercisable 181 $16.41 269 $14.98 247 $12.61
- --------------------------------------------------------------------------------------------------------------------
Shares available for future grants, end of year 66 92 194
- --------------------------------------------------------------------------------------------------------------------
Director Deferred Compensation Plan
The Company has a deferred compensation plan for its non-employee directors,
which requires eligible directors to defer either 50% or 100% of their basic
annual compensation. 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 a quarterly basis. 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, pursuant to a plan
amendment implemented in fiscal 2003, is generally required to be paid in the
form of common stock. Compensation expense under this plan was $0.3 million in
fiscal 2004, and $0.1 million in each of fiscal 2003 and 2002, respectively.
The following is a summary of the activity under this plan (units in thousands):
For the years ended February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Common stock equivalent units,
beginning of year 35 31 25
Common stock equivalent units
earned 5 4 6
Distributions (11) - -
- --------------------------------------------------------------------------------
Common stock equivalent units,
end of year 29 35 31
- --------------------------------------------------------------------------------
Common stock equivalent units
available, end of year 50 65 69
- --------------------------------------------------------------------------------
Range of common stock prices
used to calculate common stock
equivalent units $14.82-$26.45 $16.43-$22.60 $9.73-$17.10
- --------------------------------------------------------------------------------
Restricted Stock Awards
The Company provides 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 is recorded as compensation expense ratably over the three-year periods
from the respective award dates, as adjusted for forfeitures of awards that did
not vest. Deferred compensation expense of $2.0 million and $2.1 million
associated with unearned shares under this plan as of February 29, 2004 and
February 28, 2003, respectively, is reported within Shareholders' equity on the
Company's Consolidated Balance Sheets. Compensation expense for these awards was
$1.0 million, $0.9 million and $0.7 million in fiscal 2004, 2003 and 2002,
respectively.
Through February 29, 2004, 294,000 shares, net of cancellations, have been
awarded under this plan, and 150,000 shares are unvested. The Company, at its
discretion, can grant restricted stock awards from the shares available under
its 2001 and 2003 Stock Option and Restricted Stock Plans.
Retirement Plan
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 changes in the Plan's projected benefit obligation, 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, 2004 2003 2002
- --------------------------------------------------------------------------------
Service cost - benefits earned during
the year $ 115 $ 100 $ 71
Interest cost on projected benefit
obligations 389 358 346
Net amortization and deferral 252 245 241
- --------------------------------------------------------------------------------
Net periodic pension expense $ 756 $ 703 $ 658
- --------------------------------------------------------------------------------
Projected benefit obligation:
Beginning of year $ 6,628 $ 6,070 $ 4,914
Service cost - benefits earned
during the year 115 100 71
Interest cost 389 358 346
Benefit payments (275) (275) (200)
Other 259 375 939
- -------------------------------------------------------------------------------
End of year $ 7,116 $ 6,628 $ 6,070
- -------------------------------------------------------------------------------
As of February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 4,763 $ 4,586 $ 4,555
Nonvested benefit obligation 670 563 287
- --------------------------------------------------------------------------------
Accumulated benefit obligation 5,433 5,149 4,842
Effect of projected future salary
increases 1,683 1,479 1,228
- --------------------------------------------------------------------------------
Projected benefit obligation 7,116 6,628 6,070
Unrecognized gain or (loss) (1,006) (754) (379)
Unrecognized net transition asset (1,225) (1,470) (1,715)
Additional minimum liability 548 745 867
- --------------------------------------------------------------------------------
Accrued pension cost $ 5,433 $ 5,149 $ 4,843
- --------------------------------------------------------------------------------
Assumptions used in determining
actuarial present value of
benefit obligations:
Discount rate 5.85% 6.00% 6.00%
Weighted average rate of
compensation increase 7.00% 7.00% 7.00%
- --------------------------------------------------------------------------------
17. INDUSTRY SEGMENT, GEOGRAPHIC, CUSTOMER AND SUPPLIER INFORMATION
Industry Segment
The Company operates in a single industry segment in which it designs, develops
and markets semiconductor integrated circuits for high-speed communication and
computing applications.
Geographic Information
The Company's domestic operations include its worldwide sales and revenues,
exclusive of some of its sales and revenues from customers in Japan, and most of
its operating expenses. The majority of the Company's sales and 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.
