-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KKtqW0InYGGqZXEcVXNn7YlYcenF1r6oHIgQWX9Ec9/YhmAnfq/A1+YilKFcVmR3 u3UTqs9AWgmPl6ycbdKJ8g== 0000093384-03-000093.txt : 20030715 0000093384-03-000093.hdr.sgml : 20030715 20030715150934 ACCESSION NUMBER: 0000093384-03-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MICROSYSTEMS CORP CENTRAL INDEX KEY: 0000093384 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 112234952 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07422 FILM NUMBER: 03787134 BUSINESS ADDRESS: STREET 1: 80 ARKAY DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11934 BUSINESS PHONE: 5164342904 MAIL ADDRESS: STREET 1: 80 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11934 10-Q 1 f10q_1qtr-fy04.txt 1ST QTR - FY04 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------------------- FORM 10-Q ------------------------------------------------------- [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 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) Registrant's telephone number, including area code: 631-435-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes _X_ No ____ As of May 31, 2003, there were 16,816,175 shares of the registrant's common stock outstanding. Standard Microsystems Corporation Form 10-Q For the Quarter Ended May 31, 2003 Table of Contents ----------------- Part I Financial Information ================================ Item 1 Financial Statements: Condensed Consolidated Balance Sheets as of May 31, 2003 and February 28, 2003 Condensed Consolidated Statements of Operations for the Three Months Ended May 31, 2003 and May 31, 2002 Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2003 and May 31, 2002 Notes to Condensed Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk Item 4 Controls and Procedures Part II Other Information ============================ Item 1 Legal Proceedings Item 6 Exhibits and Reports on Form 8-K Signature Certifications PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (In thousands) May 31, February 28, 2003 2003 ------------ ------------- Assets Current assets: Cash and cash equivalents $ 101,807 $ 90,025 Short-term investments 19,100 22,872 Accounts receivable, net 23,690 22,738 Inventories 20,766 17,644 Deferred income taxes 10,772 8,545 Other current assets 10,694 8,710 - ------------------------------------------------------------------------------ Total current assets 186,829 170,534 - ------------------------------------------------------------------------------ Property, plant and equipment, net 20,080 22,257 Goodwill 29,773 29,773 Intangible assets, net 5,648 6,008 Deferred income taxes 8,608 11,779 Other assets 5,433 7,598 - ------------------------------------------------------------------------------ $ 256,371 $ 247,949 ============================================================================== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 13,146 $ 9,114 Deferred income on shipments to distributors 7,428 5,943 Accrued expenses, income taxes and other current liabilities 10,167 9,838 - ------------------------------------------------------------------------------ Total current liabilities 30,741 24,895 - ------------------------------------------------------------------------------ Other liabilities 7,128 7,379 Minority interest in subsidiary 11,724 11,663 Shareholders' equity: Preferred stock - - Common stock 1,863 1,859 Additional paid-in capital 148,234 147,655 Retained earnings 79,211 77,492 Treasury stock, at cost (23,454) (23,454) Deferred stock-based compensation (2,355) (2,102) Accumulated other comprehensive income 3,279 2,562 - ------------------------------------------------------------------------------ Total shareholders' equity 206,778 204,012 - ------------------------------------------------------------------------------ $ 256,371 $ 247,949 ============================================================================== See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended May 31, ----------------------------- 2003 2002 ------------ ----------- Sales and revenues $ 42,721 $ 34,007 Cost of goods sold 22,059 18,935 - ------------------------------------------------------------------------------ Gross profit 20,662 15,072 Operating expenses (income): Research and development 9,101 6,851 Selling, general and administrative 9,513 8,194 Amortization of intangible assets 360 - Gains on real estate transactions (1,444) - - ------------------------------------------------------------------------------ Income from operations 3,132 27 Interest income 443 581 Other expense, net (736) (15) - ------------------------------------------------------------------------------ Income before provision for income taxes and minority interest 2,839 593 Provision for income taxes 895 154 Minority interest in net income of subsidiary 61 6 - ------------------------------------------------------------------------------ Income from continuing operations 1,883 433 Loss from discontinued operations (net of income tax benefits of $92 and $46) (164) (81) - ------------------------------------------------------------------------------ Net income $ 1,719 $ 352 ============================================================================== Basic net income per share: Income from continuing operations $ 0.11 $ 0.03 Loss from discontinued operations (0.01) (0.01) - ------------------------------------------------------------------------------ Basic net income per share $ 0.10 $ 0.02 ============================================================================== Diluted net income per share: Income from continuing operations $ 0.11 $ 0.02 Loss from discontinued operations (0.01) - - ------------------------------------------------------------------------------ Diluted net income per share $ 0.10 $ 0.02 ============================================================================== Weighted average common shares outstanding: Basic 16,793 16,060 Diluted 17,331 17,811 See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended May 31, ------------------------------ 2003 2002 ------------ ------------ Cash flows from operating activities: Cash received from customers $ 44,274 $ 36,239 Cash paid to suppliers and employees (42,623) (34,502) Interest received 427 525 Interest paid (24) (20) Income taxes paid (125) (70) - ------------------------------------------------------------------------------- Net cash provided by operating activities 1,929 2,172 - ------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (1,602) (1,439) Sales of property, plant and equipment 7,071 5 Sales of long-term investments 1,199 - Purchases of short-term investments (9,022) (11,795) Sales of short-term investments 12,794 7,600 Other (9) (13) - ------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 10,431 (5,642) - ------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock 31 3,890 Purchases of treasury stock - (2,595) Repayments of obligations under capital leases and notes payable (438) (264) - ------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (407) 1,031 - ------------------------------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents 85 543 Cash used for discontinued operation (256) (99) - ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 11,782 (1,995) Cash and cash equivalents at beginning of period 90,025 98,065 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 101,807 $ 96,070 =============================================================================== Reconciliation of income from continuing operations to net cash provided by operating activities: Income from continuing operations $ 1,883 $ 433 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 2,750 2,179 (Gains) and losses from sales of investments and property, net (696) 5 Other adjustments, net (67) (6) Changes in operating assets and liabilities: Accounts receivable (1,739) 1,330 Inventories (2,711) (3,631) Accounts payable and accrued expenses and other liabilities 2,994 3,496 Other changes, net (485) (1,634) - ------------------------------------------------------------------------------- Net cash provided by operating activities $ 1,929 $ 2,172 =============================================================================== During the three months ended May 31, 2003, the Company made $3,222 of capital expenditures which are being financed by the supplier through March 2004. See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial information of Standard Microsystems Corporation and subsidiaries, referred to herein as "SMSC" or "the Company", has been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission, and reflects all adjustments, consisting only of normal recurring adjustments, which in management's opinion are necessary to state fairly the Company's financial position, results of operations and cash flows for all periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of sales and revenues and expenses during the reporting period. Actual results may differ from those estimates, and such differences may be material to the financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended February 28, 2003 included in the Company's annual report on Form 10-K, as filed on May 29, 2003 with the Securities and Exchange Commission. The results of operations for the three months ended May 31, 2003 are not necessarily indicative of the results to be expected for any future periods. 2. Stock-Based Compensation The Company has in effect several stock-based compensation plans under which incentive stock options, non-qualified stock options and restricted stock awards are granted to employees and directors. All stock options are granted with exercise prices equal to the fair value of the underlying shares on the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and accordingly recognizes no compensation expense for the stock option grants. Additional pro forma disclosures as required under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", are detailed below. For purposes of pro forma disclosures, the estimated fair market value of the Company's options is amortized as an expense over the options' vesting periods. The fair value of each option grant, as defined by SFAS No. 123, is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, that significantly differ from the Company's stock option awards. