Exhibit 13
PAGE 11:
FINANCIAL REVIEW
Selected Financial Data 12
Management's Discussion and Analysis 13
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Report on Management's Responsibilities 32
Report of Independent Public Accountants 32
Standard Microsystems Corporation and Subsidiaries Page 12
SELECTED FINANCIAL DATA
As of February 28 or 29, and for the years then ended
(In thousands, except per share data) 1997 1996 1995 1994 1993
Operating Results
Revenues $ 354,138 $ 341,926 $ 378,671 $ 322,575 $ 250,495
Cost of goods sold and operating expenses 383,152 370,835 338,049 287,139 219,712
Income (loss) from operations (29,014) (28,909) 40,622 35,436 30,783
Other income (expense), net (3,988) 48,913 670 (1,964) (2,865)
Income (loss) before minority interest,
provision for income taxes and extraordinary item (33,002) 20,004 41,292 33,472 27,918
Minority interest in net income (loss)
of subsidiary 21 202 185 (209) (430)
Income (loss) before provision for income
taxes and extraordinary item (33,023) 19,802 41,107 33,681 28,348
Provision for (benefit from) income taxes (11,726) 8,201 15,940 13,770 12,510
Income (loss) before extraordinary item (21,297) 11,601 25,167 19,911 15,838
Extraordinary item -- -- (944) -- --
Net income (loss) $ (21,297) $ 11,601 $ 24,223 $ 19,911 $ 15,838
Weighted average common and
common equivalent shares 13,838 13,515 13,305 13,090 12,469
Per Share Data
Income (loss) before extraordinary item $ (1.54) $ 0.86 $ 1.89 $ 1.52 $ 1.27
Extraordinary item -- -- (0.07) -- --
Net income (loss) $ (1.54) $ 0.86 $ 1.82 $ 1.52 $ 1.27
Shareholders' equity at year end $ 12.38 $ 14.11 $ 13.16 $ 11.18 $ 9.50
Market price at year end 8.50 15.63 26.50 19.13 18.75
Balance Sheet Data
Current assets $ 130,141 $ 148,884 $ 162,776 $ 140,393 $ 111,326
Current liabilities 39,278 51,188 42,506 41,395 40,649
Working capital $ 90,863 $ 97,696 $ 120,270 $ 98,998 $ 70,677
Property, plant and equipment, net $ 62,794 $ 60,208 $ 34,908 $ 30,600 $ 30,775
Total assets 234,056 260,659 228,578 205,833 183,926
Long-term debt 7,000 -- -- 9,190 12,135
Other liabilities 4,584 4,593 915 447 313
Minority interest in subsidiary 11,397 11,376 11,174 10,989 11,198
Shareholders' equity 171,797 193,502 173,983 143,812 119,631
PAGES 13 through 16:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Standard Microsystems Corporation conducts its operations primarily through its
Component Products and System Products Divisions. The Component Products
Division (CPD) 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 the Company's
own foundry. The System Products Division (SPD) designs, produces and markets
products that connect personal computers to, and allow communications over,
local area networks (LANs). As a separate profit center, the Company's
subsidiary, Toyo Microsystems Corporation (TMC), sells component and system
products into the Japanese market.
The Company reported reduced revenues and a significant operating loss for the
fourth quarter of fiscal 1997, the result of difficulties experienced by both
its CPD and SPD, as discussed herein.
Revenues
The following table presents the Company's revenues by division and product
line, for the three years ended February 28, 1997 (in millions):
Fiscal years ended February 28 or 29, 1997 1996 1995
Component Products
Integrated circuit revenues $ 164.3 $ 123.0 $ 106.9
Foundry device revenues 14.7 15.6 3.7
Total component products revenues $ 179.0 $ 138.6 $ 110.6
System Products
Adapter revenues $ 120.3 $ 144.5 $ 204.9
Hub and switch revenues 37.2 42.0 51.5
Total system products revenues $ 157.5 $ 186.5 $ 256.4
Toyo Microsystems Corporation $ 17.6 $ 16.8 $ 11.7
Total Revenues $ 354.1 $ 341.9 $ 378.7
The increase in integrated circuit revenues in fiscal 1997, compared to fiscal
1996, was the result of an increase of approximately 31% in unit shipments of
personal computer input/output (PC I/O) integrated circuits, which are now
broadly used by most of the world's leading personal computer manufacturers.
However, during the second half of the fiscal year, and particularly in the
fourth quarter, integrated circuit revenues declined, largely because of
significant PC I/O market price reductions by several of the CPD's competitors.
Excess semiconductor manufacturing capacity in the Pacific Rim during this
period resulted in several competitors producing PC I/O circuits which the
Company believes violated the terms of these competitors' licenses under the
Company's patents. These circuits were aggressively priced and marketed during
the second half of fiscal 1997. The resolution of this licensing issue with
several of these competitors, concluded after the close of the fiscal year, may
relieve some of the PC I/O pricing pressures and encourage PC motherboard
producers to standardize on the Company's PC I/O architectures.
The increase in component products revenues in fiscal 1996, compared to fiscal
1995, resulted from continued broad acceptance of the division's PC I/O
circuits, partially fueled by the worldwide growth in demand for personal
computers, as well as relief from a shortage of manufacturing capacity which had
plagued the semiconductor industry for much of fiscal 1995. Sales of the
division's foundry devices to a particular customer also grew significantly in
fiscal 1996.
