-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QTmh7Dpz291aewbEvF/x+4Zt2wu/4RuyfRc+Qm4e1b7TS7dBvRb39XX+rJeLQ1Ol P0D/m7oZyH4qgI61Y9nhRA== 0000950168-96-000969.txt : 19981229 0000950168-96-000969.hdr.sgml : 19981229 ACCESSION NUMBER: 0000950168-96-000969 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960529 DATE AS OF CHANGE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MICROSYSTEMS CORP CENTRAL INDEX KEY: 0000093384 STANDARD INDUSTRIAL CLASSIFICATION: 3577 IRS NUMBER: 112234952 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07422 FILM NUMBER: 96573626 BUSINESS ADDRESS: STREET 1: 80 ARKAY DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164344600 MAIL ADDRESS: STREET 1: 80 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 STANDARD MICROSYSTEMS CORPORATION 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ---------------- [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Fiscal Year Ended February 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) Commission File No. 0-7422 --------------- STANDARD MICROSYSTEMS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 11-2234952 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Arkay Drive, Hauppauge, New York 11788 (Address of principal executive offices) (Zip Code) (516) 435-6000 (Registrant's telephone number, including area code) ------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each Exchange on None which registered ----------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value - - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) As of April 30, 1996, 13,532,501 shares of the registrant's common stock were outstanding and the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $216,500,000. Documents Incorporated Reference The documents incorporated by reference into this Form 10-K and the Parts hereof into which such documents are incorporated are listed below:
Document Part Those portions of the registrant's 1996 annual report to shareholders (the "Annual Report") which are specifically identified herein as incorporated by reference into this Form 10-K. II Those portions of the registrant's proxy statement for the registrant's 1996 Annual Meeting (the "Proxy Statement") which are specifically identified herein as incorporated by reference into this Form 10-K. III
================================================================================ PART I ITEM 1. BUSINESS. GENERAL Standard Microsystems Corporation (the "Company", the "Registrant", or "SMCR") is a Delaware corporation, organized in 1971. As used herein, the term "Company" includes the Company's subsidiaries except where the context otherwise requires. The address of the principal executive office of the Company is 80 Arkay Drive, Hauppauge, New York 11788, and its telephone number at that address is 516-435-6000. Toyo Microsystems Corporation, a majority owned subsidiary located in Tokyo, Japan, markets and sells SMC products in Japan. Through wholly owned subsidiaries listed below, SMC operates branch offices to market and sell its products in the following locations: Subsidiary Location Standard Microsystems Corporation (Asia) Taipei, Taiwan SMC Australia Pty. Ltd. Sydney, Australia Standard Microsystems Corporation (Canada) Oakville, Ontario, Canada SMC Enterprise Networks, Inc. Andover, Massachusetts Standard Microsystems (Europe) Ltd. London, England SMC France, Inc. St. Germain-en-Laye, France Standard Microsystems GmbH Munich, Germany SMC de Mexico SA de CV Mexico DF, Mexico SMC North America, Inc. Various states SMC Singapore Singapore BUSINESS AND PRODUCT DESCRIPTION Standard Microsystems conducts its operations primarily through two divisions, System Products and Component Products. The System Products Division designs, produces and markets products that connect personal computers (PCs) to, and allow communications over, local area networks (LANs). The Component Products Division designs, produces and markets very-large-scale-integrated (VLSI) circuits, primarily for control of various personal computer functions, as well as specialized semiconductor-related products that are produced in SMC's own semiconductor foundry. As a separate profit center, Toyo Microsystems Corporation (TMC), sells the Company's component and system products in the Japanese market. The Company's fiscal 1996 revenues declined to $341.9 million, from $378.7 million in fiscal 1995, after increasing from $322.6 million in fiscal 1994. As a percentage of consolidated revenues, system products declined to 54.6% in fiscal 1996 from 67.7% in fiscal 1995 and 81.6% in fiscal 1994. In contrast, as a percentage of consolidated revenues, component products' revenues increased to 40.5% from 29.2% and 16.7% and TMC's revenues increased to 4.9% from 3.1% and 1.7%. 2 REVENUES BY PRODUCT LINE ($MILLIONS)
FOR THE YEARS ENDED FEBRUARY 29 OR 28, % change % change 1996 96/95 1995 95/94 1994 ------- ---- ------ ---- ------ SYSTEM PRODUCTS Adapter revenues $ 144.5 -29% $ 204.9 -10% $ 228.1 Hub and switch revenues 42.0 -19 51.5 46 35.3 Total system products revenues $ 186.5 -27% $ 256.4 -3% $ 263.4 % of Company revenues 54.6% 67.7% 81.6% COMPONENT PRODUCTS Integrated circuit revenues $ 123.0 15% $ 106.9 102% $ 52.8 Foundry device revenues 15.6 320 3.7 226 1.1 Total component products revenues $ 138.6 25% $ 110.6 105% $ 53.9 % of Company revenues 40.5% 29.2% 16.7% TOYO MICROSYSTEMS CORPORATION Revenues $ 16.8 44% $ 11.7 120% $ 5.3 % of Company revenues 4.9% 3.1% 1.7% STANDARD MICROSYSTEMS CORPORATION Revenues $ 341.9 -10% $ 378.7 17% $ 322.6
BUSINESS DIVESTITURE AND ACQUISITION: In January 1996, SMC and SMC Enterprise Networks, Inc., a wholly-owned subsidiary, sold substantially all the net assets and technology of the Enterprise Networks Business Unit (ENBU) to Cabletron Systems, Inc., for $74.0 million in cash. ENBU had developed, manufactured and sold enterprise-wide switching products for computer networks. The business unit was included in SMC's system products operations for approximately ten months of fiscal 1996 and accounted for approximately 4% of consolidated revenues in fiscal 1996, 6% in fiscal 1995 and 2.5% in fiscal 1994. In February 1996, SMC acquired the assets and technology of EFAR Microsystems of Santa Clara, CA. EFAR supplies core logic chipsets for use with x86-architecture and Pentium microprocessors. The transaction was valued at $5.6 million based on the issuance of 240,000 SMC common shares, the assumption of certain liabilities and transaction fees. Nearly all of the purchase price represented purchased in-process technology and was charged to SMC's operations. Over the next three years, SMC may issue to EFAR additional common stock with a market value of up to $20 million, contingent on achieving certain operating results. BUSINESS AND PRODUCT DESCRIPTION: SYSTEM PRODUCTS DIVISION The System Products Division sells LAN products that enable personal computers to be connected to networks and permit communications among LAN users. Connection to a LAN permits a PC user to send messages to and receive messages from other LAN 3 users and share common resources such as printers, disk drives, files and programs. LANs offer individuals the advantages of working at their own PCs and, at the same time, provide an organization the benefits of connectivity and productivity by allowing multiple users to communicate and share resources. Internetworking, or connecting LANs to each other, allows users to communicate and share resources over a wider sphere. SMC LAN products include network interface cards (adapters), wiring hubs, associated software and transceivers that operate over a variety of media including unshielded twisted pair, shielded twisted pair, coaxial, and optical fiber cabling. The Company provides LAN products for major protocols or technologies used for PC-based LANs: Ethernet, Fast Ethernet, Token Ring, ARCNETR and PC Card. After the end of fiscal 1996, SMC introduced its first high-speed asynchronous transfer mode (ATM) adapters. SMC's low-cost, workgroup Ethernet switches improve network performance by segmenting the network into smaller portions, each of which receives full network bandwidth. LAN technologies combine hardware and software to control traffic signaling and message passage between PCs and peripheral devices. End users differentiate LAN technologies chiefly based upon speed and volume of data transmitted, installation procedures and equipment cost. NETWORK INTERFACE CARDS (ADAPTERS): Installed in a personal computer or workstation, an adapter is a printed circuit board that provides a connection to a LAN over telephone -- unshielded twisted pair (UTP) or shielded twisted pair (STP) -- wire, coaxial or fiber optic cables. The Company's adapters connect to the communications links or buses internal to a PC. These buses, which allow for transmission of signals within a computer, are known as industry standard architecture (ISA), extended industry standard architecture (EISA), micro-channel architecture (MCA) and peripheral component interconnect (PCI). Inserted in a PC, an adapter provides a connector for a cable that plugs into a wall outlet, much as a telephone cable connects to a wall outlet. For its Ethernet, Fast Ethernet and Token Ring adapters, SMC provides software for communicating over and diagnosing a network, installing an adapter and collecting data for managing a network. Based on an advanced single chip controller, the ETHEREZTM family of auto-configurable 16-bit Ethernet adapters was shipped in August 1994. EtherEZ supports Plug and Play (PnP), a protocol that allows a PC to analyze itself and automatically discover an adapter. When installed in a PC not supporting PnP, the EtherEZ set-up procedure is similar to but faster than that of the ETHERCARD ELITE ULTRATM adapters. Elite Ultra was SMC's first family of single-chip-based Ethernet controller adapters. For ISA bus installation, customers are increasingly purchasing the EtherEZ family as the Elite Ultra family is phased out as demand for it declines. 4 EtherEZ and Elite Ultra adapters feature SIMULTASKINGTM that improves data transmission speed. Simultasking technology forwards an information packet to the PC or cable before that packet has been fully received into the adapter's buffer memory. Elite Ultras were shipped in July 1993. Based on SMC proprietary chips, a 32-bit EISA bus master version was shipped in February 1994. Bus mastering transfers data between the network adapter and workstation without intervention by the workstation's microprocessor. Shipped in September 1994, the ETHERPOWERTM family of auto-configurable Ethernet adapters installs on the 32-bit PCI local bus. Serving as a high-speed interface between the processor and the adapter, the PCI bus eliminates bottlenecks by bypassing the traditional I/O bus (ISA), provides a wider data path and a faster data transfer rate. Shipped in February 1995, the ETHERPOWER 10/100TM PCI bus and ETHER 10/100TM EISA bus auto-configurable Fast Ethernet adapters work with either 10Mbps or 100Mbps hubs. Both adapter families feature connectors for UTP and STP cabling. The STP connection allows Token Ring users to switch to Fast Ethernet by changing adapters and hubs, leaving the cabling intact. Using an internally developed chip set, the TOKENCARD ELITETM adapter line marked SMC's entry into the Token Ring market in October 1992. Shipped in June 1994, a 32-bit EISA version uses the same bus master chip as on the Ethernet bus master adapter. In fiscal 1996, Ethernet (including PC Card and Fast Ethernet) adapters accounted for approximately 92% of SMC's adapter revenues, compared to 88% in fiscal 1995. Token Ring adapters fell to approximately 6% of adapter revenues in fiscal 1996 from 10% in fiscal 1995. ARCNET adapters accounted for the remainder of adapter revenues. Ethernet adapters that address PCI and EISA high-speed buses, the PC Card bus for laptop PCs and Fast Ethernet and plug-and-play protocols accounted for approximately 57% of SMC's adapter revenues in fiscal 1996 compared to 12% in fiscal 1995. Most of these products were first shipped in high volume after mid-year fiscal 1995. WIRING HUBS AND LAN SWITCHES: The cables, beginning at the adapter connector, are usually linked to a centrally located wiring hub. The hub passes along and boosts signals from one computer or port on a LAN to one or more other ports. Wiring hubs are called concentrators for Ethernet and Fast Ethernet, multi-station access units (MAUs) for Token Ring and hubs for ARCNET. SMC hubs are suited to workgroup or departmental LANs. In addition to the physical signaling provided by conventional hubs, intelligent hubs incorporate software for managing a network. SMC produces both conventional and intelligent hubs and the software to support network management. 5 Among conventional Ethernet 10Mbps hubs, the newest and lowest cost SMC family is the ETHEREZTM line of 5, 8 and 16 10BaseT port models that began shipping in December 1995. Initially shipped in May 1994, the 6-member 3 to 12-port TIGERHUBTM unmanaged hub family utilizes a proprietary, integrated circuit that controls 7 hub ports. SMC's older ELITE 3512TM 12-port Ethernet concentrator is upgradable to an intelligent concentrator by installing a Network Management Module (NMM). In May 1995 SMC entered the conventional Fast Ethernet hub market with shipment of the TIGERHUB 100TM family. Models include concentrators with 8 and 16 100BaseTX ports, 12 100BaseFX (optical fiber) ports and 15 100BaseTX ports and 1 100BaseFX port. TIGERSTACK TM, SMC's newest intelligent stackable concentrator, stacks up to 8 hubs or 224 UTP, coax or fiber ports, segmentable up to 32 sectors per stack. The entire stack, whether one or 32 collision domains, is managed by a single NMM. Hub configurations range from 12 to 28 UTP ports. Other models support 50-pin telco, multiple coax or multiple fiber ports. SMC believes the TigerStack is the industry's most segmentable stackable hub line. The first TigerStack models were shipped in May 1995. SMC's older ELITE 3812TM line allows stacking 8 concentrators or 96 UTP ports or 112 total ports, all controlled by a single NMM. SMC's Ring Management Module, when added to the ELITESTACKTM stackable MAUs, provides industry compliant SNMP network management for Token Ring. Shipped in December 1995, SMC's EZSWITCHTM 6-port model was the first low priced switch that SMC introduced for workgroup switching. With dedicated 10Mbps links to hubs, file servers, print servers or workstations, EZSwitch boosts network bandwidth in client/server workgroups. Introduced in fiscal 1997 for connecting workgroups to a network backbone or server farm, the EZSWITCH PLUS provides six 10Mbps and two 100Mbps ports and the TigerSwitchTM XFE provides 16 10Mbps ports and one 100Mbps port. SMC has changed its focus to workgroup and departmental LAN switches from backbone switching products under the divested ENBU. In fiscal 1996, hubs accounted for approximately 70% of SMC's hub and LAN switch revenues, compared to 59% in fiscal 1995. Approximately 94% of SMC's hub revenues were Ethernet (including Fast Ethernet) hubs, compared to 90% in fiscal 1995. Stackable Ethernet hubs rose to approximately 50% of SMC's Ethernet hub revenues from 34% in fiscal 1995. SUPPORT SOFTWARE: Supporting software that accompanies SMC's Ethernet and Token Ring adapters is delivered on SUPERDISKTM which contains: (i) driver software for popular network operating systems, (ii) EZSTARTTM installation and test utility and (iii) PC 6 AGENT/SNMP. SMC believes extensive software support, supplied without charge, distinguishes its line of adapters. Drivers enable network hardware to communicate over a LAN by linking the network protocol and the network operating system (NOS). The NOS suppliers regularly update their software, requiring SMC to regularly alter its drivers. SMC also upgrades drivers to improve performance over a network. Drivers are supplied for servers and workstations operating under network operating systems such as NovellR NetwareR 2.x, Novell Netware 3.x, Novell Netware 4.x, Novell Netware Lite, Novell Netware for SAA, MicrosoftR LAN Manager, Microsoft NT, IBMR LAN Server, SCO or ISC UNIX, Artisoft LANtasticR, BanyanR VinesR and the OSI consortium's GOSIP. SMC offers DRIVER ASSURANCE, insuring that drivers which work on new adapters are compatible with prior SMC generations. Installers also have the flexibility to choose either a fully software or hardware (jumper) configurable setup. With a Windows-like user interface in a DOS environment, EZStart (i) automatically configures an adapter; (ii) loads the drivers of choice; (iii) diagnoses the adapter and tests communications along the network and (iv) installs PC Agent/SNMP. EZStart's macro function records mouse clicks or keystrokes to be saved and reused to automatically install a large number of adapters without installer intervention. PC Agent/SNMP uses Simple Network Management Protocol (SNMP), an industry-standard protocol that facilitates network management. PC Agent/SNMP gathers status data about a computer in which an adapter resides. On request, that data is passed along to an SNMP-based network management program. PC Agent/SNMP for Ethernet, Fast Ethernet and Token-Ring allows SMC adapters to be polled for status data by SNMP compliant network management systems such as enterprise-wide packages offered by Hewlett-Packard, Sun Microsystems or Novell. SNMP agents are provided as software embedded in flash, read only memory with SMC's intelligent hub platforms. The agents gather status data about the physical hardware on the segment of a LAN connected to that hub. Network management systems that utilize data gathered by PC Agent/SNMP also utilize data gathered by hub-based agents. SMC offers ELITEVIEWTM, a family of SNMP-based software packages for managing workgroup, departmental or enterprise LANs. EliteView's capabilities have been regularly upgraded. EliteView 4.2 operates on a PC under a Windows environment and supports Ethernet and Token Ring networks. Features that improve upon prior releases include the ability to: (i) utilize dynamic data exchange (DDE) to share information with DDE-based applications such as Microsoft's Excel spreadsheet; (ii) create an inventory and a logical road map; (iii) graphically display the devices that are IP, IPX and SNMP auto-discoverable; and (iv) draw and customize hierarchical views of various network levels. 7 SMC provides an out-of-band network management utility with SMC's intelligent MAUs. Out-of-band management allows the utility to monitor the network even when the network is unable to operate. SMC also offers network management for ARCNET installations. DESIGN CRITERIA: SMC's System Products Division designs and develops critical integrated circuits that control the operation of its Ethernet and Token Ring adapters. The Company believes that this vertical integration provides an advantage in terms of control over costs, performance, quality and time-to-market, when compared to competitors who buy critical integrated circuits from merchant semiconductor manufacturers. The single-chip 795 Ethernet controller is the key device on EtherEZ adapters. The single-chip 790 ULTRACHIPTM Ethernet controller is the key device on Elite Ultra adapters. The 571 EISA bus master chip is used on both Ethernet and Token Ring EISA adapters. SMC has also designed critical components for its hub products. The 710 chip supports up to seven 10Base-T Ethernet ports on TigerHub and TigerStack hubs. BUSINESS AND PRODUCT DESCRIPTION: COMPONENT PRODUCTS DIVISION The Component Products Division (CPD) designs, develops and manufactures very-large-scale-integrated (VLSI) circuits. SMC maintains its SUPERCELLTM library of complex circuit functions, shortening the design cycle for VLSI circuits. Component products are focused on the personal computer input/output (PC I/O) and networking markets. In fiscal 1996 approximately 80% of the Division's revenues were from PC I/O devices, compared to approximately 88% in fiscal 1995. SMC's PC I/O controllers are integrated circuits with multiple functions for controlling and interfacing various peripheral and communications functions in a PC. Features include digital data separation, vertical or horizontal recording, control of serial and parallel ports, interfaces with the game port and hard disk drive and floppy disk control. CHIPROTECTTM circuitry prevents damage to the integrated circuit from inadvertent current overloads on the parallel port interface. PC I/O controllers introduced by SMC during fiscal 1993 and 1994 are known as super I/O devices. In a single package, these circuits combine many of the connectivity functions listed above that have become required features for PCs. SMC's super I/O class of devices are pin compatible, offering customers the flexibility to design one circuit board layout, modifying characteristics by inserting one or another of SMC's devices. Popular PC I/O devices support Enhanced Parallel Port (EPP) and Microsoft and Hewlett-Packard sponsored Extended Capabilities Port (ECP) protocols that provide very high speed communications through the parallel port between a PC and peripheral equipment. During fiscal 1995 and 1996, SMC announced PC I/O devices with enhanced features including interfaces for infrared (IR) wireless communications, support of PnP and low 8 electrical power usage for laptop and handheld PCs. SMC also announced and began to ship a class of PC I/O controllers known as ultra I/O. On a single chip, these devices add keyboard and mouse control, system clock generator and a real time clock to the super I/O level of functionality. New PC I/O features in fiscal 1997 include support of the 4.4Mbps IrDA Fast IR standard. Network circuits are sold to vendors of ARCNET, Ethernet and Fast Ethernet equipment. Versions of ARCNET devices are optimized for use in industrial control and transportation markets. CPD's most advanced single-chip Ethernet controller integrates memory management, PC Card-bus interface logic, 4.6kb RAM and optional Simultasking. In fiscal 1995, the Division entered the Fast Ethernet market with the 10Base-T/100Base-T FEASTTM controller device. The technologies received from the February 1996 EFAR acquisition focus on the PCI bus. SuperCell designs include controllers for memory, cache memory, PCI bus, IDE disk drives and DMA and power management technology. These designs are expected to be incorporated into future SMC integrated circuits. EFAR's principal product is the ULTRACORETM logic chipset for high-speed PCI-bus PCs. SMC's fastest growing business in fiscal 1996 was foundry products that employ semiconductor fabrication techniques in the Company's own wafer production facility. By far, the most important contributor to SMC's foundry revenues was a heater device for the ink cartridge used on a customer's line of ink jet printers. Foundry devices accounted for approximately 4.5% of SMC's revenues and 11% of divisional revenues in fiscal 1996 compared to approximately 1% and 3%, respectively, in fiscal 1995. BUSINESS AND PRODUCT DESCRIPTION: WARRANTY POLICY Depending upon the product, the Company generally warranties against defects in material and workmanship for periods varying from one year to the lifetime of a product. Estimated warranty costs are accrued when products are sold. MARKETS AND COMPETITION Network products of the System Products Division are used chiefly in conjunction with personal computers which are connected to local area networks. Integrated circuits of the Component Products Division are used primarily in personal computers. Competition is characterized by rapid technological change and significant unit price reductions which may not always correspond to a decrease in production costs. Product line differentiation may be determined by breadth, diversity, performance characteristics such as speed, quality and reliability and prices. Among the competitors, important distinctions are timeliness of shipments, depth of customer support and technical service. 9 The principal methods SMC uses to compete include new products, servicing customers and reducing manufacturing costs. While past performance can be a guide, there is no assurance that the Company can improve or maintain gross profit margins. MARKETS AND COMPETITION: SYSTEM PRODUCTS DIVISION The available worldwide market for the Company's LAN products is determined by the installed base of PCs, sales of new PCs and the portion of PCs connected to local area networks. SMC agrees with market analysts who believe that the number of PCs shipped and the percentage of PCs connected to LANs has increased over recent years. Competitors include domestic and foreign manufacturers, many of whom possess substantially greater resources than SMC. SMC's Ethernet, Fast Ethernet, Token Ring and ARCNET adapters accounted for 78% of System Products Division (SPD) revenues, or 42% of Company revenues, during fiscal 1996. SMC addresses over 95% of the available market for network interface cards in terms of units sold. The coverage statistics are based upon estimates of the worldwide adapter market for calendar 1995 made by market research firms. According to the market research estimates, during 1995, approximately 29 million adapters were shipped compared to 23 million adapters in calendar 1994. The Company shipped 2.3 million adapters in fiscal 1996 and 2.6 million adapters in fiscal 1995, the fiscal years most comparable to calendar 1994 and 1995. SMC's Ethernet, Fast Ethernet Token Ring and ARCNET conventional and intelligent wiring hubs and low port-count Ethernet switches accounted for 22% of divisional revenues, and 12% of Company revenues, during fiscal 1996. With the importance of increasing messaging speed and network management in workgroup and departmental networks, SMC believes hub and switch products will become a larger portion of networking revenues. The baseline for this expectation excludes revenues from the internetworking LAN switch product line that was divested in January 1996. According to a market research estimate, during calendar 1995, approximately 38 million shared media hub ports were shipped for connecting computers and computer peripheral equipment to LANs. This compares to an estimate of 26 million hub ports for calendar 1994. The Company shipped over 1.2 million hub ports in fiscal 1996 and over 0.9 million hub ports in fiscal 1995, the fiscal years most comparable to calendar 1994 and 1995. Because many competitors sell products that perform similar functions, SPD's strategy is to provide superior price/performance solutions for the PC LAN market, along with a high level of customer support, technical service and embedded software. SMC has combined its comprehensive product line with services under its BUYER ASSURANCE program that includes 3-year to lifetime product warranties, 7-day/24-hour phone technical support, 10 cross-shipment product replacement and 30-day money-back privileges. Market share for each competitor is based on a combination of price, performance, service, promotional and advertising activity and strength of the marketing channels. Competition is provided by domestic and foreign manufacturers in US and international markets. Some companies concentrate on aggressive pricing as the principal competitive tool. On the other hand, many manufacturers differentiate themselves by supplementing price strategies with performance, service and acceleration of new product design cycles. The Company has generally been able to lower production costs through manufacturing efficiencies and pass along cost savings through reduced selling prices, while providing new product features and technology. In most cases, product improvements are derived from SMC's semiconductor, board design, production, testing and software capabilities. Most system products competitors lack the depth of SMC's semiconductor design capability and commitment. SMC believes its breadth and timeliness of driver support provides an advantage over most other adapter suppliers. MARKETS AND COMPETITION: COMPONENT PRODUCTS DIVISION The Division's strategy is to concentrate its product development, sales and marketing resources into the PC I/O, networking and core logic chipset markets. These markets represent a small portion of the total semiconductor market. Competitors include both domestic and foreign manufacturers, many of whom possess substantially greater resources than SMC. Within the PC I/O market, SMC believes the variety of performance features and the design flexibility provided to customers has led to strong acceptance of its family of PC I/O devices and allowed SMC to become a market leader. The Division has continually added devices with enhanced features. Principal customers for PC I/O devices are most major producers of PCs. Entry into the competitive chipset market, through the EFAR acquisition, concentrates on devices for the high speed PCI-bus. Incorporating EFAR's technology into future SMC devices is expected to be the primary benefit to the Company. In the market for single-chip Ethernet control devices, the Division has emphasized products for laptop computers. SMC's principal customers have been producers of PC Card-bus adapters. A family of low-cost industrial ARCNET controllers addresses industrial network solutions, usually characterized by long design-in cycles and low volume. Customers use these devices in machine-to-machine networking applications. While many companies offer semiconductor foundry services worldwide, SMC has been willing to undertake engineering programs for prospective customers and deliver non- 11 standard devices that require semiconductor fabrication techniques. The processes that SMC's foundry business undertakes might be considered too specialized to be economically viable by many wafer fabrication facilities that deliver high-volume, advanced technology VLSI circuits. SALES AND DISTRIBUTION SMC's system products are sold worldwide, primarily to distributors of computer and networking products and also to system integrators and original equipment manufacturers (OEMs). Component products are sold worldwide, primarily to OEMs and also to distributors of semiconductor devices. The Company maintains a reserve for anticipated product returns and price protection. No customer accounted for as much as 10% of revenues in fiscal 1996. SALES AND DISTRIBUTION: SYSTEM PRODUCTS DIVISION Standard Microsystems sells LAN products primarily through LAN and microcomputer distributors. The distributors sell products to thousands of resellers who offer products to end users. The Division provides service and support and promotional programs to encourage resellers to buy SMC products from distributors. In addition, the Company sells to strategic accounts, who may be PC producers who ship their PCs with SMC adapters, or system integrators, who include SMC adapters when bidding for government or commercial contracts. In accordance with industry practice, distributor inventory is protected with respect to price on inventories that the distributor may have on hand at the time of a change in the published list price, and with respect to the rotation of slow moving inventory in exchange for other inventory of equal value. Distributor contracts may be terminated by written notice by either party. The contracts specify terms covering the return of inventories. Returns of product pursuant to termination of these agreements have not been material. Reserves are estimated based on information provided by distributors on sales to their customers and on their inventory levels. SALES AND DISTRIBUTION: COMPONENT PRODUCTS DIVISION Sales are primarily to OEMs. Producers of PCs are the Division's largest customer group. In addition, a small percentage of products are sold to electronic component distributors. In accordance with industry practice, distributor inventory is protected with respect to price on inventories which the distributor may have on hand at the time of a change in the published list price. Also, in accordance with industry practice, slow moving inventory may be exchanged for other inventory of equal value. Distributor contracts may be terminated by written notice by either party. The contracts specify the terms for the return 12 of inventories. Returns of product pursuant to termination of these agreements have not been material. SALES AND DISTRIBUTION: INTERNATIONAL SALES As a percentage of total revenues, the Company's sales to customers located outside the United States (mainly in Europe, Asia and the Pacific Rim and Canada) has increased. The principal shift occurred in sales to Asia and the Pacific Rim, caused primarily by a trend of component products' domestic branded customers to produce a greater proportion of their PCs in offshore factories. The European market was relatively more stable than North American markets, which incurred a higher portion of the adjustments made in networking products distribution inventory during fiscal 1996 and fiscal 1995. The decline in revenues in the US and Canada primarily reflected a reduction of distributor inventory to levels that were considered appropriate for the rate of sales of SMC's networking products by distributors to their reseller customers during fiscal 1996. The improvement in Japan, reflected in TMC's progress, resulted principally from selling more PC I/O devices in fiscal 1996 and selling more networking products in fiscal 1995.
