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 1995 1994 1993 1992 1991
OPERATING RESULTS
Revenues $ 378,671 $ 322,575 $ 250,495 $ 132,744 $ 87,017
Cost of goods sold and operating expenses 338,049 287,139 219,712 130,679 87,186
Income (loss) from operations 40,622 35,436 30,783 2,065 (169)
Other income (expense), net 670 (1,964) (2,865) (134) 2,266
Income before minority interest, provision
for income taxes and extraordinary item 41,292 33,472 27,918 1,931 2,097
Minority interest in net income (loss)
of subsidiary 185 (209) (430) (425) (266)
Income before provision for income taxes
and extraordinary item 41,107 33,681 28,348 2,356 2,363
Provision for income taxes 15,940 13,770 12,510 1,761 1,175
Income before extraordinary item 25,167 19,911 15,838 595 1,188
Extraordinary item (944) - - - -
Net income $ 24,223 $ 19,911 $ 15,838 $ 595 $ 1,188
Weighted average common and
common equivalent shares 13,305 13,090 12,469 11,604 11,560
PER SHARE DATA
Income before extraordinary item $ 1.89 $ 1.52 $ 1.27 $ .05 $ .10
Extraordinary item (0.07) - - - -
Net income $ 1.82 $ 1.52 $ 1.27 $ .05 .10
Shareholders' equity at year end $ 13.16 $ 11.18 $ 9.50 $ 7.70 $ 7.65
Market price at year end 26.50 19.13 18.75 9.13 5.38
BALANCE SHEET DATA
Current assets $ 162,776 $ 140,393 $ 111,326 $ 79,718 $ 75,231
Current liabilities 43,421 41,842 40,962 35,085 8,119
Working capital $ 119,355 $ 98,551 $ 70,364 $ 44,633 $ 67,112
Property, plant and equipment, net $ 34,908 $ 30,600 $ 30,775 $ 33,116 $ 34,543
Total assets 228,578 205,833 183,926 154,299 111,654
Long-term debt - 9,190 12,135 18,240 1,783
Minority interest in subsidiary 11,174 10,989 11,198 11,628 12,053
Shareholders' equity 173,983 143,812 119,631 89,346 88,004
Standard Microsystems Corporation
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the Company's Consolidated Statements of
Income, as percentages of revenues, for the three years ended February 28, 1995:
FISCAL YEARS ENDED FEBRUARY 28, 1995 1994 1993
Revenues 100.0% 100.0% 100.0%
Cost of goods sold 56.6 60.2 59.4
Gross profit 43.4 39.8 40.6
Research and development 7.5 7.4 6.8
Selling, general and administrative 23.8 19.7 19.8
Amortization of intangible assets 1.4 1.7 1.8
Total operating expenses 32.7 28.8 28.4
Income from operations 10.7 11.0 12.2
Other income (expense), net 0.2 (0.6) (1.1)
Income before minority interest, income taxes and
extraordinary item 10.9 10.4 11.1
Minority interest in net income (loss) of subsidiary 0.1 (0.1) (0.2)
Income before taxes and extraordinary item 10.8 10.5 11.3
Provision for income taxes 4.2 4.3 5.0
Income before extraordinary item 6.6 6.2 6.3
Extraordinary item (0.2) - -
Net income 6.4% 6.2% 6.3%
REVENUES
Revenues increased 17% to $378.7 million in fiscal 1995, from $322.6 million
in fiscal 1994, reflecting increased shipments of component products and hubs
and LAN switches. Revenues of network interface cards (adapters) declined in
fiscal 1995. The decline in adapter revenues included a 16% decline in Ethernet
adapter revenue, primarily reflecting a decline in average selling prices. The
growth in revenue from hubs and LAN switches reflected increased shipments of
the ES/1 LAN Switch, initial shipment of the TigerSwitch as well as increased
shipments of wiring hubs. The growth in revenues from component products was
driven by the broad acceptance of PC I/O products by major PC manufacturers. For
fiscal 1996, growth of component products' revenues is expected to approximate
the rate of growth of the PC market.
In fiscal 1994, revenues of all product lines increased from the prior year
results. The table below provides product line data for the three years ended
February 28, 1995:
FISCAL YEARS ENDED FEBRUARY 28, 1995 1994 1993
System products
Network interface cards $ 206.1 $ 229.1 $ 206.3
Hubs and LAN switches 55.2 36.1 19.6
261.3 265.2 225.9
Component products 117.4 57.4 24.6
Total revenues $ 378.7 $ 322.6 $ 250.5
System products revenues in the fourth quarter of fiscal 1995 were lower
than anticipated and inventory in the distributor channel was above targeted
levels, primarily because of lower than anticipated shipments from distributors
to their reseller customers. The Company expects that a reduction of inventory
in the distributor channel will lead to a decline in networking products'
revenues in the first quarter of fiscal 1996 from the first quarter of fiscal
1995.