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. Had compensation expense been recorded under the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below (in thousands, except per share data): Three Months Ended May 31, --------------------- 2003 2002 --------------------------------------------------------------------------- Net income - as reported $ 1,719 $ 352 Add: Stock-based compensation expense included in net income, net of taxes - as reported 182 120 Deduct: Stock-based compensation expense determined using fair value method, net of taxes (2,415) (242) --------------------------------------------------------------------------- Net income (loss) - pro forma $ (514) $ 230 =========================================================================== Basic and diluted net income per share - as reported $ 0.10 $ 0.02 =========================================================================== Basic and diluted net income (loss) per share - pro forma $ (0.03) $ 0.01 =========================================================================== 3. Balance Sheet Data Inventories are valued at the lower of first-in, first-out cost or market and consist of the following (in thousands): May 31, 2003 Feb. 28, 2003 ----------------------------------------------------------- Raw materials $ 686 $ 761 Work in process 8,343 7,686 Finished goods 11,737 9,197 ----------------------------------------------------------- $ 20,766 $ 17,644 =========================================================== Property, plant and equipment consists of the following (in thousands): May 31, 2003 Feb. 28, 2003 ---------------------------------------------------------------- Land $ 1,571 $ 3,434 Buildings and improvements 20,265 29,927 Machinery and equipment 83,867 81,562 ---------------------------------------------------------------- 105,703 114,923 Less: accumulated depreciation 85,623 92,666 ---------------------------------------------------------------- $ 20,080 $ 22,257 ================================================================ During the three months ended May 31, 2003, the Company sold certain portions of its real estate holdings, further details for which appear within Note 10. 4. Net Income Per Share Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of shares issuable through stock options. The shares used in calculating basic and diluted net income per share for the Condensed Consolidated Statements of Operations included within this report are reconciled as follows (in thousands): Three Months Ended May 31, ---------------------- 2003 2002 ---------------------- Average shares outstanding for basic net income per share 16,793 16,060 Dilutive effect of stock options 538 1,751 ------------------------------------------------------------ Average shares outstanding for diluted net income per share 17,331 17,811 ============================================================ Options covering 3.4 million and 0.1 million shares were excluded from the computation of average shares outstanding for diluted net income per share for the three months ended May 31, 2003 and 2002, respectively, because their effect was antidilutive. 5. Comprehensive Income The Company's other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, and unrealized gains and losses on equity investments classified as available-for-sale. The components of the Company's comprehensive income for the three months ended May 31, 2003 and 2002 were as follows (in thousands): Three Months Ended May 31, ------------------------- 2003 2002 ------------------------- Net income $ 1,719 $ 352 Other comprehensive income (loss): Change in foreign currency translation adjustment 38 966 Change in unrealized gain (loss) on marketable equity securities, net of taxes 14 (31) Reclassification adjustment for loss on marketable equity security included in net income, net of taxes 665 - --------------------------------------------------------------------------- Total comprehensive income $ 2,436 $ 1,287 =========================================================================== During the three months ended May 31, 2003, the Company sold its remaining equity investment in Chartered Semiconductor Manufacturing, Ltd. This investment was classified as available-for-sale, and temporary changes in its market value, net of income taxes, were included within the Company's Other comprehensive income, and were presented cumulatively as an unrealized gain or loss, net of income taxes, within Accumulated other comprehensive income on the Company's Consolidated Balance Sheets. The amount presented as a reclassification adjustment in the preceding table represents the amounts previously reported within Other comprehensive income as an unrealized loss on this investment, net of income taxes, through February 28, 2003. 6. Business Acquisition In June 2002, the Company acquired all of the outstanding common stock of Gain Technology Corporation (Gain), a developer and supplier of high-speed, high-performance analog and mixed-signal communications integrated circuits and proprietary intellectual property cores, based in Tucson, Arizona, for initial consideration of $36.1 million. The terms of the acquisition provided that up to $17.5 million of additional consideration, payable in SMSC common stock and cash, could be issued to Gains's former shareholders during fiscal 2004 contingent upon satisfaction of certain performance goals. It has been determined that this additional consideration was not earned. The unaudited pro forma results of operations for the three months ended May 31, 2002 set forth below give effect to the acquisition of Gain as if it had occurred at the beginning of fiscal 2003. Pro forma data is subject to certain assumptions and estimates, and is presented for informational purposes only. This data does not purport to be indicative of the results that would have actually occurred had the acquisition occurred on the basis described above, nor do they purport to be indicative of future operating results. Three Months Ended May 31, 2002 ------------------------- (in thousands, except per share data) Actual Pro forma ------------------------- Sales and revenues $ 34,007 $ 35,245 Net income (loss) 352 (1,011) ======================================================================= Basic and diluted net income (loss) per share $ 0.02 $ (0.06) ======================================================================= 7. Business Restructuring In December 2001, the Company announced a restructuring plan for its exit from the PC chipset business. A summary of the activity in the reserve related to this restructuring for the three months ended May 31, 2003 is as follows (in thousands): Non-cancelable lease Other obligations Charges Total --------------------------------------------------------------------------- Business restructuring reserve at February 28, 2003 $ 1,374 $ 45 $ 1,419 Cash payments (100) - (100) --------------------------------------------------------------------------- Business restructuring reserve at May 31, 2003 $ 1,274 $ 45 $ 1,319 =========================================================================== Payments related to non-cancelable lease obligations are being paid over their respective terms through August 2008. 8. Discontinued Operations The Company is currently involved in a legal action relating to a past divestiture of a business unit. This divestiture was accounted for as a discontinued operation, and accordingly, costs associated with this action, net of income taxes, are reported as a Loss from discontinued operations on the Condensed Consolidated Statements of Operations. These costs totaled $0.2 million and $0.1 million for the three months ended May 31, 2003 and 2002, respectively, after applicable income tax benefits. 9. Goodwill and Intangible Assets The Company's June 2002 acquisition of Gain Technology Corporation included the acquisition of $7.1 million of finite-lived intangible assets and $29.8 million of goodwill. In accordance with the provisions of SFAS No. 142, this goodwill is not amortized, but is tested for impairment in value annually, as well as when an event or circumstance occurs indicating a possible impairment in its value. All finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives. Existing technologies have been assigned an estimated useful life of six years. Customer contracts have been assigned useful lives of between one and ten years (with a weighted average life of approximately seven years), and non-compete agreements have been assigned useful lives of two years. The weighted average useful life of all intangible assets is approximately six years. As of May 31, 2003, the Company's finite-lived intangible assets consisted of the following (in thousands): Accumulated Cost Amortization Net ------------------------------------------------------------------------- Existing technologies $ 6,179 $ 1,030 $ 5,149 Customer contracts 498 204 294 Non-compete agreements 410 205 205 ------------------------------------------------------------------------ $ 7,087 $ 1,439 $ 5,648 ========================================================================= Estimated future intangible asset amortization expense for the remainder of fiscal 2004, and for the five fiscal years thereafter, is as follows (in thousands): Period Amount ------------------------------------------- Remainder of fiscal 2004 $ 951 Fiscal 2005 1,114 Fiscal 2006 1,062 Fiscal 2007 1,062 Fiscal 2008 1,062 Fiscal 2009 290 =========================================== 10. Real Estate Transactions During the first quarter of fiscal 2004, the Company sold certain portions of its Hauppauge, New York real estate holdings, for combined proceeds of $7.0 million, net of applicable transaction costs. These transactions resulted in a combined gain of $1.7 million, $1.4 million of which related to property in which the Company has no continued interest and was recognized within the Company's fiscal 2004 first quarter operating results, and $0.3 million of which related to property that the Company has leased back from the purchaser and has therefore been deferred. This deferred gain will be recognized within the Company's operating results on a straight-line basis over a 30-month period beginning in June 2003, consistent with the term of the lease. The Company's rent obligation over the term of this lease is approximately $0.9 million. 11. Sales of Equity Investment During the three months ended May 31, 2003, the Company sold its remaining equity investment in Chartered Semiconductor Manufacturing, Ltd., realizing a loss of $0.7 million, which is included within Other expense, net. 12. Litigation In June 2003, Standard Microsystems Corporation was named as a defendant in a patent infringement lawsuit filed by Analog Devices, Inc. in the United States District Court for the District of Massachusetts (Analog Devices, Inc. v. Standard Microsystems Corporation, Case Number 03 CIV 11216). The Complaint filed in the suit alleges that some of the Company's products infringe one or both of two Analog Devices' patents, and seeks injunctive relief and unspecified damages. The Company has reviewed and investigated the allegations in the Complaint and believes that the suit is without merit. 