FINANCIAL REVIEW
Selected
Financial Data.... 24
Management's
Discussion and
Analysis.......... 25
Consolidated
Balance Sheets.... 32
Consolidated
Statements
of Income......... 33
Consolidated
Statements of
Shareholders'
Equity............ 34
Consolidated
Statements
of Cash Flows..... 35
Notes to
Consolidated
Financial
Statements........ 36
Report on
Management's
Responsibilities.. 45
Report of
Independent
Public Accountants 45
23
Standard Microsystems Corporation
and Subsidiaries
Selected Financial Data
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF FEBRUARY 29 OR 28, AND
FOR THE YEARS THEN ENDED
1996 1995 1994 1993 1992
OPERATING RESULTS
Revenues $341,926 $378,671 $322,575 $250,495 $132,744
Cost of goods sold and operating expenses 370,835 338,049 287,139 219,712 130,679
Income (loss) from operations (28,909) 40,622 35,436 30,783 2,065
Other income (expense), net 48,913 670 (1,964) (2,865) (134)
Income before minority interest, provision
for income taxes and extraordinary item 20,004 41,292 33,472 27,918 1,931
Minority interest in net income (loss)
of subsidiary 202 185 (209) (430) (425)
Income before provision for income
taxes and extraordinary item 19,802 41,107 33,681 28,348 2,356
Provision for income taxes 8,201 15,940 13,770 12,510 1,761
Income before extraordinary item 11,601 25,167 19,911 15,838 595
Extraordinary item -- (944) -- -- --
Net income $11,601 $24,223 $19,911 $15,838 $595
Weighted average common and
common equivalent shares 13,515 13,305 13,090 12,469 11,604
PER SHARE DATA
Income before extraordinary item $0.86 $1.89 $1.52 $1.27 $0.05
Extraordinary item -- (0.07) -- -- --
Net income $0.86 $1.82 $1.52 $1.27 $0.05
Shareholders' equity at year end $14.11 $13.16 $11.18 $9.50 $7.70
Market price at year end 15.63 26.50 19.13 18.75 9.13
BALANCE SHEET DATA
Current assets $148,884 $162,776 $140,393 $111,326 $79,718
Current liabilities 55,781 43,421 41,842 40,962 35,085
Working capital $93,103 $119,355 $98,551 $70,364 $44,633
Property, plant and equipment, net $60,208 $34,908 $30,600 $30,775 $33,116
Total assets 260,659 228,578 205,833 183,926 154,299
Long-term debt -- -- 9,190 12,135 18,240
Minority interest in subsidiary 11,376 11,174 10,989 11,198 11,628
Shareholders' equity 193,502 173,983 143,812 119,631 89,346
24
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 29, 1996:
FISCAL YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994
Revenues 100.0% 100.0% 100.0%
Cost of goods sold 64.1 56.6 60.2
Gross profit 35.9 43.4 39.8
Research and development 9.3 7.5 7.4
Selling, general and administrative 31.1 23.8 19.7
Amortization of intangible assets 2.4 1.4 1.7
Purchased in-process technology 1.6 -- --
Total operating expenses 44.4 32.7 28.8
Income (loss) from operations (8.5) 10.7 11.0
Other income (expense), net 14.3 0.2 (0.6)
Income before minority interest, income taxes and
extraordinary item 5.8 10.9 10.4
Minority interest in net income (loss) of subsidiary 0.1 0.1 (0.1)
Income before taxes and extraordinary item 5.7 10.8 10.5
Provision for income taxes 2.4 4.2 4.3
Income before extraordinary item 3.3 6.6 6.2
Extraordinary item -- (0.2) --
Net income 3.3% 6.4% 6.2%
BUSINESS DIVESTITURE AND ACQUISITION
In January 1996, the Company and SMC Enterprise Networks, Inc., a wholly-owned
subsidiary, sold substantially all of the assets and technology of the Company's
Enterprise Networks Business Unit (ENBU) to Cabletron Systems, Inc., for $74.0
million in cash. This business unit, which originated through the Company's
December 1992 acquisition of Massachusetts-based Sigma Network Systems, Inc.,
developed, manufactured and sold enterprise-wide switching products for computer
networks. The Company realized a $49.7 million pre-tax gain on the sale, after
related costs. As security for the Company's indemnification obligations under
the agreement, $7.1 million of the purchase price was placed in escrow to be
used as a source from which indemnifiable losses may be paid by the Company to
Cabletron. The Company anticipates no material claims for indemnifiable losses.
In February 1996, the Company acquired the assets and technology of EFAR
Microsystems, Inc., of Santa Clara, California. EFAR supplies core logic
chipsets for use in personal computers using x86-architecture and Pentium
microprocessors. The transaction was valued at $5.6 million, including the
issuance of 240,000 shares of the Company's common stock, the assumption of
liabilities, and transaction fees. $5.5 million of the purchase price
represented purchased in-process technology and was charged to the Company's
operations. The Company may issue up to $20 million of additional common stock
to EFAR over the next three years, contingent upon the acquired business
achieving certain operating results.
25
Standard Microsystems Corporation
and Subsidiaries
RESULTS OF OPERATIONS BY INDUSTRY SEGMENT
The following table presents the Company's revenues and operating income by
industry segment for the three years ended February 29, 1996 (in millions):
FISCAL YEARS ENDED % CHANGE % CHANGE
FEBRUARY 29 OR FEBRUARY 28, 1996 96/95 1995 95/94 1994
SYSTEM PRODUCTS
Adapter revenues $ 144.5 -29% $ 204.9 -10% $228.1
Hub and switch revenues 42.0 -19 51.5 46 35.3
Total system products revenues $ 186.5 -27% $ 256.4 -3% $ 263.4
Operating income (loss) (40.5) -257 25.9 -41 44.1
% of revenues (21.7) %10.1% 16.7%
COMPONENT PRODUCTS
Integrated circuit revenues $ 123.0 15% $ 106.9 102% $ 52.8
Foundry device revenues 15.6 320 3.7 226 1.1
Total component products revenues $ 138.6 25% $ 110.6 105% $ 53.9
Operating income 31.2 5 29.7 467 5.2
% of revenues 22.5% 26.8% 9.7%
TOYO MICROSYSTEMS CORPORATION
Revenues $ 16.8 44% $ 11.7 120% $ 5.3
Operating income (loss) 1.0 52 0.7 -- (1.2)
% of revenues 5.9% 5.6% (23.6)%
GENERAL, CORPORATE AND OTHER
Operating (loss) ($ 20.5) 32% ($ 15.6) 23% ($ 12.6)
Standard Microsystems Corporation conducts its operations primarily through the
System Products Division and the Component Products Division. The System
Products Division designs, produces and markets products that connect personal
computers to, and allow communications over, local area networks (LANs). The
Component Products Division designs, produces and markets
very-large-scale-integrated circuits, mainly for control of various personal
computer functions, as well as specialized semiconductor-related products that
are produced in SMC's own foundry. As a separate profit center, the Company's
subsidiary, Toyo Microsystems Corporation (TMC), sells component and system
products in the Japanese market.
REVENUES
The Company's revenues declined 10% to $341.9 million in fiscal 1996,
from $378.7 million in fiscal 1995. As a percentage of consolidated revenues,
system products declined to 54.6% in fiscal 1996 from 67.7% in fiscal 1995, as
component products increased to 40.5% from 29.2% and TMC increased to 4.9% from
3.1%. Results for the year were handicapped by system products' 27% revenue
decline, only partially offset by component products' 25% growth and TMC's 44%
growth.