Standard Microsystems Corporation
and Subsidiaries
For the Company, fiscal 1994 revenues were 29% higher than in fiscal 1993,
reflecting 17% growth for system products consisting of 11% growth for adapters
and 85% growth for hubs and LAN switches, and 113% growth for component
products. As a result of the December 1992 acquisition of Sigma Network Systems,
Inc., LAN switches were included in fiscal 1993 revenues for only the final two
months of the year.
GROSS PROFIT
Fiscal 1995 gross profit margins improved to 43.4% from 39.8% in fiscal 1994
and 40.6% in fiscal 1993. The improvement in fiscal 1995 was attributable to
increased unit volume of PC I/O devices, allowing for lower production costs and
more efficient utilization of manufacturing overhead for the Component Products
Division. In addition, the growth of LAN switching revenues, which carry higher
gross margins than adapter revenues, led to improved gross margins for the
System Products Division. The decline in gross profit margin in fiscal 1994
from fiscal 1993 reflected a 16% decline in average selling prices for Ethernet
adapters, that was largely offset by the shift in product mix, in the second
half, to a new, lower cost generation of Ethernet adapters.
The Company maintains ongoing product cost reduction programs and develops
innovative products that have helped maintain and improve gross profit margins
to offset price competition that characterizes the Company's business.
OPERATING EXPENSES
Research and development expenses increased to $28.2 million or 7.5% of
revenues in fiscal 1995 from $23.9 million or 7.4% in fiscal 1994 and $17.0
million or 6.8% in fiscal 1993. In fiscal 1996, engineering efforts for
networking products will focus on developing high speed Fast Ethernet and ATM
technology products and enhancing LAN switch, hub and adapter products.
Component products development is directed toward reducing device costs and
enhancing the functionality and performance of PC I/O and LAN products.
Selling, general and administrative expenses were $90.0 million or 23.8% of
revenues in fiscal 1995, compared to $63.5 million or 19.7% in fiscal 1994 and
$49.4 million or 19.8% in fiscal 1993. These expenses included spending for
advertising, which increased to $23.2 million in fiscal 1995 from $13.6 million
in fiscal 1994 and $9.7 million in fiscal 1993. A major portion of the increase
in selling, general and administrative expenses in fiscal 1995 reflected a 45%
increase in sales and marketing personnel to approximately 300 at the end of
fiscal 1995. The Company plans to continue to aggressively expand its sales and
marketing force, including customer support, to strengthen all of its channels
of distribution for LAN products and component products.
OTHER INCOME AND EXPENSE
Fiscal 1995 interest expense declined $0.4 million due to lower average
borrowings outstanding and the year-end elimination of long-term debt. Interest
income increased $0.5 million, primarily reflecting interest income on a tax
refund receivable. Other income (expense), net improved $1.7 million reflecting
a $1.2 million capital gain resulting from the sale of an investment and reduced
financing fees.
In fiscal 1994, interest expense declined $0.7 million associated with a
decrease in long-term debt to $13.2 million at the end of fiscal 1994, from
$19.1 million a year earlier. Interest income declined $0.1 million reflecting
the decrease in cash available for investment.
EXTRAORDINARY ITEM
In January 1995, SMC prepaid $10.8 million of debt, canceling a $35.0
million line of credit and replacing it with an $80.0 million line. As a result,
the Company incurred prepayment penalties, the write-off of unamortized
financing cost, and other fees, amounting to approximately $1.5 million or $0.9
million after taxes.
INCOME TAXES
For fiscal 1995, income taxes were provided at an effective rate of 38.8%
compared to 40.9% for fiscal 1994 and 44.1% for fiscal 1993. In fiscal 1995, the
effective rate included the 35.0% federal tax rate and a 3.7% effective state
tax rate. The reduction in the effective tax rate in fiscal 1995 from fiscal
1994 primarily reflected the benefit of an election under section 197 of the
Internal Revenue Code, allowing the deductibility of goodwill associated with
the October 1991 acquisition of the LAN adapter business of Western Digital
Standard Microsystems Corporation
and Subsidiaries
Corporation and a full year's operation of a foreign sales corporation.
These items were partially offset by a reduction in the difference between the
federal tax rate and foreign tax rates, among other items.
In fiscal 1994, the effective rate included the 35.0% federal tax rate, a
3.7% effective state tax rate and 1.2% representing the difference between the
federal tax rate and foreign tax rates, including the effect of non-deductible
expenses incurred by the Company's Japanese subsidiary. The remainder represents
the net effect of goodwill and income tax credits, among other items.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $119.4 million at the end of
fiscal 1995 from $98.6 million at the end of fiscal 1994. The increase in
working capital was primarily from increases in accounts receivable and
inventories to support higher revenues offset by a moderate increase in current
liabilities and a moderate decrease in cash and cash equivalents.
Days of sales outstanding (DSOs) rose to 67 in the fourth quarter of fiscal
1995 from 63 in the year earlier period. This increase reflected a greater
percentage of revenues accruing toward the end of the quarter when compared to
the year earlier period. Reduction of networking products inventory in the
distributor channel is expected to result in a more even distribution of
revenues during a quarter and lower DSOs.
Annualized inventory turnover declined to 5.1 times for the fourth quarter
of fiscal 1995 from 6.5 times for the year earlier period. This decrease
reflected lower than planned revenues and a consequent increase in inventory.
