Exhibit 13
PAGE 11:
FINANCIAL REVIEW
Selected Financial Data 12
Management's Discussion and Analysis 13
Consolidated Statements of Operations 20
Consolidated Balance Sheets 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Report on Management's Responsibilities 39
Report of Independent Public Accountants 39
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 12
SELECTED FINANCIAL DATA
(In thousands, except percentages and per share data)
<TABLE>
<CAPTION>
As of February 29 or 28, and for the years then ended 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
(Fiscal 1999 and 1998 presented pro forma for the change in
revenue recognition)
Revenues ..................................................... $153,247 $151,768 $144,252 * *
Gross profit ................................................. 59,363 54,623 39,460 * *
As a percentage of revenues ................................ 39% 36% 27%
Research and development ..................................... 24,365 17,437 14,298 * *
As a percentage of revenues ................................ 16% 11% 10%
Selling, general and administrative .......................... 32,993 30,469 30,645 * *
As a percentage of revenues ................................ 22% 20% 21%
Operating income (loss) ...................................... 2,005 5,163 (5,483) * *
As a percentage of revenues ................................ 1% 3% (4%)
Income (loss) from continuing operations ..................... 3,442 5,186 (4,255) * *
As a percentage of revenues ................................ 2% 3% (3%)
Net income (loss) ............................................ 7,593 (13,362) (22,071) * *
As a percentage of revenues ................................ 5% (9%) (15%)
Diluted net income (loss) per share
Income (loss) from continuing operations ................... $ 0.22 $ 0.32 $ (0.27) * *
Net income (loss) .......................................... 0.48 (0.85) (1.42) * *
---------------------------------------------------------------------------------------------------------------------------------
Operating Results
(Fiscal 1996 through fiscal 1999 presented as
previously reported)
Revenues ..................................................... $153,247 $155,826 $148,326 $180,918 $138,882
Gross profit ................................................. 59,363 55,980 44,463 43,755 56,285
Research and development ..................................... 24,365 17,437 14,298 12,808 8,473
Selling, general and administrative .......................... 32,993 30,550 30,726 38,161 35,726
Operating income (loss) ...................................... 2,005 6,439 (561) (7,214) 6,632
Income (loss) from continuing operations ..................... $ 3,442 $ 6,003 $ (1,105) $ (4,613) $ 3,596
Net income (loss) from discontinued operations ............... - (5,255) (18,846) (16,684) 8,005
Gain (loss) on sales of discontinued operations,
net of taxes ................................................ 4,151 (13,293) 1,030 - -
Cumulative effect of change in accounting principle,
net of taxes ................................................ (2,924) - - - -
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ............................................ $ 4,669 $(12,545) $(18,921) $(21,297) $ 11,601
Diluted net income (loss) per share
Income (loss) from continuing operations ................... $ 0.22 $ 0.38 $ (0.07) $ (0.33) $ 0.27
Net income (loss) .......................................... 0.29 (0.79) (1.22) (1.54) 0.86
---------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding ............. 15,915 15,824 15,519 13,838 13,515
---------------------------------------------------------------------------------------------------------------------------------
Balance Sheet and Other Data
Cash and short-term investments .............................. $ 75,405 $ 70,071 $ 55,758 $ 8,382 $ 18,459
Working capital .............................................. 109,016 96,342 83,784 45,164 36,718
Capital expenditures ......................................... 10,503 10,847 3,854 8,654 26,947
Depreciation and amortization ................................ 9,988 10,544 11,328 10,462 4,559
Earnings before interest, taxes, depreciation
and amortization ............................................ 12,280 16,745 8,718 3,401 10,681
Total assets ................................................. 260,508 200,657 210,049 217,240 244,228
Long-term obligations ........................................ 22,151 7,816 7,297 11,584 4,593
Shareholders' equity ......................................... 201,792 158,434 172,377 171,797 193,502
Book value per common share .................................. 12.80 10.21 10.82 12.38 14.11
* Data was not available in sufficient detail to provide pro forma information
for these fiscal years.
</TABLE>
<PAGE>
Page 13 through 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and footnotes thereto contained in this
report.
OVERVIEW
Standard Microsystems Corporation (the Company or SMSC) is a worldwide designer
and supplier of metal-oxide-semiconductor/very-large-scale-integrated
(MOS/VLSI) circuits for the personal computer (PC) and related industries.
Currently, the Company is prominent as the world's leading supplier of
input/output (I/O) integrated circuits. I/O circuits perform many of the basic
input/output functions required in a personal computer or an embedded
application, including keyboard control and BIOS, floppy disk control and
serial and parallel port control. The Company also supplies integrated
circuits for embedded control systems, local area networking applications and
connectivity applications. The Company's products are manufactured by
world-class semiconductor foundries and assemblers.
In recent years, the majority of the Company's revenues have been derived from
supplying I/O circuits to the PC marketplace. Strategically, the Company is
introducing a line of System Controller Hubs based upon its I/O technology and
is pursuing broader product offerings, particularly for USB connectivity. It
is also now in the process of developing a line of chipsets.
Chipsets are advanced integrated circuits used within a personal computer or
similar application to control the flow of information between the
microprocessor, memory modules, graphics controllers and other peripheral
devices. A chipset is typically comprised of two primary devices - a memory
controller (sometimes referred to as the north bridge) and an I/O controller
(sometimes referred to as the south bridge).
The Company believes that its existing I/O technology portfolio, its strong
relationships with major PC suppliers, and its significant intellectual
property rights provide a solid foundation for its chipset development
initiatives. As part of this strategy, in September 1999, the Company signed a
technology exchange agreement with Intel Corporation (Intel), the world's
leading supplier of chipsets, intended to accelerate the Company's development
of value-added chipset solutions that support Intel microprocessors in personal
computer and embedded applications. As part of this agreement, the Company
gains access to Intel's complete line of current and future memory controllers
and Firmware Hub devices. The Company's chipset products will include
complete solutions comprised of Intel's leading performance memory controllers
and SMSC's own value-added I/O controllers, and in some applications, Super I/O
devices and Intel Firmware Hub devices.
Standard Microsystems Corporation sells its products to a worldwide customer
base, which includes most of the world's leading personal computer and personal
computer motherboard manufacturers. The Company's I/O circuits reside on the
motherboards of personal computer products made by Compaq, Dell, Fujitsu,
Gateway, Hewlett-Packard, IBM, Intel, NEC, Sony, Toshiba and most other leading
manufacturers. The Company also sells its products through electronics
distributors, who provide value-added access to a broad base of smaller
personal computer suppliers, as well as to many customers who use the Company's
products in diverse embedded systems, networking and connectivity applications.
The Company is based in Hauppauge, New York, operates design centers in New
York, Austin, TX, Westborough, MA and San Jose, CA, and has sales offices in
the United States, Europe and Taiwan. The Company conducts its business in the
Japanese market through its majority owned subsidiary, Toyo Microsystems
Corporation.
RESULTS OF OPERATIONS
CHANGE IN REVENUE RECOGNITION POLICY
In fiscal 2000, the Company changed its accounting policy for the recognition
of revenue on product shipments to distributors. Recognition of revenue and
related gross profit on shipments to distributors is now deferred until the
product is resold by the distributors. This change was made with an effective
date of March 1, 1999 (the beginning of fiscal 2000).
Management believes this accounting policy to be the most conservative and
preferable to SMSC's former policy because it better aligns reported results
with, focuses the Company on, and allows investors to better understand,
end-user demand for the products SMSC sells through distribution. This revenue
recognition policy is commonly used within the semiconductor industry.
The cumulative effect of this change in accounting principle on all prior years
resulted in a fiscal 2000 charge of $2,924,000, net of $1,716,000 of income tax
benefits, or $0.19 per diluted share.
All prior period revenue and income or loss figures quoted in comparative
commentary in this discussion are stated as if the change in distributor
revenue recognition had been in effect in all periods discussed.
REVENUES
The Company's revenues increased to $153.2 million in fiscal 2000 from $151.8
million in fiscal 1999. Overall unit shipments increased to approximately 50
million units in fiscal 2000, a 25% increase from 40 million units shipped in
fiscal 1999. Declines in average selling prices offset most of the impact of
the unit volume growth. Overall, revenues from shipments of I/O products
contributed about 80% of the Company's revenues in both fiscal 2000 and fiscal
1999. Combined revenues from local area networking, connectivity and embedded
control devices increased slightly in fiscal 2000, compared to fiscal 1999,
benefiting from higher unit volumes partially offset by lower average selling
prices.
Fiscal 1999 revenues totaled $151.8 million, compared to $144.3 million in
fiscal 1998. The Company's unit volumes increased substantially in fiscal
1999, to about 40 million units, compared to just under 30 million units in
fiscal 1998, partially offset by a significant drop in average selling prices,
generally driven by excess worldwide semiconductor manufacturing capacity. The
Company also introduced a line of USB connectivity products during fiscal 1999,
offering devices supporting new communications standards for personal computer,
peripheral and embedded applications, which provided some modest incremental
revenue contribution in fiscal 1999.
International shipments accounted for 78% of the Company's revenues in fiscal
2000, compared to 83% in fiscal 1999 and 73% in fiscal 1998. While the demand
for the Company's products is primarily driven by the worldwide demand for
personal computers, peripheral devices, and embedded applications, Asia and the
Pacific Rim was by far the most significant international market for the
Company's products during each of these periods, primarily reflecting the high
concentration of the world's personal computer and personal computer
motherboard manufacturing activity in this region. The Company expects that
international shipments, particularly to the Asia and Pacific Rim region,
will continue to represent a significant portion of its revenues.