System products' lower revenues reflected a decline in shipments to
distributors, SMC's principal customers for adapter, hub and LAN switch
networking products. The decline resulted primarily from a reduction of
distributor inventory to levels that were considered appropriate for the rate of
sales of SMC's products by distributors to their reseller customers during
fiscal 1996. Revenues of network interface cards (adapters) fell 29% in fiscal
1996, including a 25% decline in Ethernet adapter revenues. The decline in
Ethernet adapter revenues resulted from a 9% decline in unit volume and a 17%
decline in average selling prices.
26
Standard Microsystems Corporation
and Subsidiaries
Hub and LAN switch revenues declined by $9.5 million, or 19%, in fiscal
1996. Most of this decline occurred in the Enterprise Networks Business Unit
that was sold to Cabletron Systems, Inc. That business, which was included
within the Company's operations for approximately ten months in fiscal 1996,
accounted for approximately 4% and 6% of consolidated revenues in fiscal 1996
and fiscal 1995, respectively.
Component products' growth in fiscal 1996 was generated principally by
continued broad acceptance of PC I/O integrated circuits by major PC producers
and by specialized semiconductor-related revenues that grew more than 300% from
a very small base in fiscal 1995. In addition, growth at TMC came primarily from
increased sales of PC I/O devices in Japan. SMC believes that an industry-wide
shortage of capacity to produce semiconductors during most of fiscal 1996
curtailed revenues of integrated circuits. During the fourth quarter, SMC
received initial production wafers from two suppliers under specific programs
discussed in the WAFER PURCHASE AGREEMENTS section of this discussion. The
Company also received initial wafers from other suppliers, requiring no specific
investment. All of these sources of integrated circuit wafer capacity
contributed to an increase in fourth quarter component products revenues over
the levels of the first three quarters of fiscal 1996.
The Company's revenues increased 17% in fiscal 1995, reflecting
increased shipments of component products, hubs and LAN switches. Component
products' revenues grew 105%, reflecting broad acceptance of PC I/O circuits by
major PC manufacturers. Adapter revenues declined 10% in fiscal 1995, including
a 16% decrease in Ethernet adapter revenues, primarily from lower average
selling prices. Hub and LAN switch revenues grew 46%, reflecting increased
shipments of the ES/1 LAN Switch, initial shipment of the TigerSwitch and
increased shipments of wiring hubs. 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 due to lower than
anticipated shipments from distributors to their customers. TMC also contributed
to the Company's overall improvement with revenue growth of 120%, principally
from networking products growth.
The following table presents the Company's revenues by geographic area
as percentages of total revenues to unaffiliated customers. All but Japan (TMC),
within the category REVENUES OUTSIDE THE UNITED STATES, are considered export
revenues shipped from U.S. operations.
FISCAL YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994
United States 43.7% 53.2% 56.0%
Asia and Pacific Rim 25.4 14.2 9.3
Europe 20.3 22.9 26.1
Canada 3.2 4.0 4.3
Other 2.5 2.6 2.6
Export revenues 51.4 43.7 42.3
Japan (TMC) 4.9 3.1 1.7
Revenues outside the United States 56.3 46.8 44.0
Total revenues 100.0% 100.0% 100.0%
International revenues were 56.3% of the Company's revenues in fiscal
1996, compared with 46.8% in fiscal 1995 and 44.0% in fiscal 1994. The principal
shift occurred in revenues to Asia and the Pacific Rim, which grew 62% in fiscal
1996 and 79% in fiscal 1995. This growth was caused primarily by a trend of
component products' domestic-branded customers to produce a greater proportion
of their PCs in offshore factories. In system products' major international
market, Europe, revenues declined 20% in 1996 and grew 3% in 1995.
The European market was relatively more stable than North American
markets, which incurred a greater proportion of the previously-cited adjustments
in networking products' distribution inventory during fiscal 1996 and fiscal
1995. United States and Canadian revenues declined 26% and 29%, respectively, in
fiscal 1996 after fiscal 1995 gains of 12% and 11%,
27
Standard Microsystems
Corporation and Subsidiaries
respectively. The improvement in Japan resulted principally from TMC selling
more PC I/O devices in fiscal 1996 and selling more networking products in
fiscal 1995.
Revenue transfers between industry segments are reported in note 10
of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The majority of these
transfers consists of components and systems products shipped to TMC for
resale in Japan.
GROSS PROFIT
The gross profit margin declined to 35.9% in fiscal 1996 from 43.4% in fiscal
1995. An $11.8 million inventory write-down accounted for 4 percentage points of
the gross profit margin decline. This charge, provided in the second quarter,
wrote down certain system products' inventory to estimated net realizable value.
The write-down reflected the disappointing reception of a new product and the
reduction of its selling price, lower than projected demand for several older
product lines being replaced by newer products, and a decision to reduce the
variety of networking products that perform similar functions.
Factors contributing to the remaining 3.5 percentage points of the gross
margin decline were:
(Bullet) Lower average selling prices for network interface cards,
switching and hub products, only partially offset by a reduction in
production costs
(Bullet) Distribution of manufacturing overhead over reduced system
products' revenues
(Bullet) A disproportionate decline in revenues of generally higher
margined networking products such as Token Ring and ARCNET adapters and
enterprise switches
(Bullet) Lower margins for the newest generation of PC I/O integrated
circuits, in which higher costs more than offset higher average selling
prices
(Bullet) A partial offset to these items from higher foundry
business margins
Fiscal 1995 gross profit margins improved to 43.4% from 39.8% in fiscal
1994. The improvement in fiscal 1995 was attributable to increased unit volume
of PC I/O devices, leading to lower production costs and more efficient
utilization of manufacturing overhead for component products. In addition, the
growth of LAN switching revenues, which carried higher gross margins than
adapter revenues, led to improved gross margins for system products.
SMC maintains programs to reduce product costs and develop innovative
products that have helped to offset price competition that characterizes the
Company's business. These programs have generally contributed to maintaining
gross profit margins. The percentage of revenues from new products in fiscal
1996 was above the year earlier percentage, but was insufficient to offset the
variables enumerated above that led to a reduction in gross profit margins. New
product revenues were approximately 26% of total revenues in fiscal 1996
compared to 17% in fiscal 1995 and 27% in fiscal 1994. New products are defined
as those products that were initially shipped to customers during the preceding
four quarters.
OPERATING EXPENSES
Research and development expenses increased to $31.7 million, or 9.3% of
revenues, in fiscal 1996 from $28.3 million, or 7.5% of revenues, in fiscal 1995
and $24.0 million, or 7.4% of revenues, in fiscal 1994. Of these amounts, $9.8
million was spent by the divested ENBU in fiscal 1996, compared to $7.6 million
in fiscal 1995. In fiscal 1997, engineering efforts for networking products will
focus on developing Fast Ethernet, ATM and PC Card technology products and
reducing costs and enhancing the performance of adapter, hub and LAN switch
products. Development for component products is directed toward enhancing the
functionality and performance and reducing device costs of PC I/O, PCsystems
logic chipset and LAN integrated circuits.
Selling, general and administrative expenses increased 18% to $106.3
million, or 31.1% of revenues, in fiscal 1996, compared to $90.0 million, or
23.8% of revenues, in fiscal 1995 and $63.5 million, or 19.7% of revenues, in
fiscal 1994. These expenses included spending for advertising, which decreased
to $17.4 million in fiscal 1996 from $23.2 million in fiscal 1995 and increased
from $13.6 million in fiscal 1994.