FOR THE YEARS ENDED FEBRUARY 29 OR 28, %change %change 1996 96/95 1995 95/94 1994 ---- ------ ---- ----- ---- United States $149.4 -26% $201.5 12% $180.7 Export Asia and Pacific Rim 87.0 62 53.7 79 30.1 Europe 69.3 -20 86.5 3 84.3 Canada 10.8 -29 15.3 11 13.8 Other 8.6 -13 9.9 18 8.5 - - -------------------------------------------------------------------------------------------------------------------- Export revenues $175.7 6 $165.5 21 $136.5 Japan (TMC) 16.8 44 11.7 120 5.3 - - -------------------------------------------------------------------------------------------------------------------- Revenues outside the U.S. 192.5 9 177.1 25 141.8 - - -------------------------------------------------------------------------------------------------------------------- Total revenues $341.9 -10% $378.7 17% $322.6 - - --------------------------------------------------------------------------------------------------------------------
Export sales are made in United States dollars. Sales by Toyo Microsystems, which are not classified as export sales, are denominated in Japanese yen. SMC's competitive position in international markets may be affected by currency fluctuations. BACKLOG The Company schedules production based upon a forecast of demand for its products. Sales of networking products are made primarily pursuant to purchase orders generally requiring delivery within one month. In light of industry practice and experience, the 13 Company believes that backlog is not a particularly meaningful indicator of future sales of networking products. Sales of component products are made primarily pursuant to purchase orders generally requiring delivery within six months. Customers do cancel and extend the delivery time for products on order. Nevertheless, in light of industry practice and experience, the Company believes that backlog can be a meaningful indicator of future sales of component products. At the end of fiscal 1996, SMC's backlog was $86.3 million, compared to $28.2 million at the end of fiscal 1995. MANUFACTURING Products of the System Products Division are assembled by turnkey subcontractors at plants located in the United States and Ireland. Design and assembly of these products primarily utilize surface mount technology. SMC provides the subcontract manufacturer with detailed documentation necessary to build a board to required quality specifications. This documentation includes board schematics and drawings, bills of materials, quality specifications and packaging, handling and shipping details. The subcontract manufacturer is then responsible for component and printed circuit board procurement, incoming test of components, mounting components on a printed circuit board and the burn-in and final testing of the boards. SMC requires that assembled boards be manufactured to Interconnecting and Packaging and Electronic Circuit (IPC) standards. SPD's manufacturing support, customer support, and sales operations have been ISO-9002 certified since September 1995. In January 1996, the adapter products operation was recommended for ISO-9001 registration. ISO-9000 is an international quality system standard. Internal procedures and business process changes implemented as part of an effort to obtain ISO-9000 certification have contributed to reducing internal costs, increasing efficiency and establishing baseline quality measurements through documented work processes. ISO procedures have been integrated into SMC's total quality management program. SMC utilizes semiconductor foundries and assembly contractors in the US, Southeast Asia and Western Europe to provide state-of-the-art integrated circuit manufacturing and assembly capacity. These foundries manufacture most of the integrated circuits required by the Component Products Division and proprietary circuits used by the System Products Division. During fiscal 1996, 89% of the revenues of the Component Products Division resulted from the sale of product manufactured by subcontractor foundries, compared to 92% in 1995. 14 In fiscal 1996, SMC purchased $16.0 million of wafer fabrication equipment for a semiconductor plant in Madrid, Spain, owned by AT&T Corp.'s Microelectronics Business Unit. This investment was made pursuant to an October 1994 cooperative wafer fabrication agreement between SMC and AT&T that is intended to provide SMC with wafers for five years beginning in March 1996. The Madrid facility is capable of producing device geometries of 0.9 to 0.45 microns (millionths of a meter). In fiscal 1996, SMC purchased a minority equity interest in Singapore-based Chartered Semiconductor Pte Ltd. for $19.9 million. This transaction is intended to provide SMC with wafers for ten years from an advanced facility that will be capable of producing device geometries of 0.6 to 0.2 microns. This arrangement, along with the AT&T agreement, is intended to provide a portion of the Company's long-term production requirements for state-of-the-art integrated circuits. The Company has developed relationships with several suppliers who represent the primary source for certain components, raw material and finished product. Most components and other materials purchased by SMC and its subcontractors are generally available from multiple suppliers. However, certain components and other materials are available only from a single source. The inability to obtain certain components or materials could lead to an interruption in shipments of certain SMC products. SMC and its subcontract assemblers have generally been able to obtain both sole and multiple-sourced materials without interrupting production schedules. However, the inability to obtain certain components, materials or finished products from a supplier or subcontractor could cause a temporary interruption in the sale of the Company's products. High levels of production by PC manufacturers led to an industry-wide shortage of silicon wafer fabrication capacity in fiscal 1996 and fiscal 1995. As a result, SMC believes that, in both years, it was unable to produce all the integrated circuits it was capable of selling. Although the shortage of silicon wafer fabrication capacity eased during the fourth quarter of fiscal 1996, difficulty in securing additional capacity could reemerge and impact revenue and profit growth in the future. RESEARCH AND DEVELOPMENT The technology involved in designing and manufacturing SMC's products is complex and is constantly being refined. Accordingly, the Company is committed to a program of research and development oriented toward improving and refining its existing capabilities and developing new techniques, designs and technologies for producing component and system products. During the fiscal year which ended February 29, 1996, SMC spent $31.7 million on research and development, which equaled 9.3% of revenues. This compares with $28.3 15 million, or 7.5% of revenue, spent during fiscal 1995 and $24.0 million, or 7.4% of revenues, during fiscal 1994. Of these amounts, $9.8 million was spent by the divested Enterprise Networks Business Unit in fiscal 1996 compared to $7.6 million in fiscal 1995. Engineering groups, developing both system products and component products, utilize semiconductor design techniques to minimize chip area and utilize advanced wafer processing and packaging methods. The goal is to improve features, performance and reliability while minimizing integrated circuit manufacturing costs. NEW PRODUCTS: Networking products introduced by the System Products Division during fiscal 1996 included cost reduced and enhanced Ethernet adapters, a flexible Ethernet stackable hub family, low cost, unmanaged Ethernet and Fast Ethernet concentrators and a low cost workgroup Ethernet switch. Integrated circuits introduced by the Component Products Division during fiscal 1996 included extensions to its PC I/O controller family, a single-chip Ethernet controller with a PC Card-bus interface, and an enhanced industrial ARCNET controller. PRODUCTS INITIALLY SHIPPED IN FISCAL 1996 ETHERNET AND FAST ETHERNET ADAPTERS: ETHEREZTM: 8416 - Cost reduced models of 16-bit ISA PnP (auto-configurable) compliant, I/O or memory mapped adapters with 10Base-T connector, thin coax connector or a combination of 10Base-T and thin coax connectors; added model with a combination of 10Base-T, thin coax and AUI connectors ETHERPOWERTM: 8432 - Cost reduced models of 32-bit PCI auto-configurable, bus master adapters with 10Base-T connector or a combination of 10Base-T and thin coax connectors; added model with a combination of 10Base-T, thin coax and AUI connectors ETHERPOWER2TM: 8434 - 32-bit PCI auto-configurable, dual channel bus master adapters with 10Base-T connector or a combination of 10Base-T and thin coax connectors DRIVER SOFTWARE: Macintosh drivers for EtherPower, EtherPower2 and EtherPower 10/100 adapters for installation in PCI-bus Power Macintosh computers. AIX Version Four drivers for EtherPower, EtherPower2 and EtherPower 10/100 adapters for installation in PCI-bus Power PC based IBM Personal Computer series computers. ETHERNET AND FAST ETHERNET HUBS: TIGERHUB 100TM: Family of four unmanaged 100 Mbps hubs, configured: 5116TX - 16 100Base-TX ports; 5116TFX - 16 100Base-TX ports, 1 100Base-FX port; 5112FX - 12 100Base-FX ports; 5108TX - 8 100Base-TX ports, desktop TIGERSTACKTM: Family of nine segmentable, manageable stackable hubs, configured: 3312TC - 12 10Base-T ports, 1 BNC port, 1 AUI port; 3312TCI - 3312TC with NMM; 3314T - 14 10Base-T ports; 3326TC - 26 10Base-T ports, 1 BNC port, 1 AUI port; 3326TCI - 3326TC with NMM; 3328T - 28 10Base-T ports; 3328TELCO - 2 50-pin telco 16 ports, 4 RJ45 ports; 3306BC - 6 BNC ports, 1 AUI port, 1 10Base-T port; 3306FC - 6FL ports, 1 AUI port, 1 BNC port; 3300NMM -SNMP network management module ETHEREZ HUB TM: Family of three unmanaged hubs, configured: 3605T-EZ - 5 10Base-T ports; 3608TC-EZ - 8 10Base-T ports, 1 BNC port; 3616TC-EZ - 16 10Base-T ports, 1 BNC port, 1 AUI port LAN SWITCHING PRODUCTS: EZ SWITCH TM: EZ006 - Six-port, low-cost Ethernet cut-through switch with 5 10Base-T ports and 1 AUI port, half duplex or full duplex NETWORK MANAGEMENT SOFTWARE: ELITEVIEWTM V4.2: Windows based NMS supporting SNMP agents for SMC Ethernet and Token Ring adapters and intelligent hubs NETWORK AND PC I/O CONTROLLERS: COM20023: ARCNET controller with CD interface to accept digital signal streams from data or audio CD drives and frequency-shift-keying encode/decode to maximize data transfer rate from ARCNET protocol SMC91C94: 10Mbps Ethernet controller, with PC Card interface logic, 4.6kb RAM with optional Simultasking FDC37C669: ISA PnP compatible in addition to Super I/O features of 2.88 megabyte floppy disk control, serial port and parallel port control with chip protection and power down, EPP and ECP protocol support to interface with high speed peripherals PATENTS AND LICENSE AGREEMENTS The Company has received United States patents, and the corresponding Foreign equivalents, relating to its technologies and additional patent applications are pending. The Company has entered into non-exclusive patent licensing and patent/technology licensing agreements which have entitled the licensees to utilize the Company's patents or technologies, in exchange for which the Company has received, in various combinations, lump-sum payments, royalty payments, the right to utilize other patents or technologies of the licensees or other consideration, including the right to manufacture, market and sell specific products designed by the licensees. These agreements have typically provided for bi-directional licenses under certain patents, utility models and design patents, existing at the effective date of the particular agreement and patent applications filed within a specified period of years after the effective date of the agreement. The licenses usually continue for the life of the particular patent. The Company has, from time to time, been informed of claims that it may be infringing patents owned by others. When the Company deems it appropriate, the Company may seek licenses under certain of such patents. However, no assurance can be given that 17 satisfactory license agreements will be obtained, if sought by the Company, or that failure to obtain any such licenses would not adversely affect the Company's future operations. ENVIRONMENTAL REGULATION Federal, state and local regulations impose various controls on the discharge of certain chemicals and gases used in semiconductor processing. The Company's facilities have been designed to comply with these regulations. However, increasing public attention has focused on the environmental impact of electronics manufacturing operations and there is no assurance that future regulations will not impose significant costs on the Company. EMPLOYEES As of February 29, 1996, of the Company's 864 employees, 168 were engaged in engineering, including research and development, 287 in marketing and sales, 165 in executive and administrative activities and 244 in manufacturing and manufacturing support. This compared to February 28, 1995, when, of the Company's 861 employees, 202 were engaged in engineering, including research and development, 301 in marketing and sales, 161 in executive and administrative activities and 197 in manufacturing and manufacturing support. Many employees are highly skilled and SMC's success depends upon its ability to retain and attract such employees. The Company has never had a work stoppage. No employees are represented by a labor organization and the Company considers its employee relations to be satisfactory. - - ----------------------------------------------------------------- SMC and Standard Microsystems are registered trademarks of Standard Microsystems Corporation. Product names and company names are the trademarks of their respective holders. 18 ITEM 2. PROPERTIES. The Company owns five facilities, totaling approximately 249,000 square feet of plant and office space, located on approximately 28 acres in Hauppauge, New York, where research, development, manufacturing, product testing, warehousing, shipping, marketing, selling and administrative functions are conducted. The Company occupies a 50,000 square foot facility in Irvine, California, where SMC's System Products Division conducts most of the research, development and marketing for adapter products. The lease expires in 1997. In addition, the Company maintains offices in leased facilities in: San Jose, California; Miami, Florida; Atlanta, Georgia; Oakbrook Terrace, Illinois; Andover, Massachusetts; Dayton, Ohio; Austin and Dallas, Texas; Falls Church, Virginia; Bellevue, Washington; Melbourne and Sydney, Australia; Oakville, Ontario, Canada; London, England; St. Germain-en-Laye, France; Munich, Germany; Tokyo, Japan; Mexico DF, Mexico; Singapore; Johannesburg, South Africa and Taipei, Taiwan. As of February 29, 1996, the Company owned machinery and equipment, property and leasehold improvements with an original cost of $139.9 million and accumulated depreciation and amortization of $79.7 million. ITEM 3. LEGAL PROCEEDINGS. In June 1993, Penril Datacom Networks, Inc., commenced an action against the Company, its wholly-owned subsidiary SMC Enterprise Networks, Inc. (successor by merger to Sigma Network Systems, Inc.), and two former officers of Sigma, alleging, among other items, breach of September 1991 and March 1990 agreements between Sigma and Penril and seeking $8.0 million. The Company counterclaimed against Penril, alleging breach of contract and sought damages in excess of $1.4 million. In November 1995, Penril filed a First Amended complaint seeking $50.0 million in damages and a trebling of those damages. Penril has filed further motions that the Company has opposed. While it is not possible to assess the likelihood of Penril establishing liability, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has accrued the estimated cost of legal fees to defend against these claims and intends to defend against these claims vigorously. In June 1995, several actions were filed against the Company and certain of its officers and directors. The actions have been consolidated into one complaint. The consolidated claims purport to be a class action on behalf of the purchasers of the Company's common stock between September 19, 1994, and June 2, 1995. The consolidated complaint asserts claims under federal securities laws and alleges that the 19 price of the Company's common stock was artificially inflated during the class action period by false and misleading statements and the failure to disclose certain information. While it is not possible to assess the likelihood of any liability being established, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has answered the consolidated complaint, has accrued the estimated cost of legal fees to defend against these claims, and intends to defend against these claims vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the registrant as of April 30, 1996, are as follows:
SERVED AS AN NAME POSITION AGE OFFICER SINCE Paul Richman Chairman and 53 1971 Chief Executive Officer Arthur Sidorsky Executive Vice President 62 1980 Component Products Division Anthony M. D'Agostino Senior Vice President Finance 38 1988 and Treasurer Lance Murrah Senior Vice President and 40 1994 General Manager System Products Division Eric Nowling Vice President and Controller 39 1995
All officers serve at the pleasure of the Board of Directors 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information captioned "Market price" and the last paragraph appearing in the Annual Report under the heading "Quarterly Financial Data" are incorporated herein by this reference. Except as specifically set forth herein and elsewhere in this Form 10-K, no information appearing in the Annual Report is incorporated by reference into this report nor is the Annual Report deemed to be filed, as part of this report or otherwise, pursuant to the Securities Exchange Act of 1934. ITEM 6. SELECTED FINANCIAL DATA. The information appearing in the Annual Report under the caption "Selected Financial Data" is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements, notes thereto, Report of Independent Public Accountants thereon and quarterly financial data appearing in the Annual Report are incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information appearing in the Proxy Statement under the caption "Election of Directors" is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION. The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information appearing in the Proxy Statement under the captions "Election of Directors" and "Voting Securities of Certain Beneficial Owners and Management" is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information appearing in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by this reference. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements The following consolidated financial statements of the Company and its subsidiaries have been incorporated by reference from the Annual Report pursuant to Part II, Item 8: Consolidated Statements of Income for the three years ended February 29, 1996 Consolidated Balance Sheets, February 29, 1996 and February 28, 1995 Consolidated Statements of Shareholders' Equity for the three years ended February 29, 1996 Consolidated Statements of Cash Flows for the three years ended February 29, 1996 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. Financial Statement Schedules Schedules are omitted because of the absence of conditions requiring them or because the required information is shown on the consolidated financial statements or the notes thereto. 3. Exhibits, which are listed on the Exhibit Index, are filed as part of this report and such Exhibit Index is incorporated by reference. Exhibits 10.1 through 10.22 listed on the accompanying Exhibit Index identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference. (b) A report on Form 8-K dated January 12, 1996, was filed during the last quarter of the period covered by this report. The Form 8-K reported the sale of the assets of the Enterprise Networks Business Unit and contained the following financial statements pursuant to Item 7: 23 Unaudited Pro Forma Consolidated Condensed Balance Sheet at November 30, 1995 Unaudited Pro Forma Consolidated Condensed Statement of Income for the Nine Months Ended November 30, 1995 Unaudited Pro Forma Consolidated Condensed Statement of Income for the Fiscal Year Ended February 28, 1995 Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANDARD MICROSYSTEMS CORPORATION (Registrant) By S/ANTHONY M. D'AGOSTINO ANTHONY M. D'AGOSTINO Vice President Finance and Treasurer (Principal Financial and Accounting Officer) Date: May 2_, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature and Title Date PAUL RICHMAN May 25, 1996 Paul Richman, Chairman, Chief Executive Officer and Director (Principal Executive Officer) ERIC M. NOWLING May 25, 1996 Eric M. Nowling Vice President and Controller (Principal Accounting Officer) 25 EVELYN BEREZIN May 25, 1996 Evelyn Berezin Director ROBERT M. BRILL May 25, 1996 Robert M. Brill Director PETER F. DICKS May 25, 1996 Peter F. Dicks Director HERMAN FIALKOV May 25, 1996 Herman Fialkov Director RAYMOND FRANKEL May 25, 1996 Raymond Frankel Director IVAN T. FRISCH May 25, 1996 Ivan T. Frisch Director 26 EXHIBIT INDEX
Incorporated By Exhibit Reference To: No. Exhibit Exhibit 3(a) [9] 3.1 Restated Certificate of Incorporation Exhibit 3(b) [8] 3.2 By-Laws as amended Exhibit 1 [5] 3.3 Rights Agreement dated January 7, 1988, with Securities Trust Company as Rights Agent Exhibit 3 [6] 3.4 Amendment No. 1 to Rights Agreement Exhibit 10.1[14] 10.1 Employment Agreement dated March 1, 1995, with Paul Richman * 10.2 Amendment thereto dated July 10, 1995 Exhibit 10(d)[13] 10.3 Employment Agreement dated March 1, 1993, with Arthur Sidorsky Registrant's Proxy 10.4 1984 Stock Option Plan for Officers Statement dated May and Key Employees 16, 1984, Exhibit A Exhibit 10(g) [4] 10.5 Amendment to 1984 Stock Option Plan for Officers and Key Employees Registrant's Proxy 10.6 1986 Stock Option Plan for Statement dated May Officers and Key Employees 22, 1986, Exhibit A Exhibit 10(i) [4] 10.7 Amendment to 1986 Stock Option Plan for Officers and Key Employees Exhibit 10(m) [1] 10.8 Amendment to 1986 Stock Option Plan for Officers and Key Employees dated March 29, 1990 Registrant's Proxy 10.9 1989 Stock Option Plan Statement dated June 6, 1989, Exhibit A Registrant's Proxy 10.10 1991 Restricted Stock Bonus Plan Statement dated July 17, 1991, Exhibit A Registrant's Proxy 10.11 Director Stock Option Plan Statement dated May 29, 1990, Exhibit A Registrant's Proxy 10.12 1994 Director Stock Option Plan Statement dated May 31, 1995, Exhibit A Exhibit 10(m) [11] 10.13 Resolutions adopted February 18, 1992, amending Director Stock Option Plan, 1991 Restricted Stock Bonus Plan, 1989 StockOption Plan, 1986 Stock Option Plan and 1984 Stock Option Plan Exhibit 10.14 [14] 10.14 Retirement Plan for Directors Registrant's Proxy 10.15 1993 Stock Option Plan for Officers Statement dated May and Key Employees 25, 1993, Exhibit A Exhibit 10(x)[13] 10.16 Executive Retirement Plan Registrant's Proxy 10.17 1994 Stock Option Plan for Officers Statement dated May and Key Employees 26, 1994, Exhibit A Exhibit 10.18 [14] 10.18 Resolutions adopted October 31, 1994, amending the Retirement Plan for Directors and the Executive Retirement Plan Exhibit 10.19 [14] 10.19 Resolutions adopted January 3, 1995, amending the 1994, 1993, 1989, 1986, and 1984 Stock Option Plans and the 1991 Restricted Stock Plan Exhibit 10.2 [2] 10.20 Patent and Trade Secrets Agreement dated March 12, 1983, with Paul Richman Exhibit 10.22 [14] 10.21 Consulting Agreement dated March 1, 1995, with Herman Fialkov Exhibit 10(t) [7] 10.22 Form of Severance Pay Agreement (renewed annually through December 31, 1996) Exhibit 2(b) [10] 10.23 Technology Transfer Agreement between SMC and Western Digital Corporation dated September 27, 1991 Exhibit 2(c) [10] 10.24 Noncompetition Agreement between SMC and Western Digital Corporation dated September 27, 1991 Exhibit 10.27 [14] 10.25 Credit Agreement dated January 13, 1995 * 10.26 First Amendment dated March 28, 1995 * 10.27 Second Amendment dated October 13, 1995 * 10.28 Third Amendment dated March 28, 1996 Exhibit 2 [15] 10.29 Asset Purchase Agreement dated January 9, 1996, among Cabletron Systems, Inc., and SMC Enterprise Networks, Inc * 10.30 Agreement for Purchase and Sale of Assets among SMC, EFAR Microsystems, Inc., and the Key Officers identified therein dated February 26, 1996 * 13 Portions of Annual Report to Stockholders for year ended February 29, 1996, incorporated by reference * 23 Consent of Arthur Andersen LLP * 27 Financial Data Schedule * 99 Form 11-K for year ended December 31, 1995, of registrant's Incentive Savings and Retirement Plan
* Filed herewith. [1] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1990. [2] Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 1983. [3] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1985. [4] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1987. [5] Registrant's Registration on Form 8-A dated January 11, 1988. [6] Registrant's Amendment No. 2 on Form 8 dated April 14, 1988 to Registration on Form 8-A. [7] Registrant's Annual Report on Form 10-K for fiscal year ended February 29, 1988. [8] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1989. [9] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1991. [10] Registrant's Current Report on Form 8-K filed October 31, 1991. [11] Registrant's Annual Report on Form 10-K for fiscal year ended February 29, 1992. [12] Registrant's Current Report on Form 8-K filed January 13, 1993. [13] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1994. [14] Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1995. [15] Registrant's Current Report on Form 8-K dated January 26, 1996. EX-10 2 EXHIBIT 10.2 EXHIBIT 10.2 AMENDMENT TO EMPLOYMENT AGREEMENT DATED MARCH 1, 1995 BETWEEN STANDARD MICROSYSTEMS CORPORATION AND PAUL RICHMAN The Agreement made as of the first day of March, 1995 between the undersigned, Standard Microsystems Corporation and Paul Richman (the "Agreement"), is hereby amended as follows, effective July 10, 1995: 1. The second sentence in subsection THIRD (a) shall be replaced by the following: "The base rate shall be $450,000.00 provided, however, that the Base Rate shall be modified as of March 1, 1996, and as of each successive March 1 to the end of the term of this Agreement, in proportion to any increase in the Consumer Price Index, as hereinafter defined, between the February levels of the two immediately proceeding years." 2. The last paragraph in subsection THIRD (b) shall be replaced by the following: "Notwithstanding the preceding provisions of this subsection THIRD (b), the aggregate amount payable pursuant to this subsection THIRD (b) for the fiscal year of SMC ending February 29, 1996, and for each fiscal year of SMC thereafter, shall not exceed $450,000.00 or the Base Rate then currently in effect, whichever amount is higher." 3. The Agreement is amended only to the extent specified above. It is not intended to extend or renew any other provision of the Agreement that would not continue if this Amendment had not been effected. IN WITNESS HEREOF, SMC has caused this Agreement to be executed on its behalf by its representative, thereunto duly authorized, and Paul Richman has executed this Agreement as of July 10, 1995. STANDARD MICROSYSTEMS CORPORATION ___________________________ By: _____________________________ Paul Richman Herman Fialkov, Director and Chairman, Compensation Committee EX-10 3 EXHIBIT 10.26 Exhibit 10.26 FIRST AMENDMENT, dated as of March 28, 1995 (this "Amendment"), to the Credit Agreement, dated as of January 13, 1995 (as amended pursuant to this Amendment and as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among STANDARD MICROSYSTEMS CORPORATION, a Delaware corporation (the "Borrower") and the several banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"; individually a "Lender"). W I T N E S S E T H : WHEREAS, the Borrower and the Lenders are parties to the Credit Agreement; WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement in the manner provided for herein; and WHEREAS, the Lenders are willing to agree to the requested amendments; NOW, THEREFORE, in consideration of the premises contained herein, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein as defined terms are so used as so defined. 2. Amendments to Subsection 1.1. Subsection 1.1 of the Credit Agreement is hereby amended by inserting the following definitions in the proper alphabetical order: "CSM": Chartered Semiconductor Manufacturing Pte Ltd, a company incorporated in Singapore. "Manufacturing Agreement": the Agreement dated as of March __, 1995, between CSM and the Borrower. "Subscription Agreement": the Agreement dated as of March __, 1995, among Singapore Technologies Ventures Pte Ltd, a company incorporated in Singapore, CSM and the Borrower. 3. Amendments to Subsection 6.2. Subsection 6.2 of the Credit Agreement is hereby amended as follows: (a) by deleting the word "and" appearing at the end of clause (e) thereof; (b) by deleting the period at the end of clause (f) thereof and substituting "; and" in lieu thereof; and (c) by adding a new clause at the end thereof to read in its entirety as follows: Exhibit 10.26 "(g) Indebtedness under foreign exchange lines of credit, provided that the aggregate principal amount of such Indebtedness at any time outstanding does not exceed $500,000." 4. Amendments to Subsection 6.9. Subsection 6.9 of the Credit Agreement is hereby amended as follows: (a) by deleting the word "and" appearing at the end of clause (c) thereof; (b) by deleting the period at the end of clause (d) thereof and substituting "; and" in lieu thereof; and (c) by adding a new clause at the end thereof to read in its entirety as follows: "(e) the acquisition of "B" Shares in CSM by the Borrower pursuant to the Subscription Agreement for an aggregate purchase price not to exceed $20,000,000, provided that, concurrently with or prior to the consummation of such acquisition, the Borrower and CSM shall have entered into the Manufacturing Agreement." 5. Representations and Warranties. On and as of the date hereof, the Borrower hereby confirms, reaffirms and restates the representations and warranties set forth in Section 3 of the Credit Agreement mutatis mutandis, except to the extent that such representations and warranties expressly relate to a specific earlier date in which case the Borrower hereby confirms, reaffirms and restates such representations and warranties as of such earlier date, provided that the references to the Credit Agreement in such representations and warranties shall be deemed to refer to the Credit Agreement as amended pursuant to this Amendment. The Borrower hereby further represents and warrants that attached hereto as Exhibits A and B, respectively, are true, complete and correct copies of the Manufacturing Agreement and the Subscription Agreement. 6. Effectiveness. This Amendment shall become effective as of the date first written above upon execution of this Amendment by the Borrower and the Required Lenders and upon execution of the Acknowledgment and Consent attached hereto by each Guarantor. 7. Continuing Effect; No Other Amendments. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect. The amendments provided for herein are limited to the specific subsections of the Credit Agreement specified herein and shall not constitute an amendment of, or an indication of the Lenders' willingness to amend, any other provisions of the Credit Agreement or the same subsections for any other date or time period (whether or not such other provisions or compliance with such subsections for another date or time period are affected by the circumstances addressed in this Amendment). 8. Expenses. The Borrower agrees to pay and reimburse each Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the preparation Exhibit 10.26 and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to such Lender. 9. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto, each of which counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument. 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. STANDARD MICROSYSTEMS CORPORATION By:______________________________________ Name: Title: CHEMICAL BANK By:______________________________________ Name: Title: NATIONAL WESTMINSTER BANK N.A. By:______________________________________ Name: Title: ACKNOWLEDGEMENT AND CONSENT Each of the undersigned corporations as a guarantor under that certain Guarantee, dated as of January 13, 1995 (the "Guarantee"), made by each of such corporations in favor of the Lenders confirms and agrees that, after giving effect to the First Amendment to which this Acknowledgment and Consent is attached, the Guarantee is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects and the Guarantee does, and shall continue to, secure the payment of all of the Obligations (as defined in the Guarantee) pursuant to the terms of the Guarantee. Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement referred to in the First Amendment to which this Acknowledgment and Consent is attached. STANDARD MICROSYSTEMS SMC FRANCE, INC. CORPORATION (ASIA) By By ------------------------- ------------------------- Title Title ---------------------- ---------------------- SMC AUSTRALIA, INC. SMC INTERNATIONAL, INC. By By ------------------------ ------------------------ Title Title ---------------------- ---------------------- SMC MASSACHUSETTS INC. SMC SALES, INC. By By ------------------------ ------------------------ Title Title ---------------------- ---------------------- EX-10 4 EXHIBIT 10.27 Exhibit 10.27 SECOND AMENDMENT, dated as of October 13, 1995 (this "Amendment"), to the Credit Agreement, dated as of January 13, 1995 (as amended pursuant to the First Amendment thereto, dated as of March 28, 1995 and this Amendment and as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among STANDARD MICROSYSTEMS CORPORATION, a Delaware corporation (the "Borrower") and the several banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"; individually a "Lender"). W I T N E S S E T H : WHEREAS, the Borrower and the Lenders are parties to the Credit Agreement; WHEREAS, the Borrower and the Lenders wish to amend the Credit Agreement in the manner provided for herein; and WHEREAS, the Lenders are willing to agree to waive compliance with certain provisions of the Credit Agreement in the manner provided for herein; NOW, THEREFORE, in consideration of the premises contained herein, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein as defined terms are so used as so defined. 2. Amendment to Subsection 1.1. Subsection 1.1 of the Credit Agreement is hereby amended by deleting in their entireties the definitions of "Consideration" and "Permitted Acquisitions" appearing therein and by inserting a new definition in the proper alphabetical order to read as follows: "Second Amendment": the Second Amendment to this Agreement, dated as of October 13, 1995. 3. Amendment to Subsection 3.16. Subsection 3.16 of the Credit Agreement is hereby amended by deleting the words "(a) finance Permitted Acquisitions (as hereinafter defined) and (b)" appearing therein. 4. Amendment to Subsection 6.8. Subsection 6.8 of the Credit Agreement is hereby amended by deleting the words "and any such expenditure resulting from a Permitted Acquisition" appearing therein. 5. Amendment to Subsection 6.9(d). Subsection 6.9 of the Credit Agreement is hereby amended by deleting paragraph (d) thereof in its entirety and substituting in lieu thereof a new paragraph to read in its entirety as follows: Exhibit 10.27 "(d) the $1,000,000 loan made by the Borrower to EFAR Microsystems, Inc., prior to the date hereof." 6. Amendment to Subsection 6.15. Subsection 6.15 of the Credit Agreement is hereby amended by deleting the words "and those businesses acquired pursuant to Permitted Acquisitions" appearing therein. 7. Amendments to Schedule 1.1(a). Schedule 1.1(a) of the Credit Agreement is hereby amended by deleting such Schedule in its entirety and substituting in lieu thereof a new Schedule to read in its entirety as set forth in Annex A hereto. 8. Waiver of Subsection 6.1(f). The Lenders hereby waive compliance by the Borrower with the requirements of subsection 6.1(f) to the extent and solely to the extent that the Inventory Turnover Ratio was 3.48 to 1.00 at any time prior to May 31, 1995 rather that 3.50 to 1.00 or higher as required by such subsection. 9. Representations and Warranties. On and as of the date hereof, the Borrower hereby confirms, reaffirms and restates the representations and warranties set forth in Section 3 of the Credit Agreement mutatis mutandis, except to the extent that such representations and warranties expressly relate to a specific earlier date in which case the Borrower hereby confirms, reaffirms and restates such representations and warranties as of such earlier date, provided that the references to the Credit Agreement in such representations and warranties shall be deemed to refer to the Credit Agreement as amended pursuant to this Amendment. 10. Conditions to Effectiveness. This Amendment shall become effective as of the date first written above upon (i) execution of this Amendment by the Borrower and the Required Lenders and upon execution of the Acknowledgment and Consent attached hereto by each Guarantor and (ii) receipt by each Lender of a Note executed and delivered by a duly authorized officer of the Borrower conforming to the applicable requirements of the Credit Agreement. 11. Continuing Effect; No Other Amendments. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect. The amendments provided for herein are limited to the specific subsections of the Credit Agreement specified herein and shall not constitute an amendment of, or an indication of the Lenders' willingness to amend, any other provisions of the Credit Agreement or the same subsections for any other date or time period (whether or not such other provisions or compliance with such subsections for another date or time period are affected by the circumstances addressed in this Amendment). 12. Expenses. The Borrower agrees to pay and reimburse each Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the preparation and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to such Lender. Exhibit 10.27 13. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto, each of which counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument. 14. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. STANDARD MICROSYSTEMS CORPORATION By:______________________________________ Name: Title: CHEMICAL BANK By:______________________________________ Name: Title: NATIONAL WESTMINSTER BANK N.A. By:______________________________________ Name: Title: ACKNOWLEDGEMENT AND CONSENT Each of the undersigned corporations as a guarantor under that certain Guarantee, dated as of January 13, 1995 (the "Guarantee"), made by each of such corporations in favor of the Lenders confirms and agrees that, after giving effect to the Second Amendment to which this Acknowledgment and Consent is attached, the Guarantee is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects and the Guarantee does, and shall continue to, secure the payment of all of the Obligations (as defined in the Guarantee) pursuant to the terms of the Guarantee. Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement referred to in the Second Amendment to which this Acknowledgment and Consent is attached. STANDARD MICROSYSTEMS SMC FRANCE, INC. CORPORATION (ASIA) By By ------------------------- ------------------------- Title Title ---------------------- ---------------------- SMC AUSTRALIA, INC. SMC INTERNATIONAL, INC. By By ------------------------ ------------------------ Title Title ---------------------- ---------------------- SMC MASSACHUSETTS INC. SMC SALES, INC. By By ------------------------ ------------------------ Title Title ---------------------- ---------------------- Annex A Schedule 1.1(a) Commitments Lender Amount Chemical Bank $12,500,000 National Westminster Bank N.A. 12,500,000 Total $25,000,000 EX-10 5 EXHIBIT 10.28 Exhibit 10.28 THIRD AMENDMENT, dated as of March 28, 1996 (this "Amendment"), to the Credit Agreement, dated as of January 13, 1995 (as amended pursuant to the First Amendment thereto, dated as of March 28, 1995, the Second Amendment thereto, dated as of October 13, 1995, and this Amendment, and as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among STANDARD MICROSYSTEMS CORPORATION, a Delaware corporation (the "Borrower") and the several banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"; individually a "Lender"). W I T N E S S E T H : WHEREAS, the Borrower and the Lenders are parties to the Credit Agreement; WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement in the manner provided for herein; and WHEREAS, the Lenders are willing to agree to the requested amendments; NOW, THEREFORE, in consideration of the premises contained herein, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein as defined terms are so used as so defined. 2. Amendment to Subsection 1.1. (a) Subsection 1.1 is hereby amended by inserting the word "CSM" before the defined term "Subscription Agreement" and placing the defined term "CSM Subscription Agreement" in the proper alphabetical order. (b) Subsection 1.1 of the Credit Agreement is hereby further amended by inserting the following definitions in the proper alphabetical order to read as follows: "DSNT": Digital Secured Networks Technology Inc., a Delaware corporation." "DSNT Subscription Agreement": the Agreement dated as of March 28, 1996, among DSNT and the Borrower "Third Amendment": the Third Amendment to this Agreement, dated as of April 28, 1996. 3. Amendment to Subsection 6.9. Subsection 6.9 of the Credit Agreement is hereby amended as follows: (a) by deleting the word "and" appearing at the end of clause (d) thereof; Exhibit 10.28 (b) by deleting the period at the end of clause (e) thereof and substituting "; and" in lieu thereof; and (c) by adding a new clause at the end thereof to read in its entirety as follows: "(f) the acquisition of Series A Convertible Preferred Stock in DSNT by the Borrower pursuant to the DSNT Subscription Agreement for an aggregate purchase price not to exceed $250,000." 4. Amendment to Schedule 3.15. Schedule 3.15 of the Credit Agreement is hereby amended by deleting such Schedule in its entirety and substituting in lieu thereof a new Schedule to read in its entirety as set forth in Annex A hereto. 5. Representations and Warranties. On and as of the date hereof, the Borrower hereby confirms, reaffirms and restates the representations and warranties set forth in Section 3 of the Credit Agreement mutatis mutandis, except to the extent that such representations and warranties expressly relate to a specific earlier date in which case the Borrower hereby confirms, reaffirms and restates such representations and warranties as of such earlier date, provided that the references to the Credit Agreement in such representations and warranties shall be deemed to refer to the Credit Agreement as amended pursuant to this Amendment. 6. Conditions to Effectiveness. This Amendment shall become effective as of the date first written above upon execution of this Amendment by the Borrower and the Required Lenders and upon execution of the Acknowledgment and Consent attached hereto by each Guarantor. 7. Continuing Effect; No Other Amendments. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect. The amendments provided for herein are limited to the specific subsections of the Credit Agreement specified herein and shall not constitute an amendment of, or an indication of the Lenders' willingness to amend, any other provisions of the Credit Agreement or the same subsections for any other date or time period (whether or not such other provisions or compliance with such subsections for another date or time period are affected by the circumstances addressed in this Amendment). 8. Expenses. The Borrower agrees to pay and reimburse each Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the preparation and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to such Lender. 9. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto, each of which counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument. Exhibit 10.28 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. STANDARD MICROSYSTEMS CORPORATION By:______________________________________ Name: Title: CHEMICAL BANK By:______________________________________ Name: Title: NATIONAL WESTMINSTER BANK N.A. By:______________________________________ Name: Title: ACKNOWLEDGEMENT AND CONSENT Each of the undersigned corporations as a guarantor under that certain Guarantee, dated as of January 13, 1995 (the "Guarantee"), made by each of such corporations in favor of the Lenders confirms and agrees that, after giving effect to the Third Amendment to which this Acknowledgment and Consent is attached, the Guarantee is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects and the Guarantee does, and shall continue to, secure the payment of all of the Obligations (as defined in the Guarantee) pursuant to the terms of the Guarantee. Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement referred to in the Third Amendment to which this Acknowledgment and Consent is attached. STANDARD MICROSYSTEMS SMC FRANCE, INC. CORPORATION (ASIA) By By ------------------------- ------------------------- Title Title ---------------------- ---------------------- SMC AUSTRALIA, INC. SMC INTERNATIONAL, INC. By By ------------------------ ------------------------ Title Title ---------------------- ---------------------- SMC MASSACHUSETTS INC. SMC NORTH AMERICA, INC. (formerly known as SMC SALES, INC.) By By ------------------------ ------------------------ Title Title ---------------------- ---------------------- Annex A Schedule 3.15 STANDARD MICROSYSTEMS CORPORATION SCHEDULE OF SUBSIDIARIES All subsidiaries are wholly-owned, except Toyo Microsystems Corporation. Delaware corporations Standard Microsystems Corporation (Asia) SMC Australia, Inc. SMC France, Inc. SMC International, Inc. SMC Massachusetts, Inc. SMC North America, Inc. (formerly known as SMC Sales, Inc.) Foreign corporations Standard Microsystems Corporation (Canada) (incorporated in Ontario, Canada) Standard Microsystems (Europe) Limited (incorporated in United Kingdom) Standard Microsystems GmbH (incorporated in Germany) Toyo Microsystems Corporation (incorporated in Japan) EX-10 6 EXHIBIT 10.30 AGREEMENT FOR PURCHASE AND SALE OF ASSETS, dated as of February 6, 1996, is made among STANDARD MICROSYSTEMS CORPORATION, a Delaware corporation ("Buyer"), EFAR MICROSYSTEMS, INC., a California corporation, Peter C.R. Ju ("Ju"), Ying Feng Chang ("Chang") and Chin Hwaun Wu ("Wu" and together with Ju and Chang, the "Key Officers"). WHEREAS, Buyer, Company (as hereinafter defined), and the Key Officers hereby agree as follows: WHEREAS, the parties have had discussions regarding the development, manufacturing, and marketing of Core Logic Products (as hereinafter defined), prefatory to the agreements hereinafter set forth; and WHEREAS, Buyer wishes to buy from the Company, and the Company wishes to sell to Buyer, the Assets (as hereinafter defined), on the terms and conditions hereinafter set forth; NOW THEREFORE, the parties set forth their agreement as follows: ARTICLE I DEFINITIONS When used in this Agreement, the following terms shall have the respective meanings set forth below: "Accounts Receivable" shall mean all of the Company's accounts, notes, accounts receivable, contract rights, drafts, and other instruments, receivables and rights to the payment of money or other forms of considera- tion, for goods sold or leased or services performed. "Adjustment Amount" is defined in Section 2.10.3. "Affiliate" shall mean with respect to any Person (i) a Person directly or indirectly controlling, controlled by or under common control with, such Person; (ii) a Person owning or controlling 10% or more of the outstanding voting securities of such Person; or (iii) an officer, director or partner of such Person. When the Affiliate is an officer, director or partner of such Person, any other Person for which the Affiliate acts in that capacity shall also be considered an Affiliate. For these purposes, control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Agreement for Purchase and Sale of Assets, including all exhibits and schedules hereto, as the same may hereafter be amended, modified or supplemented from time to time. "Assets" shall mean all of the Business, goodwill, assets, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, wherever located and whether or not carried or reflected on the books and records of the Company, which are owned by the Company or in which the Company has any interest (including the right to use). The Assets shall include, but not be limited to, the following: (a) the Real Property; (b) the Inventories; (c) the Tangible Personal Property; (d) the Intangible Personal Property; (e) the Licenses or Permits; (f) the Contracts or Other Agreements; (g) the Accounts Receivable; (h) the Books and Records; (i) all rights of the Company under express or implied warranties from suppliers or contractors with respect to the Assets; (j) all of the Company's claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind; (k) all goodwill of the Business as a going concern; (l) all of the Company's cash on hand or on deposit; and (m) all other properties, tangible and intangible, not otherwise referred to above which are owned by the Company or in which it has any interest, including the right to use (to the extent of such interest or right). "Assumed Obligation Schedule" is defined in Section 2.3(a). "Authority" shall mean any governmental, regulatory or administrative body, agency or authority, any court or judicial authority, any arbitrator, or any public, private or industry regulatory authority, whether international, national, Federal, state, or local. "Average Market Price/Contingent Payment" shall mean the arithmetic mean of the closing prices for the Buyer Common on each of the trading days within the fiscal quarter ending on the applicable Contingent Payment Measurement Date, as reported in The Wall Street Journal. "Average Market Price/Initial Payment" shall mean the arithmetic mean of the closing prices for the Buyer Common on each of the 10 trading days immediately preceding and each of the 10 trading days immediately following the execution and delivery of this Agreement, as reported in The Wall Street Journal. "Balance Sheet" shall mean the balance sheet con- tained in the Financial Statements. "Balance Sheet Date" shall mean September 30, 1995. "Bill of Sale" is defined in Section 2.8(b). "Books and Records" shall mean all books and records, ledgers, employee records, customer lists, files, correspondence, and other written records of every kind owned by the Company or in which the Company has any inter- est, but excluding the Company's minute books and stock ledgers. "Business" shall mean the business of the Company as conducted now by the Company anywhere in the world and as would now be proposed to be conducted, but for the execution of this Agreement. "Buyer Common" shall mean the Common Stock, $.10 par value per share, of Buyer. "Buyer Disclosure Schedule" shall mean the Schedule delivered by Buyer to the Company herewith. The Buyer Disclosure Schedule shall be a part of this Agreement. "CA-GCL" shall mean the California General Corporation Law. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et. seq., as the same may be amended from time to time. "Closing" is defined in Section 2.6. "Closing Date" shall mean the date upon which the Closing occurs. "Code" shall mean the Internal Revenue Code of 1986, as the same may hereafter be amended from time to time. Any reference to a specific section of the Code shall refer to the cited provision as the same may be subsequently amended from time to time, as well as to any successor provision(s). "Company" shall mean EFAR Microsystems, Inc., a California corporation, including the EFAR Microsystems, Inc. Taiwan branch. "Company Capital Stock" shall mean the Company Common and the Company Preferred. "Company Common" shall mean the Common Stock, without par value, of the Company. "Company Disclosure Schedule" shall mean the schedule delivered by Company to Buyer herewith. The Company Disclosure Schedule shall be a part of this Agreement. "Company Documents" shall mean this Agreement and all other agreements, instruments and certificates to be executed by the Company in connection with this Agreement. "Company Preferred" shall mean the Series A Preferred Stock and the Series B Preferred Stock. "Consent Solicitation" is defined in Section 3.1.4. "Contingent Payment" is defined in Section 2.10.1. "Contingent Payment Date" shall mean the date that is 30 days following the relevant Contingent Payment Measurement Date. "Contingent Payment Dollar Value" shall mean one- third of the Gross Profit derived from sales of Core Logic Products during the six month period ending on the applicable Contingent Payment Measurement Date. "Contingent Payment Measurement Date" shall mean the last day of each of February and August commencing August 31, 1996 and ending on February 28, 1999. "Continuing Warranties" is defined in Section 2.3(b). "Continuing Warranties Obligations" is defined in Section 2.3(b). "Contract Accruals" is defined in Section 2.3(a). "Contracts or Other Agreements" shall mean all contracts, agreements, warranties, guaranties, indentures, bonds, options, leases, subleases, easements, mortgages, plans, collective bargaining agreements, licenses, purchase orders, sales orders, commitments or other binding arrangements of any nature whatsoever, express or implied, written or unwritten, and all amendments thereto, entered into by or binding upon the Company or to which any of the Assets may be subject. "Core Logic Business Unit" is defined in Section 5.18. "Core Logic Products" shall mean any semiconductor device (or set of semiconductor devices), along with any supporting software, firmware, microcode, and documentation, released for production by the Core Logic Business Unit. "Core Logic Technology Package" is defined in Section 5.15. "Employment Agreements" are defined in Section 6.7. "Employee Records" shall mean all of the Company's Books and Records relating to employees who shall become employees of Buyer or SMC Asia, as of the Closing. "Environmental Law or Orders" shall mean collectively, all Laws and Orders relating to industrial hygiene, occupational safety conditions or environmental conditions on, under or about property, including, without limitation, RCRA, CERCLA and all other Laws and Orders relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, hazardous or toxic materials or wastes into the environment (including ambient air, surface water, ground water, land surface or sub-surface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial hazardous or toxic materials or wastes. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may hereafter be amended from time to time. Any reference to a specific section of ERISA shall refer to the cited provision as the same may be subsequently amended from time to time, as well as to any successor provision(s). "ERISA Affiliate" shall mean all trades and businesses (whether or not incorporated) which, together with the Company, are either members of a controlled group of corporations, within the meaning of Section 414(b) of the Code, or are under common control, within the meaning of Section 414(c) of the Code. "ERISA Plans" shall mean, collectively, all Pension Plans and all Welfare Plans required to be disclosed in Section 3.13 of the Company Disclosure Schedule. "Escrow Agreement" shall mean the Documentation and Deposit Agreement dated September 13, 1995 between the Company, Buyer and Brambles NSD, Inc. attached hereto as Exhibit 1. "Exchange Act" is defined in Section 5.11.4. "Excluded Liabilities" is defined in Section 2.4. "Financial Statements" shall mean the unaudited balance sheet and statements of income of the Company as of and for the nine-month period ended September 30, 1995, including all notes thereto. "GAAP" shall mean generally accepted accounting principles. "Gross Profit" shall mean the difference between revenues and cost of goods sold, as determined in accordance with GAAP, applied consistently with Buyer's then-current practices. "Initial Payment" is defined in 2.5(a). "Intangible Personal Property" shall mean all intangible properties owned by the Company or in which the Company has any interest (including the right to use), including, without limitation, (i) the Company's name and all Marks; (ii) all statutory, common law and registered copyrights and mask work rights, and all applications for the registration thereof; (iii) all Patents; (iv) all Software; (v) all other inventions, discoveries, improvements, processes, formulas (secret or otherwise), algorithms, Trade Secrets, information, know-how and ideas (including those in the possession of third parties, but that are the property of the Company); and (vi) all Technical Documentation. "Inventories" shall mean all inventories, including, without limitation, inventories of raw materials, work in progress, storehouse stocks, materials, supplies, finished goods and consigned goods, owned by the Company or in which the Company has any interest (including the right to use), whether located on the premises of the Business, in transit to or from such premises, in storage facilities or otherwise. "IRS" shall mean the United States Internal Revenue Service. "Key Employees" shall mean the employees listed in Section 6.7 of the Company Disclosure Schedule. "Labor Agreements" shall mean, collectively, (i) all employment agreements, collective bargaining agreements or other labor agreements to which the Company is a party or by which it or any of its properties is bound; (ii) all pension, profit sharing, deferred compensation, bonus, stock option, stock purchase, savings, retainer, consulting, retirement, welfare or incentive plans, agreements, or arrangements (including ERISA Plans) to which the Company is a party or by which it or any of its properties is bound; and (iii) all plans, agreements, or arrangements under which "fringe benefits" (including, but not limited to, hospitalization plans or programs, medical insurance, vacation plans or programs, sick plans or pro- grams and related benefits) are afforded to any employees of the Company. "Law" shall mean any law, statute, regulation, rule, ordinance, or other binding action or pronouncement of an Authority. "Licenses or Permits" shall mean all licenses and permits issued to the Company or in which the Company has any interest (including the right to use). "Lien or Other Encumbrance" shall mean any lien, pledge, mortgage, security interest, charge, conditional sales contract, option, restriction on transfer, use, power to exercise rights or to grant rights to others, or other restriction, reversionary interest, right of first refusal, voting trust arrangement, preemptive right, claim under bailment or storage contract, easement or any other adverse claim or right whatsoever, now existing or that hereafter may come into existence upon the passage of time or the occurrence of any transaction contemplated hereby. "Losses" shall mean all damages, awards, judgments, payments, diminutions in value and other losses, however suffered or characterized, all interest thereon, all costs and expenses of investigating any claim, lawsuit or arbitration and any appeal therefrom, all actual attorneys' fees incurred in connection therewith, whether or not such claim, lawsuit or arbitration is ultimately defeated and all amounts paid incident to any compromise or settlement of any such claim, lawsuit or arbitration. "Marks" shall mean all registered and unregistered trademarks, service marks, trade names, and slogans, all applications therefor, and all associated goodwill. "Material Contracts" shall mean, collectively, the Contracts or Other Agreements that are, or are required to be, identified anywhere in the Company Disclosure Schedule by the terms and provisions of this Agreement. "MoSys" is defined in Section 5.10. "MoSys Agreement" is defined in Section 5.10. "Option Holder" is defined in Section 3.2.1. "Order" shall mean any decree, order, judgment, writ, award, injunction, rule or consent of or by an Authority. "Patents" shall mean all registered patents, including, without limitation, all reissues, divisions, continuations, continuations in part, utility models and design patents, all patent applications, and all associated inventions, industrial models, processes, designs, technical information, shop rights, know-how, Trade Secrets, processes, operating, maintenance and other manuals, drawings and specifications, process flow diagrams and related data. "Pension Plan" shall mean any employee pension benefit plan within the meaning of Section 3(2) of ERISA. "Person" shall mean any entity, corporation, com- pany, association, joint venture, joint stock company, partnership, trust, organization, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including agencies, departments, bureaus, boards, divisions and instrumen- talities thereof), trustee, receiver or liquidator and all subsidiaries thereof. "Prospectus" is defined in Section 5.12.1(b). "RCRA" shall mean the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901, et. seq. as the same may be amended from time to time. "Real Property" shall mean, collectively, all real properties in which the Company has any interest or estate (including the right to use), together with all buildings, fixtures, trade fixtures, plant and other improvements located thereon or attached thereto; all of the Company's rights arising out of use thereof (including air, water, oil and mineral rights); and all subleases, franchises, licenses, permits, easements and rights-of-way which are appurtenant thereto. "Registration" is defined in Section 5.11.1. "Registration Statement" is defined in Section 5.11.1(a). "SEC" is defined in Section 5.11.1(a). "Securities Act" is defined in Section 5.11.1(a). "Series A Preferred Stock" shall mean the 7% cumulative convertible Preferred A Stock, without par value, of the Company. "Series B Preferred Stock" shall mean the convertible Preferred B Stock, without par value, of the Company. "Shareholder Approval" is defined in Section 3.1.3. "Shareholders" shall mean the Persons identified in Section 3.2 of the Company Disclosure Schedule as an owner of Company Capital Stock as of the date hereof or any Option Holder who, on or after the date hereof and prior to the Closing, shall exercise his, her or its option. "SMC Asia" shall mean Standard Microsystems Corporation (Asia), a Delaware corporation. "Software" shall mean all partial or whole "software" and "firmware" and documentation thereof (including, without limitation, all electronic data processing systems and program specifications, source codes, object codes, routines, microcodes, input data and report layouts and formats, record file layouts, outlines, documentation, diagrams, specifications and narrative descriptions and flow charts). "Tangible Personal Property" shall mean all machinery, equipment, trucks, automobiles, furniture, supplies, spare parts, computers, hardware, tools, stores and other tangible personal property owned by the Company or in which the Company has any interest (including the right to use), other than the Inventories and the Books and Records. "Tax Returns" shall mean, collectively all Federal, state, foreign, and local tax reports, returns, information returns and other related documents required by any relevant taxing Authority to be filed with such Authority. "Taxes" shall mean, collectively all taxes, including without limitation, income, gross receipts, net proceeds, alternative, add-on, minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), stamp, leasing, excise, duty, franchise, transfer, license, withholding, payroll, employ- ment, fuel, excess profits, environmental, occupational, interest equalization, windfall profits and severance taxes, and all other like governmental charges. "Technical Documentation" shall mean all technical information and documentation, including, without limitation, all partial or whole designs, drawings, schematics, board layouts, bills of material, chip tooling, pattern generation tapes, test tapes, logic diagrams, circuit diagrams, partial or whole mask, board, chip or cell designs, outlines, or other specifications, descriptions used in the Business, or documentation, writings, drawings, papers, records, books, tapes, disks, or other tangible media embodying any of the Intangible Personal Property. "Territory" is defined in Section 5.14.1. "Trade Secrets" shall have its customary meaning and includes without limitation any information, including a formula, pattern, compilation, program, device, method, technique, or process, that: derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing definition in any way, Trade Secrets include inventions, technical and business information, such as information set out in or relating to computer programs, engineering or technical data, drawings, designs, manufacturing techniques, research and development plans and practices, cost data, pricing practices and policies, marketing practices and policies, licensing practices and policies, and the identity and location of past, present, or prospective suppliers, licensors, licensees, or customers. "Transfer Agent" shall mean the Transfer Agent for the Buyer Common. "Welfare Plan" shall mean any employee welfare benefit plan within the meaning of Section 3(1) of ERISA. ARTICLE II PURCHASE AND SALE OF ASSETS; THE CLOSING 2.1 Assets to be Transferred. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Company shall sell and deliver to the Buyer, and the Buyer shall purchase and accept from the Company, all of the Assets with (i) such changes thereto not constituting a material adverse change thereto (individually or in aggregate) as may occur in the ordinary course of business and (ii) such deletions or additions thereto that may occur with the written consent of the Buyer, in each case in (i) or (ii) above, consistent with the terms and conditions of this Agreement, from the date hereof to the Closing. 2.2 Instruments of Sale. The sale and delivery of the Assets to the Buyer, as herein provided, shall be effected by bills of sale, endorsements, assignments, licenses, drafts, checks and other instruments of transfer and conveyance, agreements and documents in the form specified herein or reasonably acceptable to the Buyer. 2.3 Assumed Liabilities and Obligations. At the Closing, the Buyer shall assume and shall thereafter pay, discharge and perform in the ordinary course each of the following (the "Assumed Obligations"): (a) only: (i) the obligations of the Company arising and accruing with respect to performance to be rendered after the Closing Date under the express terms of the leases, contracts, customer obligations and other obligations listed in Exhibit 2.3(a) hereto (the "Assumed Obligations Schedule"), except those contracts listed thereon, the assignment of which requires the consent of a Person that has not been obtained as of the Closing; provided, however, that except as set forth in Section 2.3(b), the Buyer shall not assume or be obligated to pay, discharge or perform any obligation relating to products sold by the Company; (ii) the obligations of the Company to sell and deliver products under order backlog and associated costs of selling, manufacturing and delivering same, but only to the extent of products that are finished and packaged on the Closing Date; and (iii) the payment obligations under the express terms of any contract, lease, customer obligation, or other obligation listed in Exhibit 2.3(a) due after the Closing Date and arising and accruing with respect to performance rendered to or for the Company prior to the Closing Date (the "Contract Accruals"); and (b) all express replace or repair obligations of the Company arising directly out of the express terms of the express warranties specifically disclosed in Section 2.3(b) of the Company Disclosure Schedule (the "Warranties"), which arise on or after the Closing Date with respect to sales or shipments of products before the Closing Date (the "Continuing Warranties", and together with all costs and expenses incurred in connection with such Continuing Warranties, the "Continuing Warranties Obligations"). 2.4 No Other Liabilities or Obligations Assumed. Except as expressly set forth herein, the Buyer shall not assume, and shall not be liable for any liabilities or obligations of the Business, the Company, any of the Company's Affiliates, or any other Person, whether the same are direct or indirect, fixed, contingent or otherwise, known or unknown, whether arising under a Contract or Other Agreement or otherwise, other than the Assumed Obligations specifically listed on the Assumed Obligations Schedule or the Continuing Warranties Obligations listed on Section 2.3(b) of the Company Disclosure Schedule (the liabilities and obligations not assumed by the Buyer pursuant to this Agreement, the "Excluded Liabilities"). Without limitation of the foregoing, the Excluded Liabilities shall include, and the Buyer shall not assume or be liable for any of the Company's, the Company's Affiliates', or the Business's liabilities or obligations which relate to any (a) Labor Agreement; (b) claim, suit, action or proceeding alleging that any product was defective, improperly designed or manufactured, or that the sale thereof breached any implied warranty, except this clause (b) shall not impair Buyer's obligation to assume pursuant to Section 2.3(b) the express replace or repair obligations of Company under the express terms of any of the Continuing Warranties; (c) any liability of the Company with respect to "dissenting shares," as meant by Section 1300 of the CA-GCL; (d) any liability for any dividend on Company Capital Stock, except as set forth on Exhibit 2.3(a); or (e) Taxes, except as provided in Section 2.7.1. The Company shall promptly pay, discharge and perform in the ordinary course all Excluded Liabilities. NYB Initial Payment. (a) In consideration for the sale and delivery of the Assets, and subject to the terms and conditions of this Agreement, at the Closing, the Buyer shall pay to the Company that number of shares of Buyer Common calculated in the manner set forth in Section 2.5(b) (the "Initial Payment"). (b) The total number of shares of Buyer Common to be issued to the Company at the Closing shall equal: (i) the quotient obtained by dividing $4,000,000 by the Average Market Price/Initial Payment, minus (ii) the shares that are to be subtracted as a result of the operation of Section 2.11.1. (c) In addition, at the Closing, Buyer shall pay the Company, by bank check or wire transfer in immediately available funds $341,600. 2.6 Closing. The closing (the "Closing") shall occur on the latest of (i) second business day after Shareholder Approval shall have been obtained by written consent of all Shareholders, (ii) the 10th business day following the day on which the right of dissenting shareholders to make demand for payment of their shares shall have expired, or (iii) the second business day after Buyer's Board of Directors shall have approved the Agreement, as contemplated in Section 6.10, provided that Buyer, in its sole discretion, may accelerate the Closing Date to any day not sooner than the second business day after the date on which Shareholder Approval shall have been obtained. The Closing shall occur at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York 10154, except as otherwise agreed by Buyer and the Company. At the Closing, Buyer shall deliver to the Company a certificate registered in the name of the Company for the total number of shares of Buyer Common required by Section 2.5(b), accompanied by a cashier's check payable to the Company for the total amount of cash required under Section 2.11.1 (or a wire transfer thereof), representing the Initial Payment. The certificate shall bear such legends, and Buyer may give the Transfer Agent such instructions, as shall be reasonably appropriate to enforce Company's obligations under Section 5.11.2(b). 2.7 Taxes and Other Matters. 2.7.1 Payment of Taxes. The Buyer agrees to pay and hold the Company harmless from all transfer taxes, sales taxes and other similar taxes or charges imposed by any governmental entity in connection with the transfer of the Assets. Each of the Buyer and the Company shall prepare and file, and shall fully cooperate with the other party with respect to such preparation and filing of, any returns and other filings relating to any such taxes, fees, charges, or transfers, as may be required. 2.7.2 Allocation of Purchase Price. The parties agree that the purchase price of the Assets is to be allocated among the Assets as set forth on Exhibit 2.7.2. The parties agree to be bound for all purposes by such allocation and to execute and file IRS Forms 8594 consistent therewith. 2.8 Company's Deliveries at Closing. 2.8.1 Deliveries to Buyer. At the Closing, the Company will deliver, or cause to be delivered, to the Buyer or SMC-Asia the following: (a) duly executed assignments of the Contracts or Other Agreements and all consents to such assignments obtained prior to the Closing Date in form and substance satisfactory to the Buyer and its counsel; (b) duly executed bills of sale with respect to the Assets substantially in the form of Exhibit 2.8(b) (the "Bill of Sale"); (c) the certificates or certified copies of documents contemplated by Sections 6.1 and 6.6 hereof; (d) certificates of incumbency for the officers of the Company executing this Agreement and the other Company Documents or making certifications at the time of the Closing, dated as of the Closing in form and substance reasonably satisfactory to the Buyer and its counsel; (e) the opinion of Skjerven, Morrill, MacPherson, Franklin & Friel, the Company's counsel, as provided for in Section 6.4 hereof; (f) the Employee Records; (g) the Core Logic Technology Package; (h) copies of resolutions duly adopted by the Company's Board of Directors described in Section 3.1.4, certified as complete, accurate and authentic copies and being in full force and effect as of the Closing by an appropriate officer of the Company in form and substance reasonably satisfactory to the Buyer and its counsel; (i) copies of resolutions duly adopted by the Shareholders constituting Shareholder Approval, certified by an appropriate officer of the Company as complete, accurate and authentic copies and being in full force and effect as of the Closing in form and substance reasonably satisfactory to the Buyer and its counsel; ID3 certified copies of banking resolutions on banks' printed forms designating only those persons whom Buyer shall have specified as authorized to write checks on or make withdrawals from the Company's bank accounts; (k) duly executed assignments of the Company's right, title and interest in and to the Marks, Patents and other Intangible Personal Property in form and substance reasonably satisfactory to the Buyer and its counsel; (l) a true, complete and accurate list setting forth the Company's order backlog (as of the Closing Date); (m) insurance certificates naming the Buyer as an additional insured with respect to the Company's Business product liability coverage for claims arising from products sold prior to the Closing; (n) the Employment Agreements, duly executed by the respective Key Employees; (o) the MoSys Agreement, duly executed by the Company and MoSys; and (p) all other properties, documents, instruments, writings and certificates reasonably requested by the Buyer to be delivered by the Company at the Closing, to the extent not theretofore delivered. 2.8.2 Location for delivery. Except as otherwise provided in Section 2.8.1, the Assets shall be delivered to Buyer or SMC Asia, as the case may be, in place, where currently located. 2.9 Buyer Deliveries at Closing. At the Closing, the Buyer will deliver, or cause to be delivered, to the Company the following: (a) the Initial Payment; (b) an assumption agreement in connection with all of the Assumed Obligations to be assumed by the Buyer pursuant to Section 2.3 hereof, in form and substance reasonably satisfactory to the Company and its counsel; (c) the certificates or certified copies of documents contemplated by Sections 7.1 and 7.5; (d) certificates of incumbency for the officers of the Buyer executing this Agreement and the other Company Documents or making certifications at the time of the Closing, dated as of the Closing, in form and substance reasonably satisfactory to the Company and its counsel; (e) the opinion of Loeb & Loeb LLP, the Buyer's counsel, as described in and provided by Section 7.3 hereof; (f) copies of resolutions duly adopted by the Board of Directors of the Buyer, authorizing and approving the transactions contemplated hereby and the execution and delivery of this Agreement and the other documents to be executed by Buyer pursuant hereto, certified as complete, accurate and authentic copies and as being in full force and effect as of the Closing by an appropriate officer of the Buyer, in form and substance reasonably satisfactory to the Company and its counsel; and (g) all other documents, instruments and writings reasonably requested by the Company to be delivered by the Buyer at the Closing. 2.10 Contingent Payment. 2.10.1 Contingent Payment Obligation. In further consideration for the sale and delivery of the Assets, and subject to the terms and conditions of this Agreement, at each Contingent Payment Date, the Buyer shall pay to the Company that number of shares of Buyer Common calculated in the manner set forth in Section 2.10.2 (each a "Contingent Payment"); provided, however, that Buyer's obligation to make Contingent Payments shall be fully satisfied, and Buyer shall have no further obligation to make Contingent Payments, after Contingent Payments shall have been made in respect of total Contingent Payment Dollar Value equal to the difference between $22,000,000 and the Adjustment Amount; and provided further that the Buyer may, at its option, make any Contingent Payment in cash. 2.10.2 Calculation of Contingent Payment. The total number of shares of Buyer Common to be issued to the Company on each Contingent Payment Date shall equal: (i) the quotient obtained by dividing (x) the Contingent Payment Dollar Value by (y) the Average Market Price/Contingent Payment minus (ii) the shares that are to be subtracted as a result of the operation of Section 2.11.1. 2.10.3 Adjustment Amount. Within 60 days after the Closing Date, Buyer shall deliver to the Company a statement setting forth the Adjustment Amount as determined in accordance herewith. The Adjustment Amount shall be the amount by which the Assumed Obligations exceeds the amount of Company cash included in the Assets. 2.11 No Fractional Shares; Adjustments. 2.11.1 No Fractional Shares. No certificates or scrip representing fractional shares of Buyer Common shall be issued, and such fractional share interests will not entitle the owner thereof to vote or to any other rights of a stockholder of Buyer. In lieu of any fractional share to which the Company would otherwise have been entitled, the Company shall receive an amount in cash equal to the product of such fraction and the Average Market Price/Initial Payment or Average Market Price/Contingent Payment, as the case may be. 2.11.2 Adjustments. All amounts referred to in Sections 2.5(b) or 2.10.2 shall be adjusted appropriately for any stock split, stock dividend, reverse stock split or like changes in the outstanding Buyer Common prior to the Closing Date or the applicable Contingent Payment Date, as the case may be. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company and the Key Officers, jointly and severally, hereby represent and warrant to Buyer that: 3.1 Organization; Authority; Due Authorization; Vote Required. 3.1.1 Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the Laws of California; has all requisite corporate power to own, lease, and operate the Assets and to carry on the Business; and is duly qualified or licensed to do business as a foreign corporation and is in good standing in Taiwan, which is the only jurisdiction in which the nature of the Company's Business or the location of its Assets requires such qualification or licensing. 3.1.2 Authority to Execute and Perform Agreements. The Company has all requisite corporate power, authority and approvals required to enter into, execute and deliver this Agreement and all of the other Company Documents and to perform fully the Company's obligations hereunder and thereunder. 3.1.3 Due Authorization; Enforceability. Subject only to obtaining shareholder approval of this Agreement and the principal terms of the transactions contemplated hereby as required by the CA-GCL and the Company's Articles of Incorporation ("Shareholder Approval"), the Company has taken all actions necessary to authorize it to enter into and perform fully its obligations under this Agreement and all of the other Company Documents and to consummate the transactions contemplated herein and therein. This Agreement and the other Company Documents to which the Company, any Key Officer, or any Key Employee is a party are, and, as of the Closing Date, together with any other Company Document or agreement to which any such Person will be a party, will be, the legal, valid, and binding agreement of each such Person, enforceable in accordance with their respective terms, except as such may be subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally (including, without limitation, laws pertaining to preferential and fraudulent transfers), and that equitable remedies are subject to the discretion of the court. 3.1.4 Specific Board Action. Without limiting any other representation or warranty hereunder, the Board of Directors of the Company has unanimously adopted resolutions (a) approving and authorizing the execution and delivery of this Agreement and the other Company Documents and the performance by the Company of all its obligations hereunder and under the other Company Documents; (b) authorizing and directing the solicitation of written consents of the Shareholders to obtain Shareholder Approval ("Consent Solicitation"); (c) stating its determination that this Agreement is in the best interests of the Shareholders, recommending that the Shareholders vote their Company Capital Stock in favor of Shareholder Approval, and directing the inclusion of such determination and recommendation in the Consent Solicitation; and (d) terminating options outstanding under the Company's 1992 Stock Option Plan in accordance with Paragraph 9b thereof. The Board of Directors has not adopted any plan to dissolve the Company or distribute shares of Buyer Common to the Shareholders. 3.1.5 Vote Required. The affirmative vote of a majority of the votes that holders of the Company Common and Series B Preferred Stock are entitled to cast are the only votes necessary to constitute Shareholder Approval, and no other action by the Board of Directors of the Company or the Shareholders is or will be required in connection therewith. 3.2 Capitalization and Ownership of Company Capital Stock. The authorized capital stock of the Company, constituting the Company Capital Stock, consists of 20,000,000 shares of Company Common, without par value, of which [889,212] are issued and outstanding as of the date hereof, 5,000,000 shares of Preferred Stock, without par value, of which 1,220,000 are designated Series A Preferred Stock, all of which shares issued and outstanding as of the date hereof, and 1,280,000 of which are designated Series B Preferred Stock and 1,238,506 of which are issued and outstanding as of the date hereof. No other shares of capital stock of the Company are and authorized or outstanding. Section 3.2 of the Company Disclosure Schedule identifies each owner of Company Capital Stock and accurately sets forth (i) each class of Company Capital Stock and number of shares of such class held by such Shareholder, (ii) the nationality and residence address of such Shareholder, and (iii) all relationships between such Shareholder and the Company, any officer or employee of the Company, or any Option Holder or other Shareholder. Section 3.2 of the Company Disclosure Schedule identifies each owner of any option to purchase shares of Company Capital Stock ("Option Holder"), accurately identifying the stock option plan pursuant to which each option was granted to such Option Holder, the date of grant and vested status of such option, and the class of Company Capital Stock and number of shares of such class issuable pursuant to such option. Except as disclosed on Section 3.2 of the Company Disclosure Schedule, there are no Contracts or Other Agreements or other rights to subscribe for any Company Capital Stock, or Contracts or Other Agreements or other obligations requiring the Company to issue, or grant any rights to acquire, or securities or instruments exercisable or exchangeable for or convertible into, any Company Capital Stock or Contracts or Other Agreements or other obligations requiring the Company to merge, consolidate, dissolve, liquidate, restructure or recapitalize the Company. All outstanding Company Capital Stock is duly authorized, validly issued, fully paid, and nonassessable. 3.3 Subsidiaries. The Company does not own, directly or indirectly, any interest or investment (whether equity or debt) in any subsidiary. 3.4 No Violation. Except as disclosed in Section 3.4 of the Company Disclosure Schedule, and subject to obtaining Shareholder Approval, neither the execution or delivery by the Company of this Agreement or any of the Company Documents nor the consummation of the transactions contemplated herein or therein will: (a) violate any provision of the Articles of Incorporation, bylaws or other charter document of the Company; (b) violate, conflict with, or constitute a default under, permit the termination or acceleration of, or cause the loss of any material right or option under, any Material Contract; (c) require any authorization, consent or approval of, exemption or other action by, or notice to, any party to any Material Contract; (d) result in the creation or imposition of any Lien or Other Encumbrance upon any of the Assets; or (e) violate or require any consent or notice under any Law or Order to which the Company or any of its Assets is subject. 3.5 Regulatory Approvals and Other Consents. Section 3.5 of the Company Disclosure Schedule sets forth a complete and accurate description of each consent, approval, authorization, notice, filing, exemption or other require- ment, whether prescribed by the Articles of Incorporation, by-laws, other charter document of the Company, Law or Order or required pursuant to the terms of any Material Contract, that must be obtained from any Person or that must otherwise be satisfied by the Company in order that (i) the execution or delivery by the Company of this Agreement or any of the Company Documents and (ii) the consummation of the transactions contemplated herein or therein will not cause any breach of the representations and warranties contained in Section 3.4. 3.6 Financial Condition. 3.6.1 Financial Statements. Section 3.6.1 of the Company Disclosure Schedule sets forth (i) the balance sheets of the Company as of December 31, 1992, 1993 and 1994, the related statements of income, stockholders' equity, and cash flows for the year then ended, reviewed by Michael C. Jagchid, the Company's independent certified public accountant, whose reports thereon are included therewith, and (ii) the unaudited balance sheet at September 30, 1995 and the related statements of income for the nine months ended September 30, 1995 and 1994. Said financial statements (a) were prepared from and in accordance with the Books and Records of the Company; (b) were prepared in accordance with GAAP; (c) fairly present the Company's financial condition and the results of its operations as of the relevant dates thereof and for the periods covered thereby; (d) contain and reflect all necessary adjustments and accruals for a fair presentation of the Company's financial condition and the results of its operations for the periods covered by said financial statements; and (e) contain and reflect adequate provisions for all reasonably anticipated liabilities for all Taxes with respect to the periods covered and all prior periods. 3.6.2 No Undisclosed Liabilities. Except for (i) those liabilities specifically reflected or reserved against on the Balance Sheet, (ii) those current liabilities for trade or business obligations incurred since the Balance Sheet Date in connection with the purchase of goods or services in the ordinary course of the Business and consis- tent with past practices, (none of which liabilities is, individually or in the aggregate, material and none of which is for breach of contract, breach of warranty, tort (including product liability) or infringement), (iii) those liabilities arising under any Material Contract (none of which liabilities is for breach of contract, breach of warranty, tort (including product liability) or infringement) or (iv) those liabilities otherwise specifically disclosed in Section 3.6.2 of the Company Disclosure Schedule (none of which liabilities is for breach of contract, breach of warranty, tort (including product liability) or infringement), the Company has, as of the date hereof, no direct or indirect indebtedness, liabilities, claims, losses, damages, deficiencies, obligations or responsibilities, known or unknown, liquidated or unliquidated, accrued, absolute, contingent or otherwise, and whether or not of a kind required by GAAP to be set forth on a financial statement, which individually is or in the aggregate are material to the condition (financial or otherwise), Assets, liabilities, Business, operations or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit. 3.6.3 Inventories. Section 3.6.3 of the Company Disclosure Schedule accurately lists the Company's Inventories as of its date. Buyer acknowledges that it will write down to zero all Inventories not related to order backlog as of the Closing, and the Company and the Key Officers shall have no liability respecting such writedown. Except as set forth in Section 3.6.3 of the Company Disclosure Schedule, all such Inventories were, and are, owned by the Company free and clear of any Liens or Other Encumbrances, and no items included in such Inventories were, or are, held by the Company on consignment from others. 3.6.4 Accounts Receivable. All Accounts Receivable, whether reflected on the Balance Sheet or otherwise, represent bona fide sales of inventory or services of the Company in the ordinary course of the Business and are fully collectible, net of any reserves shown on the Balance Sheet or identified in Section 3.6.4 of the Company Disclosure Schedule, which reserves are adequate and were calculated consistent with past practices. 