GROSS PROFIT
The Company's products generally experience declines in average selling prices
and gross margins over their life cycles. In order to offset declines in
average selling prices, the Company must continue to reduce the costs of
products through product and manufacturing design changes, volume discounts,
yield improvements, manufacturing efficiencies and lower costs negotiated with
subcontract manufacturers. The Company's gross profit margin is also dependent
on its ability to introduce new, competitive products, which generally command
higher margins early in their life cycles.
The Company's gross profit percentage for fiscal 2000 increased to 38.7%,
compared to 36.0% in fiscal 1999. This gross profit improvement can be
attributed to comprehensive manufacturing cost reduction programs, higher
yields, increased unit volumes shipped and the continuing migration to new,
higher margin products. The Company made significant progress during fiscal
2000 in improving its manufacturing efficiencies, particularly in its
semiconductor test operation. The unit volume increase in fiscal 2000 also
enabled better utilization of manufacturing support overhead.
The Company's gross profit margin increased from 27.4% in fiscal 1998 to 36.0%
in fiscal 1999. This improvement was driven primarily by reduced product
material costs and a shift to higher margin products, partially offset by lower
average selling prices. During fiscal 1999, the Company was able to reduce
product material costs through lower foundry wafer prices, lower contract
assembly costs, the adoption of finer geometry fabrication processes and the
redesign of products to reduce die sizes.
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development (R&D) consists of circuit design and
validation, product engineering, software development and related support
activities. The Company's ongoing commitment to research and development is
essential to maintaining product leadership in existing product lines and to
providing innovative product offerings. The Company therefore expects to
continue to make significant investments in research and development.
Research and development expenses increased to $24.4 million in fiscal 2000, a
40% increase over $17.4 million in fiscal 1999. In fiscal 1999, R&D had
increased by 22% from $14.3 million in fiscal 1998. The increases in both
periods reflect increased engineering staff as well as increases in other
development costs. The majority of the fiscal 2000 increase resulted from the
Company's accelerated investment in chipset development programs. During the
past several years, the Company has expanded its R&D resources by establishing
a design center in Westborough, MA, and expanding its Hauppauge, NY,
San Jose, CA and Austin, TX design centers.
The Company's fiscal 2001 engineering efforts will focus on chipset design and
validation activities, as well continuing enhancements and cost reductions in
its existing product lines.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $33.0 million in fiscal 2000,
compared to $30.5 million in fiscal 1999. This increase is primarily the
result of the elimination of administrative support subsidies no longer being
received from SMC Networks, Inc. (SMC), the Company's former local area
networking business. These subsidies ended in the middle of fiscal 1999
concurrently with the bilateral termination of the Company's administrative
support services for SMC. In addition, transitions in executive management
resulted in an increase in compensation costs in fiscal 2000.
Selling, general and administrative expenses of $30.5 million in fiscal 1999
decreased slightly from $30.6 million in fiscal 1998. This decline resulted
primarily from lower administrative overhead accomplished primarily through
staff attrition and reductions in professional services and other general
administrative expenses, driven by the Company's October 1997 decision to exit
the local area networking business. These declines were partially offset by
higher direct selling and marketing expenses associated with higher fiscal 1999
revenues.
OTHER INCOME AND EXPENSE
The increases in interest income in fiscal 2000 compared to fiscal 1999, and in
fiscal 1999 compared to fiscal 1998, are predominately due to interest income
received on higher average balances of cash and cash equivalents available for
investment, and, in fiscal 2000, an investment portfolio mix change to taxable
securities from tax-exempt securities.
During the second quarter of fiscal 1998, a net charge of $2.0 million was
recorded for the settlement of a class action litigation initiated against the
Company and certain of its officers and directors in 1995.
INCOME TAXES
The Company's effective income tax rate for fiscal 2000 was 37%. By comparison,
the effective income tax rate was approximately 30% in fiscal 1999, and tax
benefits were recorded at a rate of 37% in fiscal 1998. The Company's
increased effective income tax rate in fiscal 2000 primarily reflects the
impact of certain losses incurred in foreign tax jurisdictions for which no
corresponding tax benefit is currently recorded. Generally, the Company's
income tax rate includes the federal and state statutory tax rates, the impact
of certain permanent differences between the book and tax accounting treatment
of certain expenses, the impact of tax-exempt income and various tax credits.
DISCONTINUED OPERATIONS
Throughout the past several years, the Company has refocused its resources on
its core semiconductor integrated circuits business, where the Company believes
it has its most valuable assets and its best growth opportunities. In this
regard, the Company divested itself of its local area networking hardware
business in 1997 and its Foundry Business Unit in 1999.
In March 1999, the Company's Board of Directors approved a plan for the Company
to divest its Foundry Business Unit (FBU). The FBU had experienced significant
losses during its last several years of operations. The divestiture was
completed on June 1, 1999, with the sale of the assets of the Foundry Business
Unit to privately held Inertia Optical Technology Applications, Inc. (IOTA) of
Newark, NJ. The assets of the Foundry Business Unit were then combined with
the operations of IOTA, and the combined businesses began operating as Standard
MEMS, Inc. (SMI).
The transaction was effected through IOTA's purchase of the FBU's assets in
exchange for common stock of IOTA representing 38% of IOTA's outstanding
capital stock. As a result of this transaction, the Company recorded a charge
of $13.3 million, net of $1.9 million of tax benefits, in the fourth quarter of
fiscal 1999, covering write-downs of certain FBU assets, operating losses
expected to occur before completion of the transaction, and other costs
associated with the transaction. In the fourth quarter of fiscal 2000, the
Company reduced this charge by $0.7 million, net of $0.4 million of income
taxes, reflecting lower expected final disposition costs, and also recognized
$3.4 million of previously reserved tax benefits on the transaction, now
deemed to be realizable.
The Company committed to reducing its 38% interest in SMI to 19% or less within
one year of the transaction, and satisfied that commitment with the sale of a
portion of its investment in SMI for $6.8 million in cash in March 2000.
Following several years of reduced revenues and significant operating losses,
during the third quarter of fiscal 1998, the Company reorganized its System
Products Division, which designed, produced and marketed products used in the
local area networking of personal computers, into a new corporation called SMC
Networks, Inc. Concurrently with this reorganization, the Company sold an
80.1% interest in the new corporation to Taiwan-based Accton Technology
Corporation (Accton), for $40.2 million in cash, resulting in a pre-tax gain of
$1.6 million. The Company retained a 19.9% ownership interest in SMC Networks,
Inc., and carries this investment at cost on its consolidated balance sheets.
The Company is currently involved in a dispute with Accton, an Accton
affiliate, and SMC Networks, Inc. regarding this transaction, as described in
Note 12 to the consolidated financial statements.
The Company's historical financial information reports the operating results,
net assets and cash flows of the Foundry Business Unit and the System Products
Division as discontinued operations for all periods presented in which the
Company operated those businesses. The discussions and analyses contained
herein are of continuing operations, as restated, unless otherwise noted.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition continues to be strong, with a current ratio
in excess of 5 to 1 and no bank debt. In recent years, the Company has
financed its operating and capital requirements principally through cash flows
from operations.
The Company's cash, cash equivalents and short-term investments increased from
$70.1 million at the end of fiscal 1999 to $75.4 million at the end of fiscal
2000. Working capital increased from $96.3 million to $109.0 during this same
period. Operating activities generated $17.7 million of cash in fiscal 2000,
compared to $14.6 million in fiscal 1999.
Accounts receivable declined by $6.0 million during the year, reflecting more
balanced shipments within the quarter and lower fourth quarter shipments in
fiscal 2000 than in fiscal 1999. The Company's accounts receivable contains
minimal delinquencies, and there were no material bad debt losses in either
fiscal 2000 or fiscal 1999.
Inventory increased to $20.1 million as of February 29, 2000 compared to $13.8
million at February 28, 1999. The increase in inventory in fiscal 2000
resulted from a reduction of inventory in the distribution channel as well as
the decision to build stock on certain high-volume products in anticipation of
tightening wafer fabrication capacity. Indeed, several of the Company's
suppliers have recently reported minimal, if any, available capacity for
additional demand. In addition, certain technology delays in the personal
computer marketplace have resulted in delayed shipments of some of the
Company's new products.
The Company holds an equity interest of less than 2% in Singapore-based
Chartered Semiconductor Manufacturing Ltd. (Chartered), acquired for $19.9
million during fiscal 1996. Under the terms of an agreement related to this
investment, the Company is allocated sub-micron wafer production capacity for
ten years in Chartered's wafer fabrication facility.
In October 1999, shares of Chartered began trading publicly on the Singapore
stock exchange, and also began trading on the NASDAQ stock exchange as American
Depository Shares, or ADSs. Accordingly, this investment is reported at its
estimated market value of $73.1 million on the accompanying February 29, 2000
consolidated balance sheet and is subject to normal open market fluctuations.
This investment was reported at cost in prior reporting periods.
In October 1998, the Company's Board of Directors authorized the Company to
repurchase up to one million shares of its common stock on the open market or
in private transactions. As of February 29, 2000, the Company had repurchased
671,000 shares of common stock at a cost of $4.4 million, including 150,000
shares of common stock repurchased in fiscal 2000 at a cost of $1.4 million.