Included within fiscal 1996 expenses are $2.5 million related to the
severance of several executives and a $1.2 million reserve for estimated legal
fees. Excluding these items, fiscal 1996 selling, general and administrative
expenses increased by 14% over fiscal 1995 expenses to $102.6 million, or 30.0%
of revenues. Of these amounts, $10.8 million was directly related
28
Standard Microsystems Corporation
and Subsidiaries
to the fiscal 1996 operation of the ENBU, compared to $7.9 million in fiscal
1995. Most of the increases in fiscal 1996, excluding the severance charges and
legal fee accrual, reflected higher selling and marketing expenses for LAN
switching and hub products and for component products. The increased spending
also resulted from an expansion of the infrastructure to support the growth in
the component products business.
Sales and marketing personnel declined to approximately 285 at the end
of fiscal 1996, chiefly reflecting the divestiture of the ENBU. As a result, the
Company no longer needs to support a networking sales force that sells directly
to end users and will concentrate chiefly on existing distribution and major
account channels. 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 increases in amortization of intangible assets in fiscal 1996 from
fiscal 1995 reflected an accelerated write-off of certain assets. The increase
also included a $2.4 million write-down of previously acquired LAN technology to
its estimated realizable value in the second quarter. The charge was taken as a
result of a reassessment of the Company's business prospects for this
technology, and the decision to reduce related development activity.
OPERATING PROFITS
In fiscal 1996, the Company reported an operating loss of $28.9 million,
or -8.5% of revenues, which compares to an operating profit of $40.6 million, or
10.7% of revenues, in fiscal 1995 and $35.4 million, or 11.0% of revenues, in
fiscal 1994. The major contributor to the decline in fiscal 1996 was the system
products business, which incurred an operating loss of $40.5 million, or -21.7%
of its revenues. Operating income for component products business rose 5% in
fiscal 1996 to $31.2 million, or 22.5% of its revenues.
In fiscal 1995, when the Company's operating profits rose 15%, system
products' operating profits declined 41% to $25.9 million, or 10.1% of revenues.
The impetus behind the Company's overall growth was the 467% improvement in
component products' operating income to $29.7 million, or 26.8% of revenues. TMC
recorded growth in both fiscal 1996 and 1995, ameliorating the fiscal 1996
decline and aiding the progress in fiscal 1995. General, corporate and other
operating expenses increased to restrain the grow th in overall operating
profits in both years.
As discussed in the previous sections, portions of the fiscal 1996
operating loss resulted primarily from lower gross margins for both systems and
components products, system products' inventory write-downs, increases in
intangible asset amortization and charges for in-process technology, severance
and legal fees. Also, in both fiscal 1996 and 1995, system products' profits
were restrained by losses at the ENBU, prior to its sale.
OTHER INCOME AND EXPENSE
In fiscal 1996, interest expense decreased $0.2 million, associated with
lower interest rates on a new credit line negotiated in January 1995. The impact
was partially offset by higher average borrowings in fiscal 1996 although, after
selling the ENBU, the Company repaid all its bank debt in the fourth quarter.
Interest income declined $0.8 million, primarily reflecting a decrease in
average cash balances available for investment during fiscal 1996.
Fiscal 1995 interest expense declined $0.4 million due to lower average
borrowings outstanding and the fourth quarter retirement 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.
EXTRAORDINARY ITEMS
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
of the early debt retirement, the Company incurred prepayment penalties, the
write-off of unamortized financing costs, and other fees, amounting to $1.5
million or $0.9 million after taxes.
29
Standard Microsystems Corporation
and Subsidiaries
INCOME TAXES
In fiscal 1996, income taxes were provided at an effective rate of
41.4%, compared to 38.8% for fiscal 1995 and 40.9% for fiscal 1994. The
effective rate for fiscal 1996 included the 35.0% federal tax rate and a 3.8%
effective state tax rate. In addition, goodwill written off in connection with
the sale of the ENBU was not deductible for tax purposes, raising the Company's
fiscal 1996 effective tax rate.
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
allowing the deductibility of goodwill associated with a fiscal 1992 acquisition
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.
WAFER PURCHASE AGREEMENTS
Pursuant to a September 1994 agreement with AT&T Corp., the Company
purchased $16.0 million of wafer fabrication equipment for installation in a
semiconductor plant owned by AT&T's Microelectronics Business Unit in Madrid,
Spain. This agreement allocates sub-micron wafer production capacity to the
Company for five years beginning in March 1996. The $16.0 million is included
within the Company's fiscal 1996 capital expenditures.
In fiscal 1996, the Company purchased a minority equity interest in
Singapore-based Chartered Semiconductor Pte Ltd. for $19.9 million. Under this
agreement, Chartered allocates sub-micron wafer production capacity to the
Company for ten years. The $19.9 million is included within Other assets on the
accompanying balance sheet. This arrangement, along with the AT&T agreement, is
intended to provide a portion of the Company's long-term production requirements
for state-of-the-art integrated circuits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to $93.1 million at the end of
fiscal 1996 from $119.4 million at the end of fiscal 1995. The decrease in
working capital was primarily from decreases of $11.0 million in cash and cash
equivalents and $19.9 million in accounts receivable and an increase of $12.4
million in current liabilities. These items were partially offset by increases
of $14.6 million in inventories and $2.4 million in deferred tax benefits and
other assets.
The decrease in cash and cash equivalents to $18.5 million at the end of
fiscal 1996 primarily reflected paying income taxes of $17.7 million, $39.0
million for capital expenditures, and $19.9 million for an interest in Chartered
Semiconductor Pte Ltd. Partially funding these transactions was the receipt of
$63.4 million of net cash realized from the sale of the ENBU. These net proceeds
resulted from the ENBU's $74.0 million selling price, reduced by $7.1 million
placed into escrow and $3.5 million of transaction costs.
Cash and cash equivalents decreased by $2.6 million to $29.5 million at
the end of fiscal 1995, 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.
The reduction of inventory in the system products' distribution channel
resulted in a more even dispersal of revenues and lower days of sales
outstanding (DSO). During fiscal 1996, DSOs declined to 54 in the fourth quarter
from 67 in the fourth quarter of fiscal 1995 and from 63 in the fourth quarter
of fiscal 1994. The increased DSOs in the fourth quarter of fiscal 1995
reflected a greater percentage of sales occurring toward the end of the quarter
when compared to the year earlier period.
Annualized inventory turnover declined to 4.0 times for the fourth
quarter of fiscal 1996 from 5.1 times for the year earlier period. The decline
in inventory turnover primarily reflects an investment in component products'
inventory in anticipation of higher sales in the coming quarter. During fiscal
1997, the Company intends to reduce system products' inventory, in part, by
reducing the variety of Ethernet adapters that are installed in PCs.
30
Standard Microsystems Corporation
and Subsidiaries
Concurrent with the early retirement of all of its bank debt in January
1995, the Company negotiated an $80.0 million unsecured revolving credit line
that replaced a $35.0 million revolving credit agreement. During fiscal 1996,
the Company borrowed varying amounts under this credit line, peaking at $18.0
million at the end of November 1995. During fiscal 1996, the Company experienced
reduced revenues, losses from operations and asset write-downs. This performance
resulted in the Company's non-compliance with certain financial condition
covenants under the $80.0 million line of credit agreement. In connection
therewith, the Company obtained waivers from its banks respecting the failure to
meet these covenants, and, in October 1995, the agreement was amended to reduce
the credit line to $25.0 million.