Revenues from the System Products Division declined by almost 16% in fiscal
1997, following a 27% decline in fiscal 1996. The declines in adapter revenues
reflect reduced unit shipments to distributors, the division's principal
customers for its products. Declining sales of older Ethernet adapters, as well
as significant reductions in prices for Fast Ethernet adapters during the fourth
quarter, contributed to the fiscal 1997 revenue decline. The fiscal 1997
reduction in hub and switch revenues reflects the January 1996 sale of the
division's Enterprise Networks Business Unit (ENBU), which was responsible for
enterprise-wide switching products, to Cabletron Systems, Inc. After adjusting
fiscal 1996 results for this divestiture, hub and switch revenues actually
increased modestly in fiscal 1997. The decline in fiscal 1996 hub and switch
revenues, compared to fiscal 1995, resulted from reduced shipments of the ENBU's
switching products.
International shipments accounted for about 55% of the Company's revenues in
fiscal 1997, compared to 56% in fiscal 1996 and 47% in fiscal 1995. Increased
shipments during these periods to Asia and the Pacific Rim, primarily reflecting
the corresponding growth in integrated circuit revenues, have been offset by
reduced shipments to Europe and to the rest of the world. Lower overall SPD
shipments have, in turn, resulted in lower shipments to Europe.
Gross Profit
The Company's gross profit has declined from 43.4% in fiscal 1995 to 35.9% in
fiscal 1996 and to 26.9% in fiscal 1997. One significant reason for this trend
has been the shift in product mix from system products to component products.
System products contributed 68% of consolidated revenues in fiscal 1995,
compared to 44% in fiscal 1997, while component products' contribution to
consolidated revenues increased from 29% in fiscal 1995 to 51% in fiscal 1997.
Component products have historically produced lower margins than system
products, resulting in lower consolidated gross profit as this shift occurred.
Also during this period, selling price declines on system products have exceeded
cost reductions, resulting in a downward trend in system products' margins.
Certain integrated circuits introduced by the Company during the first half of
fiscal 1997 experienced lower than expected manufacturing yields, restraining
the division's gross profit during the period. These yields increased to
acceptable levels during the second half of the fiscal year.
During the fourth quarter of fiscal 1997, the Company recorded charges of $9.9
million to write down certain component and system products inventories to net
realizable value, in response to significant market price reductions, in some
cases below cost, for various PC I/O, Ethernet and Fast Ethernet products, as
well as to recognize excess inventory of older and discontinued products. The
reduction in order input and shipments during the fourth quarter led to these
excess inventory balances.
In the second quarter of fiscal 1996, an $11.8 million charge was recorded to
reduce the carrying value of certain system products inventory reflecting the
disappointing reception of a new product introduction, lower than projected
demand for several older product lines, and a decision to reduce the variety of
networking products that perform similar functions.
Research and Development Expenses
Research and development (R&D) expenses decreased 17% in fiscal 1997 compared to
fiscal 1996, primarily the result of the January 1996 divestiture of the ENBU,
partially offset by increased R&D expenditures by the Component Products
Division. The R&D expenses of the divested ENBU totaled almost $9.8 million
during fiscal 1996. Fiscal 1997 research and development expenditures of the CPD
increased by almost $3.5 million compared to fiscal 1996, as the division
expanded its resources in this area through the February 1996 acquisition of the
assets and staff of San Jose, California-based EFAR Microsystems, Inc., the
October 1996 establishment of a design center in Massachusetts, and the
expansion of its Austin, Texas design center. Fiscal 1998 CPD engineering
efforts are expected to focus on continuing enhancements and cost reductions to
its flagship PC I/O product line and also on expanding into new PC technologies.
The System Products Division's fiscal 1998 R&D is expected to focus on
development of leading-edge products in emerging LAN technologies, primarily
Fast Ethernet and, to a lesser extent, ATM.
Fiscal 1996 R&D expenditures were $3.4 million, or 12%, higher than comparable
fiscal 1995 figures. During the first half of fiscal 1996, the SPD was
continuing to expand its development efforts in enterprise-wide switching
products, and thus $2.2 million of the fiscal 1996 increase reflects growth in
ENBU expenditures. In addition, fiscal 1996 expenditures for component product
development were modestly higher than in fiscal 1995.
Selling, General and Administrative Expenses
Fiscal 1997 selling, general and administrative expenses of $93.1 million
declined 13% from $106.3 million in fiscal 1996. This decline includes an $11.3
million reduction in sales and marketing expenses incurred by the SPD, resulting
from both the sale of the ENBU and lower fiscal 1997 revenues, partially offset
by a $3.8 million increase in such expenditures for the CPD. The increased
expenditures for the CPD were driven primarily by its increased fiscal 1997
revenues, and include direct selling expenses such as commissions and royalties,
as well as costs associated with increased sales and marketing staff. The
Company's fiscal 1997 general corporate expenses increased by approximately $1.1
million compared to fiscal 1996, reflecting costs of implementing a new
client/server information system, partially offset by the impact of executive
severance charges incurred during the prior fiscal year.
Selling, general and administrative expenses increased 18% to $106.3 million in
fiscal 1996, from $90.0 million in fiscal 1995. Fiscal 1996 operating expenses
included $2.5 million of executive severance charges, as well as higher selling
and marketing expenses for LAN switching and hub products. Fiscal 1996 expenses
also include higher marketing and selling costs associated with higher revenues
in the Component Products Division.
Other Operating Expenses
The reduction in amortization of intangible assets in fiscal 1997 resulted from
the sale of the ENBU and its related goodwill, as well as the impact of a $2.4
million write-down of an acquired LAN technology to its net realizable value in
fiscal 1996. This write-down also accounts for the fiscal 1996 increase in such
amortization compared to fiscal 1995.
The $5.4 million charge for purchased in-process technology reported in fiscal
1996 resulted from the Company's February 1996 acquisition of the assets of EFAR
Microsystems, Inc., for 240,000 shares of the Company's common stock.
Other Income and Expense
The decline in interest income in both fiscal 1997 and fiscal 1996 reflects
lower average cash balances available for investment during both periods.