As more fully described below, the Company repurchased another 200,000 shares
in a transaction with Intel Corporation in March 2000.
In March 1997, the Company and Intel Corporation entered into a Common Stock
and Warrant Purchase Agreement (the Agreement) whereby Intel purchased
approximately 1,543,000 of newly issued shares of the Company's common stock
for $9.50 per share, or approximately $14.7 million. Intel also received a
three-year warrant to purchase an additional 1,543,000 shares at varying
prices, expiring on March 18, 2000. In March 2000, in accordance with the
terms of the warrant, Intel executed a "net exercise", whereby Intel received
approximately 200,000 shares of the Company's common stock, which was equal in
fair value to the excess of the warrant's market value over its exercise value,
as defined in the Agreement. The Company immediately repurchased these 200,000
shares from Intel for $1.9 million under its common stock repurchase program.
The majority of the $10.5 million and $10.8 million of capital expenditures
incurred in fiscal 2000 and fiscal 1999, respectively, were for expanding the
Company's semiconductor test operation and acquiring intellectual property used
in the design of the Company's products. There were no material commitments
for capital expenditures as of February 29, 2000.
The Company has considered in the past, and will continue to consider, various
possible transactions to secure necessary foundry manufacturing capacity,
including equity investments in, prepayments to, or deposits with foundries, in
exchange for guaranteed capacity or other arrangements which address the
Company's manufacturing requirements.
The Company expects that its cash, cash equivalents, short-term investments,
cash flows from operations, and its borrowing capacity, will be sufficient to
finance the Company's operating and capital requirements through the end of
fiscal 2001.
<PAGE>
FINANCIAL MARKET RISKS
As of February 29, 2000, the Company's $2.0 million of short term investments
consisted primarily of investments in U.S. treasury, corporate and municipal
obligations with maturities of between three and twelve months. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at February 29, 2000, the fair value of these short-term investments
would decline by an immaterial amount. The Company generally expects to hold
its fixed income investments until maturity and therefore would not expect
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on short-term investments.
The Company has international sales and expenditures and is, therefore, subject
to certain foreign currency rate exposure. The Company conducts a significant
amount of its business in Asia. In order to reduce the risk from fluctuation
in foreign exchange rates, most of the Company's product sales and all of its
arrangements with its foundry, test and assembly vendors are denominated in
U.S. dollars. Transactions in the Japanese market made by the Company's
majority owned subsidiary, Toyo Microsystems Corporation (TMC), are denominated
in Japanese yen. The Company has never received a cash dividend (repatriation
of cash)from TMC nor does it expect to receive such a dividend in the near
future. The Company has not entered into any significant currency hedging
activities.
YEAR 2000 DISCUSSION
During 1999, the Company implemented and completed a comprehensive Year 2000
project designed to identify and assess the risks associated with its
information systems, products, operations and suppliers that are not Year 2000
compliant, and to develop, test and implement remediation and contingency plans
to mitigate these risks. The project included comprehensive reviews of
potential risks in the areas of business application software, technical
infrastructure, end-user computing, engineering and development tools, supplier
and service provider compliance, manufacturing tools, facilities infrastructure
and the Company's products. The costs incurred for this project, including
testing, implementation and remediation, were not significant.
The Company is currently not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products or
services of third parties. The Company will continue to monitor its computer
applications and those of its suppliers and vendors, as necessary, to ensure
that any latent Year 2000 issues that may arise are addressed promptly.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As a supplier of semiconductors, the Company competes in a challenging business
environment which is characterized by intense competition, rapid technological
change and cyclical business patterns. Except for the historical information
contained herein, the matters discussed in this report are forward-looking
statements. The Company faces a variety of risks and uncertainties in
conducting its business, some of which are out of its control, and any of
which, were they to occur, could impair the Company's operating performance.
For a more detailed discussion of risk factors, please refer to the Company's
report on Form 10-K filed with the Securities and Exchange Commission.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 20
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
<S> <C> <C> <C>
Revenues ......................................................... $ 153,247 $ 155,826 $ 148,326
Cost of goods sold ............................................... 93,884 99,846 103,863
--------- --------- ---------
Gross profit ..................................................... 59,363 55,980 44,463
--------- --------- ---------
Operating expenses:
Research and development ....................................... 24,365 17,437 14,298
Selling, general and administrative ............................ 32,993 30,550 30,726
Write-down of investment ....................................... - 1,554 -
--------- --------- ---------
57,358 49,541 45,024
--------- --------- ---------
Income (loss) from operations .................................... 2,005 6,439 (561)
--------- --------- ---------
Other income (expense):
Interest income ................................................ 3,442 2,667 1,151
Interest expense ............................................... (285) (279) (249)
Other income (expense), net .................................... 258 (167) (1,978)
--------- --------- ---------
3,415 2,221 (1,076)
--------- --------- ---------
Income (loss) before income taxes and minority interest .......... 5,420 8,660 (1,637)
Provision for (benefit from) income taxes ........................ 2,007 2,586 (603)
Minority interest in net income (loss) of subsidiary ............. (29) 71 71
--------- --------- ---------
Income (loss) from continuing operations ......................... 3,442 6,003 (1,105)
--------- --------- ---------
Discontinued operations:
Loss from discontinued operations (net of income
tax benefits of $2,956 and $10,113) ......................... - (5,255) (18,846)
Gain (loss) on sales of discontinued operations
(net of income taxes of ($2,980),($1,908) and $555) ......... 4,151 (13,293) 1,030
--------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle ........................................... 7,593 (12,545) (18,921)
--------- --------- ---------
Cumulative effect of change in accounting principle,
(net of income tax benefits of $1,716) ......................... (2,924) - -
--------- --------- ---------
Net income (loss) ................................................ $ 4,669 $ (12,545) $ (18,921)
========= ========= =========
Basic net income (loss) per share:
Income (loss) from continuing operations ....................... $ 0.22 $ 0.38 $ (0.07)
Loss from discontinued operations .............................. - (0.33) (1.21)
Gain (loss) on sales of discontinued operations ................ 0.27 (0.84) 0.06
Cumulative effect of change in accounting principle ............ (0.19) - -
--------- --------- ---------
Basic net income (loss) per share ................................ $ 0.30 $ (0.79) $ (1.22)
========= ========= =========
Diluted net income (loss) per share:
Income (loss) from continuing operations ...................... $ 0.22 $ 0.38 $ (0.07)
Loss from discontinued operations ............................. - (0.33) (1.21)
Gain (loss) on sales of discontinued operations ............... 0.26 (0.84) 0.06
Cumulative effect of change in accounting principle ........... (0.19) - -
--------- --------- ---------
Diluted net income (loss) per share ............................. $ 0.29 $ (0.79) $ (1.22)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 21
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
As of February 29 or 28, 2000 1999
<S> <C> <C>
------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents .......................... $ 73,405 $ 68,071
Short-term investments ............................. 2,000 2,000
Accounts receivable, net of allowance for doubtful
accounts of $480 and $1,111, respectively ........ 16,559 22,608
Inventories ........................................ 20,051 13,785
Deferred income taxes .............................. 12,779 8,154
Other current assets ............................... 9,277 4,592
--------- ---------
Total current assets ............................... 134,071 119,210
--------- ---------
Property, plant and equipment, net ................... 34,137 34,652
Investment in Chartered Semiconductor ................ 73,104 19,944
Deferred income taxes ................................ - 5,323
Other assets ......................................... 19,196 21,528
--------- ---------
$ 260,508 $ 200,657
========= =========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable ................................... $ 9,575 $ 8,873
Deferred income on shipments to distributors ....... 5,958 -
Accrued expenses and other liabilities ............. 9,522 13,995
--------- ---------
Total current liabilities .......................... 25,055 22,868
--------- ---------
Deferred income taxes ................................ 15,387 -
Other liabilities .................................... 6,764 7,816
Commitments and contingencies
Minority interest in subsidiary ...................... 11,510 11,539
Shareholders' equity:
Preferred stock, $.10 par value
authorized 1,000,000 shares, none issued ......... - -
Common stock, $.10 par value
authorized 30,000,000 shares,
issued 16,431,000 and 16,045,000
shares, respectively ............................. 1,643 1,605
Additional paid-in capital ......................... 112,297 108,665
Retained earnings .................................. 52,123 47,454
Treasury stock, 671,000 and 521,000 shares,
respectively, at cost ........................... (4,379) (2,957)
Accumulated other comprehensive income ............. 40,108 3,667
--------- ---------
Total shareholders' equity ......................... 201,792 158,434
--------- ---------
$ 260,508 $ 200,657
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Shares Amount Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1997 ................. 13,876 $1,388 $ 87,095 $78,920 - $ - $ 4,394 $171,797
Comprehensive loss:
Net loss ................................... - - - (18,921) - - - (18,921)
Other comprehensive loss
Unrealized loss on investments ........... - - - - - - (333) (333)
Foreign currency translation adjustment .. - - - - - - (582) (582)
--------
Total other comprehensive loss ............. (915)
--------
Total comprehensive loss ................... (19,836)
Shares issued under incentive savings
and retirement plan ...................... 114 11 1,163 - - - - 1,174
Stock options exercised .................... 386 39 3,444 - - - - 3,483
Tax effect of employee stock plans ......... - - 709 - - - - 709
Stock grants to employees, net ............. 7 1 426 - - - - 427
Investment by Intel Corporation, net ....... 1,543 154 14,469 - - - - 14,623
---------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 ................. 15,926 1,593 107,306 59,999 - - 3,479 172,377
Comprehensive loss:
Net loss ................................... - - - (12,545) - - - (12,545)