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 next twelve months. It is anticipated that
cash flow from operations, supplemented by borrowings under the revolving credit
line as necessary, will be used chiefly to fund capital expenditures in fiscal
1997. Significant capital expenditures expected in fiscal 1997 include the
continuing upgrade to a new client/server information system and purchases of
various foundry production, design, and test equipment.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained in this annual report,
certain matters discussed herein are forward-looking statements that involve
risks and uncertainties. The forward-looking statements herein are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995.
A number of variables could affect the Company's future operating
results, including worldwide demand for personal computers and numerous
competitive factors. The Company's most important customers for component
products are personal computer producers, and a slowdown in the rate of growth
in demand for PCs could affect the Company's growth and intensify competition.
The inability to obtain adequate integrated circuit wafers could allow
competitors who process wafers internally to gain market share relative to the
Company. These competitors may also, more aggressively, reduce product prices.
The Company's adapters are inserted in newly sold and previously
installed PCs, so that the sales growth of PCs influences sales of adapters.
Improvements in PC performance require more powerful adapters, and that has led
to a shift in the mix of adapters that the Company sells towards the high speed
PCI bus and Fast Ethernet adapters. The Company also sells PC cards for portable
computers. Product mix, product prices and the acceptance of newly introduced
products can be altered by competitors' new products, promotions and pricing.
The Company's product development, sales and marketing progress is
dependent on hiring and retaining employees with specific skills. The Company is
also dependent on a limited number of suppliers for certain components,
assemblies, software and finished products.
High levels of production by PC manufacturers led to an industry-wide
shortage of silicon wafer fabrication capacity in fiscal 1996 and 1995. While
these shortages eased during the fourth quarter of fiscal 1996, they could occur
again and lead to difficulty in securing additional manufacturing capacity,
potentially curtailing revenue and profit growth in fiscal 1997 and beyond.
Alternatively, PC production could weaken, leading customers to cancel or delay
orders for the Company's products.
With 56% of the Company's revenues in fiscal 1996 shipped to customers
located outside of the United States, global economic conditions and changes in
foreign currency exchange rates can influence the demand for the Company's
products. Because of these and other circumstances that could affect the
Company's operating results, past financial performance is not necessarily
indicative of results to be expected in the future.
31
Standard Microsystems Corporation
and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AS OF FEBRUARY 29 OR 28, 1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,459 $ 29,478
Accounts receivable, net of allowance for doubtful
accounts of $1,369 and $1,102, respectively 55,976 75,826
Inventories 60,408 45,789
Deferred tax benefits 8,607 5,392
Other current assets 5,434 6,291
TOTAL CURRENT ASSETS 148,884 162,776
PROPERTY, PLANT AND EQUIPMENT:
Land 3,832
Buildings and improvements 26,839 26,901
Machinery and equipment 109,235 77,639
139,906 108,372
Less: accumulated depreciation 79,698 73,464
PROPERTY, PLANT AND EQUIPMENT, NET 60,208 34,908
OTHER ASSETS
51,567 30,894
$260,659 $228,578
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 30,801 $ 24,193
Accrued expenses and other liabilities 23,884 15,527
Income taxes payable 1,096 3,701
TOTAL CURRENT LIABILITIES 55,781 43,421
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN SUBSIDIARY
11,376 11,174
SHAREHOLDERS' EQUITY:
Preferred stock, $0.10 par value
Authorized 1,000,000 shares, none outstanding -- --
Common stock, $0.10 par value
Authorized 30,000,000 shares
Outstanding 13,711,000 and 13,222,000
shares, respectively 1,371 1,322
Additional paid-in capital 84,737 77,319
Retained earnings 100,217 88,616
Unrealized gain on investment, net of tax 2,226 718
Foreign currency translation adjustment 4,951 6,008
TOTAL SHAREHOLDERS' EQUITY 193,502 173,983
$260,659 $228,578
The accompanying notes are an integral part of these consolidated financial
statements.
32
Standard Microsystems Corporation
and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994
Revenues $341,926 $ 378,671 $ 322,575
Cost of goods sold 219,141 214,269 194,210
Gross profit 122,785 164,402 128,365
Operating expenses:
Research and development 31,666 28,286 23,963
Selling, general and administrative 106,337 90,005 63,477
Amortization of intangible assets 8,237 5,489 5,489
Purchased in-process technology 5,454 -- --
151,694 123,780 92,929
Income (loss) from operations (28,909) 40,622 35,436
Other income (expense):
Interest income 630 1,453 912
Interest expense (1,072) (1,255) (1,649)
Gain on sale of business unit 49,663 -- --
Other income (expense), net (308) 472 (1,227)
48,913 670 (1,964)
Income before minority interest, provision for
income taxes and extraordinary item 20,004 41,292 33,472
Minority interest in net income (loss) of subsidiary 202 185 (209)
Income before provision for income taxes and
extraordinary item 19,802 41,107 33,681
Provision for income taxes 8,201 15,940 13,770
Income before extraordinary item 11,601 25,167 19,911
Extraordinary item
Loss on retirement of debt, net of applicable
income taxes of $600 -- 944 --
Net income $ 11,601 $ 24,223 $ 19,911
Income (loss) per common and common equivalent share:
Income before extraordinary item $ 0.86 $ 1.89 $ 1.52
Extraordinary item -- (0.07) --
Net income per common and
common equivalent share $ 0.86 $ 1.82 $ 1.52
The accompanying notes are an integral part of these consolidated financial
statements.
33
Standard Microsystems Corporation
and Subsidiaries
Consolidated Statements of Shareholders' Equity
(IN THOUSANDS)
FOREIGN
ADDITIONAL UNREALIZED CURRENCY
COMMON STOCK PAID-IN RETAINED GAIN ON TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS INVESTMENT ADJUSTMENT
BALANCE AT FEBRUARY 28, 1993 12,591 $ 1,259 $ 69,807 $ 44,482 $-- $ 4,083
Shares issued under employee
stock purchase plan 46 5 879 -- -- --
Stock options exercised 194 19 1,253 -- -- --
Tax effect of employee stock plans -- -- 992 -- -- --
Restricted stock grants to
employees, net 36 4 185 -- -- --
Foreign currency translation
adjustment -- -- -- -- -- 933
Net income -- -- -- 19,911 -- --
BALANCE AT FEBRUARY 28, 1994 12,867 1,287 73,116 64,393 -- 5,016
Shares issued under employee
stock purchase plan 60 6 1,173 -- -- --
Stock options exercised 245 24 1,967 -- -- --
Tax effect of employee stock plans -- -- 707 -- -- --
Restricted stock grants to
employees, net 50 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 1,322 77,319 88,616 718 6,008
Shares issued under employee
stock purchase plan 91 9 1,564 -- -- --
Stock options exercised 72 7 674 -- -- --
Tax effect of employee stock plans -- -- 377 -- -- --
Stock issued for business acquisition 240 24 3,880 -- -- --
Restricted stock grants to
employees, net 86 9 923 -- -- --
Unrealized gain on investment,
net of taxes -- -- -- -- 1,508 --
Foreign currency translation
adjustment -- -- -- -- -- (1,057)
Net income -- -- -- 11,601 -- --
BALANCE AT FEBRUARY 29, 1996 13,711 $ 1,371 $ 84,737 $100,217 $ 2,226 $ 4,951
The accompanying notes are an integral part of these consolidated financial
statements.