Interest expense in all three fiscal years presented resulted principally from
borrowings under the Company's revolving line of credit.
In September 1996, the Company settled an ongoing litigation with Penril
Datacomm Networks, Inc. (Penril) related to technology and product agreements
between Penril and Sigma Network Systems, Inc. (Sigma). These agreements were
executed before the Company's purchase of Sigma in December 1992. This business
was reorganized to operate as the Company's ENBU, focusing on enterprise-wide
switching products, and was subsequently sold to Cabletron Systems, Inc. in
January 1996. The Company and Penril agreed to a settlement of the disputes
whereby all claims of both parties were dismissed, resulting in the Company
recording a $4.1 million charge in the third quarter of fiscal 1997.
In January 1996, the Company realized a $49.7 million gain on the sale of the
assets and technology of its ENBU to Cabletron Systems Inc. for $74.0 million.
Income Taxes
The Company's effective income tax benefit rate for fiscal 1997 was 35.5%. This
rate includes a relatively low benefit rate for state income taxes as several
states in which the Company operates do not allow net operating loss carrybacks.
In fiscal 1996, income taxes were provided for at an effective rate of 41.4%,
higher than the 38.8% rate reported for fiscal 1995. The goodwill written off in
connection with the sale of the ENBU was not deductible for tax purposes,
raising the fiscal 1996 effective tax rate.
Liquidity and Capital Resources
The Company's working capital decreased from $97.7 million at February 29, 1996,
to $90.9 million at February 28, 1997, primarily as a result of the net loss
incurred by the Company during the second half of fiscal 1997. Cash generated by
operating activities in fiscal 1997 was $4.9 million, as the year's net loss was
effectively offset by depreciation expense and amortization. Investing
activities in fiscal 1997 included $19.4 million of capital expenditures and
$2.0 million of strategic investments in new semiconductor technologies by the
CPD. Fiscal 1997 capital expenditures were focused on improvements to the
Company's wafer fabrication plant, semiconductor test equipment, information
systems improvements and engineering design tools. There were no material
commitments for capital expenditures as of February 28, 1997, and fiscal 1998
capital expenditures are expected to be lower than fiscal 1997 capital
expenditures. Net borrowings of $7.0 million under the Company's revolving line
of credit partially financed fiscal 1997's investing requirements.
The Company maintains a combined $25.0 million revolving line of credit with two
banks, which permits the Company to borrow funds on a revolving basis, primarily
to finance working capital needs. The Company's disappointing financial
performance resulted in several violations of financial covenants during fiscal
1997, for which the appropriate bank waivers were obtained, allowing the Company
to continue to borrow, as necessary, pursuant to the original terms and
conditions of the credit line. In May 1997, the Company and its banks
renegotiated the terms of the credit line, extending the agreement through July
1998, adjusting the interest rate, and providing the banks with a general
security interest in the Company's trade accounts receivable and inventory.
Revised financial covenants were also agreed upon.
In July 1997, $7.1 million, plus interest, which was placed in escrow pursuant
to the January 1996 sale of the ENBU to Cabletron Systems, Inc., is scheduled to
be released to the Company. In April 1997, Cabletron filed a claim against the
escrow account, and in May 1997 filed a related lawsuit, alleging breach by the
Company of the non-competition clause of the Asset Purchase Agreement. The
lawsuit seeks an injunction and unspecified damages.
The Company firmly believes that this claim is without merit.
The net operating loss generated in fiscal 1997 will be carried back for income
tax purposes to recover approximately $8.0 million of taxes paid in prior
periods. While difficult to predict, a significant portion of these tax refunds
could be received before the end of fiscal 1998, or, alternatively, be applied
against potential tax liabilities generated in fiscal 1998.
In March 1997, Intel Corporation (Intel) acquired 1.5 million newly-issued
shares of the Company's common stock for $14.7 million, resulting in a slightly
below 10% ownership of the Company. Intel also received a three-year warrant to
purchase an additional 1.5 million shares, at various prices, pursuant to a
recently signed agreement between the Company and Intel. Note 10 of the Notes to
Consolidated Financial Statements included herein provides additional details of
this agreement and the related business arrangement.
The Company expects that its cash and cash equivalents, cash flows from
operations, borrowing capacity under its revolving line of credit and several
other of sources of cash (including the March 1997 equity investment by Intel)
will be sufficient to finance the Company's operating and capital requirements
through the end of fiscal 1998.
Factors That May Affect Future Results
Certain statements and information contained in this annual report constitute
"forward-looking statements" within the meaning of the Federal Securities laws.
These forward-looking statements involve risks and uncertainties which may cause
actual results and performance to be different from those expressed or implied
in such statements.
The Company competes in the personal computer semiconductor and local area
networking markets, both of which are characterized by intense competition,
rapid changes in technology and price erosion. Many of the
competitors in these markets are larger and have significantly greater
financial and other resources than the Company.
The Company's quarterly and annual operating results may be influenced by many
factors, including, among others: the worldwide demand for personal computers,
the ability to introduce competitive products on a timely basis, constraints on
the availability and fluctuations in the cost of subcontracted manufacturing,
the ability to forecast market and customer demand, and new products and
technologies introduced by competitors.
Sales of most of the Company's products depend largely on sales of personal
computers. Reductions in the rate of growth in the PC market could adversely
affect the Company's operating results. In addition, as a component supplier to
PC manufacturers, the Company's Component Products Division often experiences a
greater magnitude of demand fluctuation than the Division's customers themselves
experience. Also, some of the Company's products are used in PCs for the
consumer market, which tends to be a more volatile market than other segments of
the PC marketplace.
The Company's success is highly dependent upon its ability to develop new
products, bring them to the market ahead of its competitors, and induce
customers to select its products for their needs. In an environment of
accelerating changes in technology and short product life cycles, these factors
have become increasingly challenging and important.