Other comprehensive income (loss)
Unrealized loss on investments ........... - - - - - - (334) (334)
Foreign currency translation adjustment .. - - - - - - 522 522
--------
Total other comprehensive income ........... 188
--------
Total comprehensive loss ................... (12,357)
Shares issued under incentive savings
and retirement plan ...................... 95 10 778 - - - - 788
Stock options exercised .................... 23 2 184 - - - - 186
Tax effect of employee stock plans ......... - - 16 - - - - 16
Stock grants to employees, net ............. 1 - 381 - - - - 381
Purchases of treasury stock ................ - - - - (521) (2,957) - (2,957)
---------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1999 ................. 16,045 1,605 108,665 47,454 (521) (2,957) 3,667 158,434
Comprehensive income:
Net income ................................. - - - 4,669 - - - 4,669
Other comprehensive income
Unrealized gain on investments ........... - - - - - - 35,737 35,737
Foreign currency translation adjustment .. - - - - - - 704 704
--------
Total other comprehensive income ........... 36,441
--------
Total comprehensive income ................. 41,110
Shares issued under incentive savings
and retirement plan ...................... 90 9 784 - - - - 793
Stock options exercised .................... 223 22 1,938 - - - - 1,960
Tax effect of employee stock plans ......... - - 232 - - - - 232
Stock grants to employees, net ............. 73 7 678 - - - - 685
Purchases of treasury stock ................ - - - - (150) (1,422) - (1,422)
---------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 2000 ................. 16,431 $1,643 $112,297 $52,123 (671) $(4,379) $40,108 $201,792
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Standard Microsystems Corporation and Subsidiaries Page 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers ...................................... $ 163,468 $ 151,998 $ 143,884
Cash paid to suppliers and employees .............................. (148,099) (139,735) (128,039)
Interest received ................................................. 3,417 2,737 1,216
Interest paid ..................................................... (285) (279) (261)
Income taxes received (paid) ...................................... (796) (92) 1,360
Cash paid for litigation settlement ............................... - - (2,000)
--------- --------- ---------
Net cash provided by operating activities ........................... 17,705 14,629 16,160
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .............................................. (10,503) (10,847) (3,854)
Sales of machinery and equipment .................................. 863 6,464 53
Purchases of short-term investments ............................... (8,000) (5,002) (8,603)
Sales of short-term investments ................................... 8,000 11,605 -
Escrow investment ................................................. (117) (110) (2,047)
Release of escrow investment ...................................... - - 7,110
Other ............................................................. 200 (454) (250)
--------- --------- ---------
Net cash provided by (used for) investing activities ................ (9,557) 1,656 (7,591)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................ 2,457 363 18,405
Purchases of treasury stock ....................................... (1,422) (2,957) -
Borrowings under line of credit agreements ........................ - - 33,960
Repayments of borrowings under line of credit agreements .......... - - (40,960)
Repayments of obligations under capital leases .................... (853) (654) (152)
--------- --------- ---------
Net cash provided by (used for) financing activities ................ 182 (3,248) 11,253
--------- --------- ---------
Effect of foreign exchange rate changes on cash and cash
equivalents ..................................................... 226 170 (544)
--------- --------- ---------
Net cash provided by (used for) discontinued operations ............. (3,222) 7,709 (17,282)
--------- --------- ---------
Net cash provided by sale of discontinued operation ................. - - 36,777
--------- --------- ---------
Net increase in cash and cash equivalents ........................... 5,334 20,916 38,773
Cash and cash equivalents at beginning of year ...................... 68,071 47,155 8,382
--------- --------- ---------
Cash and cash equivalents at end of year ............................ $ 73,405 $ 68,071 $ 47,155
========= ========= =========
Reconciliation of income (loss) from continuing operations
to net cash provided by operating activities:
Income (loss) from continuing operations ............................ $ 3,442 $ 6,003 $ (1,105)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization ..................................... 9,988 10,544 11,328
Other adjustments, net ............................................ (87) 2,340 1,328
Changes in operating assets and liabilities:
Accounts receivable ............................................. 9,933 (4,183) (4,359)
Inventories ..................................................... (7,354) 3,171 12,716
Accounts payable and accrued expenses and other liabilities ..... 363 (4,868) (3,740)
Other changes, net .............................................. 1,420 1,622 (8)
--------- --------- ---------
Net cash provided by operating activities ........................... $ 17,705 $ 14,629 $ 16,160
========= ========= =========
Noncash investing and financing activities:
During fiscal 1999 and fiscal 1998, the Company financed certain capital
expenditures totaling $1,447,000 and $3,229,000, respectively, through capital
lease obligations. During fiscal 1999, the Company sold certain equipment
for $8,224,000, of which installment payments of $790,000 and $197,000 are
receivable in fiscal 2001 and 2002, respectively.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Page 24 - 38
Standard Microsystems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Standard Microsystems Corporation (the Company or SMSC), a Delaware corporation
founded in 1971 and based in Hauppauge, New York, is a worldwide supplier of
leading-edge MOS/VLSI integrated circuits for the personal computer and related
industries. The Company's products provide solutions in Personal Computer
Input/Output (PC I/O), Systems Logic, USB Connectivity, Local Area Networking
and Embedded Control Systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's fiscal year ends on the last day in February. The consolidated
financial statements include the accounts of the Company and its subsidiaries
after elimination of all significant intercompany accounts and transactions.
RECLASSIFICATIONS
Certain items in the prior years' consolidated financial statements have been
reclassified to conform to the fiscal 2000 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of cash in banks and highly
liquid debt instruments purchased with original maturities of three months or
less.
SHORT-TERM INVESTMENTS
Marketable debt and equity securities are reported at fair value. Unrealized
gains and losses on short-term investments are either included within net
income for those securities classified as trading securities, or included as a
separate component of shareholders' equity for those securities classified as
available-for-sale. As of February 29, 2000, short-term investments consist
primarily of investments in U.S. Treasury, corporate and municipal obligations
with maturities of between three and twelve months and are classified as
available-for-sale. The cost of these short-term investments approximates
their market value as of February 29, 2000.
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 amounts
presented for other long-term liabilities also approximate fair value.
INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and 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.
COST BASIS INVESTMENTS
Equity investments of less than 20% in non-publicly traded companies are
carried at cost. Changes in the value of these investments are not recognized
unless an impairment in value is deemed to be other than temporary.
INVESTMENTS IN EQUITY SECURITIES
Investments in publicly traded equity securities are classified as
available-for-sale and are carried at fair value on the accompanying
consolidated balance sheets. Unrealized gains and losses on such securities,
net of taxes, are reported in accumulated other comprehensive income within
shareholders' equity.
<PAGE>
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment in value using a gross
cash flow basis and provides reserves for impairment whenever events or
circumstances indicate that the carrying amount of the assets may not be fully
recoverable.
REVENUE RECOGNITION
The Company recognizes revenue from product sales to original equipment
manufacturers (OEMs) and end-users at the time of shipment, net of appropriate
reserves for product returns and allowances. In fiscal 2000, the Company
changed its revenue recognition policy on product shipments to distributors.
Recognition of revenue and associated gross profit on such shipments is
deferred until the product is resold by the distributors. This accounting
change is further explained within Note 6 - Accounting Change - Recognition of
Revenue on Shipments to Distributors.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company has reviewed the
bulletin and believes that its current revenue recognition policy is
consistent with the guidance provided in SAB No. 101.
STOCK-BASED COMPENSATION
The Company grants stock options to employees with exercise prices equal to the
fair value of the shares at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees and accordingly, recognizes no compensation expense for
the stock option grants. Additional pro forma disclosures as required under
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, are presented within these Notes to Consolidated
Financial Statements.
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.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars
using the exchange rates in effect at the balance sheet date. Results of their
operations are translated using the average exchange rates during the period.
Resulting translation adjustments are recorded in accumulated other
comprehensive income within shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not presently
make use of any significant derivative instruments and this new accounting
pronouncement is not expected to have a material effect on its financial
statements.
<PAGE>
3. NET INCOME (LOSS) PER SHARE
Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income by the sum
of the weighted-average common shares outstanding during the period plus the
dilutive effect of shares issuable through stock options and warrants. Shares
used in calculating basic and diluted net income (loss) per share are
reconciled as follows (in thousands):
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
Average shares outstanding for basic net income (loss) per share ........ 15,620 15,789 15,519
Dilutive effect of stock options and warrants ........................... 295 35 -
-------------------------------------------------------------------------------------------------------
Average shares outstanding for diluted net income (loss) per share ...... 15,915 15,824 15,519
=======================================================================================================
</TABLE>
The Company reported a net loss from continuing operations in fiscal 1998, and
accordingly, the effect of stock options and warrants was anti-dilutive for
that period and was therefore excluded from the calculation of average common
shares outstanding for diluted net income (loss) per share.
As of February 29, 2000, outstanding options covering 34,000 common shares were
excluded from the computation of diluted net income (loss) per share because
their effect was antidilutive.