3.6.5 Absence of Certain Changes. Except as indicated in Section 3.6.5 of the Company Disclosure Schedule, since the Balance Sheet Date, the Company has conducted the Business only in the ordinary course consistent with its past practices and has not: (a) suffered any change, event or condition which, in any case or in the aggregate, has had or could reasonably be expected to have a material adverse effect upon the Company's condition (financial or otherwise), Assets, liabilities, Business, operations or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit, or the Company's ability to consummate the transactions contemplated herein; (b) suffered any destruction, damage to or loss of any Asset (whether or not covered by insurance) which could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), Assets, liabilities, Business, operations, or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit, the value or utility of the Assets or the Company's ability to consummate the transactions contemplated herein; (c) incurred any obligation or liabil- ity or taken property subject to any liability, whether absolute, accrued, contingent or otherwise and whether due or to become due, except current liabilities for trade or business obligations incurred since the Balance Sheet Date in connection with the purchase of goods or services in the ordinary course of the Business and consistent with prior practices, none of which liabilities, in any event, involved in excess of $5,000, individually, or $25,000, in the aggregate; (d) mortgaged, pledged, or subjected any of the Assets to any Lien or Other Encumbrance; (e) sold, transferred, leased to others or otherwise disposed of any of the Assets, except for Inventory sold in the ordinary course of the Business consistent with past practices; (f) amended or terminated any Material Contract or any License or Permit or received any notice of termination of any of the same; (g) declared or made any payment of dividends or other distribution to any Shareholder or upon or in respect of any Company Capital Stock, or purchased, retired or redeemed, or obligated itself to purchase, retire or redeem, any Company Capital Stock; (h) encountered any labor union organ- izing activity, suffered any actual or threatened employee strike, work stoppage, slow-down or lock-out, or any material change in its relations with its employees, agents, customers or suppliers, or suffered any actual or threatened claim of wrongful discharge, or other unlawful labor practice or proceeding; (i) made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or agreed or orally promised to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or vacation pay, to any Shareholder, director, officer, employee, salesperson, distributor or agent of the Company; (j) changed its accounting methods or practices (including, without limitation, any change in depreciation or amortization policies or rates) or revalued any of its Assets; (k) entered into any transaction, contract or commitment other than in the ordinary course of the Business and consistent with its prior practices; or (l) entered into any agreement or made any commitment to take any of the types of action described in subparagraphs (a) through (k) above. 3.7 Tax Matters. Except as indicated in Section 3.7 of the Company Disclosure Schedule: (a) within the times and in the manner pre- scribed by Law, the Company has filed all Tax Returns that the Company is required to file, has paid or provided for all Taxes shown thereon to be due and owing by it and has paid or provided for all deficiencies or other assessments of Taxes, interest or penalties owed by it; no taxing Authority has asserted any claim for the assessment of any additional Taxes of any nature with respect to any periods covered by any such Tax Returns; all Taxes required to be withheld or collected by the Company have been duly withheld or collected and, to the extent required, have been paid to the proper taxing Authority or properly segregated or deposited as required by Law; (b) each Tax Return filed by the Company fully and accurately reflects its liability for Taxes for such year or period and accurately sets forth all items (to the extent required to be included or reflected in such returns) relevant to its future liabilities for Taxes, including the tax basis of its properties and assets. The provisions for Taxes payable reflected in the Financial Statements are fully adequate; (c) no audit of any Tax Return of the Company is in progress or, to the knowledge of the Company or any Key Officer, threatened; (d) no extensions of time with respect to any date on which any Tax Return was or is to be filed by the Company is in force; (e) the Company has not waived or extended any applicable statute of limitations relating to the assessment of any Taxes; (f) no issue has been raised with the Com- pany by any taxing Authority that is currently pending in connection with any Tax Returns. No material issue has been raised in any examination by any taxing Authority with respect to the Company which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. There are no unresolved issues or unpaid deficiencies relat- ing to any such examination; and (g) the Company has delivered to Buyer true and correct copies of all Federal and state income Tax Returns of the Company for the last four complete fiscal years. 3.8 Compliance with Laws; Governmental Matters. 3.8.1 General. The Company has in all material respects complied with, and is now in all material respects in compliance with, all Laws and Orders applicable to the Business, and no material capital expenditures will be required in order to insure continued compliance therewith. Section 3.8.1 of the Company Disclosure Schedule sets forth each License or Permit material to the conduct of the Business, together with its date of expiration and a brief description of its material terms. Except for the Licenses or Permits already held by the Company as disclosed in Section 3.8.1 of the Company Disclosure Schedule, no other franchise, license, permit, order or approval of any Authority is material to or necessary for the conduct of the Business. Each License or Permit listed in Section 3.8.1 of the Company Disclosure Schedule is in full force and effect; the Company is now and has at all times in the past been in all material respects in full compliance with each thereof; no material violations are or have in the last five years been recorded by any Authority in respect of any thereof, and no proceeding is pending or, to the knowledge of the Company or any Key Officer, threatened to revoke, amend or limit any thereof. Except as disclosed in Section 3.8.1 of the Company Disclosure Schedule, there are no pending or, to the knowledge of the Company or any Key Officer, threatened proceedings by or before any Authority which involve new special assessments, assessment districts, bonds, Taxes, condemnation actions, Laws or Orders or similar matters which, if instituted, could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), Assets, liabilities, or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit. 3.8.2 Environmental and Industrial Hygiene Compliance. Except as disclosed in Section 3.8.2 of the Company Disclosure Schedule, (i) neither the Company nor, to the best of its knowledge, any of the Assets has ever been or is now in any material respect in violation of any applicable Environmental Law or Order; (ii) neither the Company nor, to the best of its knowledge, any third party has prior to the date hereof ever used, generated, manufactured, stored or disposed of, on, under, or about the Assets or transported to or from the Assets any flammable explosives, radioactive materials, hazardous wastes or toxic substances, except in compliance with Law; (iii) the Company has obtained and now holds all material permits, licenses and other authorizations that are required to be held by it under all applicable Environmental Laws or Orders; (iv) the Company is in compliance in all material respects with all terms and conditions of any and all required permits, licenses and authorizations and all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in all applicable Environmental Laws or Orders, and any notice or demand letter issued, entered, promulgated or approved thereunder; (v) to the Company's best knowledge, no facts, past or present events, or conditions interfere with or prevent continued compliance in all material respects by the Company with, or give rise to any material present or potential legal, common law, or statutory liability of the Company under, any applicable Environmental Law or Order; (vi) there is no pending civil or criminal litigation, written notice of violation or administrative proceeding involving the Company and relating in any way to any Environmental Law or Order (including any notice, demand letter or written claim under RCRA, CERCLA and similar state or local laws), other than rulemaking proceedings, if any; and (vii) to the Company's best knowledge, there has been no disposal by the Company, directly or indirectly, of any hazardous materials or wastes to, on, or in any site currently listed or formally proposed to be listed on the National Priorities List under CERCLA or any site listed or formally proposed to be listed as a major or priority cleanup site under any comparable state law. For the purpose of this Section 3.8.2, hazardous materials shall include but not be limited to (i) substances now defined as "hazardous substances," "hazardous materials," or "toxic substances" in CERCLA, the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq. or RCRA, as the same may be amended from time to time, or in the regulations adopted and publications promulgated pursuant to said Laws from time to time and (ii) those substances now or at any time hereafter defined as "hazardous wastes" in Section 25117 of the California Health and Safety Code or as "hazardous substances" in Section 25316 of the California Health and Safety Code, as the same may be amended from time to time, or in the regulations adopted and publications promulgated pursuant to said laws from time to time. 3.9 Litigation. Section 3.9 of the Company Disclosure Schedule sets forth an accurate and complete description of every pending or, to the knowledge of the Company or any Key Officer, threatened adverse claim, dispute, governmental investigation, suit, action (including, without limitation, nonjudicial real or personal property foreclosure action), arbitration, legal, administrative or other proceeding of any nature, domestic or foreign, criminal or civil, at law or in equity, by or against or otherwise affecting the Company, the Business, the Assets, or any Key Employee. Section 3.9 of the Company Disclosure Schedule includes a true and complete copy, as currently in effect, of the settlement agreement between the Company and Toshiba Electronics Taiwan Corporation referred to in the 25 August 1995 letter of Dennis McAteer to Michael E. Hingle. The Company has fully discharged its obligations thereunder. The Company has delivered to Buyer copies of all relevant court papers and other documents relating to the matters referred to in Section 3.9 of the Company Disclosure Schedule. Except as disclosed in Section 3.9 of the Company Disclosure Schedule: (a) the Company is not in default with respect to any Order by which it is bound or to which any of the Assets is subject, and there exists no Order enjoining or requiring the Company to take any action of any kind with respect to the Business or the Assets; (b) neither the Company nor, to the knowledge of the Company or any Key Officer, any officer, director, or employee of the Company has been permanently or temporarily enjoined by any Order from engaging in or continuing any conduct or practice in connection with the Business or the Assets. 3.10 Property of the Company. 3.10.1 Real Property. (a) The Company owns no Real Property. The Company has delivered to Buyer true, correct, and complete copies of each lease for Real Property to which Company is a party, and all amendments thereto. Each such lease, together with all amendments, is listed in Section 3.10.1 of the Company Disclosure Schedule and, to the knowledge of the Company and the Key Officers, is valid, and enforceable by the Company, with respect to the other party thereto, except as such may be subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally (including, without limitation, laws pertaining to preferential and fraudulent transfers), and that equitable remedies are subject to the discretion of the court. Neither the Company nor any other party to any such lease is in breach of any provision thereof. (b) All of the buildings, fixtures and other improvements constituting a part of the Real Property are in good operating condition and repair, and the Business is not, to the knowledge of the Company or any Key Officer, in any material respect in violation of any applicable building code, zoning ordinance or other Law, or without limitation, applicable environmental protection and occupational health and safety laws. (c) The Company has not experienced any material interruption in the delivery of adequate quantities of any utilities (including, without limitation, electricity, natural gas, potable water, water for cooling or similar purposes and fuel oil) or other public services (including, without limitation, sanitary and industrial sewer service) required by the Company in the operation of the Business. (d) All of the Real Property has unqualified access to public roads and to all utilities, including electricity, sanitary and storm sewer, potable water, oil, natural gas and other utilities used in the operation of the Business. 3.10.2 Tangible Personal Property. Section 3.10.2 of the Company Disclosure Schedule sets forth, as of the date hereof, a description of each item of Tangible Personal Property owned by the Company having either a depreciated book value or estimated fair market value (whichever is lower) per unit in excess of $1,000 or not owned by the Company but in the possession of the Company or used by the Company in the Business and having rental payments therefor in excess of $2,000 per year, together with a description of the owner of, and any Contract or Other Agreement relating to the possession or use of, each such item of Tangible Personal Property. Except as disclosed in Section 3.10.2 of the Company Disclosure Schedule, as of the date hereof: (a) the Company has good and marketable title to each item of the Tangible Personal Property owned by the Company, free and clear of all Liens or Other Encumbrances, except for liens, if any, for personal property taxes not due and liens of repairpersons or bailees or other similar liens incurred in the ordinary course of the Business in respect of obligations that are not overdue; and (b) each item of the Tangible Personal Property is in good operating condition and repair, usable in the ordinary course of the Business, and the operation thereof as conducted prior to the date hereof, as presently conducted and as proposed to be conducted, is not in any material respect in violation of any applicable building code, zoning ordinance, or other Law, including without limitation, with respect to environmental protection. 3.10.3 Intangible Personal Property. Section 3.10.3 of the Company Disclosure Schedule sets forth, as of the date hereof, (i) a true and complete schedule of each Mark, Patent, item of Software, or Trade Secret constituting a part of the Intangible Personal Property; (ii) a true and complete schedule of each statutory, common law, registered copyright, or mask work right, and each registration and application therefor con- stituting a part of the Intangible Personal Property; (iii) a true and complete schedule identifying all Technical Documentation and the specific location of each item thereof; and (iv) a true and complete schedule of each Contract or Other Agreement to which the Company is a party relating to any item of Intangible Personal Property. Section 3.10.3 of the Company Disclosure Schedule specifies which of such Contracts or Other Agreements requires the Company to pay or entitles it to receive any royalty, license fee, or other compensation and the amount thereof or the basis for computing same. Section 3.10.3 of the Company Disclosure Schedule also identifies each item of Intangible Personal Property development of which was funded by a third Person (including any officer, director, employee, or Shareholder) or was conducted by or as a joint venture, in partnership, or otherwise in collaboration, with any other Person (except an employee solely in his or her capacity as such) and any Contract or Other Agreement pursuant to which same occurred. The effectuation of the transactions contemplated hereby will not adversely affect in any manner such Contract or Other Agreement or any item or part of the Intangible Personal Property or the nature or usefulness thereof in the hands of the Buyer. Except as indicated in 3.10.3 of the Company Disclosure Schedule, as of the date hereof: (a) the Company is the owner of all right, title and interest in and to each item of the Intan- gible Personal Property, free and clear of all Liens or Other Encumbrances; (b) all Trademarks, Patents, copyrights, mask work rights and all other Intangible Personal Property and all state, Federal, and foreign registrations listed in Section 3.10.3 of the Company Disclosure Schedule are valid and in full force and effect, and all applications therefor listed in Section 3.10.3 of the Company Disclosure Schedule have been properly filed and are in proper form, and none of the foregoing are subject to any Taxes, maintenance fees or actions falling due within 120 days after the date hereof; (c) there are no existing Orders and no pending claims, actions, judicial or other adversary proceedings, disputes or disagreements involving the Company concerning any item of the Intangible Personal Property or part thereof, and, to the knowledge of the Company and each Key Officer, no such action, proceeding, dispute or disagreement is threatened; (d) the Company has, and upon consummation of the transactions contemplated hereby, Buyer will have, the full, exclusive, and irrevocable right and authority in perpetuity to use each item of the Intangible Personal Property as it has been used previously in the Business; to the knowledge of the Company and each Key Officer, such use did not ever, does not, and will not conflict with, infringe upon, or violate any Patent, copyright, Mark, Trade Secret or other proprietary right of any other Person; the Company has not infringed and is not now infringing any proprietary right belonging to any other Person; no Person has made any assertion contrary to or inconsistent with the foregoing; and, to the knowledge of the Company and each Key Officer, no Person has infringed upon or violated any Intangible Personal Property of the Company or threatened to do so; (e) all Trade Secrets of the Company are presently protectible, and are not part of the public knowledge or literature, nor to the knowledge of the Company or any Key Employee have any been used, divulged or appropriated for the benefit of any Person other than the Company or to the detriment of the Company; the Company has taken reasonable security measures to protect the secrecy, confidentiality, and value of its Trade Secrets; and the Technical Documentation related to each Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it, and to allow its full and proper use without reliance on the special knowledge or memory of others; and (f) upon commencement of employment with the Company, and prior to disclosure to any Company employee of any Trade Secret or other Company confidential information, each employee of the Company (whether now or at any time previously employed) executed an agreement with Company in the form set forth in Section 3.10.3(f) of the Company Disclosure Schedule; each such agreement has vested fully, exclusively, and irrevocably in the Company all Intangible Personal Property developed, in whole or in part, or alone or together with others, by each Company employee during the term of his or her employment with the Company and is otherwise enforceable by the Company in accordance with its terms; and to the knowledge of the Company or any Key Officer, no employee has breached or threatened to breach any term thereof. 3.10.4 Use Restrictions. Except as disclosed in Section 3.5, 3.10.2 or 3.10.3 of the Company Disclosure Schedule, none of the Tangible Personal Property or Intangible Personal Property owned or used by the Company is subject to (a) any material contractual restriction on the manner in, purpose for, or location at, which same may be used, or (b) other restriction on any use of same that would result from the consummation of the transactions contemplated hereby. 3.10.5 Necessary Properties. Except as set forth in Section 3.10.5 of the Company Disclosure Schedule, as of the date hereof, the Assets include all of the assets, real properties, tangible personal properties and intangible properties necessary for the conduct of the Business as conducted to the date hereof, as presently conducted and as proposed to be conducted. 3.11 Agreements. (a) Section 3.11(a) of the Company Dis- closure Schedule sets forth a true and complete list of each Contract or Other Agreement now in effect, except (i) any Contract or Other Agreement specifically identified in Sec- tions 3.10.1, 3.10.2, 3.10.3, 3.12.1, or 3.14 of the Company Disclosure Schedule or that would be required to be dis- closed therein but for specific exclusions contained in any of such Sections; (ii) purchase or sales orders made in the ordinary course of the Business not involving payments, costs, or potential liabilities in excess of $2,500; and (iii) any other Contract or Other Agreement made in the ordinary course of the Business not involving aggregate payments, costs, or potential liabilities in excess of $2,500. Notwithstanding clause (iii) of the previous sentence, each Contract or Other Agreement to which any officer, director, employee or Shareholder is a party, or arising from a relationship described in Section 3.18, or pursuant to which any Company Trade Secret was at any time disclosed to a third Person, that otherwise would not be required to be disclosed pursuant to any other provision of this Agreement, is disclosed in Section 3.11(a) of the Company Disclosure Schedule. (b) Except as disclosed in Section 3.11(b) of the Company Disclosure Schedule: (i) each Material Contract is the valid, legal and binding obligation of the Company and, to the Company's knowledge, of the other contracting party, enforceable in all material respects in accordance with its terms against the other contracting party and is in full force and effect, except as such may be subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally (including, without limitation, laws pertaining to preferential and fraudulent transfers), and that equitable remedies are subject to the discretion of the court; and all rights of the Company thereunder are owned free and clear of any Lien or Other Encumbrance; (ii) no other contracting party to any Material Contract is now in material breach thereof or has breached the same in any material respect prior to the date hereof; neither the Company nor any Key Officer has any knowledge of any anticipated material breach thereof by any such party; and there is not now, nor has there been prior to the date hereof, any disagreement or dispute arising under any Material Contract that has not been resolved; (iii) the Company has fulfilled all material obligations required pursuant to each Material Contract to have been performed by it prior to the date hereof, and neither the Company nor any Key Officer has any reason to believe that the Company or the Core Logic Business Unit will not be able to fulfill, when due, all of its obligations under each Material Contract remaining to be performed after the date hereof; (iv) the Company is not under any material liability or obligation with respect to the return of Inventory or products sold by the Company that are in the possession of distributors, wholesalers, retailers, or customers; (v) the Company is not a party to, nor bound by, any Contract or Other Agreement or any provision of its Articles of Incorporation or by-laws that (x) restricts the conduct of the Business anywhere in the world or (y) contains any unusual or burdensome provisions that could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), Assets, liabilities, Business, operations or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit; and (vi) the Material Contracts include all of the contracts and agreements necessary for the conduct of the Business as conducted prior to the date hereof, as presently conducted by the Company, and as proposed to be conducted. (c) Section 3.11(c) of the Company Disclosure Schedule sets forth a true and correct list of each proposed agreement, commitment, arrangement, or other understanding under current discussion between Company and any third party that would, or reasonably could be expected to, be required to be disclosed pursuant to any provision of this Agreement, if same had been executed as of the date hereof. A copy of the most recent draft of such agreement and all other documents evidencing the current state of such discussion is set forth in Section 3.11(c) of the Company Disclosure Schedule. 3.12 Labor and Employment Matters. 3.12.1 Labor Agreements. Section 3.12.1 of the Company Disclosure Schedule sets forth a true and current list of all of the Labor Agreements now in effect. The Company has previously delivered to Buyer true and correct information concerning the Company's employees, including with respect to the (i) name, residence address, and social security number; (ii) position; (iii) compensation; (iv) vacation and other fringe benefits; (v) claims under any Welfare Plan; (vi) location of employment; (vii) citizenship; and (viii) resident alien status (if applicable). Except as disclosed in Section 3.12.1 of the Company Disclosure Schedule, as of the date hereof: (a) all employees of the Company are employees at will, and the employment of each employee of the Company may be terminated immediately by the Company; (b) to the knowledge of the Company, no employee of the Company has any plan to terminate his or her employment at or prior to the Closing, whether or not as a result of the transactions contemplated herein; (c) to the knowledge of the Company and each Key Officer, no employee of the Company, in the ordinary course of his or her duties, has breached or will breach any obligation to a former employer in respect of any proprietary right of such former employer; and (d) the Company has no material labor relations problems. 3.12.2 Compliance With Labor Laws and Agreements. Except as disclosed in Section 3.12.2 of the Company Disclosure Schedule, the Company has complied in all material respects with all Labor Agreements and all applicable Laws and Orders relating to employment or labor. To the Company's knowledge, no such Law or Order of California requires Buyer to give any notice, make any filing, receive any approval, or take any other action to, with, or from or with respect to any Authority in connection with the transactions contemplated hereby. Except as disclosed in Section 3.12.2 of the Company Disclosure Schedule, there is no legal prohibition with respect to the permanent residence of any Company employee in the United States or his or her permanent employment by the Company or the Buyer. No present or former employee, officer or director of the Company has, or will have at the Closing Date, any claim against the Company for any matter including, without limitation, for wages, salary, vacation or sick pay, or under any Welfare Plan. Except as disclosed in Section 3.12.2 of the Company Disclosure Schedule, there is no: (a) unfair labor practice complaint against the Company pending before the National Labor Rela- tions Board or any state or local agency; (b) pending labor strike or other material labor trouble affecting the Company; (c) material labor grievance pending against the Company; (d) pending representation question respecting the employees of the Company; or (e) pending arbitration proceeding arising out of or under any collective bargaining agreement to which the Company is a party. In addition, to the knowledge of the Company and each Key Officer in the ordinary course of business (and without any special investigation): (i) none of the matters specified in clauses (a) through (e) above is threatened against the Company; (ii) no union organizing activities have taken place with respect to the Company; (iii) no basis exists for which a claim may be made under any collective bargaining agreement to which the Company is a party; and (iv) all employees referred to in Section 6.7 are in good health. There has been no mass layoff or plant closing as defined in the Worker Adjustment and Retraining Notification Act or any similar state or local "plant closing" law with respect to the employees of the Company. 3.13 Pension and Benefit Plans. All accrued obligations of the Company applicable to its employees, whether arising by operation of Law, by contract, by past custom or otherwise, for payments by the Company to trusts or other funds or to any governmental agency, with respect to unemployment compensation benefits, social security benefits or any other benefits for its employees with respect to the employment of said employees through the date hereof have been paid or adequate accruals therefor have been made on the Books and Records. All reasonably anticipated obligations of the Company with respect to such employees, whether arising by operation of Law, by contract, by past custom, or otherwise, for salaries, vacation and holiday pay, sick pay, bonuses and other forms of compensation payable to such employees in respect of the services rendered by any of them prior to the date hereof have been or will be paid by the Company prior to the Closing Date. The Company does not currently maintain, contribute to or participate in any Pension Plan (whether single employer, multi-employer or otherwise), has not maintained, contributed to or participated in any Pension Plan and has no commitment to adopt a Pension Plan. The Company does not have, and has never had, any ERISA Affiliate. The Company has no liability, and to its best knowledge, is not aware of any potential liability, including, but not limited to, joint and several liability for Pension Plans of current or former ERISA Affiliates, with respect to any Pension Plan. Except as disclosed in Section 3.13 of the Company Disclosure Schedule, as of the date hereof: (a) the Company does not maintain or participate in, and have any obligation to contribute to, have in effect, and has not committed to adopt, any Welfare Plan (or improvement thereto); (b) each ERISA Plan conforms in form and operation, in all material respects to all applicable Laws and Orders, including ERISA and the applicable provisions of the Code. All notices, reports, returns, applications and disclosures have been timely made which are required to be made to the Internal Revenue Service, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation, any participants in the ERISA Plans, any trustee, or any insurer with respect to the ERISA Plans; (c) the Company has made or provided for (with fully-funded reserves) all contributions heretofore required to have been made under all of the ERISA Plans, and will, by the Closing Date, have made or provided for (with fully-funded reserves) all contributions required to be made on or before the Closing Date under all such plans; (d) no ERISA Plan nor any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction which may subject any of such ERISA Plans, any such trust, or any party dealing with such ERISA Plans or any such trust (including the Company), to the Tax or penalty on prohibited transactions imposed by Section 4975 of the Code or to a civil penalty imposed by Section 502 of ERISA; (e) there are no material actions, claims or lawsuits which have been asserted or instituted against any of the ERISA Plans or the trusts thereunder, and to the knowledge of the Company or any Key Officer, no basis for such action, claim or lawsuit exists, and no such action, claim or lawsuit has been threatened; (f) the Company has not agreed to indemnify any other party for any liabilities or expenses which have been or may in the future be incurred by or asserted against such other party in respect of any ERISA Plan; (g) the Company has no unpaid liability in respect of any employee for any contribution and/or premium due under any Welfare Plan constituting one of the ERISA Plans and has no liability as to any benefits to which any employee may be entitled under any Welfare Plan constituting one of the ERISA Plans, whether for benefits due or claims filed which is not fully and accurately reflected on its Financial Statements; (h) the Company does not maintain or participate in any Welfare Plan which provides for continuing benefits or coverage for any participant or any spouse, dependent or beneficiary under such plan after termination of employment, except as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and the regulations thereunder and at the expense of the participant or the beneficiary of the participant. The Company is in compliance with the COBRA notice and continuation coverage requirements with respect to all plans which it maintains or in which it participates; and (i) except as disclosed in Section 3.13 of the Company Disclosure Schedule, the transaction contemplated by this Agreement will not (under a Labor Agreement, an ERISA Plan or otherwise) result in any increase in benefit payable or acceleration of benefit vesting or liability for severance or termination pay or any similar payment to any current or former employee of the Company. 3.14 Insurance. Section 3.14 of the Company Dis- closure Schedule sets forth a true and complete list of all policies or binders of fire, liability, workers' compensa- tion, vehicular or other insurance held by or on behalf of the Company specifying the type of policy, the insurer, the policy number or covering note number with respect to binders and describing each pending claim thereunder. Such policies and binders are in full force and effect and are in all material respects in accordance with the customary insurance requirements for the industry of the Company and in compliance with all applicable Laws and Orders. The Company is not, and has not been, in any material respect in default, with respect to any provision contained in any such policy or binder or failed to give any notice or present any claim under any such policy or binder in due and timely fashion. There are no outstanding unpaid claims under any such policy or binder. The Company has not received a notice of cancellation or non-renewal of any such policy or binder. The Company has no knowledge of any inaccuracy in any application for such policies or binders, any failure to pay premiums when due, or any similar state of facts which may form the basis for termination of any such insurance. The Company has never been refused any insurance with respect to its properties or operations, nor has its insur- ance coverage ever been limited. No such policy is ter- minable or cancelable by the insurer by virtue of the consummation of the transactions contemplated herein. 3.15 Suppliers and Customers. (a) Section 3.15(a) of the Company Disclosure Schedule is a true, complete and current list of the Company's customers (including distributors). All information previously delivered by the Company to Buyer relating to its customers and sales of its product is true, complete and correct in all material respects. Except as disclosed in Section 3.15(a) of the Company Disclosure Schedule, no single supplier or customer of the Company is of material importance to the Company. Except as set forth in Section 3.15(a) of the Company Disclosure Schedule, the relationships of the Company with its suppliers, customers, and sales representatives are good commercial working relationships, and no Person who was a supplier, customer, or sales representative of the Company at any time during the Company's previous fiscal year or the current fiscal year has canceled or otherwise terminated, or threatened to cancel or otherwise terminate, its relationship with the Company or decreased or limited materially, or threatened to decrease or limit materially, its services, supplies, or materials to the Company or its purchases of the services or products of the Company. Except as set forth in Section 3.15(a) of the Company Disclosure Schedule, the Company has no knowledge that any such supplier, customer, or sales representative intends to cancel or otherwise modify its relationship with the Company or to decrease materially or limit its services or products to the Company or its purchases of the services or products of the Company. Except as set forth in Section 3.15(a) of the Company Disclosure Schedule, the execution, delivery, or performance of this Agreement, or the consummation of the transactions contemplated hereby will not, to the knowledge of the Company or any Key Officer, adversely affect the relationship of the Business with any such supplier, customer or sales representative. (b) Each written commitment or Contract or Other Agreement to which an Authority is a party or obligating Company, for the benefit of any Authority, to maintain a supply of any Company product, and any commitment, sales order, or Contract or Other Agreement requiring the Company to deliver or sell any Company product at a date later than six months after the date hereof, is described in Section 3.15(b) of the Company Disclosure Schedule or identified in Section 3.11(a) of the Company Disclosure Schedule. (c) Section 3.15(c) of the Company Disclosure Schedule sets forth (i) a true, complete, and accurate list, since January 1, 1995, of all sales representatives of the Company and (ii) a true, complete, and accurate list of each Person who has or to the Company's knowledge, claims any right to sell Company products in any geographic area or to any particular customer, and a reasonably detailed description of such right or claim. 3.16 Warranties and Merchandising. (a) Section 3.16(a) of the Company Disclosure Schedule sets forth (i) true, complete and accurate copies or descriptions of all of the Company's forms of warranty now in effect with respect to any Company product; (ii) a true, complete and accurate list of all warranty claims made with respect to any Company product during the last fiscal year or the current fiscal year, identifying the product, customer, nature of the claim and date made, remedial action taken, and dollar amount involved; (iii) a true, complete, and accurate description of all of the Company's stock rotation or co-op advertising obligations; and (iv) a true, complete and accurate list of all Contracts or Other Agreements and other documents of the Company, other than Labor Agreements, providing for or describing or otherwise obligating the Company with respect to incentives for sales of Company products or to make payments to or for a customer, or make any other accommodation for a customer, or take back any Company product from a customer (or in absence of such Contract or Other Agreement or document, Section 3.16(a) of the Company Disclosure Schedule accurately and completely describes each such obligation and the customers to whom such obligation is owed). (b) As of December 31, 1995, the aggregate of all unfilled accepted orders for the sale of Company products is approximately $289,000. A true, complete, and accurate list of all of such orders, specifying amount, customer date accepted, and date due is contained in Section 3.16(b) of the Company Disclosure Schedule. 3.17 Product Quality. 3.17.1 Claims and Occurrences. Except as disclosed in Section 3.17.1 of the Company Disclosure Schedule, there is no claim now pending or, to the knowledge of the Company or any Key Officer in the ordinary course of business and without special investigation, threatened by or before any Authority alleging any defect in any product manufactured, shipped, sold or delivered by the Company or alleging, with respect thereto, any failure of the Company to warn or any breach by the Company of any implied warranty or representation, as a result of which personal injury or property damage is alleged to have occurred, nor to the knowledge of the Company or any Key Officer is there any valid basis for any such claim. 3.17.2 Compliance With Standards. All products, manufacturing standards applied, and testing procedures used comply in all material respects with all applicable specifications and the product literature in which they are described and all applicable Laws promulgated, administered or enforced by the Federal Communications Commission and with all applicable standards established by Underwriters Laboratory, or equivalent U.S. laboratory, CISPR, or CSA. 3.18 Potential Conflicts of Interest. Except as disclosed in Section 3.18 of the Company Disclosure Sched- ule, none of the Key Employees, and no Affiliate of any of them, (i) holds a beneficial interest in any Contract or Other Agreement of the Company (other than contracts, commitments, or agreements between the Company and such persons in their capacities as employees, officers, or directors of the Company) or (ii) owns, directly or indirectly, in whole or in part, any tangible or intangible property (including, without limitation any Patent, Mark, franchise, invention, permit, license, Trade Secret, or confidential information) that the Company uses or the use of which is necessary for the Company's conduct of the Business. 3.19 Certain Transactions. Except as disclosed in Section 3.19 of the Company Disclosure Schedule, all purchases and sales or other transactions, if any, between the Company, on the one hand, and any Key Officer, officer, director, Shareholder, Key Employee or Affiliate thereof, on the other hand, have been made on the basis of prevailing market rates and terms, such that all such transactions have been on terms no less favorable to the Company than those that would have been available from unrelated third parties. 3.20 Powers of Attorney and Suretyships. Except as disclosed in Section 3.20 of the Company Disclosure Schedule, the Company has no general or special powers of attorney outstanding (whether as grantor or grantee thereof) or any obligation or liability (whether actual, accrued, accruing, contingent, or otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any Person. 3.21 Banking Facilities. Section 3.21 of the Com- pany Disclosure Schedule contains a true and complete list of: (a) each bank, savings and loan, or other financial institution with which the Company has an account or safety deposit box and the numbers of the accounts or safety deposit boxes maintained by the Company thereat; and (b) the names of all persons authorized to draw on each such account or to have access to any such safety deposit box facility, together with a description of the authority (and conditions thereof, if any) of each such person with respect thereto. 3.22 Absence of Adverse Changes. Neither the Company nor any Key Officer knows or has reason to know of any material fact or contingency that could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), Assets, liabilities, Business, operations or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit, the value or utility of the Assets, or the ability of the Company to consummate the transactions contemplated herein or in the other Company Documents. 3.23 Full Disclosure. The Company has heretofore made all of the Books and Records available to Buyer for its inspection and has heretofore delivered to Buyer copies of all Material Contracts and other documents referred to in the Company Disclosure Schedule. All Material Contracts, documents, and other papers or copies thereof delivered to Buyer by or on behalf of the Company in connection with this Agreement or the other Company Documents and the transactions contemplated herein or therein are accurate, complete, and authentic. Furthermore, the information furnished to Buyer by or on behalf of the Company in connection with this Agreement or the other Company Documents and the transactions contemplated herein or therein does not contain any untrue statement of a material fact and does not omit to state any material fact necessary to make the statements made, in the context in which they are made, true or not misleading. Except for matters of general application relating to companies similarly situated to the Company, there is no fact that the Company has not disclosed to Buyer in writing that could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), Assets, liabilities, Business, operations, properties or prospects (before or after the Closing Date), of the Company or the Core Logic Business Unit, the value or utility of the Assets, or the ability of the Company to consummate the transactions contemplated herein or in the other Company Documents. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Company as follows: 4.1 Due Incorporation. The Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has all requisite power and authority to own, lease, and operate its assets, properties and business and to carry on its business as now conducted. 4.2 Authority to Execute and Perform Agreements. Subject to the further approval of the Board of Directors of the Buyer referred to in Section 6.10, the Buyer has all requisite corporate power, authority, and approval required to enter into, execute, and deliver this Agreement and the other agreements to be executed by it hereunder and to perform fully its obligations hereunder and thereunder. 4.3 Due Authorization. Subject to the further approval of the Board of Directors of the Buyer referred to in Section 6.10, the Buyer has taken all action necessary to authorize it to enter into and perform its obligations under this Agreement and all other agreements to be executed by it hereunder and to consummate the transactions contemplated herein and therein. Subject to such further approval, this Agreement and such other agreements will be, as of the Clos- ing Date, the legal, valid, and binding obligations of the Buyer, enforceable in accordance with their respective terms, except as such may be subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally (including, without limitation, laws pertaining to preferential and fraudulent transfers), and that equitable remedies are subject to the discretion of the court. Upon issuance pursuant to this Agreement, the Buyer Common will be legally and validly issued, fully paid, and nonassessable. 4.4 No Violation. Subject to Section 4.5, neither the execution and delivery of this Agreement and all other agreements to be executed by Buyer hereunder nor the consummation of the transactions contemplated herein and therein will (a) violate any provision of the Certificate of Incorporation or bylaws of Buyer; (b) violate, conflict with, or constitute a default under any agreement to which Buyer is a party or by which it or its property is bound; (c) require the consent of any party to any Material Contract or Other Agreement to which Buyer is a party or by which it or its property is bound; or (d) violate any Laws or Orders to which Buyer or its property is subject. 