-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, B4imnFUBIQFDXRTQJ9BcvP2bU5ieADNDPm+kobcmY5nwDk9aqkHZyRZPeFncIYOx 7IQ5d10jvLQsphNc80gH4w== 0000950168-95-000481.txt : 19950531 0000950168-95-000481.hdr.sgml : 19950531 ACCESSION NUMBER: 0000950168-95-000481 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19950228 FILED AS OF DATE: 19950530 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MICROSYSTEMS CORP CENTRAL INDEX KEY: 0000093384 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 112234952 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07422 FILM NUMBER: 95543233 BUSINESS ADDRESS: STREET 1: 80 ARKAY DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164656000 MAIL ADDRESS: STREET 1: 80 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 STANDARD MICROSYSTEMS CORP. 80946 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 28, 1995 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 (REGISTRANTIS TELEPHONE NUMBER, INCLUDING AREA CODE ) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of each Exchange on Title of each Class which registered None 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 (Check Mark) 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 REGISTRANTIS 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 28, 1995, 13,220,953 SHARES OF THE REGISTRANTIS COMMON STOCK WERE OUTSTANDING AND THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON- AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $245,380,000. 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 1995 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 1995 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 "SMC (R) ") 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. Through SMC Massachusetts Inc., a wholly- owned subsidiary, SMC develops internetworking products. 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 SMC Australia, Inc. Sydney, Australia Standard Microsystems Corporation (Canada) Oakville, Ontario, Canada Standard Microsystems (Europe) Ltd. London, England SMC France, Inc. St. Germain-en-Laye, France Standard Microsystems GmbH Munich, Germany SMC Sales, Inc. Various States Standard Microsystems Corporation (Asia) Taipei, Taiwan SMC Singapore Singapore SMC South Africa Johannesburg, South Africa 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 allow personal computers (PCs) to be connected to local area networks (LANs) and products that connect LANs to each other. The Component Products Division designs, produces and markets metal- oxide-semiconductor/very-large-scale-integrated (MOS/VLSI) circuits mainly for PC input/output (I/O) control and computer and industrial network control PERCENT OF REVENUES BY PRODUCT LINE Fiscal year ended February: 1995 1994 1993 System products 69.0% 82.2% 90.5% Component products 31.0% 17.8% 9.5% Total 100.0% 100.0% 100.0% 2 BUSINESS AND PRODUCT DESCRIPTION: SYSTEM PRODUCTS DIVISION SMC LAN products enable a personal computer to be connected to a network and permit LANs to be connected to each other. Connection to a LAN permits a personal computer user to send messages to and receive messages from other LAN 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 within a facility or over an entire enterprise instead of being confined to a workgroup or a department. SMC LAN products include network interface cards (adapters), wiring hubs, associated software and transceivers that operate over a variety of media including 10Base-T twisted pair, 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 and ARCNET(R). 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. SMC's modular platform, internetworking LAN switch product line integrates the functions of a bridge, a router and intelligent hubs in a single chassis. It operates over major LAN protocols: Ethernet, Token Ring and FDDI (Fiber Distributed Data Interface) and provides a high speed interface to campus networks. It is most often used as a collapsed backbone to connect LANs within a single facility. A new Ethernet switch is used in workgroups to accelerate the bandwidth by segmenting the network into smaller portions, each of which receives full network bandwidth. On March 1, 1994, the Division formed the Desktop Networks Business Unit and the Enterprise Networks Business Unit to focus on product development and marketing. Desktop Networks concentrates on adapter products, and Enterprise Networks concentrates on wiring hub and LAN switch product lines. Sales, manufacturing, technical customer support and marketing communications continue as centralized divisional functions serving both business units. NETWORK INTERFACE CARDS (ADAPTERS): Installed in a personal computer or workstation, an adapter is a printed circuit board which provides for 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 permit connection to the communications links or buses internal to a PC. These buses, which allow for transmission of signals in a computer, are known as industry standard architecture (ISA), extended industry standard architecture (EISA), micro-channel architecture (MCA) and peripheral component interconnect (PCI). An adapter provides a connector for a cable which plugs into a wall outlet, much as a telephone cable connects to a wall outlet. SMC provides software for communicating over and diagnosing a network, installing an adapter and collecting data for managing a network for its Ethernet and Token Ring adapters. TheEtherCard Elite Ultra(TM) line of 16-bit Ethernet adapters, shipped in July 1993, was SMC's first family of single chip-based Ethernet controller adapters. Based on SMC proprietary chips, a 32-bit EISA bus master version was shipped in February 1994. Bus mastering allows the adapter to transfer data between the network and workstation without intervention by the microprocessor in the workstation. Shipped in August 1994, and based on a more advanced single chip controller, the EtherEZ(TM) family of auto-configurable 16-bit Ethernet adapters supports Plug and Play (PnP) which allows a PC to discover an adapter. When installed in a PC not supporting PnP, the set up procedure is similar to but faster than that of Elite Ultra adapters. Shipped in September 1994, the EtherPower(TM) family of auto-configurable Ethernet adapters is installed on the high speed, 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 (like ISA), provides a wider data path and a faster data transfer rate. Shipped in February 1995, the EtherPower 10/100(TM) PCI bus and Ether 10/100(TM) EISA bus auto-configurable Fast Ethernet adapters work with either 10BASE-T or 100BASE-T hubs. Both adapters 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. The TokenCard Elite(TM) line of adapters, shipped in October 1992, marked SMC's entry into the Token Ring market. Incorporating SMC's internally developed chip set allows for low cost production. Shipped in June 1994, a 32-bit EISA version uses the same bus master chip as on the Ethernet bus master adapter. WIRING HUBS: 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, multi-station access units (MAUs) for Token Ring and hubs for ARCNET. SMC hub products are best suited to workgroup or departmental sized LANs. In addition to the physical signaling function, intelligent hubs incorporate software which aids in managing a network. SMC produces both conventional and intelligent hubs and the software to support network management. SMC's Elite 3512 (TM)12-port Ethernet 4 concentrator is upgradable to an intelligent concentrator by installing the Company's Network Management Module(TM). SMC's Elite 3812 stackable concentrator allows stacking 8 concentrators or 96 UTP ports or 112 total ports, all controlled by a single Network Management Module. The new 6-member TigerHub(TM) family of unmanaged hubs of 3 to 12 ports is based on a proprietary, highly integrated circuit which controls up to 7 hub ports. SMC also introduced a Ring Management Module, that when added to the EliteStack(TM) stackable MAUs, provides industry compliant SNMP network management for Token Ring. INTERNETWORKING PLATFORM: SMC's EliteSwitch(TM) model ES/1(TM) internetworking product is based on an 800 megabit per second (Mbps) backplane. The dual RISC (reduced instruction set computer) processor architecture of its Packet Processing Engine(TM) is capable of filtering and forwarding at the maximum packet rate of each of its ports. The chassis can house five modules, each with a RISC processor, and redundant power supplies. The modules and power supplies are hot swappable, enabling parts installation without interrupting the ES/1's operation. By varying the mix of modules, the ES/1 platform can be configured as: (i) a bridge or router to seamlessly interconnect LAN segments in a collapsed backbone environment; (ii) a bridge or router to connect LANs to enterprise networks; (iii) a bridge or router to connect clients and servers in a client- server network; (iv) an intelligent hub for Ethernet, Token-Ring, FDDI or any combination of the three; and (v) any combination of the above. The environments which best utilize the ES/1's attributes apply to interconnecting different types of LANs within a building or between buildings within close proximity, an environment known as INTRANETWORKING. In those environments, the customer can use the ES/1's high speed bridging and routing, the faculty to translate between LAN protocols, the support of popular IP and IPX (Novell) routing protocols and the ability to connect to high speed phone lines. The user can make these connections without incurring additional costs associated with routers, which usually incorporate software to connect computer resources over a wide area. Shipped in November 1994, the TigerSwitch(TM) XE is an intelligent Ethernet LAN switch used to increase more bandwidth to a workgroup. A TigerSwitch may be connected to chassis or stackable hubs, workstations and servers, segmenting the network so that each attached entity receives a full 10 Mbps of bandwidth provided by Ethernet. TigerSwitches can be trunked together or to ES/1s, providing a large network of switched Ethernet ports. SUPPORT SOFTWARE: Supporting software that accompanies SMC's(TM) EliteSeries lines of SuperDisk(TM) Ethernet and Token Ring adapters is delivered on which contains: (i) drivers for popular network operating systems, (ii) EZStart(TM) installation and test utility and (iii) 5 PC Agent/SNMP. SMC believes extensive software support, which is supplied without charge, distinguishes its line of adapters. A driver is software that enables network hardware to communicate over a LAN by providing the link between the network protocol and the network operating system. Suppliers of network operating systems regularly update their software, which requires SMC to regularly alter its drivers. SMC also updates drivers to improve performance over a network. Drivers are supplied for servers and workstations operating under network operating systems such as Novell(R) Netware(R) 2.x, Novell Netware 3.x, Novell Netware 4.x, Novell Netware Lite, Novell Netware for SAA, Microsoft(R) LANManager, IBM(R) LANServer, SCO or ISC UNIX, Artisoft LANtastic(R), Banyan(R) Vines(R) and the OSI consortium's GOSIP. SMC offers Driver Assurance, insuring that drivers which work on new EliteSeries adapters are compatible with prior 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 a 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 which can 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 which facilitates network management. PC Agent/SNMP gathers data about the status of 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 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 both SMC's intelligent concentrators and switching hub platform. The agents gather status data about the physical hardware on the segment of a LAN connected to that hub. The network management systems which utilize data gathered by PC Agent/SNMP also utilize data gathered by the hub based agents. SMC offers EliteView(TM), a family of SNMP-based software packages for managing workgroup, departmental or enterprise LANs. EliteView's capabilities have been regularly upgraded. Shipped in June 1994, EliteView 4.0 operates on a PC under a Windows environment and supports both 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 other DDE-based applications such as Microsoft's Excel 6 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. Release 4.1 supports the TigerSwitch. EliteView 4.0-ES gathers status data from ES/1 LAN switches, as well as from hub-based and PC-based agents. Several versions of EliteView operate under the UNIX operating system to monitor and manage the ES/1 internetworking platform. EliteView/OV runs under Hewlett-Packard OpenView network management system (NMS), allowing a network manager to monitor and manage the ES/1 along with all other network devices. Similarly, EliteView/NV runs under IBM NetView/6000 and EliteView/SN runs under SunConnect SunNet Manager. A user can click on an icon on the screen of these UNIX-based NMSs to access EliteView . 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. THE SMC UNITY FRAMEWORK: The System Products Division has developed a framework called SMC Unity to highlight the breadth of SMC's product portfolio for the LAN backbone, wiring closet and desktop. SMC Unity consists of three basic layers of functionality for a comprehensive, on-premises networking solution: The LAN Access layer provides intelligent Ethernet, Fast Ethernet and Token Ring adapters and unmanaged hubs and represents the intersection at which individual PC users access the network. The Bandwidth Acceleration layer utilizes SMC's TigerSwitch, connected to SMC's or others' stackable hubs, to segment and, thus, increase the capacity of a network without impacting a useris existing wiring, hubs and adapters. The Intranetworking layer depends upon the multi-technology ES/1 LAN switch to: (i) provide a high speed backbone; (ii) translate between Ethernet, Token Ring and FDDI protocols; (iii) accommodate emerging Fast Ethernet and ATM technologies and (iv) be reliable through redundancy, hot swappability and other measures. DESIGN CRITERIA: SMC's System Products Division designs and develops critical integrated circuit components that control the operation of its Ethernet and Token Ring network interface cards. 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 those competitors who buy critical integrated circuits from merchant semiconductor manufacturers. The single-chip 790UltraChip(TM) Ethernet controller is the key device on the EtherCard Elite Ultra family of 16-bit Ethernet adapters and on the 32-bit bus master version. A more advanced single-chip 795 Ethernet controller is the key 7 device on the EtherEZ family of auto-configurable Plug and Play (PnP) 16-bit Ethernet adapters. The 571 EISA bus master chip is used on both the Ethernet and Token Ring EISA adapters. Chip and board designers, software developers and documentation personnel are able to focus on optimizing the performance of each product aided by the high level of functional integration obtainable within a single integrated circuit. SMC has also designed critical components for its hub and internetworking products. The 710 hub chip supports six 10Base-T Ethernet ports. BUSINESS AND PRODUCT DESCRIPTION: COMPONENT PRODUCTS DIVISION The Component Products Division designs, develops and manufactures very- large-scale-integrated (VLSI) circuitry. SMC maintains its SuperCell(TM) library of complex circuit functions which shortens the design cycle of VLSI circuits. Component products are focused on the personal computer input/output (PC I/O) and networking markets. During fiscal 1994 and 1995, the Division's revenues were primarily from PC I/O devices. SMC's PC I/O controllers consist of integrated circuits with a variety of levels of functional integration for control and interfacing of various peripheral and communications functions in a PC. Features include AT interfaces, digital data separation, vertical or horizontal recording, control of serial and parallel ports, interfaces with the game port and hard disk drive, and other functions for floppy disk control. ChiProtect(TM) 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, SMC announced PC I/O devices with enhanced features including interfaces for infrared (IR) wireless communications, support of PnP and low 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. Network circuits are sold to vendors of ARCNET, Ethernet and Fast Ethernet equipment. Versions of ARCNET devices have been developed which are optimized for use in the 8 industrial control and transportation markets. In October 1993, the Division announced availability of a single-chip Ethernet controller with RAM (SCECR) on board. The device integrates an Ethernet controller, memory management, ISA bus interface, encoder and decoder, 10Base-T transceiver and AUI interface and memory. In April 1994, the division announced the FEAST (TM) chip, the first 100Base-T Fast Ethernet controller device available from a semiconductor supplier. It also supports 10Base-T on the same chip. BUSINESS AND PRODUCT DESCRIPTION: WARRANTY POLICY The Company's products are generally under warranty against defects in material and workmanship for periods of 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. The principal methods SMC uses to compete include new products, servicing customers and reducing manufacturing costs. However, although past performance can be a guide, there is no assurance that the Company can continue to 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 forecasters who believe that 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 address over 90% 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 1994 made by market research firms. According to the market estimates, during 1994, about 23 million adapters were shipped for installation into personal computers. These market researchers estimate that in calendar 1993, 17 million adapters were shipped. 9 The Desktop Networks Business Unit, which includes Ethernet, Fast Ethernet, Token Ring and ARCNET adapters, accounted for 79% of System Products Division revenues, or 54% of Company revenues, during fiscal 1995. SMC's line of conventional and intelligent wiring hubs is aimed principally at workgroup and departmental environments. As network management gains in importance in both workgroup and departmental-sized networks, SMC believes that hub products will become a larger portion of the System Products Division revenues. The LAN switch internetworking product line has benefited from the growing need to supply more bandwidth to networks and to build enterprise-wide networks by connecting LANs which utilize different protocols. The ES/1 is best applied to connecting LANs within a facility or in close proximity on a campus. SMC believes the power and flexibility provided by the platform's high-speed backplane, architecture and modularity offers a competitive advantage and lower initial and lifetime costs to customers. Utilizing much of the technology of the ES/1, the new TigerSwitch XE is aimed at accelerating bandwidth for workgroup LANs. SMC believes its power and flexibility offers a competitive advantage and lower initial and lifetime costs to customers. The Enterprise Networks Business Unit, which includes Ethernet, Token Ring and ARCNET wiring hubs and LAN switches, accounted for 21% of divisional revenues, or 15% of Company revenues, during fiscal 1995. Because many competitors sell products which perform similar functions, the System Products Division's strategy is to provide superior price/performance solutions for the PC LAN market, along with the highest level of customer support, technical service and software. SMC has combined its comprehensive product line and services into the SMC Unity framework for on-premises networking solutions. Market share for each participant 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 both the US and international markets. Some companies concentrate on aggressive pricing as the principal competitive tool. On the other hand, the leading manufacturers supplement price strategies with performance and service. In addition, shorter product life cycles have required acceleration of new product design cycles. The Company has been able to lower production costs through manufacturing efficiencies while advancing the technology and features of its products and passing along cost savings through reduced selling prices. In most cases, product improvements are derived from SMC's semiconductor and board design, production, testing and software capabilities. Most of the System Products Division's competitors lack the depth of SMC's 10 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 and networking 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 the market leader. The division has continually added devices with enhanced features. Principal customers for PC I/O devices are most major producers of PCs. The fiscal 1993, 1994 and 1995 introductions of 10 Mbps and 100 Mbps single chip Ethernet control devices placed the Component Products Division in a growing and very competitive market for PC LANs. A family of low cost industrial ARCNET controllers addresses industrial network solutions, characterized by long design-in cycles. Addressing specific customers, SMC's foundry business applies semiconductor fabrication skills to non-semiconductor products, including a device for ink jet printer heads. SALES AND DISTRIBUTION SMC's system products are sold primarily to distributors of computer products as well as system integrators, original equipment manufacturers (OEMs) and end users. Component products are sold primarily to OEMs and also to distributors of semiconductor devices. The Company maintains a reserve for anticipated product returns and price protection. One customer, Ingram Micro D Inc., accounted for over 10% of revenues in fiscal 1995. SALES AND DISTRIBUTION: SYSTEM PRODUCTS DIVISION Standard Microsystems sells and markets most LAN products primarily through LAN and microcomputer distributors and OEM/strategic accounts. 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. 11 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, 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 the terms covering the return of inventories. Returns of product pursuant to termination of these agreements have not been material. LAN switches are sold chiefly to end users, value added resellers and OEM/strategic accounts who buy directly from SMC. Sales of Token Ring products frequently require direct end-user contact by SMC personnel although sales are fulfilled through the distributor channel. Because internetworking products impact a broad portion of a customer's network, they generally fall under the authority of an organization's information technology manager. As a result, during this past fiscal year, SMC has expanded its sales organization to also sell directly to end users. SALES AND DISTRIBUTION: COMPONENT PRODUCTS DIVISION Sales are primarily to OEMs and electronic component distributors. Producers of PCs are the Division's largest customer group. 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 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, the Far East and Canada) were 46.8% in fiscal 1995, 44.0% in fiscal 1994, and 43.9% in fiscal 1993. Export sales are made in United States dollars, except for sales by Toyo Microsystems, which are denominated in Japanese yen. SMC's competitive position in foreign markets may be impacted by currency fluctuations. BACKLOG The Company schedules production based upon a forecast of demand for its products. Sales are made primarily pursuant to purchase orders generally requiring delivery within one month. In light of industry practice and experience, the Company believes that backlog is not a particularly meaningful indicator of future sales. 12 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, bill of materials, quality specifications and packaging, handling and shipping details. The subcontract manufacturer is then responsible for component procurement, including printed circuit boards, incoming test of components, mounting all components on the 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. SMC utilizes semiconductor foundries and assembly contractors in the US, Southeast Asia and Western Europe to provide state-of-the-art CMOS manufacturing and assembly capacity. These foundries manufacture most of the proprietary integrated circuits used in System Products Division products. During fiscal 1995, 92% of the revenues of the Component Products Division resulted from the sale of product manufactured by subcontractor foundries, compared to 88% in 1994. The Company continuously explores additional subcontract manufacturing relationships. In October 1994, SMC and AT&T Microelectronics entered into a cooperative wafer fabrication agreement for SMC to invest $16 million in wafer fabrication equipment for a semiconductor plant owned by AT&T Microelectronics, located in Madrid, Spain. This investment provides SMC with wafers from a facility capable of producing device geometries of 0.9 to 0.45 microns (millionths of a meter). SMC will receive wafers over a five year period beginning near the end of fiscal 1996 when SMC is expected to first receive wafers. In the first quarter of fiscal 1996, SMC purchased a minority equity interest in Singapore-based Chartered Semiconductor Pte Ltd. for approximately $14 million. An additional $6.0 million will be invested in early fiscal 1997. This transaction provides SMC with wafers from an advanced facility being built that will be capable of producing device geometries of 0.6 to 0.2 microns. SMC will receive wafers over a ten year period beginning near the end of fiscal 1996 when SMC is expected to first receive wafers. 