4. DISCONTINUED OPERATIONS
In March 1999, the Company's Board of Directors approved a plan for the Company
to divest its Foundry Business Unit (FBU). This divestiture was completed on
June 1, 1999, with the Company signing an Asset Purchase Agreement, and related
agreements, selling the assets of its Foundry Business Unit to privately held
Inertia Optical Technology Applications, Inc. (IOTA) of Newark, NJ. The
combined businesses now operate as Standard MEMS, Inc. (SMI).
The transaction was effected through IOTA's purchase of the FBU's assets from
SMSC, in exchange for 38% of IOTA's outstanding common stock. At the time of
the transaction, the Company committed to reducing its holdings in SMI to below
20% within one year of this transaction. In March 2000, the Company reduced
its interest in SMI to below 20% with the sale of a portion of its investment
in SMI for $6.8 million in cash.
The Company has reported the operating results, net assets and cash flows of
the Foundry Business Unit as a discontinued operation. Upon approval of the
plan of disposition, the Company recorded a pre-tax charge of $15.2 million
in the fourth quarter of fiscal 1999, covering write-downs of certain assets,
pre-closing operating losses, and other costs associated with the transaction.
In the fourth quarter of fiscal 2000, the Company recorded a $4,151,000
adjustment to reduce the loss on the disposition of this operation, primarily
reflecting a previously reserved income tax benefit now deemed realizable, as
well as an adjustment of estimated final disposition costs.
Summarized financial information for this discontinued operation is as follows
(in millions):
As of February 28, and for the years then ended 1999 1998
---------------------------------------------------------------------
Revenues ....................................... $10.3 $7.4
---------------------------------------------------------------------
Loss before income taxes ....................... (8.2) (5.3)
---------------------------------------------------------------------
Net loss ....................................... (5.3) (3.4)
---------------------------------------------------------------------
Current assets ................................. 5.1 5.9
---------------------------------------------------------------------
Total assets ................................... 6.6 13.0
---------------------------------------------------------------------
Current liabilities ............................ 1.3 0.7
---------------------------------------------------------------------
Net assets ..................................... 5.3 12.3
=====================================================================
<PAGE>
In October 1997, the Company executed an agreement with Accton Technology
Corporation of Hsinchu, Taiwan (Accton) whereby the Company transferred
substantially all of the assets comprising its System Products Division to a
newly formed, wholly-owned subsidiary, SMC Networks, Inc., and then sold 80.1%
of SMC Networks, Inc.'s outstanding common stock to Global Business Investments
(B.V.I.) Corp., a newly formed, wholly-owned subsidiary of Accton. The System
Products Division supplied hardware and software products for the local area
network (LAN) marketplace. In consideration for the sale of stock, the Company
received $40,237,000 in cash, of which $2,012,000 was placed in an escrow
account, scheduled for release on January 2, 1999, to secure the Company's
indemnity obligations under the agreement. As a result of this transaction,
the Company realized a pre-tax gain of $1,585,000, after related costs, in the
third quarter of fiscal 1998. The Company's remaining 19.9% minority interest
in SMC Networks, Inc. is carried at a cost of $8,452,000 within other assets
on the accompanying consolidated balance sheets. The Company is currently
involved in a dispute with Accton, its affiliate and SMC Networks, Inc.
regarding this transaction, as described in Note 12 within these notes to
consolidated financial statements.
The operating results and cash flows of the System Products Division are
presented as a discontinued operation in the accompanying consolidated
financial statements for fiscal 1998.
Summarized financial information for this discontinued operation is as follows
(in millions):
As of February 28, 1998 and for the year then ended
---------------------------------------------------
Revenues .............................. $65.5
---------------------------------------------------
Loss before income taxes .............. (23.1)
---------------------------------------------------
Net loss .............................. (15.4)
---------------------------------------------------
Current assets ........................ 19.1
---------------------------------------------------
Total assets .......................... 19.1
---------------------------------------------------
Current liabilities ................... 2.0
---------------------------------------------------
Net assets ............................ 17.1
===================================================
5. INVESTMENTS
INVESTMENT IN CHARTERED SEMICONDUCTOR
During fiscal 1996, the Company entered into an agreement with Singapore-based
Chartered Semiconductor Manufacturing Ltd. (Chartered), whereby the Company
acquired a minority equity interest of less than 2% in Chartered for
$19,944,000. Under the terms of this agreement, the Company is allocated
sub-micron wafer production capacity for ten years in Chartered's wafer
fabrication facility.
In October 1999, shares of Chartered began trading publicly on the Singapore
stock exchange, and also began trading on the NASDAQ stock exchange as American
Depository Shares, or ADSs. Accordingly, this investment is reported at its
estimated February 29, 2000 market value of $73,104,000 on the accompanying
consolidated balance sheet. This investment was reported at cost in prior
reporting periods.
INVESTMENT IN ACCELERIX INCORPORATED
During fiscal 1997 and fiscal 1998, the Company acquired a minority equity
interest of less than 20% in privately held Accelerix Incorporated of Ontario,
Canada, for $1,733,000. During the fourth quarter of fiscal 1999, the Company
recorded a $1,554,000 write-down of this investment to reflect its fair market
value. The investment was subsequently sold at approximately its written down
value in June 1999.
6. ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON SHIPMENTS TO DISTRIBUTORS
In the fourth quarter of fiscal 2000, the Company changed its accounting method
for the recognition of revenue on shipments to distributors. Recognition of
revenue and related gross profit on shipments to distributors is deferred until
the distributor resells the product. This change was made with an effective
date of March 1, 1999 (the beginning of fiscal 2000).
Management of the Company believes that this accounting change is to a
preferable method because it better aligns reported results with, focuses the
Company on, and allows investors to better understand, end-user demand for the
products SMSC sells through distribution. This revenue recognition policy is
commonly used within the semiconductor industry.
<PAGE>
The cumulative effect of this change in accounting principle was a charge of
$2,924,000, net of $1,716,000 of income tax benefits, or $0.19 per diluted
share.
The estimated pro forma effects of the accounting change on the current
and prior years' results are presented below (in thousands, except per share
data):
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported:
Revenues ............................................ $153,247 $155,826 $148,326
Income (loss) from continuing operations .......... 3,442 6,003 (1,105)
Net income (loss) ................................. 4,669 (12,545) (18,921)
Basic net income (loss) per share ...................
Income (loss) from continuing operations .......... $ 0.22 $ 0.38 $ (0.07)
Net income (loss) ................................. 0.30 (0.79) (1.22)
Diluted net income (loss) per share .................
Income (loss) from continuing operations .......... $ 0.22 $ 0.38 $ (0.07)
Net income (loss) ................................. 0.29 (0.79) (1.22)
Unaudited pro forma amounts reflecting the change
in accounting principle applied retroactively:
Revenues ............................................ $153,247 $151,768 $144,252
Income (loss) from continuing operations .......... 3,442 5,186 (4,255)
Net income (loss) ................................. 7,593 (13,362) (22,071)
Basic net income (loss) per share ...................
Income (loss) from continuing operations .......... $ 0.22 $ 0.32 $ (0.27)
Net income (loss) ................................. 0.49 (0.85) (1.42)
Diluted net income (loss) per share .................
Income (loss) from continuing operations .......... $ 0.22 $ 0.32 $ (0.27)
Net income (loss) ................................. 0.48 (0.85) (1.42)
</TABLE>
7. OTHER BALANCE SHEET DATA
(In thousands)
<TABLE>
<CAPTION>
As of February 29 or 28, 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES:
Raw materials ........................................... $ 361 $ 475
Work-in-process ......................................... 11,146 9,310
Finished goods .......................................... 8,544 4,000
-------- -------
$ 20,051 $13,785
======== =======
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................... $ 3,434 $ 3,832
Buildings and improvements .............................. 30,097 29,846
Machinery and equipment ................................. 70,193 63,890
-------- -------
103,724 97,568
Less: accumulated depreciation .......................... 69,587 62,916
-------- -------
$ 34,137 $34,652
======== =======
OTHER ASSETS:
Common stock of SMC Networks, Inc. ...................... $ 8,452 $ 8,452
Other ................................................... 10,744 13,076
-------- -------
$ 19,196 $21,528
======== =======
ACCRUED EXPENSES AND OTHER LIABILITIES:
Salaries and fringe benefits ............................ $ 3,696 $ 2,908
Disposition costs ....................................... 2,369 6,950
Income taxes payable .................................... 771 1,161
Current portion of obligations under capital leases ..... 924 852
Other ................................................... 1,762 2,124
-------- -------
$ 9,522 $13,995
======== =======
OTHER LIABILITIES:
Retirement benefits ..................................... $ 4,672 $ 4,682
Obligations under capital leases ........................ 2,092 3,017
Other ................................................... - 117
-------- -------
$ 6,764 $ 7,816
======== =======
</TABLE>
8. LINE OF CREDIT
The Company's $10,000,000 line of credit with several banks, which permitted
the Company to borrow funds on a revolving basis, primarily to finance working
capital needs, expired in July 1999. There had been no borrowings under this
credit line since October 1997. The Company deemed it unnecessary to renew the
credit line at the current time, but continues to evaluate its financing
requirements on an ongoing basis.