34
Standard Microsystems Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 361,215 $ 367,342 $ 293,927
Cash paid to suppliers and employees (357,981) (331,406) (276,443)
Interest received 622 3,027 1,284
Interest paid (1,082) (1,168) (1,699)
Income taxes paid (17,670) (16,467) (11,884)
Net cash provided by (used for) operating activities (14,896) 21,328 5,185
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (39,012) (13,578) (8,119)
Acquisition of business (1,440) -- --
Sale of business unit, net of related costs 70,473 -- --
Escrow investment (7,050) -- --
Investment in Chartered Semiconductor Pte Ltd. (19,944) -- --
Other 50 39 3,089
Net cash provided by (used for) investing activities 3,077 (13,539) (5,030)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,573 1,991 1,403
Borrowings under line of credit agreements 34,000 927 1,055
Principal payments of long-term debt (34,000) (14,117) (7,000)
Net cash provided by (used for) financing activities 1,573 (11,199) (4,542)
Effect of foreign exchange rate changes on cash
and cash equivalents (773) 773 630
Net decrease in cash and cash equivalents (11,019) (2,637) (3,757)
Cash and cash equivalents at beginning of year 29,478 32,115 35,872
Cash and cash equivalents at end of year $ 18,459 $ 29,478 $ 32,115
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 11,601 $ 24,223 $ 19,911
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 18,976 14,813 13,799
Gain on sale of business unit (49,663) -- --
Purchased in-process technology 5,454 -- --
Other adjustments, net 1,423 2,168 1,040
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITION
AND SALE OF BUSINESSES:
Accounts receivable 19,058 (11,027) (28,265)
Inventories (24,459) (11,608) (5,921)
Accounts payable and accrued expenses
and other liabilities 13,425 4,714 2,678
Other changes, net (10,711) (1,955) 1,943
Net cash provided by (used for) operating activities $ (14,896) $ 21,328 $ 5,185
CASH USED FOR ACQUISITION OF BUSINESS AS REFLECTED IN THE CONSOLIDATED
STATEMENTS OF CASH FLOWS IS SUMMARIZED AS FOLLOWS:
Net assets and technology acquired $ 5,554
Common stock issued (3,904)
Liabilities assumed and created (210)
Cash used for acquisition of business $ 1,440
The accompanying notes are an integral part of these consolidated financial
statements.
35
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 all its subsidiaries (the Company). All
significant intercompany accounts and 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. 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, these debt instruments are
categorized as available for sale and are recorded at fair value which
approximates cost.
INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market and
consist of the following (in thousands):
AS OF FEBRUARY 29 OR 28, 1996 1995
Inventories:
Raw materials $ 9,556 $ 11,547
Work-in-process 34,622 16,239
Finished goods 16,230 18,003
$ 60,408 $ 45,789
During fiscal 1996, an $11,800,000 charge to cost of goods sold was recorded to
reduce the carrying value of certain system products inventory to estimated net
realizable value. The principal reasons for the write-down were the
disappointing reception of a new product and the reduction of its selling price,
lower than projected demand for several older product lines and a decision to
reduce the variety of networking products that perform the same function.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful lives of the buildings (20 to 25
years) and machinery and equipment (3 to 7 years). Upon sale or retirement of
property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected
currently.
INVESTMENT IN EQUITY SECURITIES
In accordance with the provisions of SFAS 115, at February 29, 1996, and
February 28, 1995, an investment in a publicly traded equity security is carried
at fair value within Other assets on the accompanying Consolidated Balance
Sheets. A corresponding unrealized gain, net of taxes, is reported as a separate
component of Shareholders' equity.
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 primarily on a straight-line basis over
their respective estimated useful lives, ranging from three to ten years. The
carrying values of these assets are periodically reviewed to assess
recoverability. During the second quarter of fiscal 1996, the Company canceled
certain product development projects related to a particular LAN technology,
resulting in a write-down of $2,400,000 in the value of this acquired technology
and an acceleration of its amortization to reflect a reduction in its estimated
useful life.
REVENUE RECOGNITION
The Company recognizes revenues from product sales and accrues for
estimated product returns and price protection and other sales allowances at the
time of shipment.
PRODUCT WARRANTY
The Company's products are generally under limited 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.
SOFTWARE DEVELOPMENT EXPENSES
Software development costs incurred after achieving technological
feasibility are not material and, therefore, are expensed as incurred.
36
Standard Microsystems Corporation
and Subsidiaries
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.
NEW ACCOUNTING STANDARDS
During fiscal 1997, the Company is required to adopt Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS 123, ACCOUNTING FOR
STOCK BASED COMPENSATION. Adoption of SFAS 121 will not have a material effect
on the Company's consolidated financial statements. The Company expects to
disclose the fair value of options granted under stock option plans in a
footnote to its 1997 consolidated financial statements, as permitted by SFAS
123.
RECLASSIFICATIONS
Certain items shown have been reclassified to conform with the fiscal 1996
presentation.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. BUSINESS DIVESTITURE AND ACQUISITION
In January 1996, the Company and its wholly-owned subsidiary, SMC
Enterprise Networks, Inc., sold substantially all of the assets and technology
associated with the Company's Enterprise Networks Business Unit to Cabletron
Systems, Inc., for $74,000,000 in cash, resulting in a gain of $49,663,000
before taxes. The business unit, which originated through the Company's December
1992 purchase of Massachusetts-based Sigma Network Systems, Inc., developed,
manufactured and sold enterprise-wide switching products for computer networks.
As security for the Company's indemnification obligations, $7,050,000 of the
purchase price was placed in escrow to be used as a source from which
indemnifiable losses, if they occur, may be paid by the Company to Cabletron.
The Company expects no material claims for indemnification pursuant to this
contract.
In February 1996, the Company acquired the assets and technology of EFAR
Microsystems, Inc., of Santa Clara, CA. Accounted for as a purchase, the
acquisition was valued at $5,554,000 based on the issuance of 240,000 shares of
the Company's common stock, the assumption of liabilities and transaction fees.
As a result of this acquisition, the Company recorded a $5,454,000 charge for
the purchase of in-process technology. The acquisition agreement also provides
for the issuance of up to $20,000,000 of additional common stock over the next
three years to EFAR, contingent upon the acquired business achieving certain
operating results. Pro forma information for this acquisition is not presented
because the pro forma amounts would not differ materially from historical
results.
3. LONG-TERM DEBT
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 consisted 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 an $80,000,000
unsecured revolving line of credit, which permitted the Company to borrow funds
on a revolving basis through January 1998, bearing interest at rates varying
from .625% to 1.0% above the London Interbank
37
Standard Microsystems Corporation
and Subsidiaries
Subsidiaries Offering Rate (LIBOR). The unused portion of the line bears an
annual commitment fee of 0.25%.
The Company had no borrowings under this line during fiscal 1995. During fiscal
1996, the Company borrowed varying amounts under this line bearing interest at
rates between 6.4% and 8.8%. During fiscal 1996, the Company obtained waivers
respecting the fail ure to meet certain financial condition covenants under this
revolving credit agreement and, in October 1995, the agreement was amended to
reduce the credit line to $25,000,000. There were no borrowings under the line
of credit as of February 29, 1996.