Export Sales
The information below summarizes sales and revenues to unaffiliated customers by
geographic region (in thousands):
For the years ended February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
North America $ 37,138 $ 14,712 $ 42,913
Asia and Pacific Rim 168,380 131,903 106,123
Europe 10,335 8,823 10,157
Rest of World 20 79 105
- --------------------------------------------------------------------------------
$ 215,873 $ 155,517 $ 159,298
- --------------------------------------------------------------------------------
Significant Customers
Revenues from significant customers, as percentages of total sales and revenues,
are summarized as follows:
For the years ended February 29 or 28, 2004 2003 2002
- --------------------------------------------------------------------------------
Customer A 16% 20% 15%
Customer B 16% 14% 6%
Customer C 12% 10% 29%
Customer D 12% 12% 6%
Significant Suppliers
The Company does not operate a wafer fabrication facility. Two independent
semiconductor wafer 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 $7.3
million and $6.6 million of the Company's accounts receivable, net of sales
allowances, as of February 29, 2004 and February 28, 2003, respectively. 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 its cash, cash equivalents and liquid 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.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data. The sum of the income (loss) per share
amounts may not total due to rounding.)
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 29
- ---------------------------------------------------------------------------------------------------------------
Fiscal 2004
Product sales $ 42,488 $ 47,961 $ 52,302 $ 49,218
Intellectual property revenues 233 328 20,447 2,896
- ---------------------------------------------------------------------------------------------------------------
42,721 48,289 72,749 52,114
Gross profit 20,662 21,506 42,399 25,070
Operating income 3,132 1,944 20,268 3,465
Income from continuing operations 1,883 1,506 14,787 3,366
Gain (loss) from discontinued operations (164) (26) (3) 169
Net income 1,719 1,480 14,784 3,535
Gain on redemption of preferred stock of subsidiary - - - 6,685
Net income applicable to common shareholders 1,719 1,480 14,784 10,220
===============================================================================================================
Basic net income per share:
Income from continuing operations $ 0.11 $ 0.09 $ 0.84 $ 0.19
Gain (loss) from discontinued operations (0.01) - - 0.01
- ---------------------------------------------------------------------------------------------------------------
Basic net income per share 0.10 0.09 0.84 0.20
Gain on redemption of preferred stock of subsidiary - - - 0.37
- ---------------------------------------------------------------------------------------------------------------
Basic net income per share applicable to common
shareholders $ 0.10 $ 0.09 $ 0.84 $ 0.57
===============================================================================================================
Diluted net income per share:
Income from continuing operations $ 0.11 $ 0.08 $ 0.77 $ 0.17
Gain (loss) from discontinued operations (0.01) - - 0.01
- ---------------------------------------------------------------------------------------------------------------
Diluted net income per share 0.10 0.08 0.77 0.18
Gain on redemption of preferred stock of subsidiary - - - 0.34
- ---------------------------------------------------------------------------------------------------------------
Diluted net income per share applicable to common
shareholders $ 0.10 $ 0.08 $ 0.77 $ 0.51
===============================================================================================================
Average shares outstanding:
Basic net income per share 16,793 16,863 17,577 18,007
Diluted net income per share 17,331 17,722 19,242 19,887
Market price per share:
High $ 16.00 $ 21.50 $ 31.65 $ 36.56
Low 11.71 13.50 19.46 23.70
===============================================================================================================
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
- ---------------------------------------------------------------------------------------------------------------
Fiscal 2003
Product sales $ 33,828 $ 37,948 $ 40,293 $ 42,175
Intellectual property revenues 179 352 305 437
- ---------------------------------------------------------------------------------------------------------------
34,007 38,300 40,598 42,612
Gross profit 15,072 17,111 17,945 19,296
Operating income 27 231 14 798
Income (loss) from continuing operations 433 568 (9,032) 1,060
Loss from discontinued operations (81) (258) (125) (36)
Net income (loss) 352 310 (9,157) 1,024
===============================================================================================================
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.03 $ 0.03 $ (0.54) $ 0.06
Loss from discontinued operations (0.01) (0.01) (0.01) -
- ---------------------------------------------------------------------------------------------------------------
$ 0.02 $ 0.02 $ (0.55) $ 0.06
===============================================================================================================
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.02 $ 0.03 $ (0.54) $ 0.06
Loss from discontinued operations - (0.01) (0.01) -
- ---------------------------------------------------------------------------------------------------------------
$ 0.02 $ 0.02 $ (0.55) $ 0.06
===============================================================================================================
Average shares outstanding:
Basic net income per share 16,060 16,631 16,718 16,748
Diluted net income per share 17,811 18,214 16,718 17,905
Market price per share:
High $ 27.65 $ 24.90 $ 22.85 $ 22.43
Low 16.30 16.32 11.80 12.99
===============================================================================================================
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 717 holders of record of the Company's common stock at
February 29, 2004.
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 AUDITORS
To the Board of Directors and Shareholders of Standard Microsystems Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Standard
Microsystems Corporation and its subsidiaries at February 29, 2004, and February
28, 2003, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
Standard Microsystems Corporation and its subsidiaries as of February 28, 2002,
and for the year then ended were audited by other independent accountants who
have ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated April 4, 2002.
PricewaterhouseCoopers LLP
New York, NY
April 9, 2004
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
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