9. SHAREHOLDERS' EQUITY
COMMON STOCK REPURCHASE PROGRAM
In October 1998, the Company's Board of Directors approved a common stock
repurchase program, allowing the Company to repurchase up to one million shares
of its common stock on the open market or in private transactions. As of
February 29, 2000, the Company had repurchased 671,000 shares of common stock
at a cost of $4,379,000, including 150,000 shares of common stock repurchased
in fiscal 2000 at a cost of $1,422,000. As more fully described below, the
Company repurchased another 200,000 shares in a transaction with Intel
Corporation in March 2000.
INVESTMENT BY INTEL CORPORATION
In March 1997, the Company and Intel Corporation (Intel) entered into a Common
Stock and Warrant Purchase Agreement (the Agreement) whereby Intel purchased
approximately 1,543,000 of newly issued shares of the Company's common stock
for $9.50 per share, or approximately $14,654,000. Intel also received a
three-year warrant to purchase an additional 1,543,000 shares at a price per
share of $10.45 which increased to $11.40 and then to $12.35 on
March 18, 1998 and 1999, respectively.
So long as they continue to hold their initial investment, the Agreement
provides Intel with certain rights, including a right of first refusal upon
certain proposed sales of common stock by the Company, demand registration
rights with respect to shares acquired under the Agreement, a right for Intel
to designate a representative to serve on the Company's Board of Directors, and
anti-dilution rights. The Agreement also imposes certain restrictions upon
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.
In March 2000, as provided for in the warrant, Intel executed a "net exercise",
whereby Intel received approximately 200,000 shares of the Company's common
stock, which was equal in fair value to the excess of the warrant's market
value over its exercise value, as defined in the Agreement. The Company
immediately repurchased these 200,000 shares from Intel for $1,928,000 under
its common stock repurchase program. This warrant is now fully exercised.
SHAREHOLDER RIGHTS PLAN
In January 1998, the Company's Board of Directors adopted a new Shareholder
Rights Plan, replacing the Company's previous plan, which expired on January
12, 1998. Under this plan, the Company's shareholders of record on
January 13, 1998 received a dividend distribution of one preferred stock
purchase right for each share of common stock then held. In the event of
certain efforts to acquire control of the Company, these rights allow
shareholders to purchase common stock of the Company at a discounted price.
The rights will expire in January 2008, unless previously redeemed by the
Company at $.01 per right. Like the previous plan, the new Shareholder Rights
Plan continues the Company's commitment to ensuring fair value to all
shareholders in the event of an unsolicited takeover offer.
<PAGE>
10. INCOME TAXES
The provision for (benefit from) income taxes included in the accompanying
consolidated statements of operations consists of the following (in thousands):
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal .................................................. $(4,228) $ 661 $(17,597)
Foreign .................................................. 87 140 55
State .................................................... 718 68 376
------- ------- --------
(3,423) 869 (17,166)
Deferred ................................................... 734 (3,147) 7,005
------- -------- --------
(2,689) (2,278) (10,161)
------- ------ --------
Less: tax benefits from discontinued operations ............ (2,980) (4,864) (9,558)
------- ------ --------
Less: tax benefits from change in accounting principle ..... (1,716) - -
------- ------ --------
$ 2,007 $ 2,586 $ (603)
======= ======= ========
</TABLE>
The tax benefits from discontinued operations in fiscal 2000 include $3,413,000
of previously reserved tax benefits, now deemed to be realizable, related to
the Company's June 1999 sale of its former Foundry Business Unit, as discussed
in Note 4.
The provision for (benefit from) income taxes differs from the amount computed
by applying the U.S. Federal statutory tax rate as a result of the following:
For the years ended February 29 or 28, 2000 1999 1998
-----------------------------------------------------------------------------
Provision for (benefit from) income taxes
computed at the statutory rate ........... 35.0% 35.0% (35.0)%
State taxes ................................. 1.0 1.3 (2.0)
Differences between foreign and U.S.
income tax rates ......................... 8.1 (0.9) 1.0
Tax exempt income ........................... (5.7) (5.5) (2.0)
Other ....................................... (1.4) - 1.2
-----------------------------------------------------------------------------
37.0% 29.9% (36.8)%
=============================================================================
The tax effects of temporary differences that result in deferred tax benefits
and liabilities are as follows (in thousands):
As of February 29 or 28, 2000 1999
--------------------------------------------------------------------------
Deferred tax assets:
Reserves and accruals not currently
deductible for income tax purposes .......... $ 5,324 $ 9,281
Net operating loss carryforwards ............... 3,750 -
Intangible asset amortization .................. 3,323 3,714
Inventory valuation ............................ 1,761 1,837
Purchased in-process technology ................ 1,614 1,715
Property, plant and equipment depreciation ..... 779 320
Other 238 214
-------- -------
Total deferred tax assets ...................... 16,789 17,081
-------- -------
Less: valuation allowance ...................... - (3,413)
-------- -------
16,789 13,668
-------- -------
Deferred tax liabilities:
Unrealized gains on investments ................ (19,397) (191)
-------- -------
Total deferred tax liabilities ................. (19,397) (191)
-------- -------
Net deferred tax assets (liabilities) .......... $ (2,608) $13,477
======== =======
Income (loss) before income taxes and minority interest includes foreign income
of $474,000, $363,000 and $412,000 for fiscal 2000, 1999 and 1998,
respectively.
<PAGE>
The net operating loss reported by the Company in fiscal year 1998, the
majority of which was generated by the discontinued operations, was carried
back against profits reported in prior periods and resulted in an income tax
refund of $18,092,000 received in fiscal 1999. The refund received was
included within the Net Cash Provided By (Used For) Discontinued Operations
caption in the consolidated statements of cash flows.
Income tax benefits of $232,000, $16,000 and $709,000 related to the Company's
stock option plans for fiscal 2000, 1999 and 1998, respectively, have been
credited to additional paid-in capital.
The Company has $1,719,000 of New York State tax credit carryforwards at the
end of fiscal 2000, of which $85,000 will expire in fiscal 2001. The remaining
$1,634,000 of credit carryforwards expire at various dates in fiscal 2002
through fiscal 2009.
11. MINORITY INTEREST IN SUBSIDIARY
Sumitomo Metal Industries, Ltd. Of Osaka, Japan (Sumitomo) owns 20% of the
issued and outstanding common stock and all of the non-cumulative, non-voting
6% preferred stock of the Company's subsidiary, Toyo Microsystems Corporation
(TMC). The Company and Sumitomo 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 $1,178,000 at an
exchange rate of 110 yen per dollar. No such dividends have as yet been
declared. In the event that a third party acquires a majority of the
outstanding common stock of the Company, Sumitomo has the option to require
the Company to purchase Sumitomo's interest in TMC.
12. COMMITMENTS AND CONTINGENCIES
COMPENSATION
Certain executives and key employees are employed under separate agreements
terminating on various dates through fiscal 2003. These agreements provide,
among other things, for annual base salaries and guaranteed incentives totaling
$1,614,000, $919,000 and $284,000 in fiscal 2001, 2002 and 2003, respectively.
CAPITAL LEASES
The Company leases certain equipment under long-term capital leases, some of
which include options to purchase the equipment for a nominal cost at the
termination of the lease.
Included within property and equipment are the following assets held under
capital leases (in thousands):
As of February 29 or 28, 2000 1999
----------------------------------------------------------------
Machinery and equipment ............... $ 4,676 $ 4,676
Less: accumulated depreciation ........ (1,759) (824)
------- -------
$ 2,917 $ 3,852
======= =======
Future minimum lease payments for assets under capital leases for the next five
fiscal years are as follows (in thousands):
2001 ........................................ $ 1,136
2002 ........................................ 1,136
2003 ........................................ 940
2004 ........................................ 204
2005 ........................................ -
-------
Total minimum lease payments ................ 3,416
Less: Amount representing interest .......... 400
-------
Present value of minimum lease payments ..... 3,016
Less: Current portion ....................... 924
--------
Long-term obligation ........................ $ 2,092
========
<PAGE>
OPERATING LEASES
FACILITIES AND EQUIPMENT LEASED FROM OTHERS
The Company leases certain facilities, equipment and vehicles under operating
leases. Total rental expenses for all operating leases was $663,000,
$1,335,000 and $1,354,000 in fiscal 2000, 1999 and 1998, respectively.
BUILDINGS AND IMPROVEMENTS LEASED TO OTHERS
The Company leases certain of its buildings and related improvements to outside
parties under noncancelable operating leases, including one such lease executed
in March 2000. At February 29, 2000, the cost and accumulated depreciation of
the leased buildings were $24,320,000 and $17,719,000, respectively.
Future minimum rental income and commitments under operating leases are as
follows (in thousands):
Rental Rental
Income Commitments
---------------------------------------------------------------
2001 ............................... $ 680 $ 510
2002 ............................... 791 559
2003 ............................... 823 419
2004 ............................... 856 336
2005 ............................... 536 359
2006 and thereafter ................ 2,639 91
------ ------
$6,325 $2,274
====== ======
LITIGATION
The Company is subject to various lawsuits and claims in the ordinary course of
business. While the outcome of these matters cannot be determined, management
believes that their ultimate resolution will not have a material effect on the
Company's operations or financial position.
As indicated in Note 4 to these consolidated financial statements, during
fiscal 1998, the Company sold an 80.1% interest in SMC Networks, Inc., a
then-newly formed subsidiary comprised of its former local area networking
division, to an affiliate of Accton Technology Corporation (Accton) for
approximately $40,237,000 in cash, $2,012,000 of which was placed into an
escrow account.