4.5 Required Consents. Each consent, approval, authorization, waiver, and other requirement prescribed by any Law or Order or material contract or other material agreement that must be obtained or satisfied by Buyer and that is necessary for the execution and delivery by Buyer of this Agreement and all other agreements to be executed by it hereunder and the consummation of the transactions contemplated herein or therein are listed on Section 4.5 of the Buyer Disclosure Schedule. ARTICLE V CERTAIN COVENANTS The parties hereto covenant and agree as follows: 5.1 Business Examinations and Physical Investigations of Assets. Prior to the Closing Date, the Buyer shall be entitled, through its employees and representatives, including, without limitation, Loeb & Loeb LLP and Arthur Andersen LLP, to make such investigations and examinations of the Company, its Books and Records, the Business, and the Assets as Buyer may reasonably request. In order that Buyer may have the full opportunity to do so, the Company shall furnish Buyer and its representatives during such period with all information concerning the Business and the Assets as Buyer or such representatives may reasonably request and cause the Company's officers, employees, consultants, agents, accountants, and attorneys to cooperate fully with Buyer and such representatives and to make full disclosure of all information and documents requested by Buyer and/or such representatives. Any such investigations and examinations shall be conducted at reasonable times and under reasonable circumstances. No investigation by Buyer shall, however, diminish or obviate in any way, the effectiveness of any of the representations, warranties, covenants, or agreements of the Company or any of the Key Officers contained in this Agreement. All information shall be kept confidential pursuant to Section 11.2. 5.2 Conduct of Business. (a) From the date hereof through the Closing Date, the Company shall conduct the Business in such a manner that the representations and warranties contained in Article III shall continue to be true and correct in all material respects as of the Closing Date as if made at and as of the Closing Date. (b) From the date hereof through the Closing Date, the Company shall conduct the Business only in the ordinary course and consistent with its prior practices, shall not make or institute any unusual or novel methods of manufacture, purchase, sale, lease, management, accounting or operation or that vary materially from those in use as of the date hereof and shall maintain, keep and preserve the Assets in good condition and repair. In addition, the Company shall use its best efforts (i) to preserve the Business and organization of the Company intact, (ii) to keep available to Buyer the services of the Company's present officers, employees, agents and independent contractors, (iii) to preserve for the benefit of Buyer the goodwill of the Company's suppliers, customers, landlords and others having business relations with it, and (iv) to cooperate with Buyer and use reasonable efforts to assist Buyer in obtaining the consent of any landlord, licensor, or other party to any lease or Contract or Other Agreement with the Company where the consent of such landlord or other party may be required by reason of the transactions contemplated herein. Without limiting the generality of the foregoing, prior to the Closing, the Company shall not with- out Buyer's prior written approval: (x) enter into any Contract or Other Agreement, commitment or other understanding or arrangement, (y) perform, take any action or incur or permit to exist any of the acts, transactions, events or occurrences of the type (1) described in Section 3.6.5 which would have been inconsistent with the representations and warranties set forth therein had the same occurred after the Balance Sheet Date and prior to the date hereof or (2) described in Section 3.19 that would be required to be set forth on Section 3.19 of the Company Disclosure Schedule if it had previously taken place, or (z) amend or propose to amend its Articles of Incorporation or by-laws. 5.3 Changes in Business. From the date hereof through the Closing Date, the Company shall consult with, and in good faith consider implementing the instructions of, Buyer with respect to (i) the cancellation of Contracts or Other Agreements, commitments or other understandings or arrangements to which the Company is a party, including, without limitation, purchase orders for any item of Inventory and commitments for capital expenditures or improvements; (ii) entering into any Contract or Other Agreement of a kind referred to in Section 3.11(c); (iii) the commencement in one or more of the Company's loca- tions of the orderly and gradual discontinuance of par- ticular items or operations; (iv) the purchasing, pricing or selling policies (including, without limitation, selling at discounts merchandise of the Business); and (v) the settlement or disposition of any litigation or claim. 5.4 Insurance. From the date hereof through the Closing Date, the Company shall maintain in force (including necessary renewals thereof) the insurance policies listed in Section 3.14 of the Company Disclosure Schedule, except to the extent that they may be replaced with equivalent policies appropriate to insure the Assets and the Business, to the same extent as currently insured at the same rates or at different rates approved by Buyer. 5.5 No Defaults. From the date hereof through the Closing Date, the Company shall not commit a material default under any term or provision of, or suffer or permit to exist any condition or event which, with notice or lapse of time or both, would constitute a material default by the Company under, any Material Contract or any License or Permit. 5.6 Reporting and Compliance With Law. From the date hereof through the Closing Date, the Company shall duly and timely file all Tax Returns required to be filed with Authorities and duly observe and conform, in all material respects, to all applicable Laws and Orders. 5.7 Litigation. From the date hereof through the Closing Date, the Company shall promptly notify Buyer of any lawsuit, claim, proceeding, or investigation that after the date hereof is threatened or commenced against the Company, or to the Company's knowledge, any officer, director, employee, consultant, agent or Shareholder, in his, her or its capacity as such, which, if decided adversely, could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), Assets, liabilities, Business, operations or prospects (before or after the Closing Date) of the Company or the Core Logic Business Unit, the value or utility of the Assets or the ability of the Company to consummate the transactions contemplated herein or the other Company Documents. 5.8 Arrangements with Employees. From the date hereof until the Closing Date, the Company, after prior reasonable notice from Buyer, shall permit Buyer to approach and negotiate with any or all employees of the Company, including, but not limited to, managerial staff, in an effort to persuade them to continue in the employ of the Company pending the Closing and thereafter to become employees of the Buyer. The Company shall cooperate with Buyer in such negotiations. 5.9 No Solicitation or Negotiation. Unless and until this Agreement shall be terminated, the Company shall not, nor shall it cause, suffer or permit its directors, officers, employees, representatives, agents, accountants or attorneys to, initiate or solicit, directly or indirectly, any inquiries or the making of any proposal, or engage in negotiations or discussions with any Person, or provide any confidential information or data to any Person, with respect to any acquisition, business combination or purchase of all or substantially all of the Assets or any significant Asset (other than Inventory in the ordinary course) of the Company, or any direct or indirect equity interest in the Company or otherwise facilitate any effort or attempt to seek any of the foregoing. Furthermore, the Company shall immediately terminate any existing activities, discussions or negotiations with any Person with respect to any of the foregoing. 5.10 Agreement with Monolithic Systems Technology. The parties will use best efforts to cause to be executed and delivered an agreement between Monolithic Systems Technology, Inc., a California corporation ("MoSys"), Buyer, and the Company (the "MoSys Agreement") satisfactory to Buyer, granting to Buyer substantially the same rights as are granted to Company pursuant to an Agreement dated October 12, 1994 between MoSys and Company. 5.11 Registration of Buyer Common. 5.11.1 Registration Procedures. Buyer hereby agrees to use best efforts to cause to be registered under and in accordance with the Securities Act (a "Registration") the Buyer Common constituting the Initial Payment. In addition, Buyer hereby agrees to use best efforts to cause a Registration, on one occasion in each 12 month period in which a Contingent Payment is made, of the Buyer Common so issued to the Company during such 12 month period In Connection with such Registrations, Buyer will, as expeditiously as practicable, after the Closing in the case of the Initial Payment, and after the second, fourth and sixth Contingent Payments are made in the case of the Contingent Payments: (a) prepare and file with the Securities and Exchange Commission (the "SEC") a registration statement under the Securities Act covering the applicable Buyer Common issued to the Company hereunder (a "Registration Statement") and use its best efforts to cause such Registration Statement to become and remain effective as provided herein and shall use its best efforts to comply with the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations of the SEC in preparing and filing such Registration Statement; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for a period of not less than two years from the date of issuance of the Buyer Common covered by such Registration Statement; cause the prospectus which is part of the Registration Statement ("Prospectus") to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act applicable to it with respect to the disposition of all securities covered by such Registration Statement during such two-year period; (c) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest practicable time; and (d) on or prior to the date on which the Registration Statement is declared effective, use its best efforts to register or qualify the Buyer Common covered by such Registration Statement under the securities laws of the States of California and New York. 5.11.2 Obligations of the Company. (a) The Company will furnish to Buyer in writing such information and affidavits as Buyer may reasonably request or as may be required in connection with any registration, qualification or compliance with respect to the Buyer Common. The Company shall give prompt notice to Buyer of each sale by the Company of Buyer Common registered pursuant hereto. (b) The Company will not sell any Buyer Common issued to the Company hereunder until a Registration Statement covering same shall become effective and same shall have been qualified for sale under applicable state securities laws, except pursuant to applicable exemptions. Immediately on notice from Buyer, the Company will cease sales of the Buyer Common, for so long as Buyer shall advise Company such cessation is required under applicable Federal or state securities laws. The Company shall not adopt any plan to dissolve the Company or distribute Buyer Common to Shareholders until after two years from the Closing Date. (c) At the end of any period during which Buyer keeps any Registration Statement current and effective as provided by Section 5.11.1(b) hereof, the Company shall discontinue sales of Buyer Common pursuant to such Registration Statement and the Company shall notify Buyer of the number of shares of Buyer Common registered which remain unsold at the end of such period. 5.11.3 Registration Expenses. All of the costs and expenses of each registration hereunder will be borne by the Buyer, including all registration and filing fees, the fees and expenses of Buyer's counsel and accountants and all other costs and expenses incident to Buyer's performance of or compliance with this Agreement, including without limitation the preparation, printing (or otherwise duplicating) and filing under the Securities Act of the Registration Statement (and all amendments and supplements thereto) and furnishing copies thereof and of the Prospectus included therein, and the costs and expenses incurred in connection with the qualification of the Buyer Common issued to the Company hereunder under the securities laws of the States of California and New York; provided, that Buyer shall not bear costs and expenses of the Company comprising brokerage fees, transfer taxes, the fees and expenses of any counsel, accountants or other representatives retained by the Company, or any fees, costs or expenses required to be borne by the Company under state securities laws. 5.11.4 Indemnification. (a) The Buyer agrees to indemnify and hold harmless the Company and its officers and directors and each Person who controls the Company (within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act")), against any losses, claims, damages, liabilities (joint or several) and expenses (including attorneys' fees) caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus, or preliminary Prospectus or any amendment or supplement to any of the foregoing or any omission or alleged omission to state therein a material fact necessary to make the statements therein (in the case of the Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as the same are caused by (i) or contained in any written information furnished to Buyer in connection with the preparation of such Prospectus by the Company, (ii) violation by the Company of Section 5.11.2, or (iii) the failure of the Company to deliver a copy of the Registration Statement or Prospectus or any amendment or supplement thereto after Buyer has furnished the Company with a copy thereof. (b) The Company and the Key Officers, jointly and severally, agree to indemnify, to the full extent permitted by Law, Buyer, its directors and officers and each Person who controls Buyer (within the meaning of the Securities Act and the Exchange Act) against any losses, claims, damages, liabilities and expenses (including attorneys' fees) resulting from (i) any untrue or alleged untrue statement of a material fact or any omission or alleged omission to state a material fact necessary to make the statements in the Registration Statement or Prospectus or preliminary Prospectus (in the case of the Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading to the extent, that such untrue statement or omission was made in reliance upon written information furnished by the Company in connection with the preparation of such Prospectus or (ii) the breach of any covenant in Section 5.11.2. (c) Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification, and (ii) unless in such indemnified party's reasonable judgement a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). The failure of an indemnified party to give notice pursuant to clause (i) above shall not relieve any indemnifying party of its obligations hereunder except to the extent such indemnifying party is prejudiced by such failure. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless, in the reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel of counsels. (d) If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. 5.12 Shareholder Matters. 5.12.1 Notices to Shareholders. Immediately following execution hereof, Company shall (a) notify each Option Holder, in accordance with paragraph 9b of the Company's 1992 Stock Option Plan, that the Company has declared the options outstanding thereunder terminated in accordance therewith and (b) transmit to each Shareholder the Consent Solicitation. 5.12.2 CA-GCL Section 1301. The Company shall comply with CA-GCL Section 1301 after Shareholder Approval shall have been obtained. 5.12.3 Review by Buyer. Company shall afford Buyer reasonable opportunity to review and comment upon all notices, Consent Solicitations, and other documents and instruments to be distributed by Company pursuant to this Section 5.12, prior to distribution of same. 5.13 Records. Following the Closing, upon the request of Buyer, on the one hand, or the Company on the other, the other party shall make available to the requesting party such records and information relating to the Company in its possession that the other party may reasonably require in connection with income, franchise or other tax matters or for any other proper purpose under circumstances where such information cannot be readily obtained from other sources. 5.14 Covenants Not to Compete. 5.14.1 Covenant. The Company covenants and agrees that for a period of ten years from the date hereof, it shall not, directly or indirectly, as principal, partner, agent, servant, employee, consultant, stockholder, or otherwise, anywhere in the world (the "Territory"), engage or attempt to engage in any business activity competitive with the Business. 5.14.2 Reasonableness of Restrictions. Buyer and Company acknowledge and agree that it is not possible to limit the geographic scope of the covenants not to compete contained in this Agreement to particular cities, counties or other geographic subdivisions of any jurisdiction. For purposes of Section 16601 of the California Business and Professions Code, the parties agree that the names of each and every city and county of California, which are listed on Exhibit 5.14.2, and every other jurisdiction covered hereby, are incorporated by reference herein. The Company recognizes that the foregoing territorial and time limitations are reasonable and properly required for the adequate protection of the business of Buyer and the Affiliates of Buyer and that in the event that any such territorial or time limitation is deemed to be unreasonable in arbitration or otherwise, the Company agrees to request, and to submit to, the reduction of said territorial and/or time limitation to such an area or period as shall be deemed reasonable by the Arbitrator, as herein- after defined, or other tribunal. 5.14.3 Separate Covenants. Buyer and the Company intend for the covenants not to compete contained in this Agreement to comply with the provisions of California Business and Professions Code Section 16601, and to be construed as a series of separate covenants, one for each county, state, market area or business area, and for each year. Except for geographic coverage, each such covenant shall be deemed identical in terms to the covenants in Section 5.14.1 of this Agreement. 5.14.4 Increased Time Limitations. In the event that the Company shall be in violation of the aforementioned restrictive covenants, then the time limitation thereof shall be extended for a period of time during which such breach or breaches shall occur. 5.14.5 Severability of Claims. The existence of any claim or cause of action by the Company against Buyer or any Affiliate of Buyer, if any, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by Buyer or any Affiliate of Buyer of the foregoing restrictive covenants but shall be resolved by separate proceeding. 5.14.6 Injunctive Relief. The Company agrees that a remedy at law for any breach of the foregoing shall be inadequate and that Buyer or any Affiliate of Buyer shall be entitled to injunctive relief, in addition to any other remedy it might have. 5.15 Core Logic Technology Package. The parties shall, on the day before the Closing Date, prepare a technology package (the "Core Logic Technology Package"), the partial contents of which are defined and documented in the Escrow Agreement. The Core Logic Technology Package shall contain the source database materials for two revisions of the following Company devices: EC924 EC932 EC926 The first database shall reflect the last revisions of each design database which was used to produce working semiconductor devices for each part number. A copy of each device, labeled according to the appropriate revision, shall be included in the Core Logic Technology Package. The second database shall reflect the latest revision of the designs of each referenced Company device, effective 48 hours prior to the Closing. The Company covenants that the Core Logic Technology Package, when utilized with appropriate Assets, and without undue additional engineering or other planning, will enable a person ordinarily skilled in the art to design, develop, make, use, sell, support, service, and maintain the Core Logic Products. 5.16 Remittance of Payments. The Company shall promptly remit and pay over in kind to the Buyer any and all payments received by it from customers or vendors of the Company in respect of products or services provided by the Company prior to the Closing Date, including any payments made in respect of the Accounts Receivable. Any payment made in the form of a check or other negotiable instrument shall be endorsed and made payable by the Company to the Buyer. The Company will cooperate with the Buyer, immediately after the Closing, in notifying all Persons owing any obligation to the Company, thereafter to remit or pay same to the Buyer. 5.17 Company Debts. The Company shall promptly pay or satisfy any and all of its debts or obligations not assumed by the Buyer pursuant to this Agreement as the same shall become due and payable. 5.18 Core Logic Business Unit. The Buyer intends to operate the Assets as a business unit to be named the "Core Logic Business Unit" on a basis substantially the same as the other business units of the Buyer are operated. Buyer agrees that it will not take any action or execute any transaction (other than to enforce this Agreement), with a principal intention of avoiding or eliminating any Contingent Payment. ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATION OF BUYER TO CLOSE The obligation of Buyer to consummate the trans- actions contemplated herein shall be subject to the fulfillment, at or before the Closing Date, of all of the conditions set forth below in this Article VI. Buyer may waive any or all of such conditions in whole or in part without prior notice; provided, however, that no such waiver shall constitute a waiver by Buyer of any right or remedy otherwise available to it if the Company or any Key Officer shall be in default of any of its, his or her representations, warranties or covenants contained in this Agreement, or any Shareholder shall be in default of any of his, her, or its representations, warranties, or covenants contained in the Solicitation Documents. 6.1 Representations and Warranties; Performance of Covenants. The representations and warranties of the Company and the Key Officers contained in this Agreement and in any other Company Document shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, and each obligation of the Company or any of the Key Officers to be performed by him, her, or it on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date; there shall not have occurred between the date hereof and the Closing Date any material adverse change in the condition (financial or otherwise), Assets, liabilities (whether absolute, accrued, contingent or otherwise), Business, operations, or prospects of the Company, or in the value or utility of the Assets, or in the ability of the Company to consummate the transactions contemplated herein or the other Company Documents; no action, suit or proceeding shall have been instituted before any court or governmental body or instituted or threatened by any governmental agency or body which has or may have, in the opinion of Buyer, a material adverse effect on the condition (financial or otherwise), Assets, properties, Business or prospects of the Company or the Core Logic Business Unit; and the Company shall have delivered to Buyer a certificate to such effect dated the Closing Date signed by the President and Chief Financial Officer of the Company. 6.2 Shareholder Action. Shareholder Approval shall have been obtained by unanimous vote or written consent of the Shareholders. 6.3 Third Party Consents. All consents, Licenses and Permits, or approvals from Authorities parties to any Material Contract which may be required or be desirable in connection with (a) the consummation of the transactions contemplated hereby and (b) the Buyer's ownership of the Assets and operation of the Business, shall have been obtained upon terms and conditions satisfactory to Buyer. Consent of the lenders to Buyer which may be required or be desirable in connection with the consummation of the transactions contemplated hereby shall have been obtained upon terms and conditions satisfactory to Buyer. 6.4 Opinion of Counsel to the Company. Buyer shall have received the favorable opinion of Skjerven, Morrill, MacPherson, Franklin & Friel, counsel to the Company in the form of Exhibit 6.4. Such opinion shall also cover such other matters incident to the transactions contemplated by this Agreement as Buyer may reasonably request. 6.5 Approval of Counsel to Buyer. All actions and proceedings hereunder and all documents and other papers required to be delivered by the Company hereunder or in connection with the consummation of the transactions contemplated herein, and all other related matters shall have been approved in its reasonable discretion by Loeb & Loeb LLP, counsel to Buyer, as to their form and substance. 6.6 No Amendments to Resolutions; Corporate Status. The resolutions of the Company's Board of Directors referred to in Section 3.1.4 and of the Shareholders constituting Shareholder Approval shall not have been modified or rescinded. The Company shall be in good standing under the laws of California and each jurisdiction in which it shall have qualified to do business and shall have delivered to Buyer (a) a certified copy of its Articles of Incorporation, (b) a true and correct copy of its bylaws certified by the Company's Secretary, (c) good standing certificates from the Secretary of State of each jurisdiction in which the Company is qualified to do business, and (d) a long form good standing certificate from the California State Secretary as of a date which is not more than seven days prior to the Closing Date. 6.7 Employment Agreements. Each of the employees listed in Section 6.7 of the Company Disclosure Schedule shall have entered into employment agreements with Buyer in the form of Exhibit 6.7 (the "Employment Agreements"). 6.8 MoSys Agreement. The MoSys Agreement shall have been executed and delivered by the parties thereto and be in full force and effect. 6.9 No Action or Proceeding. No action, suit or proceeding shall have been instituted or threatened before any Authority seeking to challenge or restrain the transactions contemplated herein that presents a substantial risk that such transactions will be restrained or that either party hereto may suffer material damages or other relief as a result of consummating such transactions. 6.10 Approval of Board of Directors. The execution, delivery and performance of this Agreement and all of the other Company Documents to which the Buyer is a party shall have been approved by the Board of Directors of the Buyer at the meeting of the Board of Directors of the Buyer scheduled to be held on February 19, 1996. ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligation of the Company to consummate the transactions contemplated herein shall be subject to the fulfillment, at or before the Closing Date, of all the conditions set forth below in this Article VII. The Company may waive any or all of such conditions in whole or in part without prior notice; provided, however, that no such waiver shall constitute a waiver by the Company of any right or remedy otherwise available to it if Buyer shall be in default of any of its representations, warranties or cove- nants contained in this Agreement. 7.1 Representations and Warranties. The representations and warranties of Buyer contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date; each of the obligations of Buyer to be performed by it on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date; and at the Closing Buyer shall have delivered to the Company a certificate dated the Closing Date to such effect. 7.2 Shareholder Approval; Further Board Approval. 7.2.1 Shareholder Approval. This Agreement shall have been approved and adopted by the consent in writing or by the affirmative vote of the holders of at least the minimum number of shares of Company Capital Stock and of each class thereof necessary to approve this Agreement under California Law. 7.2.2 Board Approval. The Company's Board of Directors shall have approved any amendment of this Agreement required by Buyer's Board of Directors in approving this Agreement pursuant to Section 6.10. 7.3 Opinion of Counsel to Buyer.The Company shall have received the favorable opinion of Loeb & Loeb LLP, counsel to Buyer, dated as of the Closing Date in the form of Exhibit 7.3. Such opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Company may reasonably request. 7.4 Approval of Counsel to the Company. All actions and proceedings hereunder and all documents or other papers required to be delivered by Buyer hereunder or in connection with the consummation of the transactions con- templated herein; and all other related matters shall have been approved by Skjerven, Morrill, MacPherson, Franklin & Friel, counsel to the Company, as to their form and substance. 7.5 Good Standing. The Buyer shall be in good standing under the laws of Delaware and shall each have delivered to the Company (a) a certified copy of its Certificate of Incorporation, (b) a true and correct copy of its bylaws and (c) a long form good standing certificate from the Secretary of State of the State of Delaware as of a date which is not more than seven days prior to the Closing Date. 7.6 No Action or Proceeding. No action, suit or proceeding shall have been instituted or threatened before any Authority seeking to challenge or restrain the transactions contemplated herein that presents a substantial risk that such transactions will be restrained or that either party hereto may suffer material damages or other relief as a result of consummating such transactions. 7.7 Governmental Approvals. Any and all approvals or Licenses and Permits from any Authority required for (a) the lawful consummation of the transactions contemplated herein and (b) the Buyer's ownership of the Assets and operation of the Business, shall have been obtained. ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES 8.1 Survival of Representations and Covenants of the Company and the Key Officers. Notwithstanding any right of Buyer fully to investigate the affairs of the Company and notwithstanding any knowledge of facts determined or determinable by Buyer pursuant to such investigation or right of investigation, Buyer shall have the right to rely fully upon the representations, warranties, covenants and agreements of the Company and the Key Officers contained in this Agreement, provided that Buyer shall advise the Company of any breach of the foregoing that Buyer shall discover. Each representation, warranty, covenant and agreement of Company or any Key Officer contained herein shall survive the execution and delivery of this Agreement and the Closing and shall thereafter terminate and expire on the second anniversary of the Closing Date, except that the representa- tions and warranties of the Company contained in Sections 3.7, 3.8.2, and 3.19 shall terminate and expire 90 days after the expiration of the statute of limitations applicable to claims by third parties against Buyer or the Company, in respect of the matter or matters which are the subject of said representations and warranties, unless, on or before such date, Buyer shall have delivered to any of the Key Officers a written notice of a claim with respect to such representation, warranty, covenant or agreement. 8.2 Survival of Representations and Covenants of Buyer. Each representation, warranty, covenant, and agreement of Buyer contained herein shall survive the execution and delivery of this Agreement and shall thereafter terminate and expire on the second anniversary of the Closing Date, unless, on or before such date, the Company shall have delivered to Buyer a written notice of a claim with respect to such representation, warranty, cove- nant, or agreement. ARTICLE IX INDEMNIFICATION 9.1 Indemnification of Buyer. (a) The Key Officers and the Company, jointly and severally, shall indemnify, defend and hold harmless Buyer, and its stockholders, directors, officers, employees, agents, attorneys and representatives, from and against (a) any and all Losses that may be incurred or suffered by any such party and arising out of or resulting from any breach of any representation, warranty, covenant or agreement of the Company or any Key Officer contained in this Agreement, including, without limitation, any attempt (whether or not successful) by any Person to cause or require Buyer or Company, to pay, perform or discharge any debt, obligation, deficiency, liability or commitment the existence of which constitutes a breach of any such representation, warranty, covenant or agreement, (b) any and all Losses that may be incurred or suffered by any such Person from the ownership or operations of Company, the Assets, or the Business arising prior to the Closing Date, except to the extent (i) reflected in the Financial Statements or (ii) incurred after the Balance Sheet Date and prior to the Closing Date and not related to the violation or breach of any Law or Order, Contract or Other Agreement, or right or interest of any third Person, whether or not such Loss or potential Loss shall have been disclosed to or discovered by Buyer before the Closing Date, (c) any and all Losses that may be incurred or suffered by any such Person arising out of or resulting from any failure of the parties hereto to comply with the California Bulk Sales laws, and (d) any and all Losses from any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, incurred in enforcing this indemnity to the extent that the aggregate amount of Losses shall exceed $40,000. No Key Officer shall have liability under clause (a) or (b) of the preceding sentence respecting any matter as to which the Company has made a representation or warranty that by its terms is limited to the knowledge of the Company, unless such Key Officer shall have had knowledge of facts or circumstances constituting a breach of such representation or warranty. Buyer may set off against any Contingent Payment otherwise due any amounts to which it may be entitled pursuant to this Article IX. (b) Notwithstanding anything else contained herein, the Key Officers and the Company, jointly and severally, shall indemnify and hold harmless Buyer and its stockholders, directors, officers, employees, agents, attorneys and representatives with respect to any Losses that may be incurred from any claims made prior to the fifth anniversary of the date of this Agreement arising from any alleged violation of Section 6 of an Agreement dated August 20, 1992 between Company and ASICtronics Solutions Inc. and any corresponding improper use of the intellectual property of ASICtronics Solutions Inc. 9.2 Indemnification of Company. If this Agreement shall be terminated by the Company pursuant to Section 10.2.2, Buyer shall indemnify, defend and hold harmless Company from and against any and all Losses that may be incurred or suffered by Company on account of the breach by Buyer of the agreement, covenant, representation, or warranty giving rise to such termination. Buyer shall indemnify, defend, and hold harmless the Company and the Key Officers from and against any and all Losses that may be incurred or suffered by them, as officers of the Company, arising from the Core Logic Business Unit's operations after the Closing. 9.3 Notice of Indemnification. Any Person entitled to indemnification hereunder will (a) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (b) unless in such indemnified party's reasonable judgment a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). The failure of an indemnified party to give notice pursuant to clause (a) above shall not relieve any indemnifying party of its obligations hereunder except to the extent such indemnifying party shall have been prejudiced thereby. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless, in the reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. The indemnified party shall cooperate in any defense assumed by the indemnifying party and may participate in the defense of any claim. 9.4 Contribution. If for any reason the indemnification provided for in Section 9.1 or 9.2 is unavailable to an indemnified party as contemplated by such Sections, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. ARTICLE X TERMINATION; REMEDIES 10.1 Termination Without Default. In the event that, as of the Closing Date, any event or state of facts not constituting a default by a party shall exist, which event or state of facts constitutes a failure of the condi- tions precedent for the benefit of Buyer on the one hand, or the Company on the other, the side for whose benefit such condition precedent is imposed hereby shall have the right, at its sole option, to terminate this Agreement prior to the Closing without liability to the other side. If Shareholder Approval shall not have been obtained within 30 days from the date hereof, or the Closing shall not have occurred within 90 days of the date hereof, Buyer, on the one hand, or the Company on the other, shall have the right to terminate this Agreement without liability to either side. Such right may be exercised by Buyer, on the one hand, or the Company on the other, as the case may be, giving written notice to the other on or before the Closing Date, specifying the event or state of facts giving rise to such right of termination. 10.2 Termination Upon Default. 10.2.1 Termination by Buyer. Buyer may terminate this Agreement by giving notice to the Company on or prior to the Closing Date, without prejudice to any rights or obligations Buyer may have, if the Company or any Key Officer or any Shareholder shall have materially breached any agreement, covenant, representation, or warranty contained herein or in any Company Document unless such breach shall be curable and shall have been cured by the Closing Date. 10.2.2 Termination by the Company. The Company may terminate this Agreement by giving notice to Buyer, without prejudice to any rights or obligations Company may have, if Buyer shall have materially breached any of its covenants, agreements, representations, and warranties contained herein unless such breach shall be curable and shall have been cured by the Closing Date. 10.2.3 Rights Reserved. In event of termination pursuant to Section 10.2.1 or 10.2.2, the side not guilty of the breach may pursue such remedies as are available to it at law or equity, or as are provided hereunder. 10.3 Arbitration. \NYBS\ Mandatory Arbitration. Buyer, on the one hand, and the Company and any Key Officer, on the other, shall promptly submit any dispute, claim, or controversy arising out of or relating to this Agreement or any Company Document (including, without limitation, with respect to the meaning, effect, validity, termination, interpretation, performance, or enforcement of this Agreement or such Company Document) or any alleged breach (including any action in tort, contract, equity, or otherwise), to binding arbitration before one arbitrator ("Arbitrator"). The parties agree that, except as otherwise provided herein respecting temporary or preliminary injunctive relief, binding arbitration shall be the sole means of resolving any dispute, claim, or controversy arising out of or relating to this Agreement or any Company Document (including, without limitation, with respect to the meaning, effect, validity, termination, interpretation, performance or enforcement of this Agreement or such Company Document) or any alleged breach (including any claim in tort, contract, equity, or otherwise). 10.3.2 Arbitrator's Qualifications and Selection. The Arbitrator shall be an active member of the California Bar, specializing for at least 15 years in mergers and acquisitions of high technology companies and corporate and securities law. The Arbitrator shall be selected by the New York chapter head of the American Arbitration Association upon the request of either side. The Arbitrator shall be selected within thirty 30 days of request. 10.3.3 Governing Law; Written Decision. In any arbitration hereunder, this Agreement and any Company Document shall be governed by the laws of the State of California applicable to a contract negotiated, signed, and wholly to be performed in California, which laws the Arbitrator shall apply in rendering his or her decision. The Arbitrator shall issue a written decision, setting forth findings of fact and conclusions of law, within 60 days after he or she shall have been selected. The Arbitrator shall have no authority to award punitive or other exemplary damages. 10.3.4 Procedures; Evidence; Experts. (a) Any arbitration instituted by the Company shall be held in Los Angeles, California and any arbitration instituted by Buyer shall be held, at the Buyer's option, in either San Francisco or San Jose, California, in each case in accordance with and under the then-current provisions of the rules of the American Arbitration Association, except as otherwise provided herein. (b) On application to the Arbitrator, any party shall have rights to discovery to the same extent as would be provided under the Federal Rules of Civil Procedure, and the Federal Rules of Evidence shall apply to any Arbitration under this Agreement; provided, however, that the Arbitrator shall limit any discovery or evidence such that his or her decision shall be rendered within the period referred to in Section 10.3.3. (c) The Arbitrator may, at his or her discretion and at the expense of the party(ies) who will bear the cost of the Arbitration, employ experts to assist him or her in his or her determinations. 10.3.5 Costs. The costs of the Arbitration proceeding and any proceeding in court to confirm or to vacate any arbitration award or to obtain temporary or preliminary injunctive relief as provided in Section 10.3.7, as applicable (including, without limitation, actual attorneys' fees and costs), shall be borne by the unsuccessful party and shall be awarded as part of the Arbitrator's decision, unless the Arbitrator shall otherwise allocate such costs, for the reasons set forth, in such decision. 10.3.6 Consent to Jurisdiction. Any judgment upon any award rendered by the Arbitrator may be entered in and enforced by any court of competent jurisdiction. The parties expressly consent to the jurisdiction of the courts (Federal and state) in California to enforce any award of the Arbitrator or to render any provisional or injunctive relief in connection with or in aid of the Arbitration. The parties expressly consent to the personal and subject matter jurisdiction of the Arbitrator to arbitrate any and all matters to be submitted to arbitration hereunder. None of the parties hereto shall challenge any arbitration hereunder on the grounds that any party necessary to such arbitration (including, without limitation, the parties hereto) shall have been absent from such arbitration for any reason, including, without limitation, that such party shall have been the subject of any bankruptcy, reorganization, or insolvency proceeding. 10.3.7 Injunctive Relief. This Section 10.3 shall not prevent any party from seeking or obtaining temporary or preliminary injunctive relief in a court for any breach or threatened breach of any provision of this Agreement or any Company Document; provided that the determination whether such breach or threatened breach shall have occurred and the remedy therefor (other than with respect to such preliminary or temporary relief) shall be made by arbitration pursuant to this Section 10.3. 10.3.8 Indemnification. The parties shall indemnify the Arbitrator and any experts employed by the Arbitrator and hold them harmless from and against any claim or demand arising out of any arbitration under this Agreement or any Company Document, unless resulting from the willful misconduct of the person indemnified. 10.3.9 Survival. This arbitration clause shall survive the termination of this Agreement and any Company Document. 10.4 WAIVER OF JURY TRIAL; EXEMPLARY DAMAGES. ALL PARTIES HEREBY WAIVE THEIR RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT OR ANY COMPANY DOCUMENT. No party shall be awarded punitive or other exemplary damages respecting any dispute arising under this Agreement or any Company Document. 10.5 Attorneys' Fees. The unsuccessful party to any court or other proceeding arising out of this Agreement that is not resolved by arbitration under Section 10.3 shall pay to the prevailing party all attorneys' fees and costs actually incurred by the prevailing party, in addition to any other relief to which it may be entitled. As used in this Section 10.5 and elsewhere in this Agreement, "actual attorneys' fees" or "attorneys' fees actually incurred" means the full and actual cost of any legal services actually performed in connection with the matter for which such fees are sought, calculated on the basis of the usual fees charged by the attorneys performing such services, and shall not be limited to "reasonable attorneys' fees" as that term may be defined in statutory or decisional authority. 