Cash and cash equivalents decreased by $2.6 million in fiscal 1995 to $29.5
million, primarily reflecting net cash provided by operating activities of $20.1
million and $2.0 million from the issuance of common stock, offset by a net pay-
down of long-term debt of $13.2 million and capital expenditures of $13.6
million.
Cash and cash equivalents decreased by $3.7 million in fiscal 1994 to $32.1
million primarily reflecting net cash provided by operating activities of $5.2
million, $1.4 million from the issuance of common stock and the release of $3.0
million cash that had been restricted in accordance with a term loan agreement,
offset by a net pay-down of long-term debt of $5.9 million and capital
expenditures of $8.1 million.
In January 1995, the Company negotiated an $80.0 million revolving credit
line that replaced a $35.0 million revolving credit agreement. At the end of
fiscal 1995, the Company had not drawn upon its credit line.
As of February 28, 1995, pursuant to an agreement with AT&T
Microelectronics, the Company was committed to purchase approximately $16.0
million of wafer fabrication equipment in fiscal 1996 for a semiconductor plant
owned by AT&T in Madrid, Spain.
Following the close of fiscal 1995, the Company purchased a minority equity
interest in Singapore-based Chartered Semiconductor Pte Ltd. for approximately
$14.0 million. An additional $6.0 million will be invested in early fiscal 1997.
This arrangement, along with the AT&T agreement, is intended to provide the
Company with a portion of its long-term requirements for state-of-the-art
integrated circuits, beginning near the end of fiscal 1996.
The Company believes that its present working capital position, combined
with forecasted cash flow and available borrowing capacity will be sufficient to
meet cash requirements for the foreseeable future. It is anticipated that cash
flow from operations, supplemented by borrowings under the revolving credit
line, will be used to fund capital expenditures in fiscal 1996.
GENERAL
A number of variables could affect the future operating results of the
Company, including global economic conditions, market acceptance of newly
introduced products, the availability of certain components and finished
products from a limited number of suppliers and numerous competitive factors.
High levels of production by PC manufacturers have led to an industry-wide
shortage of silicon wafer fabrication capacity. As a result, SMC is currently
faced with limited subcontractor fabrication capacity. The Company's difficulty
in securing additional capacity could impact revenue and profit growth in fiscal
1996 and beyond.
With almost one-half of the Company's revenue derived from outside of the
United States, changes in foreign currency exchange rates could affect demand
for the Company's products. Because of these and other factors that could affect
the Company's operating results, past financial performance is not necessarily
indicative of results to be expected in the future.
Standard Microsystems Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AS OF FEBRUARY 28, 1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,478 $ 32,115
Accounts receivable, net of allowance for doubtful
accounts of $1,102 and $1,001, respectively 75,826 65,504
Inventories 45,789 34,104
Deferred tax benefits 5,392 4,738
Other current assets 6,291 3,932
TOTAL CURRENT ASSETS 162,776 140,393
PROPERTY, PLANT AND EQUIPMENT:
Land 3,832 3,832
Buildings and improvements 26,901 25,810
Machinery and equipment 77,639 66,466
108,372 96,108
Less: accumulated depreciation 73,464 65,508
PROPERTY, PLANT AND EQUIPMENT, NET 34,908 30,600
INTANGIBLE ASSETS 26,479 31,968
DEFERRED TAX BENEFITS 1,795 -
OTHER ASSETS 2,620 2,872
$228,578 $ 205,833
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ - $ 4,000
Accounts payable 24,193 19,789
Accrued expenses and other liabilities 15,527 15,447
Income taxes payable 3,701 2,606
TOTAL CURRENT LIABILITIES 43,421 41,842
LONG-TERM DEBT - 9,190
MINORITY INTEREST IN SUBSIDIARY 11,174 10,989
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value
Authorized 1,000,000 shares, none outstanding - -
Common stock, $.10 par value
Authorized 30,000,000 shares
Outstanding 13,222,000 and 12,867,000
shares, respectively 1,322 1,287
Additional paid-in capital 77,319 73,116
Retained earnings 88,616 64,393
Unrealized gain on investment, net of tax 718 -
Foreign currency translation adjustment 6,008 5,016
TOTAL SHAREHOLDERS' EQUITY 173,983 143,812
$228,578 $ 205,833
The accompanying notes are an integral part of these consolidated
financial statements.