The vast majority of the Company's products are manufactured, assembled and
tested by independent foundries and subcontract manufacturers. This reliance
upon foundries and subcontractors involves certain risks, including potential
lack of manufacturing availability, reduced control over delivery schedules,
availability of advanced process technologies, changes in manufacturing yields,
and potential cost fluctuations. Most of the Company's LAN products are
currently manufactured by two separate subcontractors, increasing the potential
risk of interruptions in LAN manufacturing availability.
The Company generally must order inventory to be built by its foundries and
subcontract manufacturers well in advance of product shipments. Because the
Company's markets are volatile, there is risk that the Company may forecast
incorrectly and produce excess or insufficient inventories. This inventory risk
is increased by the recent trend for customers to place orders with increasingly
shorter lead times. Such inventory imbalances actually contributed significantly
to the Company's operating loss in the fourth quarter of fiscal 1997.
A significant number of the Company's foundries and subcontractors are located
in Asia. Many of the Company's customers also manufacture in Asia or subcontract
their manufacturing to Asian companies. This concentration of manufacturing and
selling activity in Asia poses risks that could affect demand for and supply of
the Company's products, including currency exchange rate fluctuations, economic
and trade policies, and the Asian political environment.
The Company's performance is inherently dependent upon hiring and retaining
employees with specific skills. The inability to hire and retain such employees
could hinder the Company's product development and ability to manufacture,
market and sell its products.
A limited number of customers account for a significant portion of the Company's
revenues. The Company's revenues from any one customer can fluctuate from period
to period depending upon market demand for that customer's products, the
customer's inventory management and the overall financial condition of the
customer.
Standard Microsystems Corporation and Subsidiaries Page 17
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and February 29, 1996
(In thousands, except share and per share data) 1997 1996
Assets
Current assets:
Cash and cash equivalents $ 8,382 $ 18,459
Accounts receivable, net of allowance for doubtful
accounts of $1,761 and $1,369, respectively 31,182 55,976
Inventories 59,249 60,408
Deferred tax benefits 11,704 8,607
Other current assets 19,624 5,434
Total current assets 130,141 148,884
Property, plant and equipment:
Land 3,832 3,832
Buildings and improvements 28,870 26,839
Machinery and equipment 125,022 109,235
157,724 139,906
Less: accumulated depreciation 94,930 79,698
Property, plant and equipment, net 62,794 60,208
Other assets 41,121 51,567
$234,056 $260,659
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 24,753 $ 30,801
Accrued expenses and other liabilities 13,715 19,291
Income taxes payable 810 1,096
Total current liabilities 39,278 51,188
Long-term debt 7,000 --
Other liabilities 4,584 4,593
Commitments and contingencies
Minority interest in subsidiary 11,397 11,376
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 13,876,000 and 13,711,000
shares, respectively 1,388 1,371
Additional paid-in capital 87,095 84,737
Retained earnings 78,920 100,217
Unrealized gain on investment, net of tax 953 2,226
Foreign currency translation adjustment 3,441 4,951
Total shareholders' equity 171,797 193,502
$234,056 $260,659
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries Page 18
CONSOLIDATED STATEMENTS OF INCOME
For the years ended February 28 or 29,
(In thousands, except per share data) 1997 1996 1995
Revenues $ 354,138 $ 341,926 $ 378,671
Cost of goods sold 258,790 219,141 214,269
Gross profit 95,348 122,785 164,402
Operating expenses:
Research and development 26,340 31,666 28,286
Selling, general and administrative 93,123 106,337 90,005
Amortization of intangible assets 4,899 8,237 5,489
Purchased in-process technology -- 5,454 --
124,362 151,694 123,780
Income (loss) from operations (29,014) (28,909) 40,622
Other income (expense):
Interest income 520 630 1,453
Interest expense (619) (1,072) (1,255)
Litigation settlement (4,057) -- --
Gain on sale of business unit -- 49,663 --
Other income (expense), net 168 (308) 472
(3,988) 48,913 670
Income (loss) before minority interest, provision for
income taxes and extraordinary item (33,002) 20,004 41,292
Minority interest in net income of subsidiary 21 202 185
Income (loss) before provision for income taxes and
extraordinary item (33,023) 19,802 41,107
Provision for (benefit from) income taxes (11,726) 8,201 15,940
Income (loss) before extraordinary item (21,297) 11,601 25,167
Extraordinary item
Loss on retirement of debt, net of applicable
income taxes of $600 -- -- 944
Net income (loss) $ (21,297) $ 11,601 $ 24,223
Income (loss) per common and common equivalent share:
Income (loss) before extraordinary item $ (1.54) $ 0.86 $ 1.89
Extraordinary item -- -- (0.07)
Net income (loss) per common and
common equivalent share $ (1.54) $ 0.86 $ 1.82
The accompanying notes are an integral part of these consolidated financial
statements.