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 29 OR 28, 1996 1995 1994
Current
Federal $12,950 $16,242 $11,897
Foreign 619 345 188
State 580 2,281 1,907
14,149 18,868 13,992
Deferred (5,948) (2,928) (222)
$ 8,201 $15,940 $13,770
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 29 OR 28, 1996 1995 1994
Provision for income
taxes computed at
the statutory rate 35.0% 35.0% 35.0%
State taxes 3.8 3.7 3.7
Differences between
foreign and U.S.
income tax rates -- -- 1.2
Foreign sales
corporation (1.0) (1.3) (0.5)
Income tax credits (2.9) (0.1) (0.3)
Goodwill amortization 2.4 0.5 1.9
ENBU goodwill 7.6 -- --
Other (3.5) 1.0 (0.1)
41.4% 38.8% 40.9%
The tax effects of temporary differences that result in deferred tax benefits
are as follows (in thousands):
AS OF FEBRUARY 29 OR 28, 1996 1995
Reserves and accruals not
currently deductible
for tax purposes $ 3,143 $ 1,031
Intangible asset amortization 3,832 2,360
Inventory valuation 3,046 2,151
Net operating loss carryforward -- 857
Purchased in-process
technology 1,909 --
Depreciation 273 1,031
Other (71) (243)
$ 12,131 $ 7,187
Goodwill associated with the Company's January 1996 sale of its Enterprise
Networks Business Unit was not deductible for tax purposes, raising the
Company's fiscal 1996 effective tax rate by 7.6 percentage points.
During fiscal 1995, the Company elected a fifteen-year amortization of
certain intangible assets related to the fiscal 1992 acquisition of a local area
networking business. This election allows the Company to take a tax deduction
for previously non-deductible goodwill.
Realization of tax benefits from NOL carryforwards created by the
Company's Japanese subsidiary is uncertain, and accordingly is fully reserved.
At a current foreign exchange rate, these carryforwards aggregated approximately
$6,212,000 as of February 29, 1996, and will expire between fiscal 1997 and
fiscal 1999.
Income tax benefits of $377,000, $707,000 and $992,000 related to the
Company's stock option plans for fiscal 1996, 1995 and 1994, respectively, have
been credited to additional paid-in capital.
The Company has $1,851,000 of New York State tax credit carryforwards of
which $950,000 and $289,000 expire in fiscal 1997 and 1998, respectively. The
remaining $612,000 of credit carryforwards expire at various dates in fiscal
1999 through fiscal 2004.
38
Standard Microsystems Corporation
and Subsidiaries
5. OTHER BALANCE SHEET DATA
(IN THOUSANDS)
AS OF FEBRUARY 29 OR 28, 1996 1995
Other assets:
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) 7,797 15,279
36,397 43,879
Less: accumulated amortization 22,388 17,400
14,009 26,479
Common stock of
Chartered Semiconductor Pte Ltd. $19,944 --
Deferred tax benefits 3,524 1,795
Escrow deposit 7,050 --
Other assets 7,040 2,620
$51,567 $30,894
Accrued expenses and other liabilities:
Salaries and fringe benefits $ 7,046 $ 6,502
Advertising 1,587 3,683
Other 15,251 5,342
$23,884 $15,527
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 $1,234,000 at an exchange rate of 105 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 on
various dates through fiscal 2000. These agreements provide, among other things,
for annual base salaries totaling $932,000 in fiscal 1997 and declining amounts
as the agreements expire through fiscal 2000.
The Company has also entered into agreements with certain senior 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 fiscal years are as follows
(in thousands):
1997 $1,218
1998 1,090
1999 1,000
2000 979
2001 751
Total rent expense was $1,317,000, $1,013,000 and $755,000 in fiscal 1996, 1995
and 1994, respectively.
WAFER PURCHASE AGREEMENTS
In September 1994, the Company entered into an agreement with AT&T Corp.'s
Microelectronics Business Unit (AT&T) whereby the Company purchased $15,979,000
of wafer manufacturing equipment for installation at AT&T's Madrid, Spain,
facility during fiscal 1996. The agreement provides that a portion of AT&T's
wafer production capacity during the five-year period beginning in March 1996
will be reserved for the Company's requirements at favorable pricing.
In March 1995, the Company entered into an agreement with Singapore-based
Chartered Semiconductor Pte Ltd., whereby the Company acquired a minority equity
interest in Chartered for $19,944,000 during fiscal 1996. This investment is
reported at cost on the accompanying balance sheet. Under this agreement, the
Company is to be allocated sub-micron wafer production capacity for ten years in
Chartered's recently constructed wafer fabrication facility.
39
Standard Microsystems Corporation
and Subsidiaries
CUSTOMER SUPPLY AGREEMENT
The Company has an agreement with one customer to deliver components, and
the customer is obligated to purchase these components, according to agreed-upon
schedules over the next two years. The Company will sell the components at
specified prices as defined in the agreement.
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 June 1993, Penril Datacom Networks, Inc., commenced an action against
the Company, its wholly-owned subsidiary SMC Enterprise Networks, Inc.
(successor by merger to Sigma Network Systems, Inc.), and two former officers of
Sigma, alleging, among other items, breach of September 1991 and March 1990
agreements between Sigma and Penril and seeking $8,000,000. The Company
counterclaimed against Penril, alleging breach of contract and sought damages in
excess of $1,400,000. In November 1995, Penril filed a First Amended complaint
seeking $50,000,000 in damages and a trebling of those damages. Penril has filed
further motions that the Company has opposed. While it is not possible to assess
the likelihood of Penril establishing liability, nor predict the amount of
damages that might be awarded in the event of a successful claim, the Company
has accrued the estimated cost of legal fees to defend against these claims and
intends to defend against these claims vigorously.
In June 1995, several actions were filed against the Company and certain of
its officers and directors. The actions have been consolidated into one
complaint. The consolidated claims purport to be a class action on behalf of the
purchasers of the Company's common stock between September 19, 1994, and June 2,
1995. The consolidated complaint asserts claims under federal securities laws
and alleges that the price of the Company's common stock was artificially
inflated during the class action period by false and misleading statements and
the failure to disclose certain information. While it is not possible to assess
the likelihood of any liability being established, nor predict the amount of
damages that might be awarded in the event of a successful claim, the Company
has answered the consolidated complaint, has accrued the estimated cost of legal
fees to defend against these claims, and intends to defend against these claims
vigorously.
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
totaled $1,066,000, $866,000 and $729,000 in fiscal 1996, 1995 and 1994,
respectively.
The Company has authorized unissued common stock reserved for issuance to
the Plan. As of February 29, 1996, 121,000 unissued shares remain in reserve.
Since its inception, 729,000 shares of the Company's common stock have been
contributed to the Plan.
As of February 29, 1996, 547 of the 745 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 29, 1996, the expiration
dates of the outstanding options range from March 31, 1996, to February 28,
2006, and the exercise prices range from $4.13 to $30.00 (average $17.55) per
share. The following is a summary of activity under the plans over the past
three fiscal years:
40
Standard Microsystems Corporation
and Subsidiaries
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994
Shares under option, beginning of year 867,000 732,000 602,000
Options granted during the year 821,000 402,000 304,000
Options canceled or terminated (225,000) (53,000) (26,000)
Options exercised:
1996 ($4.13 to $17.38 per share) (69,000) -- --
1995 ($4.13 to $26.00 per share) -- (214,000) --
1994 ($4.13 to $19.38 per share) -- -- (148,000)
Shares under option, end of year 1,394,000 867,000 732,000
Options exercisable, end of year 369,000 167,000 128,000
Shares available for future grants, end of year 42,000 665,000 290,000
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, 1996, 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 $14.80) per
share.