Standard Microsystems Corporation
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993
Revenues $ 378,671 $ 322,575 $ 250,495
Cost of goods sold 214,269 194,210 148,678
Gross profit 164,402 128,365 101,817
Operating expenses:
Research and development 28,286 23,963 17,033
Selling, general and administrative 90,005 63,477 49,414
Amortization of intangible assets 5,489 5,489 4,587
123,780 92,929 71,034
Income from operations 40,622 35,436 30,783
Other income (expense):
Interest income 1,453 912 1,020
Interest expense (1,255) (1,649) (2,310)
Other income (expense), net 472 (1,227) (1,575)
670 (1,964) (2,865)
Income before minority interest, provision for income
taxes and extraordinary item 41,292 33,472 27,918
Minority interest in net income (loss) of subsidiary 185 (209) (430)
Income before provision for income taxes and
extraordinary item 41,107 33,681 28,348
Provision for income taxes 15,940 13,770 12,510
Income before extraordinary item 25,167 19,911 15,838
Extraordinary item
Loss on extinguishment of debt, net of applicable
income taxes of $600 944 - -
Net income $ 24,223 $ 19,911 $ 15,838
Income per common and common equivalent share:
Income before extraordinary item $ 1.89 $ 1.52 $ 1.27
Extraordinary item (0.07) - -
Net income per common and
common equivalent share $ 1.82 $ 1.52 $ 1.27
The accompanying notes are an integral part of these consolidated
financial statements.
Standard Microsystems Corporation
and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
FOREIGN
ADDITIONAL UNREALIZED CURRENCY
COMMON STOCK PAID-IN RETAINED GAIN ON TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS INVESTMENT ADJUSTMENT
BALANCE AT FEBRUARY 29, 1992 11,600,000 $ 1,160 $ 56,371 $ 28,644 $ - $ 3,171
Shares issued under employee
stock purchase plan 47,000 5 579 - - -
Exercise of stock options 573,000 57 3,201 - - -
Tax effect of employee stock plans - - 1,329 - - -
Restricted stock grants to
employees, net 21,000 2 49 - - -
Stock issued for
business acquisition 350,000 35 8,278 - - -
Foreign currency translation
adjustment - - - - - 912
Net income - - - 15,838 - -
BALANCE AT FEBRUARY 28, 1993 12,591,000 1,259 69,807 44,482 - 4,083
Shares issued under employee
stock purchase plan 46,000 5 879 - - -
Exercise of stock options 194,000 19 1,253 - - -
Tax effect of employee stock plans - - 992 - - -
Restricted stock grants to
employees, net 36,000 4 185 - - -
Foreign currency translation
adjustment - - - - - 933
Net income - - - 19,911 - -
BALANCE AT FEBRUARY 28, 1994 12,867,000 1,287 73,116 64,393 - 5,016
Shares issued under employee
stock purchase plan 60,000 6 1,173 - - -
Exercise of stock options 245,000 24 1,967 - - -
Tax effect of employee stock plans - - 707 - - -
Restricted stock grants to
employees, net 50,000 5 356 - - -
Unrealized gain on investment,
net of taxes - - - - 718 -
Foreign currency translation
adjustment - - - - - 992
Net income - - - 24,223 - -
BALANCE AT FEBRUARY 28, 1995 13,222,000 $ 1,322 $ 77,319 $ 88,616 $ 718 $ 6,008
The accompanying notes are an integral part of these consolidated
financial statements.
Standard Microsystems Corporation
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 367,342 $ 293,927 $ 249,870
Cash paid to suppliers and employees (331,406) (276,443) (209,004)
Interest received 1,800 1,284 1,052
Interest paid (1,168) (1,699) (2,557)
Income taxes paid (16,467) (11,884) (13,235)
Net cash provided by operating activities 20,101 5,185 26,126
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,578) (8,119) (4,772)
Acquisition of business - - (272)
Other 1,266 3,089 230
Net cash used for investing activities (12,312) (5,030) (4,814)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,991 1,403 3,355
Principal payments of long-term debt (14,117) (7,000) (8,000)
Net borrowings under line of credit agreement 927 1,055 895
Net cash used for financing activities (11,199) (4,542) (3,750)
Effect of foreign exchange rate changes on
cash and cash equivalents 773 630 394
Net increase (decrease) in cash and cash equivalents (2,637) (3,757) 17,956
Cash and cash equivalents at beginning of year 32,115 35,872 17,916
Cash and cash equivalents at end of year $ 29,478 $ 32,115 $ 35,872
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 24,223 $ 19,911 $ 15,838
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 14,813 13,799 12,005
Minority interest in net income (loss) of subsidiary 185 (209) (430)
Other adjustments, net 756 1,249 849
CHANGES IN OPERATING ASSETS AND LIABILITIES,
NET OF EFFECT OF ACQUISITION OF BUSINESS:
Accounts receivable (11,027) (28,265) (559)
Inventories (11,608) (5,921) (6,548)
Accounts payable, accrued expenses and other
liabilities 4,714 2,678 4,911
Other changes, net (1,955) 1,943 60
Net cash provided by operating activities $ 20,101 $ 5,185 $ 26,126
CASH USED FOR ACQUISITION OF BUSINESS AS REFLECTED IN THE CONSOLIDATED
STATEMENTS OF CASH FLOWS IS SUMMARIZED AS FOLLOWS:
Fair value of non-cash assets acquired, excluding goodwill $ - $ - $ 3,134
Goodwill - - 7,582
Liabilities assumed and created, net of tax benefit - - (2,131)
Common stock issued - - (8,313)
Cash paid to acquire business $ - $ - $ 272
The accompanying notes are an integral part of these consolidated
financial statements.
Standard Microsystems Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Standard
Microsystems Corporation (SMC) and its subsidiaries (the Company). All
significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash in banks and highly
liquid debt instruments purchased with maturities of three months or less.