In December 1998, Accton notified the Company and the escrow agent of Accton's
intention to seek indemnification and damages from the Company in excess of
$10.0 million by reason of alleged misrepresentations and inadequate
disclosures relating to the transaction and other alleged breaches of covenants
and representations in the related agreements. Based upon those allegations,
the escrow account was not released to the Company as scheduled in January
1999. In January 1999, the Company filed an action in the Supreme Court of
New York (the Action) against Accton, SMC Networks, Inc. and other parties,
seeking the release of the escrow account to the Company on the grounds that
Accton's allegations are without merit, and seeking payment of approximately
$1.6 million (which is included within other assets on the Company's
consolidated balance sheet at February 29, 2000) owed to the Company by SMC
Networks, Inc. In November 1999, the Court issued an order staying the Action
and directed the parties to arbitration under the arbitration provisions of
the original transaction agreements. The Company has filed an appeal from the
order. Moreover, because many of the claims made by Accton against the Company
are non-arbitrable, the Company has filed a motion requesting that the Court
stay arbitration of those claims.
The Company is confident that it negotiated and fully performed the agreements
with Accton in good faith. While it is not possible at this time to assess the
likelihood of any liability being established, the Company considers these
claims to be without merit. The Company will vigorously defend itself against
these allegations and expects that the outcome will not be material to the
Company.
<PAGE>
13. BENEFIT AND INCENTIVE PLANS
INCENTIVE SAVINGS AND RETIREMENT PLAN
The Company maintains a defined contribution Incentive Savings and Retirement
Plan (the Plan) which, pursuant to Section 401(k) of the Internal Revenue Code,
permits employees to defer taxation on their pre-tax contributions to the Plan.
The Plan permits employees to contribute up to 15% of their earnings, through
payroll deductions, based on earnings reduction agreements. The Company'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 $639,000,
$630,000, and $804,000 in fiscal 2000, 1999, and 1998, respectively.
The Company has authorized unissued common stock reserved for issuance to the
Plan. As of February 29, 2000, there were 54,000 shares remaining in reserve
for this plan. Since its inception, 1,145,000 shares of the Company's common
stock have been contributed to the Plan.
As of February 29, 2000, 302 of the 350 employees who had satisfied the Plan's
eligibility requirements to participate were making contributions to the Plan.
EMPLOYEE STOCK OPTION PLANS
Under the Company's stock option plans, the Compensation Committee of the Board
of Directors is authorized to grant stock options to purchase 3,350,000 shares
of common stock. The purpose of these plans is to promote the interests of the
Company and its shareholders by providing officers and key employees with
additional incentives and the opportunity, through stock ownership, to increase
their proprietary interest in the Company and their personal interest in its
continued success. Options are granted at prices not less than the fair market
value on the date of grant. As of February 29, 2000, 840,000 shares of common
stock were available for future grants.
Stock option plan activity is summarized below (shares in thousands):
<TABLE>
<CAPTION>
Fiscal Weighted Fiscal Weighted Fiscal Weighted
2000 Average 1999 Average 1998 Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year ..... 1,370 $9.18 881 $10.38 1,357 $ 9.82
Granted .................................... 1,767 8.95 719 9.04 235 10.16
Exercised .................................. (237) 8.92 (30) 9.00 (386) 9.02
Canceled or expired ........................ (390) 8.75 (200) 14.02 (325) 9.63
----------------------------------------------------------------------------------------------------------------
Options outstanding, end of year ........... 2,510 $9.10 1,370 $ 9.18 881 $10.38
================================================================================================================
Options exercisable ........................ 359 $9.27 417 $ 9.14 395 $10.79
================================================================================================================
</TABLE>
The following table summarizes information relating to currently outstanding
and exercisable options as of February 29, 2000 (shares in thousands):
<TABLE>
<CAPTION>
Weighted Average
Range of Remaining Life Options Weighted Average Options Weighted Average
Exercise Prices (in years) Outstanding Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.25 - $ 7.31 8.93 332 $ 7.24 8 $ 6.66
$ 7.38 9.17 548 7.38 - -
$ 7.50 - $ 9.00 7.80 669 8.40 231 8.92
$ 9.06 - $10.94 8.46 520 9.78 104 9.81
$11.00 - $17.19 9.69 441 12.92 16 12.25
==================================================================================================================
</TABLE>
As allowed under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company applies APB Opinion No. 25 and related
interpretations to accounting for the stock options awarded under these plans.
Accordingly, no compensation cost has been recognized for these stock options.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) and net income (loss) per share would
have been the pro forma amounts indicated below (in thousands, except per
share data):
<PAGE>
For the years ended February 29 or 28, 2000 1999 1998
----------------------------------------------------------------------------
Net income (loss):
As reported ...................... $4,669 $(12,545) $(18,921)
Pro forma ........................ 2,320 (14,731) (21,540)
----------------------------------------------------------------------------
Diluted net income (loss) per share:
As reported ...................... $ 0.29 $ (0.79) $ (1.22)
Pro forma ........................ 0.15 (0.93) (1.39)
============================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the years ended February 29 or 28, 2000 1999 1998
---------------------------------------------------------------------------
Dividend yield ...................... - - -
Expected volatility ................. 63% 65% 58%
Risk-free interest rates ............ 6.64% 5.37% 5.70%
Expected lives (in years) ........... 4 4 4
===========================================================================
The weighted average Black-Scholes values of options granted in fiscal 2000,
1999 and 1998 were $5.00, $4.84 and $5.18, respectively. The values produced
by this model are limited by the inclusion of highly subjective assumptions,
which greatly affect the calculated values.
DIRECTOR STOCK OPTION PLAN
Under the Company's Director Stock Option Plan, non-qualified options to
purchase common stock may be granted to directors at prices not less than the
market price of the shares at the date of grant. At February 29, 2000, the
expiration dates of the outstanding options range from July 22, 2001 to
February 7, 2010, and the exercise prices range from $8.50 to $14.88
(average $10.16) per share.
The following is a summary of activity under the Director Stock Option Plan
over the past three fiscal years (in thousands):
For the years ended February 29 or 28, 2000 1999 1998
------------------------------------------------------------------------------
Shares under option, beginning of year ............... 228 210 186
Options granted during the year ...................... 67 33 33
Options canceled or terminated ....................... (102) (15) (9)
Options exercised .................................... - - -
------------------------------------------------------------------------------
Shares under option, end of year ..................... 193 228 210
------------------------------------------------------------------------------
Options exercisable, end of year ..................... 168 212 177
------------------------------------------------------------------------------
Shares available for future grants, end of year ...... 57 91 109
==============================================================================
DIRECTOR DEFERRED COMPENSATION PLAN
In March 1997, the Company implemented a deferred compensation plan for its
non-employee directors effective following the Company's July 1997 annual
meeting of shareholders. The plan permits eligible directors to defer 50% or
100% of their basic annual compensation, which is otherwise paid in cash.
Under this plan, an unfunded account is established, for each participating
director, which is credited with equivalent units of the Company's common stock
on the first day of each quarter. These equivalent units track the economic
performance of the underlying stock, but carry no voting rights. The deferred
compensation earned under this plan is payable when the participant leaves the
Company's Board of Directors, for any reason, and is paid in either common
stock or an equivalent amount of cash, at the election of the participant.
The following is a summary of the activity under this plan (units in
thousands):
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock equivalent units, beginning of year ........... 19 7 -
Common stock equivalent units earned during the year ....... 10 12 7
Common stock distributed during the year ................... (6) - -
------------------------------------------------------------------------------------------------------------------
Common stock equivalent units, end of year ................. 23 19 7
==================================================================================================================
Common stock equivalent units available, end of year ....... 71 81 93
==================================================================================================================
Range of common stock prices used to calculate
common stock equivalent units .............................. $7.25 - $11.13 $6.88 - $10.00 $8.63 - $15.63
==================================================================================================================
</TABLE>
RESTRICTED STOCK BONUS PLAN
The Company maintains a Restricted Stock Bonus Plan, which provides for common
stock awards to certain officers and key employees. Awards granted under the
plan are earned in 25%, 25%, and 50% increments on the first, second and third
anniversaries of the award, respectively. The shares granted are distributed
provided the employee has remained employed by the Company through such
anniversary dates; otherwise the unearned shares are forfeited. The maximum
number of shares issuable under the plan is 350,000, of which 68,000, net of
cancellations, have been awarded as of February 29, 2000. The market value of
these shares at the date of award, net of cancellations, is recorded as
compensation expense ratably over the three-year periods from the respective
award dates. This compensation expense was $257,000, $354,000 and $363,000 in
fiscal 2000, 1999 and 1998, 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 the participant's
average compensation during the three-year period prior to retirement. The
Company is the beneficiary of life insurance policies that have been purchased
as a method of partially financing these benefits. Based on the latest
available actuarial information, 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
(dollars in thousands):
<TABLE>
<CAPTION>
For the years ended February 29 or 28, 2000 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year ........... $ 31 $ 30 $ 56
Interest cost on projected benefit obligations ........... 378 347 361
Net amortization and deferral ............................ 245 245 258
------ ------ ------
Net periodic pension expense ............................. $ 654 $ 622 $ 675
====== ====== ======
As of February 29 or 28, 2000 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation ................................ $3,868 $3,789 $3,158
Nonvested benefit obligation ............................. 126 122 449
------ ------ ------
Accumulated benefit obligation ........................... 3,994 3,911 3,607
Effect of projected future salary increases .............. 803 1,360 1,227
------ ------ ------
Projected benefit obligation ............................. 4,797 5,271 4,834
Unrecognized net loss .................................... (465) (308) (156)
Unrecognized net transition asset ........................ (2,206) (2,451) (2,696)
Additional minimum liability ............................. 930 1,398 1,624
------ ------ ------
Accrued pension cost ..................................... $3,056 $3,910 $3,606
====== ====== ======
Assumptions used in determining actuarial present value of benefit obligations:
Discount rate 7.25% 7.25% 7.25%
Weighted-average rate of compensation increase 7.00% 7.00% 7.00%
==================================================================================================
</TABLE>
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 $144,000, $99,000 and $118,000
was accrued during fiscal 2000, 1999 and 1998, 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. Incentive compensation of $838,000, $549,000 and
$537,000 was earned in fiscal 2000, 1999 and 1998, respectively.