The following is a summary of activity under the Director Stock Option
Plan over the past three fiscal years:
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994
Shares under option, beginning of year 43,000 59,000 90,000
Options granted during the year 104,500 15,000 15,000
Options exercised:
1996 ($11.75 per share) (3,500) -- --
1995 ($7.13 per share) -- (31,000) --
1994 ($7.13 to $11.75 per share) -- -- (46,000)
Shares under option, end of year 144,000 43,000 59,000
Options exercisable, end of year 59,000 13,000 34,000
Shares available for future grants, end of year 175,000 30,000 45,000
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.
These 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
183,000, net of cancellations, have been awarded as of February 29, 1996. 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 $761,000, $361,000 and
$189,000 in fiscal 1996, 1995 and 1994, respectively.
41
Standard Microsystems Corporation
and Subsidiaries
RETIREMENT PLANS
In March 1994, the Company adopted an unfunded Supplemental Executive
Retirement Plan to provide senior management with retirement, disability and
death benefits. The retirement benefits are based upon 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 on the latest actuarial information available,
the following table sets forth the components of the net periodic pension
expense, the funded status and the assumptions used in determining the present
value of benefit obligations (in thousands):
FOR THE YEAR ENDED FEBRUARY 29, 1996
Service cost - benefits earned
during the year $33
Interest cost on projected
benefit obligations 298
Net amortization and deferral 245
Net periodic pension expense $576
AS OF FEBRUARY 29, 1996
Actuarial present value of:
Vested benefit obligation $2,868
Nonvested benefit obligation 503
Accumulated benefit obligation 3,371
Effect of projected future salary increases 1,903
Projected benefit obligation 5,274
Unrecognized net loss (1,042)
Unrecognized net transition asset (3,186)
Additional minimum liability 2,325
Accrued pension cost $3,371
Assumptions used in determining
actuarial present value of benefit obligations:
Discount rate 7.50%
Weighted-average rate of
compensation increase 7.00%
In addition to the net periodic pension expense detailed above, the Company
recorded a $1,000,000 charge in the second quarter of fiscal 1996 related to the
separation of two fully vested executive officers.
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 $162,000, $264,000 and $270,000
was accrued during fiscal 1996, 1995 and 1994, respectively.
EXECUTIVE INCENTIVES
The Company's Board of Directors has provided that certain executives
receive incentive compensation based upon certain revenues, earnings and other
performance measures. As such, incentive compensation of $1,483,000 was earned
during fiscal 1996, of which $342,000 will be issued in common stock pursuant to
the Company's Restricted Stock Bonus Plan. $1,506,000 and $1,700,000 of
incentive compensation was earned during fiscal 1995 and 1994, respectively.
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. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in two principal industries:
very-large-scale-integrated circuits primarily used in personal computers for
input/output and network control (Component Products) and local area network
products used to connect personal computers (System Products). Although the
Company's subsidiary, Toyo Microsystems Corporation (TMC), sells component and
system products in the Japanese market, it operates as a separate profit center
and is reported within this disclosure as a separate segment of the Company's
operations.
Income (loss) from operations by industry segment excludes general
corporate expenses, other income and expenses, and income taxes. Transfers
between industry segments are accounted for on an arm's length pricing basis.
General corporate assets include primarily cash and cash equivalents, assets
associated with general corporate activities, tax assets, and certain
investments.
42
Standard Microsystems Corporation
and Subsidiaries
INDUSTRY SEGMENT INFORMATION
(IN THOUSANDS)
GENERAL
COMPONENT SYSTEM CORPORATE
PRODUCTS PRODUCTS TMC AND OTHER CONSOLIDATED
FISCAL 1996
Total revenues $ 143,084 $ 190,097 $ 16,790 $ -- $ 349,971
Intersegment transfers (4,487) (3,558) -- -- (8,045)
Revenues from unaffiliated customers $ 138,597 $ 186,539 $ 16,790 $ -- $ 341,926
Income (loss) from operations 31,177 (40,543) 995 (20,538) (28,909)
Identifiable assets 101,878 93,405 12,634 52,742 260,659
Depreciation and amortization 2,522 14,708 112 1,634 18,976
Capital expenditures 23,999 5,671 132 9,445 39,247
FISCAL 1995
Total revenues $ 112,815 $ 259,499 $ 11,661 $ -- $ 383,975
Intersegment transfers (2,226) (3,078) -- -- (5,304)
Revenues from unaffiliated customers $110,589 $ 256,421 $ 11,661 $ -- $ 378,671
Income (loss) from operations 29,676 25,862 656 (15,572) 40,622
Identifiable assets 39,267 137,769 11,486 40,056 228,578
Depreciation and amortization 2,308 11,005 120 1,380 14,813
Capital expenditures 2,560 8,114 59 2,533 13,266
FISCAL 1994
Total revenues $ 55,203 $ 264,079 $ 5,291 $ -- $ 324,573
Intersegment transfers (1,267) (731) -- -- (1,998)
Revenues from unaffiliated customers $ 53,936 $ 263,348 $ 5,291 $ -- $ 322,575
Income (loss) from operations 5,232 44,086 (1,249) (12,633) 35,436
Identifiable assets 30,640 126,738 10,488 37,967 205,833
Depreciation and amortization 2,952 9,781 159 907 13,799
Capital expenditures 1,196 6,255 16 699 8,166
GEOGRAPHIC INFORMATION
The Company's domestic operations include the worldwide revenues and
operating results of the Component Products and System Products business
segments, and corporate activities. The Component Products and System Products
business segments conduct their sales and marketing operations outside of the
United States through TMC in Japan, and through sales subsidiaries in Canada,
Europe, Asia and the Pacific Rim, Latin America, and South Africa. Revenues and
operating profits from customers in Japan are recorded by TMC.
Less than 10% of the combined Component Products business segment, System
Products business segment and general corporate identifiable assets are located
outside of the United States. Included within the identifiable assets of the
Component Products business segment is $15,979,000 of equipment installed at an
AT&T Microelectronics wafer fabrication facility in Madrid, Spain.
43
Standard Microsystems Corporation
and Subsidiaries
EXPORT SALES
The information below summarizes sales to unaffiliated
customers for the Component Products and System Products business segments by
geographic region (in thousands):
FOR THE YEARS ENDED
FEBRUARY 29 OR 28, 1996 1995 1994
United States $149,414 $201,539 $180,736
Export
Asia and
Pacific Rim 86,975 53,721 30,065
Europe 69,304 86,510 84,266
Canada 10,816 15,294 13,759
Other 8,627 9,946 8,458
$325,136 $367,010 $317,284
MAJOR CUSTOMERS
During fiscal 1996 no customer accounted for more than 10% of the Company's
revenues. In fiscal 1995, one customer accounted for 10.3% of revenues. In
fiscal 1994, one customer accounted for 11.9% of revenues.
CONCENTRATIONS OF CREDIT RISK
The Company sells a significant amount of its products through several
distributors and PC producers and, as a result, maintains individually
significant accounts receivable balances from each of these customers. 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 the Company's expectations.
Distributors have the right to return slow moving inventory in exchange
for other inventory of equal value. Distributors also have the right to
protection with respect to the price paid for inventories on hand. The
Company maintains a reserve for anticipated product returns and price
protection.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED MAY 31 AUG. 31 NOV. 30 FEB. 29
FISCAL 1996
Revenues $ 72,209 $ 85,434 $ 90,570 $ 93,713
Gross profit 28,395 22,823 37,656 33,910
Operating income (loss) (4,718) (17,687) 867 (7,372)
Net income (loss) (3,001) (12,105) 303 26,404
Per Share Data:
Net income (loss) $ (0.22) $ (0.91) $ 0.02 $ 1.94
Market price
High 26.50 19.75 23.50 21.13
Low 15.38 12.50 15.25 15.25
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
High19.50 19.63 25.25 31.63
Low 14.88 13.38 18.38 21.38
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 1,360 holders of record of the Company's common stock at
April 8, 1996. 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.