Inventories
Inventories are valued at the lower of first-in, first-out cost (material,
direct labor and overhead) or market.
Software Development Expenses
The Company expenses software development costs as incurred.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful lives of the buildings (20 to 25
years) and machinery and equipment (3 to 7 years). Upon sale or retirement of
property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected currently.
Investment in Equity Securities
Included within Other Assets is an equity investment in a single investee at
February 28, 1995 and 1994. During fiscal 1995, the Company adopted Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES (SFAS 115). In accordance with the provisions of SFAS
115, this investment is carried at fair value at February 28, 1995, with a
corresponding unrealized gain, net of taxes, reported as a separate component of
shareholders' equity. The consolidated balance sheet at February 28, 1994, has
not been restated for this accounting change and reflects this investment at
cost.
During the fourth quarter of fiscal 1995, the Company sold approximately
one-half of this equity investment, realizing a pre-tax gain of $1,227,000,
which is included within "Other Income (Expense)" on the accompanying
Consolidated Statements of Income.
Intangible Assets
Intangible assets are amortized on a straight-line basis over their
respective estimated useful lives, ranging from six to twelve years.
Product Warranty
The Company's products are generally under warranty against defects in
material and workmanship for periods ranging from one year to lifetime.
Estimated warranty costs are accrued when the products are sold.
Income Taxes
Deferred income taxes are provided on temporary differences that arise in
the recording of transactions for financial and tax reporting purposes and
result in deferred tax assets and liabilities. Deferred tax assets are reduced
by an appropriate valuation allowance if it is management's judgment that part
of the deferred tax asset will not be realized. Tax credits are accounted for as
reductions of the current provision for income taxes in the year in which the
related expenditures are incurred.
Foreign Currency Translation
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 as a separate component
of shareholders' equity.
Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share has been computed based on
the weighted average number of shares outstanding during the year, including the
effect of common equivalent shares if dilutive. The difference between primary
and fully diluted earnings per share is immaterial for all periods presented.
Reclassifications
Certain items shown have been reclassified to conform with the fiscal 1995
presentation.
Standard Microsystems Corporation
and Subsidiaries
2. BUSINESS ACQUISITIONS
In December 1992, the Company issued 350,000 shares of its common stock in
exchange for all of the outstanding common and preferred stock of Sigma Network
Systems, Inc. The acquisition was valued at approximately $8,700,000, including
related costs, and was accounted for as a purchase. The excess of the cost over
the fair value of the net assets acquired is being amortized on a straight-line
basis over a seven year period.
The following unaudited summary presents the Company's pro forma
consolidated results of operations for the year ended February 28, 1993, as if
this acquisition had occurred at the beginning of the fiscal year. These results
do not necessarily represent results which would have occurred had this
acquisition taken place on the basis assumed above.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED FEBRUARY 28, 1993
Revenues $ 253,263
Net income $ 14,004
Net income per share $ 1.12
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
AS OF FEBRUARY 28, 1995 1994
Revolving credit agreement, bearing
interest at prime rate plus 2% $ - $ 5,940
10.68% senior term loan - 5,250
Bank note, bearing interest at prime
rate plus 4% - 2,000
- 13,190
Less: current maturities - 4,000
$ - $ 9,190
During the fourth quarter of fiscal 1995, the Company retired all of its
bank debt, consisting of a revolving line of credit, a senior term loan and a
bank note, and recorded an after-tax extraordinary loss of $944,000 on this
early retirement. The extraordinary loss consists of early redemption premiums
paid to the debt holders and the write-off of deferred financing costs
associated with this debt.
Concurrent with this early retirement, the Company arranged a new
$80,000,000 unsecured revolving line of credit, which permits the Company to
borrow funds on a revolving basis through January 1998. The line of credit bears
an annual commitment fee of .25% of the unused portion of the line, and bears
interest at rates varying from .625% to 1.0% above the London Interbank Offering
Rate (LIBOR).
4. INCOME TAXES
The provision for income taxes included in the accompanying consolidated
statements of income consists of the following (in thousands):
FOR THE YEARS ENDED
FEBRUARY 28, 1995 1994 1993
Current
Federal $ 16,242 $ 11,897 $ 11,970
Foreign 345 188 177
State 2,281 1,907 2,209
18,868 13,992 14,356
Deferred (2,928) (222) (1,846)
$ 15,940 $ 13,770 $ 12,510
The provision for taxes on income before extraordinary item differs from the
amount computed by applying the U.S. Federal statutory tax rate as a result of
the following:
FOR THE YEARS ENDED
FEBRUARY 28, 1995 1994 1993
Provision for income
taxes computed at
the statutory rate 35.0% 35.0% 34.0%
State taxes 3.7 3.7 5.1
Differences between
foreign and
U.S. income tax rates,
including effect of
unused foreign NOL
carryforwards - 1.2 3.2
Foreign sales
corporation (1.3) (0.5) -
Income tax credits (0.1) (0.3) (1.3)
Goodwill amortization 0.5 1.9 1.1
Other 1.0 (0.1) 2.0
38.8% 40.9% 44.1%
The tax effects of temporary differences that result in deferred tax
benefits are as follows (in thousands):
AS OF FEBRUARY 28, 1995 1994
Reserves and accruals not
deductible for tax purposes $ 3,391 $ 1,258
Inventory valuation 2,151 1,930
Net operating loss carryforward 857 1,028
Depreciation 1,031 335
Other (243) 187
$ 7,187 $ 4,738
Standard Microsystems Corporation
and Subsidiaries
Realization of tax benefits from NOL carryforwards of the Company's Japanese
subsidiary is uncertain, and accordingly is fully reserved. At a current foreign
exchange rate, these carry-forwards aggregate approximately $6,500,000 as of
February 28, 1995, and will expire between fiscal 1996 and fiscal 2000.