10.6 Interest On Amounts Due. Any amount payable by one party to another under any provision of this Article X shall bear interest at the rate of 12% per annum from the date due until paid. ARTICLE XI MISCELLANEOUS 11.1 Expenses of Transaction. The Company, on the one hand, and Buyer on the other, shall each bear its own direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and the other Company Documents and the consummation and performance of the transactions contemplated herein or therein (it being understood that such expenses of the Company, to the extent unpaid as of the Closing, shall be paid from Company cash on hand as of the Closing). 11.2 Confidentiality. Subject to any obligation to comply with (i) any Law (ii) any rule or regulation of any Authority or securities exchange or (iii) any subpoena or other legal process to make information available to the Persons entitled thereto, whether or not the transactions contemplated herein shall be concluded, all information obtained by any party about any other and all of the terms and conditions of this Agreement and the other Company Documents shall be kept in confidence by each party, and each party shall cause its directors, officers, employees, agents and attorneys to hold such information confidential; provided, however, that the foregoing shall not apply to any information obtained by Buyer through its own independent investigations of the Company or received by Buyer from a third party that, to the knowledge of Buyer after due inquiry, was not under any obligation to keep such informa- tion confidential, or to any information obtained by Buyer that is generally known to others engaged in the trade or Business of the Company; and provided, further, that from and after the Closing, Buyer shall not be under any obligation to maintain confidential any such information concerning the Company. If this Agreement shall be terminated for any reason, each party shall return or cause to be returned to the other all written data, information, files, records and copies of documents, worksheets and other materials obtained by such party in connection with the transactions contemplated herein. 11.3 Publicity. No publicity release or announce- ment concerning this Agreement or the transactions con- templated herein shall be issued without advance written approval of the form and substance thereof by Buyer and the Company; provided, however, that such restrictions shall not apply to any disclosure required by regulatory Authorities, applicable Law or the rules of any securities exchange which may be applicable. 11.4 Notices. All notices, requests and other communications hereunder shall be in writing and shall be delivered by courier or other means of personal service (including by means of a nationally recognized courier service or a professional messenger service), or sent by telex or telecopy or mailed first class, postage prepaid, by certified mail, return receipt requested, in all cases, addressed to: Buyer: Standard Microsystems Corporation 80 Arkay Drive Hauppauge, New York 11788 Telecopy: (516) 273-5550 Attention: George W. Houseweart With copies to: Standard Microsystems Corporation 80 Arkay Drive Hauppauge, New York 11788 Telecopy: (516) 273-5550 Attention: Sandra Sefcsik Standard Microsystems Corporation 80 Arkay Drive Hauppauge, New York 11788 Telecopy: (516) 273-5550 Attention: Arthur Sidorsky Loeb & Loeb LLP 345 Park Avenue New York, New York 10154 Telecopy: (212) 407-4990 Attention: David C. Fischer, Esq. Company: EFAR Microsystems, Inc. 3211 Scott Blvd., Suite 100 Santa Clara, California 95054 Telecopy: (408) 496-1116 Attention: Mr. Peter C.R. Ju With a copy to: Skjerven, Morrill, MacPherson, Franklin & Friel 25 Metro Drive, Suite 700 San Jose, California 95110 Telecopy: (408) 283-1233 Attention: Marc David Freed, Esq. All notices, requests and other communications shall be deemed given on the date of actual receipt or delivery as evidenced by written receipt, acknowledgement or other evidence of actual receipt or delivery to the addressee. In case of service by telecopy, a confirmation copy of such notice shall be sent, on the date notice is given, by certified mail as set forth above. Either party hereto may from time to time by notice in writing served as set forth above designate a different address or a different or additional person to which all such notices or communications thereafter are to be sent or given. 11.5 Further Assurances. Buyer, on the one hand, and Company and the Key Officers on the other hand, shall each use its reasonable and diligent best efforts to proceed promptly with the transactions contemplated herein, to fulfill or to cause to be fulfilled the covenants made by it or the conditions precedent to the obligations of the side and to execute (before or after the Closing) such further documents and other papers and perform such further acts as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated herein. 11.6 Modifications and Amendments; Waivers and Consents. At any time prior to the Closing Date or termina- tion of this Agreement, Buyer, on the one hand, and the Company, on the other hand, may, by written agreement: (a) extend the time for the performance of any of the obligations or other acts of the other side; (b) waive any inaccuracies in the representations and warranties made by the other side contained in this Agreement or any other agreement or document delivered pursuant to this Agreement; and (c) waive compliance with any of the covenants or agreements of the other side contained in this Agreement. However, no such waiver shall operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits a waiver or consent by or on behalf of any party hereto, such waiver or consent shall and may only be given in writing. 11.7 Entire Agreement. This Agreement (including the exhibits hereto and the Company and Buyer Disclosure Schedules), the Company Documents, agreements, documents and instruments to be executed and delivered pursuant hereto or thereto are the final, complete, and exclusive agreement among the parties with respect to the transactions contemplated hereby; supersede all prior agreements, understandings and representations written or oral, with respect thereto; and may not be contradicted by evidence of any such prior or contemporaneous agreement, understanding or representation, whether written or oral. 11.8 Governing Law and Venue. This Agreement is to be governed by and construed in accordance with the laws of the State of California. Subject to the provisions of Section 10.4 requiring arbitration of disputes, any suit brought hereon, any and all legal proceedings, to enforce this Agreement, including any action to compel arbitration pursuant to Section 10.4 or to enforce or vacate any judgment or award rendered therein, whether in contract, tort, equity or otherwise, shall be brought in the California state courts or Federal courts sitting in California. The parties hereto hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it, consents to service of process in any manner prescribed in Section 11.4 or in any other manner authorized by Federal or California law, and agrees that a final judgment in any such action or proceed- ing shall be conclusive and may be enforced in other juris- dictions by suit on the judgment or in any other manner specified by Law. 11.9 Binding Effect. This Agreement and the rights, covenants, conditions and obligations of the respective parties hereto and any instrument or agreement executed pursuant hereto shall be binding upon the parties and their respective successors, assigns, and legal representatives. Neither this Agreement, nor any rights or obligations of any party hereunder, may be delegated or assigned by a party without the prior written consent of the other parties; provided, however, that prior to or following the Closing, this Agreement and any rights and obligations of Buyer hereunder may, without the prior written consent of the Company or any Key Officer or any Shareholder, be assigned and delegated by Buyer to any Affiliate of Buyer or pledged or hypothecated to any lender(s) of Buyer or any such Affiliate, and, following the Closing, Buyer may assign this Agreement and any rights and obligations of Buyer hereunder, except that Buyer's obligations to the Company or any Key Officer shall not be impaired by any of the foregoing. 11.10 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. In making proof of this Agreement it shall not be necessary to produce or account for more than one counterpart. 11.11 Section Headings. The section headings of this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof. 11.12 Gender; Tense, Etc. Where the context or construction requires, all words applied in the plural shall be deemed to have been used in the singular, and vice versa; the masculine shall include the feminine and neuter, and vice versa; and the present tense shall include the past and future tense, and vice versa. 11.13 No Third Party Rights. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any Person other than the parties hereto, and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third Person to any party to this Agree- ment, nor shall any provision give any third Person any right of subrogation or action over against any party to this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. STANDARD MICROSYSTEMS CORPORATION By:___________________________ Paul Richman Chairman and Chief Executive Officer _____________________________ Peter C.R. Ju Ying Feng Chang ______________________________ Chin Hwaun Wu EFAR MICROSYSTEMS, INC. By:__________________________ Peter C.R. Ju President Company Disclosure Schedule 2.3(b) Warranties 3.2 Ownership of Company Capital Stock 3.4 No Violation 3.5 Regulatory Approvals and Other Consents 3.6.1 Financial Statements 3.6.2 Liabilities 3.6.3 Inventories 3.6.4 Accounts Receivable 3.6.5 Absence of Certain Changes 3.7 Tax Matters 3.8.1 Licenses and Permits 3.8.2 Environmental and Industrial Hygiene 3.9 Toshiba Settlement; Pending or Threatened Litigation 3.10.1 Leases for Real Property 3.10.2 Tangible Personal Property Owned by or in the Possession of the Company 3.10.3 Intangible Personal Property 3.10.3(f) Employee Confidentiality Agreements and Former Employees in Possession of Trade Secrets 3.10.4 Use Restrictions 3.10.5 Necessary Properties 3.11(a) Contracts and Other Agreements 3.11(b) Enforceability of Contracts or Other Agreements 3.11(c) Agreements Under Current Discussion 3.12.1 Labor Agreements 3.12.2 Compliance with Labor Laws and Agreements 3.13 Pension and Benefit Plans 3.14 Insurance 3.15(a) Customers, Distributors and Suppliers 3.15(b) Supply, Delivery and Sales Contracts or Other Agreements 3.15(c) Sales Agents 3.16(a) Warranties and Merchandising 3.16(b) Back Order Status 3.17.1 Pending or Threatened Claims 3.18 Potential Conflicts of Interest 3.19 Certain Transactions with Insiders Not Made on Basis of Prevailing Market Rates and Terms 3.20 Powers of Attorney and Suretyships 3.21 Banking Facilities 6.7 Key Employees Buyer Disclosure Schedule 4.5 Required Consents Exhibits Exhibit 1 Escrow Agreement Exhibit 2.3(a) Assumed Obligations Schedule Exhibit 2.7.2 Purchase Price Allocation Exhibit 2.8(b) Bill of Sale Exhibit 5.14.2 California Counties Exhibit 6.4 Form of Opinion of Company Counsel Exhibit 6.8 Form of Employee Agreement Exhibit 7.3 Form of Opinion of Loeb & Loeb LLP Exhibit 2.8(b)(1) BILL OF SALE WHEREAS, STANDARD MICROSYSTEMS, INC., a Delaware corporation ("Buyer"), EFAR MICROSYSTEMS, INC., a California corporation (the "Company"), and the Key Officers named therein are parties to that certain Agreement for Purchase and Sale of Assets dated as of February 6, 1996 (the "Asset Purchase Agreement"), for the purchase and sale of the Assets, as defined in Article I of the Asset Purchase Agreement. KNOW ALL PERSONS BY THESE PRESENTS THAT the Company, for good and valuable consideration paid to it, receipt and sufficiency of which is hereby acknowledged, does hereby grant, sell, convey, assign (to the extent assignable), transfer and deliver to Buyer all of the Company's right, title and interest in and to all of the Assets, to have and to hold the same unto Buyer. The Company covenants with Buyer as follows, which covenants shall survive the sale, transfer and delivery of the Assets: On and after the date hereof and without further consideration, the Company will, from time to time at Buyer's reasonable request, execute and deliver such further instruments of conveyance, assignment and transfer and will take or cause to be taken such other action as Buyer may reasonably request for the more effective conveyance, assignment and transfer to Buyer of any of the Assets. IN WITNESS WHEREOF, the Company has caused this Bill of Sale to be duly executed as of this ___ day of ________, 1996. EFAR MICROSYSTEMS, INC. By: Name: Peter C.R. Ju Title: President Exhibit 2.8(b)(2) BILL OF SALE WHEREAS, STANDARD MICROSYSTEMS, INC., a Delaware corporation ("Buyer"), EFAR MICROSYSTEMS, INC., a California corporation (the "Company"), and the Key Officers named therein are parties to that certain Agreement for Purchase and Sale of Assets dated as of February 6, 1996 (the "Asset Purchase Agreement"), for the purchase and sale of the Assets, as defined in Article I of the Asset Purchase Agreement. KNOW ALL PERSONS BY THESE PRESENTS THAT the Company, for good and valuable consideration paid to it, receipt and sufficiency of which is hereby acknowledged, does hereby grant, sell, convey, assign (to the extent assignable), transfer and deliver to Standard Microsystems Corporation (Asia), a Delaware corporation ("SMC Asia"), all of the Company's right, title and interest in and to all of the Assets physically located in Taiwan, to have and to hold the same unto SMC Asia. The Company covenants with SMC Asia as follows, which covenants shall survive the sale, transfer and delivery of the Assets physically located in Taiwan: On and after the date hereof and without further consideration, the Company will, from time to time at SMC Asia's reasonable request, execute and deliver such further instruments of conveyance, assignment and transfer and will take or cause to be taken such other action as SMC Asia may reasonably request for the more effective conveyance, assignment and transfer to SMC Asia of any of the Assets physically located in Taiwan. IN WITNESS WHEREOF, the Company has caused this Bill of Sale to be duly executed as of this ___ day of _________, 1996. EFAR MICROSYSTEMS, INC. By: Name: Peter C.R. Ju Title: President Exhibit 5.14.2 (a) Alameda County (b) Alpine County (c) Amador County (d) Butte County (e) Calaveras County (f) Colusa County (g) Contra Costa County (h) Del Norte County (i) El Dorado County (j) Fresno County (k) Glenn County (l) Humboldt County (m) Imperial County (n) Inyo County (o) Kern County (p) Kings County (q) Lake County (r) Lassen County (s) Los Angeles County (t) Madera County (u) Marin County (v) Mariposa County (w) Mendocino County (x) Merced County (y) Modoc County (z) Mono County (aa) Monterey County (ab) Napa County (ac) Nevada County (ad) Orange County (ae) Placer County (af) Plumas County (ag) Riverside County (ah) Sacramento County (ai) San Benito County (aj) San Bernardino County (ak) San Diego County (al) San Francisco County (am) San Joaquin County (an) San Luis Obispo (ao) San Mateo County (ap) Santa Barbara County (aq) Santa Clara County (ar) Santa Cruz County (as) Shasta County (at) Sierra County (au) Siskiyou County (av) Solano County (aw) Sonoma County (ax) Stanislaus County (ay) Sutter County (az) Tehama County (ba) Trinity County (bb) Tulare County (bc) Tuolumne County (bd) Ventura County (be) Yolo County (bf) Yuba County Exhibit 6.4 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power, authority and approvals to enter into, execute and deliver the Agreement, the Assignments, and the other agreements, instruments, certificates and documents to be executed by the Company in connection therewith (collectively, the "Company Documents"), to fully perform its obligations thereunder and to fully carry out the transactions contemplated thereby. 2. The Company has all requisite corporate power to own, lease and operate the Assets and to carry on the Business as conducted prior to the date hereof, presently conducted, and as proposed to be conducted, and is duly qualified or licensed to do business as a foreign corporation in each jurisdiction in which the location of its Assets or the nature of its business requires such qualification, except for such jurisdictions where the failure to so qualify or be so licensed would not have any material adverse effect upon the condition (financial or otherwise), assets, liabilities, operations or prospects of the Business. 3. Except as disclosed in Section 3.4 of the Company Disclosure Schedule, neither the execution or delivery by the Company of the Agreement or any of the other Company Documents nor the consummation of the transactions contemplated therein: (a) violates any provision of the Articles of Incorporation or Bylaws of the Company; (b) violates, conflicts with or constitutes a default under, permits the termination or acceleration of, or causes the loss of any material right or option under any Material Contract of which we have knowledge; (c) to our knowledge, results in the creation or imposition of any Lien or Other Encumbrance upon any of the Assets; or (d) violates any Law or Order to which the Company or any of its Assets is subject. 4. The execution and delivery of the Agreement and each of the other Company Documents by the Company, the performance by the Company of its obligations thereunder, and the carrying out by the Company of the transactions contemplated thereby, have been duly authorized by all necessary corporate action by the Company. No other corporate or shareholder authorization or approval with respect to the Company is or was required for the Company to enter into the Agreement and each of the other Company Documents, perform its obligations thereunder, and carry out the transactions contemplated thereby. The Agreement and each of the other Company Documents to which the Company or any Key Officer is a party constitute valid and binding obligations of such Person enforceable against such Person in accordance with their respective terms, except as such enforceability may be subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting a creditors' rights generally (including, without limitation, laws pertaining to preferential or fraudulent transfers), and that equitable remedies are subject to the discretion of the court. No opinion is rendered hereunder with respect to Sections 10.4 or 11.8 of the Agreement or provisions of the other Company Documents to the same effect. 5. To our knowledge, except as set forth in Section 3.9 of the Company Disclosure Schedule, there is no pending or threatened adverse claim, dispute, governmental investigation, suit, action (including without limitation, nonjudicial real or personal property foreclosure actions), arbitration, legal, administrative or other proceeding of any nature, domestic or foreign, criminal or civil, at law or in equity, by or against or otherwise affecting the Company, which, if decided adversely to the Company, could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Business, the Assets, the ability of the Buyer to employ the Key Employees, or the Company's ability to perform its obligations under and carry out the transactions contemplated in the Agreement and the other Company Documents. 6. No consent, approval, authorization, notice, waiver, exemption or filing which has not been obtained or made is required (i) by the Articles of Incorporation or Bylaws of the Company, (ii) by any Law or Order to which the Company is subject, (iii) pursuant to the terms of any of the Material Contract of which we are aware, or (iv) pursuant to the terms of any of the Contracts or Other Agreements to which the Company is a party of which we are aware, in connection with the execution by the Company of the Agreement or any of the other Company Documents, or the performance by the Company of its obligations thereunder. 7. To our knowledge, the Company has in all material respects complied with, and is now in all material respects in compliance with, all Laws or Orders applicable to the Business, the Key Employees and the Assets. To our knowledge, except for the Licenses or Permits held by the Company listed in Section 3.8.1 of the Company Disclosure Schedule, and local permits or licenses that are not unique to the computer peripheral or electronics business, no other franchise, license, permit, order or approval of any Authority is material to or necessary for the conduct of the Business. To our knowledge, each License or Permit listed in Section 3.8.1 of the Company Disclosure Schedule is in full force and effect and the Company is in compliance therewith in all material respects. To our knowledge, the Company has received no notice of any asserted present failure by the Company to comply with any such Law, Order, Permit or License. 8. Except as disclosed in Section 3.9 of the Company Disclosure Schedule, to our knowledge, there exists no order enjoining the Company from taking or requiring the Company to take any action of any kind with respect to or otherwise relating to the Business or the Assets. 9. The Assignments are sufficient and in proper form to convey all of the Company's right, title and interest in and to all of the Assets and have been duly authorized and properly executed and delivered by the Company to the Buyer. 10. To our knowledge based upon the search of, or certificates of public officials relating to, such public records as we have determined to be appropriate, as of ____________, 1995, except as disclosed in the Company Disclosure Schedule, there was no Lien or Encumbrance on any of the Assets of the type which may be perfected only by filing a financing statement under the Uniform Commercial Code, or by a filing with the United States Patent & Trademark Office or the United States Copyright Office. 11. To our knowledge, all Patents, Marks, copyrights, and mask work rights, and all state and federal registrations and all applications therefor are valid and in full force and effect and none thereof are subject to any refiling or renewal actions falling due within six months after the Closing Date, and none of the Patents is subject to any Taxes, maintenance fees or actions falling due within six months of the Closing Date. To our knowledge, no claim has been asserted against the Company challenging the validity of any of the Patents. 12. The Company has the right, free and clear of any other right or claim of any third party of which we are aware to sell and deliver the Intangible Personal Property being sold and delivered to the Buyer under the Agreement. 13. The Company has the right, free and clear of any right or claim of any third party of which we are aware, to deliver the Care Logic Package to the Buyer under the Agreement. 14. To our knowledge, no claim has been asserted against the Company or any of its Affiliates challenging the validity of any assignment or contract (or portion thereof) for assignment or license of any portion of the Intangible Personal Property, or property right therein, to the Company or any of its Affiliates, or for maintaining confidentiality of any Trade Secret, and we know of no basis for any such claim. 15. To our knowledge, except as set forth in section 3.9 of the Company Disclosure Schedule, there are no pending claims, actions, judicial or other adversary proceedings, interferences, disputes, or disagreements concerning any item of Intangible Personal Property owned by the Company, to which the Company or any of its Affiliates is named as a party, including, without limitation, respecting infringement of any Patent, Mark, mask work right, or copyright, or misappropriation or misuse of any invention, Trade Secret, or other proprietary information, and no such action, proceeding, dispute or disagreement is threatened by or against Company or any of its Affiliates. 16. To our knowledge, except as set forth in Section 3.10.3 of the Company Disclosure Schedule, and subject to the transactions contemplated by the Agreement, the Company has the right to use each material item of Intangible Personal Property in perpetuity in connection with the conduct of the Business; (ii) such use does not infringe upon or violate any Patent, Mark, mask work right, copyright, Trade Secret, or other proprietary right of any other Person; (iii) the Company has not infringed and is not now infringing on any proprietary right of any other Person; and (iv) no Person has made any assertion to the contrary. 17. To our knowledge, the Company has not entered into any settlement regarding the breach or infringement of any United States or foreign license, Patent, Trade Secret, mask work right, copyright, invention or similar right directly and uniquely related to the Business. 18. To our knowledge, the Patents identified in Section 3.10.3 of the Company Disclosure Schedule are the only Patents or Patent applications owned solely or jointly by the Company or any of its Affiliates, containing claims covering the practice of any of the Business. This opinion is limited to the present laws of the States of California (except for and without giving effect to the choice of laws or conflicts of laws principles thereof) and the federal laws of the United States, and to the present judicial interpretations thereof and to the facts as they presently exist. We express no opinion as to the applicability or effect of the laws of any other jurisdiction. Exhibit 7.3 1. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to enter into the Agreement and the other Buyer Documents, to fully perform its obligations thereunder and to fully carry out the transactions contemplated thereby. 2. Neither the execution or delivery by the Buyer of the Agreement or the other Buyer Documents nor the performance by the either of the Buyer of its obligations thereunder: (a) violates any provision of its Certificate of Incorporation, by- laws or other charter documents; (b) to our knowledge, violates, conflicts with or constitutes an event which (with or without notice and/or lapse of time) would constitute a default under, permit or result in the termination or acceleration of, or cause the loss of any rights or options under any Material Agreement to which it is a party; (c) to our knowledge, violates any Order to which it or any of its properties is subject; or (d) to our knowledge, violates any Law to which it is subject. 3. The execution and delivery of the Agreement and the other Buyer Documents by the Buyer, the performance by the Buyer of its obligations thereunder, and the carrying out by the Buyer of the transactions contemplated thereby have been duly authorized by all necessary corporate action by the Buyer. No shareholder authorization or approval with respect to the Buyer is or was required for the Buyer to enter into the Agreement and the other Buyer Documents, perform its obligations thereunder and carry out the transactions contemplated thereby. The Agreement constitutes, and the other Buyer Documents constitute, valid and binding obligations of the Buyer enforceable against the Buyer in accordance with their respective terms, except as such validity, binding nature and enforceability may be subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws (including, without limitation, laws pertaining to preferential or fraudulent transfers) relating to or limiting a creditor's rights generally, general principles of good faith, fair dealing, materiality, reasonableness and equity (regardless of whether considered in a proceeding in equity or at law), and that equitable remedies are subject to the discretion of the court, and no opinion is rendered hereunder with respect to Sections 5.1, 5.11.4, 5.14, 9.1, 9.2, 9.3, 9.4, 10.3.7, 10.3.8 or 10.4 of the Agreement or any provision of any other Buyer Document to the same effect or any provision contained in any of the Buyer Documents which relate, by incorporation by reference, reaffirmation or otherwise, to any agreements or documents other than the Buyer Documents or any such agreement or document other than the Buyer Documents. 4. Except for reporting requirements of the Exchange Act, no consent, approval, authorization, notice, waiver, exemption or filing is required (i) by the Certificate of Incorporation, by-laws or other charter document of the Buyer, (ii) to our knowledge, by any Law or Order to which the Buyer is subject, or (iii) to our knowledge, pursuant to the terms of any Material Agreement of which the Buyer is a party, in connection with the execution by the Buyer of the Agreement or any of the other Buyer Documents, or the performance by the Buyer of it's obligations thereunder. 5. To our knowledge, there is no pending or threatened adverse claim, dispute, governmental investigation, suit, action (including, without limitation, nonjudicial real or personal property foreclosure actions), arbitration, legal, administrative or other proceeding of any nature, domestic or foreign, criminal or civil, at law or in equity, by or against the Buyer, which, if decided adversely to the Buyer, could reasonably be expected to have a material adverse effect upon the Buyer's ability to perform its respective obligations under the Agreement and the other Buyer Documents, except as relating to matters disclosed in the Buyer Disclosure Schedule and in filings made by the Buyer with the Securities Exchange Commission. Buyer Disclosure Schedule Section 4.5 Required Consents Consents of Lenders to Buyers Exhibit 2.7.2 PURCHASE PRICE ALLOCATION Intentionally Omitted Exhibits and Disclosure Schedule are contained in Volume II. TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . 1 ARTICLE II PURCHASE AND SALE OF ASSETS; THE CLOSING. . . . . 11 2.1 Assets to be Transferred.. . . . . . . . . . . . . . . 11 2.2 Instruments of Sale. . . . . . . . . . . . . . . . . . 11 2.3 Assumed Liabilities and Obligations. . . . . . . . . . 11 2.4 No Other Liabilities or Obligations Assumed. . . . . . 12 2.5 Initial Payment. . . . . . . . . . . . . . . . . . . . 13 2.6 Closing. . . . . . . . . . . . . . . . . . . . . . . . 13 2.7 Taxes and Other Matters. . . . . . . . . . . . . . . . 14 2.7.1 Payment of Taxes . . . . . . . . . . . . . . 14 2.7.2 Allocation of Purchase Price . . . . . . . . 14 2.8 Company's Deliveries at Closing. . . . . . . . . . . . 14 2.8.1 Deliveries to Buyer. . . . . . . . . . . . . 14 2.8.2 Location for delivery. . . . . . . . . . . . 15 2.9 Buyer Deliveries at Closing. . . . . . . . . . . . . . 16 2.10 Contingent Payment.. . . . . . . . . . . . . . . . . . 16 2.10.1 Contingent Payment Obligation. . . . . . . . 16 2.10.2 Calculation of Contingent Payment. . . . . . 17 2.10.3 Adjustment Amount. . . . . . . . . . . . . . 17 2.11 No Fractional Shares; Adjustments. . . . . . . . . . . 17 2.11.1 No Fractional Shares . . . . . . . . . . . . 17 2.11.2 Adjustments. . . . . . . . . . . . . . . . . 17 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . 17 3.1 Organization; Authority; Due Authorization; Vote Required.. . . . . . . . . . . . . . . . . . . . . . . 18 3.1.1 Organization and Good Standing. . . . . . . 18 3.1.2 Authority to Execute and Perform Agreements.. . . . . . . . . . . . . . . . . 18 3.1.3 Due Authorization; Enforceability. . . . . . 18 3.1.4 Specific Board Action. . . . . . . . . . . . 18 3.1.5 Vote Required. . . . . . . . . . . . . . . . 19 3.2 Capitalization and Ownership of Company Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . 19 3.3 Subsidiaries.. . . . . . . . . . . . . . . . . . . . . 20 3.4 No Violation.. . . . . . . . . . . . . . . . . . . . . 20 3.5 Regulatory Approvals and Other Consents. . . . . . . . 20 3.6 Financial Condition. . . . . . . . . . . . . . . . . . 20 3.6.1 Financial Statements.. . . . . . . . . . . . 20 3.6.2 No Undisclosed Liabilities.. . . . . . . . . 21 3.6.3 Inventories. . . . . . . . . . . . . . . . . 21 3.6.4 Accounts Receivable. . . . . . . . . . . . . 22 3.6.5 Absence of Certain Changes.. . . . . . . . . 22 3.7 Tax Matters. . . . . . . . . . . . . . . . . . . . . . 23 3.8 Compliance with Laws; Governmental Matters. . . . . . 25 3.8.1 General. . . . . . . . . . . . . . . . . . . 25 3.8.2 Environmental and Industrial Hygiene Compliance.. . . . . . . . . . . . . . . . . 25 3.9 Litigation.. . . . . . . . . . . . . . . . . . . . . . 26 3.10 Property of the Company. . . . . . . . . . . . . . . 27 3.10.1 Real Property. . . . . . . . . . . . . . . 27 3.10.2 Tangible Personal Property. . . . . . . . . 28 3.10.3 Intangible Personal Property. . . . . . . . 28 3.10.4 Use Restrictions . . . . . . . . . . . . . . 30 3.10.5 Necessary Properties.. . . . . . . . . . . . 31 3.11 Agreements. . . . . . . . . . . . . . . . . . . . . . 31 3.12 Labor and Employment Matters.. . . . . . . . . . . . . 33 3.12.1 Labor Agreements.. . . . . . . . . . . . . . 33 3.12.2 Compliance With Labor Laws and Agreements. . 33 3.13 Pension and Benefit Plans. . . . . . . . . . . . . . . 34 3.14 Insurance. . . . . . . . . . . . . . . . . . . . . . . 36 3.15 Suppliers and Customers. . . . . . . . . . . . . . . 37 3.16 Warranties and Merchandising.. . . . . . . . . . . . . 38 3.17 Product Quality. . . . . . . . . . . . . . . . . . . . 39 3.17.1 Claims and Occurrences.. . . . . . . . . . . 39 3.17.2 Compliance With Standards. . . . . . . . . . 39 3.18 Potential Conflicts of Interest. . . . . . . . . . . . 39 3.19 Certain Transactions.. . . . . . . . . . . . . . . . . 39 3.20 Powers of Attorney and Suretyships.. . . . . . . . . . 40 3.21 Banking Facilities.. . . . . . . . . . . . . . . . . . 40 3.22 Absence of Adverse Changes.. . . . . . . . . . . . . . 40 3.23 Full Disclosure. . . . . . . . . . . . . . . . . . . . 40 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . 41 4.1 Due Incorporation. . . . . . . . . . . . . . . . . . . 41 4.2 Authority to Execute and Perform Agreements. . . . . . 41 4.3 Due Authorization. . . . . . . . . . . . . . . . . . . 41 4.4 No Violation.. . . . . . . . . . . . . . . . . . . . . 42 4.5 Required Consents. . . . . . . . . . . . . . . . . . . 42 ARTICLE V CERTAIN COVENANTS. . . . . . . . . . . . . . . . . . . 42 5.1 Business Examinations and Physical Investigations of Assets. . . . . . . . . . . . . . . . . . . . . . . . 42 5.2 Conduct of Business. . . . . . . . . . . . . . . . . . 43 5.3 Changes in Business. . . . . . . . . . . . . . . . . . 44 5.4 Insurance. . . . . . . . . . . . . . . . . . . . . . . 44 5.5 No Defaults. . . . . . . . . . . . . . . . . . . . . . 44 5.6 Reporting and Compliance With Law. . . . . . . . . . . 44 5.7 Litigation.. . . . . . . . . . . . . . . . . . . . . . 44 5.8 Arrangements with Employees. . . . . . . . . . . . . . 45 5.9 No Solicitation or Negotiation.. . . . . . . . . . . . 45 5.10 Agreement with Monolithic Systems Technology. . . . . 45 5.11 Registration of Buyer Common.. . . . . . . . . . . . . 46 5.11.1 Registration Procedures. . . . . . . . . . . 46 5.11.2 Obligations of the Company.. . . . . . . . . 47 5.11.3 Registration Expenses. . . . . . . . . . . . 47 5.11.4 Indemnification. . . . . . . . . . . . . . . 48 5.12 Shareholder Matters. . . . . . . . . . . . . . . . . . 49 5.12.1 Notices to Shareholders. . . . . . . . . . . 49 5.12.2 CA-GCL Section 1301. . . . . . . . . . . . . 49 5.12.3 Review by Buyer. . . . . . . . . . . . . . . 49 5.13 Records. . . . . . . . . . . . . . . . . . . . . . . . 50 5.14 Covenants Not to Compete . . . . . . . . . . . . . . . 50 5.14.1 Covenant . . . . . . . . . . . . . . . . . . 50 5.14.2 Reasonableness of Restrictions . . . . . . . 50 5.14.3 Separate Covenants . . . . . . . . . . . . . 50 5.14.4 Increased Time Limitations . . . . . . . . . 51 5.14.5 Severability of Claims . . . . . . . . . . . 51 5.14.6 Injunctive Relief. . . . . . . . . . . . . . 51 5.15 Core Logic Technology Package. . . . . . . . . . . . . 51 5.16 Remittance of Payments . . . . . . . . . . . . . . . . 52 5.17 Company Debts. . . . . . . . . . . . . . . . . . . . . 52 5.18 Core Logic Business Unit. . . . . . . . . . . . . . . 52 ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATION OF BUYER TO CLOSE. . . . . . . . . . . . . . . . . . 52 6.1 Representations and Warranties; Performance of Covenants. . . . . . . . . . . . . . . . . . . . . . . 52 6.2 Shareholder Action.. . . . . . . . . . . . . . . . . . 53 6.3 Third Party Consents.. . . . . . . . . . . . . . . . . 53 6.4 Opinion of Counsel to the Company. . . . . . . . . . . 53 6.5 Approval of Counsel to Buyer.. . . . . . . . . . . . . 53 6.6 No Amendments to Resolutions; Corporate Status.. . . . 54 6.7 Employment Agreements. . . . . . . . . . . . . . . . . 54 6.8 MoSys Agreement. . . . . . . . . . . . . . . . . . . . 54 6.9 No Action or Proceeding. . . . . . . . . . . . . . . . 54 6.10 Approval of Board of Directors.. . . . . . . . . . . . 54 ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO CLOSE . . . . . . . . . . . . . 54 7.1 Representations and Warranties.. . . . . . . . . . . . 55 7.2 Shareholder Approval; Further Board Approval.. . . . . 55 7.2.1 Shareholder Approval . . . . . . . . . . . . . . 55 7.2.2 Board Approval. . . . . . . . . . . . . . . . . 55 7.3 Opinion of Counsel to Buyer. . . . . . . . . . . . . . 55 7.4 Approval of Counsel to the Company.. . . . . . . . . . 55 7.5 Good Standing. . . . . . . . . . . . . . . . . . . . . 55 7.6 No Action or Proceeding. . . . . . . . . . . . . . . . 56 7.7 Governmental Approvals.. . . . . . . . . . . . . . . . 56 ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . 56 8.1 Survival of Representations and Covenants of the Company and the Key Officers.. . . . . . . . . . . . . 56 8.2 Survival of Representations and Covenants of Buyer.. . 56 ARTICLE IX INDEMNIFICATION . . . . . . . . . . . . . . . . . 57 9.1 Indemnification of Buyer.. . . . . . . . . . . . . . . 57 9.2 Indemnification of Company.. . . . . . . . . . . . . . 58 9.3 Notice of Indemnification. . . . . . . . . . . . . . . 58 9.4 Contribution.. . . . . . . . . . . . . . . . . . . . . 59 ARTICLE X TERMINATION; REMEDIES. . . . . . . . . . . . . . . . . 59 10.1 Termination Without Default. . . . . . . . . . . . . . 59 10.2 Termination Upon Default. . . . . . . . . . . . . . . 59 10.2.1 Termination by Buyer. . . . . . . . . . . . 59 10.2.2 Termination by the Company.. . . . . . . . . 60 10.2.3 Rights Reserved. . . . . . . . . . . . . . . 60 10.3 Arbitration. . . . . . . . . . . . . . . . . . . . . . 60 10.3.1 Mandatory Arbitration. . . . . . . . . . . . 60 10.3.2 Arbitrator's Qualifications and Selection. . 60 10.3.3 Governing Law; Written Decision. . . . . . . 60 10.3.4 Procedures; Evidence; Experts. . . . . . . . 61 10.3.5 Costs. . . . . . . . . . . . . . . . . . . . 61 10.3.6 Consent to Jurisdiction. . . . . . . . . . . 61 10.3.7 Injunctive Relief. . . . . . . . . . . . . . 62 10.3.8 Indemnification. . . . . . . . . . . . . . . 62 10.3.9 Survival.. . . . . . . . . . . . . . . . . . 62 10.4 WAIVER OF JURY TRIAL; EXEMPLARY DAMAGES. . . . . . . . 62 10.5 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . 62 10.6 Interest On Amounts Due. . . . . . . . . . . . . . . . 63 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . 63 11.1 Expenses of Transaction. . . . . . . . . . . . . . . . 63 11.2 Confidentiality. . . . . . . . . . . . . . . . . . . . 63 11.3 Publicity. . . . . . . . . . . . . . . . . . . . . . . 64 11.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . 64 11.5 Further Assurances.. . . . . . . . . . . . . . . . . . 65 11.6 Modifications and Amendments; Waivers and Consents.. . 65 11.7 Entire Agreement.. . . . . . . . . . . . . . . . . . . 66 11.8 Governing Law and Venue. . . . . . . . . . . . . . . . 66 11.9 Binding Effect.. . . . . . . . . . . . . . . . . . . . 66 11.10 Counterparts. . . . . . . . . . . . . . . . . . . . . 67 11.11 Section Headings. . . . . . . . . . . . . . . . . . . 67 11.12 Gender; Tense, Etc. . . . . . . . . . . . . . . . . . 67 11.13 No Third Party Rights.. . . . . . . . . . . . . . . . 67 AGREEMENT FOR PURCHASE AND SALE OF ASSETS Among STANDARD MICROSYSTEMS CORPORATION EFAR MICROSYSTEMS, INC. and THE KEY OFFICERS Dated: February 6, 1996 EX-13 7 EXHIBIT 13 FINANCIAL REVIEW Selected Financial Data.... 24 Management's Discussion and Analysis.......... 25 Consolidated Balance Sheets.... 32 Consolidated Statements of Income......... 33 Consolidated Statements of Shareholders' Equity............ 34 Consolidated Statements of Cash Flows..... 35 Notes to Consolidated Financial Statements........ 36 Report on Management's Responsibilities.. 45 Report of Independent Public Accountants 45 23 Standard Microsystems Corporation and Subsidiaries Selected Financial Data (IN THOUSANDS, EXCEPT PER SHARE DATA) AS OF FEBRUARY 29 OR 28, AND FOR THE YEARS THEN ENDED
1996 1995 1994 1993 1992 OPERATING RESULTS Revenues $341,926 $378,671 $322,575 $250,495 $132,744 Cost of goods sold and operating expenses 370,835 338,049 287,139 219,712 130,679 Income (loss) from operations (28,909) 40,622 35,436 30,783 2,065 Other income (expense), net 48,913 670 (1,964) (2,865) (134) Income before minority interest, provision for income taxes and extraordinary item 20,004 41,292 33,472 27,918 1,931 Minority interest in net income (loss) of subsidiary 202 185 (209) (430) (425) Income before provision for income taxes and extraordinary item 19,802 41,107 33,681 28,348 2,356 Provision for income taxes 8,201 15,940 13,770 12,510 1,761 Income before extraordinary item 11,601 25,167 19,911 15,838 595 Extraordinary item -- (944) -- -- -- Net income $11,601 $24,223 $19,911 $15,838 $595 Weighted average common and common equivalent shares 13,515 13,305 13,090 12,469 11,604 PER SHARE DATA Income before extraordinary item $0.86 $1.89 $1.52 $1.27 $0.05 Extraordinary item -- (0.07) -- -- -- Net income $0.86 $1.82 $1.52 $1.27 $0.05 Shareholders' equity at year end $14.11 $13.16 $11.18 $9.50 $7.70 Market price at year end 15.63 26.50 19.13 18.75 9.13 BALANCE SHEET DATA Current assets $148,884 $162,776 $140,393 $111,326 $79,718 Current liabilities 55,781 43,421 41,842 40,962 35,085 Working capital $93,103 $119,355 $98,551 $70,364 $44,633 Property, plant and equipment, net $60,208 $34,908 $30,600 $30,775 $33,116 Total assets 260,659 228,578 205,833 183,926 154,299 Long-term debt -- -- 9,190 12,135 18,240 Minority interest in subsidiary 11,376 11,174 10,989 11,198 11,628 Shareholders' equity 193,502 173,983 143,812 119,631 89,346
24 Standard Microsystems Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following table presents the Company's Consolidated Statements of Income, as percentages of revenues, for the three years ended February 29, 1996:
FISCAL YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 Revenues 100.0% 100.0% 100.0% Cost of goods sold 64.1 56.6 60.2 Gross profit 35.9 43.4 39.8 Research and development 9.3 7.5 7.4 Selling, general and administrative 31.1 23.8 19.7 Amortization of intangible assets 2.4 1.4 1.7 Purchased in-process technology 1.6 -- -- Total operating expenses 44.4 32.7 28.8 Income (loss) from operations (8.5) 10.7 11.0 Other income (expense), net 14.3 0.2 (0.6) Income before minority interest, income taxes and extraordinary item 5.8 10.9 10.4 Minority interest in net income (loss) of subsidiary 0.1 0.1 (0.1) Income before taxes and extraordinary item 5.7 10.8 10.5 Provision for income taxes 2.4 4.2 4.3 Income before extraordinary item 3.3 6.6 6.2 Extraordinary item -- (0.2) -- Net income 3.3% 6.4% 6.2%
BUSINESS DIVESTITURE AND ACQUISITION In January 1996, the Company and SMC Enterprise Networks, Inc., a wholly-owned subsidiary, sold substantially all of the assets and technology of the Company's Enterprise Networks Business Unit (ENBU) to Cabletron Systems, Inc., for $74.0 million in cash. This business unit, which originated through the Company's December 1992 acquisition of Massachusetts-based Sigma Network Systems, Inc., developed, manufactured and sold enterprise-wide switching products for computer networks. The Company realized a $49.7 million pre-tax gain on the sale, after related costs. As security for the Company's indemnification obligations under the agreement, $7.1 million of the purchase price was placed in escrow to be used as a source from which indemnifiable losses may be paid by the Company to Cabletron. The Company anticipates no material claims for indemnifiable losses. In February 1996, the Company acquired the assets and technology of EFAR Microsystems, Inc., of Santa Clara, California. EFAR supplies core logic chipsets for use in personal computers using x86-architecture and Pentium microprocessors. The transaction was valued at $5.6 million, including the issuance of 240,000 shares of the Company's common stock, the assumption of liabilities, and transaction fees. $5.5 million of the purchase price represented purchased in-process technology and was charged to the Company's operations. The Company may issue up to $20 million of additional common stock to EFAR over the next three years, contingent upon the acquired business achieving certain operating results. 25 Standard Microsystems Corporation and Subsidiaries RESULTS OF OPERATIONS BY INDUSTRY SEGMENT The following table presents the Company's revenues and operating income by industry segment for the three years ended February 29, 1996 (in millions):
FISCAL YEARS ENDED % CHANGE % CHANGE FEBRUARY 29 OR FEBRUARY 28, 1996 96/95 1995 95/94 1994 SYSTEM PRODUCTS Adapter revenues $ 144.5 -29% $ 204.9 -10% $228.1 Hub and switch revenues 42.0 -19 51.5 46 35.3 Total system products revenues $ 186.5 -27% $ 256.4 -3% $ 263.4 Operating income (loss) (40.5) -257 25.9 -41 44.1 % of revenues (21.7) %10.1% 16.7% COMPONENT PRODUCTS Integrated circuit revenues $ 123.0 15% $ 106.9 102% $ 52.8 Foundry device revenues 15.6 320 3.7 226 1.1 Total component products revenues $ 138.6 25% $ 110.6 105% $ 53.9 Operating income 31.2 5 29.7 467 5.2 % of revenues 22.5% 26.8% 9.7% TOYO MICROSYSTEMS CORPORATION Revenues $ 16.8 44% $ 11.7 120% $ 5.3 Operating income (loss) 1.0 52 0.7 -- (1.2) % of revenues 5.9% 5.6% (23.6)% GENERAL, CORPORATE AND OTHER Operating (loss) ($ 20.5) 32% ($ 15.6) 23% ($ 12.6)