13. Recent Accounting Pronouncements In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123", which is effective for financial statements for fiscal years ending after December 15, 2002, with early adoption permitted. SFAS No. 148 enables companies that choose to adopt the fair value based method to report the full effect of employee stock options in their financial statements immediately upon adoption, and to make available to investors better and more frequent disclosure about the cost of employee stock options. As further discussed within Note 2, the Company will continue to apply the disclosure-only provisions of both SFAS No. 123 and SFAS No. 148. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not believe that the adoption of SFAS No. 149 will have a material effect on its financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated condensed financial statements and notes thereto contained in this report. Portions of this report may contain forward-looking statements about expected future events and financial and operating results that involve risks and uncertainties. These include the timely development and market acceptance of new products; the impact of competitive products and pricing; the effect of changing economic conditions in domestic and international markets; changes in customer order patterns, including loss of key customers, order cancellations or reduced bookings; and excess or obsolete inventory and variations in inventory valuation, among others. Words such as "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers or divestitures. Standard Microsystems Corporation (the Company or SMSC) competes in the semiconductor industry, which has historically been characterized by intense competition, rapid technological change, cyclical market patterns, price erosion and periods of mismatched supply and demand. In addition, sales of many of the Company's products depend largely on sales of personal computers and peripheral devices, and reductions in the rate of growth of the PC and embedded markets could adversely affect its operating results. SMSC conducts business outside the United States and is subject to tariff and import regulations and currency fluctuations, which may have an effect on its business. All forward-looking statements speak only as of the date hereof and are based upon the information available to SMSC at this time. Such information is subject to change, and the Company will not necessarily inform investors of such changes, except as required by law. These and other risks and uncertainties, including potential liability resulting from pending or future litigation, are detailed from time to time in the Company's reports filed with the Securities and Exchange Commission (SEC). Investors are advised to read the Company's Annual Report on Form 10-K and other quarterly reports on Form 10-Q filed with the SEC, particularly those sections entitled "Other Factors That May Affect Future Operating Results", for a more complete discussion of these and other risks and uncertainties. Overview -------- Description of Business SMSC is a designer and worldwide supplier of advanced digital, mixed-signal and analog semiconductor solutions for a broad range of communications and computing applications in the areas of Advanced Input/Output (I/O), USB connectivity, networking and embedded control systems. The Company is a fabless semiconductor supplier whose products are manufactured by world-class third-party semiconductor foundries and assemblers. To ensure the highest quality, the Company conducts a significant portion of its final testing requirements in the Company's own state-of-the-art testing operation. The Company is prominent as the world's leading supplier of Advanced I/O integrated circuits for desktop and mobile personal computers. Advanced I/O circuits contain a variety of individual functions ranging from legacy PC I/O to leading edge system management, including flash memory, infrared communications support, a real-time clock, and power management. The Company serves the networking and connectivity markets with its families of integrated Ethernet and USB 2.0 products, along with other products, which provide solutions for the needs of network printers, set-top boxes, home gateway products, automobile navigation systems, cellular base stations, USB peripherals and a variety of other machine-to-machine communications applications. The Company's headquarters are located in Hauppauge, New York, and SMSC operates design and validation centers in New York, Austin, Texas, Tucson, Arizona and Phoenix, Arizona, and has sales offices in the United States, Europe, Taiwan, Korea and China. The Company conducts most of its business in the Japanese market through its majority-owned subsidiary, SMSC Japan. Critical Accounting Policies and Estimates ------------------------------------------ This discussion and analysis of the Company's financial condition and results of operations is based upon the unaudited consolidated condensed financial statements included in this report, which have been prepared in accordance with accounting principles for interim financial statements generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of sales and revenues and expenses during the reporting period. The Company believes that the critical accounting policies and estimates listed below are important to the portrayal of the Company's financial condition and operating results, and require critical management judgments and estimates about matters that are inherently uncertain. Although management believes that its judgments and estimates are appropriate and reasonable, actual future results may differ from these estimates, and to the extent that such differences are material, future reported operating results may be affected. o Revenue recognition o Inventory valuation o Determination of the allowance for doubtful accounts receivable o Valuation of long-lived assets o Accounting for deferred income tax assets o Legal contingencies Further information regarding these policies appears within the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's annual report on Form 10-K for the fiscal year ended February 28, 2003 filed with the SEC on May 29, 2003. During the three-month period ended May 31, 2003, there were no significant changes to any critical accounting policies or to the procedures used in making the estimates and judgments required to apply these policies. Results of Operations --------------------- Sales and Revenues Sales and revenues for the three months ended May 31, 2003 were $42.7 million, an increase of approximately 26% compared to $34.0 million reported in the first quarter of the prior fiscal year. The largest portion of this increase was attributable to higher product sales from the Company's networking and USB connectivity product lines, both of which continue to achieve increased product sales from new product introductions. Continued market acceptance of the Company's LAN91C111 single-chip non-PCI Ethernet controller contributed to the sixth consecutive quarter of increased networking product sales, while the Company's USB connectivity products experienced a fourth consecutive quarter of growth, driven in part by several recently-introduced products for USB 2.0 connectivity applications. Product sales of PC I/O products were also higher in the first quarter of fiscal 2004 than in the prior year's first quarter, as several key design wins drove an increase in unit PC I/O shipments. Sales and revenues from customers outside of North America accounted for approximately 90% and 89% of the Company's revenues for the three-month periods ended May 31, 2003 and 2002, respectively, the largest portion of which was to the Asia and Pacific Rim region. The Company expects that international shipments, particularly to the Asia and Pacific Rim region, will continue to represent a significant portion of its sales and revenues. Gross Profit Gross profit for the three months ended May 31, 2003 was $20.7 million, or 48.4% of sales and revenues, compared to $15.1 million, or 44.3% of sales and revenues, for the three months ended May 31, 2002. This improvement in gross profit reflects the impact of higher proportionate sales and revenue contribution from non-PC I/O product lines in the current fiscal year's first quarter, which generally carry higher gross profit margins than PC I/O products. Higher unit production during the first three months of fiscal 2004 resulted in a more efficient use of fixed manufacturing overhead costs, also contributing to the higher gross profit in the current period. In addition, gross profit in the prior fiscal year's first quarter was adversely impacted by higher charges for slow-moving and obsolete inventory. Research and Development Expenses The semiconductor industry, and the individual markets in which the Company currently competes, are highly competitive, and the Company believes that the continued investment in research and development (R&D) is essential to maintaining and improving its competitive position, and to driving its opportunities for future growth. The Company's research and development activities are performed by a team of highly-skilled and experienced engineers and technicians, and are primarily directed towards the design of new integrated circuits, the development of new software design tools and blocks of logic, as well as ongoing cost reductions and performance improvements in existing products. R&D expenses were $9.1 million, or approximately 21% of sales and revenues, for the three months ended May 31, 2003, compared to $6.9 million, or approximately 20% of sales and revenues, for the three months ended May 31, 2002. The current period's R&D expenses include the impact of the Company's June 2002 acquisition of Gain Technology Corporation (Gain), which added 35 highly skilled engineers and designers to the Company's staff, as well as other engineering staff additions. Costs associated with development programs in advanced .18 and .25 micron semiconductor technologies also contributed to the current period's increased R&D expenses, compared to the first quarter of fiscal 2003. Selling, General and Administrative Expenses Selling, general and administrative expenses were $9.5 million, or approximately 22% of sales and revenues, for the three months ended May 31, 2003. These expenses compare to $8.2 million, or approximately 24% of sales and revenues, for the year-earlier period. This dollar increase reflects the impact of additional selling, general and administrative costs associated with the June 2002 acquisition of Gain, and also costs associated with additional staff added to expand the Company's sales and marketing capabilities. The current year's first quarter also reflects incremental selling costs, primarily sales commissions and incentives, associated with the period's higher product sales than those reported in the corresponding year-earlier