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 from a single source. The inability to obtain certain components or materials 13 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 have led to an industry-wide shortage of silicon wafer fabrication capacity. As a result, SMC believes it was unable to produce all the integrated circuits it was capable of selling in fiscal 1995. Currently faced with limited subcontractor fabrication capacity, difficulty in securing additional capacity could impact revenue and profit growth in fiscal 1996 and beyond 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 component and system products. During the fiscal year which ended February 28, 1995, SMC spent $28,286,000 on research and development, which equaled 7.5% of revenues. This compares with $23,963,000 or 7.4% of revenues spent during fiscal 1994 and $17,033,000 or 6.8% of revenues during fiscal 1993. Engineering groups within both the System Products and Component Products Divisions utilize semiconductor design techniques to minimize chip area and utilize advanced wafer processing and packaging methods. The goal is to obtain the best features, performance and reliability while minimizing integrated circuit manufacturing costs. NEW PRODUCTS: Key networking products introduced by the SYSTEM PRODUCTS DIVISION during fiscal 1995 included two lines of single-chip based Ethernet adapters and low cost unmanaged concentrators. Key internetworking products introduced included a workgroup Ethernet switch and Token Ring and fiber input/output modules (IOMs) for the ES/1. Software introduced supported routing protocols and network management based on the SNMP industry standard protocol. Key products introduced by the COMPONENT PRODUCTS DIVISION during fiscal 1995 included extensions to its PC I/O controller family and a single-chip Fast Ethernet controller. 14 PRODUCTS INITIALLY SHIPPED IN FISCAL 1995 ETHERNET PRODUCTS: ETHEREZ (TM): 16-bit ISA PnP (auto-configurable) compliant adapters with 10Base-T connector, thin coax connector or a combination of 10Base-T and thin coax connectors, I/O or memory mapped ETHERPOWER(TM): 32-bit PCI auto-configurable adapters with 10Base-T connector or a combination of 10Base-T and thin coax connectors, bus master ETHERPOWER10/100(TM): 32-bit PCI auto-configurable adapters with 10Base-T and STP connectors, bus master, software selection of 10Base-T or 100Base-T ETHER10/100(TM): 32-bit EISA auto configurable adapters with 10Base-T connectors, DMA burst mode access, software selection of 10Base-T or 100Base-T ELITECARD(TM): PCMCIA credit-card-sized adapters with a 10Base-T or a combination of 10Base-T and thin coax connectors for laptop and portable computers ETHERCARD ELITE ULTRA(TM): 16-bit ISA adapters with 10Base-T and AUI connectors or thin coax and AUI connectors TIGERHUB(TM): Family of six unmanaged hubs configured: TP6 - 6 10Base-T ports, 1 AUI port; TP6B - 6 10Base-T ports, 1 BNC port; CX3 - 3 BNC ports, 1 AUI port; TP12 - 12 10Base-T ports, 1 AUI port, 1 BNC port, segmentable; CX6 - 6 BNC ports, 1 AUI port, 1 10Base-T port, segmentable; FL6 - 6 dual fiber ports, 1 AUI port, 1 BNC port, segmentable TOKEN RING PRODUCTS: TOKENCARD ELITE MASTER32(TM): 32-bit EISA adapter with 10Base-T and thin coax connectors, bus master ELITESTACK RMM(TM): plug-in module with microprocessor and SNMP agent stored in flash PROM to allow up to 32 EliteStack stackable MAUs to be monitored by an SNMP-based NMS LAN SWITCHING PRODUCTS: QUAD TOKEN RING INPUT/OUTPUT MODULES (QTIOM): four port modules with connectors for twisted pair or coax cables; each IOM connects an ES/1 to four independent Token-Ring LANs and allows seamless connection to attached networks, including Ethernet and FDDI INTELLIGENT FDDI INPUT/OUTPUT MODULE (IFIOM): dual attached fiber interface allowing an ES/1 to switch between multiple FDDI networks HIGH-SPEED SERIAL INTERFACE INPUT/OUTPUT MODULE (HIOM): connection across public network to T3/E3 or Sonnet up to 52 Mbps or T1/E1 up to 10 Mbps TIGERSWITCH(TM) XE: Ethernet store and forward switch with 24 RJ-45 ports, 1 AUI port and 1 RS-232C connection with 10 Mbps to each port for an aggregate of 240 Mbps of bandwidth 15 NETWORK MANAGEMENT SOFTWARE: ELITEVIEW(TM) V4.0: Windows based NMS for managing networks with SMC hubs and adapters, supporting SNMP agents for SMC Ethernet and Token Ring adapters and hubs; V4.0-ES: also incorporates ES/1 support; also shipped V4.1 and V4.1-ES ELITEVIEW(TM) /NV, /OV and /SN SNAP-INS: SNMP applications enabling management, control and monitoring of ES/1 from within UNIX based NMSs: /NV - with IBM's NetView; /OV - with Hewlett-Packard's OpenView; /SN - with SunConnect's SunNet Manager NETWORK AND PC I/O CONTROLLERS: SMC91C100: FEAST (Fast Ethernet using Advanced SMC Technology) dual speed 10 and 100Mbps controller, memory management and 32-bit data path FDC37C665IR,..666IR: infrared communications for wireless data transfers between notebook PCs, personal digital assistants and desktop PCs, low power; 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 FDC37C667: ISA PnP compatible in addition to Super I/O features FDC37C92X: adds keyboard controller and real time clock to features of 665IR to become ultra I/O class controller (X varies from 1 to 5, depending upon the BIOS [basic input/output system] supported) FDC37C93X: adds PnP support to 92X features SMC34C731: 486 core logic companion, buffers to drive ISA bus signals, memory refresh SMC34C761: high voltage buffer including multiple line drivers and receivers, timers and dual game port interface, for use with SMC PC I/O devices PATENTS AND LICENSE AGREEMENTS The Company has received numerous United States patents 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. 16 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 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, accordingly, there is no assurance that future regulations will not impose significant costs on the Company. EMPLOYEES As of February 28, 1995, 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. This compared to February 28, 1994, when, of the Companyis 755 employees, 182 were engaged in engineering, including research and development, 207 in marketing and sales, 148 in executive and administrative activities and 218 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. 17 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 the Desktop Networks Business Unit of SMC's System Products Division conducts research, development and marketing. The lease expires in 1997. The Company occupies a 61,000 square foot facility in Andover, Massachusetts, principally used by the Enterprise Networks Business Unit of SMC's System Products Division which conducts research, development and marketing. The lease expires in 2001. In addition, the Company maintains offices in leased facilities in: San Diego and San Jose, California; Boca Raton and Miami, Florida; Atlanta, Georgia; Oakbrook Terrace, Illinois; Beachwood and Dayton, Ohio; Austin and Dallas, Texas; McLean, Virginia; Bellevue, Washington; Sydney, Australia; Oakville, Ontario, Canada; London, England; St. Germain-en-Laye, France; Munich, Germany; Tokyo, Japan; Singapore; Johannesburg, South Africa and Taipei, Taiwan. Machinery and equipment and leasehold improvements with an original cost of approximately $108,372,000 and accumulated depreciation and amortization of approximately $73,465,000 are owned by the Company as of February 28, 1995. 18 ITEM 3. LEGAL PROCEEDINGS. Not applicable. 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, 1995, are as follows:
SERVED AS AN NAME POSITION AGE OFFICER SINCE Victor F. Trizzino President and 54 1980 Chief Executive Officer Paul Richman Chairman 52 1971 Gerald E. Gollub Executive Vice President 52 1976 Arthur Sidorsky Executive Vice President 61 1980 Anthony M. D'Agostino Vice President Finance 37 1988 and Treasurer
All officers serve at the pleasure of the Board of Directors. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information captioned "Market price" and the last three paragraphs 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. 20 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. 21 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 28, 1995 Consolidated Balance Sheets, February 28, 1995 and February 28, 1994 Consolidated Statements of Shareholders' Equity for the three years ended February 28, 1995 Consolidated Statements of Cash Flows for the three years ended February 28, 1995 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. Financial Statement Schedules Report of Independent Public Accountants on Schedules Schedule II - Valuation and Qualifying Accounts for the three years ended February 28, 1995 22 All other 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(a) through 10(m) 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) No report on Form 8-K was filed during the last quarter of the period covered by this report. 23 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 25, 1995 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, 1995 Paul Richman Chairman and Director VICTOR F. TRIZZINO May 25, 1995 Victor F. Trizzino President, Chief Executive Officer and Director (Principal Executive Officer) 24 EVELYN BEREZIN May 25, 1995 Evelyn Berezin Director ROBERT M. BRILL May 25, 1995 Robert M. Brill Director PETER F. DICKS May 25, 1995 Peter F. Dicks Director HERMAN FIALKOV May 25, 1995 Herman Fialkov Director RAYMOND FRANKEL May 25, 1995 Raymond Frankel Director IVAN T. FRISCH May 25, 1995 Ivan T. Frisch Director 25 Schedule II STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED FEBRUARY 28, 1995
Additions Balance at Charged to Write-offs, Balance at Year Ended Beginning Costs and Net of End February 28, 1995 of Period Expenses Recoveries of Period Allowance for doubtful accounts $1,001,000 $808,000 $(707,000) $1,102,000 Year Ended February 28, 1994 Allowance for doubtful accounts $ 792,000 $399,000 $(190,000) $1,001,000 Year Ended February 28, 1993 Allowance for doubtful accounts $ 504,000 $360,000 $ (72,000) $ 792,000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To Standard Microsystems Corporation: We have audited in accordance with generally accepted auditing standards, the financial statements included in Standard Microsystems Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 29, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Baltimore, Maryland March 29, 1995 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 as of January 7, 1988 with Mellon Securities Trust Company as Rights Agent Exhibit 3 [6] 3.4 Amendment No. 1 to Rights Agreement * 10.1 Employment Agreement, dated as of March 1, 1995, with Paul Richman Exhibit 10(b)[13] 10.2 Employment Agreement dated as of March 1, 1993, with Victor Trizzino Exhibit 10(c)[13] 10.3 Employment Agreement, dated as of March 1, 1993, with Gerald E. Gollub Exhibit 10(d)[13] 10.4 Employment Agreement dated as of March 1, 1993 with Arthur Sidorsky Registrant's Proxy 10.5 1984 Stock Option Plan for Statement dated May Officers and Key Employees 16, 1984, Exhibit A Exhibit 10(g) [4] 10.6 Amendment to 1984 Stock Option Plan for Officers and Key Employees Registrant's Proxy 10.7 1986 Stock Option Plan for Statement dated May Officers and Key Employees 22, 1986, Exhibit A Exhibit 10(i) [4] 10.8 Amendment to 1986 Stock Option Plan for Officers and Key Employees Exhibit 10(m) [1] 10.9 Amendment to 1986 Stock Option Plan for Officers and Key Employees dated March 29, 1990 Registrant's Proxy 10.10 1989 Stock Option Plan Statement dated June 6, 1989, Exhibit A Registrant's Proxy 10.11 1991 Restricted Stock Statement dated July Bonus Plan 17, 1991, Exhibit A Registrant's Proxy 10.12 Director Stock Option Statement dated May Plan 29, 1990, Exhibit A Exhibit 10(m) [11] 10.13 Resolutions adopted February 18, 1992 amending Director Stock Option Plan, 1991 Restricted Stock Bonus Plan, 1989 Stock Option Plan, 1986 Stock Option Plan and 1984 Stock Option Plan * 10.14 Retirement Plan for Directors Registrant's Proxy 10.15 1993 Stock Option Plan Statement dated May for Officers and Key 25, 1993, Exhibit A Employees Exhibit 10(x)[13] 10.16 Executive Retirement Plan Registrant's Proxy 10.17 1994 Stock Option Plan Statement dated May for Officers and Key 26, 1994, Exhibit A Employees * 10.18 Resolutions adopted October 31, 1994 amending the Retirement Plan for Directors and the Executive Retirement Plan * 10.19 Resolutions adopted January 3, 1995 amending the 1994, 1993, 1989, 1986, and 1984 Stock Option and the 1991 Restricted Stock Plan Exhibit 10.2 [2] 10.20 Patent and Trade Secrets Agreement, dated as of March 12, 1983 with Paul Richman Exhibit 10(r) [7] 10.21 Patent and Trade Secrets Agreement, dated as of March 1, 1988 with Gerald Gollub * 10.22 Consulting Agreement dated as of March 1, 1995 with Herman Fialkov Exhibit 10(t) [7] 10.23 Form of Severance Pay Agreement (renewed annually through December 31, 1995) Exhibit 2(a) [10] 10.24 Agreement for Purchase and Sale of Assets between SMC and Western Digital Corporation, dated September 16, 1991, as amended Exhibit 2(b) [10] 10.25 Technology Transfer Agreement between SMC and WDC dated as of September 27, 1991 Exhibit 2(c) [10] 10.26 Noncompetition Agreement between SMC and WDC dated as of September 27, 1991 * 10.27 Credit Agreement dated January 13, 1995 Exhibit 2 [12] 10.28 Agreement and Plan of Merger Among SMC, SMC Massachusetts Inc., Sigma Network Systems Inc., Ashraf M. Dahod and Kwabena D. Akufo dated December 8, 1992 * 13 Portions of Annual Report to Stockholders for year ended February 28, 1995 incorporated by reference * 23 Consent of Arthur Andersen LLP * 27 Financial Data Schedule * 99 Form 11-K for year ended February 28, 1994 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, 1995. EX-10 2 EXHIBIT 10.1 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of March, 1995 (the "Commencement Date") between Standard Microsystems Corporation, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware and having an office at 80 Arkay Drive, Hauppauge, New York 11788, hereinafter referred to as "SMC," and Paul Richman, residing at 6 Swan Place, Nissequogue, NY 11780, hereinafter referred to as "Mr. Richman." W I T N E S S E T H: WHEREAS, SMC is engaged, among other things, in the business of developing, manufacturing and selling networking and board-level products and integrated circuits for use in the electronics industry; and WHEREAS, SMC has for many years employed Mr. Richman and desires to continue to employ or engage him in an executive or consulting capacity, upon the terms and conditions hereinafter in this Agreement set forth, and Mr. Richman is desirous of being so employed or engaged; and WHEREAS, SMC controls, or may control in the future, various corporations and/or other enterprises, the corporations and/or other enterprises from time to time controlled by SMC being referred to in this Agreement as "SMC AFFILIATES;" and WHEREAS, SMC may have, or may have in the future, a minority interest in various corporations and/or other enterprises, the corporations and/or other enterprises in which SMC may have, from time to time, a minority interest being referred to in this Agreement as "SMC ASSOCIATED COMPANIES;" and WHEREAS, Mr. Richman is, as of the Commencement Date, employed as the Chairman of the Board of SMC; Now, therefore, in consideration of the premises and the mutual covenants and conditions contained herein, the parties hereto agree as follows: FIRST: Subject to paragraph SIXTH, SMC agrees to employ Mr. Richman and Mr. Richman agrees to be employed pursuant to this Agreement for a period commencing on the Commencement Date and ending February 29, 2000. For so long as he shall be employed pursuant to the preceding sentence, Mr. Richman shall serve as Chairman of the Board of SMC, if he so desires and if elected to such office. SMC and Mr. Richman agree that any change in Mr. Richman's position and/or responsibilities will not alter any of the other terms of this Agreement, except as expressly set forth herein. Mr. Richman agrees to apply his experience and skill to such problems as shall be presented to him from time to time by, or at the direction of, the Board of Directors of SMC in connection with the business of SMC, the SMC AFFILIATES and the SMC ASSOCIATED COMPANIES. Although Mr. Richman may be required to spend a significant portion of his business time travelling on behalf of SMC, the SMC AFFILIATES and the SMC ASSOCIATED COMPANIES, Mr. Richman shall not be required to conduct his principal activities or have his headquarters at a location outside the Hauppauge, Long Island, New York area (hereby defined to include all points within fifty miles of Hauppauge, Long Island, New York). SECOND: (a) Subject to Clause (b) of this paragraph SECOND, Mr. Richman shall render 120 hours of service per month hereunder, including travel time (essentially 80% of full time) and, during such time, shall give his full time, attention, best efforts and skill to SMC, the SMC AFFILIATES and the SMC ASSOCIATED COMPANIES and shall accept willingly and carry out the duties assigned to him in the furtherance of the business of SMC, the SMC AFFILIATES and the SMC ASSOCIATED COMPANIES. During the period of this Agreement, he shall not engage in any activity competing or in conflict with the best interests of SMC, the SMC AFFILIATES and the SMC ASSOCIATED COMPANIES. In addition to the compensation set forth in paragraph THIRD hereof, and in consideration for these services, SMC agrees to make available to Mr. Richman the benefits and privileges regularly granted by SMC to other senior executives of SMC, except for any benefit or privilege under any plan that requires for eligibility a greater number of hours of service than are required of Mr. Richman under this Agreement. For purposes of computing Mr. Richman's benefit under SMC's Executive Retirement Plan, Mr. Richman's employment will be deemed to have terminated February 28, 1995. Mr. Richman waives all rights under the Retirement Plan for Directors of Standard Microsystems Corporation. Mr. Richman shall be entitled to vacation determined as the product obtained by multiplying the number of vacation days per year to which he currently is entitled by the Adjustment Factor, as hereinafter defined. At all times when he is not required to serve SMC pursuant to this Agreement, Mr. Richman shall be free to pursue, for his own enjoyment and financial benefit, other activities such as, but not limited to, acting as President of the Consortium for Technology Licensing, Ltd., teaching, lecturing and writing, so long as such activities do not compete with SMC or conflict with the best interests of SMC. Mr. Richman will report all significant changes and/or new developments pertaining to such activities to the Board of Directors of SMC at its regular meetings and, between such meetings, to the Chief Executive Officer of SMC. (b) Either party may at any time, and from time to time, give notice to the other (a "Change Time Notice") that the hours of service per month specified in Clause (a) of this paragraph SECOND shall be reduced, as specified in such notice to 90, 60 or 30 hours of service per month, effective on the first day of a calendar month specified in the notice (the "Change Date"), which day shall be not less than three months following the giving of such notice and not earlier than March 1, 1996. Effective from the Change Date, the reduced number of hours specified in the Change Time Notice shall be substituted for 120 in the penultimate sentence of paragraph THIRD (A). Once the number of service hours per month is reduced in the manner described herein above, the number of service hours per month may be increased only by written mutual agreement of the parties. THIRD: A. SMC shall pay to Mr. Richman, and Mr. Richman agrees to accept as compensation for and in consideration of the work to be performed hereunder by Mr. Richman, a weekly salary at an annual rate determined by multiplying the Base Rate, as hereinafter defined, by the Adjustment Factor, as hereinafter defined. The Base Rate shall be $386,500 provided, however, that the Base Rate shall be modified as of March 1, 1995, 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 preceding years. Each such modification shall be made retroactively when the Consumer Price Index for the February next preceding the date of such adjustment becomes available. The words "Consumer Price Index," as used in this Agreement shall mean the Consumer Price Index for All Urban Consumers, U.S. City Average, All Items (1982- 84=100), as reported by the Bureau of Labor Statistics of the U.S. Department of Labor. In the event that this Consumer Price Index shall be superseded or shall be published by a different agency, then the superseding index shall be substituted for this Consumer Price Index in such a manner as to implement the intent of this Agreement that the Base Rate shall be modified annually, beginning as of March 1, 1996, so that the purchasing power thereof shall be maintained at a level at least equivalent to the purchasing power thereof at March 1, 1995. The Adjustment Factor shall be a fraction, the numerator of which shall be 120, or such other number of hours of service as the parties shall agree that Mr. Richman shall provide pursuant to paragraph SECOND, and the denominator of which shall be 150. The Board of Directors of SMC shall have full discretion from time to time to fix the Base Rate, for any period specified by the Board, at an amount exceeding the Base Rate determined pursuant to the preceding provisions of this paragraph THIRD (a). B. As additional compensation for his services, SMC shall pay to Mr. Richman: 1. a further amount equal to five percent (5%) of all revenues receivable by SMC and/or SMC AFFILIATES from the licensing of any patent or technology of SMC and/or SMC AFFILIATES (whether or not such technology is covered by any patent of SMC and/or SMC AFFILIATES), which revenues become receivable after February 28, 1995 and while Mr. Richman is employed under this Agreement or any modification, extension or renewal thereof or while Mr. Richman is willing to act as an employee of, or consultant to, SMC on terms acceptable to SMC; plus, but without duplication, 2. a further amount equal to five percent (5%) of all revenues receivable by SMC ASSOCIATED COMPANIES from the licensing of any patent or technology of any SMC ASSOCIATED COMPANIES (whether or not such technology is covered by any patent of SMC, SMC AFFILIATES and/or SMC ASSOCIATED COMPANIES), which revenues become receivable after February 28, 1995 and while Mr. Richman is employed under this Agreement or any modification, extension or renewal thereof or while Mr. Richman is willing to act as an employee of, or consultant to, SMC on terms acceptable to SMC; plus, but without duplication, 3. a further amount equal to one percent (1%) of sales by SMC and/or SMC AFFILIATES of products manufactured and/or sold by SMC and/or SMC AFFILIATES pursuant to any second-sourcing, technology transfer or other agreement with a licensee of any patent or technology of SMC and/or SMC AFFILIATES (whether or not such technology is covered by any patent of SMC and/or SMC AFFILIATES) which sales are actually made by SMC and/or SMC AFFILIATES after February 28, 1995 and while Mr. Richman is employed under this Agreement or any modification, extension or renewal thereof or while Mr. Richman is willing to act as an employee of, or consultant to, SMC on terms acceptable to SMC; plus, but without duplication, 4. a further amount equal to one percent (1%) of sales by SMC ASSOCIATED COMPANIES of products manufactured and/or sold by SMC ASSOCIATED COMPANIES pursuant to any second-sourcing, technology transfer or other agreement with a licensee of any patent or technology of SMC, SMC AFFILIATES and/or SMC ASSOCIATED COMPANIES (whether or not such technology is covered by any patent of SMC, SMC AFFILIATES and/or SMC ASSOCIATED COMPANIES) which sales are actually made by SMC ASSOCIATED COMPANIES after February 28, 1995 and while Mr. Richman is employed under this Agreement or any modification, extension or renewal thereof or while Mr. Richman is willing to act as an employee of, or consultant to, SMC on terms acceptable to SMC. Payments required to be made pursuant to subparagraphs (i), (ii), (iii) and (iv) of this subsection THIRD (b) or subsection THIRD (c), which payments are based on revenues or sales of SMC AFFILIATES or SMC ASSOCIATED COMPANIES, shall be reduced by a percentage equal to the percentage of the equity not owned by SMC of the SMC AFFILIATE or SMC ASSOCIATED COMPANY generating such sales or revenues, during the period covered by the payment. In computing the compensation payable pursuant to this subsection THIRD (b) or subsection THIRD (c), there shall be excluded from the computation all revenues receivable from Texas Instruments Incorporated and all sales pursuant to any second-sourcing, technology transfer or other agreements with Texas Instruments Incorporated. Payments due pursuant to this subsection THIRD (b) shall be made to Mr. Richman by SMC quarterly, not later than ninety (90) days after the end of each fiscal quarter of each fiscal year of SMC, beginning with the quarter ending May 31, 1995. Such payments shall continue during the lifetime of Mr. Richman, so long as he is willing to act as an employee of, or consultant to, SMC on terms acceptable to SMC. Notwithstanding the preceding provisions of this paragraph THIRD (b), the aggregate amount payable pursuant to this paragraph THIRD (b) for any fiscal year of SMC shall not exceed $364,000. C. In the event of the death of Mr. Richman while Mr. Richman is employed under this Agreement or any modification, extension or renewal thereof, or while Mr. Richman is acting as a consultant to SMC, an amount equal to two and one half percent (2.5%) of all revenues receivable by SMC and/or SMC AFFILIATES, during the five (5) year period commencing on the day following the death of Mr. Richman, from the licensing of any patent or technology of SMC and/or SMC AFFILIATES (whether or not such technology is covered by any patent of SMC and/or SMC AFFILIATES) shall be paid to the estate of Mr. Richman and, in addition, an amount equal to five-tenths of one percent (0.5%) of sales by SMC and/or SMC AFFILIATES of products manufactured and/or sold by SMC and/or SMC AFFILIATES pursuant to any second- sourcing, technology transfer or other agreement with a licensee of any patent or technology of SMC and/or SMC AFFILIATES (whether or not such technology is covered by any patent of SMC and/or SMC AFFILIATES) shall also be paid to the estate of Mr. Richman. Payments due pursuant to this subsection THIRD (c) shall be made to the estate of Mr. Richman quarterly, not later than ninety (90) days after the end of each fiscal quarter of each