Standard Microsystems Corporation and Subsidiaries Page 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY As of February 28 or 29, and for
the years then ended
Additional Unrealized Foreign
Common Stock Paid-In Retained Gain On Translation
(In thousands) Shares Amount Capital Earnings Investment Adjustment
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 grant 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 grant 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
Shares issued under employee stock purchase plan 110 11 1,351 -- -- --
Stock options exercised 61 6 425 -- -- --
Tax effect of employee stock plans -- -- 42 -- -- --
Restricted stock grants to employees, net (6) -- 540 -- -- --
Unrealized gain on investment, net of taxes -- -- -- -- (1,273) --
Foreign currency translation adjustment -- -- -- -- -- (1,510)
Net loss -- -- -- (21,297) -- --
Balance at February 28, 1997 13,876 $ 1,388 $ 87,095 $ 78,920 $ 953 $ 3,441
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 20:
Standard Microsystems Corporation and Subsidiaries Page 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 28 or 29,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers $ 378,049 $ 361,215 $ 367,342
Cash paid to suppliers and employees (369,329) (357,981) (331,406)
Interest received 512 622 3,027
Interest paid (634) (1,082) (1,168)
Income taxes received (paid) 350 (17,670) (16,467)
Cash paid for litigation settlement (4,057) -- --
---------
Net cash provided by (used for) operating activities 4,891 (14,896) 21,328
---------
Cash flows from investing activities:
Capital expenditures (19,366) (39,012) (13,578)
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) --
Investment in Accelerix Incorporated (1,483) -- --
Other (482) 50 39
Net cash provided by (used for) investing activities (21,331) 3,077 (13,539)
Cash flows from financing activities:
Proceeds from issuance of common stock 431 1,573 1,991
Borrowings under line of credit agreements 47,731 34,000 927
Principal payments of long-term debt (40,731) (34,000) (14,117)
Net cash provided by (used for) financing activities 7,431 1,573 (11,199)
Effect of foreign exchange rate changes on cash and cash
equivalents (1,068) (773) 773
Net decrease in cash and cash equivalents (10,077) (11,019) (2,637)
Cash and cash equivalents at beginning of year 18,459 29,478 32,115
Cash and cash equivalents at end of year $ 8,382 $ 18,459 $ 29,478
Reconciliation of net income (loss)
to net cash provided by (used for) operating activities:
Net income (loss) $ (21,297) $ 11,601 $ 24,223
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 22,249 18,976 14,813
Gain on sale of business unit -- (49,663) --
Purchased in-process technology -- 5,454 --
Other adjustments, net 1,796 1,423 2,168
Changes in operating assets and liabilities, net of effects
of acquisition and sale of businesses:
Accounts receivable 23,848 19,058 (11,027)
Inventories 969 (24,459) (11,608)
Accounts payable and accrued expenses and other liabilities (11,599) 13,425 4,714
Other changes, net (11,075) (10,711) (1,955)
Net cash provided by (used for) operating activities $ 4,891 $ (14,896) $ 21,328
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.
Page 21-32
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. These debt
instruments are categorized as available for sale and are recorded at fair value
which approximates cost.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short-term maturities. The amount presented
for long-term debt also approximates fair value.
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 28 or 29, 1997 1996
-------- --------
Inventories:
Raw material $10,161 $ 9,556
Work-in-process 33,356 34,622
Finished goods 15,732 16,230
---------- ---------
$59,249 $60,408
========= =========
During the fourth quarter of fiscal 1997, both the Company's Component Products
and System Products Divisions experienced unexpected reductions in order input
and accelerated price competition in their respective markets. These adverse
business conditions resulted in excessive inventory balances and market price
reductions of certain parts below cost. Accordingly, the Company recorded
charges of $9,900,000 to cost of goods sold during the fourth quarter of fiscal
1997 reflecting a reduction in net realizable value of certain inventory and
excess inventory of older and discontinued products.
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
As of February 28, 1997 and February 29, 1996, 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.
Intangible Assets
Intangible assets are amortized primarily on a straight-line basis over their
respective estimated useful lives, ranging from three to ten years. 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.
Long - Lived Assets
During fiscal 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS 121). SFAS No. 121 requires
the Company to review the recoverability of the carrying amount of its
long-lived assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
cash flows, undiscounted and without interest, is less than the carrying amount
of the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value. The adoption of SFAS No.
121 did not have a material effect on the Company's results of operations,
financial position or cash flow.
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.
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 1997
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 ACQUISITIONS AND DIVESTITURE
In October 1996, the Company aquired a 19.9% equity interest in privately held
Accelerix Incorporated of Carp, Ontario, Canada, for $1,483,000. The Company and
Accelerix also entered into an agreement providing the Company with rights to
market, second source and enhance Accelerix' application specific memory
technology. This investment is carried at cost on the accompanying consolidated
balance sheet.
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 through
February 1999 to EFAR, contingent upon the acquired business achieving certain
operating results. Pro forma information for this acquisition would not differ
materially from historical results and is therefore not presented.
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 is
in an interest bearing escrow account until July 1997, to be used as a source
from which indemnifiable losses, if they occur, may be paid by the Company to
Cabletron. In April 1997, Cabletron filed a claim against the escrow account,
and in May 1997 filed a related lawsuit, alleging breach by the Company of the
non-competition clause of the Asset Purchase Agreement. The lawsuit seeks an
injunction and unspecified damages. The Company firmly believes that this claim
is without merit.
3. LONG-TERM DEBT
The Company maintains a $25,000,000 line of credit with several banks, which
permits the Company to borrow funds on a revolving basis, primarily to finance
working capital needs. During fiscal 1997 and fiscal 1996, the Company violated
several financial condition covenants under the agreement, for which the
appropriate bank waivers were obtained, allowing the Company to continue to
borrow, as necessary, pursuant to the original terms and conditions of the
credit line. Borrowings during fiscal 1997 and 1996 were at interest rates
between 6.0% and 8.5%.
In May 1997, the Company and its banks renegotiated the terms of the credit
line, extending the agreement through July 1998, adjusting the interest rate on
borrowings to either the banks' prime rate or LIBOR plus 225 basis points
(depending on the maturity of the borrowing), and providing the banks with a
general security interest in the Company's trade accounts receivable and
inventory. Revised financial covenants covering net income, net worth and
various financial ratios were also agreed upon.
At February 28, 1997, the $7,000,000 of outstanding debt bears interest at
6.0625% and is due in fiscal 1999.