period. Amortization of Intangible Assets For the three months ended May 31, 2003, the Company recorded amortization expenses of $0.4 million for intangible assets associated with the June 2002 acquisition of Gain. Gains on Real Estate Transactions During the first quarter of fiscal 2004, the Company sold certain portions of its Hauppauge, New York real estate holdings, for combined proceeds of $7.0 million, net of applicable transaction costs. These transactions resulted in a combined gain of $1.7 million, $1.4 million of which related to property in which the Company has no continued interest and was recognized within the Company's fiscal 2004 first quarter operating results, and $0.3 million of which related to property that the Company has leased back from the purchaser and has therefore been deferred. This deferred gain will be recognized within the Company's operating results on a straight-line basis over a 30-month period beginning in June 2003, consistent with the term of the lease. The Company's rent obligation over the term of this lease is approximately $0.9 million. Other Income and Expense Interest income of $0.4 million for the three-month period ended May 31, 2003 declined from $0.6 million for the corresponding year-earlier period reflecting lower interest rates on short-term investments. During the three months ended May 31, 2003, the Company sold its remaining equity investment in Chartered Semiconductor Manufacturing, Ltd. (Chartered), realizing losses of $0.7 million, which are included within Other expense, net. Provision For Income Taxes The Company's provision for income taxes from continuing operations in the first quarter of fiscal 2004 was $0.9 million, resulting in an effective income tax rate of 31.5%. The provision for income taxes from continuing operations in the prior fiscal year's first quarter was $0.2 million, with an effective income tax rate of 26.0%. The Company expects its effective tax rate on income from continuing operations to be approximately 30.0% in fiscal 2004, excluding the tax effect of the non-recurring real estate and equity investment sales which occurred during the first quarter. Taxes on those non-recurring transactions were provided for at the Company's approximate incremental income tax rate of 36.0%, the result of which was an overall effective income tax rate from continuing operations that was slightly above 30.0% in the first quarter of fiscal 2004. The expected effective income tax rate for fiscal 2004 primarily reflects the statutory Federal and state income tax rates, adjusted for the impact of tax-exempt interest income and anticipated income tax credits. Discontinued Operations The Company is currently involved in a legal action relating to a past divestiture of a business unit. This divestiture was accounted for as a discontinued operation, and accordingly, costs associated with this action, net of income taxes, are reported as a Loss from discontinued operations on the Condensed Consolidated Statements of Operations. These costs totaled $0.2 million and $0.1 million for the three months ended May 31, 2003 and 2002, respectively, after applicable income tax benefits. Liquidity and Capital Resources ------------------------------- The Company currently finances its operations through a combination of existing resources and cash generated by operations. The Company's cash, cash equivalents and short-term investments increased to $120.9 million as of May 31, 2003, compared to $112.9 million at February 28, 2003. This increase reflects $7.0 million of cash provided by sales of real estate and $1.2 million of cash provided by sales of the Company's investment in Chartered. Operating activities generated $1.9 million of cash for the three months ended May 31, 2003. Investing activities provided $10.4 million of cash for the same period, including the effects of the aforementioned real estate and Chartered investment transactions. Financing activities consumed $0.4 million of cash during the first three months of fiscal 2004. The Company's inventories were $20.8 million at May 31, 2003, compared to $17.6 at February 28, 2003, as the Company stages for higher demand anticipated in the second quarter of fiscal 2004, consistent with its typical business cycle. Accounts receivable increased from $22.7 million at February 28, 2003 to $23.7 million at May 31, 2003. The aging of the Company's accounts receivable portfolio remains almost entirely current. Capital expenditures for the three months ended May 31, 2003 were $4.8 million, of which $1.6 million was paid in cash. First quarter capital investments included an expenditure of $4.3 million in advanced design tools, $3.2 million of which is being financed on a short-term basis by the supplier with payment terms extending through March 1, 2004. This $3.2 million is reported within Accounts payable at May 31, 2003. There were no material commitments for capital expenditures as of May 31, 2003. As noted previously, the Company completed its acquisition of Gain in June 2002 for total initial consideration of $36.1 million. It has been determined that $17.5 million of additional SMSC common stock and cash, which was contingently payable to former Gain shareholders during fiscal 2004 upon satisfaction of certain performance goals, was not earned. During the first quarter of fiscal 2004, the Company did not acquire any additional treasury stock through its common stock repurchase program, under which approximately 1.2 million shares remain available for repurchase. As of May 31, 2003, the Company held approximately 1.8 million shares of treasury stock, at a cost of $23.5 million. The Company has considered in the past, and will continue to consider, various possible transactions to secure necessary foundry manufacturing capacity, including equity investments in, prepayments to, or deposits with foundries, in exchange for guaranteed capacity or other arrangements which address the Company's manufacturing requirements. The Company may also consider utilizing cash to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company may evaluate potential acquisitions of or investment in such businesses, products or technologies owned by third parties. The Company expects that its cash, cash equivalents, short-term investments, cash flows from operations and its borrowing capacity will be sufficient to finance the Company's operating and capital requirements for at least the next 12 months. Recent Accounting Pronouncements -------------------------------- In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123", which is effective for financial statements for fiscal years ending after December 15, 2002, with early adoption permitted. SFAS No. 148 enables companies that choose to adopt the fair value based method to report the full effect of employee stock options in their financial statements immediately upon adoption, and to make available to investors better and more frequent disclosure about the cost of employee stock options. The Company will continue to apply the disclosure-only provisions of both SFAS No. 123 and SFAS No. 148. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not believe that the adoption of SFAS No. 149 will have a material effect on its financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Market Risks ---------------------- Interest Rate Risk - The Company's exposure to interest rate risk relates primarily to its investment portfolio. The primary objective of the Company's investment portfolio management is to invest available cash while preserving principal and meeting liquidity needs. In accordance with the Company's investment policy, investments are placed with high credit-quality issuers and the amount of credit exposure to any one issuer is limited. As of May 31, 2003, the Company's $19.1 million of short-term investments consisted primarily of investments in corporate, government and municipal obligations with maturities of between three and twelve months. If market interest rates were to increase immediately and uniformly by 10 percent from levels at May 31, 2003, the Company estimates that the fair value of these short-term investments would decline by an immaterial amount. The Company generally expects to hold its fixed income investments until maturity and, therefore, would not expect operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on short-term investments. Equity Price Risk - The Company has no material investments in equity securities of other companies on its Consolidated Balance Sheet as of May 31, 2003. Foreign Currency Risk - The Company has international sales and expenditures and is, therefore, subject to certain foreign currency rate exposure. The Company conducts a significant amount of its business in Asia. In order to reduce the risk from fluctuation in foreign exchange rates, most of the Company's product sales and all of its arrangements with its foundry, test and assembly vendors are denominated in U.S. dollars. Transactions in the Japanese market made by the Company's majority-owned subsidiary, SMSC Japan, are denominated in Japanese yen. SMSC Japan purchases a significant amount of its products for resale from Standard Microsystems Corporation in U.S. dollars, and from time to time enters into forward exchange contracts to hedge against currency fluctuations associated with these product purchases. During fiscal 2003, SMSC Japan entered into a contract with a Japanese financial institution to purchase U.S. dollars to meet a portion of its U.S. dollar denominated product purchase requirements. Gains and losses on this contract, which expired in March 2003, were not significant. The Company has never received a cash dividend (repatriation of cash) from SMSC Japan nor does it expect to receive such a dividend in the near future. Other Factors That May Affect Future Operating Results ------------------------------------------------------ As a supplier of semiconductors, the Company competes in a challenging business environment, which is characterized by intense competition, rapid technological change and cyclical business patterns. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements. The Company faces a variety of risks and uncertainties in conducting its business, some of which are out of its control, and any of which, were they to occur, could impair the Company's operating performance. For a more detailed discussion of risk factors, please refer to the Company's annual report on Form 10-K for the fiscal year ended February 28, 2003 filed with the Securities and Exchange Commission on May 29, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. (b) Changes in Internal Controls There were no changes in the Company's internal controls or in other factors that could have significantly affected those controls subsequent to the date of the Company's most recent evaluation. PART II - OTHER INFORMATION =========================== ITEM 1. Legal Proceedings In June 2003, Standard Microsystems Corporation was named as a defendant in a patent infringement lawsuit filed by Analog Devices, Inc. in the United States District Court for the District of Massachusetts (Analog Devices, Inc. v. Standard Microsystems Corporation, Case Number 03 CIV 11216). The Complaint filed in the suit alleges that some of the Company's products infringe one or both of two Analog Devices' patents, and seeks injunctive relief and unspecified damages. The Company has reviewed and investigated the allegations in the Complaint and believes that the suit is without merit. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Contract of Sale between Standard Microsystems Corporation and RGC Kennedy Drive, LLC, dated May 22, 2003. 99.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002. (b) Reports on Form 8-K On April 10, 2003, Standard Microsystems Corporation filed a report on Form 8-K relating to its operating results for the three and twelve-month periods ended February 28, 2003, as presented in a press release dated April 7, 2003. SIGNATURE Pursuant to the requirements 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 DATE: July 15, 2003 /s/ Andrew M. Caggia ------------------------- (Signature) Andrew M. Caggia Senior Vice President - Finance (duly authorized officer) and Chief Financial Officer (principal financial officer) CERTIFICATION I, Steven J. Bilodeau, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Standard Microsystems Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 15, 2003 By: /s/ Steven J. Bilodeau -------------------------- (signature) Steven J. Bilodeau Chairman of the Board, President and Chief Executive Officer CERTIFICATION I, Andrew M. Caggia, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Standard Microsystems Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 15, 2003 By: /s/ Andrew M. Caggia ------------------------- (signature) Andrew M. Caggia Senior Vice President - Finance and Chief Financial Officer EX-99.1 3 exhibit_99-1.txt CERTIFICATIONS Exhibit 99.1 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Standard Microsystems Corporation (the Company), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended May 31, 2003 of the Company fully complies, in all material respects, with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: July 15, 2003 By: /s/ Steven J. Bilodeau -------------------------- (signature) Steven J. Bilodeau Chairman of the Board, President and Chief Executive Officer By: /s/ Andrew M. Caggia ------------------------ (signature) Andrew M. Caggia Senior Vice President - Finance and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-10.1 4 exhibit_10-1.txt CONTRACT OF SALE Exhibit 10.1 CONTRACT OF SALE THIS CONTRACT OF SALE (hereafter, this "Contract of Sale" or this "Contract") made as of this 22nd day of May, 2003 by and between Standard Microsystems Corporation ("seller"), having an office at 80 Arkay Drive, Hauppauge, N.Y. 11788 and RCG Kennedy Drive, LLC. ("purchaser"), having an office at c/o Reckson Associates Realty Corp., 225 Broadhollow Road, Suite 212W, Melville, New York 11747-4883 . WHEREAS, seller desires to sell to the purchaser and purchaser desires to buy from seller certain real property, with the improvements thereon, (the "Premises" as defined in paragraph 1.8 below) upon the terms and conditions set forth in this Contract of Sale. NOW, THEREFORE, in consideration of the terms and conditions set forth in this Contract of Sale, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the seller and purchaser agree as follows: 1. Definitions. As used in this Contract, the following terms shall have the definitions set forth below: 1.1 Closing Date/ Closing. The term "Closing Date" shall mean May 22, 2003.The term "Closing" or "closing" shall mean the closing of title to the Premises. 1.2 and 1.3 Intentionally Omitted. 1.4 Improvements. The term "Improvements" shall mean those buildings, fixtures and appurtenances situated on and attached to the Land (as such term is defined below). 1.5 Intangible Personal Property. The term "Intangible Personal Property" shall mean, to the extent assignable, all of the right, title and interest of seller in and to the following items: (i) the Leases (as such term is defined below); (ii) any governmental permits or licenses with respect to the Premises, to the extent in seller's possession, and (iii) any plans owned by seller and in seller's possession relating the ownership and operation of the Premises. 1.6 Land. The term "Land" shall mean the parcels of real property situate in the Town of Smithtown, County of Suffolk, State of New York, having the street addresses of 300 Kennedy Drive and 350 Kennedy Drive, known and designated as tax lot numbers 800-185-2-40.3; 800-185-2-45.9; 800-185-2-41 and more particularly described on Schedule A annexed hereto and forming a part hereof. The sale shall include all right, title and interest, if any, of the seller in and to any land lying in the bed of any public street, road or avenue in front of or adjoining the Premises, to the center line thereof 1.7 Personalty. The term "Personalty" shall mean all of the right, title and interest of seller in and to all tangible personal property owned by seller as of the Effective Date located on and affixed or appurtenant to the Land and/or the Improvements including, but not limited to, all heating, ventilating, plumbing, lighting, electrical and air conditioning machinery, fixtures, appliances and equipment. Notwithstanding the foregoing sentence, seller's personal property which is not affixed or appurtenant to the Land and/or Improvements (including, but not limited to, seller's furniture, business equipment and machinery, and trade fixtures) shall not be deemed to be part of the Personalty. The parties agree that all right, title and interest of the seller in any Personalty transferred hereunder shall be deemed transferred under the deed of conveyance to the Premises delivered at the closing, and that no part of the Purchase Price shall be deemed to have been paid by the purchaser for the same. 1.8 Premises. The term the "Premises" or "premises" shall mean, collectively, the Land, the Improvements, the Intangible Personal Property and the Personalty. 2. Agreement to Buy and Sell. Seller hereby agrees to sell to purchaser and purchaser hereby agrees to buy from seller the Premises, upon the terms and conditions set forth in this Contract of Sale. 3. Intentionally Omitted 4. Closing. On the Closing Date, subject to the terms and conditions of this Contract of Sale, seller shall sell, transfer, assign and deliver the Premises to purchaser and purchaser shall purchase, acquire and accept from seller, the Premises. The closing of title to the Premises shall take place on the Closing Date in accordance with an escrow procedure mutually agreeable to seller and purchaser (including, without limitation, closing via mail) or at the offices of seller or at the offices of purchaser's lending institution (if any) at 11:00A.M. on the Closing Date. 5. Purchase Price/Escrow Terms. The purchase price ("Purchase Price") of the Premises is Six Million Four Hundred Seventy Five Thousand ($6,475,000.00) Dollars payable by direct electronic wire transfer of immediately available funds confirmed by the seller as received in an account designated by the seller (such check or such wire transfer being hereinafter referred to as "Acceptable Funds"). If the seller shall so request at least two (2) business days prior to closing, the purchaser shall deliver, at the closing, one or more such checks or wire transfers constituting Acceptable Funds to the order of such parties (other than the seller) and in such amounts as the seller may request. Purchaser shall receive a credit against the amount payable pursuant to this subparagraph for the aggregate amount of such checks and/or wire transfers. 6. Transfer Taxes. Seller shall pay any New York State Real Property Transfer Taxes ("deed stamps") due in connection with the sale of the Premises to purchaser and the recording of the Deed. 7. "Subject to" provisions. The Premises shall be sold and shall be conveyed subject to: (i) utility company rights and easements of record to lay, maintain, repair and operate wires, lines, cables, pipes, poles, boxes and other fixtures and facilities under, in, over and upon the Premises or any portion thereof provided same do not interfere with the use and enjoyment of the developed portions of the Premises as commercial/industrial buildings; (ii) leases and occupancies described on the Schedule of Leases and Occupancies annexed hereto and made a part hereof as Schedule B (collectively, the "Leases" and individually, a "Lease"); (iii) real property taxes, assessments, water rates, water frontage charges, water meter charges, sewer taxes, sewer rent charges, including those that are to become due and payable after the closing of title to the Premises, subject to the apportionment provisions of this Contract; (iv) Variations between the descriptions of the Premises annexed to this Contract and filed map descriptions; (v) Fifty-foot wide setback restrictions shown on filed map #4961; (vi) Agreement by and between V.I.P. Associates to New York Telephone Company recorded in Liber 9257 cp 369; (vii) Electric Easement made by Milnet Realty Corp. to Long Island Lighting Company dated December 4, 1967 recorded December 20, 1967 in Liber 6276 cp 174 (viii) State of facts shown on the survey of the premises made by Jerome D'Amaro dated August 21, 1984 and updated through September 18, 1991; (x) any and all violations of law and/or municipal or governmental ordinances, orders or requirements noted in or issued after the expiration of the Feasibility Period by any federal, state or municipal entity or department having jurisdiction over or affecting the Premises and any state of facts or conditions which might, with the passage of time, constitute such violations (collectively "Violations"); (xi) Electric Easement recorded in Liber 9240 Page 194; (xii) Right of Way between purchaser and seller over 350 Kennedy Drive (unrecorded) as shown on Schedule E to this Contract and to be executed by the parties at the Closing; (xiii) Reservation recited in Liber 6350 Page 348; (xiv) Water Easement recorded in Liber 6080 Page 137; (xv) Sewer Agreement recorded in Liber 7042 Page 353; (xvi) Electric Easement recorded in Liber 6266 Page 51; and (xvii) Water Easement recorded in Liber 6276 Page 447. 8. Representations and Warranties. 