fiscal year of SMC, beginning with the quarter ending just after the death of Mr. Richman. D. In the case of any dispute between SMC and Mr. Richman as to the amounts of revenues or sales or the percentage of equity not owned by SMC, the determination of such consolidated net income, revenues, sales or percentage by the independent public accountants retained by SMC to audit its financial statements for such fiscal year shall be binding and conclusive upon both parties to this Agreement. FOURTH: The Patent and Trade Secrets Agreement between SMC and Mr. Richman, dated March 1, 1983, shall remain in effect but, commencing March 1, 1995, shall be applicable only to inventions and improvements discovered or made after February 28, 1995 and relating to semiconductor devices and/or integrated circuits or networking-related electronic components and/or systems; provided that if SMC shall enter into any new line of business after the date of this Agreement, the Patents and Trade Secrets Agreement shall apply to inventions and improvements related to that line of business from the date on which SMC shall enter such line of business. Nothing in this paragraph FOURTH shall release or otherwise affect Mr. Richman's obligations under the Patent and Trade Secrets Agreement in relation to any invention or improvement made or discovered prior to March 1, 1995. FIFTH: The obligations of SMC under this Agreement shall not be affected by the sale, lease or exchange of all, or any substantial part, of the property and assets of SMC unless SMC shall require the purchaser, by an instrument in writing to assume such obligations, in which event SMC shall be relieved of such obligations to the extent they have been so assumed. Except to the extent such obligations are so assumed, SMC's obligations under this Agreement shall continue in full force and effect through February 29, 2000. SIXTH: Should SMC's Board of Directors fail to elect Mr. Richman Chairman of the Board, or request that he retire or resign from such position, or should Mr. Richman desire so to retire or resign, he shall continue to render services hereunder, as a consultant and independent contractor, but shall no longer be an employee of SMC. SMC shall continue to make available to Mr. Richman the same benefits and privileges to which he is entitled under paragraph SECOND, except for any benefit or privilege under any plan as to which eligibility is restricted to employees. SEVENTH: Any notice or any other communication given under this Agreement to either party shall be in writing and shall be delivered or mailed to such party at the address of such party appearing at the head of this Agreement; provided that either party may by notice designate a changed address for such party. Any such notice shall be deemed given (a) if mailed properly addressed, postage prepaid, certified mail, return receipt requested, on the third business day after mailing in New York, New York or Hauppauge, New York, or (b) if delivered otherwise than pursuant to (a), at the time of the actual delivery. EIGHTH: Each previous Employment Agreement between the parties to this Agreement is hereby superseded by this Agreement. IN WITNESS WHEREOF, SMC has caused this Agreement to be executed on its behalf by its representative, thereunto duly authorized, and Mr. Richman has executed this Agreement as of the day and year first above written. STANDARD MICROSYSTEMS CORPORATION By: Herman Fialkov, Director and Chairman, Compensation Committee ______________________________ Paul Richman EX-10 3 EXHIBIT 10.14 Retirement Plan for Directors of Standard Microsystems Corporation 1. Each person who shall serve as a director of Standard Microsystems Corporation on or after October 1, 1992, shall be entitled to retire pursuant to this Plan. A director who proposes so to retire shall effect such retirement by giving notice of his retirement to the Secretary of the corporation. Such retirement shall be effective on the date specified in such notice or, if no date is so specified, on the date of delivery of his notice to the Secretary. 2. Commencing with the first day of the calendar quarter immediately following the retirement of a director pursuant to this Plan, the corporation will pay such director an amount equal to one-fourth of the annual director's retainer in effect for such director at the effective date of such retirement. The annual retainer is the director's fee for one year regularly payable to a director by the corporation, inclusive of any amount payable by reason of service on a committee of the Board, but exclusive of all meeting fees and reimbursement for expenses of attendance at meetings of directors. Subject to paragraph 3, the payment just specified shall be repeated on the first day of each subsequent calendar quarter for a period of ten years (forty payments in the aggregate) but not longer than the period during which the retiring director shall have received director's fees for service as a director, at the effective date of his retirement. 3. In the event of the death of a retired director, the retirement benefit specified in paragraph 2 shall be paid to the surviving spouse of the retired director, commencing with the first day of the calendar quarter next following his death. Payment shall be made at the same rate as prevailed prior to such death, except that such payments shall continue only through one-half of the remaining period during which the director would have received payments, had he survived. In the event of the death of a director prior to retirement, payments shall be made as if he had retired on the date of his death. If the director is not survived by a spouse or, upon the death of such surviving spouse, payments hereunder shall terminate. 4. No person shall be nominated as a director for a three-year term if he shall have attained the age of 73, on or before the date of the annual meeting at which the nomination would be presented. A director who is not reelected as such at the expiration of his term shall be deemed to have retired at that time. 5. During the year following the effective date of a director's retirement, the retired director shall be invited to attend each Board meeting as a consultant and shall be reimbursed for the reasonable expenses incurred in connection with such attendance together with an amount equal to the meeting fee then being paid to directors. 6. A person who may qualify for benefits under both this Plan and the Executive Retirement Plan of Standard Microsystems Corporation shall elect benefits under one of such plans in lieu of benefits under the other. Such election shall be effected by filing a notice thereof with the Secretary of the corporation. 7. The Board, in its sole discretion, may amend or terminate the Plan at any time and from time to time; provided, however, that no plan amendment or termination shall, without the consent of the affected director, reduce or eliminate any benefit theretofore accrued. EX-10 4 EXHIBIT 10.18 The Retirement Plan for Directors was amended by adding the following paragraphs 6 and 7 thereto: 6. A person who may qualify for benefits under both this plan and the Executive Retirement Plan of Standard Microsystems Corporation shall elect benefits under one of such plans in lieu of benefits under the other. Such election shall be effected by filing a notice thereof with the Secretary of the corporation. 7. The Board, in its sole discretion, may amend or terminate the Plan at any time and from time to time; provided, however, that no plan amendment or termination shall, without the consent of the affected director, reduce or eliminate any benefit theretofore accrued. The Executive Retirement Plan was amended by adding the following to Section 6.2: A person who may qualify for benefits under both this Plan and the Retirement Plan for Directors of Standard Microsystems Corporation shall elect benefits under one such plan in lieu of benefits under the other. Such election shall be effected by filing a notice thereof with the Administrator, prior to receiving any benefit under either plan. EX-10 5 EXHIBIT 10.19 RESOLVED, that the 1994 and 1993 Stock Option Plans be, and hereby are, amended by deleting from paragraph 8(b), the words, "at any time subsequent to the first anniversary of the grant of the option", and from paragraph 9, the phrase, ", subsequent to the first anniversary of the grant of the option,". RESOLVED, that the 1989 Stock Option Plan be, and hereby is, amended by (i) deleting from paragraph 8(b), the words, "at any time subsequent to the first anniversary of the grant of the option"; (ii) inserting at the beginning of paragraph 9 the words, "Notwithstanding the provisions of paragraph 7 specifying installments in which an option shall be exercisable"; (iii) inserting before the words "within the last to occur of" the phrase, ",as to all shares of Common Stock remaining subject to the option,"; and (iv) deleting from paragraph 9, all language after the words, "original expiration date of the option". RESOLVED, that the 1986 and 1984 Stock Option Plans be, and hereby are, amended by inserting the following at the end of paragraph 8: "Notwithstanding the provisions of paragraph 7 specifying the installments in which an option shall be exercisable, upon an optionee's actual retirement at or after normal retirement date, the option shall be exercisable (within the time periods set forth in paragraph 9) as to all shares of Common Stock remaining subject to the option." and by amending paragraph 9 to read in its entirety as follows: "Notwithstanding the provisions of paragraph 7 specifying the installments in which an option shall be exercisable, if an optionee shall die or become permanently disabled within the meaning of Section 22(e)(3) of the Code, while he is employed by the Company or within thirty days after the termination of his employment (other than termination by the Company for cause or voluntarily on the part of the optionee and without the consent of the Company), such option may be exercised, as to all shares of Common Stock remaining subject to the option, within the later to occur of (a) three months after the termination of the optionee's employment or (b) 30 days after the appointment of a legal representative or guardian, but in no case more than one year after termination of employment and in no case after the original expiration date of the option." RESOLVED, that the 1991 Restricted Stock Plan be, and hereby is, amended by deleting from Section 5.03 the words, "and any of such events shall occur more than one year after the date on which a Restricted Stock Bonus Award is granted to him". EX-10 6 EXHIBIT 10.22 March 1, 1995 Mr. Herman Fialkov 199 Middle Neck Road Great Neck, New York 11021 Dear Mr. Fialkov: This letter will confirm the terms pursuant to which you have agreed to serve as a consultant to Standard Microsystems Corporation, a Delaware corporation, ("SMC") for a period commencing on the date of this letter and ending on June 30, 1997. 1. Your duties as consultant shall consist of serving SMC as an advisor and consultant, as requested by its Board of Directors or by members of its senior management, and rendering advice to the Board and to members of senior management of SMC in response to such inquiries relating to the business of SMC as they shall from time to time address to you. You will use your best judgment in responding to such requests. Responses shall be oral except to the extent that you shall prefer, from time to time, to respond in writing. Your consulting duties under this agreement do not require the preparation of written reports or analyses. 2. Your fee as a consultant shall be equivalent to $57,500 per annum, payable monthly. 3. Your services pursuant to this agreement shall be performed at such times as shall be reasonably convenient to you in the light of your other business, professional and personal activities, including business or personal travel and your own vacation schedule. You shall not be required to perform services under this agreement, except within 50 miles of Hauppauge, Long Island, New York, unless you consent otherwise. 4. In the event of your death prior to June 30, 1997, your compensation pursuant to this agreement shall be continued six months following the month in which such death occurs. 5. Should you be requested to perform services beyond the scope of ordinary consulting duties, you will be additionally compensated for such service on a basis to be agreed between you and SMC. Such agreement shall be made promptly after you advise the person requesting such services that such services are beyond the scope of ordinary consulting duties. Pending such an agreement, neither you nor SMC shall have any obligation in relation to such services. 6. The fee specified in this agreement as your compensation as consultant shall not affect your right to compensation as a director of SMC, for which service you will be compensated, in addition to your consulting fee, on the same basis as are all other directors of SMC. 7. SMC contemplates that, during the term of this agreement you may engage in all such business activities as you desire to conduct, in addition to serving as consultant under this agreement. No limitation on such activities is imposed by this agreement except that, without SMC's consent, you will not serve any competitor of SMC engaged in the design or manufacture of semiconductor devices or networking products. 8. You agree that you will keep in strict secrecy and confidence any information, knowledge or data, written or unwritten, relating to SMC's business, that you may receive, develop or learn in the course of your engagement by SMC, which (i) has not been disclosed in issued patents or (ii) is not generally or publicly known or (iii) has not been unrestrictedly disclosed by SMC. You further agree not to disclose any such information, knowledge or data to others, and not to use such information, knowledge or data for any purpose of your own, whether during or after your engagement with SMC, except with the prior written consent of SMC. It is understood that this Agreement does not restrict you in the exercise of your technical skill subsequent to your engagement with SMC; provided that the exercise of such skill does not involve the disclosure to others of the aforesaid secret or confidential information, knowledge or data, or the use by you of such secret or confidential information, knowledge or data on your own behalf or on behalf of other employers or business interests. You further agree, during engagement as a consultant to SMC, or upon termination of such engagement, not to take with you without SMC's written consent, any drawing, blueprint, photograph, sample, model, specification, design, descriptive matter, picture, reproduction or any other matter representing any product, machine, process or other development whatsoever, which has been, or is to be, made or used by SMC. 9. Your obligations under this agreement shall inure to the benefit of and be enforceable by any corporation or other entity which is, or any time after the date hereof shall be, a parent or subsidiary or otherwise affiliated with SMC and by any corporation or other entity which shall hereafter acquire SMC or any such affiliate. If the foregoing conforms with our understanding, please sign the enclosed copy hereof at the place provided for your signature and return it to the undersigned. Very truly yours, STANDARD MICROSYSTEMS CORPORATION By:______________________________ Victor F. Trizzino President Accepted and Agreed to: _________________________ Herman Fialkov EX-10 7 EXHIBIT 10.27 CREDIT AGREEMENT, dated as of January 13, 1995, among Standard Microsystems Corporation, a Delaware corporation (the "Borrower") and the several banks and other financial institutions from time to time parties to this Agreement (collectively, the "Lenders" individually, a "Lender"). The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABR": for any day with respect to any ABR Loan made by any Lender, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate of such Lender in effect on such day and (b) the Federal Funds Effective Rate determined by such Lender as in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the relevant Lender as its prime rate in effect at its principal office (the Prime Rate not being intended to be the lowest rate of interest charged by such Lender in connection with extensions of credit to debtors); and "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day of such transactions received by the relevant Lender from three federal funds brokers of recognized standing selected by it. Any change in the ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be. "ABR Loans": Loans the rate of interest applicable to which is based upon the ABR. "Affiliate": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": with respect to any Eurodollar Loan for each Interest Period with respect thereto, (a) 0.625% with respect to the portion of such Eurodollar Loan which when added to the aggregate amount of all Loans outstanding at the time such Eurodollar Loan is made (before giving effect to the making of such Eurodollar Loan) would not exceed $29,999,999, (b) 0.875% with respect to the portion of such Eurodollar Loan which when added to the aggregate amount of all Loans outstanding at the time such Eurodollar Loan is made (before giving effect to the making of such Eurodollar Loan) would exceed $29,999,999 but would not exceed $59,999,999 and (c) 1.00% with respect to the portion of such Eurodollar Loan which when added to the aggregate amount of all Loans outstanding at the time such Eurodollar Loan is made (before giving effect to the making of such Eurodollar Loan) would exceed $59,999,999. "Assignee": as defined in subsection 8.6(c). "Available Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) the aggregate principal amount of all Loans made by such Lender then outstanding. "Board of Governors": the Board of Governors of the Federal Reserve System or any Governmental Authority which succeeds to the powers and functions thereof. "Borrowing Date": any Business Day specified in a notice pursuant to subsection 2.2 or 2.7 as a date on which the Borrower requests the Lenders to make Loans hereunder. "Business": as defined in subsection 3.17. "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Chemical": Chemical Bank, a New York banking corporation. "Closing Date": the date on which the conditions precedent set forth in subsection 4.1 shall be satisfied. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Commitment": as to any Lender, the obligation of such Lender to make Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1.1(a), as such amount may be reduced from time to time in accordance with the provisions of this Agreement. "Commitment Percentage": as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any time after the Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Loans then outstanding constitutes of the aggregate principal amount of the Loans then outstanding). "Commitment Period": the period from and including the date hereof to but not including the Termination Date or such earlier date on which the Commitments shall terminate as provided herein. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Consideration": with respect to any Permitted Acquisition, collectively, (i) all cash paid by the Borrower or any of its Subsidiaries in connection with such Permitted Acquisition, including in respect of transaction costs, fees and other expenses incurred by the Borrower or any of its Subsidiaries in connection with such Permitted Acquisition, (ii) all guarantees and other contingent obligations created, and all liabilities assumed, by the Borrower or any of its Subsidiaries in connection with such Permitted Acquisition, (iii) the value of all Capital Stock issued by the Borrower or any of its Subsidiaries in connection with such Permitted Acquisition and (iv) any deferred portion of the purchase price or any other costs paid by the Borrower or any of its Subsidiaries in connection with such Permitted Acquisition. "Consolidated Current Liabilities": at any date of determination, all liabilities of the Borrower and its Subsidiaries which, in accordance with GAAP, would be classified on a consolidated balance sheet of the Borrower and its Subsidiaries as current liabilities. "Consolidated EBITDA": for any period, the Consolidated Net Income for such period, plus, to the extent deducted in determining such Consolidated Net Income, (i) interest expense, (ii) depreciation, (iii) amortization, (iv) all Federal, state, local and foreign income taxes and (v) all other non-cash expenses, minus, to the extent added in determining such Consolidated Net Income, any non-cash income or non-cash gains, all as determined on a consolidated basis in accordance with GAAP. "Consolidated Funded Debt": at any date of determination thereof, all Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, which by its terms matures more than one year after such date of determination (including the current portion of any such Indebtedness) and any such Indebtedness maturing within one year after such date of determination which is renewable or extendable at the option of the obligor to a date more than one year from such date of determination and, including, in any event, the Loans. "Consolidated Net Income": for any period, the net income of the Borrower and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP but excluding from the determination thereof (without duplication) any extraordinary gains. If Consolidated Net Income is less than zero for any period, Consolidated Net Income may be referred to as a Consolidated Net Loss for such period. "Consolidated Net Worth": at any date of determination thereof, all items which would, in accordance with GAAP, be included under shareholders' equity on a consolidated balance sheet of the Borrower and its Subsidiaries at such date of determination. "Consolidated Quick Assets": at any date of determination thereof, all cash, cash equivalents and accounts receivable of the Borrower and its Subsidiaries at such date of determination, determined in accordance with GAAP and set forth on the then most recent consolidated balance sheet of the Borrower and its Subsidiaries. "Consolidated Tangible Net Worth": at any date of determination thereof, Consolidated Net Worth at such date of determination, minus (a) any surplus resulting from the write-up of assets subsequent to August 31, 1994, (b) goodwill, including any amounts (however designated on the balance sheet) representing the cost of acquisitions of Subsidiaries in excess of underlying tangible assets, (c) patents, trademarks, copyrights, (d) leasehold improvements not recoverable at the expiration of a lease and (e) deferred charges (including, but not limited to, unamortized debt discount and expense, organization expenses and experimental and development expenses, but excluding prepaid expenses). "Consolidated Total Unsubordinated Liabilities": at any date of determination thereof, all items which would, in accordance with GAAP be included on a consolidated balance sheet of the Borrower and its Subsidiaries as liabilities, excluding Subordinated Debt and any minority interests in Subsidiaries owned by Persons other than the Borrower or any of its Subsidiaries. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Default": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollars" and "$": dollars in lawful currency of the United States of America. "Domestic Subsidiary": any Subsidiary which is not a foreign Subsidiary. "Environmental Laws": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board of Governors) maintained by a member bank of the Federal Reserve System. "Eurodollar Base Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan made by any Lender, the rate per annum equal to the rate at which such Lender is offered Dollar deposits at or about 10:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of such Lender's Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of such Lender's Eurodollar Loan to be outstanding during such Interest Period. "Eurodollar Loans": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate 1.00 - Eurocurrency Reserve Requirements "Event of Default": any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Financing Lease": any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "Foreign Subsidiary": any Subsidiary that is organized or incorporated under the laws of any jurisdiction outside the United States of America. "GAAP": generally accepted accounting principles and practices in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants acting through the Financial Accounting Standards Board or through other appropriate boards or committees thereof or in such other statements by such other entity as may be in general use by significant segments of the accounting profession and which are consistently applied for all periods so as to properly reflect the financial condition, operations and cash flows of the Borrower and its Subsidiaries. "GFC Credit Agreement": the Loan Agreement dated as of October 15, 1991, between the Borrower and Greyhound Financial Corporation. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Guarantor": any Person delivering a Guarantee pursuant to this Agreement. "Indebtedness": of any Person at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities and accrued expenses incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of such Person under Financing Leases, (d) all obligations of such Person in respect of acceptances issued or created for the account of such Person and (e) all liabilities secured by any Lien on any property owned by such Person if such Person has not assumed or otherwise become liable for the payment thereof. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Interest Payment Date": as to any Loan, the last Business Day of each month during which such Loan is outstanding. "Interest Period": with respect to any Eurodollar Loan: (i) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Lenders no later than 12:00 P.M. Noon, New York City time, three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; (3) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (4) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Eurodollar Loan. "Interest Rate Protection Agreements": as to any Person, all interest rate swaps, caps or collar agreements or similar arrangements entered into by such Person providing for protection against fluctuations in interest rates or currency exchange rates or the exchange of nominal interest obligations, either generally or under specific contingencies. "Inventory Turnover Ratio": at any date of determination thereof, the ratio of (a) the aggregate amount of "cost of goods sold" expensed during the then most recently completed period of four consecutive fiscal quarters to (b) the aggregate amount of inventory of the Borrower and its Subsidiaries as set forth on the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such period. "Investments": as defined in subsection 6.9. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Financing Lease having substantially the same economic effect as any of the foregoing). "Loans": as defined in subsection 2.1. "Loan Documents": this Agreement, any Notes and the Subsidiaries Guarantee. "Loan Parties": the Borrower and each Domestic Subsidiary. "Material Adverse Effect": a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this or any of the other Loan Documents or the rights or remedies of any Lender hereunder or thereunder. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea- formaldehyde insulation. "Material Subsidiary": at any time, any Subsidiary (a) the Total Assets of which exceed 5% of the Total Assets of the Borrower and its Subsidiaries at such time and (b) the Total Revenues of which for the then most recently completed fiscal quarter exceed 5% of the Total Revenues of the Borrower and its Subsidiaries for such fiscal quarter. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NatWest": National Westminster Bank N.A., a national banking association. "Non-Excluded Taxes": as defined in subsection 2.14(a). "Notes": as defined in subsection 2.5(d). "Participant": as defined in subsection 8.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Acquisition": as to any Person, the acquisition of all or substantially all of the Capital Stock or assets of another Person, provided that (y) (i) the aggregate Consideration for all such acquisitions subsequent to the Closing Date shall not exceed $30,000,000, (ii) such other Person (or the assets being acquired) must be in (or be used in, in the case of acquired assets) a comparable business to the business in which the Borrower is engaged as of the Closing Date, (iii) such acquisition transaction shall be "non-hostile" and shall be consummated with the consent of the Board of Directors of such other Person and (iv) no Default or Event of Default shall have then occurred and be continuing or would result therefrom. "Permitted Investments": (a) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (b) Dollar denominated time deposits and certificates of deposit, having maturities of not more than one year from the date of acquisition thereof, of any Lender or of any domestic commercial bank which has a capital and surplus of at least $1,000,000,000, (c) commercial paper rated at least A-1 or the equivalent thereof by Standard & Poor's Ratings Group or P-1 or the equivalent thereof by Moody's Investors Service, Inc. and in either case maturing within one year after the date of acquisition, (d) securities issued by money-market funds with assets of $2,500,000,000 or more, (e) tax-exempt debt securities, having maturities of not more than one year from the date of acquisition thereof, issued by any Person organized under the laws of any State of the United States or of the District of Columbia, which securities are rated A or better by Standard and Poor's Ratings Group or a or better by Moody's Investors Service, Inc, (f) preferred stock, having maturities of not more than one year from the date of acquisition thereof, issued by closed end municipal bond funds which are rated AAA by Standard & Poor's Ratings Group and Aaa by Moody's Investors Services, Inc., (g) repurchase obligations with a term of not more than seven days for underlying securities of the type described in clause (a), (h) equity securities issued by any Person organized under the laws of any State of the United States or of the District of Columbia with an aggregate purchase price not to exceed $1,000,000 at any time, which equity securities have been registered under the Securities Act of 1933 or the Securities Exchange Act of 1934 and are traded on a stock exchange or the National Association of Securities Dealers, Inc. National Market System and (i) equity securities of Mosaid Limited owned by the Borrower on the date hereof. "Person": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Properties": as defined in subsection 3.17. "Regulation U": Regulation U of the Board of Governors as in effect from time to time. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. (Section Mark) 2615. "Required Lenders": at any time, Lenders the Commitment Percentages of which aggregate more than 75%. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer and the president of the Borrower or, with respect to financial matters, the chief financial officer of the Borrower. "Sanwa Credit Agreement": the Loan and Security Agreement dated as of October 15, 1991, between the Borrower and Sanwa Business Credit Corporation. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Subordinated Debt": any unsecured Indebtedness of the Borrower or any of its Subsidiaries: no part of the principal of which is required to be paid (whether by way of mandatory sinking fund, mandatory redemption, mandatory prepayment or otherwise) prior to January 13, 1998; the payment of the principal of and interest on which and other obligations of the Borrower in respect thereof are subordinated to the prior payment in full of the principal of and interest (including post-petition interest) on the Loans and all other obligations and liabilities of the Borrower to and the Lenders hereunder on terms and conditions approved in writing by the Required Lenders; and all other terms and conditions of which are satisfactory in form and substance to the Required Lenders (as evidenced by their prior written approval thereof). "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Subsidiaries Guarantee": the Guarantee to be executed by all the Domestic Subsidiaries, substantially in the form of Exhibit A, as the same may be amended, supplemented or otherwise modified from time to time. "Supplier Contract": collectively, (a) the Consignment Agreement, dated as of September 15, 1994 (SMC Contract No. 165-GWH), between the Borrower and AT&T Corp. and (b) the Integrated Circuit Supply Agreement (SMC Contract No. 166-GWH), dated September 15, 1994, between the Borrower and AT&T Corp. "Termination Date": the third anniversary of the Closing Date. "Total Assets": as to any Person at any date of determination, the total assets of such Person and its Subsidiaries at such date of determination as determined on a consolidated basis in accordance with GAAP, excluding assets attributable to any minority interests in Subsidiaries owned by Persons other than such Person or any of its Subsidiaries. "Total Revenues": as to any Person for any period, the total revenues of such Person and its Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP excluding revenues attributable to any minority interests in Subsidiaries owned by Persons other than such Person or any of its Subsidiaries. "Transferee": as defined in subsection 8.6(d). "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any Loan Document or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in any Loan Document, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrower and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Commitments. (a) Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("Loans") to the Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the amount of such Lender's Commitment. During the Commitment Period, the Borrower may use the Commitments by borrowing, prepaying the Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by the Borrower and notified to each Lender in accordance with subsections 2.2 and 2.7, provided that no Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Termination Date. 2.2 Procedure for Borrowing. The Borrower may borrow under the Commitments during the Commitment Period on any Business Day, provided that the Borrower shall give each Lender irrevocable telephonic notice (which notice must be received by each Lender prior to 12:00 P.M. Noon, New York City time and must be promptly confirmed in writing), (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Loans are to be initially Eurodollar Loans or (b) on such Business Day, otherwise, specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of each such Eurodollar Loan and the respective lengths of the initial Interest Periods therefor. Each borrowing from each Lender under the Commitments shall be in an amount equal to $500,000 or a whole multiple thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Borrower by crediting the account of the Borrower maintained by the Borrower with such Lender. 2.3 Commitment Fee. The Borrower agrees to pay to each Lender a commitment fee for the period from and including the first day of the Commitment Period to the Termination Date, computed at the rate of 1/4 of 1% per annum on the average daily amount of the unused Commitment of such Lender during the period for which payment is made, payable monthly in arrears on the last Business Day of each month and on the Termination Date or such earlier date as the Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. 2.4 Termination or Reduction of Commitments. The Borrower shall have the right, upon not less than three Business Days' prior written notice to each Lender, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments. Any such reduction shall be in a minimum amount of at least $2,000,000 or a whole multiple of $500,000 in excess thereof and shall reduce permanently the Commitments then in effect. 2.5 Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to each Lender the then unpaid principal amount of each Loan made by such Lender on the Termination Date (or such earlier date on which the Loans become due and payable pursuant to Section 7). The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in subsection 2.8. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The entries made in the accounts of each Lender maintained pursuant to subsection 2.5(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender to maintain or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to such Borrower by such Lender in accordance with the terms of this Agreement. (d) The Borrower agrees that, upon the request of any Lender, the Borrower will execute and deliver to such Lender a promissory note of the Borrower evidencing the Loans made by such Lender, substantially in the form of Exhibit B (a "Note"), dated the Closing Date and payable to the order of such Lender and in a principal amount equal to the lesser of (a) the amount of the then Commitment of such Lender or (b) the aggregate unpaid principal amount of all Loans made by such Lender. Each Lender is hereby authorized to record the date, Type and amount of each Loan made by such Lender and the date and amount of each payment or prepayment of principal with respect thereto, each conversion of all or a portion thereof to another Type, each continuation of all or a portion thereof as the same Type and, in the case of Eurodollar Loans, the length of each Interest Period and Eurodollar Rate with respect thereto, on the schedule annexed to and constituting a part of its Note or any continuation thereof, and any such recordation shall, to the extent permitted by applicable law, constitute prima facie evidence of the accuracy of the information so recorded, provided that the failure to make any such recordation or any error therein shall not affect the obligation of the Borrower to repay (with applicable interest) the Loans made to the Borrower in accordance with the terms of this Agreement. 2.6 Optional Prepayments. The Borrower may on any Business Day prepay the Loans, in whole or in part in multiples of $500,000, without premium or penalty (subject to the next succeeding sentence), upon irrevocable notice to each Lender on the date of such prepayment, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, ABR Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any amounts payable pursuant to subsection 2.15. 2.7 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving each Lender at least two Business Days' prior irrevocable telephonic notice of such election (which must be promptly confirmed in writing), provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving each Lender at least three Business Days' prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. All or any part of outstanding Eurodollar Loans and ABR Loans may be converted as provided herein, provided that (i) no Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Required Lenders have determined that such a conversion is not appropriate and (ii) no Loan may be converted into a Eurodollar Loan after the date that is one month prior to the Termination Date. (b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to each Lender, in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, of the length of the next Interest Period to be applicable to such Eurodollar Loan, provided that no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Required Lenders have determined that such a continuation is not appropriate or (ii) after the date that is one month prior to the Termination Date and provided, further, that if the Borrower shall fail to give such notice or if such continuation is not permitted such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. 2.8 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each ABR Loan shall bear interest at a rate per annum equal to the ABR. (c) If all or a portion of (i) the principal amount of any Loan, (ii) any interest payable thereon or (iii) any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the ABR plus 2%, from the date of such non-payment until such amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date and on the Termination Date and, (i) in the case of a Eurodollar Loan, the last day of each Interest Period for such Eurodollar Loan, and (ii) in the case of an ABR Loan, the date of conversion of such ABR Loan into a Eurodollar Loan pursuant to subsection 2.7, provided that interest accruing pursuant to paragraph (c) of this subsection shall be payable from time to time on demand. (e) The Applicable Margin for each Eurodollar Loan shall be determined on the first day of each Interest Period with respect thereto. 2.9 Computation of Interest and Fees. Commitment fees and interest shall be calculated on the basis of a 360- day year for the actual days elapsed. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. 2.10 Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) any Lender shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining such Lender's Eurodollar Rate for such Interest Period, or (b) any Lender shall have determined that such Lender's Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lender (as conclusively certified by such Lender) of making or maintaining its affected Loans during such Interest Period, such Lender shall give telecopy or telephonic notice thereof to the Borrower as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be converted to or continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice has been withdrawn by such Lender, no further Eurodollar Loans shall be made or continued as such by such Lender, nor shall the Borrower have the right to convert Loans made by such Lender to Eurodollar Loans. 2.11 Pro Rata Treatment and Payments. (a) Each borrowing by the Borrower from the Lenders hereunder, each conversion or continuation of Loans by the Borrower, each payment by the Borrower on account of any commitment fee hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 2:00 P.M., New York City time, on the due date thereof to each Lender in immediately available funds. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 2.12 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert ABR Loans to Eurodollar Loans shall forthwith be cancelled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to ABR Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to subsection 2.15. 2.13 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by subsection 2.14 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduced amount receivable. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Lender to the Borrower shall be conclusive in the absence of manifest error. The Borrower shall not be obligated to compensate any Lender pursuant to subsection 2.13(b) for amounts accruing prior to the date which is 180 days before such Lender notifies the Borrower of its obligation to compensate such Lender for such amounts. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.14 Taxes. (a) All payments made by the Borrower under this Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on any Lender as a result of a present or former connection between such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any Note). If any such non- excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to any Lender hereunder or under any Note, the amounts so payable to such Lender shall be increased to the extent necessary to yield to such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this subsection. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to such Lender a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to any Lender the required receipts or other required documentary evidence, the Borrower shall indemnify each Lender for any incremental taxes, interest or penalties that may become payable by such Lender as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: (i) deliver to the Borrower (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Borrower two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Lender or a Participant pursuant to subsection 8.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. 2.15 Indemnity. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.16 Change of Lending Office. Each Lender agrees that if it makes any demand for payment under subsection 2.13 or 2.14(a), or if any adoption or change of the type described in subsection 2.12 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrower to make payments under subsection 2.13 or 2.14(a), or would eliminate or reduce the effect of any adoption or change described in subsection 2.12. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to each Lender that: 3.1 Financial Condition. The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at February 28, 1994 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by Arthur Andersen & Co., copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at February 28, 1994 and the related consolidating statements of income and of cash flows for the fiscal year ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at August 31, 1994 and November 30, 1994 and the related unaudited consolidated statements of income and of cash flows for the six-month and nine-month periods, respectively, ended on such dates, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such dates, and the consolidated results of their operations and their consolidated cash flows for the six-month and nine-month periods then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Except as set forth on Schedule 3.1(a), neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto. Except as set forth on Schedule 3.1(a), during the period from February 28, 1994 to and including the date hereof there has been no sale, transfer or other disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at February 28, 1994. 3.2 No Change. (a) Since February 28, 1994 or, if later, the date of the most recent audited financial statements delivered to the Lenders pursuant to subsection 5.1(a), there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect and (b) during the period from February 28, 1994 to and including the date hereof, no dividends or other distributions have been declared, paid or made upon the Capital Stock of the Borrower nor has any of the Capital Stock of the Borrower been redeemed, retired, purchased or otherwise acquired for value by the Borrower or any of its Subsidiaries. 3.3 Corporate Existence; Compliance with Law. Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and any Notes and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents to which the Borrower is a party. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document to which it is a party when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 3.5 No Legal Bar. The execution, delivery and performance of the Loan Documents to which the Borrower is a party, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 3.6 No Material Litigation. Except as set forth on Schedule 3.6, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby or (b) which could reasonably be expected to have a Material Adverse Effect. 3.7 No Default. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 3.8 Ownership of Property; Liens. Each of the Borrower and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such property is subject to any Lien except as permitted by subsection 6.3. 3.9 Intellectual Property. The Borrower and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower know of any valid basis for any such claim, except to the extent such claims, individually or collectively, could not reasonably be expected to have a Material Adverse Effect. The use of such Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.10 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 3.11 Taxes. Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 3.12 Federal Regulations. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board of Governors as now and from time to time hereafter in effect. If requested by any Lender, the Borrower will furnish to each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-1 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 3.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. 3.14 Investment Company Act; Other Regulations. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board of Governors) which limits its ability to incur Indebtedness. 3.15 Subsidiaries. Schedule 3.15 sets forth a complete list of all Subsidiaries of the Borrower as of the date hereof. 3.16 Purpose of Loans. The proceeds of the Loans will be used to (a) finance Permitted Acquisitions (as hereinafter defined) and (b) finance capital expenditures and the ongoing working capital requirements of the Borrower and its Subsidiaries. 3.17 Environmental Matters. Except as set forth on Schedule 3.17: (a) The facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "Properties") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law except in either case insofar as such violation or liability, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. (b) The Properties and all operations at the Properties are in compliance, and have in the last 5 years been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties or materially impair the fair saleable value thereof. (c) Neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that is or are reasonably likely to result in a Material Adverse Effect. (d) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. (f) There has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Borrower or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably give rise to liability under Environmental Laws except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Initial Loans. The agreement of each Lender to make the initial Loan requested to be made by it is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the following conditions precedent: (a) Loan Documents. Each Lender shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, (ii) if requested by such Lender, a Note executed and delivered by a duly authorized officer of the Borrower and (iii) the Subsidiaries Guarantee, executed and delivered by a duly authorized officer of each Domestic Subsidiary. (b) Refinancing. Each Lender shall have received evidence reasonably satisfactory to the Lenders that the Sanwa Credit Agreement and the GFC Credit Agreement shall be terminated prior to or concurrently with making of the initial Loans under this Agreement, together with executed copies of all payout or assignment letters, lien releases or assignments, termination or assignment statements, satisfactions, agreements, certificates and other documents entered into in connection with such termination, all of which payout letters, lien releases or assignments, termination or assignment statements, satisfactions, agreements, certificates and other documents shall be in form and substance reasonably satisfactory to each Lender. (c) Borrowing Certificate. Each Lender shall have received, with a counterpart for each Lender, a certificate of the Borrower, dated the Closing Date, substantially in the form of Exhibit C, with appropriate insertions and attachments, satisfactory in form and substance to such Lender, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (d) Corporate Proceedings of the Borrower. Each Lender shall have received a copy of the resolutions, in form and substance satisfactory to such Lender, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party and (ii) the borrowings contemplated hereunder, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate shall be in form and substance satisfactory to each Lender and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (e) Borrower Incumbency Certificate. Each Lender shall have received a Certificate of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of the Borrower executing any Loan Document, satisfactory in form and substance to such Lender, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (f) Corporate Proceedings of Subsidiaries. Each Lender shall have received a copy of the resolutions, in form and substance satisfactory to such Lender, of the Board of Directors of each Domestic Subsidiary of the Borrower which is a party to a Loan Document authorizing the execution, delivery and performance of the Loan Documents to which it is a party, certified by the Secretary or an Assistant Secretary of each such Domestic Subsidiary as of the Closing Date, which certificate shall be in form and substance satisfactory to such Lender and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (g) Subsidiary Incumbency Certificates. Each Lender shall have received a certificate of each Domestic Subsidiary of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of such Subsidiaries executing any Loan Document, satisfactory in form and substance to such Lender, executed by the President or any Vice President and the Secretary or any Assistant Secretary of each such Domestic Subsidiary. (h) Corporate Documents. Each Lender shall have received true and complete copies of the certificate of incorporation and by-laws of the Borrower and each of its Subsidiaries certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower and each of its Subsidiaries. (i) Fees. Each Lender shall have received the fees to be received on the Closing Date pursuant to the Fee Letter dated as of January 13, 1995, from the Borrower to Chemical and NatWest. (j) Legal Opinions. Each Lender shall have received the executed legal opinion of Loeb and Loeb, counsel to the Borrower, substantially in the form of Exhibit D. Such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as any Lender may reasonably require. (k) Lien Searches. Each Lender shall have received the results of a recent search by a Person satisfactory to such Lender, of the Uniform Commercial Code, judgement and tax lien filings which may have been filed with respect to personal property of the Borrower, and the results of such search shall be satisfactory to such Lender. (l) Supplier Contract. Each Lender shall have received a certified copy of the Supplier Contract which shall be satisfactory in form and substance to such Lender. 