44
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 29, 1996, and February 28, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended February 29, 1996. 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 29, 1996, and February 28, 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended February 29, 1996, in conformity with generally accepted
accounting principles.
April 8, 1996 ARTHUR ANDERSEN LLP
Washington, D.C.
45
Standard Microsystems Corporation
and Subsidiaries
SHAREHOLDER INFORMATION
Corporate Headquarters:
80 Arkay Drive, Hauppauge, NY 11788
Telephone: 516-435-6000
COMMON STOCK
SYMBOL: SMSC
During the fiscal year ended February 29, 1996,
prices as reported by NASDAQ were:
High $261/2
Low $121/2
Closing $155/8
1996 ANNUAL MEETING
The Annual Shareholders' Meeting will be held at 10:00 a.m., Monday, July 22,
1996, at The Radisson Hotel Islandia, 3635 Expressway Drive North, Hauppauge, NY
11788 (Exit 58 on the Long Island Expressway).
FORM 10-K
A copy of Form 10-K filed with the Securities and Exchange Commission can be
obtained upon written request to Manager of Investor Relations, Standard
Microsystems Corporation, at the corporate headquarters' address above.
SHAREHOLDER INQUIRIES, CHANGE OF ADDRESS OR DUPLICATE MAILINGS
Questions concerning stock transfer, lost certificates or other administrative
matters should be directed to Chemical Mellon Shareholder Services, L.L.C., by
calling 1-800-526-0801. For hearing or speech impaired, call 1-800-231-5469.
Chemical Mellon has installed TELECOMMUNICATIONS DEVICES FOR THE DEAF. If you
change your address or wish to consolidate duplicate mailings, please write to
Chemical Mellon Shareholder Services, L.L.C., at the address below.
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services, L.L.C.
P.O. Box 590, Ridgefield Park, NJ 07660
AUDITORS
Arthur Andersen LLP
1666 K Street, N.W., Washington, D.C. 20006
COUNSEL
General Counsel: Loeb and Loeb
345 Park Avenue, New York, NY 10154
Patent Counsel:
Hopgood, Calimafde, Kalil & Judlowe
60 East 42nd Street, New York, NY 10165
DIVISIONS
System Products Division
350 Kennedy Drive, Hauppauge, NY 11788
Component Products Division
300 Kennedy Drive, Hauppauge, NY 11788
INTERNATIONAL OPERATIONS
Standard Microsystems Corporation (Asia)--Taipei, Taiwan
SMC Australia Pty. Ltd.--Melbourne and Sydney, Australia
Standard Microsystems Corporation (Canada)--Toronto,
Ontario, Canada
Standard Microsystems (Europe) Ltd.--London, England
SMC France, Inc.--St. Germain-en-Laye, France
Standard Microsystems GmbH--Munich, Germany
SMC de Mexico SA de CV--Mexico DF, Mexico
SMC Singapore--Singapore
SMC South Africa--Johannesburg, South Africa
Toyo Microsystems Corporation--Tokyo, Japan
PATENT/TECHNOLOGY LICENSEES
Acer Laboratories Inc.
Advanced Micro Devices, Inc.
AT&T Corp.
Data General Corporation
Fujitsu, Ltd.
General Motors Corporation
Hitachi, Ltd.
Hualon Microelectronics Corporation
Intel Corporation
International Business Machines Corporation (IBM)
ITT Corporation
Kawasaki Steel Corporation
M/A-COM, Inc.
Matsushita Electric Industrial Co., Ltd.
Micron Technology, Inc.
Mitsubishi Electric Corporation
MOSTEK Corporation
National Semiconductor Corporation
NEC Corporation
Nippon Steel Semiconductor Corporation
Oki Electric Industry Company, Ltd.
Samsung Electronics Co., Ltd.
Sanyo Electric Co., Ltd.
SGS-Thomson Microelectronics BV
Sharp Corporation
Texas Instruments Incorporated
Toshiba Corporation
United Microelectronics Corporation
Winbond Electronics Corporation
46
Directors, Corporate & Divisional Officers
BOARD OF DIRECTORS
Paul Richman
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Evelyn Berezin
VENTURE CAPITAL CONSULTANT
Robert M. Brill
GENERAL PARTNER
POLY VENTURES, L.P.,
VENTURE INVESTMENT MANAGEMENT
Peter F. Dicks
CORPORATE DIRECTOR
Herman Fialkov
GENERAL PARTNER
POLY VENTURES, L.P.,
VENTURE INVESTMENT MANAGEMENT
Raymond Frankel
PORTFOLIO MANAGER
GLICKENHAUS & CO.,
INVESTMENT MANAGEMENT
Ivan T. Frisch
PROVOST
POLYTECHNIC UNIVERSITY
CORPORATE OFFICERS
Paul Richman*
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Arthur Sidorsky*
EXECUTIVE VICE PRESIDENT
COMPONENT PRODUCTS DIVISION
Lance Murrah*
SENIOR VICE PRESIDENT AND GENERAL MANAGER
SYSTEM PRODUCTS DIVISION
Anthony M. D'Agostino*
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Walter J. Kmeta
SENIOR VICE PRESIDENT
WAFER FAB OPERATIONS
Douglas L. Finke
VICE PRESIDENT
COMPONENT PRODUCTS MARKETING
Lawrence H. Goldstein
VICE PRESIDENT
COMPONENT PRODUCTS ENGINEERING
George W. Houseweart
VICE PRESIDENT
LAW AND INTELLECTUAL PROPERTY
Di Ma
VICE PRESIDENT
COMPONENT PRODUCTS OPERATIONS
Reginald R. Maton Jr.
VICE PRESIDENT AND
CHIEF INFORMATION OFFICER
Eric M. Nowling*
VICE PRESIDENT AND CONTROLLER
Harold I. Kahen
SECRETARY
LOEB AND LOEB, SPECIAL COUNSEL
COMPONENT PRODUCTS
DIVISION OFFICERS
John E. Burgess
DIVISIONAL VICE PRESIDENT
SALES
Ian F. Harris
DIVISIONAL VICE PRESIDENT
ENGINEERING
Robert E. Hollingsworth
DIVISIONAL VICE PRESIDENT
TECHNICAL MARKETING
Peter C. R. Ju
DIVISIONAL VICE PRESIDENT
PC SYSTEMS LOGIC BUSINESS UNIT
John E. Meade
DIVISIONAL VICE PRESIDENT
MANUFACTURING ENGINEERING
R. Edwin Shaddix
DIVISIONAL VICE PRESIDENT
MANUFACTURING
SYSTEM PRODUCTS
DIVISION OFFICERS
Kenneth W. Brinkerhoff
DIVISIONAL VICE PRESIDENT
ENGINEERING
Eileen M. Conlon
DIVISIONAL VICE PRESIDENT
MANUFACTURING
Clemente J. Russo
DIVISIONAL VICE PRESIDENT
CUSTOMER MANAGEMENT
Steven Schmid
DIVISIONAL VICE PRESIDENT
NEW PRODUCT DEVELOPMENT
*Executive Officer