8.1 "As Is"/No Representations. The purchaser acknowledges, represents and warrants to the seller that (i) the purchaser has inspected, investigated and examined the Premises and is fully satisfied with the physical condition of the Premises including, but not limited to, the Personalty; (ii) the Leases have been exhibited to and examined by purchaser prior to execution of this Contract and purchaser is fully aware of the terms and conditions of the Leases and the status of the tenancies (iii) the seller has not made and does not make any representation as to the physical condition of the Premises (including, but not limited to the existence of any hazardous or non-hazardous substances and/or any other environmental matters affecting the Premises), or the income, rents, Leases, expenses, operations, value of the Land or the Improvements, adequacy or fitness for use of the Personalty, or any other matter or thing affecting or related to the Premises or this transaction that might be pertinent in considering the purchase of the Premises or entering into this Contract of Sale, except as may be herein specifically set forth in this Contract of Sale, and the purchaser hereby expressly acknowledges that no such representations have been made; and (iv) the purchaser has inspected the Premises and agrees to take the Premises "as is" in such condition as the same may be on the date of the closing of title to the Premises. The seller is not liable or bound in any manner by expressed or implied warranties, guaranties, promises, statements, representations or information pertaining to the Premises made or furnished by any real estate broker, agent, employee, servant, officer, director, partner, shareholder or other person representing or purporting to represent the seller unless such warranties, guaranties, promises, statement, representations or information are expressly and specifically set forth herein. All understandings and agreements heretofore had between the parties hereto are merged in this Contract of Sale which alone fully and completely expresses their agreement and the parties agree that the Contract has been entered into after full investigation by the purchaser. 8.2 Notwithstanding the foregoing provisions of paragraph 8.1 above, seller hereby represents and warrants to purchaser that each of the following is true, accurate and complete as of the date of this Contract and shall be true, accurate and complete as of the Closing Date: (a) Seller is a corporation duly formed, validly existing and in good standing under the laws of the State of Delaware. Seller has full power and authority to enter into this Contract and to assume and perform all of its obligations hereunder. The execution and delivery of this Contract and the performance by seller of its obligations have been duly authorized by all requisite corporate action and no further action or approval is required in order to constitute this Contract as a valid, binding and enforceable obligation of seller. (b) To the best of seller's knowledge, there are no judgments, orders or decrees against seller unpaid or unsatisfied which could become liens against the Premises, nor any legal action, suit or other legal or administrative proceeding pending before any court or administrative agency which would adversely affect the Premises including, without limitation, any condemnation proceeding and, to the best of seller's knowledge, there are no threatened legal actions, suits or other legal or administrative proceedings relating to the Premises (including, without limitation, any condemnation proceeding) or any state of facts which could be reasonably expected to result in any such action, suit or other proceeding. (c) To the best of seller's knowledge, the execution and delivery of this Contract by seller and the performance by seller of its obligations hereunder do not conflict with or violate any law, rule, judgment, regulation, order, writ, injunction or decree of any court or governmental or quasi governmental entity with jurisdiction over seller including, without limitation, the United States of America, the state of New York, or any political subdivision of the foregoing, or any decision or ruling of any arbitrator, to which seller is a party or by which seller is bound. (d) To the best of seller's knowledge, there are no mechanic's or construction liens against the Premises, the satisfaction of which could not be accomplished out of the proceeds of Closing. (e) The Leases described in Schedule B annexed hereto contain the entire agreement between seller and the tenants with respect to the leasing of the Premises and such leases are in full force and effect and have not been modified or amended except as set forth on Schedule B. The Leases are the only leases, licenses or other agreements for the use of the Premises. (f) the security deposits (as described in this Contract) required under the Leases are the only security deposits required to be held by seller with respect to the Leases. (g) there are no service or maintenance contracts or management or other leasing agreements relating to or affecting the Premises to which seller is a party. (h) Seller has not commenced any proceedings which are pending to obtain a reduction in real estate taxes applicable to the Premises. Seller has not received any written notice that the Premises is subject to any assessments, special or otherwise, nor has seller received any written notice of the intention of any governmental authority to impose any such assessments. (i) there are no brokerage agreements in effect with respect to the Leases to which seller is a party or which are binding upon seller. (j) the summary of insurance policies annexed hereto as Schedule F is an accurate and complete summary of all of the insurance policies maintained by seller which cover the Premises. (k) seller has not granted a purchase option to any third party to purchase the Premises, where such option remains outstanding. (l) to the best of seller's knowledge, there are no employment or union contracts or collective bargaining agreements which are binding upon purchaser or which would result in a lien against the Premises. (m) the accounts receivable report annexed hereto as Schedule J is an accurate and complete summary of all amounts outstanding, paid and payable as of the Closing Date. 8.3. As used in this paragraph 8.3 and 8.4, the following terms shall have the following meanings: (a) "Environmental Activity" means any use, storage, release, threatened release, emission, disposal, escape, seepage, leakage, spillage, pumping, pouring, emptying, injection, dumping, presence, migration, transferring, manufacturing, discharge, generation, processing, abatement, removal or disposition of any Hazardous Materials from, under, into or on the Premises or the groundwater beneath the Premises or any handling, transportation or treatment of Hazardous Materials arranged by or on behalf of seller and relating to the Premises. (b) "Environmental Law" means any federal, state or local statute, code, ordinance, rule, regulation, permit, consent approval, license, judgment, order, writ, decree, injunction, guidance or policy statement, or other authorization, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, as amended (42 U.S.C. ss.ss.9601 et seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. ss.ss. 6901 et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. ss.ss.1801 et seq.), the Clean Air Act, as amended (33 U.S.C. ss.ss.1251 et seq.), the Federal Water Pollution Control Act, as amended (33 U.S.C. ss.ss.1251 et seq.), the New York State Environmental Conservation Law, as amended, the Sanitary Code of Suffolk County, and any applicable requirements to register underground storage tanks, relating to emissions, discharges, releases or threatened releases of Hazardous Materials into ambient air, surface water, groundwater, publicly owned treatment works, septic tanks, or land, or otherwise relating to the pollution or protection of the environment. (c) "Hazardous Materials" means any substance, material or waste which is regulated by any Environmental Law and includes, without limitation, (i) any substance, material or waste defined, used or listed as a "hazardous waste", "extremely hazardous waste", "restricted hazardous waste", "hazardous substance", "Hazardous materials", "toxic substance", or other similar terms as defined or used in any Environmental Law, (ii) any petroleum products, asbestos, polychlorinated biphenyls, flammable explosives or radioactive materials, (iii) any additional substances or materials which are now or hereafter deemed hazardous or toxic substances under any Environmental Laws relating to the Premises, and (iv) as of any date of determination, any additional substances or materials which are hereafter incorporated in or added to the definition of "hazardous materials" for purposes of any Environmental Law. 8.4. Seller hereby represents and warrants, except for conditions or information contained in two Phase I Environmental Site Assessments dated May 2001 prepared by Gannet Fleming and based on information presently available and known to Seller, that, except in a manner which is in full compliance with all applicable Environmental Laws: (a) Seller has not engaged in or caused or permitted any other person(s) to engage in any Environmental Activity at, on, under or with respect to the Premises; (b) Seller is not aware of any Environmental Activity at the Premises that has affected, is affecting or has the potential to affect the Premises, waters on or adjacent to the Premises, or lands adjacent to or in the vicinity of the Premises; and (c) Seller has received no notice of, and has no knowledge of, any violations of or claims under or pursuant to any Environmental Law or any occurrence, condition or circumstance which would give rise to a violation of or claim under or pursuant to any Environmental Law pertaining to or affecting the Premises. 8.5 The representations and warranties of seller contained in section 8.4 above are limited by information presently available and known to seller. All representations and warranties of seller contained in this paragraph 8 shall survive the closing for a period of one (1) year (the "Survival Period"). 