4.2 Conditions to Each Loan. The agreement of each Lender to make any Loan requested to be made by it on any date (including, without limitation, its initial Loan) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Borrower and its Subsidiaries in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (c) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to such Lender, and such Lender shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date thereof that the conditions contained in this subsection have been satisfied. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender hereunder or under any other Loan Document, the Borrower shall and (except in the case of delivery of financial information, reports and notices and subsection 5.10) shall cause each of its Subsidiaries to: 5.1 Financial Statements. Furnish to each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of (i) the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without qualification by Arthur Andersen & Co. or other independent certified public accountants of nationally recognized standing satisfactory to the Required Lenders and (ii) the consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidating statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings and of cash flows of the Borrower and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 5.2 Certificates; Other Information. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 5.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 5.1(a) and (b), a certificate of a Responsible Officer (i) stating that, to the best of such Officer's knowledge, the Borrower and its Subsidiaries during such period have observed or performed all of their respective covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by them, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) setting forth the calculations required to determine compliance with subsections 6.1 and 6.8; (c) within 90 days after the beginning of each fiscal year of the Borrower, a copy of the projections by the Borrower of the balance sheet, income statement and cash flow budget of the Borrower and its Subsidiaries for such fiscal year and the subsequent three fiscal years, such projections to be accompanied by a certificate of the Chief Financial Officer of the Borrower to the effect that such projections have been prepared in good faith on the basis of sound financial planning practice and reasonable assumptions; (d) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to its stockholders, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (e) promptly, a copy of each management letter, if any, prepared by the accountants which audited the financial statements delivered pursuant to subsection 5.1(a); and (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 5.4 Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 6.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 5.5 Maintenance of Property; Insurance. Keep all property useful and necessary in its business in good working order and condition; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to each Lender, upon written request, full information as to the insurance carried. 5.6 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants. 5.7 Notices. Promptly give notice to each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries in which the amount involved is $1,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; and (e) any development or event which could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 5.8 Environmental Laws. (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not be reasonably expected to have a Material Adverse Effect. 5.9 Additional Guarantors. Promptly inform each of the Lenders of the creation or acquisition of each new Domestic Subsidiary after the Closing Date and cause each such new Domestic Subsidiary of the Borrower to execute promptly after creation or acquisition thereof a Supplement in the form attached to the Subsidiaries Guarantee as Exhibit A pursuant to which such new Domestic Subsidiary shall become a party to the Subsidiaries Guarantee as a guarantor thereunder. 5.10 Assets. (a) Own at least 90% of the Total Assets of the Borrower and its Subsidiaries (other than the assets owned by Toyo Microsystems Corporation on the date hereof) at all times and (b) cause at least 90% of the Total Assets of the Borrower to be located in the United States of America at all times. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender hereunder or under any other Loan Document, the Borrower shall not, and (except with respect to subsections 6.1) shall not permit any of its Subsidiaries to, directly or indirectly: 6.1 Financial Condition Covenants. eL Maintenance of Net Worth. Permit Consolidated Net Worth at any time (i) on or prior to February 27, 1995, to be less than $150,000,000, (ii) at any time during the period from and including February 28, 1995 to and including February 27, 1996, to be less than $157,500,000, (iii) at any time during the period from and including February 28, 1996 to and including February 27, 1997, to be less than the greater of (A) $165,000,000 or (B) an amount equal to the actual Consolidated Net Worth at February 28, 1995 plus $7,500,000 or (iv) at any time thereafter, to be less than the greater of (A) $172,500,000 or (B) an amount equal to the actual Consolidated Net Worth at February 28, 1996 plus $7,500,000. (b) Consolidated Net Income. Permit (i) Consolidated Net Income to be less than $7,500,000 for any fiscal year ending after the Closing Date or (ii) a Consolidated Net Loss to occur in three or more consecutive fiscal quarters during any period of four consecutive fiscal quarters ending after the Closing Date. (c) Maintenance of Quick Asset Ratio. Permit the ratio of Consolidated Quick Assets to Consolidated Current Liabilities to be less than 1.25 to 1.00 at any time. (d) Ratio of Total Unsubordinated Liabilities to Consolidated Tangible Net Worth. Permit the ratio of Consolidated Total Unsubordinated Liabilities to Consolidated Tangible Net Worth at any time to be greater than 1.25 to 1.00. (e) Ratio of Consolidated Funded Debt to Consolidated EBITDA. Permit the ratio of Consolidated Funded Debt at any time to Consolidated EBITDA for the most recently completed period of four consecutive fiscal quarters then ended to be greater than 1.75 to 1.00. (f) Maintenance of Inventory Turnover. Permit the Inventory Turnover Ratio to be less than 3.50 to 1.00 at any time. 6.2 Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower under this Agreement; (b) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary, provided that the maximum amount of any such Indebtedness of the Foreign Subsidiaries to the Borrower shall not exceed $1,000,000 in the aggregate at any time outstanding; (c) Indebtedness of the Borrower and any of its Subsidiaries incurred to finance the acquisition of fixed or capital assets to the extent permitted under subsection 6.8 (whether pursuant to a loan, a Financing Lease or otherwise) in an aggregate principal amount not exceeding in the aggregate $3,000,000 at any time outstanding; (d) Subordinated Debt of the Borrower or any of its Subsidiaries; (e) Indebtedness outstanding on the date hereof and listed on Schedule 6.2(e); and (f) Indebtedness of a corporation which becomes a Subsidiary after the date hereof, provided that (i) such indebtedness existed at the time such corporation became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such corporation by the Borrower no Default or Event of Default shall have occurred and be continuing or would result therefrom. 6.3 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or such Subsidiary; (f) Liens in existence on the date hereof listed on Schedule 6.3(f), provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Borrower and its Subsidiaries permitted by subsection 6.2(c) incurred to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 100% of the original purchase price of such property at the time it was acquired; and (h) Liens on the property or assets of a corporation which becomes a Subsidiary after the date hereof securing Indebtedness permitted by subsection 6.2(f), provided that (i) such Liens existed at the time such corporation became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is limited to the property and assets subject to such Lien at the time such corporation becomes a Subsidiary and is not spread to cover any property or assets of such corporation after the time such corporation becomes a Subsidiary (including, without limitation, pursuant to after-acquired property or similar clause) and (iii) the amount of Indebtedness secured thereby is not increased. 6.4 Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any Guarantee Obligation except: (a) Guarantee Obligations in existence on the date hereof and listed on Schedule 6.4(a); (b) Guarantee Obligations of the Borrower and its Subsidiaries created after the date hereof in an aggregate amount not to exceed $250,000 in the aggregate at any one time outstanding; (c) Guarantee Obligations of the Borrower in respect of operating leases entered into by any Subsidiary in the ordinary course of business; and (d) the Guarantees. 6.5 Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or with or into any one or more wholly owned Domestic Subsidiaries of the Borrower (provided that the wholly owned Domestic Subsidiary or Domestic Subsidiaries shall be the continuing or surviving corporation); (b) any wholly owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any wholly owned Domestic Subsidiary of the Borrower; and (c) as permitted under subsection 6.9. 6.6 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person other than the Borrower or any wholly owned Subsidiary, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) the sale or discount without recourse of accounts receivable in the ordinary course of business in connection with the compromise or collection thereof; (d) the sale of equipment to AT&T Corp. pursuant to the terms of the Supplier Contract as in effect on the date hereof; (e) the sale of equipment with an aggregate net book value not exceeding $500,000 in any fiscal year; and (f) as permitted by subsection 6.5(b). 6.7 Limitation on Dividends. Declare or pay any dividend (other than dividends payable solely in common stock of the Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any Domestic Subsidiary which is not wholly owned by the Borrower or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary, except for (i) repurchases of its common stock in an amount not to exceed $5,000,000 in the aggregate after the Closing Date, (ii) dividends in respect of the Capital Stock of any Domestic Subsidiary which is not wholly owned by the Borrower which is paid on a ratable basis to all holders of such Capital Stock and (iii) dividends and/or purchases of common stock of the Borrower in respect of employee benefit plans of the Borrower as in effect on the date hereof not exceeding $500,000 in the aggregate in any year. 6.8 Limitation on Capital Expenditures. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any expenditure in respect of the purchase or other acquisition of fixed or capital assets (excluding any such asset acquired in connection with normal replacement and maintenance programs properly charged to current operations and any such expenditure resulting from a Permitted Acquisition) except for expenditures in the ordinary course of business not exceeding, in the aggregate for the Borrower and its Subsidiaries during any of the fiscal years of the Borrower set forth below, the amount set forth opposite such fiscal year below: Fiscal Year Amount 1995 $8,000,000 1996 $35,000,000 1997 $30,000,000 1998 $30,000,000 ; provided that Capital Expenditures with respect to the 1995 Fiscal Year shall be calculated with respect to the period beginning on the Closing Date and ending on February 28, 1995. 6.9 Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person ("Investments"), except : (a) extensions of trade credit in the ordinary course of business; (b) Permitted Investments; (c) Investments by the Borrower in its Subsidiaries as of the Closing Date listed in Schedule 3.15 hereto and additional equity Investments (including, without limitation, by virtue of a transaction permitted under subsection 6.5) in Subsidiaries, provided that the aggregate amount of such Investments in Foreign Subsidiaries shall not exceed $1,000,000 in the aggregate subsequent to the Closing Date; and (d) Permitted Acquisitions by the Borrower. 6.10 Limitation on Optional Payments and Modifications of Debt Instruments. (a) Make any optional payment or prepayment on or redemption or purchase of any Subordinated Debt, (b) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any such Subordinated Debt (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon), or (c) amend the subordination provisions of the Subordinated Debt. 6.11 Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of the Borrower's or such Subsidiary's business and (c) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate, except for contracts with directors and executive officers of the Borrower and its Subsidiaries entered into in the ordinary course of business with respect to services rendered to the Borrower and its Subsidiaries. 6.12 Limitation on Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary. 6.13 Limitation on Changes in Fiscal Year; Accounting Changes. (a) Permit the fiscal year of the Borrower to end on a day other than the last day of February or (b) change any accounting treatments or reporting practices used in connection with the preparation of the consolidated financial statements of the Borrower and its Subsidiaries as of the date hereof except as required or permitted by GAAP. 6.14 Limitation on Negative Pledge Clauses. Enter into with any Person any agreement, other than (a) this Agreement or (b) any industrial revenue bonds, purchase money mortgages or Financing Leases permitted by this Agreement (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby), which prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. 6.15 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the date of this Agreement and those businesses acquired pursuant to Permitted Acquisitions. 6.16 Limitation on Interest Rate Protection Agreements. Enter into any Interest Rate Protection Agreements other than Interest Rate Protection Agreements with respect to the Loans, provided that (i) the aggregate notional amount of all such Interest Rate Protection Agreements shall not exceed the Commitments and (ii) such Interest Rate Protection Agreements shall be unsecured. SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan when due in accordance with the terms thereof or hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Borrower or any other Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower or any other Loan Party shall default in the observance or performance of any agreement contained in Section 6; or (d) The Borrower or any other Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and in the case of any such default under Section 5 (other than subsection 5.1, 5.2(a), 5.2(b), 5.4, 5.5, 5.6 or 5.7), such default shall continue unremedied for a period of 20 days; or (e) The Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest of any Indebtedness (other than the Loans) or in the payment of any Guarantee Obligation, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created, if the aggregate amount of the Indebtedness and/or Guarantee Obligations in respect of which such default or defaults shall have occurred is at least $100,000; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (f) (i) The Borrower or any of its Material Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Material Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Material Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 30 days; or (iii) there shall be commenced against the Borrower or any of its Material Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 30 days from the entry thereof; or (iv) the Borrower or any of its Material Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Material Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $250,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or (i) Any Guarantee shall cease, for any reason, to be in full force and effect with respect to any Material Subsidiary or any Guarantor shall so assert; or (j) (i) Any Person or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (A) shall have acquired beneficial ownership of 20% or more of any outstanding class of Capital Stock having ordinary voting power in the election of directors of the Borrower or (B) shall obtain the power (whether or not exercised) to elect a majority of the Borrower's directors or (ii) the Board of Directors of the Borrower shall not consist of a majority of Continuing Directors; "Continuing Directors" shall mean the directors of the Borrower on the Closing Date and each other director, if such other director's nomination for election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) the Required Lenders may, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) the Required Lenders may, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 8. MISCELLANEOUS 8.1 Amendments and Waivers. Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. The Required Lenders may from time to time (a) enter into with the Borrower written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) reduce the amount or extend the scheduled date of maturity of any Loan or of any installment thereof, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitments, in each case without the consent of each Lender affected thereby, or (ii) amend, modify or waive any provision of this subsection or reduce the percentage specified in the definition of Required Lenders, or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents or the release of any Guarantor under the Subsidiaries Guarantee, in each case without the written consent of all the Lenders. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders and all future holders of the Loans. In the case of any waiver, the Borrower and the Lenders shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 8.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or five days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: Standard Microsystems Corporation 80 Arkay Drive Hauppauge, New York 11788 Attention: Anthony D'Agostino Telecopy: (516) 273-5550 The Lenders: Chemical Bank Middle Market Group 7600 Jericho Turnpike Woodbury, New York 11797 Attention: Account Officer Standard Microsystems Corporation Telecopy: (516) 364-3307 National Westminster Bank N.A. 100 Jericho Quadrangle Jericho, New York 11753 Attention: Christine Dekajlo Standard Microsystems Corporation Telecopy: (516) 349-2098 provided that any notice, request or demand to or upon the Lenders pursuant to subsection 2.2, 2.4, 2.7 or 2.11 shall not be effective until received. 8.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 8.4 Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 8.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse Chemical and NatWest for all their out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to Chemical and NatWest, (b) to pay or reimburse each Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the fees and disbursements of counsel to each Lender, (c) to pay, indemnify, and hold each Lender harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided, that the Borrower shall have no obligation hereunder to any Lender with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of any such Lender or (ii) legal proceedings commenced against any such Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such. The agreements in this subsection shall survive repayment of the Loans and all other amounts payable hereunder. 8.6 Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in subsection 8.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of subsections 2.12, 2.13 and 2.14 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided that, in the case of subsection 2.14 such Participant shall have complied with the requirements of said subsection and, provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such subsection than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Borrower (which shall not be unreasonably withheld), to an additional bank or financial institution ("an Assignee") all or any part of its rights and obligations under this Agreement and the other Loan Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit E, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower), provided that, (i) notwithstanding the foregoing, the consent of the Borrower shall not be required in the case of any such assignment to an additional bank or financial institution by Chemical or NatWest unless the sum of the aggregate principal amount of the Loans and the aggregate amount of the unused Commitment being assigned is greater than 49% of the Commitment of Chemical or NatWest, as the case may be, at such time (provided that Chemical or NatWest, as the case may be, shall provide ten days notice to the Borrower prior to making any assignment pursuant to this clause (i)) and (ii) in the case of any such assignment to an additional bank or financial institution, the sum of the aggregate principal amount of the Loans and the aggregate amount of the unused Commitment being assigned and, if such assignment is of less than all of the rights and obligations of the assigning Lender, the sum of the aggregate principal amount of the Loans and the aggregate amount of the unused Commitment remaining with the assigning Lender are each not less than $10,000,000. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (e) of this subsection, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the assigning Lender, new Notes shall not be required to be executed and delivered by the Borrower, for any assignment which occurs at any time when any of the events described in Section 7(a) or 7(f) shall have occurred and be continuing. (d) The Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee, subject to the provisions of subsection 8.15, any and all financial information in such Lender's possession concerning the Borrower and its Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Agreement. (e) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this subsection concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. 8.7 Adjustments; Set-off. (a) If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 7(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 8.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8.9 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Borrower and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 8.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8.12 Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in subsection 8.2 or at such other address of which each Lender shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 8.13 Acknowledgements. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) no Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 8.14 WAIVERS OF JURY TRIAL. THE BORROWER AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 8.15 Confidentiality. Each Lender agrees to keep confidential all non-public information provided to it by the Borrower pursuant to this Agreement that is designated by the Borrower in writing as confidential; provided that nothing herein shall prevent any Lender from disclosing any such information (i) to any other Lender, (ii) to any Transferee which receives such information and which agrees to keep such information confidential on substantially the same terms as those set forth in this subsection 8.15, (iii) to its employees, directors, agents, attorneys, accountants and other professional advisors, (iv) upon the request or demand of any Governmental Authority having jurisdiction over such Lender, (v) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (vi) which has been publicly disclosed other than in breach of this Agreement or (vii) in connection with the exercise of any remedy hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. STANDARD MICROSYSTEMS CORPORATION By: Title: CHEMICAL BANK By: Title: NATIONAL WESTMINSTER BANK N.A. By: Title: [EXECUTION COPY] STANDARD MICROSYSTEMS CORPORATION, ______________________________________________________ $80,000,000 CREDIT AGREEMENT Dated as of January 13, 1995 ______________________________________________________ CHEMICAL BANK NATIONAL WESTMINSTER BANK N.A. as Lenders TABLE OF CONTENTS Page SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Defined Terms. . . . . . . . . . . . . . . . . . . . . . 