Income tax provisions for fiscal 1995, 1994 and 1993 have not been reduced
by $707,000, $992,000 and $1,329,000, respectively, of tax benefits related to
the Company's stock option plans. These amounts have been credited to additional
paid-in capital.
The Company has $3,001,000 of New York State tax credit carryforwards of
which $1,230,000 and $950,000 expire in fiscal 1996 and 1997, respectively. The
remaining $821,000 of credit carryforwards expire at various dates in fiscal
1998 through fiscal 2004.
During fiscal 1995, the Company made an election to amortize $3,318,000 of
goodwill related to the October 1991 acquisition of the local area networking
business of Western Digital Corporation. This election will allow the Company to
take a tax deduction for this previously non-deductible goodwill over a fifteen
year period. Additionally, the other intangible assets related to this
acquisition will now also be amortized over a fifteen year period for tax
purposes. Previously, the tax lives of these assets varied from six to twelve
years.
5. OTHER BALANCE SHEET DATA
(IN THOUSANDS)
AS OF FEBRUARY 28, 1995 1994
Inventories:
Raw materials $11,547 $ 5,920
Work-in-process 16,239 14,764
Finished goods 18,003 13,420
$45,789 $34,104
Intangible assets:
Covenant not to compete $15,100 $15,100
Acquired LAN technologies 13,500 13,500
Excess of acquisition cost
over fair value of net assets
acquired (goodwill) 15,279 15,279
43,879 43,879
Less: accumulated amortization 17,400 11,911
$26,479 $31,968
Accrued expenses and
other liabilities:
Salaries and fringe benefits $ 6,502 $ 6,153
Advertising 3,683 3,232
Other 5,342 6,062
$15,527 $15,447
6. MINORITY INTEREST IN SUBSIDIARY
Sumitomo Metal Industries, Ltd. of Osaka, Japan (SMI) owns 20% of the issued
and outstanding common stock and all of the non-cumulative, non-voting 6%
preferred stock of the Company's subsidiary, Toyo Microsystems Corporation
(TMC). The Company and SMI have agreed to declare a preferred dividend if TMC
should realize net income of at least five times the total amount of preferred
dividends which would be payable on all preferred stock then outstanding. The
annual preferred dividend would be equal to 6% of the subscription price of 2.16
billion yen, or approximately $1,336,000 at an exchange rate of 97 yen per
dollar.
In the event that a third party acquires a majority of the outstanding
common stock of the Company, SMI has the option to require the Company to
purchase SMI's interest in TMC.
7. COMMITMENTS AND CONTINGENCIES
Compensation
Certain executives are employed under separate agreements terminating in
fiscal 1996. These agreements provide, among other things, for base salaries
totalling $1,436,000 through fiscal 1996.
The Company has employment contracts with certain key employees of its
subsidiary, SMC Massachusetts Inc., which provide for base salaries totalling
$600,000 per year through fiscal 1996. Incentive payments aggregating up to
$830,000 per year are also payable under these contracts through fiscal 1996,
subject to achieving certain product development and revenue milestones as
defined in the contracts.
The Company has also entered into agreements with certain officers providing
for severance pay if their employment is terminated following a change in
control of the Company.
Operating Leases
The Company leases certain vehicles, facilities and equipment. Minimum
rentals under these leases for each of the next five years are as follows (in
thousands):
1996 $1,306
1997 1,310
1998 806
1999 710
2000 695
Total rent expense was $1,013,000, $755,000 and $490,000 in fiscal 1995,
1994 and 1993, respectively.
Standard Microsystems Corporation
and Subsidiaries
Wafer Supply Agreements
In September 1994, the Company entered into an agreement with AT&T
Microelectronics whereby the Company will purchase approximately $16,000,000 of
wafer manufacturing equipment for installation at AT&T facilities. In return, a
portion of AT&T's wafer production capacity during the five year period
following the installation of the equipment will be reserved for the Company's
requirements at favorable pricing. The first production wafers are expected to
be delivered by the end of fiscal 1996.
In March 1995, the Company entered into an agreement to invest approximately
$20,000,000 in Chartered Semiconductor Pte Ltd. (Chartered), a semiconductor
manufacturer located in Singapore. Under the terms of the agreement, the Company
acquired an equity interest in Chartered of less than 5% and, in return, will be
allocated capacity in a new wafer fabrication facility to be constructed by
Chartered in Singapore. Approximately $14,000,000 of the Company's investment
was made in March 1995, with the remaining $6,000,000 investment scheduled for
March 1996.