4. INCOME TAXES
The provision for (benefit from) income taxes included in the accompanying
consolidated statements of income consists of the following (in thousands):
For the years ended
February 28 or 29, 1997 1996 1995
------------- ------------- -------------
Current
Federal $(8,700) $12,950 $ 16,242
Foreign 877 619 345
State 507 580 2,281
------------ ------------- -------------
(7,316) 14,149 18,868
Deferred (4,410) (5,948) (2,928)
------------- ------------- -------------
$(11,726) $ 8,201 $ 15,940
============= ============= =============
The provision for (benefit from) 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 or 29, 1997 1996 1995
------------- ------------- -------------
Provision for (benefit from) (35.0)% 35.0% 35.0%
income taxes computed at
the statutory rate
State taxes (0.5) 3.8 3.7
Foreign sales corporation (1.1) (1.0) (1.3)
Income tax credits (1.0) (2.9) (0.1)
Goodwill amortization .5 2.4 0.5
ENBU goodwill ----- 7.6 ---
Other 1.6 (3.5) 1.0
------------ -------------- -------------
(35.5)% 41.4% 38.8%
============ ============= ============
The tax effects of temporary differences that result in deferred tax benefits
are as follows (in thousands):
As of February 28 or 29, 1997 1996
------ -------
Reserves and accruals not $ 6,581 $ 3,143
currently deductible for
tax purposes
Intangible asset amortization 4,905 3,832
Inventory valuation 5,665 3,046
Sale of Business Unit (1,925) ---
Purchased in-process technology 1,904 1,909
Depreciation 441 273
Other (180) (71)
--------- --------
$17,391 $12,131
========= ========
The federal income tax benefit of the net operating loss generated by the
Company in fiscal 1997 will be fully realized by carryback against prior taxble
income, and accordingly, $8,014,000 of income taxes receivable are included
within Other current assets on the consolidated balance sheet at February 28,
1997.
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
$3,074,000 as of February 28, 1997, and will expire in fiscal 1998 and fiscal
1999.
Income tax benefits of $42,000, $377,000 and $707,000 related to the Company's
stock option plans for fiscal 1997, 1996 and 1995, respectively, have been
credited to additional paid-in capital.
The Company has $1,575,000 of New York State tax credit carryforwards of which
$289,000 and $97,000 expire in fiscal 1998 and 1999, respectively. The remaining
$1,189,000 of credit carryforwards expire at various dates in fiscal 2000
through fiscal 2006.
5. OTHER BALANCE SHEET DATA
(In thousands) 1997 1996
As of February 28 or 29,
Other current assets:
Escrow deposit $ 7,353 $ --
Income taxes receivable 8,014 --
Other 4,257 5,434
$19,624 $ 5,434
------- -------
Other assets:
Intangible assets:
Covenant not to compete $15,100 $15,100
Acquired technologies 14,050 13,500
Excess of acquisition cost
over fair value of net assets
acquired (goodwill) 7,797 7,797
------- -------
36,947 36,397
------- -------
Less: accumulated amortization 27,287 22,388
------- -------
9,660 14,009
Common stock of
Chartered Semiconductor Pte Ltd. $19,944 $19,944
Deferred tax benefits 5,687 3,524
Escrow deposit -- 7,050
Other assets 5,830 7,040
======= =======
$41,121 $51,567
======= =======
Accrued expenses and other liabilities:
Salaries and fringe benefits $ 5,091 $ 7,046
Advertising 1,200 1,587
Other 7,424 10,658
------- -------
$13,715 $19,291
======= =======
Other liabilities:
Retirement benefits $ 4,055 $ 3,987
Other 529 606
------- -------
$ 4,584 $ 4,593
======= =======
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 $1,080,000 at an exchange rate of 120 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 and key employees are employed under separate agreements
terminating on various dates through fiscal 2000. These agreements provide,
among other things, for annual base salaries totaling $1,501,000, $1,330,000 and
$746,000 in fiscal 1998, 1999 and 2000, respectively
Severance Agreements
The Company's System Products Division has experienced significant
operating losses over the past two years resulting in concern over the retention
of the Division's key employees. As a result, in March 1997, the Company
approved separate arrangements with approximately 150 System Products Division
employees, providing for severance benefits should the employee be involuntarily
terminated for reasons other than cause or performance through February 28,
1998. The maximum potential payments under these agreements total $5,060,000,
including $726,000 which would be paid under the Company's regular severance
policy.
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):
1998 $1,593
1999 1,376
2000 903
2001 660
2002 628
Total rent expense was $2,229,000, $1,317,000 and $1,013,000 in fiscal 1997,
1996 and 1995, respectively.
Wafer Purchase Agreements
In September 1994, the Company entered into an agreement with Lucent
Technologies Inc.'s (formerly AT&T Corp.) Microelectronics Business Unit
(Lucent) whereby the Company purchased approximately $16,000,000 of wafer
manufacturing equipment for installation at Lucent's Madrid, Spain, facility.
The agreement provides that a portion of Lucent'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 consolidated 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.
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 provided for
payments by the Company over the period ending December 31, 1996.
In September 1996, the Company reached an agreement with Penril Datacomm
Networks, Inc. to settle a legal action initiated by Penril in June 1993. In
1990 and 1991, Penril had entered into technology and product agreements with
Sigma Networks Systems, Inc., which was subsequently acquired by the Company in
December 1992. Sigma became a wholly-owned subsidiary of the Company and was
renamed SMC Enterprise Networks, Inc. In January 1996, the Company sold this
business to Cabletron Systems Inc. The Company and Penril agreed to a settlement
whereby all claims of both parties were dismissed, resulting in the Company
recording a $4,057,000 pretax charge in the third quarter of fiscal 1997.
In June 1995, several actions were filed against the Company and certain of
its officers and directors. These complaints have been consolidated into 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 $983,000,
$1,066,000 and $866,000 in fiscal 1997, 1996 and 1995, respectively.