<PAGE>
14. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
As of February 28, 1999, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas and
major customers.
INDUSTRY SEGMENT
The Company operates predominantly in one industry segment in which it designs,
develops and markets semiconductor integrated circuits for the personal
computer, peripheral and embedded systems markets.
GEOGRAPHIC INFORMATION
The Company's domestic operations include its worldwide revenues, exclusive of
its revenues from customers in Japan, and most of its operating expenses.
Revenues and operating profits from customers in Japan are recorded by TMC.
The Company conducts various sales and marketing operations outside of the
United States through TMC in Japan, and through subsidiaries in Europe and
Asia.
The Company's long-lived assets include net property and equipment, and other
long-lived assets. The vast majority of the Company's net property and
equipment is located in the United States. Included within other long-lived
assets is an equity investment in Singapore-based Chartered Semiconductor
Manufacturing Ltd. valued at $73,104,000 as of February 29, 2000.
EXPORT SALES
The information below summarizes sales to unaffiliated customers by geographic
region (in thousands):
For the years ended February 29 or 28, 2000 1999 1998
-----------------------------------------------------------------------------
North America ........................ $ 33,371 $ 26,041 $ 40,570
Asia and Pacific Rim ................. 99,013 115,146 98,128
Europe ............................... 20,383 14,467 9,311
Rest of World ........................ 480 172 317
-----------------------------------------------------------------------------
$153,247 $155,826 $148,326
-----------------------------------------------------------------------------
MAJOR CUSTOMERS
During fiscal 2000, one customer accounted for 14.5% of the Company's revenues
and in fiscal 1999 one customer accounted for 11.8% of the Company's revenues.
During fiscal 1998, no customer accounted for more than 10% of the Company's
revenues.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products to personal computer manufacturers and their
subcontractors and to electronic component distributors, and maintains
individually significant accounts receivable balances from several of its
larger customers. The Company performs credit evaluations of its customers'
financial condition on a regular basis and although the Company generally
requires no collateral, letters of credit may be required from its customers
in certain circumstances. Reserves for estimated credit losses are maintained
and actual losses have been insignificant for all years presented.
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 29
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 2000
Revenues
As originally reported ....................................... $ 35,430 $ 38,268 $ 41,027 $ 33,901
Effect of change in accounting principle ..................... 2,716 (230) 2,136 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. 38,146 38,038 43,163 33,901
----------------------------------------------------------------- -------- -------- -------- --------
Gross profit
As originally reported ....................................... 13,639 14,838 16,707 13,148
Effect of change in accounting principle ..................... 292 - 740 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. 13,931 14,838 17,447 13,148
----------------------------------------------------------------- -------- -------- -------- --------
Operating income (loss)
As originally reported ....................................... (303) 625 1,741 (1,011)
Effect of change in accounting principle ..................... 240 10 703 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. (63) 635 2,444 (1,011)
----------------------------------------------------------------- -------- -------- -------- --------
Income from continuing operations
As originally reported ....................................... 175 758 1,634 265
Effect of change in accounting principle ..................... 154 6 450 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. 329 764 2,084 265
----------------------------------------------------------------- -------- -------- -------- --------
Gain on sale of discontinued operation .......................... - - - 4,151
Cumulative effect of change in accounting principle ............. (2,924) - - -
----------------------------------------------------------------- -------- -------- -------- --------
Net income (loss)
As originally reported ....................................... 175 758 1,634 4,416
Effect of change in accounting principle ..................... (2,770) 6 450 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. (2,595) 764 2,084 4,416
================================================================= ======== ======== ======== ========
Basic net income (loss) per share
Continuing operations
As originally reported ....................................... $ 0.01 $ 0.05 $ 0.10 $ 0.02
Effect of change in accounting principle ..................... 0.01 - 0.03 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. 0.02 0.05 0.13 0.02
----------------------------------------------------------------- -------- -------- -------- --------
Gain on sale of discontinued operation ......................... - - - 0.26
Cumulative effect of change in accounting principle ............ (0.19) - - -
----------------------------------------------------------------- -------- -------- -------- --------
Basic net income (loss) per share after effect of change
in accounting principle ........................................ $ (0.17) $ 0.05 $ 0.13 $ 0.28
================================================================= ======== ======== ======== ========
Diluted net income (loss) per share
Continuing operations
As originally reported ....................................... $ 0.01 $ 0.05 $ 0.10 $ 0.02
Effect of change in accounting principle ..................... 0.01 - 0.03 -
----------------------------------------------------------------- -------- -------- -------- --------
As restated .................................................. 0.02 0.05 0.13 0.02
----------------------------------------------------------------- -------- -------- -------- --------
Gain on sale of discontinued operation ......................... - - - 0.25
Cumulative effect of change in accounting principle ............ (0.19) - - -
----------------------------------------------------------------- -------- -------- -------- --------
Diluted net income (loss) per share after effect of
change in accounting principle ................................. $ (0.17) $ 0.05 $ 0.13 $ 0.27
================================================================= ======== ======== ======== ========
Average shares outstanding
Basic net income (loss) per share .............................. 15,575 15,626 15,641 15,626
Diluted net income (loss) per share ............................ 15,601 15,680 15,887 16,420
Market price per share
High ......................................................... $ 8.63 $ 9.00 $ 13.38 $ 17.25
Low .......................................................... 7.13 7.00 7.75 10.44
================================================================= ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter ended May 31 Aug. 31 Nov. 30 Feb. 28
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues ........................................................ $ 35,284 $ 37,865 $ 42,745 $ 39,932
Gross profit .................................................... 13,016 13,947 15,610 13,406
Operating income (loss) ......................................... 2,690 2,637 2,336 (1,224)
Income from continuing operations ............................... 2,018 1,972 1,886 127
Net loss from discontinued operation ............................ (1,573) (1,367) (1,083) (1,232)
Loss on sale of discontinued operation .......................... - - - (13,293)
Net income (loss) ............................................... 445 605 803 (14,398)
================================================================= ======== ======== ======== =======
Basic and diluted net income (loss) per share
Continuing operations ........................................ $ 0.13 $ 0.12 $ 0.12 $ 0.01
Discontinued operation ....................................... (0.10) (0.08) (0.07) (0.08)
Loss on sale of discontinued operation ....................... - - - (0.86)
----------------------------------------------------------------- -------- -------- -------- --------
$ 0.03 $ 0.04 $ 0.05 $ (0.93)
================================================================= ======== ======== ======== ========
Pro forma amounts for fiscal 1999 assuming the change in
accounting principle related to revenue recognition was applied
retroactively:
Revenues ..................................................... $ 33,129 $ 40,762 $ 40,323 $ 37,554
Gross profit ................................................. 12,930 15,273 13,856 12,564
Operating income (loss) ...................................... 2,647 3,905 630 (2,019)
Income (loss) from continuing operations ..................... 1,990 2,784 794 (382)
Net income (loss) ............................................ 417 1,417 (289) (14,907)
Basic and diluted net income (loss) per share
Continuing operations ........................................ $ 0.12 $ 0.17 $ 0.05 $ (0.02)
Net income (loss) ............................................ 0.03 0.09 (0.02) (0.96)
================================================================= ======== ======== ========= ========
Average shares outstanding
Basic net income (loss) per share ............................ 15,946 15,978 15,745 15,511
Diluted net income (loss) per share .......................... 16,034 16,031 15,748 15,519
Market price share
High ...................................................... $ 11.88 $ 11.13 $ 8.00 $ 9.94
Low ....................................................... 8.63 6.25 4.63 6.00
================================================================= ======== ======== ======== ========
</TABLE>
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 860 holders of record of the Company's common stock at
April 3, 2000.
The present policy of the Company is to retain earnings to provide funds for
the operation and expansion of its business. The Company has never paid a cash
dividend, and does not expect to pay cash dividends in the foreseeable future.
<PAGE>
===============================================================================
REPORT ON MANAGEMENT'S RESPONSIBILITIES Page 39
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.
Arthur Andersen LLP, independent public accountants, has audited the
consolidated financial statements in this annual report.
===============================================================================
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, 2000 and February 28, 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended February 29, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Standard Microsystems
Corporation and subsidiaries as of February 29, 2000 and February 28, 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended February 29, 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 6 to the consolidated financial statements, effective
March 1, 1999, the Company changed its method of accounting for recognition of
revenue on shipments to distributors.
April 3, 2000 Arthur Andersen LLP
New York, New York