Litigation
In September 1991, the Company and Texas Instruments Incorporated (TI)
agreed to settle, terminate and dismiss litigation between the two companies. In
addition to the settlement agreement, the parties entered into a five year
patent cross-licensing agreement covering the manufacturing of certain
semiconductor and local area network products, which license provides for
payments by the Company over a period ending December 31, 1996.
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's operations or financial
position.
8. 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 earnings
reduction contributions to the Plan.
The Plan permits employees to contribute up to 15% of their earnings,
through payroll deductions, based on earnings reduction agreements. The
Company's contribution, which is equal to one-half of the employee's
contribution up to 6%, is invested in the common stock of the Company and
totalled $866,000, $729,000 and $448,000 in fiscal 1995, 1994 and 1993,
respectively.
The Company has authorized unissued common stock reserved for issuance to
the Plan. As of February 28, 1995, 205,000 unissued shares remain in reserve.
Since its inception, 637,000 shares of the Company's common stock have been
contributed to the Plan.
As of February 28, 1995, 610 of the 749 employees who had satisfied the
Plan's eligibility requirements to participate were making salary deduction
contributions.
Stock Option Plans
Under the Company's stock option plans, options to purchase common stock may
be granted to officers and key employees at prices not less than the market
price of the shares at the date of grant. At February 28, 1995, the expiration
dates of the outstanding options range from March 30, 1995, to January 31, 2000,
and the exercise prices range from $4.13 to $30.00 (average $16.33) per share.
The following is a summary of activity under the plans over the past
three years:
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993
Shares under option, beginning of year 732,000 602,000 1,101,000
Options granted during the year 402,000 304,000 155,000
Options cancelled or terminated (53,000) (26,000) (131,000)
Options exercised:
1995 ($4.13 to $26.00 per share) (214,000)
1994 ($4.13 to $19.38 per share) (148,000)
1993 ($4.13 to $8.75 per share) (523,000)
Shares under option, end of year 867,000 732,000 602,000
Options exercisable, end of year 167,000 128,000 105,000
Shares available for future grants, end of year 665,000 290,000 81,000
Standard Microsystems Corporation
and Subsidiaries
Under the Company's Director Stock Option Plan, non-qualified options to
purchase common stock may be granted to directors at prices not less than the
market price of the shares at the date of grant. At February 28, 1995, the
expiration dates of the outstanding options range from June 30, 1997, to July 7,
1999, and the exercise prices range from $11.75 to $16.00 (average $14.22) per
share.
The following is a summary of activity under the Director Stock Option Plan
over the past three years:
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993
Shares under option, beginning of year 59,000 90,000 125,000
Options granted during the year 15,000 15,000 15,000
Options cancelled or terminated - - -
Options exercised:
1995 ($7.13 per share) (31,000)
1994 ($7.13 to $11.75 per share) (46,000)
1993 ($7.13 per share) (50,000)
Shares under option, end of year 43,000 59,000 90,000
Options exercisable, end of year 13,000 34,000 75,000
Shares available for future grants, end of year 30,000 45,000 60,000
Restricted Stock Bonus Plan
The Company's Restricted Stock Bonus Plan provides for common stock awards
to certain officers and key employees. The fair market value of shares awarded
to an employee in any year is limited to 20% of the employee's base salary. Such
common stock awards are earned in equal installments on the second, third and
fourth anniversaries of the award, provided the employee has remained in the
Company's employ through such anniversary dates; otherwise the unearned shares
are forfeited.
The maximum number of shares issuable under the plan is 400,000 of which
136,000, net of cancellations, have been awarded as of February 28, 1995. The
market value of these shares at the date of award, net of cancellations, is
recorded as compensation expense ratably over four year periods from the
respective award dates. This compensation expense was $361,000, $189,000 and
$51,000 in fiscal 1995, 1994 and 1993, respectively.
Retirement Plans
In March 1994, the Company adopted an unfunded Supplemental Executive
Retirement Plan to provide senior management with retirement, disability and
death benefits. Benefits are based upon average compensation during the three
year period prior to retirement. The projected benefit obligation at the end of
fiscal 1995 was approximately $4,000,000. Assumptions used in developing the
projected benefit obligation at the end of fiscal 1995 are detailed as follows:
Weighted-average discount rate 7.25%
Weighted-average rate of compensation increase 7.00%
Weighted-average expected long-term return
on plan assets 7.25%
The cost of this plan will be accrued over the remaining years of service of
each of the participants, of which $401,000 was accrued in fiscal 1995. The
Company is the beneficiary of life insurance policies that have been purchased
as a method of partially financing benefits under this plan.
During fiscal 1993, the Company adopted an unfunded retirement plan for the
non-employee members of its Board of Directors. The plan provides for annual
benefit payments equal to the annual retainer in effect at the date of
retirement, for a period of years equal to the lesser of the director's years of
service or ten years. The cost of this plan is accrued over the directors'
estimated remaining years of service, of which $264,000, $270,000 and $139,000
was accrued during fiscal 1995, 1994 and 1993, respectively.