The Company has authorized unissued common stock reserved for issuance to the
Plan. As of February 28, 1997, there were no unissued shares remaining in
reserve for this plan, however, it is anticipated that the Company's Board of
Directors will authorize reserve for additional shares in fiscal 1998. Since its
inception, 850,000 shares of the Company's common stock have been contributed to
the Plan.
As of February 28, 1997, 577 of the 776 employees who had satisfied the Plan's
eligibility requirements to participate were making salary deduction
contributions.
Employee Stock Option Plans
Under the Company's stock option plans, the Compensation Committee of the Board
of Directors is authorized to grant stock options to purchase 2,274,000 shares
of common stock. The purpose of these plans is to promote the interests of the
Company and its shareholders by providing the officers and key employees with
additional incentives and the opportunity, through stock ownership, to increase
their proprietary interest in the Company and their personal interest in its
continued success. Options are granted at prices not less than the fair market
value on the date of grant. At February 28, 1997, 917,000 shares of common stock
were available for future grants.
Stock option plan activity is summarized below (shares in thousands):
Fiscal Weighted Fiscal Weighted
1997 Average 1996 Average
Shares Exercise Price Shares Exercise Price
--------------- ---------------- -------------------
Options outstanding, March 1 1,383 $17.53 848 $17.16
Granted 1,799 $10.61 821 $17.42
Exercised (61) $ 7.07 (69) $ 9.07
Canceled or expired (1,764) $16.76 (217) $18.34
Options outstanding, February 28 or 29 1,357 $ 9.82 1,383 $17.53
Options exercisable 387 $10.62 409 $17.28
------ ------ ------ ------
The following table summarizes information relating to currently outstanding and
exercisable options as of February 28, 1997(sharesin thousands):
Weighted
Remaining Average Weighted Average
Range of Life Options Exercise Options Exercise
Exercise Prices (in years) Outstanding Price Exercisable Price
- ------------------------- ------------------ --------------- ------------------ --------------- ------------------
$8.50 - $9.00 6.9 1,213 $8.99 307 $9.00
$9.13 - $9.38 9.2 7 $9.15 1 $9.38
$15.50 - $16.25 2.1 51 $16.02 41 $16.03
$17.38 - $17.81 2.2 46 $17.38 26 $17.39
$18.69 - $20.63 3.2 40 $18.70 12 $18.74
------------------ --------------- ------------------ --------------- ------------------
Effective March 1, 1996, the Company has elected to disclose the pro forma
effects of SFAS statement No. 123, Accounting for Stock-Based Compensation. As
allowed under the provisions of this new statement, the Company will continue to
apply APB Opinion No. 25 and related interpretations to accounting for the stock
options awarded under these plans. Accordingly, no compensation cost has been
recognized for these stock options. Had compensation cost for these plans been
determined consistent with SFAS statement No. 123, the Company's net income
(loss) and net income (loss) per share would have been the pro forma amounts
indicated below (in thousands, except per share data):
For the years ended February 1997 1996
28 or 29,
- -------------------------------- ----------- --------------------
Net income(loss):
As reported $(21,297) $11,601
Pro forma (23,295) 10,431
-------------- ---------------
Net income (loss) per share:
As reported $(1.54) $.86
Pro forma (1.68) .77
------------ --------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the years ended February 1997 1996
28 or 29,
- -------------------------------- -------------------- --------------------
Dividend yield - -
Expected volatility 57% 57%
Risk-free interest rates 5.71%-6.27% 5.54%
Expected lives (in years) 1-4 4
------------ -------------
The weighted average Black-Scholes value of options granted in fiscal 1997 and
1996 were $3.65 and $8.69, respectively. The values produced by this model are
limited by the inclusion of highly subjective assumptions which greatly affect
calculated values.
On January 27, 1997, the Compensation Committee of the Board of Directors
approved an exchange program for employees to surrender all outstanding options
for new options with an exercise price at the then current fair market value of
$9.00 per share. The new options issued will vest and expire on the same
schedule as the original options surrendered. Active employees were offered a
one-for-one exchange while corporate officers were offered three new options for
every four surrendered. As a condition of accepting this offer, no new options
are permitted to be exercised prior to August 1, 1997. Additional compensation
cost was recognized in the pro forma numbers presented above, and all of the
tables in this disclosure have been updated to reflect the effects of this
repricing.
Director Stock Option Plan
Under the Company's Director Stock Option Plan, non-qualified options to
purchase common stock may be granted to directors at prices not less than the
market price of the shares at the date of grant. At February 28, 1997, the
expiration dates of the outstanding options range from June 30, 1997, to July
22, 2001, and the exercise prices range from $11.38 to $16.00 (average $13.87)
per share.