1 1.2 Other Definitional Provisions. . . . . . . . . . . . . . 12 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS . . . . . . . . . . . . . 12 2.1 Commitments. . . . . . . . . . . . . . . . . . . . . . . 12 2.2 Procedure for Borrowing. . . . . . . . . . . . . . . . . 13 2.4 Termination or Reduction of Commitments. . . . . . . . . 13 2.5 Repayment of Loans; Evidence of Debt . . . . . . . . . . 13 2.6 Optional Prepayments . . . . . . . . . . . . . . . . . . 14 2.7 Conversion and Continuation Options. . . . . . . . . . . 14 2.8 Interest Rates and Payment Dates . . . . . . . . . . . . 15 2.9 Computation of Interest and Fees . . . . . . . . . . . . 15 2.10 Inability to Determine Interest Rate. . . . . . . . . . 15 2.11 Pro Rata Treatment and Payments . . . . . . . . . . . . 16 2.12 Illegality. . . . . . . . . . . . . . . . . . . . . . . 16 2.13 Requirements of Law . . . . . . . . . . . . . . . . . . 17 2.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.15 Indemnity . . . . . . . . . . . . . . . . . . . . . . . 19 2.16 Change of Lending Office. . . . . . . . . . . . . . . . 19 SECTION 3. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 19 3.1 Financial Condition. . . . . . . . . . . . . . . . . . . 19 3.2 No Change. . . . . . . . . . . . . . . . . . . . . . . . 20 3.3 Corporate Existence; Compliance with Law . . . . . . . . 20 3.4 Corporate Power; Authorization; Enforceable Obligations. . . . . . . . . . . . . . . . . . . . . . 21 3.5 No Legal Bar . . . . . . . . . . . . . . . . . . . . . . 21 3.6 No Material Litigation . . . . . . . . . . . . . . . . . 21 3.7 No Default . . . . . . . . . . . . . . . . . . . . . . . 21 3.8 Ownership of Property; Liens . . . . . . . . . . . . . . 21 3.9 Intellectual Property. . . . . . . . . . . . . . . . . . 22 3.10 No Burdensome Restrictions. . . . . . . . . . . . . . . 22 3.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.12 Federal Regulations . . . . . . . . . . . . . . . . . . 22 3.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.14 Investment Company Act; Other Regulations . . . . . . . 23 3.15 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 23 3.16 Purpose of Loans. . . . . . . . . . . . . . . . . . . . 23 3.17 Environmental Matters . . . . . . . . . . . . . . . . . 23 SECTION 4. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . 24 4.1 Conditions to Initial Loans. . . . . . . . . . . . . . . 24 4.2 Conditions to Each Loan. . . . . . . . . . . . . . . . . 26 SECTION 5. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . 27 5.1 Financial Statements . . . . . . . . . . . . . . . . . . 27 5.2 Certificates; Other Information. . . . . . . . . . . . . 27 5.3 Payment of Obligations . . . . . . . . . . . . . . . . . 28 5.4 Conduct of Business and Maintenance of Existence. . . . . . . . . . . . . . . . . . . . . . . 28 5.5 Maintenance of Property; Insurance . . . . . . . . . . . 29 5.6 Inspection of Property; Books and Records; Discussions. . . . . . . . . . . . . . . . . . . . . . 29 5.7 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 29 5.8 Environmental Laws . . . . . . . . . . . . . . . . . . . 30 5.9 Additional Guarantors. . . . . . . . . . . . . . . . . . 30 5.10 Assets. . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 6. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . 30 6.1 Financial Condition Covenants. . . . . . . . . . . . . . 31 6.2 Limitation on Indebtedness . . . . . . . . . . . . . . . 31 6.3 Limitation on Liens. . . . . . . . . . . . . . . . . . . 32 6.4 Limitation on Guarantee Obligations. . . . . . . . . . . 33 6.5 Limitation on Fundamental Changes. . . . . . . . . . . . 33 6.6 Limitation on Sale of Assets . . . . . . . . . . . . . . 34 6.7 Limitation on Dividends. . . . . . . . . . . . . . . . . 34 6.8 Limitation on Capital Expenditures . . . . . . . . . . . 34 6.9 Limitation on Investments, Loans and Advances. . . . . . 35 6.10 Limitation on Optional Payments and Modifications of Debt Instruments. . . . . . . . . . . 35 6.11 Limitation on Transactions with Affiliates. . . . . . . 35 6.12 Limitation on Sales and Leasebacks. . . . . . . . . . . 36 6.13 Limitation on Changes in Fiscal Year; Accounting Changes . . . . . . . . . . . . . . . . . . 36 6.14 Limitation on Negative Pledge Clauses . . . . . . . . . 36 6.15 Limitation on Lines of Business . . . . . . . . . . . . 36 6.16 Limitation on Interest Rate Protection Agreements . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 7. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . 36 SECTION 8. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 39 8.1 Amendments and Waivers . . . . . . . . . . . . . . . . . 39 8.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 40 8.3 No Waiver; Cumulative Remedies . . . . . . . . . . . . . 40 8.4 Survival of Representations and Warranties . . . . . . . 40 8.5 Payment of Expenses and Taxes. . . . . . . . . . . . . . 41 8.6 Successors and Assigns; Participations and Assignments. . . . . . . . . . . . . . . . . . . . . . 41 8.7 Adjustments; Set-off . . . . . . . . . . . . . . . . . . 43 8.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . 44 8.9 Severability . . . . . . . . . . . . . . . . . . . . . . 44 8.10 Integration . . . . . . . . . . . . . . . . . . . . . . 44 8.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . 44 8.12 Submission To Jurisdiction; Waivers . . . . . . . . . . 44 8.13 Acknowledgements. . . . . . . . . . . . . . . . . . . . 45 8.14 WAIVERS OF JURY TRIAL . . . . . . . . . . . . . . . . . 45 8.15 Confidentiality . . . . . . . . . . . . . . . . . . . . 45 SCHEDULES Schedule 1.1(a) Commitments Schedule 3.1(a) Off-Balance Sheet Obligations Schedule 3.6 Litigation Schedule 3.15 Subsidiaries Schedule 3.17 Environmental Matters Schedule 6.2(e) Existing Indebtedness Schedule 6.3(f) Existing Liens Schedule 6.4(a) Existing Guarantee Obligations EXHIBITS Exhibit A Form of Subsidiaries Guarantee Exhibit B Form of Note Exhibit C Form of Closing Certificate Exhibit D Form of Opinion of Counsel to Borrower Exhibit E Form of Assignment and Acceptance GUARANTEE, dated as of January 13, 1995, made by each of the corporations that are signatories hereto (collectively, the "Guarantors"; individually, a "Guarantor"), in favor of the several banks and other financial institutions (collectively, the "Lenders"; individually, a "Lender") parties to the Credit Agreement, dated as of January 13, 1995 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Standard Microsystems Corporation, a Delaware corporation (the "Borrower"), and the Lenders. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, the Borrower owns directly or indirectly all of the issued and outstanding stock of each Guarantor; WHEREAS, the proceeds of the Loans will be used in part to enable the Borrower to make valuable transfers to each of the Guarantors in connection with the operation of its business; WHEREAS, the Borrower and the Guarantors are engaged in related businesses, and each Guarantor will derive substantial direct and indirect benefit from the making of the Loans; and WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective Loans to the Borrower under the Credit Agreement that the Guarantors shall have executed and delivered this Guarantee to each Lender. NOW, THEREFORE, in consideration of the premises and to induce the Lenders to enter into the Credit Agreement and to make their respective Loans to the Borrower under the Credit Agreement, each Guarantor hereby agree with the Lenders, as follows: I.. Defined Terms. A. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. [For purposes of this Guarantee, the term "Lender" shall include any Affiliate of any Lender which has entered into an Interest Rate Protection Agreement with the Borrower.] B. As used herein, "Obligations" means the collective reference to the unpaid principal of and interest on the Loans and all other obligations and liabilities of the Borrower to the Lenders (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, any Notes, the other Loan Documents [, any Interest Rate Protection Agreement entered into by the Borrower with any Lender] or any other document made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Lenders that are required to be paid by the Borrower or any Guarantor pursuant to the terms of the Credit Agreement or this Guarantee or any other Loan Document). C. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and section and paragraph references are to this Guarantee unless otherwise specified. D. The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. II.. Guarantee A. Subject to the provisions of Section 2(b), each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. B. Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the maximum aggregate amount equal to the largest amount that would not render its obligations hereunder and thereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law. C. Each Guarantor further agrees to pay any and all expenses (including, without limitation, all fees and disbursements of counsel) which may be paid or incurred by any Lender in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, such Guarantor under this Guarantee. This Guarantee shall remain in full force and effect until the Obligations are paid in full and the Commitments are terminated, notwithstanding that from time to time prior thereto the Borrower may be free from any Obligations. D. Each Guarantor agrees that the Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing this Guarantee or affecting the rights and remedies of or any Lender hereunder. E. No payment or payments made by the Borrower, any of the Guarantors, any other guarantor or any other Person or received or collected by or any Lender from the Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments made by such Guarantor in respect of the Obligations or payments received or collected from such Guarantor in respect of the Obligations, remain liable for the Obligations up to the maximum liability of such Guarantor hereunder until the Obligations are paid in full and the Commitments are terminated. F. Each Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to any Lender on account of its liability hereunder, it will notify the Lender in writing that such payment is made under this Guarantee for such purpose. III.. Right of Contribution. Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder who has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 5 hereof. The provisions of this Section shall in no respect limit the obligations and liabilities of any Guarantor to the Lenders, and each Guarantor shall remain liable to the Lenders for the full amount guaranteed by such Guarantor hereunder. IV.. Right of Set-off. Upon the occurrence of any Event of Default, each Guarantor hereby irrevocably authorizes each Lender at any time and from time to time without notice to such Guarantor or any other Guarantor, any such notice being expressly waived by each Guarantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender to or for the credit or the account of such Guarantor, or any part thereof in such amounts as such Lender may elect, against and on account of the obligations and liabilities of such Guarantor to such Lender hereunder and claims of every nature and description of such Lender against such Guarantor, in any currency, whether arising hereunder, under the Credit Agreement, any Note, any other Loan Document [, any Interest Rate Protection Agreement entered into by the Borrower with any Lender] or otherwise, as such Lender may elect, whether or not or any Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. Each Lender shall notify such Guarantor promptly of any such set-off and the application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. V.. No Subrogation. Notwithstanding any payment or payments made by any of the Guarantors hereunder or any set-off or application of funds of any of the Guarantors by any Lender, no Guarantor shall be entitled to be subrogated to any of the rights of any Lender against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by any Lender for the payment of the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to Lenders by the Borrower on account of the Obligations are paid in full and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Lenders exact form received by such Guarantor (duly indorsed by such Guarantor to the Lenders, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Lenders may determine. VI.. Amendments, etc. with respect to the Obligations; Waiver of Rights. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Obligations made by the Required Lenders or any Lender may be rescinded by the Required Lenders or such Lender and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Required Lenders or any Lender, and the Credit Agreement, any Notes, any other Loan Document [, any Interest Rate Protection Agreement entered into by the Borrower with any Lender] and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Required Lenders or such Lender may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. No Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against any of the Guarantors, the Required Lenders may, but shall be under no obligation to, make a similar demand on the Borrower or any other Guarantor or guarantor, and any failure by the Required Lenders to make any such demand or to collect any payments from the Borrower or any such other Guarantor or guarantor or any release of the Borrower or such other Guarantor or guarantor shall not relieve any of the Guarantors in respect of which a demand or collection is not made or any of the Guarantors not so released of their several obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of any Lender against any of the Guarantors. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. VII.. Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by any Lender upon this Guarantee or acceptance of this Guarantee, the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Obligations. Each Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of the Credit Agreement, any Note, any other Loan Document, [, any Interest Rate Protection Agreement entered into by the Borrower with any Lender,] any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by any Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower against any Lender or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of such Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Required Lenders or any Lender may, but shall be under no obligation to, pursue such rights and remedies as they or it may have against the Borrower or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Required Lenders or such Lender to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve such Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Required Lenders or such Lender against such Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of each Guarantor under this Guarantee shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Obligations. VIII.. Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. IX.. Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to each Lender without set-off or counterclaim in U.S. Dollars at the office of such Lender [set forth in subsection 8.2 of the Credit Agreement]. X.. Representations and Warranties Each Guarantor hereby represents and warrants that: A. it is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged; B. it has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guarantee, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Guarantee; C. this Guarantee constitutes a legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles and an implied covenant of good faith and fair dealing; D. the execution, delivery and performance of this Guarantee will not violate any provision of any Requirement of Law or Contractual Obligation of such Guarantor and will not result in or require the creation or imposition of any Lien on any of the properties or revenues of such Guarantor pursuant to any Requirement of Law or Contractual Obligation of the Guarantor; E. no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of such Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guarantee; F. no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of such Guarantor, threatened by or against such Guarantor or against any of its properties or revenues 1. with respect to this Guarantee or any of the transactions contemplated hereby or 2. which could have a material adverse effect on the business, operations, property or financial or other condition of such Guarantor; G. to the extent that the representations and warranties set forth in subsection 3.8 through and including subsection 3.17 of the Credit Agreement apply to such Guarantor, each such representation and warranty is true and correct; and H. if such Guarantor is not incorporated under the laws of the United States of America or a state thereof, (1) such Guarantor is not subject to any exchange controls which would affect its ability to make payments under this Guarantee, (2) any payments made by such Guarantor under this Guarantee will not be subject to any withholding tax or other similar obligations of any Governmental Authority outside the United States of America and (3) the obligations of such Guarantor under this Guarantee will be pari passu with all other unsecured obligations of such Guarantor. Each Guarantor agrees that the foregoing representations and warranties shall be deemed to have been made by such Guarantor on the date of each borrowing by the Borrower under the Credit Agreement on and as of such date of borrowing as though made hereunder on and as of such date. XI.. Covenants. Each Guarantor hereby covenants and agrees with each Lender that, from and after the date of this Guarantee until the Obligations are paid in full and the Commitments are terminated, such Guarantor will comply with provisions of Sections 5 and 6 of the Credit Agreement to the extent such provisions apply to such Guarantor. [To be expanded with respect to foreign subsidiaries.] XII.. Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or five days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows: A. if to any Lender, at its address or transmission number for notices provided in subsection 8.2 of the Credit Agreement; and B. if to any Guarantor, at its address or transmission number for notices set forth under its signature below. Each Lender and each Guarantor may change its address and transmission numbers for notices by notice in the manner provided in this Section. XIII.. Counterparts. This Guarantee may be executed by one or more of the Guarantors on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the counterparts of this Guarantee signed by all the Guarantors shall be delivered to each Lender. XIV.. Severability. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. XV.. Integration. This Guarantee represents the agreement of each Guarantor with respect to the subject matter hereof and there are no promises or representations by any Lender relative to the subject matter hereof not reflected herein. XVI.. Amendments in Writing; No Waiver; Cumulative Remedies. A. None of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except by a written instrument executed by each Guarantor provided that any provision of this Guarantee may be waived by the Lenders in a letter or agreement by facsimile transmission. B. No Lender shall by any act (except by a written instrument pursuant to paragraph 16(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which such Lender would otherwise have on any future occasion. C. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. XVII.. Section Headings. The Section headings used in this Guarantee are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. XVIII.. Successors and Assigns. This Guarantee shall be binding upon the successors and assigns of each Guarantor and shall inure to the benefit of the Lenders and their successors and assigns. XIX.. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. XX.. Submission To Jurisdiction; Waivers. Each Guarantor hereby irrevocably and unconditionally: A. submits for itself and its property in any legal action or proceeding relating to this Guarantee and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; B. consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; C. agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Guarantor at its address set forth under its signature below or at such other address of which the Lenders shall have been notified pursuant Section 12; D. agrees that nothing herein shall affect the right to effect service or process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and E. waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, consequential or punitive damages. XXI.. WAIVERS OF JURY TRIAL. EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY AND FOR ANY COUNTERCLAIM THEREIN. XXII.. Addition of Guarantors. Subsection 5.10(c) of the Credit Agreement requires that any Subsidiary (other than a Foreign Subsidiary) of the Borrower created or acquired after the Closing Date become a Guarantor hereunder by executing and delivering a Supplement to this Guarantee in the form attached hereto as Exhibit A. From and after the date any such Subsidiary executes and delivers a Supplement to this Guarantee in the form attached hereto as Exhibit A to each Lender, such Subsidiary shall be deemed to be a Guarantor for all purposes under this Guarantee. IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. STANDARD MICROSYSTEMS CORPORATION (ASIA) By Title Address for Notices: Fax: SMC FRANCE, INC. By Title Address for Notices: Fax: SMC AUSTRALIA, INC. By Title Address for Notices: Fax: SMC INTERNATIONAL, INC. By Title Address for Notices: Fax: SMC MASSACHUSETTS INC. By Title Address for Notices: Fax: SMC SALES, INC. By Title Address for Notices: Fax: EXHIBIT A TO SUBSIDIARIES GUARANTEE [FORM OF ADDITIONAL SUBSIDIARIES SUPPLEMENT] SUPPLEMENT, dated _______________ to the Subsidiaries Guarantee, dated as of January __, 1995 (as amended, supplemented or otherwise modified, the "Subsidiaries Guarantee"), made by certain subsidiaries of Standard Microsystems Corporation, a Delaware corporation (the "Borrower"), from time to time parties thereto (collectively, the "Guarantors"). W I T N E S S E T H : WHEREAS, the Subsidiaries Guarantee provides that any Subsidiary of the Borrower, although not a Guarantor thereunder at the time of the initial execution thereof, may become a Guarantor under the Subsidiaries Guarantee upon the delivery to the Lenders of a supplement in substantially the form of this Supplement; and WHEREAS, the undersigned was not a Subsidiary on the Closing Date and, therefore, was not a party to the Subsidiaries Guarantee but is required by the Credit Agreement and now desires to become a Guarantor thereunder; NOW, THEREFORE, the undersigned hereby agrees as follows: The undersigned agrees to be bound by all of the provisions of the Subsidiaries Guarantee applicable to a Guarantor thereunder and agrees that it shall, on the date this Supplement is delivered to the Lenders, become a Guarantor, for all purposes of the Subsidiaries Guarantee to the same extent as if originally a party thereto with the representations and warranties contained therein being deemed to be made by the undersigned as of the date hereof. Terms defined in the Subsidiaries Guarantee shall have their defined meanings when used herein. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written. [NAME OF SUBSIDIARY GUARANTOR] By Title Address for Notices: Fax: EX-13 8 EXHIBIT 13 Standard Microsystems Corporation and Subsidiaries SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF FEBRUARY 28 OR 29, AND FOR THE YEARS THEN ENDED 1995 1994 1993 1992 1991 OPERATING RESULTS Revenues $ 378,671 $ 322,575 $ 250,495 $ 132,744 $ 87,017 Cost of goods sold and operating expenses 338,049 287,139 219,712 130,679 87,186 Income (loss) from operations 40,622 35,436 30,783 2,065 (169) Other income (expense), net 670 (1,964) (2,865) (134) 2,266 Income before minority interest, provision for income taxes and extraordinary item 41,292 33,472 27,918 1,931 2,097 Minority interest in net income (loss) of subsidiary 185 (209) (430) (425) (266) Income before provision for income taxes and extraordinary item 41,107 33,681 28,348 2,356 2,363 Provision for income taxes 15,940 13,770 12,510 1,761 1,175 Income before extraordinary item 25,167 19,911 15,838 595 1,188 Extraordinary item (944) - - - - Net income $ 24,223 $ 19,911 $ 15,838 $ 595 $ 1,188 Weighted average common and common equivalent shares 13,305 13,090 12,469 11,604 11,560 PER SHARE DATA Income before extraordinary item $ 1.89 $ 1.52 $ 1.27 $ .05 $ .10 Extraordinary item (0.07) - - - - Net income $ 1.82 $ 1.52 $ 1.27 $ .05 .10 Shareholders' equity at year end $ 13.16 $ 11.18 $ 9.50 $ 7.70 $ 7.65 Market price at year end 26.50 19.13 18.75 9.13 5.38 BALANCE SHEET DATA Current assets $ 162,776 $ 140,393 $ 111,326 $ 79,718 $ 75,231 Current liabilities 43,421 41,842 40,962 35,085 8,119 Working capital $ 119,355 $ 98,551 $ 70,364 $ 44,633 $ 67,112 Property, plant and equipment, net $ 34,908 $ 30,600 $ 30,775 $ 33,116 $ 34,543 Total assets 228,578 205,833 183,926 154,299 111,654 Long-term debt - 9,190 12,135 18,240 1,783 Minority interest in subsidiary 11,174 10,989 11,198 11,628 12,053 Shareholders' equity 173,983 143,812 119,631 89,346 88,004
Standard Microsystems Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents the Company's Consolidated Statements of Income, as percentages of revenues, for the three years ended February 28, 1995:
FISCAL YEARS ENDED FEBRUARY 28, 1995 1994 1993 Revenues 100.0% 100.0% 100.0% Cost of goods sold 56.6 60.2 59.4 Gross profit 43.4 39.8 40.6 Research and development 7.5 7.4 6.8 Selling, general and administrative 23.8 19.7 19.8 Amortization of intangible assets 1.4 1.7 1.8 Total operating expenses 32.7 28.8 28.4 Income from operations 10.7 11.0 12.2 Other income (expense), net 0.2 (0.6) (1.1) Income before minority interest, income taxes and extraordinary item 10.9 10.4 11.1 Minority interest in net income (loss) of subsidiary 0.1 (0.1) (0.2) Income before taxes and extraordinary item 10.8 10.5 11.3 Provision for income taxes 4.2 4.3 5.0 Income before extraordinary item 6.6 6.2 6.3 Extraordinary item (0.2) - - Net income 6.4% 6.2% 6.3%