Executive Incentives
Under arrangements approved by the Company's Board of Directors, certain
executives receive incentive compensation based upon certain revenues and
earnings of the Company, as defined. $1,506,000 of such compensation was earned
during fiscal 1995, of which $260,000 will be issued in common stock pursuant to
the Company's Restricted Stock Bonus Plan. $1,700,000 and $2,627,000 of
incentive compensation was earned during fiscal 1994 and 1993, respectively.
Standard Microsystems Corporation
and Subsidiaries
9. STOCK PURCHASE RIGHTS PLAN
Under a stock purchase rights plan, shareholders may be entitled to purchase
common stock in the Company at a discounted price, in the event of certain
efforts to acquire control of the Company. The rights will expire in January
1998, unless previously redeemed by the Company at $.01 per right.
10.CUSTOMER AND GEOGRAPHIC INFORMATION
Geographic Information
International sales accounted for 46.8%, 44.0% and 43.9% of total revenues
during fiscal 1995, 1994 and 1993, respectively. International sales were
primarily to customers in Europe, Canada and the Far East. Approximately 94% and
95% of the Company's identifiable assets were located in the United States at
February 28, 1995 and 1994, respectively. The remainder were located primarily
in the Company's Japanese subsidiary.
Major Customers
During fiscal 1995, one customer accounted for 10.3% of revenues. In fiscal
1994, one customer accounted for 11.9% of revenues. In fiscal 1993, two
customers represented 13.4% and 11.5% of revenues, respectively.
Concentrations of Credit Risk
The Company is primarily engaged in the design, development and marketing of
products utilized in the personal computer networking marketplace. The Company
sells a significant amount of its products through distributors and as a result,
maintains individually significant receivable balances from its major
distributors. The Company performs credit evaluations on a regular basis and
generally requires no collateral. Allowances for credit losses are maintained,
and actual losses have been within management's expectations.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED MAY 31 AUG. 31 NOV. 30 FEB. 28
FISCAL 1995
Revenues $80,020 $91,964 $104,771 $101,916
Gross profit 35,355 39,978 45,233 43,837
Operating income 9,344 9,770 11,811 9,697
Income before extraordinary item 5,358 5,583 6,821 7,405
Extraordinary item - - - (944)
Net income 5,358 5,583 6,821 6,461
Per Share Data
Income before extraordinary item $ 0.41 $ 0.42 $ 0.51 $ 0.55
Extraordinary item - - - (0.07)
Net income 0.41 0.42 0.51 0.48
Market price
High 19.50 19.63 25.25 31.63
Low 14.88 13.38 18.38 21.38
FISCAL 1994
Revenues $68,444 $72,031 $ 88,894 $ 93,206
Gross profit 26,410 28,350 35,928 37,678
Operating income 8,016 7,511 9,593 10,316
Net income 4,392 4,162 5,430 5,927
Per Share Data
Net income $ 0.34 $ 0.32 $ 0.41 $ 0.45
Market price
High 21.25 20.75 25.13 26.75
Low 12.50 14.50 17.50 17.25
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 List.
There were approximately 1,200 holders of record of the Company's common
stock at March 29, 1995. The Company has never paid a cash dividend. The
present policy of the Company is to retain earnings to provide funds for the
operation and expansion of its business. The Company does not expect to pay
cash dividends in the foreseeable future.
Standard Microsystems Corporation
and Subsidiaries
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The consolidated financial statements of Standard Microsystems Corporation
and its subsidiaries have been prepared under the direction of management in
conformity with generally accepted accounting principles, consistently applied.
The statements include amounts that reflect management's objective estimates and
judgments.
Standard Microsystems Corporation and its subsidiaries maintain accounting
systems and related internal accounting controls which, in the opinion of
management, provide reasonable assurance, at appropriate cost, that assets are
properly controlled and safeguarded and that transactions are executed in
accordance with management's authorization and are recorded and reported
properly.
The audit committee of the Board of Directors is composed solely of
directors who are not officers or employees of the Company. The committee meets
periodically with representatives of management and the independent public
accountants. The independent public accountants have free access to the
committee, without management present, to discuss the results of their audit
work, adequacy of internal financial controls and the quality of the financial
reporting. The committee also recommends to the directors the appointment of the
independent public accountants.
The independent public accountants provide an objective, independent review
as to management's discharge of its responsibilities as they relate to the
integrity of reported operating results and financial condition.
The consolidated financial statements in this annual report have been
audited by Arthur Andersen LLP, independent public accountants.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Standard Microsystems
Corporation:
We have audited the accompanying consolidated balance sheets of Standard
Microsystems Corporation (a Delaware corporation) and subsidiaries as of
February 28, 1995, and February 28, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended February 28, 1995. 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 generally accepted auditing
standards. 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, 1995, and February 28, 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended February 28, 1995, in conformity with generally accepted
accounting principles.
March 29, 1995 ARTHUR ANDERSEN LLP
Baltimore, Md.