9. Intentionally Omitted 10. Inability of Seller to Perform. In the event that the seller is unable to convey title to the Premises in accordance with the terms of this Contract of Sale or in accordance with any representations or warranties made by the seller hereunder, the sole responsibility of the seller will be to reimburse purchaser for the actual out of pocket expenses incurred by purchaser for the inspections and reports performed by third parties on behalf of purchaser during the Feasibility Period and attorney's fees incurred by purchaser, provided, however, that such fees and expenses shall not exceed Twenty Five Thousand ($25,000.00) Dollars, in the aggregate, and shall not include the services of purchaser's in house staff and (c) pay to purchaser the net cost of examining the title to the Premises (not to exceed the charges fixed by the New York Board of Title Underwriters) and the net cost of updating any existing survey of the Premises actually incurred by the purchaser and, upon the giving of such instructions and the making of such payments, this Contract of Sale shall be canceled and neither party shall have any further claim against or obligation to the other by reason of this Contract (except those, if any that are specifically stated to survive the termination of this Contract of Sale) and the lien, if any, of the purchaser against the Premises shall wholly cease and expire. Except as expressly provided in this Contract of Sale, the seller may, but shall not be required to take any measures of any kind or to bring any action or proceeding or to incur any expense in order to correct any misrepresentation or breach of any warranty or remove any objection to title that the purchaser has not agreed to accept. The purchaser may nevertheless accept such title as the seller may be able to convey, without reduction of or credit against the Purchase Price and without any other liability on the part of the seller, provided that the purchaser irrevocably waives in writing any right or claim against the seller in connection therewith If the Premises are affected by any lien, encumbrance or question of title not expressly consented to herein by the purchaser or which the purchaser is not required to take title subject to, the seller shall have the right to remove or satisfy the same and shall be entitled to an adjournment of the closing for a reasonable period of time (not to exceed sixty [60] days) in connection therewith. 11. Removal of Violations and Liens. 11.1 Notwithstanding anything contained in this Contract to the contrary and without imposing any obligation on the seller hereunder, seller may, but shall not be required to comply with and/or remove any violations and/or liens against the Premises provided, however, that seller shall cure any violations or other liens against the Premises that (i) would adversely affect the marketability of title to the premises; (ii) in seller's reasonable estimation, would require seller to expend $25,000.00 or less, in the aggregate, to satisfy and/or remove all of such violations and liens; (iii) can be satisfied or removed within a reasonable period of time as specified in paragraph 10 above; and (iv) purchaser has not agreed to take title to the Premises subject to such violations and liens. 11.2 It is expressly understood and agreed that if, in seller's reasonable estimation, all of the conditions set forth in 11.1 (i) through (iv) are not met, then seller shall have the option of : (a) removing such violations and/or liens in accordance with the provisions of this Contract; or (b) refusing to remove the same. Seller shall promptly provide purchaser with written notice of whether it has elected option (a) or (b) of this section 11.2. In the event that the seller refuses to remove any such violation(s) and/or lien(s) as aforesaid, then purchaser shall have the option of: (a) taking title subject to such violation(s) and/or lien(s) in which event, the purchaser shall receive an allowance at the closing in reduction of the purchase price in an amount equal to the reasonable estimated cost to remove such violation(s) and liens, not to exceed $25,000.00 in the aggregate; or canceling this Contract, in which event, the terms and provisions of paragraph 10 shall apply. 11.3 Notwithstanding any contrary provisions of this paragraph 11, seller expressly agrees that it shall remove any lien against the Premises, other than those liens set forth in paragraph 7 hereof, which can be removed by the payment of a stipulated sum of money. 12. Customs in Respect to Title Closings. Except as otherwise herein expressly provided, the "customs in respect to title closings" adopted by the Real Estate Board of New York, Inc. shall apply to the apportionments and other matters therein mentioned. 13. Intentionally Omitted 14. Financing Statements, Etc. If on the date of closing there shall be conditional bills of sale, chattel mortgages or financing statements filed in respect of the Premises, they shall not be deemed to be objections to title, provided that the seller executes and delivers to the purchaser an affidavit setting forth that the property covered by such instruments is the property of a tenant or is otherwise not the property of seller. If on the date of closing there shall be financing statements which affect the property of seller and were filed on a day more than five (5) years prior to such date of closing and not continued, they shall not be deemed to be an objection to title, provided that the seller executes and delivers to the purchaser an affidavit setting forth that the property covered by such instrument is no longer in or at the Premises or, if such property is in or at the Premises, that such property has been fully paid for. 15. Deed. Seller shall convey fee simple estate in the Premises to purchaser by a bargain and sale deed with covenants against grantor's acts (the "Deed"). The Deed shall be in proper statutory form for recording, as more particularly set forth on Schedule G to this Contract, and shall contain the covenant required by subdivision 5 of Section 13 of the Lien Law. Purchaser shall accept title to the Premises free of all encumbrances, except those stated in this Contract. 16. Objections. If the purchaser has any objection to title or to the closing of title hereunder, purchaser, or its attorney, shall give written notice (the "Objection Notice") of such legal objection to the seller, or its attorney, no later than the Closing Date, time being of the essence with respect to the giving of the Objection Notice. The Objection Notice shall delineate with reasonable specificity the nature and substance of the objections stated therein. In the event that the Objection Notice is given within the time period provided for in this paragraph then, except for those objections set forth in the Objection Notice and any objection disclosed to the purchaser in a subsequent continuation title search, title to the Premises shall be deemed good and marketable and the purchaser waives any right it may have to make any other objections to title. Any attempt by the seller to cure an objection shall not be construed as an admission by the seller that such objection is one that would give the purchaser the right to cancel this Contract of Sale. 17. Liens. If the Premises are subject to any liens including, without limitation, transfer, inheritance, estate, franchise, license or other similar taxes, the same shall not be deemed an objection to title provided that any title company in good standing to which the purchaser has applied for title insurance will omit such liens from its policy of title insurance or will insure the purchaser against collection of such liens out of the Premises without any additional premium or cost to purchaser for such insurance. 18. Apportionments. The following are to be apportioned as of midnight of the date immediately prior to the Closing Date and all amounts due to the seller hereunder are to be paid by the purchaser by Acceptable Funds: (a) To the extent not payable by the tenants of the Premises, water tax rates, water frontage charges and sewer taxes and water and sewer rent charges; (b) Real property taxes on the basis of the fiscal year, and assessments (if any); (c) To the extent not payable by the tenants of the Premises, fuel at the Premises at the seller's cost, including any taxes thereon, and the written estimate made by the seller's fuel supplier shall be conclusive as to the amount of such fuel and as to such costs and taxes; (d) All accrued unpaid and/or prepaid rent and additional rent payable under the Leases (collectively, the "Rents") provided, however, that if any tenant is in arrears in the payment of any Rents on the date of Closing, Rents received from such tenant after the Closing shall be applied in the following order of priority: (i) first to the month in which the Closing occurs; (ii) then to the month preceding the month in which the Closing occurred; (iii) then to the month or months following the month in which the Closing occurred up to the then current date and (iv) finally to the period prior to the period in item (ii) of this paragraph. Any Rents received by purchaser from any tenant or tenants that were in arrears on the date of Closing shall be received by the purchaser as trustee for the seller on account of, and in payment of, the past due Rents, in the order of priority set forth in this paragraph. Purchaser shall immediately remit the past due Rents so collected to the seller; and (e) Any Rents which cannot be ascertained with certainty as of the Closing shall be prorated on the basis of the parties' reasonable estimates of such amounts as of midnight of the night preceding the Closing and shall be the subject of a final proration ninety (90) days after the Closing, or as soon thereafter as the precise amounts can be ascertained. Purchaser shall notify seller when it becomes aware that any such estimated amount has been ascertained. Once all such Rent amounts have been ascertained, purchaser shall prepare a final proration statement which shall be subject to seller's reasonable approval. Upon seller's acceptance and reasonable approval of any final proration statement submitted by purchaser, such statement shall be conclusively deemed to be accurate and final and promptly thereafter seller or purchaser, as the case may be, shall pay to the other the difference between (i) the amount set forth on the approved final proration statement and (ii) the estimated amount actually prorated at Closing. It is further agreed that Purchaser shall receive a credit at Closing in the amount of $125,000.00 to cover the free rent period given by Seller to Aeroflex, Incorporated pursuant to that certain Amendment to Lease made as of May 1, 2003 by and between Seller and Aeroflex. The provisions of this paragraph shall survive the closing and the delivery of the deed hereunder for the Survival Period. 19. Default. (a) In the event that the purchaser shall fail timely to pay the Purchase Price at the time of the closing, or otherwise shall default in the timely performance of any of the terms or provisions of this Contract and fail to cure such default within five (5) days of its receipt of written notice from seller of such default this Contract shall be deemed null and void and all rights and obligations of the parties hereto shall terminate and neither the seller nor the purchaser shall have any claim against the other arising out of this Contract of Sale, except those that are specifically stated to survive termination of this Contract of Sale. (b) In the event seller shall default in the performance of any of the terms or provisions of this Contract, purchaser shall also have such remedies as purchaser shall be entitled to at law or in equity, including, without limitation, specific performance. 