REVENUES Revenues increased 17% to $378.7 million in fiscal 1995, from $322.6 million in fiscal 1994, reflecting increased shipments of component products and hubs and LAN switches. Revenues of network interface cards (adapters) declined in fiscal 1995. The decline in adapter revenues included a 16% decline in Ethernet adapter revenue, primarily reflecting a decline in average selling prices. The growth in revenue from hubs and LAN switches reflected increased shipments of the ES/1 LAN Switch, initial shipment of the TigerSwitch as well as increased shipments of wiring hubs. The growth in revenues from component products was driven by the broad acceptance of PC I/O products by major PC manufacturers. For fiscal 1996, growth of component products' revenues is expected to approximate the rate of growth of the PC market. In fiscal 1994, revenues of all product lines increased from the prior year results. The table below provides product line data for the three years ended February 28, 1995:
FISCAL YEARS ENDED FEBRUARY 28, 1995 1994 1993 System products Network interface cards $ 206.1 $ 229.1 $ 206.3 Hubs and LAN switches 55.2 36.1 19.6 261.3 265.2 225.9 Component products 117.4 57.4 24.6 Total revenues $ 378.7 $ 322.6 $ 250.5
System products revenues in the fourth quarter of fiscal 1995 were lower than anticipated and inventory in the distributor channel was above targeted levels, primarily because of lower than anticipated shipments from distributors to their reseller customers. The Company expects that a reduction of inventory in the distributor channel will lead to a decline in networking products' revenues in the first quarter of fiscal 1996 from the first quarter of fiscal 1995. Standard Microsystems Corporation and Subsidiaries For the Company, fiscal 1994 revenues were 29% higher than in fiscal 1993, reflecting 17% growth for system products consisting of 11% growth for adapters and 85% growth for hubs and LAN switches, and 113% growth for component products. As a result of the December 1992 acquisition of Sigma Network Systems, Inc., LAN switches were included in fiscal 1993 revenues for only the final two months of the year. GROSS PROFIT Fiscal 1995 gross profit margins improved to 43.4% from 39.8% in fiscal 1994 and 40.6% in fiscal 1993. The improvement in fiscal 1995 was attributable to increased unit volume of PC I/O devices, allowing for lower production costs and more efficient utilization of manufacturing overhead for the Component Products Division. In addition, the growth of LAN switching revenues, which carry higher gross margins than adapter revenues, led to improved gross margins for the System Products Division. The decline in gross profit margin in fiscal 1994 from fiscal 1993 reflected a 16% decline in average selling prices for Ethernet adapters, that was largely offset by the shift in product mix, in the second half, to a new, lower cost generation of Ethernet adapters. The Company maintains ongoing product cost reduction programs and develops innovative products that have helped maintain and improve gross profit margins to offset price competition that characterizes the Company's business. OPERATING EXPENSES Research and development expenses increased to $28.2 million or 7.5% of revenues in fiscal 1995 from $23.9 million or 7.4% in fiscal 1994 and $17.0 million or 6.8% in fiscal 1993. In fiscal 1996, engineering efforts for networking products will focus on developing high speed Fast Ethernet and ATM technology products and enhancing LAN switch, hub and adapter products. Component products development is directed toward reducing device costs and enhancing the functionality and performance of PC I/O and LAN products. Selling, general and administrative expenses were $90.0 million or 23.8% of revenues in fiscal 1995, compared to $63.5 million or 19.7% in fiscal 1994 and $49.4 million or 19.8% in fiscal 1993. These expenses included spending for advertising, which increased to $23.2 million in fiscal 1995 from $13.6 million in fiscal 1994 and $9.7 million in fiscal 1993. A major portion of the increase in selling, general and administrative expenses in fiscal 1995 reflected a 45% increase in sales and marketing personnel to approximately 300 at the end of fiscal 1995. The Company plans to continue to aggressively expand its sales and marketing force, including customer support, to strengthen all of its channels of distribution for LAN products and component products. OTHER INCOME AND EXPENSE Fiscal 1995 interest expense declined $0.4 million due to lower average borrowings outstanding and the year-end elimination of long-term debt. Interest income increased $0.5 million, primarily reflecting interest income on a tax refund receivable. Other income (expense), net improved $1.7 million reflecting a $1.2 million capital gain resulting from the sale of an investment and reduced financing fees. In fiscal 1994, interest expense declined $0.7 million associated with a decrease in long-term debt to $13.2 million at the end of fiscal 1994, from $19.1 million a year earlier. Interest income declined $0.1 million reflecting the decrease in cash available for investment. EXTRAORDINARY ITEM In January 1995, SMC prepaid $10.8 million of debt, canceling a $35.0 million line of credit and replacing it with an $80.0 million line. As a result, the Company incurred prepayment penalties, the write-off of unamortized financing cost, and other fees, amounting to approximately $1.5 million or $0.9 million after taxes. INCOME TAXES For fiscal 1995, income taxes were provided at an effective rate of 38.8% compared to 40.9% for fiscal 1994 and 44.1% for fiscal 1993. In fiscal 1995, the effective rate included the 35.0% federal tax rate and a 3.7% effective state tax rate. The reduction in the effective tax rate in fiscal 1995 from fiscal 1994 primarily reflected the benefit of an election under section 197 of the Internal Revenue Code, allowing the deductibility of goodwill associated with the October 1991 acquisition of the LAN adapter business of Western Digital Standard Microsystems Corporation and Subsidiaries Corporation and a full year's operation of a foreign sales corporation. These items were partially offset by a reduction in the difference between the federal tax rate and foreign tax rates, among other items. In fiscal 1994, the effective rate included the 35.0% federal tax rate, a 3.7% effective state tax rate and 1.2% representing the difference between the federal tax rate and foreign tax rates, including the effect of non-deductible expenses incurred by the Company's Japanese subsidiary. The remainder represents the net effect of goodwill and income tax credits, among other items. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to $119.4 million at the end of fiscal 1995 from $98.6 million at the end of fiscal 1994. The increase in working capital was primarily from increases in accounts receivable and inventories to support higher revenues offset by a moderate increase in current liabilities and a moderate decrease in cash and cash equivalents. Days of sales outstanding (DSOs) rose to 67 in the fourth quarter of fiscal 1995 from 63 in the year earlier period. This increase reflected a greater percentage of revenues accruing toward the end of the quarter when compared to the year earlier period. Reduction of networking products inventory in the distributor channel is expected to result in a more even distribution of revenues during a quarter and lower DSOs. Annualized inventory turnover declined to 5.1 times for the fourth quarter of fiscal 1995 from 6.5 times for the year earlier period. This decrease reflected lower than planned revenues and a consequent increase in inventory. Cash and cash equivalents decreased by $2.6 million in fiscal 1995 to $29.5 million, primarily reflecting net cash provided by operating activities of $20.1 million and $2.0 million from the issuance of common stock, offset by a net pay- down of long-term debt of $13.2 million and capital expenditures of $13.6 million. Cash and cash equivalents decreased by $3.7 million in fiscal 1994 to $32.1 million primarily reflecting net cash provided by operating activities of $5.2 million, $1.4 million from the issuance of common stock and the release of $3.0 million cash that had been restricted in accordance with a term loan agreement, offset by a net pay-down of long-term debt of $5.9 million and capital expenditures of $8.1 million. In January 1995, the Company negotiated an $80.0 million revolving credit line that replaced a $35.0 million revolving credit agreement. At the end of fiscal 1995, the Company had not drawn upon its credit line. As of February 28, 1995, pursuant to an agreement with AT&T Microelectronics, the Company was committed to purchase approximately $16.0 million of wafer fabrication equipment in fiscal 1996 for a semiconductor plant owned by AT&T in Madrid, Spain. Following the close of fiscal 1995, the Company purchased a minority equity interest in Singapore-based Chartered Semiconductor Pte Ltd. for approximately $14.0 million. An additional $6.0 million will be invested in early fiscal 1997. This arrangement, along with the AT&T agreement, is intended to provide the Company with a portion of its long-term requirements for state-of-the-art integrated circuits, beginning near the end of fiscal 1996. The Company believes that its present working capital position, combined with forecasted cash flow and available borrowing capacity will be sufficient to meet cash requirements for the foreseeable future. It is anticipated that cash flow from operations, supplemented by borrowings under the revolving credit line, will be used to fund capital expenditures in fiscal 1996. GENERAL A number of variables could affect the future operating results of the Company, including global economic conditions, market acceptance of newly introduced products, the availability of certain components and finished products from a limited number of suppliers and numerous competitive factors. High levels of production by PC manufacturers have led to an industry-wide shortage of silicon wafer fabrication capacity. As a result, SMC is currently faced with limited subcontractor fabrication capacity. The Company's difficulty in securing additional capacity could impact revenue and profit growth in fiscal 1996 and beyond. With almost one-half of the Company's revenue derived from outside of the United States, changes in foreign currency exchange rates could affect demand for the Company's products. Because of these and other factors that could affect the Company's operating results, past financial performance is not necessarily indicative of results to be expected in the future. Standard Microsystems Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AS OF FEBRUARY 28, 1995 1994 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 29,478 $ 32,115 Accounts receivable, net of allowance for doubtful accounts of $1,102 and $1,001, respectively 75,826 65,504 Inventories 45,789 34,104 Deferred tax benefits 5,392 4,738 Other current assets 6,291 3,932 TOTAL CURRENT ASSETS 162,776 140,393 PROPERTY, PLANT AND EQUIPMENT: Land 3,832 3,832 Buildings and improvements 26,901 25,810 Machinery and equipment 77,639 66,466 108,372 96,108 Less: accumulated depreciation 73,464 65,508 PROPERTY, PLANT AND EQUIPMENT, NET 34,908 30,600 INTANGIBLE ASSETS 26,479 31,968 DEFERRED TAX BENEFITS 1,795 - OTHER ASSETS 2,620 2,872 $228,578 $ 205,833 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ - $ 4,000 Accounts payable 24,193 19,789 Accrued expenses and other liabilities 15,527 15,447 Income taxes payable 3,701 2,606 TOTAL CURRENT LIABILITIES 43,421 41,842 LONG-TERM DEBT - 9,190 MINORITY INTEREST IN SUBSIDIARY 11,174 10,989 SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value Authorized 1,000,000 shares, none outstanding - - Common stock, $.10 par value Authorized 30,000,000 shares Outstanding 13,222,000 and 12,867,000 shares, respectively 1,322 1,287 Additional paid-in capital 77,319 73,116 Retained earnings 88,616 64,393 Unrealized gain on investment, net of tax 718 - Foreign currency translation adjustment 6,008 5,016 TOTAL SHAREHOLDERS' EQUITY 173,983 143,812 $228,578 $ 205,833
The accompanying notes are an integral part of these consolidated financial statements. Standard Microsystems Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993 Revenues $ 378,671 $ 322,575 $ 250,495 Cost of goods sold 214,269 194,210 148,678 Gross profit 164,402 128,365 101,817 Operating expenses: Research and development 28,286 23,963 17,033 Selling, general and administrative 90,005 63,477 49,414 Amortization of intangible assets 5,489 5,489 4,587 123,780 92,929 71,034 Income from operations 40,622 35,436 30,783 Other income (expense): Interest income 1,453 912 1,020 Interest expense (1,255) (1,649) (2,310) Other income (expense), net 472 (1,227) (1,575) 670 (1,964) (2,865) Income before minority interest, provision for income taxes and extraordinary item 41,292 33,472 27,918 Minority interest in net income (loss) of subsidiary 185 (209) (430) Income before provision for income taxes and extraordinary item 41,107 33,681 28,348 Provision for income taxes 15,940 13,770 12,510 Income before extraordinary item 25,167 19,911 15,838 Extraordinary item Loss on extinguishment of debt, net of applicable income taxes of $600 944 - - Net income $ 24,223 $ 19,911 $ 15,838 Income per common and common equivalent share: Income before extraordinary item $ 1.89 $ 1.52 $ 1.27 Extraordinary item (0.07) - - Net income per common and common equivalent share $ 1.82 $ 1.52 $ 1.27
The accompanying notes are an integral part of these consolidated financial statements. Standard Microsystems Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
FOREIGN ADDITIONAL UNREALIZED CURRENCY COMMON STOCK PAID-IN RETAINED GAIN ON TRANSLATION SHARES AMOUNT CAPITAL EARNINGS INVESTMENT ADJUSTMENT BALANCE AT FEBRUARY 29, 1992 11,600,000 $ 1,160 $ 56,371 $ 28,644 $ - $ 3,171 Shares issued under employee stock purchase plan 47,000 5 579 - - - Exercise of stock options 573,000 57 3,201 - - - Tax effect of employee stock plans - - 1,329 - - - Restricted stock grants to employees, net 21,000 2 49 - - - Stock issued for business acquisition 350,000 35 8,278 - - - Foreign currency translation adjustment - - - - - 912 Net income - - - 15,838 - - BALANCE AT FEBRUARY 28, 1993 12,591,000 1,259 69,807 44,482 - 4,083 Shares issued under employee stock purchase plan 46,000 5 879 - - - Exercise of stock options 194,000 19 1,253 - - - Tax effect of employee stock plans - - 992 - - - Restricted stock grants to employees, net 36,000 4 185 - - - Foreign currency translation adjustment - - - - - 933 Net income - - - 19,911 - - BALANCE AT FEBRUARY 28, 1994 12,867,000 1,287 73,116 64,393 - 5,016 Shares issued under employee stock purchase plan 60,000 6 1,173 - - - Exercise of stock options 245,000 24 1,967 - - - Tax effect of employee stock plans - - 707 - - - Restricted stock grants to employees, net 50,000 5 356 - - - Unrealized gain on investment, net of taxes - - - - 718 - Foreign currency translation adjustment - - - - - 992 Net income - - - 24,223 - - BALANCE AT FEBRUARY 28, 1995 13,222,000 $ 1,322 $ 77,319 $ 88,616 $ 718 $ 6,008
The accompanying notes are an integral part of these consolidated financial statements. Standard Microsystems Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 367,342 $ 293,927 $ 249,870 Cash paid to suppliers and employees (331,406) (276,443) (209,004) Interest received 1,800 1,284 1,052 Interest paid (1,168) (1,699) (2,557) Income taxes paid (16,467) (11,884) (13,235) Net cash provided by operating activities 20,101 5,185 26,126 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,578) (8,119) (4,772) Acquisition of business - - (272) Other 1,266 3,089 230 Net cash used for investing activities (12,312) (5,030) (4,814) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,991 1,403 3,355 Principal payments of long-term debt (14,117) (7,000) (8,000) Net borrowings under line of credit agreement 927 1,055 895 Net cash used for financing activities (11,199) (4,542) (3,750) Effect of foreign exchange rate changes on cash and cash equivalents 773 630 394 Net increase (decrease) in cash and cash equivalents (2,637) (3,757) 17,956 Cash and cash equivalents at beginning of year 32,115 35,872 17,916 Cash and cash equivalents at end of year $ 29,478 $ 32,115 $ 35,872 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 24,223 $ 19,911 $ 15,838 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 14,813 13,799 12,005 Minority interest in net income (loss) of subsidiary 185 (209) (430) Other adjustments, net 756 1,249 849 CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECT OF ACQUISITION OF BUSINESS: Accounts receivable (11,027) (28,265) (559) Inventories (11,608) (5,921) (6,548) Accounts payable, accrued expenses and other liabilities 4,714 2,678 4,911 Other changes, net (1,955) 1,943 60 Net cash provided by operating activities $ 20,101 $ 5,185 $ 26,126 CASH USED FOR ACQUISITION OF BUSINESS AS REFLECTED IN THE CONSOLIDATED STATEMENTS OF CASH FLOWS IS SUMMARIZED AS FOLLOWS: Fair value of non-cash assets acquired, excluding goodwill $ - $ - $ 3,134 Goodwill - - 7,582 Liabilities assumed and created, net of tax benefit - - (2,131) Common stock issued - - (8,313) Cash paid to acquire business $ - $ - $ 272
The accompanying notes are an integral part of these consolidated financial statements. Standard Microsystems Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Standard Microsystems Corporation (SMC) and its subsidiaries (the Company). All significant intercompany transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents consist principally of cash in banks and highly liquid debt instruments purchased with maturities of three months or less. Inventories Inventories are valued at the lower of first-in, first-out cost (material, direct labor and overhead) or market. Software Development Expenses The Company expenses software development costs as incurred. Property, Plant and Equipment Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the buildings (20 to 25 years) and machinery and equipment (3 to 7 years). Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected currently. Investment in Equity Securities Included within Other Assets is an equity investment in a single investee at February 28, 1995 and 1994. During fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115). In accordance with the provisions of SFAS 115, this investment is carried at fair value at February 28, 1995, with a corresponding unrealized gain, net of taxes, reported as a separate component of shareholders' equity. The consolidated balance sheet at February 28, 1994, has not been restated for this accounting change and reflects this investment at cost. During the fourth quarter of fiscal 1995, the Company sold approximately one-half of this equity investment, realizing a pre-tax gain of $1,227,000, which is included within "Other Income (Expense)" on the accompanying Consolidated Statements of Income. Intangible Assets Intangible assets are amortized on a straight-line basis over their respective estimated useful lives, ranging from six to twelve years. Product Warranty The Company's products are generally under warranty against defects in material and workmanship for periods ranging from one year to lifetime. Estimated warranty costs are accrued when the products are sold. Income Taxes Deferred income taxes are provided on temporary differences that arise in the recording of transactions for financial and tax reporting purposes and result in deferred tax assets and liabilities. Deferred tax assets are reduced by an appropriate valuation allowance if it is management's judgment that part of the deferred tax asset will not be realized. Tax credits are accounted for as reductions of the current provision for income taxes in the year in which the related expenditures are incurred. Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of their operations are translated using the average exchange rates during the period. Resulting translation adjustments are recorded as a separate component of shareholders' equity. Net Income per Common and Common Equivalent Share Net income per common and common equivalent share has been computed based on the weighted average number of shares outstanding during the year, including the effect of common equivalent shares if dilutive. The difference between primary and fully diluted earnings per share is immaterial for all periods presented. Reclassifications Certain items shown have been reclassified to conform with the fiscal 1995 presentation. Standard Microsystems Corporation and Subsidiaries 2. BUSINESS ACQUISITIONS In December 1992, the Company issued 350,000 shares of its common stock in exchange for all of the outstanding common and preferred stock of Sigma Network Systems, Inc. The acquisition was valued at approximately $8,700,000, including related costs, and was accounted for as a purchase. The excess of the cost over the fair value of the net assets acquired is being amortized on a straight-line basis over a seven year period. The following unaudited summary presents the Company's pro forma consolidated results of operations for the year ended February 28, 1993, as if this acquisition had occurred at the beginning of the fiscal year. These results do not necessarily represent results which would have occurred had this acquisition taken place on the basis assumed above. (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEAR ENDED FEBRUARY 28, 1993 Revenues $ 253,263 Net income $ 14,004 Net income per share $ 1.12 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands): AS OF FEBRUARY 28, 1995 1994 Revolving credit agreement, bearing interest at prime rate plus 2% $ - $ 5,940 10.68% senior term loan - 5,250 Bank note, bearing interest at prime rate plus 4% - 2,000 - 13,190 Less: current maturities - 4,000 $ - $ 9,190 During the fourth quarter of fiscal 1995, the Company retired all of its bank debt, consisting of a revolving line of credit, a senior term loan and a bank note, and recorded an after-tax extraordinary loss of $944,000 on this early retirement. The extraordinary loss consists of early redemption premiums paid to the debt holders and the write-off of deferred financing costs associated with this debt. Concurrent with this early retirement, the Company arranged a new $80,000,000 unsecured revolving line of credit, which permits the Company to borrow funds on a revolving basis through January 1998. The line of credit bears an annual commitment fee of .25% of the unused portion of the line, and bears interest at rates varying from .625% to 1.0% above the London Interbank Offering Rate (LIBOR). 4. INCOME TAXES The provision for income taxes included in the accompanying consolidated statements of income consists of the following (in thousands): FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993 Current Federal $ 16,242 $ 11,897 $ 11,970 Foreign 345 188 177 State 2,281 1,907 2,209 18,868 13,992 14,356 Deferred (2,928) (222) (1,846) $ 15,940 $ 13,770 $ 12,510 The provision for taxes on income before extraordinary item differs from the amount computed by applying the U.S. Federal statutory tax rate as a result of the following: FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993 Provision for income taxes computed at the statutory rate 35.0% 35.0% 34.0% State taxes 3.7 3.7 5.1 Differences between foreign and U.S. income tax rates, including effect of unused foreign NOL carryforwards - 1.2 3.2 Foreign sales corporation (1.3) (0.5) - Income tax credits (0.1) (0.3) (1.3) Goodwill amortization 0.5 1.9 1.1 Other 1.0 (0.1) 2.0 38.8% 40.9% 44.1% The tax effects of temporary differences that result in deferred tax benefits are as follows (in thousands): AS OF FEBRUARY 28, 1995 1994 Reserves and accruals not deductible for tax purposes $ 3,391 $ 1,258 Inventory valuation 2,151 1,930 Net operating loss carryforward 857 1,028 Depreciation 1,031 335 Other (243) 187 $ 7,187 $ 4,738 Standard Microsystems Corporation and Subsidiaries Realization of tax benefits from NOL carryforwards of the Company's Japanese subsidiary is uncertain, and accordingly is fully reserved. At a current foreign exchange rate, these carry-forwards aggregate approximately $6,500,000 as of February 28, 1995, and will expire between fiscal 1996 and fiscal 2000. Income tax provisions for fiscal 1995, 1994 and 1993 have not been reduced by $707,000, $992,000 and $1,329,000, respectively, of tax benefits related to the Company's stock option plans. These amounts have been credited to additional paid-in capital. The Company has $3,001,000 of New York State tax credit carryforwards of which $1,230,000 and $950,000 expire in fiscal 1996 and 1997, respectively. The remaining $821,000 of credit carryforwards expire at various dates in fiscal 1998 through fiscal 2004. During fiscal 1995, the Company made an election to amortize $3,318,000 of goodwill related to the October 1991 acquisition of the local area networking business of Western Digital Corporation. This election will allow the Company to take a tax deduction for this previously non-deductible goodwill over a fifteen year period. Additionally, the other intangible assets related to this acquisition will now also be amortized over a fifteen year period for tax purposes. Previously, the tax lives of these assets varied from six to twelve years. 