Standard Microsystems Corporation conducts its operations primarily through the System Products Division and the Component Products Division. The System Products Division designs, produces and markets products that connect personal computers to, and allow communications over, local area networks (LANs). The Component Products Division designs, produces and markets very-large-scale-integrated circuits, mainly for control of various personal computer functions, as well as specialized semiconductor-related products that are produced in SMC's own foundry. As a separate profit center, the Company's subsidiary, Toyo Microsystems Corporation (TMC), sells component and system products in the Japanese market. REVENUES The Company's revenues declined 10% to $341.9 million in fiscal 1996, from $378.7 million in fiscal 1995. As a percentage of consolidated revenues, system products declined to 54.6% in fiscal 1996 from 67.7% in fiscal 1995, as component products increased to 40.5% from 29.2% and TMC increased to 4.9% from 3.1%. Results for the year were handicapped by system products' 27% revenue decline, only partially offset by component products' 25% growth and TMC's 44% growth. System products' lower revenues reflected a decline in shipments to distributors, SMC's principal customers for adapter, hub and LAN switch networking products. The decline resulted primarily from a reduction of distributor inventory to levels that were considered appropriate for the rate of sales of SMC's products by distributors to their reseller customers during fiscal 1996. Revenues of network interface cards (adapters) fell 29% in fiscal 1996, including a 25% decline in Ethernet adapter revenues. The decline in Ethernet adapter revenues resulted from a 9% decline in unit volume and a 17% decline in average selling prices. 26 Standard Microsystems Corporation and Subsidiaries Hub and LAN switch revenues declined by $9.5 million, or 19%, in fiscal 1996. Most of this decline occurred in the Enterprise Networks Business Unit that was sold to Cabletron Systems, Inc. That business, which was included within the Company's operations for approximately ten months in fiscal 1996, accounted for approximately 4% and 6% of consolidated revenues in fiscal 1996 and fiscal 1995, respectively. Component products' growth in fiscal 1996 was generated principally by continued broad acceptance of PC I/O integrated circuits by major PC producers and by specialized semiconductor-related revenues that grew more than 300% from a very small base in fiscal 1995. In addition, growth at TMC came primarily from increased sales of PC I/O devices in Japan. SMC believes that an industry-wide shortage of capacity to produce semiconductors during most of fiscal 1996 curtailed revenues of integrated circuits. During the fourth quarter, SMC received initial production wafers from two suppliers under specific programs discussed in the WAFER PURCHASE AGREEMENTS section of this discussion. The Company also received initial wafers from other suppliers, requiring no specific investment. All of these sources of integrated circuit wafer capacity contributed to an increase in fourth quarter component products revenues over the levels of the first three quarters of fiscal 1996. The Company's revenues increased 17% in fiscal 1995, reflecting increased shipments of component products, hubs and LAN switches. Component products' revenues grew 105%, reflecting broad acceptance of PC I/O circuits by major PC manufacturers. Adapter revenues declined 10% in fiscal 1995, including a 16% decrease in Ethernet adapter revenues, primarily from lower average selling prices. Hub and LAN switch revenues grew 46%, reflecting increased shipments of the ES/1 LAN Switch, initial shipment of the TigerSwitch and increased shipments of wiring hubs. System products' revenues in the fourth quarter of fiscal 1995 were lower than anticipated and inventory in the distributor channel was above targeted levels, primarily due to lower than anticipated shipments from distributors to their customers. TMC also contributed to the Company's overall improvement with revenue growth of 120%, principally from networking products growth. The following table presents the Company's revenues by geographic area as percentages of total revenues to unaffiliated customers. All but Japan (TMC), within the category REVENUES OUTSIDE THE UNITED STATES, are considered export revenues shipped from U.S. operations. FISCAL YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 United States 43.7% 53.2% 56.0% Asia and Pacific Rim 25.4 14.2 9.3 Europe 20.3 22.9 26.1 Canada 3.2 4.0 4.3 Other 2.5 2.6 2.6 Export revenues 51.4 43.7 42.3 Japan (TMC) 4.9 3.1 1.7 Revenues outside the United States 56.3 46.8 44.0 Total revenues 100.0% 100.0% 100.0% International revenues were 56.3% of the Company's revenues in fiscal 1996, compared with 46.8% in fiscal 1995 and 44.0% in fiscal 1994. The principal shift occurred in revenues to Asia and the Pacific Rim, which grew 62% in fiscal 1996 and 79% in fiscal 1995. This growth was caused primarily by a trend of component products' domestic-branded customers to produce a greater proportion of their PCs in offshore factories. In system products' major international market, Europe, revenues declined 20% in 1996 and grew 3% in 1995. The European market was relatively more stable than North American markets, which incurred a greater proportion of the previously-cited adjustments in networking products' distribution inventory during fiscal 1996 and fiscal 1995. United States and Canadian revenues declined 26% and 29%, respectively, in fiscal 1996 after fiscal 1995 gains of 12% and 11%, 27 Standard Microsystems Corporation and Subsidiaries respectively. The improvement in Japan resulted principally from TMC selling more PC I/O devices in fiscal 1996 and selling more networking products in fiscal 1995. Revenue transfers between industry segments are reported in note 10 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The majority of these transfers consists of components and systems products shipped to TMC for resale in Japan. GROSS PROFIT The gross profit margin declined to 35.9% in fiscal 1996 from 43.4% in fiscal 1995. An $11.8 million inventory write-down accounted for 4 percentage points of the gross profit margin decline. This charge, provided in the second quarter, wrote down certain system products' inventory to estimated net realizable value. The write-down reflected the disappointing reception of a new product and the reduction of its selling price, lower than projected demand for several older product lines being replaced by newer products, and a decision to reduce the variety of networking products that perform similar functions. Factors contributing to the remaining 3.5 percentage points of the gross margin decline were: (Bullet) Lower average selling prices for network interface cards, switching and hub products, only partially offset by a reduction in production costs (Bullet) Distribution of manufacturing overhead over reduced system products' revenues (Bullet) A disproportionate decline in revenues of generally higher margined networking products such as Token Ring and ARCNET adapters and enterprise switches (Bullet) Lower margins for the newest generation of PC I/O integrated circuits, in which higher costs more than offset higher average selling prices (Bullet) A partial offset to these items from higher foundry business margins Fiscal 1995 gross profit margins improved to 43.4% from 39.8% in fiscal 1994. The improvement in fiscal 1995 was attributable to increased unit volume of PC I/O devices, leading to lower production costs and more efficient utilization of manufacturing overhead for component products. In addition, the growth of LAN switching revenues, which carried higher gross margins than adapter revenues, led to improved gross margins for system products. SMC maintains programs to reduce product costs and develop innovative products that have helped to offset price competition that characterizes the Company's business. These programs have generally contributed to maintaining gross profit margins. The percentage of revenues from new products in fiscal 1996 was above the year earlier percentage, but was insufficient to offset the variables enumerated above that led to a reduction in gross profit margins. New product revenues were approximately 26% of total revenues in fiscal 1996 compared to 17% in fiscal 1995 and 27% in fiscal 1994. New products are defined as those products that were initially shipped to customers during the preceding four quarters. OPERATING EXPENSES Research and development expenses increased to $31.7 million, or 9.3% of revenues, in fiscal 1996 from $28.3 million, or 7.5% of revenues, in fiscal 1995 and $24.0 million, or 7.4% of revenues, in fiscal 1994. Of these amounts, $9.8 million was spent by the divested ENBU in fiscal 1996, compared to $7.6 million in fiscal 1995. In fiscal 1997, engineering efforts for networking products will focus on developing Fast Ethernet, ATM and PC Card technology products and reducing costs and enhancing the performance of adapter, hub and LAN switch products. Development for component products is directed toward enhancing the functionality and performance and reducing device costs of PC I/O, PCsystems logic chipset and LAN integrated circuits. Selling, general and administrative expenses increased 18% to $106.3 million, or 31.1% of revenues, in fiscal 1996, compared to $90.0 million, or 23.8% of revenues, in fiscal 1995 and $63.5 million, or 19.7% of revenues, in fiscal 1994. These expenses included spending for advertising, which decreased to $17.4 million in fiscal 1996 from $23.2 million in fiscal 1995 and increased from $13.6 million in fiscal 1994. Included within fiscal 1996 expenses are $2.5 million related to the severance of several executives and a $1.2 million reserve for estimated legal fees. Excluding these items, fiscal 1996 selling, general and administrative expenses increased by 14% over fiscal 1995 expenses to $102.6 million, or 30.0% of revenues. Of these amounts, $10.8 million was directly related 28 Standard Microsystems Corporation and Subsidiaries to the fiscal 1996 operation of the ENBU, compared to $7.9 million in fiscal 1995. Most of the increases in fiscal 1996, excluding the severance charges and legal fee accrual, reflected higher selling and marketing expenses for LAN switching and hub products and for component products. The increased spending also resulted from an expansion of the infrastructure to support the growth in the component products business. Sales and marketing personnel declined to approximately 285 at the end of fiscal 1996, chiefly reflecting the divestiture of the ENBU. As a result, the Company no longer needs to support a networking sales force that sells directly to end users and will concentrate chiefly on existing distribution and major account channels. A major portion of the increase in selling, general and administrative expenses in fiscal 1995 reflected a 45% increase in sales and marketing personnel to approximately 300 at the end of fiscal 1995. The increases in amortization of intangible assets in fiscal 1996 from fiscal 1995 reflected an accelerated write-off of certain assets. The increase also included a $2.4 million write-down of previously acquired LAN technology to its estimated realizable value in the second quarter. The charge was taken as a result of a reassessment of the Company's business prospects for this technology, and the decision to reduce related development activity. OPERATING PROFITS In fiscal 1996, the Company reported an operating loss of $28.9 million, or -8.5% of revenues, which compares to an operating profit of $40.6 million, or 10.7% of revenues, in fiscal 1995 and $35.4 million, or 11.0% of revenues, in fiscal 1994. The major contributor to the decline in fiscal 1996 was the system products business, which incurred an operating loss of $40.5 million, or -21.7% of its revenues. Operating income for component products business rose 5% in fiscal 1996 to $31.2 million, or 22.5% of its revenues. In fiscal 1995, when the Company's operating profits rose 15%, system products' operating profits declined 41% to $25.9 million, or 10.1% of revenues. The impetus behind the Company's overall growth was the 467% improvement in component products' operating income to $29.7 million, or 26.8% of revenues. TMC recorded growth in both fiscal 1996 and 1995, ameliorating the fiscal 1996 decline and aiding the progress in fiscal 1995. General, corporate and other operating expenses increased to restrain the grow th in overall operating profits in both years. As discussed in the previous sections, portions of the fiscal 1996 operating loss resulted primarily from lower gross margins for both systems and components products, system products' inventory write-downs, increases in intangible asset amortization and charges for in-process technology, severance and legal fees. Also, in both fiscal 1996 and 1995, system products' profits were restrained by losses at the ENBU, prior to its sale. OTHER INCOME AND EXPENSE In fiscal 1996, interest expense decreased $0.2 million, associated with lower interest rates on a new credit line negotiated in January 1995. The impact was partially offset by higher average borrowings in fiscal 1996 although, after selling the ENBU, the Company repaid all its bank debt in the fourth quarter. Interest income declined $0.8 million, primarily reflecting a decrease in average cash balances available for investment during fiscal 1996. Fiscal 1995 interest expense declined $0.4 million due to lower average borrowings outstanding and the fourth quarter retirement of long-term debt. Interest income increased $0.5 million, primarily reflecting interest income on a tax refund receivable. Other income (expense), net improved $1.7 million reflecting a $1.2 million capital gain resulting from the sale of an investment and reduced financing fees. EXTRAORDINARY ITEMS In January 1995, SMC prepaid $10.8 million of debt, canceling a $35.0 million line of credit and replacing it with an $80.0 million line. As a result of the early debt retirement, the Company incurred prepayment penalties, the write-off of unamortized financing costs, and other fees, amounting to $1.5 million or $0.9 million after taxes. 29 Standard Microsystems Corporation and Subsidiaries INCOME TAXES In fiscal 1996, income taxes were provided at an effective rate of 41.4%, compared to 38.8% for fiscal 1995 and 40.9% for fiscal 1994. The effective rate for fiscal 1996 included the 35.0% federal tax rate and a 3.8% effective state tax rate. In addition, goodwill written off in connection with the sale of the ENBU was not deductible for tax purposes, raising the Company's fiscal 1996 effective tax rate. In fiscal 1995, the effective rate included the 35.0% federal tax rate and a 3.7% effective state tax rate. The reduction in the effective tax rate in fiscal 1995 from fiscal 1994 primarily reflected the benefit of an election allowing the deductibility of goodwill associated with a fiscal 1992 acquisition and a full year's operation of a foreign sales corporation. These items were partially offset by a reduction in the difference between the federal tax rate and foreign tax rates, among other items. WAFER PURCHASE AGREEMENTS Pursuant to a September 1994 agreement with AT&T Corp., the Company purchased $16.0 million of wafer fabrication equipment for installation in a semiconductor plant owned by AT&T's Microelectronics Business Unit in Madrid, Spain. This agreement allocates sub-micron wafer production capacity to the Company for five years beginning in March 1996. The $16.0 million is included within the Company's fiscal 1996 capital expenditures. In fiscal 1996, the Company purchased a minority equity interest in Singapore-based Chartered Semiconductor Pte Ltd. for $19.9 million. Under this agreement, Chartered allocates sub-micron wafer production capacity to the Company for ten years. The $19.9 million is included within Other assets on the accompanying balance sheet. This arrangement, along with the AT&T agreement, is intended to provide a portion of the Company's long-term production requirements for state-of-the-art integrated circuits. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased to $93.1 million at the end of fiscal 1996 from $119.4 million at the end of fiscal 1995. The decrease in working capital was primarily from decreases of $11.0 million in cash and cash equivalents and $19.9 million in accounts receivable and an increase of $12.4 million in current liabilities. These items were partially offset by increases of $14.6 million in inventories and $2.4 million in deferred tax benefits and other assets. The decrease in cash and cash equivalents to $18.5 million at the end of fiscal 1996 primarily reflected paying income taxes of $17.7 million, $39.0 million for capital expenditures, and $19.9 million for an interest in Chartered Semiconductor Pte Ltd. Partially funding these transactions was the receipt of $63.4 million of net cash realized from the sale of the ENBU. These net proceeds resulted from the ENBU's $74.0 million selling price, reduced by $7.1 million placed into escrow and $3.5 million of transaction costs. Cash and cash equivalents decreased by $2.6 million to $29.5 million at the end of fiscal 1995, primarily reflecting net cash provided by operating activities of $20.1 million and $2.0 million from the issuance of common stock, offset by a net pay-down of long-term debt of $13.2 million and capital expenditures of $13.6 million. The reduction of inventory in the system products' distribution channel resulted in a more even dispersal of revenues and lower days of sales outstanding (DSO). During fiscal 1996, DSOs declined to 54 in the fourth quarter from 67 in the fourth quarter of fiscal 1995 and from 63 in the fourth quarter of fiscal 1994. The increased DSOs in the fourth quarter of fiscal 1995 reflected a greater percentage of sales occurring toward the end of the quarter when compared to the year earlier period. Annualized inventory turnover declined to 4.0 times for the fourth quarter of fiscal 1996 from 5.1 times for the year earlier period. The decline in inventory turnover primarily reflects an investment in component products' inventory in anticipation of higher sales in the coming quarter. During fiscal 1997, the Company intends to reduce system products' inventory, in part, by reducing the variety of Ethernet adapters that are installed in PCs. 30 Standard Microsystems Corporation and Subsidiaries Concurrent with the early retirement of all of its bank debt in January 1995, the Company negotiated an $80.0 million unsecured revolving credit line that replaced a $35.0 million revolving credit agreement. During fiscal 1996, the Company borrowed varying amounts under this credit line, peaking at $18.0 million at the end of November 1995. During fiscal 1996, the Company experienced reduced revenues, losses from operations and asset write-downs. This performance resulted in the Company's non-compliance with certain financial condition covenants under the $80.0 million line of credit agreement. In connection therewith, the Company obtained waivers from its banks respecting the failure to meet these covenants, and, in October 1995, the agreement was amended to reduce the credit line to $25.0 million. The Company believes that its present working capital position, combined with forecasted cash flow and available borrowing capacity, will be sufficient to meet cash requirements for the next twelve months. It is anticipated that cash flow from operations, supplemented by borrowings under the revolving credit line as necessary, will be used chiefly to fund capital expenditures in fiscal 1997. Significant capital expenditures expected in fiscal 1997 include the continuing upgrade to a new client/server information system and purchases of various foundry production, design, and test equipment. FACTORS THAT MAY AFFECT FUTURE RESULTS Except for the historical information contained in this annual report, certain matters discussed herein are forward-looking statements that involve risks and uncertainties. The forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. A number of variables could affect the Company's future operating results, including worldwide demand for personal computers and numerous competitive factors. The Company's most important customers for component products are personal computer producers, and a slowdown in the rate of growth in demand for PCs could affect the Company's growth and intensify competition. The inability to obtain adequate integrated circuit wafers could allow competitors who process wafers internally to gain market share relative to the Company. These competitors may also, more aggressively, reduce product prices. The Company's adapters are inserted in newly sold and previously installed PCs, so that the sales growth of PCs influences sales of adapters. Improvements in PC performance require more powerful adapters, and that has led to a shift in the mix of adapters that the Company sells towards the high speed PCI bus and Fast Ethernet adapters. The Company also sells PC cards for portable computers. Product mix, product prices and the acceptance of newly introduced products can be altered by competitors' new products, promotions and pricing. The Company's product development, sales and marketing progress is dependent on hiring and retaining employees with specific skills. The Company is also dependent on a limited number of suppliers for certain components, assemblies, software and finished products. High levels of production by PC manufacturers led to an industry-wide shortage of silicon wafer fabrication capacity in fiscal 1996 and 1995. While these shortages eased during the fourth quarter of fiscal 1996, they could occur again and lead to difficulty in securing additional manufacturing capacity, potentially curtailing revenue and profit growth in fiscal 1997 and beyond. Alternatively, PC production could weaken, leading customers to cancel or delay orders for the Company's products. With 56% of the Company's revenues in fiscal 1996 shipped to customers located outside of the United States, global economic conditions and changes in foreign currency exchange rates can influence the demand for the Company's products. Because of these and other circumstances that could affect the Company's operating results, past financial performance is not necessarily indicative of results to be expected in the future. 31 Standard Microsystems Corporation and Subsidiaries Consolidated Balance Sheets (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AS OF FEBRUARY 29 OR 28, 1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,459 $ 29,478 Accounts receivable, net of allowance for doubtful accounts of $1,369 and $1,102, respectively 55,976 75,826 Inventories 60,408 45,789 Deferred tax benefits 8,607 5,392 Other current assets 5,434 6,291 TOTAL CURRENT ASSETS 148,884 162,776 PROPERTY, PLANT AND EQUIPMENT: Land 3,832 Buildings and improvements 26,839 26,901 Machinery and equipment 109,235 77,639 139,906 108,372 Less: accumulated depreciation 79,698 73,464 PROPERTY, PLANT AND EQUIPMENT, NET 60,208 34,908 OTHER ASSETS 51,567 30,894 $260,659 $228,578 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 30,801 $ 24,193 Accrued expenses and other liabilities 23,884 15,527 Income taxes payable 1,096 3,701 TOTAL CURRENT LIABILITIES 55,781 43,421 COMMITMENTS AND CONTINGENCIES -- -- MINORITY INTEREST IN SUBSIDIARY 11,376 11,174 SHAREHOLDERS' EQUITY: Preferred stock, $0.10 par value Authorized 1,000,000 shares, none outstanding -- -- Common stock, $0.10 par value Authorized 30,000,000 shares Outstanding 13,711,000 and 13,222,000 shares, respectively 1,371 1,322 Additional paid-in capital 84,737 77,319 Retained earnings 100,217 88,616 Unrealized gain on investment, net of tax 2,226 718 Foreign currency translation adjustment 4,951 6,008 TOTAL SHAREHOLDERS' EQUITY 193,502 173,983 $260,659 $228,578
The accompanying notes are an integral part of these consolidated financial statements. 32 Standard Microsystems Corporation and Subsidiaries Consolidated Statements of Income (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 Revenues $341,926 $ 378,671 $ 322,575 Cost of goods sold 219,141 214,269 194,210 Gross profit 122,785 164,402 128,365 Operating expenses: Research and development 31,666 28,286 23,963 Selling, general and administrative 106,337 90,005 63,477 Amortization of intangible assets 8,237 5,489 5,489 Purchased in-process technology 5,454 -- -- 151,694 123,780 92,929 Income (loss) from operations (28,909) 40,622 35,436 Other income (expense): Interest income 630 1,453 912 Interest expense (1,072) (1,255) (1,649) Gain on sale of business unit 49,663 -- -- Other income (expense), net (308) 472 (1,227) 48,913 670 (1,964) Income before minority interest, provision for income taxes and extraordinary item 20,004 41,292 33,472 Minority interest in net income (loss) of subsidiary 202 185 (209) Income before provision for income taxes and extraordinary item 19,802 41,107 33,681 Provision for income taxes 8,201 15,940 13,770 Income before extraordinary item 11,601 25,167 19,911 Extraordinary item Loss on retirement of debt, net of applicable income taxes of $600 -- 944 -- Net income $ 11,601 $ 24,223 $ 19,911 Income (loss) per common and common equivalent share: Income before extraordinary item $ 0.86 $ 1.89 $ 1.52 Extraordinary item -- (0.07) -- Net income per common and common equivalent share $ 0.86 $ 1.82 $ 1.52
The accompanying notes are an integral part of these consolidated financial statements. 33 Standard Microsystems Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity (IN THOUSANDS)
FOREIGN ADDITIONAL UNREALIZED CURRENCY COMMON STOCK PAID-IN RETAINED GAIN ON TRANSLATION SHARES AMOUNT CAPITAL EARNINGS INVESTMENT ADJUSTMENT BALANCE AT FEBRUARY 28, 1993 12,591 $ 1,259 $ 69,807 $ 44,482 $-- $ 4,083 Shares issued under employee stock purchase plan 46 5 879 -- -- -- Stock options exercised 194 19 1,253 -- -- -- Tax effect of employee stock plans -- -- 992 -- -- -- Restricted stock grants to employees, net 36 4 185 -- -- -- Foreign currency translation adjustment -- -- -- -- -- 933 Net income -- -- -- 19,911 -- -- BALANCE AT FEBRUARY 28, 1994 12,867 1,287 73,116 64,393 -- 5,016 Shares issued under employee stock purchase plan 60 6 1,173 -- -- -- Stock options exercised 245 24 1,967 -- -- -- Tax effect of employee stock plans -- -- 707 -- -- -- Restricted stock grants to employees, net 50 5 356 -- -- -- Unrealized gain on investment, net of taxes -- -- -- -- 718 -- Foreign currency translation adjustment -- -- -- -- -- 992 Net income -- -- -- 24,223 -- -- BALANCE AT FEBRUARY 28, 1995 13,222 1,322 77,319 88,616 718 6,008 Shares issued under employee stock purchase plan 91 9 1,564 -- -- -- Stock options exercised 72 7 674 -- -- -- Tax effect of employee stock plans -- -- 377 -- -- -- Stock issued for business acquisition 240 24 3,880 -- -- -- Restricted stock grants to employees, net 86 9 923 -- -- -- Unrealized gain on investment, net of taxes -- -- -- -- 1,508 -- Foreign currency translation adjustment -- -- -- -- -- (1,057) Net income -- -- -- 11,601 -- -- BALANCE AT FEBRUARY 29, 1996 13,711 $ 1,371 $ 84,737 $100,217 $ 2,226 $ 4,951
The accompanying notes are an integral part of these consolidated financial statements. 34 Standard Microsystems Corporation and Subsidiaries Consolidated Statements of Cash Flows (IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 361,215 $ 367,342 $ 293,927 Cash paid to suppliers and employees (357,981) (331,406) (276,443) Interest received 622 3,027 1,284 Interest paid (1,082) (1,168) (1,699) Income taxes paid (17,670) (16,467) (11,884) Net cash provided by (used for) operating activities (14,896) 21,328 5,185 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (39,012) (13,578) (8,119) Acquisition of business (1,440) -- -- Sale of business unit, net of related costs 70,473 -- -- Escrow investment (7,050) -- -- Investment in Chartered Semiconductor Pte Ltd. (19,944) -- -- Other 50 39 3,089 Net cash provided by (used for) investing activities 3,077 (13,539) (5,030) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,573 1,991 1,403 Borrowings under line of credit agreements 34,000 927 1,055 Principal payments of long-term debt (34,000) (14,117) (7,000) Net cash provided by (used for) financing activities 1,573 (11,199) (4,542) Effect of foreign exchange rate changes on cash and cash equivalents (773) 773 630 Net decrease in cash and cash equivalents (11,019) (2,637) (3,757) Cash and cash equivalents at beginning of year 29,478 32,115 35,872 Cash and cash equivalents at end of year $ 18,459 $ 29,478 $ 32,115 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income $ 11,601 $ 24,223 $ 19,911 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Depreciation and amortization 18,976 14,813 13,799 Gain on sale of business unit (49,663) -- -- Purchased in-process technology 5,454 -- -- Other adjustments, net 1,423 2,168 1,040 CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITION AND SALE OF BUSINESSES: Accounts receivable 19,058 (11,027) (28,265) Inventories (24,459) (11,608) (5,921) Accounts payable and accrued expenses and other liabilities 13,425 4,714 2,678 Other changes, net (10,711) (1,955) 1,943 Net cash provided by (used for) operating activities $ (14,896) $ 21,328 $ 5,185 CASH USED FOR ACQUISITION OF BUSINESS AS REFLECTED IN THE CONSOLIDATED STATEMENTS OF CASH FLOWS IS SUMMARIZED AS FOLLOWS: Net assets and technology acquired $ 5,554 Common stock issued (3,904) Liabilities assumed and created (210) Cash used for acquisition of business $ 1,440
The accompanying notes are an integral part of these consolidated financial statements. 35 Standard Microsystems Corporation and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Standard Microsystems Corporation (SMC) and all its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist principally of cash in banks and highly liquid debt instruments purchased with maturities of three months or less. During fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115). In accordance with the provisions of SFAS 115, these debt instruments are categorized as available for sale and are recorded at fair value which approximates cost. INVENTORIES Inventories are valued at the lower of first-in, first-out cost or market and consist of the following (in thousands): AS OF FEBRUARY 29 OR 28, 1996 1995 Inventories: Raw materials $ 9,556 $ 11,547 Work-in-process 34,622 16,239 Finished goods 16,230 18,003 $ 60,408 $ 45,789 During fiscal 1996, an $11,800,000 charge to cost of goods sold was recorded to reduce the carrying value of certain system products inventory to estimated net realizable value. The principal reasons for the write-down were the disappointing reception of a new product and the reduction of its selling price, lower than projected demand for several older product lines and a decision to reduce the variety of networking products that perform the same function. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the buildings (20 to 25 years) and machinery and equipment (3 to 7 years). Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected currently. INVESTMENT IN EQUITY SECURITIES In accordance with the provisions of SFAS 115, at February 29, 1996, and February 28, 1995, an investment in a publicly traded equity security is carried at fair value within Other assets on the accompanying Consolidated Balance Sheets. A corresponding unrealized gain, net of taxes, is reported as a separate component of Shareholders' equity. During the fourth quarter of fiscal 1995, the Company sold approximately one-half of this equity investment, realizing a pre-tax gain of $1,227,000, which is included within Other income (expense) on the accompanying Consolidated Statements of Income. INTANGIBLE ASSETS Intangible assets are amortized primarily on a straight-line basis over their respective estimated useful lives, ranging from three to ten years. The carrying values of these assets are periodically reviewed to assess recoverability. During the second quarter of fiscal 1996, the Company canceled certain product development projects related to a particular LAN technology, resulting in a write-down of $2,400,000 in the value of this acquired technology and an acceleration of its amortization to reflect a reduction in its estimated useful life. REVENUE RECOGNITION The Company recognizes revenues from product sales and accrues for estimated product returns and price protection and other sales allowances at the time of shipment. PRODUCT WARRANTY The Company's products are generally under limited warranty against defects in material and workmanship for periods ranging from one year to lifetime. Estimated warranty costs are accrued when the products are sold. SOFTWARE DEVELOPMENT EXPENSES Software development costs incurred after achieving technological feasibility are not material and, therefore, are expensed as incurred. 36 Standard Microsystems Corporation and Subsidiaries INCOME TAXES Deferred income taxes are provided on temporary differences that arise in the recording of transactions for financial and tax reporting purposes and result in deferred tax assets and liabilities. Deferred tax assets are reduced by an appropriate valuation allowance if it is management's judgment that part of the deferred tax asset will not be realized. Tax credits are accounted for as reductions of the current provision for income taxes in the year in which the related expenditures are incurred. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of their operations are translated using the average exchange rates during the period. Resulting translation adjustments are recorded as a separate component of Shareholders' equity. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share has been computed based on the weighted average number of shares outstanding during the year, including the effect of common equivalent shares, if dilutive. The difference between primary and fully diluted earnings per share is immaterial for all periods presented. NEW ACCOUNTING STANDARDS During fiscal 1997, the Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS 123, ACCOUNTING FOR STOCK BASED COMPENSATION. Adoption of SFAS 121 will not have a material effect on the Company's consolidated financial statements. The Company expects to disclose the fair value of options granted under stock option plans in a footnote to its 1997 consolidated financial statements, as permitted by SFAS 123. RECLASSIFICATIONS Certain items shown have been reclassified to conform with the fiscal 1996 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. BUSINESS DIVESTITURE AND ACQUISITION In January 1996, the Company and its wholly-owned subsidiary, SMC Enterprise Networks, Inc., sold substantially all of the assets and technology associated with the Company's Enterprise Networks Business Unit to Cabletron Systems, Inc., for $74,000,000 in cash, resulting in a gain of $49,663,000 before taxes. The business unit, which originated through the Company's December 1992 purchase of Massachusetts-based Sigma Network Systems, Inc., developed, manufactured and sold enterprise-wide switching products for computer networks. As security for the Company's indemnification obligations, $7,050,000 of the purchase price was placed in escrow to be used as a source from which indemnifiable losses, if they occur, may be paid by the Company to Cabletron. The Company expects no material claims for indemnification pursuant to this contract. In February 1996, the Company acquired the assets and technology of EFAR Microsystems, Inc., of Santa Clara, CA. Accounted for as a purchase, the acquisition was valued at $5,554,000 based on the issuance of 240,000 shares of the Company's common stock, the assumption of liabilities and transaction fees. As a result of this acquisition, the Company recorded a $5,454,000 charge for the purchase of in-process technology. The acquisition agreement also provides for the issuance of up to $20,000,000 of additional common stock over the next three years to EFAR, contingent upon the acquired business achieving certain operating results. Pro forma information for this acquisition is not presented because the pro forma amounts would not differ materially from historical results. 3. LONG-TERM DEBT During the fourth quarter of fiscal 1995, the Company retired all of its bank debt, consisting of a revolving line of credit, a senior term loan and a bank note, and recorded an after-tax extraordinary loss of $944,000 on this early retirement. The extraordinary loss consisted of early redemption premiums paid to the debt holders and the write-off of deferred financing costs associated with this debt. Concurrent with this early retirement, the Company arranged an $80,000,000 unsecured revolving line of credit, which permitted the Company to borrow funds on a revolving basis through January 1998, bearing interest at rates varying from .625% to 1.0% above the London Interbank 37 Standard Microsystems Corporation and Subsidiaries Subsidiaries Offering Rate (LIBOR). The unused portion of the line bears an annual commitment fee of 0.25%. The Company had no borrowings under this line during fiscal 1995. During fiscal 1996, the Company borrowed varying amounts under this line bearing interest at rates between 6.4% and 8.8%. During fiscal 1996, the Company obtained waivers respecting the fail ure to meet certain financial condition covenants under this revolving credit agreement and, in October 1995, the agreement was amended to reduce the credit line to $25,000,000. There were no borrowings under the line of credit as of February 29, 1996. 4. INCOME TAXES The provision for income taxes included in the accompanying consolidated statements of income consists of the following (in thousands): FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 Current Federal $12,950 $16,242 $11,897 Foreign 619 345 188 State 580 2,281 1,907 14,149 18,868 13,992 Deferred (5,948) (2,928) (222) $ 8,201 $15,940 $13,770 The provision for taxes on income before extraordinary item differs from the amount computed by applying the U.S. Federal statutory tax rate as a result of the following: FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 Provision for income taxes computed at the statutory rate 35.0% 35.0% 35.0% State taxes 3.8 3.7 3.7 Differences between foreign and U.S. income tax rates -- -- 1.2 Foreign sales corporation (1.0) (1.3) (0.5) Income tax credits (2.9) (0.1) (0.3) Goodwill amortization 2.4 0.5 1.9 ENBU goodwill 7.6 -- -- Other (3.5) 1.0 (0.1) 41.4% 38.8% 40.9% The tax effects of temporary differences that result in deferred tax benefits are as follows (in thousands): AS OF FEBRUARY 29 OR 28, 1996 1995 Reserves and accruals not currently deductible for tax purposes $ 3,143 $ 1,031 Intangible asset amortization 3,832 2,360 Inventory valuation 3,046 2,151 Net operating loss carryforward -- 857 Purchased in-process technology 1,909 -- Depreciation 273 1,031 Other (71) (243) $ 12,131 $ 7,187 Goodwill associated with the Company's January 1996 sale of its Enterprise Networks Business Unit was not deductible for tax purposes, raising the Company's fiscal 1996 effective tax rate by 7.6 percentage points. During fiscal 1995, the Company elected a fifteen-year amortization of certain intangible assets related to the fiscal 1992 acquisition of a local area networking business. This election allows the Company to take a tax deduction for previously non-deductible goodwill. Realization of tax benefits from NOL carryforwards created by the Company's Japanese subsidiary is uncertain, and accordingly is fully reserved. At a current foreign exchange rate, these carryforwards aggregated approximately $6,212,000 as of February 29, 1996, and will expire between fiscal 1997 and fiscal 1999. Income tax benefits of $377,000, $707,000 and $992,000 related to the Company's stock option plans for fiscal 1996, 1995 and 1994, respectively, have been credited to additional paid-in capital. The Company has $1,851,000 of New York State tax credit carryforwards of which $950,000 and $289,000 expire in fiscal 1997 and 1998, respectively. The remaining $612,000 of credit carryforwards expire at various dates in fiscal 1999 through fiscal 2004. 38 Standard Microsystems Corporation and Subsidiaries 5. OTHER BALANCE SHEET DATA (IN THOUSANDS) AS OF FEBRUARY 29 OR 28, 1996 1995 Other assets: Intangible assets: Covenant not to compete $15,100 $15,100 Acquired LAN technologies 13,500 13,500 Excess of acquisition cost over fair value of net assets acquired (goodwill) 7,797 15,279 36,397 43,879 Less: accumulated amortization 22,388 17,400 14,009 26,479 Common stock of Chartered Semiconductor Pte Ltd. $19,944 -- Deferred tax benefits 3,524 1,795 Escrow deposit 7,050 -- Other assets 7,040 2,620 $51,567 $30,894 Accrued expenses and other liabilities: Salaries and fringe benefits $ 7,046 $ 6,502 Advertising 1,587 3,683 Other 15,251 5,342 $23,884 $15,527 6. MINORITY INTEREST IN SUBSIDIARY Sumitomo Metal Industries, Ltd. of Osaka, Japan (SMI) owns 20% of the issued and outstanding common stock and all of the non-cumulative, non-voting 6% preferred stock of the Company's subsidiary, Toyo Microsystems Corporation (TMC). The Company and SMI have agreed to declare a preferred dividend if TMC should realize net income of at least five times the total amount of preferred dividends which would be payable on all preferred stock then outstanding. The annual preferred dividend would be equal to 6% of the subscription price of 2.16 billion yen, or approximately $1,234,000 at an exchange rate of 105 yen per dollar. In the event that a third party acquires a majority of the outstanding common stock of the Company, SMI has the option to require the Company to purchase SMI's interest in TMC. 7. COMMITMENTS AND CONTINGENCIES COMPENSATION Certain executives are employed under separate agreements terminating on various dates through fiscal 2000. These agreements provide, among other things, for annual base salaries totaling $932,000 in fiscal 1997 and declining amounts as the agreements expire through fiscal 2000. The Company has also entered into agreements with certain senior officers providing for severance pay if their employment is terminated following a change in control of the Company OPERATING LEASES The Company leases certain vehicles, facilities and equipment. Minimum rentals under these leases for each of the next five fiscal years are as follows (in thousands): 1997 $1,218 1998 1,090 1999 1,000 2000 979 2001 751 Total rent expense was $1,317,000, $1,013,000 and $755,000 in fiscal 1996, 1995 and 1994, respectively. WAFER PURCHASE AGREEMENTS In September 1994, the Company entered into an agreement with AT&T Corp.'s Microelectronics Business Unit (AT&T) whereby the Company purchased $15,979,000 of wafer manufacturing equipment for installation at AT&T's Madrid, Spain, facility during fiscal 1996. The agreement provides that a portion of AT&T's wafer production capacity during the five-year period beginning in March 1996 will be reserved for the Company's requirements at favorable pricing. In March 1995, the Company entered into an agreement with Singapore-based Chartered Semiconductor Pte Ltd., whereby the Company acquired a minority equity interest in Chartered for $19,944,000 during fiscal 1996. This investment is reported at cost on the accompanying balance sheet. Under this agreement, the Company is to be allocated sub-micron wafer production capacity for ten years in Chartered's recently constructed wafer fabrication facility. 39 Standard Microsystems Corporation and Subsidiaries CUSTOMER SUPPLY AGREEMENT The Company has an agreement with one customer to deliver components, and the customer is obligated to purchase these components, according to agreed-upon schedules over the next two years. The Company will sell the components at specified prices as defined in the agreement. LITIGATION In September 1991, the Company and Texas Instruments Incorporated (TI) agreed to settle, terminate and dismiss litigation between the two companies. In addition to the settlement agreement, the parties entered into a five-year patent cross-licensing agreement covering the manufacturing of certain semiconductor and local area network products, which license provides for payments by the Company over a period ending December 31, 1996. In June 1993, Penril Datacom Networks, Inc., commenced an action against the Company, its wholly-owned subsidiary SMC Enterprise Networks, Inc. (successor by merger to Sigma Network Systems, Inc.), and two former officers of Sigma, alleging, among other items, breach of September 1991 and March 1990 agreements between Sigma and Penril and seeking $8,000,000. The Company counterclaimed against Penril, alleging breach of contract and sought damages in excess of $1,400,000. In November 1995, Penril filed a First Amended complaint seeking $50,000,000 in damages and a trebling of those damages. Penril has filed further motions that the Company has opposed. While it is not possible to assess the likelihood of Penril establishing liability, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has accrued the estimated cost of legal fees to defend against these claims and intends to defend against these claims vigorously. In June 1995, several actions were filed against the Company and certain of its officers and directors. The actions have been consolidated into one complaint. The consolidated claims purport to be a class action on behalf of the purchasers of the Company's common stock between September 19, 1994, and June 2, 1995. The consolidated complaint asserts claims under federal securities laws and alleges that the price of the Company's common stock was artificially inflated during the class action period by false and misleading statements and the failure to disclose certain information. While it is not possible to assess the likelihood of any liability being established, nor predict the amount of damages that might be awarded in the event of a successful claim, the Company has answered the consolidated complaint, has accrued the estimated cost of legal fees to defend against these claims, and intends to defend against these claims vigorously. In the ordinary course of business, various lawsuits and claims are filed against the Company. While the outcome of these matters is currently not determinable, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's operations or financial position. 8. BENEFIT AND INCENTIVE PLANS INCENTIVE SAVINGS AND RETIREMENT PLAN The Company maintains a defined contribution Incentive Savings and Retirement Plan (the Plan) which, pursuant to Section 401(k) of the Internal Revenue Code, permits employees to defer taxation on their pre-tax earnings reduction contributions to the Plan. The Plan permits employees to contribute up to 15% of their earnings, through payroll deductions, based on earnings reduction agreements. The Company's contribution, which is equal to one-half of the employee's contribution up to 6%, is invested in the common stock of the Company and totaled $1,066,000, $866,000 and $729,000 in fiscal 1996, 1995 and 1994, respectively. The Company has authorized unissued common stock reserved for issuance to the Plan. As of February 29, 1996, 121,000 unissued shares remain in reserve. Since its inception, 729,000 shares of the Company's common stock have been contributed to the Plan. As of February 29, 1996, 547 of the 745 employees who had satisfied the Plan's eligibility requirements to participate were making salary deduction contributions. STOCK OPTION PLANS Under the Company's stock option plans, options to purchase common stock may be granted to officers and key employees at prices not less than the market price of the shares at the date of grant. At February 29, 1996, the expiration dates of the outstanding options range from March 31, 1996, to February 28, 2006, and the exercise prices range from $4.13 to $30.00 (average $17.55) per share. The following is a summary of activity under the plans over the past three fiscal years: 40 Standard Microsystems Corporation and Subsidiaries
FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 Shares under option, beginning of year 867,000 732,000 602,000 Options granted during the year 821,000 402,000 304,000 Options canceled or terminated (225,000) (53,000) (26,000) Options exercised: 1996 ($4.13 to $17.38 per share) (69,000) -- -- 1995 ($4.13 to $26.00 per share) -- (214,000) -- 1994 ($4.13 to $19.38 per share) -- -- (148,000) Shares under option, end of year 1,394,000 867,000 732,000 Options exercisable, end of year 369,000 167,000 128,000 Shares available for future grants, end of year 42,000 665,000 290,000
Under the Company's Director Stock Option Plan, non-qualified options to purchase common stock may be granted to directors at prices not less than the market price of the shares at the date of grant. At February 29, 1996, the expiration dates of the outstanding options range from June 30, 1997, to July 7, 1999, and the exercise prices range from $11.75 to $16.00 (average $14.80) per share. The following is a summary of activity under the Director Stock Option Plan over the past three fiscal years: FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 Shares under option, beginning of year 43,000 59,000 90,000 Options granted during the year 104,500 15,000 15,000 Options exercised: 1996 ($11.75 per share) (3,500) -- -- 1995 ($7.13 per share) -- (31,000) -- 1994 ($7.13 to $11.75 per share) -- -- (46,000) Shares under option, end of year 144,000 43,000 59,000 Options exercisable, end of year 59,000 13,000 34,000 Shares available for future grants, end of year 175,000 30,000 45,000 RESTRICTED STOCK BONUS PLAN The Company's Restricted Stock Bonus Plan provides for common stock awards to certain officers and key employees. The fair market value of shares awarded to an employee in any year is limited to 20% of the employee's base salary. These awards are earned in equal installments on the second, third and fourth anniversaries of the award, provided the employee has remained in the Company's employ through such anniversary dates; otherwise the unearned shares are forfeited. The maximum number of shares issuable under the plan is 400,000, of which 183,000, net of cancellations, have been awarded as of February 29, 1996. The market value of these shares at the date of award, net of cancellations, is recorded as compensation expense ratably over four-year periods from the respective award dates. This compensation expense was $761,000, $361,000 and $189,000 in fiscal 1996, 1995 and 1994, respectively. 41 Standard Microsystems Corporation and Subsidiaries RETIREMENT PLANS In March 1994, the Company adopted an unfunded Supplemental Executive Retirement Plan to provide senior management with retirement, disability and death benefits. The retirement benefits are based upon average compensation during the three-year period prior to retirement. The Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing these benefits. Based on the latest actuarial information available, the following table sets forth the components of the net periodic pension expense, the funded status and the assumptions used in determining the present value of benefit obligations (in thousands): FOR THE YEAR ENDED FEBRUARY 29, 1996 Service cost - benefits earned during the year $33 Interest cost on projected benefit obligations 298 Net amortization and deferral 245 Net periodic pension expense $576 AS OF FEBRUARY 29, 1996 Actuarial present value of: Vested benefit obligation $2,868 Nonvested benefit obligation 503 Accumulated benefit obligation 3,371 Effect of projected future salary increases 1,903 Projected benefit obligation 5,274 Unrecognized net loss (1,042) Unrecognized net transition asset (3,186) Additional minimum liability 2,325 Accrued pension cost $3,371 Assumptions used in determining actuarial present value of benefit obligations: Discount rate 7.50% Weighted-average rate of compensation increase 7.00% In addition to the net periodic pension expense detailed above, the Company recorded a $1,000,000 charge in the second quarter of fiscal 1996 related to the separation of two fully vested executive officers. During fiscal 1993, the Company adopted an unfunded retirement plan for the non-employee members of its Board of Directors. The plan provides for annual benefit payments equal to the annual retainer in effect at the date of retirement, for a period of years equal to the lesser of the director's years of service or ten years. The cost of this plan is accrued over the directors' estimated remaining years of service, of which $162,000, $264,000 and $270,000 was accrued during fiscal 1996, 1995 and 1994, respectively. EXECUTIVE INCENTIVES The Company's Board of Directors has provided that certain executives receive incentive compensation based upon certain revenues, earnings and other performance measures. As such, incentive compensation of $1,483,000 was earned during fiscal 1996, of which $342,000 will be issued in common stock pursuant to the Company's Restricted Stock Bonus Plan. $1,506,000 and $1,700,000 of incentive compensation was earned during fiscal 1995 and 1994, respectively. 9. STOCK PURCHASE RIGHTS PLAN Under a stock purchase rights plan, shareholders may be entitled to purchase common stock in the Company at a discounted price, in the event of certain efforts to acquire control of the Company. The rights will expire in January 1998, unless previously redeemed by the Company at $.01 per right. 10. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION The Company operates in two principal industries: very-large-scale-integrated circuits primarily used in personal computers for input/output and network control (Component Products) and local area network products used to connect personal computers (System Products). Although the Company's subsidiary, Toyo Microsystems Corporation (TMC), sells component and system products in the Japanese market, it operates as a separate profit center and is reported within this disclosure as a separate segment of the Company's operations. Income (loss) from operations by industry segment excludes general corporate expenses, other income and expenses, and income taxes. Transfers between industry segments are accounted for on an arm's length pricing basis. General corporate assets include primarily cash and cash equivalents, assets associated with general corporate activities, tax assets, and certain investments. 42 Standard Microsystems Corporation and Subsidiaries INDUSTRY SEGMENT INFORMATION (IN THOUSANDS)
GENERAL COMPONENT SYSTEM CORPORATE PRODUCTS PRODUCTS TMC AND OTHER CONSOLIDATED FISCAL 1996 Total revenues $ 143,084 $ 190,097 $ 16,790 $ -- $ 349,971 Intersegment transfers (4,487) (3,558) -- -- (8,045) Revenues from unaffiliated customers $ 138,597 $ 186,539 $ 16,790 $ -- $ 341,926 Income (loss) from operations 31,177 (40,543) 995 (20,538) (28,909) Identifiable assets 101,878 93,405 12,634 52,742 260,659 Depreciation and amortization 2,522 14,708 112 1,634 18,976 Capital expenditures 23,999 5,671 132 9,445 39,247 FISCAL 1995 Total revenues $ 112,815 $ 259,499 $ 11,661 $ -- $ 383,975 Intersegment transfers (2,226) (3,078) -- -- (5,304) Revenues from unaffiliated customers $110,589 $ 256,421 $ 11,661 $ -- $ 378,671 Income (loss) from operations 29,676 25,862 656 (15,572) 40,622 Identifiable assets 39,267 137,769 11,486 40,056 228,578 Depreciation and amortization 2,308 11,005 120 1,380 14,813 Capital expenditures 2,560 8,114 59 2,533 13,266 FISCAL 1994 Total revenues $ 55,203 $ 264,079 $ 5,291 $ -- $ 324,573 Intersegment transfers (1,267) (731) -- -- (1,998) Revenues from unaffiliated customers $ 53,936 $ 263,348 $ 5,291 $ -- $ 322,575 Income (loss) from operations 5,232 44,086 (1,249) (12,633) 35,436 Identifiable assets 30,640 126,738 10,488 37,967 205,833 Depreciation and amortization 2,952 9,781 159 907 13,799 Capital expenditures 1,196 6,255 16 699 8,166
GEOGRAPHIC INFORMATION The Company's domestic operations include the worldwide revenues and operating results of the Component Products and System Products business segments, and corporate activities. The Component Products and System Products business segments conduct their sales and marketing operations outside of the United States through TMC in Japan, and through sales subsidiaries in Canada, Europe, Asia and the Pacific Rim, Latin America, and South Africa. Revenues and operating profits from customers in Japan are recorded by TMC. Less than 10% of the combined Component Products business segment, System Products business segment and general corporate identifiable assets are located outside of the United States. Included within the identifiable assets of the Component Products business segment is $15,979,000 of equipment installed at an AT&T Microelectronics wafer fabrication facility in Madrid, Spain. 43 Standard Microsystems Corporation and Subsidiaries EXPORT SALES The information below summarizes sales to unaffiliated customers for the Component Products and System Products business segments by geographic region (in thousands): FOR THE YEARS ENDED FEBRUARY 29 OR 28, 1996 1995 1994 United States $149,414 $201,539 $180,736 Export Asia and Pacific Rim 86,975 53,721 30,065 Europe 69,304 86,510 84,266 Canada 10,816 15,294 13,759 Other 8,627 9,946 8,458 $325,136 $367,010 $317,284 MAJOR CUSTOMERS During fiscal 1996 no customer accounted for more than 10% of the Company's revenues. In fiscal 1995, one customer accounted for 10.3% of revenues. In fiscal 1994, one customer accounted for 11.9% of revenues. CONCENTRATIONS OF CREDIT RISK The Company sells a significant amount of its products through several distributors and PC producers and, as a result, maintains individually significant accounts receivable balances from each of these customers. The Company performs credit evaluations on a regular basis and generally requires no collateral. Allowances for credit losses are maintained and actual losses have been within the Company's expectations. Distributors have the right to return slow moving inventory in exchange for other inventory of equal value. Distributors also have the right to protection with respect to the price paid for inventories on hand. The Company maintains a reserve for anticipated product returns and price protection. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED MAY 31 AUG. 31 NOV. 30 FEB. 29 FISCAL 1996 Revenues $ 72,209 $ 85,434 $ 90,570 $ 93,713 Gross profit 28,395 22,823 37,656 33,910 Operating income (loss) (4,718) (17,687) 867 (7,372) Net income (loss) (3,001) (12,105) 303 26,404 Per Share Data: Net income (loss) $ (0.22) $ (0.91) $ 0.02 $ 1.94 Market price High 26.50 19.75 23.50 21.13 Low 15.38 12.50 15.25 15.25 FISCAL 1995 Revenues $ 80,020 $ 91,964 $ 104,771 $ 101,916 Gross profit 35,355 39,978 45,233 43,837 Operating income 9,344 9,770 11,811 9,697 Income before extraordinary item 5,358 5,583 6,821 7,405 Extraordinary item -- -- -- (944) Net income 5,358 5,583 6,821 6,461 Per Share Data: Income before extraordinary item $ 0.41 $ 0.42 $ 0.51 $ 0.55 Extraordinary item -- -- -- (0.07) Net income 0.41 0.42 0.51 0.48 Market price High19.50 19.63 25.25 31.63 Low 14.88 13.38 18.38 21.38
The Company's common stock is traded in the over-the-counter market under the NASDAQ symbol: SMSC. Trading is reported in the NASDAQ National Market. There were approximately 1,360 holders of record of the Company's common stock at April 8, 1996. The Company has never paid a cash dividend. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. The Company does not expect to pay cash dividends in the foreseeable future. 44 Standard Microsystems Corporation and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITIES The consolidated financial statements of Standard Microsystems Corporation and its subsidiaries have been prepared under the direction of management in conformity with generally accepted accounting principles, consistently applied. The statements include amounts that reflect management's objective estimates and judgments. Standard Microsystems Corporation and its subsidiaries maintain accounting systems and related internal accounting controls which, in the opinion of management, provide reasonable assurance, at appropriate cost, that assets are properly controlled and safeguarded and that transactions are executed in accordance with management's authorization and are recorded and reported properly. The audit committee of the Board of Directors is composed solely of directors who are not officers or employees of the Company. The committee meets periodically with representatives of management and the independent public accountants. The independent public accountants have free access to the committee, without management present, to discuss the results of their audit work, adequacy of internal financial controls and the quality of the financial reporting. The committee also recommends to the directors the appointment of the independent public accountants. The independent public accountants provide an objective, independent review as to management's discharge of its responsibilities as they relate to the integrity of reported operating results and financial condition. The consolidated financial statements in this annual report have been audited by Arthur Andersen LLP, independent public accountants. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Standard Microsystems Corporation: We have audited the accompanying consolidated balance sheets of Standard Microsystems Corporation (a Delaware corporation) and subsidiaries as of February 29, 1996, and February 28, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended February 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Standard Microsystems Corporation and subsidiaries as of February 29, 1996, and February 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 1996, in conformity with generally accepted accounting principles. April 8, 1996 ARTHUR ANDERSEN LLP Washington, D.C. 45 Standard Microsystems Corporation and Subsidiaries SHAREHOLDER INFORMATION Corporate Headquarters: 80 Arkay Drive, Hauppauge, NY 11788 Telephone: 516-435-6000 COMMON STOCK SYMBOL: SMSC During the fiscal year ended February 29, 1996, prices as reported by NASDAQ were: High $261/2 Low $121/2 Closing $155/8 1996 ANNUAL MEETING The Annual Shareholders' Meeting will be held at 10:00 a.m., Monday, July 22, 1996, at The Radisson Hotel Islandia, 3635 Expressway Drive North, Hauppauge, NY 11788 (Exit 58 on the Long Island Expressway). FORM 10-K A copy of Form 10-K filed with the Securities and Exchange Commission can be obtained upon written request to Manager of Investor Relations, Standard Microsystems Corporation, at the corporate headquarters' address above. SHAREHOLDER INQUIRIES, CHANGE OF ADDRESS OR DUPLICATE MAILINGS Questions concerning stock transfer, lost certificates or other administrative matters should be directed to Chemical Mellon Shareholder Services, L.L.C., by calling 1-800-526-0801. For hearing or speech impaired, call 1-800-231-5469. Chemical Mellon has installed TELECOMMUNICATIONS DEVICES FOR THE DEAF. If you change your address or wish to consolidate duplicate mailings, please write to Chemical Mellon Shareholder Services, L.L.C., at the address below. TRANSFER AGENT AND REGISTRAR Chemical Mellon Shareholder Services, L.L.C. P.O. Box 590, Ridgefield Park, NJ 07660 AUDITORS Arthur Andersen LLP 1666 K Street, N.W., Washington, D.C. 20006 COUNSEL General Counsel: Loeb and Loeb 345 Park Avenue, New York, NY 10154 Patent Counsel: Hopgood, Calimafde, Kalil & Judlowe 60 East 42nd Street, New York, NY 10165 DIVISIONS System Products Division 350 Kennedy Drive, Hauppauge, NY 11788 Component Products Division 300 Kennedy Drive, Hauppauge, NY 11788 INTERNATIONAL OPERATIONS Standard Microsystems Corporation (Asia)--Taipei, Taiwan SMC Australia Pty. Ltd.--Melbourne and Sydney, Australia Standard Microsystems Corporation (Canada)--Toronto, Ontario, Canada Standard Microsystems (Europe) Ltd.--London, England SMC France, Inc.--St. Germain-en-Laye, France Standard Microsystems GmbH--Munich, Germany SMC de Mexico SA de CV--Mexico DF, Mexico SMC Singapore--Singapore SMC South Africa--Johannesburg, South Africa Toyo Microsystems Corporation--Tokyo, Japan PATENT/TECHNOLOGY LICENSEES Acer Laboratories Inc. Advanced Micro Devices, Inc. AT&T Corp. Data General Corporation Fujitsu, Ltd. General Motors Corporation Hitachi, Ltd. Hualon Microelectronics Corporation Intel Corporation International Business Machines Corporation (IBM) ITT Corporation Kawasaki Steel Corporation M/A-COM, Inc. Matsushita Electric Industrial Co., Ltd. Micron Technology, Inc. Mitsubishi Electric Corporation MOSTEK Corporation National Semiconductor Corporation NEC Corporation Nippon Steel Semiconductor Corporation Oki Electric Industry Company, Ltd. Samsung Electronics Co., Ltd. Sanyo Electric Co., Ltd. SGS-Thomson Microelectronics BV Sharp Corporation Texas Instruments Incorporated Toshiba Corporation United Microelectronics Corporation Winbond Electronics Corporation 46 Directors, Corporate & Divisional Officers BOARD OF DIRECTORS Paul Richman CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Evelyn Berezin VENTURE CAPITAL CONSULTANT Robert M. Brill GENERAL PARTNER POLY VENTURES, L.P., VENTURE INVESTMENT MANAGEMENT Peter F. Dicks CORPORATE DIRECTOR Herman Fialkov GENERAL PARTNER POLY VENTURES, L.P., VENTURE INVESTMENT MANAGEMENT Raymond Frankel PORTFOLIO MANAGER GLICKENHAUS & CO., INVESTMENT MANAGEMENT Ivan T. Frisch PROVOST POLYTECHNIC UNIVERSITY CORPORATE OFFICERS Paul Richman* CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Arthur Sidorsky* EXECUTIVE VICE PRESIDENT COMPONENT PRODUCTS DIVISION Lance Murrah* SENIOR VICE PRESIDENT AND GENERAL MANAGER SYSTEM PRODUCTS DIVISION Anthony M. D'Agostino* SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Walter J. Kmeta SENIOR VICE PRESIDENT WAFER FAB OPERATIONS Douglas L. Finke VICE PRESIDENT COMPONENT PRODUCTS MARKETING Lawrence H. Goldstein VICE PRESIDENT COMPONENT PRODUCTS ENGINEERING George W. Houseweart VICE PRESIDENT LAW AND INTELLECTUAL PROPERTY Di Ma VICE PRESIDENT COMPONENT PRODUCTS OPERATIONS Reginald R. Maton Jr. VICE PRESIDENT AND CHIEF INFORMATION OFFICER Eric M. Nowling* VICE PRESIDENT AND CONTROLLER Harold I. Kahen SECRETARY LOEB AND LOEB, SPECIAL COUNSEL COMPONENT PRODUCTS DIVISION OFFICERS John E. Burgess DIVISIONAL VICE PRESIDENT SALES Ian F. Harris DIVISIONAL VICE PRESIDENT ENGINEERING Robert E. Hollingsworth DIVISIONAL VICE PRESIDENT TECHNICAL MARKETING Peter C. R. Ju DIVISIONAL VICE PRESIDENT PC SYSTEMS LOGIC BUSINESS UNIT John E. Meade DIVISIONAL VICE PRESIDENT MANUFACTURING ENGINEERING R. Edwin Shaddix DIVISIONAL VICE PRESIDENT MANUFACTURING SYSTEM PRODUCTS DIVISION OFFICERS Kenneth W. Brinkerhoff DIVISIONAL VICE PRESIDENT ENGINEERING Eileen M. Conlon DIVISIONAL VICE PRESIDENT MANUFACTURING Clemente J. Russo DIVISIONAL VICE PRESIDENT CUSTOMER MANAGEMENT Steven Schmid DIVISIONAL VICE PRESIDENT NEW PRODUCT DEVELOPMENT *Executive Officer EX-23 8 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (Nos. 2-78324, 33-35590, 33-15965, 33-45011, 33-69224 and 33-83400). ARTHUR ANDERSEN LLP May 25, 1996 Washington, D.C. EX-27 9 EXHIBIT 27 (FDS)
5 1,000 YEAR FEB-29-1996 FEB-29-1996 18,459 0 55,976 1,369 60,408 148,884 139,906 79,798 260,659 55,781 0 1,371 0 0 192,131 260,659 341,926 341,926 219,141 219,141 151,694 654 1,072 20,004 8,201 11,601 0 0 0 11,601 0.86 0.86
EX-99 10 EXHIBIT 99 Exhibit 99 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 --------------------------------------- FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) : [X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] . For the fiscal year ended December 31, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] . For the transition period from ........ to ........ Commission File Number 0-7422 A. Full title of the plan and address of the plan, if different from that of the issuer name below: STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: STANDARD MICROSYSTEMS CORPORATION 80 Arkay Drive Hauppauge, New York 11788 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Committee has duly caused this annual report to be signed on their behalf by the undersigned hereunto duly authorized. STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN By: _______________________________ Anthony M. D'Agostino Member, Plan Committee May 25, 1996 STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants.......................................................................4 Statement of Financial Condition as of December 31, 1995 and December 31, 1994...............................................................5-6 Statement of Income and Changes in Plan Equity For the Plan Year ended December 31, 1995.............................................................7 Notes To Financial Statements..................................................................................8-13 Schedule I - Assets Held for Investment as of December 31, 1995....................................................................................14 Schedule I - Assets Held For Investment as of December 31, 1994....................................................................................15 Schedule II - Reportable Transactions For the Year Ended December 31, 1995.........................................................................16
ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Standard Microsystems Corporation Incentive Savings and Retirement Plan Committee: We have audited the accompanying Statements of Financial Condition of the Standard Microsystems Corporation Incentive Savings and Retirement Plan as of December 31, 1995, and December 31, 1994, and the related Statement of Income and Changes in Plan Equity for the year ended December 31, 1995. These financial statements are the responsibility of the plan administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial condition of the Standard Microsystems Corporation Incentive Savings and Retirement Plan as of December 31, 1995 and 1994, and its income and changes in plan equity for the plan year ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP April 8, 1996 Washington, D.C. -4- STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENT OF FINANCIAL CONDITION As of December 31, 1995
---------------- ---------------- --------------- ---------------- Puritan Ginnie Mae Magellan Total Fund Fund Fund ---------------- ---------------- --------------- ---------------- ASSETS $ 1,119 $ - $ - $ - Cash and cash equivalents Contributions receivable: 157,045 46,321 7,789 66,632 Employee - - - - Employer matching Investments: Fidelity Puritan Fund 3,329,782 3,329,782 - - (cost of $3,099,963) Fidelity Ginnie Mae Fund 700,345 - 700,345 - (cost of $688,305) Fidelity Magellan Fund 5,825,814 - - 5,825,814 (cost of $5,046,454) Fidelity Asset Manager Fund 2,728,228 - - - (cost of $2,596,574) Fidelity Managed Income Fund 1,704,808 - - - (cost of $1,704,808) Standard Microsystems Corp. Common Stock 7,215,434 - - - (437,299 shares; cost of $8,916,734) 766,388 - - - Loans Receivable ---------------- ---------------- --------------- ---------------- 22,428,963 3,376,103 708,134 5,892,446 Total Assets ---------------- ---------------- --------------- ---------------- LIABILITIES 28,314 - - - Benefits Payable ---------------- ---------------- --------------- ---------------- 28,314 0 0 0 Total Liabilities ---------------- ---------------- --------------- ---------------- $ 22,400,649 $ 3,376,103 $ 708,134 $ 5,892,446 PLAN EQUITY ================ ================ =============== ================
---------------- --------------- ---------------- ---------------- Asset Manager Managed Income Company Fund Fund Stock Fund Loan Fund ---------------- --------------- ---------------- ---------------- ASSETS $ - $ - $ 1,119 $ - Cash and cash equivalents Contributions receivable: 21,470 13,825 1,008 - Employee - - - - Employer matching Investments: Fidelity Puritan Fund - - - - (cost of $3,099,963) Fidelity Ginnie Mae Fund - - - - (cost of $688,305) Fidelity Magellan Fund - - - - (cost of $5,046,454) Fidelity Asset Manager Fund 2,728,228 - - - (cost of $2,596,574) Fidelity Managed Income Fund - 1,704,808 - - (cost of $1,704,808) Standard Microsystems Corp. Common Stock - - 7,215,434 - (437,299 shares; cost of $8,916,734) - - - 766,388 Loans Receivable ---------------- --------------- ---------------- ---------------- 2,749,698 1,718,633 7,217,561 766,388 Total Assets ---------------- --------------- ---------------- ---------------- LIABILITIES - - 28,314 - Benefits Payable ---------------- --------------- ---------------- ---------------- 0 0 28,314 0 Total Liabilities ---------------- --------------- ---------------- ---------------- $ 2,749,698 $ 1,718,633 $ 7,189,247 $ 766,388 PLAN EQUITY ================ =============== ================ ================
The accompanyingnotes are an integral part of this statement. -5- STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENT OF FINANCIAL CONDITION As of December 31, 1994
---------------- ---------------- --------------- ---------------- Puritan Ginnie Mae Magellan Total Fund Fund Fund ---------------- ---------------- --------------- ---------------- ASSETS Cash and cash equivalents $ 1,059 $ 25 $ 11 $ 35 Contributions receivable: Employee 208,740 48,760 11,540 70,707 Employer matching 117,961 - - - Investments: Fidelity Puritan Fund (cost of $2,379,537) 2,241,881 2,241,881 - - Fidelity Ginnie Mae Fund (cost of $565,846) 524,849 - 524,849 - Fidelity Magellan Fund (cost of $3,704,721) 3,529,154 - - 3,529,154 Fidelity Asset Manager Fund (cost of $2,188,606) 1,988,713 - - - Fidelity Managed Income Fund (cost of $1,336,863) 1,336,863 - - - Standard Microsystems Corp. Common Stock (359,384 shares; cost of $7,607,083) 10,781,520 - - - Loans Receivable 720,734 - - - ---------------- ---------------- --------------- ---------------- Total Assets 21,451,474 2,290,666 536,400 3,599,896 ---------------- ---------------- --------------- ---------------- LIABILITIES Benefits Payable 1,539 - - - ---------------- ---------------- --------------- ---------------- Total Liabilities 1,539 0 0 0 ---------------- ---------------- --------------- ---------------- PLAN EQUITY $ 21,449,935 $ 2,290,666 $ 536,400 $ 3,599,896 ================ ================ =============== ================
---------------- --------------- ---------------- ---------------- Asset Manager Managed Income Company Fund Fund Stock Fund Loan Fund ---------------- --------------- ---------------- ---------------- ASSETS Cash and cash equivalents $ 29 $ 30 $ 929 $ - Contributions receivable: Employee 39,101 21,191 17,441 - Employer matching - - 117,961 - Investments: Fidelity Puritan Fund (cost of $2,379,537) - - - - Fidelity Ginnie Mae Fund (cost of $565,846) - - - - Fidelity Magellan Fund (cost of $3,704,721) - - - - Fidelity Asset Manager Fund (cost of $2,188,606) 1,988,713 - - - Fidelity Managed Income Fund (cost of $1,336,863) - 1,336,863 - - Standard Microsystems Corp. Common Stock (359,384 shares; cost of $7,607,083) - - 10,781,520 - Loans Receivable - - - 720,734 ---------------- --------------- ---------------- ---------------- Total Assets 2,027,843 1,358,084 10,917,851 720,734 ---------------- --------------- ---------------- ---------------- LIABILITIES Benefits Payable - - 1,539 - ---------------- --------------- ---------------- ---------------- Total Liabilities 0 0 1,539 0 ---------------- --------------- ---------------- ---------------- PLAN EQUITY $ 2,027,843 $ 1,358,084 $ 10,916,312 $ 720,734 ================ =============== ================ ================
The accompanying notes are an integral part of this statement. -6- STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY For the plan year ended December 31, 1995
---------------- ---------------- --------------- ---------------- Puritan Ginnie Mae Magellan Total Fund Fund Fund ---------------- ---------------- --------------- ---------------- BEGINNING BALANCE, PLAN EQUITY $ 21,449,935 $ 2,290,666 $ 536,400 $ 3,599,896 ---------------- ---------------- --------------- ---------------- Employee contributions 3,558,539 829,866 165,294 1,236,827 Employer matching contributions 1,073,690 - - - Investment Income 775,481 173,031 41,034 332,945 Realized gains (losses) on securities transactions (138,134) 51,945 5,732 114,932 Unrealized appreciation (depreciation) of investments (2,953,821) 339,766 45,046 924,242 Interfund Transfers 0 (106,880) (35,580) (1,611) ---------------- ---------------- --------------- ---------------- 2,315,755 1,287,728 221,526 2,607,335 Benefit payments 1,365,041 202,291 49,792 314,785 ---------------- ---------------- --------------- ---------------- INCREASE (DECREASE) IN PLAN EQUITY 950,714 1,085,437 171,734 2,292,550 ---------------- ---------------- --------------- ---------------- ENDING BALANCE, PLAN EQUITY $ 22,400,649 $ 3,376,103 $ 708,134 $ 5,892,446 ================ ================ =============== ================
---------------- --------------- ---------------- ---------------- Asset Manager Managed Income Company Fund Fund Stock Fund Loan Fund ---------------- --------------- ---------------- ---------------- BEGINNING BALANCE, PLAN EQUITY $ 2,027,843 $ 1,358,084 $ 10,916,312 $ 720,734 ---------------- --------------- ---------------- ---------------- Employee contributions 579,975 441,245 305,823 (491) Employer matching contributions - - 1,073,690 - Investment Income 74,716 92,000 560 61,195 Realized gains (losses) on securities transactions 21,732 - (332,475) - Unrealized appreciation (depreciation) of investments 298,854 - (4,561,729) - Interfund Transfers (84,486) (25,056) 261,826 (8,213) ---------------- --------------- ---------------- ---------------- 890,791 508,189 (3,252,305) 52,491 Benefit payments 168,936 147,640 474,760 6,837 ---------------- --------------------------------- ---------------- INCREASE (DECREASE) IN PLAN EQUITY 721,855 360,549 (3,727,065) 45,654 ---------------- --------------- ---------------- ---------------- ENDING BALANCE, PLAN EQUITY $ 2,749,698 $ 1,718,633 $ 7,189,247 $ 766,388 ================ =============== ================ ================
The accompanying notes are an integral part of this statement. -7- STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS 1) Description of the Plan Purpose and Eligibility The Standard Microsystems Corporation Employee Stock Purchase Plan (the "Plan") was established on June 23, 1982, to encourage and assist eligible employees to invest in Standard Microsystems Corporation (the "Company"), to adopt a regular savings program, and to help provide additional security for their retirement. Effective January 1, 1993, the plan was amended and restated to provide participants with improved benefits, as well as facilitate certain administrative functions. The Plan was established under sections 401(a) and 401(k) of the Internal Revenue Code which, among other provisions, allow for the deferral of income taxes on amounts contributed. Participation can begin on the first day of any calendar month after the completion of three months of service as defined in the Plan. Investment Programs With the amendments adopted effective January 1, 1993, the Plan allows participants to allocate their contributions among six investment programs. These investment vehicles are as follows: 1. Fidelity Puritan Fund - This fund seeks to obtain as much income as possible, consistent with the preservation of capital, by investing in a broadly diversified portfolio of high yielding securities, including common stocks, preferred stocks, bonds, and foreign securities. 2. Fidelity Ginnie Mae Portfolio - This fund seeks a high level of current income, by investing primarily in mortgage-related securities issued by the Government National Mortgage Association. 3. Fidelity Magellan Fund - This fund seeks capital appreciation by investing primarily in common stock and securities convertible into common stock. Up to 20% of the fund's assets may also be invested in debt securities of all types and qualities issued by foreign and domestic issuers if Fidelity Magellan Fund believes they have potential for capital appreciation. Equity investments can be made in domestic or foreign corporations. -8- 4. Fidelity Asset Manager Portfolio - This fund seeks high total return with reduced risk by allocating its assets among stock, bonds, and money market instruments, including foreign securities, normally within the following parameters: 10-50% in stocks; 20-60% in bonds, 0-70% in money market instruments. 5. Fidelity Managed Income Portfolio - This portfolio will purchase high-quality, short and long-term Guaranteed Investment Contracts (GICs), Bank Investment Contracts (BICs), short-term money market instruments, and "synthetic" GICs (debt obligations issued by one institution and insured by another as to payment of interest and return of principal at maturity). The Portfolio strives to maintain a stable $1.00 share price. 6. Standard Microsystems Corporation Stock - Common stock issued by Standard Microsystems Corporation. The value of each participant's account equals the participant's contributions, the Company's matching and regular contributions, net earnings, forfeitures allocated in accordance with the Plan provisions, and current value adjustments. Employee Contributions Each eligible participant may make qualified earnings reduction contributions from 1% - 15% of his/her earnings which are not currently subject to income taxes. These earnings reduction contributions are subject to certain statutory and regulatory limitations and may not exceed $7,000, as indexed for inflation, per calendar year ($9,240 for 1995). Participant contributions, which are entirely voluntary, are allocated by the employee between the six investment programs in ten percent increments. There were 812 and 699, active participants in the Plan and 605 and 542 participants making contributions as of December 31, 1995 and 1994, respectively. There were 130 and 76 terminated employees with funds in the plan as of December 31, 1995 and 1994, respectively. Participants may also make "rollover" contributions of distributions from other qualified plans which are not matched by the Company. For the Plan period ending December 31, 1995, "rollover" contributions of $555,634 were received by the Plan and are included in Employee contributions in the accompanying Statement of Income and Changes in Plan Equity. -9- Employer Contributions The Company may, at its discretion, contribute to the Plan "Matching Contributions" in cash or securities equal to 50% of each participant's qualified earnings reduction contribution (up to a maximum participant contribution of 6% of earnings), subject to certain statutory and regulatory limitations. In addition, the Company may, at its discretion, make an additional "Profit Sharing Contribution" which, if made, is allocated pro rata to participants on the basis of their earnings. No Profit Sharing Contribution was made to the Plan during the last plan year. Benefits Upon the death, retirement (at age 65 or later) or total and permanent disability of a participant while in the employ of the Company, the participant's entire account (including the employee's share of the Company's contributions) becomes 100% vested. If a participant's employment with the Company is terminated for any other reason, the participant is entitled to receive in full the portion of his or her account attributable to participant contributions and is also entitled to receive a portion of his or her account allocable to Employer contributions based upon the following schedule: ---------------------------- --------------------- Years of Service Percentage Vested ---------------------------- --------------------- Less than 1 year 0% 1 year but less than 2 years 20% 2 years but less than 3 years 40% 3 years but less than 4 years 60% 4 years but less than 5 years 80% 5 years or more 100% The unvested portion of a former participant's account will be allocated to the remaining participants as discussed in note 7 below. A separated participant may elect to defer distribution of his or her benefit if the benefit exceeds $3,500. In such event, the benefit remains invested in the Plan and continues to participate in Plan earnings. A separated participant, who elected to receive a distribution and who was not fully vested at the time of distribution, that is subsequently rehired and becomes eligible to participate before having incurred five consecutive One Year Breaks in Service, may repay the distribution which he or she received within five years of receiving same. A participant who, upon rehire, repays his or her distribution is recredited with all previous years of service and the full account balance, -10- determined as of the prior termination date. The Company remains contingently liable should any such participant rejoin the Company. Participant Loans and Withdrawals Subject to certain Plan provisions, participants may apply for Loans against their vested account balance. Additionally, participants are entitled to apply for hardship withdrawals and, after attaining age 59 1/2, receive in-service distributions (excluding company contribution accounts). 2) Summary of Significant Accounting Policies Basis of Accounting The financial statements of the Plan are presented on the accrual basis of accounting. Security Valuation Investments are stated at current value based upon the latest publicly quoted market prices at the end of the applicable period. The following summarizes the activity in employer securities for the Plan year ended December 31, 1995: December 31, 1995 ------------------ Shares in the Plan, beginning of the period 359,384 Shares issued to the Plan 91,664 Shares redeemed and transferred to former participants <23,676> Other Purchases/Redemptions 9,927 -------------- Shares in the Plan, end of the period 437,299 ============== The per share price at which the Plan purchased the Company's stock ranged from $14.75 to $30.13 for the Plan year ended December 31, 1995. See Note 8 for the effect of changes in the Company's stock price subsequent to December 31, 1995. -11- 3) Plan Administration Management Pursuant to the terms of the Plan: a) The Board of Directors of the Company has established the Plan Committee to act as the Company's agent to administer the Plan. The Plan Committee consists of members of the Company's management. b) Midlantic National Bank, (the "Trustee"), is the custodian of the Plan's property and funds. Under the terms of the Plan and trust agreement, securities credited to the participants' accounts are registered in the name of the Trustee. Securities issued by the Company are voted by the Trustee in accordance with participant instructions. If, however, a participant does not provide the Trustee with instructions in a timely manner, the Trustee will vote such shares at its own discretion. The Plan has obtained the required surety bonding under ERISA. Plan Costs Administrative costs of $54,800 for the Plan year ended December 31, 1995, were paid by the Company. These expenses are for record keeping and investment management services. 4) Termination of the Plan Although the Company intends to continue the Plan indefinitely, it reserves the right to amend or discontinue the Plan at any time, or to reduce, suspend or discontinue payments to be made by the Company to the Plan. Upon termination of the Plan or discontinuance of payments, the account of each participant (including the employee's share of the Company's contribution) shall become fully vested, regardless of length of service. 5) Income Tax Status Effective January 1, 1993, the Plan was amended and restated in its entirety to comply with the Tax Reform Act of 1986 and subsequent tax legislation. The Plan Administrator in June 1994 applied for a determination letter from the Internal Revenue Service (IRS) with regard to the ongoing tax qualified status of the Plan. On October 19, 1994, the IRS issued a favorable determination letter in this regard. Since the Plan has been determined by the IRS to be qualified, contributions by participants and the Company, and the earnings thereon, will continue to be -12- exempt from Federal taxes until distributed to the participants or their beneficiaries. 6) Benefits Payable Benefits payable, as of December 31, 1995 and 1994, include approximately 1,716 and 52 shares, respectively, of the Company's common stock to be distributed to former participants, with the remainder payable in cash. 7) Forfeitures During the Plan year ended December 31, 1995, $40,295 in non-vested account balances were forfeited by former participants who elected to have their vested account balance distributed to them. This amount was reallocated to the accounts of those participants who made qualified earnings reduction contributions during the Plan year in the proportion of each Participant's qualified earnings reduction contributions, up to 6%, when compared to the total of all participant's qualified earnings reduction contributions, up to 6%, provided the participant was active on the last day of the Plan year. 8) Standard Microsystems Corporation Stock Price The Company's stock price is affected by both the fundamental economic environment and computer industry conditions. Through April 30, 1996, there has been no significant change in the value of the Company's stock or any of the Plan's other assets. The value of the Plan's investments may continue to fluctuate considerably and past performance may not be representative of future results. 9) Supplementary Schedules and Disclosures See Schedule I for the assets held for investment as of December 31, 1995 and 1994. Schedule II lists reportable transactions, as defined by ERISA, which occurred during the Plan year ended December 31, 1995. During this period, there were no investments in default or transactions with parties in interest. -13- Standard Microsystems Corporation Schedule I Incentive Savings and Retirement Plan Schedule of Assets Held for Investment As of December 31, 1995
Number Of Value Per Investment Description Cost Current Value Units or Shares Fund Unit ---------- ------------- ---------------- ------------- Fidelity Puritan Fund $3,099,963 $3,329,782 195,754 $17.01 Fidelity Ginnie Mae Fund $ 688,305 $ 700,345 64,311 $10.89 Fidelity Magellan Fund $5,046,454 $5,825,814 67,758 $85.98 Fidelity Asset Manager Fund $2,596,574 $2,728,228 172,128 $15.85 Fidelity Managed Income Fund $1,704,808 $1,704,808 1,704,808 $ 1.00 SMC Common Stock $8,916,734 $7,215,434 437,299 $16.50
-14- Standard Microsystems Corporation Schedule I Incentive Savings and Retirement Plan Schedule of Assets Held for Investment As of December 31, 1994
Number Of Value Per Investment Description Cost Current Value Units or Shares Fund Unit - - --------------------------------------- --------------------- ------------------- ---------------------- --------------- Fidelity Puritan Fund $2,379,537 $ 2,241,881 151,376 $ 14.81 Fidelity Ginnie Mae Fund $ 565,846 $ 524,849 52,537 $ 9.99 Fidelity Magellan Fund $3,704,721 $ 3,529,154 52,832 $ 66.80 Fidelity Asset Manager Fund $2,188,606 $ 1,988,713 143,797 $ 13.83 Fidelty Managed Income Fund $1,336,863 $ 1,336,863 1,336,863 $ 1.00 SMC Common Stock $7,607,083 $10,781,520 359,384 $ 30.00
-15- Standard Microsystems Corporation Schedule II Incentive Savings and Retirement Plan Schedule of Reportable Transactions As of December 31, 1995 AMOUNTS IN DOLLARS
Realized Number of Investment Description Type Cost Proceeds Gain (Loss) Transactions - - -------------------------- ---------------- --------------- -------------- -------------- -------------------- FIDELITY: Puritan Fund Sale 612,616 664,560 51,945 63 Puritan Fund Purchase 1,187,721 69 Ginnie Mae Sale 122,90 128,640 5,732 41 Ginnie Mae Purchase 212,324 55 Magellan Fund Sale 738,687 853,619 114,932 66 Magellan Fund Purchase 1,778,160 77 Asset Manager Fund Sale 386,403 408,135 21,732 50 Asset Manager Fund Purchase 752,349 61 Managed Income Fund Sale 399,670 399,670 0 48 Managed Income Fund Purchase 675,621 64 SMC Common Stock Sale 1,149,565 817,091 (332,475) 51 SMC Common Stock Purchase 2,146,738 57
-16- STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN EXHIBIT INDEX - - --------------------- ------------------------------------------ Exhibit No. Description - - --------------------- ------------------------------------------ 1.....................................Consent of Independent Public Accountants ARTHUR ANDERSEN LLP Exhibit 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 11-K, into the Company's previously filed Registration Statements on Forms S-8 (No. 2-78324). ARTHUR ANDERSEN LLP May 25, 1996 Washington, D.C. -----END PRIVACY-ENHANCED MESSAGE-----