The following is a summary of activity under the Director Stock Option Plan over
the past three fiscal years (in thousands):
For the years ended February 28 or 29, 1997 1996 1995
----- ------ ------
Shares under option, beginning of year 144 43 59
Options granted during the year 50 104 15
Options canceled or terminated (8)
Options exercised:
1997 -- -- --
1996 ($11.75) -- (3) --
1995 ($7.13 per share) -- -- (31)
---- ---- ----
Shares under option, end of year 186 144 43
---- ---- ----
Options exercisable, end of year 87 59 13
---- ---- ----
Shares available for future grants, end of year 133 175 30
---- ---- ----
Restricted Stock Bonus Plan
The Company maintains two Restricted Stock Bonus Plans. Each provides for common
stock awards to certain officers and key employees. The fair market value of
shares awarded under the 1991 Plan to an employee in any year is limited to 20%
of the employee's base salary, and are earned in equal installments on the
second, third and fourth anniversaries of the award. Awards granted under the
1996 plan are earned in 25%, 25%, and 50% increments on the first, second and
third anniversaries of the award, respectively. The shares granted under each
plan are distributed 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 1996 Plan is 350,000, of which
10,000, net of cancellations, have been awarded as of February 28, 1997. No new
shares will be issued from the 1991 Plan, and as of February 28, 1997, 187,000
shares remain unearned under this plan. The market value of these shares at the
date of award, net of cancellations, is recorded as compensation expense ratably
over three or four year periods from the respective award dates. This
compensation expense was $385,000, $761,000 and $361,000 in fiscal 1997, 1996
and 1995, 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. 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 years ended February 28 or 29, 1997 1996
----------- ----------
Service cost - benefits earned during the year $76 $33
Interest cost on projected benefit obligations 275 298
Net amortization and deferral 245 245
------- -------
Net periodic pension expense $596 $576
-------- -------
As of February 28 or 29, 1997 1996
---------- -------------
Actuarial present value of:
Vested benefit obligation $3,040 $2,868
Nonvested benefit obligation 377 503
---------- ---------
Accumulated benefit obligation 3,418 3,371
Effect of projected future salary increases 1,612 1,903
------------ ------------
Projected benefit obligation 5,029 5,274
Unrecognized net loss (596) (1,042)
Unrecognized net transition asset (2,941) (3,186)
Additional minimum liability 1,925 2,325
---------- -------------
Accrued pension cost $3,417 $3,371
---------- --------------
Assumptions used in determining actuarial present value of benefit obligations:
Discount rate 7.25% 7.25%
Weighted-average rate of compensation increase 7.00% 7.00%
------------ ------------
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 $174,000, $162,000 and $264,000
was accrued during fiscal 1997, 1996 and 1995, 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. During fiscal 1997, 1996 and 1995, $560,000, $1,483,000
and $1,506,000 of incentive compensation was earned, 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. SUBSEQUENT EVENT
In March 1997, the Company and Intel Corporation (Intel) entered into a Common
Stock and Warrant Purchase Agreement (the Agreement) whereby Intel acquired
approximately 1,543,000 of newly-issued shares of the Company's common stock for
$9.50 per share, or approximately $14,654,000, and received a three-year warrant
to purchase an additional 1,543,000 shares at a price per share which increases
from $10.45, to $11.40, and then to $12.35 on March 18, 1997, 1998 and 1999,
respectively. In addition, the Company and Intel have signed a Letter of Intent
to enter into, and are currently negotiating, an agreement whereby (i) Intel
would agree to integrate the Company's current and future devices into a
specified number of Intel's motherboard designs, and consider integrating such
devices into additional motherboard designs, and (ii) the Company would grant
Intel
certain manufacturing rights should the Company be unable to perform its
obligations as a supplier of such devices.
The Agreement provides Intel with certain rights, including a right of first
refusal upon certain proposed sales of common stock by the Company, demand and
other registration rights with respect to the shares acquired under the
Agreement, a right for Intel to designate a representative to serve on the
Company's board of directors, and anti-dilution rights.
The Agreement also imposes certain restrictions on Intel, including a limitation
on Intel's ability to acquire additional shares of the Company's common stock
(referred to as a standstill arrangement), and restrictions on the transfer of
shares acquired pursuant to the Agreement. The standstill arrangement would
terminate in the event of certain third-party tender offers for the Company's
common stock.
11. 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.
Industry Segment Information General
(In thousands) Component System Corporate
Products Products TMC and Other Consolidated
----------- --------- ------------- -------- -----------
Fiscal 1997
Total revenues $186,728 $160,276 $ 17,558 $ $ 364,562
--
Intersegment transfers (7,682) (2,742) - - (10,424)
--------- ---------- ----------- ------- --------
Revenues from unaffiliated customers $179,046 $ 17,558 $ $ 354 ,138
$157,534 --
Income (loss) from operations 12,240 (19,618) 22 (21,658) (29,014)
Identifiable assets
106,314 63,915 11,059 52,768 234,056
Depreciation and amortization
8,595 9,497 110 4,047 22,249
Capital expenditures
14,167 2,400 85 2,932 19,584
------------- ------------- ----- ----- ---------
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
======= ======= ======== ======= =========
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 $13,157,000 of equipment (net) installed
at Lucent Technologies Inc.'s wafer fabrication facility in Madrid, Spain.
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 28 or 29,
1997 1996 1995
---------- ---------- ---------
United States $159,937 $149,414 $201,539
Export
Asia and Pacific Rim 112,034 86,975 53,721
Europe 51,919 69,304 86,510
Canada 7,475 10,816 15,294
Other 5,215 8,627 9,946
---------- -------- ---------
$336,580 $325,136 $367,010
========== ======== =========
Major Customers
During fiscal 1997 and fiscal 1996, no single customer accounted for more
than 10% of the Company's revenues. In fiscal 1995, one customer accounted for
10.3% 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 and. The Company maintains a
reserve for anticipated product returns and price protection.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28/29
------- ----------- ------------ -----------
Fiscal 1997
Revenues $ 100,072 $ 99,217 $ 93,769 $ 61,080
Gross profit 36,876 29,950 28,348 174
Operating income (loss) 3,237 164 (2,174) (30,241)
Net income (loss) 1,917 142 (3,854) (19,502)
Per Share Data:
Net income (loss) $ 0.14 $ 0.01 $ (0.28) $ (1.40)
Market price
High 18.75 18.00 15.25 11.75
Low 14.38 10.25 8.38 8.38
========= ========= ========= =========
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
========= ========= ========= =========
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 1,460 holders of record of the Company's common stock at
April 7, 1997.
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.
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, 1997, and February 29, 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended February 28, 1997. 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, 1997, and February 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended February 28, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
April 7, 1997 (except for Notes 2 and 3, as to which the date is May 23, 1997)
Washington, D.C.