5. OTHER BALANCE SHEET DATA (IN THOUSANDS) AS OF FEBRUARY 28, 1995 1994 Inventories: Raw materials $11,547 $ 5,920 Work-in-process 16,239 14,764 Finished goods 18,003 13,420 $45,789 $34,104 Intangible assets: Covenant not to compete $15,100 $15,100 Acquired LAN technologies 13,500 13,500 Excess of acquisition cost over fair value of net assets acquired (goodwill) 15,279 15,279 43,879 43,879 Less: accumulated amortization 17,400 11,911 $26,479 $31,968 Accrued expenses and other liabilities: Salaries and fringe benefits $ 6,502 $ 6,153 Advertising 3,683 3,232 Other 5,342 6,062 $15,527 $15,447 6. MINORITY INTEREST IN SUBSIDIARY Sumitomo Metal Industries, Ltd. of Osaka, Japan (SMI) owns 20% of the issued and outstanding common stock and all of the non-cumulative, non-voting 6% preferred stock of the Company's subsidiary, Toyo Microsystems Corporation (TMC). The Company and SMI have agreed to declare a preferred dividend if TMC should realize net income of at least five times the total amount of preferred dividends which would be payable on all preferred stock then outstanding. The annual preferred dividend would be equal to 6% of the subscription price of 2.16 billion yen, or approximately $1,336,000 at an exchange rate of 97 yen per dollar. In the event that a third party acquires a majority of the outstanding common stock of the Company, SMI has the option to require the Company to purchase SMI's interest in TMC. 7. COMMITMENTS AND CONTINGENCIES Compensation Certain executives are employed under separate agreements terminating in fiscal 1996. These agreements provide, among other things, for base salaries totalling $1,436,000 through fiscal 1996. The Company has employment contracts with certain key employees of its subsidiary, SMC Massachusetts Inc., which provide for base salaries totalling $600,000 per year through fiscal 1996. Incentive payments aggregating up to $830,000 per year are also payable under these contracts through fiscal 1996, subject to achieving certain product development and revenue milestones as defined in the contracts. The Company has also entered into agreements with certain officers providing for severance pay if their employment is terminated following a change in control of the Company. Operating Leases The Company leases certain vehicles, facilities and equipment. Minimum rentals under these leases for each of the next five years are as follows (in thousands): 1996 $1,306 1997 1,310 1998 806 1999 710 2000 695 Total rent expense was $1,013,000, $755,000 and $490,000 in fiscal 1995, 1994 and 1993, respectively. Standard Microsystems Corporation and Subsidiaries Wafer Supply Agreements In September 1994, the Company entered into an agreement with AT&T Microelectronics whereby the Company will purchase approximately $16,000,000 of wafer manufacturing equipment for installation at AT&T facilities. In return, a portion of AT&T's wafer production capacity during the five year period following the installation of the equipment will be reserved for the Company's requirements at favorable pricing. The first production wafers are expected to be delivered by the end of fiscal 1996. In March 1995, the Company entered into an agreement to invest approximately $20,000,000 in Chartered Semiconductor Pte Ltd. (Chartered), a semiconductor manufacturer located in Singapore. Under the terms of the agreement, the Company acquired an equity interest in Chartered of less than 5% and, in return, will be allocated capacity in a new wafer fabrication facility to be constructed by Chartered in Singapore. Approximately $14,000,000 of the Company's investment was made in March 1995, with the remaining $6,000,000 investment scheduled for March 1996. Litigation In September 1991, the Company and Texas Instruments Incorporated (TI) agreed to settle, terminate and dismiss litigation between the two companies. In addition to the settlement agreement, the parties entered into a five year patent cross-licensing agreement covering the manufacturing of certain semiconductor and local area network products, which license provides for payments by the Company over a period ending December 31, 1996. In the ordinary course of business, various lawsuits and claims are filed against the Company. While the outcome of these matters is currently not determinable, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's operations or financial position. 8. BENEFIT AND INCENTIVE PLANS Incentive Savings and Retirement Plan The Company maintains a defined contribution Incentive Savings and Retirement Plan (the Plan) which, pursuant to Section 401(k) of the Internal Revenue Code, permits employees to defer taxation on their pre-tax earnings reduction contributions to the Plan. The Plan permits employees to contribute up to 15% of their earnings, through payroll deductions, based on earnings reduction agreements. The Company's contribution, which is equal to one-half of the employee's contribution up to 6%, is invested in the common stock of the Company and totalled $866,000, $729,000 and $448,000 in fiscal 1995, 1994 and 1993, respectively. The Company has authorized unissued common stock reserved for issuance to the Plan. As of February 28, 1995, 205,000 unissued shares remain in reserve. Since its inception, 637,000 shares of the Company's common stock have been contributed to the Plan. As of February 28, 1995, 610 of the 749 employees who had satisfied the Plan's eligibility requirements to participate were making salary deduction contributions. Stock Option Plans Under the Company's stock option plans, options to purchase common stock may be granted to officers and key employees at prices not less than the market price of the shares at the date of grant. At February 28, 1995, the expiration dates of the outstanding options range from March 30, 1995, to January 31, 2000, and the exercise prices range from $4.13 to $30.00 (average $16.33) per share. The following is a summary of activity under the plans over the past three years:
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993 Shares under option, beginning of year 732,000 602,000 1,101,000 Options granted during the year 402,000 304,000 155,000 Options cancelled or terminated (53,000) (26,000) (131,000) Options exercised: 1995 ($4.13 to $26.00 per share) (214,000) 1994 ($4.13 to $19.38 per share) (148,000) 1993 ($4.13 to $8.75 per share) (523,000) Shares under option, end of year 867,000 732,000 602,000 Options exercisable, end of year 167,000 128,000 105,000 Shares available for future grants, end of year 665,000 290,000 81,000
Standard Microsystems Corporation and Subsidiaries Under the Company's Director Stock Option Plan, non-qualified options to purchase common stock may be granted to directors at prices not less than the market price of the shares at the date of grant. At February 28, 1995, the expiration dates of the outstanding options range from June 30, 1997, to July 7, 1999, and the exercise prices range from $11.75 to $16.00 (average $14.22) per share. The following is a summary of activity under the Director Stock Option Plan over the past three years:
FOR THE YEARS ENDED FEBRUARY 28, 1995 1994 1993 Shares under option, beginning of year 59,000 90,000 125,000 Options granted during the year 15,000 15,000 15,000 Options cancelled or terminated - - - Options exercised: 1995 ($7.13 per share) (31,000) 1994 ($7.13 to $11.75 per share) (46,000) 1993 ($7.13 per share) (50,000) Shares under option, end of year 43,000 59,000 90,000 Options exercisable, end of year 13,000 34,000 75,000 Shares available for future grants, end of year 30,000 45,000 60,000
Restricted Stock Bonus Plan The Company's Restricted Stock Bonus Plan provides for common stock awards to certain officers and key employees. The fair market value of shares awarded to an employee in any year is limited to 20% of the employee's base salary. Such common stock awards are earned in equal installments on the second, third and fourth anniversaries of the award, provided the employee has remained in the Company's employ through such anniversary dates; otherwise the unearned shares are forfeited. The maximum number of shares issuable under the plan is 400,000 of which 136,000, net of cancellations, have been awarded as of February 28, 1995. The market value of these shares at the date of award, net of cancellations, is recorded as compensation expense ratably over four year periods from the respective award dates. This compensation expense was $361,000, $189,000 and $51,000 in fiscal 1995, 1994 and 1993, respectively. Retirement Plans In March 1994, the Company adopted an unfunded Supplemental Executive Retirement Plan to provide senior management with retirement, disability and death benefits. Benefits are based upon average compensation during the three year period prior to retirement. The projected benefit obligation at the end of fiscal 1995 was approximately $4,000,000. Assumptions used in developing the projected benefit obligation at the end of fiscal 1995 are detailed as follows: Weighted-average discount rate 7.25% Weighted-average rate of compensation increase 7.00% Weighted-average expected long-term return on plan assets 7.25% The cost of this plan will be accrued over the remaining years of service of each of the participants, of which $401,000 was accrued in fiscal 1995. The Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing benefits under this plan. During fiscal 1993, the Company adopted an unfunded retirement plan for the non-employee members of its Board of Directors. The plan provides for annual benefit payments equal to the annual retainer in effect at the date of retirement, for a period of years equal to the lesser of the director's years of service or ten years. The cost of this plan is accrued over the directors' estimated remaining years of service, of which $264,000, $270,000 and $139,000 was accrued during fiscal 1995, 1994 and 1993, respectively. Executive Incentives Under arrangements approved by the Company's Board of Directors, certain executives receive incentive compensation based upon certain revenues and earnings of the Company, as defined. $1,506,000 of such compensation was earned during fiscal 1995, of which $260,000 will be issued in common stock pursuant to the Company's Restricted Stock Bonus Plan. $1,700,000 and $2,627,000 of incentive compensation was earned during fiscal 1994 and 1993, respectively. Standard Microsystems Corporation and Subsidiaries 9. STOCK PURCHASE RIGHTS PLAN Under a stock purchase rights plan, shareholders may be entitled to purchase common stock in the Company at a discounted price, in the event of certain efforts to acquire control of the Company. The rights will expire in January 1998, unless previously redeemed by the Company at $.01 per right. 10.CUSTOMER AND GEOGRAPHIC INFORMATION Geographic Information International sales accounted for 46.8%, 44.0% and 43.9% of total revenues during fiscal 1995, 1994 and 1993, respectively. International sales were primarily to customers in Europe, Canada and the Far East. Approximately 94% and 95% of the Company's identifiable assets were located in the United States at February 28, 1995 and 1994, respectively. The remainder were located primarily in the Company's Japanese subsidiary. Major Customers During fiscal 1995, one customer accounted for 10.3% of revenues. In fiscal 1994, one customer accounted for 11.9% of revenues. In fiscal 1993, two customers represented 13.4% and 11.5% of revenues, respectively. Concentrations of Credit Risk The Company is primarily engaged in the design, development and marketing of products utilized in the personal computer networking marketplace. The Company sells a significant amount of its products through distributors and as a result, maintains individually significant receivable balances from its major distributors. The Company performs credit evaluations on a regular basis and generally requires no collateral. Allowances for credit losses are maintained, and actual losses have been within management's expectations. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED MAY 31 AUG. 31 NOV. 30 FEB. 28 FISCAL 1995 Revenues $80,020 $91,964 $104,771 $101,916 Gross profit 35,355 39,978 45,233 43,837 Operating income 9,344 9,770 11,811 9,697 Income before extraordinary item 5,358 5,583 6,821 7,405 Extraordinary item - - - (944) Net income 5,358 5,583 6,821 6,461 Per Share Data Income before extraordinary item $ 0.41 $ 0.42 $ 0.51 $ 0.55 Extraordinary item - - - (0.07) Net income 0.41 0.42 0.51 0.48 Market price High 19.50 19.63 25.25 31.63 Low 14.88 13.38 18.38 21.38 FISCAL 1994 Revenues $68,444 $72,031 $ 88,894 $ 93,206 Gross profit 26,410 28,350 35,928 37,678 Operating income 8,016 7,511 9,593 10,316 Net income 4,392 4,162 5,430 5,927 Per Share Data Net income $ 0.34 $ 0.32 $ 0.41 $ 0.45 Market price High 21.25 20.75 25.13 26.75 Low 12.50 14.50 17.50 17.25
The Company's common stock is traded in the over-the-counter market under the NASDAQ symbol: SMSC. Trading is reported in the NASDAQ National Market List. There were approximately 1,200 holders of record of the Company's common stock at March 29, 1995. The Company has never paid a cash dividend. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. The Company does not expect to pay cash dividends in the foreseeable future. Standard Microsystems Corporation and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITIES The consolidated financial statements of Standard Microsystems Corporation and its subsidiaries have been prepared under the direction of management in conformity with generally accepted accounting principles, consistently applied. The statements include amounts that reflect management's objective estimates and judgments. Standard Microsystems Corporation and its subsidiaries maintain accounting systems and related internal accounting controls which, in the opinion of management, provide reasonable assurance, at appropriate cost, that assets are properly controlled and safeguarded and that transactions are executed in accordance with management's authorization and are recorded and reported properly. The audit committee of the Board of Directors is composed solely of directors who are not officers or employees of the Company. The committee meets periodically with representatives of management and the independent public accountants. The independent public accountants have free access to the committee, without management present, to discuss the results of their audit work, adequacy of internal financial controls and the quality of the financial reporting. The committee also recommends to the directors the appointment of the independent public accountants. The independent public accountants provide an objective, independent review as to management's discharge of its responsibilities as they relate to the integrity of reported operating results and financial condition. The consolidated financial statements in this annual report have been audited by Arthur Andersen LLP, independent public accountants. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Standard Microsystems Corporation: We have audited the accompanying consolidated balance sheets of Standard Microsystems Corporation (a Delaware corporation) and subsidiaries as of February 28, 1995, and February 28, 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended February 28, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Standard Microsystems Corporation and subsidiaries as of February 28, 1995, and February 28, 1994, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1995, in conformity with generally accepted accounting principles. March 29, 1995 ARTHUR ANDERSEN LLP Baltimore, Md. EX-23 9 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 Baltimore, Maryland May 25, 1995 EX-27 10 EXHIBIT 27
5 1,000 YEAR FEB-28-1995 FEB-28-1995 29,478 0 75,826 1,102 45,789 162,776 108,372 73,464 228,578 43,421 0 1,322 0 0 172,661 228,578 378,671 378,671 214,269 214,269 123,780 707 1,255 41,292 15,940 25,167 0 944 0 24,223 1.82 1.82
EX-99 11 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, 1994 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. DiAgostino Member, Plan Committee May 25, 1995 STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants 4 Statements of Financial Condition as of December 31, 1994 and December 31, 1993 5, 6 Statement of Income and Changes in Plan Equity For the Plan Year ended December 31, 1994 7 Notes To Financial Statements 8 - 14 Schedule I - Assets Held for Investment as of December 31, 1994 15 Schedule I - Assets Held For Investment as of December 31, 1993 16 Schedule II - Reportable Transactions For the Year Ended December 31, 1994 17 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, 1994 and December 31, 1993, and the related Statement of Income and Changes in Plan Equity for the plan year ended December 31, 1994. 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, 1994 and 1993, and its income and changes in plan equity for the plan year ended December 31, 1994 in conformity with generally accepted accounting principles. Arthur Andersen LLP April 7, 1995 Washington, D.C. -4- 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 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 - - - PLAN EQUITY $ 21,449,935 $ 2,290,666 536,400 $ 3,599,896
The accompanying notes to financial statements are an integral part of this statement. STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENT OF FINANCIAL CONDITION
As of December 31, 1994 Asset Manager Managed Income Company Loan Fund Fund Stock Fund 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 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 - - - - Total Assets 2,027,843 1,358,084 10,917,851 - LIABILITIES Benefits payable - - 1,539 - Total Liabilities - - 1,539 - PLAN EQUITY $ 2,027,843 $1,358,084 $10,916,312 $720,734
The accompanying notes to financial statements are an integral part of this statement. 5 STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENT OF FINANCIAL CONDITION
As of December 31, 1993 Puritan Ginnie Mae Magellan Total Fund Fund Fund ASSETS Cash and cash equivalents $ 4,943 $ 25 11 $ 35 Contributions receivable: Employee 57,160 10,061 2,907 16,795 Employer matching 90,365 - - - Investments: Fidelity Puritan Fund (cost of $1,535,417) 1,572,498 1,572,498 - - Fidelity Ginnie Mae Fund (cost of $507,278) 496,614 - 496,614 - Fidelity Magellan Fund (cost of of $2,332,582) 2,475,306 - - 2,475,306 Fidelity Asset Manager Fund (cost of $1,474,742) 1,634,721 - - - Fidelity Managed Income Fund (cost of $888,758) 888,758 - - - Standard Microsystems Corp. Common Stock (355,672 shares, cost of $9,311,368) 7,646,948 - - - Loans Receivable 258,116 - - - Total Assets 15,125,429 1,582,584 499,532 2,492,136 LIABILITIES Benefits payable 9,769 1,739 - - Total Liabilities 9,769 1,739 - 2,023 PLAN EQUITY $ 15,115,660 $ 1,580,845 499,532 $ 2,490,113
The accompanying notes to financial statements are an integral part of this statement. STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENT OF FINANCIAL CONDITION
As of December 31, 1993 Asset Manager Managed Income Company Fund Fund Stock Fund ASSETS Cash and cash equivalents $ 28 $ 29 $ 4,815 $ - Contributions receivable: Employee 8,997 3,786 14,614 - Employer matching - - 90,365 - Investments: Fidelity Puritan Fund (cost of $1,535,417) - - - - Fidelity Ginnie Mae Fund (cost of $507,278) - - - - Fidelity Magellan Fund (cost of of $2,332,582) - - - - Fidelity Asset Manager Fund (cost of $1,474,742) 1,634,721 - - - Fidelity Managed Income Fund (cost of $888,758) - 888,758 - - Standard Microsystems Corp. Common Stock (355,672 shares, cost of $9,311,368) - - 7,646,948 - Loans Receivable - - - - Total Assets 1,643,746 892,573 7,756,742 258,116 LIABILITIES Benefits payable 1,538 369 4,100 - Total Liabilities 1,538 369 4,100 - PLAN EQUITY $ 1,642,208 $ 892,204 $7,752,642 $258,116
The accompanying notes to financial statements are an integral part of this statement. 6 STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
For the plan year ended December 31, 1994 Puritan Ginnie Mae Magellan Asset Manager Managed Income Company Loan Total Fund Fund Fund Fund Fund Stock Fund Fund BEGINNING BALANCE, PLAN EQUITY $15,115,660 $1,580,845 $499,532 $2,490,113 $1,642,208 $ 892,204 $ 7,752,642 $258,116 Employee contributions 3,066,308 694,665 158,139 1,084,585 596,755 370,583 161,581 - Employer matching contributions 876,262 - - - - - 876,262 - Investment income 489,090 163,673 31,067 115,899 74,536 103,356 559 - Realized gains (losses) on securities transactions (110,190) (699) (6,592) (6,576) (9,165) - (87,158) - Unrealized appreciation (depreciation) of investments 2,745,815 (136,954) (34,404) (168,991) (190,728) - 3,276,892 - Interfund transfers (0) 86,926 (96,850) 204,927 36,949 57,739 (752,309) 462,618 7,067,285 807,611 51,360 1,229,844 508,347 531,678 3,475,828 462,618 Benefit payments 733,010 97,790 14,492 120,061 122,712 65,798 312,157 - 733,010 97,790 14,492 120,061 122,712 65,798 312,157 - INCREASE IN PLAN EQUITY 6,334,275 709,821 36,868 1,109,783 385,635 465,880 3,163,670 462,618 ENDING BALANCE, PLAN EQUITY $ 21,449,935 $ 2,290,666 $536,400 $3,599,896 $2,027,843 $1,358,084 $10,916,312 $720,734
The accompanying notes to financial statements 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 Incentive Savings and Retirement Plan (the "Plan"), formerly known as the "Employee Stock Purchase 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 FUND- This fund seeks a high level of current income, by investing primarily in mortgage-related securities issued by the Government National Mortgage Association. -8- 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. 4. FIDELITY ASSET MANAGER FUND - 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 FUND - 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 COMMON 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 1994). Participant contributions, which are entirely voluntary, are allocated by the employee between the six investment programs in ten percent increments. There were 699 and 634 active participants in the Plan and 542 and 522 participants making contributions as of December 31, 1994 and 1993, respectively. There were 65 and 76 terminated employees with funds in the plan as of December 31, 1994 and 1993, respectively. -9- 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, 1994, "rollover" contributions of $505, 828 were received by the Plan and are included in Employee contributions in the accompanying Statement of Income and Changes in Plan Equity. 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 participantis 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% -10- The unvested portion of a former participantis 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 contines 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, 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, 1994: -11- December 31, 1994 Shares in the Plan, beginning of the period 355,672 Shares issued to the Plan 68,662 Shares redeemed and transferred to former participants <64,950> Shares in the Plan, end of the period 359,384 The per share price at which the Plan purchased the Company's stock ranged from $13.75 to $27.13 for the Plan year ended December 31, 1994. See Note 8 for the effect of changes in the Company's stock price subsequent to December 31, 1994. 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 Companyis management. b) Midlantic National Bank, (the "Trustee"), is the custodian of the Planis 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. -12- Plan Costs ---------- Administrative costs of $46,253 for the Plan year ended December 31, 1994 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 Companyis 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 exempt from Federal taxes until distributed to the participants or their beneficiaries. 6) Benefits Payable ---------------- Benefits payable, as of December 31, 1994 and 1993, include approximately 52 and 191 shares, respectively, of the Company's common stock to be distributed to former participants, with the remainder payable in cash. -13- 7) Forfeitures ----------- During the Plan year ended December 31, 1994, $31,634 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%, 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 7, 1995, the Company's stock has traded in the range of $ 13.38 to $31.63 per share. Based upon the closing price of $16.75 per share on April 7, 1995, the shares held by the Plan at December 31, 1994 have decreased approximately 44%. There has been no significant change in the value 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, 1994 and 1993. Schedule II lists reportable transactions, as defined by ERISA, which occurred during the Plan year ended December 31, 1994. During this period, there were no investments in default or transactions with parties in interest. -14-
Standard Microsystems Corporation Schedule I Incentive Savings and Retirement Plan Schedule of Assets Held for Investment As of December 31, 1994 NUMBER VALUE INVESTMENT DESCRIPTION COST CURRENT VALUE OF UNITS OR SHARES PER 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 Fidelity 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 I Incentive Savings and Retirement Plan Schedule of Assets Held for Investment As of December 31, 1993 NUMBER VALUE INVESTMENT DESCRIPTION COST CURRENT VALUE OF UNITS OR SHARES PER FUND UNIT Fidelity Puritan Fund $1,535,417 $1,572,498 99,841 $15.75 Fidelity Ginnie Mae Fund $ 507,278 $ 496,614 45,728 $10.86 Fidelity Magellan Fund $2,332,582 $2,475,306 34,937 $70.85 Fidelity Asset Manager Fund $1,474,742 $1,634,721 106,151 $15.40 Fidelity Managed Income Fund $ 888,758 $ 888,758 888,758 $ 1.00 SMC Common Stock $9,311,368 $7,646,948 355,672 $21.50
16
STANDARD MICROSYSTEMS CORPORATION SCHEDULE II INCENTIVE SAVINGS AND RETIREMENT PLAN SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31,1994 /--------------AMOUNTS IN DOLLARS------------/ INVESTMENT REALIZED NUMBER OF DESCRIPTION TYPE SHARES COST PROCEEDS GAIN TRANSACTIONS FIDELITY: PURITAN FUND SALE 28,707 280,077 279,378 (699) 41 PURITAN FUND PURCHASE 80,242 1,086,417 56 GINNIE MAE SALE 14,584 158,011 151,419 (6,592) 27 GINNIE MAE PURCHASE 21,393 220,650 45 MAGELLAN FUND SALE 4,117 290,864 284,288 (6,576) 45 MAGELLAN FUND PURCHASE 22,012 1,513,704 57 ASSET MANAGER FUND SALE 15,268 233,759 224,594 (9,165) 42 ASSET MANAGER FUND PURCHASE 52,914 778,479 51 MANAGED INCOME FUND SALE 792,359 792,359 792,359 0 65 MANAGED INCOME FUND PURCHASE 1,240,647 1,240,647 71 SMC COMMON STOCK SALE 64,999 1,389,698 1,302,540 (87,158) 55 SMC COMMON STOCK PURCHASE 66,155 1,207,145 60
17 STANDARD MICROSYSTEMS CORPORATION INCENTIVE SAVINGS AND RETIREMENT PLAN EXHIBIT INDEX ------------- Exhibit No. Description - ---------- ------------ 1 Consent of Independent Public Accountants 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 Statement on Forms S-8 (No. 2-78324). April 7, 1995 Washington, D.C. -----END PRIVACY-ENHANCED MESSAGE-----