20. Notices. All notices or other communications that may be or are required to be given pursuant to the terms of this Contract of Sale shall be in writing and sent, prepaid, by either of the parties to this Contract, or their respective attorneys, and any such notice or communication shall be deemed to have been given only if and when hand delivered or delivered by a nationally recognized overnight courier (or, if delivery is not completed, when such delivery is attempted and refused) or if mailed by certified mail, return receipt requested, when actually received (or, if delivery is not completed, when such delivery is attempted and refused), or sent via facsimile with a copy sent either by hand, by nationally recognized overnight courier or by mail, in each case addressed to such party at their respective addresses set forth on page one of this Contract, with copies to their attorneys as follows: To the seller: Mr. Francis Postel Standard Microsystems Corporation 80 Arkay Drive Hauppauge, New York 11788 Telephone: (631) 434-2900 Fax: (631) 273-5550 with a copy to: Sally A. Fitzsimmons, Esq. 1 Prescott Square Bronxville, New York 10708 Telephone: (914) 395-1840 Fax: (914) 337-2812 to the purchaser: Mr. Richard Conniff Senior Vice President-Investments Reckson Operating Partnership, L.P. c/o Reckson Associates Realty Corp. 225 Broadhollow Road, Suite 212W Melville, New York 11747 Telephone: (631) 622-6633 Fax: (631) 622-6760 with copies to: Marialana M. Gravano, Esq. Vice President and Legal Counsel-Real Estate Reckson Operating Partnership, L.P. c/o Reckson Associates Realty Corp. 225 Broadhollow Road, Suite 212W Melville, New York 11747 Telephone: (631) 622-6675 Fax: (631) 622-8994 Matthew C. Lamstein, Esq. Lazer, Aptheker, Rosella & Yedid, P.C. 225 Old Country Road Melville, New York 11747 Telephone: (631) 761-0835 Facsimile: (631) 761-0014 All notices or other communications given pursuant to the terms of this Contract of Sale by or to the respective attorneys for the seller and the purchaser shall be given in the manner prescribed in this paragraph and shall be deemed given and/or received, as the case may be, with the same force and effect as though they were given by or to the seller and/or the purchaser. 21. Brokers. Each party represents and warrants to the other party that it has not dealt with any real estate broker in connection with the sale of the premises other than American Corporate Real Estate Inc. The purchaser further represents and warrants to the seller that no other broker or similar party introduced the purchaser to the seller or to the Premises and that the purchaser has not conferred with or been induced to enter into this Contract of Sale as a result of contacts with any other broker or similar party. The seller shall pay the Broker a commission pursuant to a separate agreement. Seller hereby further represents and warrants to purchaser that that no brokerage commission shall be due to American Corporate Real Estate Inc. in connection with the lease back of any portion of the Premises to seller. Each party (the "Indemnifying Party") shall indemnify and defend the other party (the "Indemnified Party") against any loss, liability, costs, claims and/or expenses, including (but not limited to) reasonable attorneys fees and disbursements, arising out of the breach on the Indemnifying Party's part of any representation, warranty and/or agreement contained in this paragraph. The provisions of this paragraph shall survive the closing of title to the Premises or, if the closing does not occur, the termination of this Contract. 22. No Assignment. The purchaser shall not, by operation of law or otherwise, transfer, assign or hypothecate this Contract of Sale or any right, obligation or interest of the purchaser herein and any attempted or purported transfer, assignment or hypothecation shall be null and void and without force or effect. Notwithstanding the foregoing, purchaser shall have the right, at or prior to closing and without the prior consent of seller, to assign its rights and obligations under this Contract to an entity affiliated with purchaser. 23. Merger. It is specifically understood and agreed that this Contract of Sale is a single, indivisible contract and the acceptance of the deed to the Premises by the purchaser shall be deemed to be a full performance and discharge of every covenant, representation, warranty, agreement and/or obligation on the part of the seller to be performed pursuant to this Contract of Sale except those, if any, that are specifically stated herein to survive the closing of title and the delivery of the deed. Unless so specifically stated, no agreement, covenant, warranty or representation made in this Contract by seller shall survive the closing of title and/or the delivery of the deed. 24. Recording. The purchaser shall not record or attempt to record this Contract of Sale or a memorandum hereof. Violation of this provision by the purchaser shall constitute a material breach of purchaser's obligations under this Contract of Sale. 25. FIRPTA. The seller shall deliver to the purchaser at the closing of title a certification which satisfies the requirements of Section 1445 of the Internal Revenue Code of 1986, as amended (and any regulations promulgated thereunder), which provides that seller is not a foreign person or entity for the purposes of such Section 1445. If the seller delivers such certification, the purchaser shall not deduct or withhold any portion of the Purchase Price pursuant to such Section 1445. 26. Assignment and Assumption of Existing Leases Each party hereby agrees to execute and deliver to the other party at the closing of title hereunder, an assignment and assumption agreement in the form annexed hereto as Schedule H of this Contract whereby seller agrees to assign all of its right, title and interest in and to the Leases to purchaser and the purchaser agrees to assume and perform all of the terms, covenants, liabilities and obligations of the Leases on the part of the landlord thereunder to be performed subsequent to the closing. Seller hereby agrees to indemnify and hold harmless purchaser from and against any liability under the Leases accruing prior to the Closing and purchaser hereby agrees to indemnify and hold harmless the seller from and against any liability under the Leases accruing from and after the Closing. . The seller makes no representation or warranty that any of the Leases will be in full force or effect as of the Closing or that any of the rents under the Leases will be currently collected on such date. If at any time between the date of this Contract and the closing, any of the rentable space in the Premises is or shall become vacant or if any of the Leases shall expire or otherwise terminate, such space shall not be leased nor shall any extension or renewal of the expired term be made (other than an extension or renewal right currently existing in a Lease and exercisable by the tenant) without the prior written consent of purchaser. In addition, seller shall not permit the assignment of any lease or the sublease of any space at the premises without first obtaining the prior written consent of purchaser. Notwithstanding the foregoing, the seller may, without the purchaser's consent, permit the occupant of such space to remain in possession on a month to month basis at a rental rate acceptable to seller, in its sole discretion. 27. Security Deposits. In the event that any tenant at the Premises shall have deposited with the seller a sum or sums of money as security (the "security deposit(s)") for the performance by such tenant of the terms, covenants and conditions of such tenant's Lease, then such security deposit(s), to the extent the same have not been applied by seller to curing the defaults of such tenant prior to the closing, shall be paid over to the purchaser at the closing of title, together with any unpaid interest accruing thereon. Simultaneously with the delivery of the security deposits and any unpaid accrued interest thereon, purchaser shall deliver a receipt for such monies and an agreement, in the form annexed hereto as Schedule I, indemnifying seller and holding seller harmless from and against any costs (including, but not limited to reasonable attorneys fees and expenses), liability and/or responsibility for such monies from and after the date of closing. The provisions of this paragraph shall survive the closing for the Survival Period. 28. Intentionally Omitted. 29. Governing Law. This Contract of Sale shall be governed by and construed in accordance with the laws of the State of New York. This Contract shall be construed without any regard to any presumption or other rule requiring construction against the party causing the same to be drafted it being agreed that the final terms of this Contract are the result of negotiations by parties having equal bargaining powers, with each having full access to legal representation. If any words or phrases in this Contract shall have been stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Contract shall be construed as if the words or phrases so stricken were never included in this Contract and no implication or inference shall be drawn from the fact that such words or phrases were so stricken. All terms and words used in this Contract of Sale, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. The terms "hereof", "herein", "hereunder" or words of similar import shall be deemed to refer to this Contract of Sale in its entirety and not to any particular provision, unless expressly so stated. 30. No offer; Binding effect. This Contract of Sale shall neither be deemed an offer to sell nor shall it bind, obligate or be effective against the seller unless and until the Contract has been fully executed by the seller and the purchaser and an executed copy is delivered to the purchaser. 31. Lease back to the seller. Simultaneously with the closing, the seller and the purchaser shall execute the lease annexed hereto as Schedule C whereby the purchaser, as landlord, leases the portion of the Premises known as 300 Kennedy Drive to the seller, as tenant, on the terms and conditions stated in such lease. It is understood and agreed that the execution of said lease, without alteration, modification or amendment (unless expressly agreed to in writing by both parties) shall be a condition to both parties obligation to close title to the Premises and the failure of either party to execute said lease at the closing shall be deemed a material default of its obligations under this Contract of Sale. 32. Exclusions. Notwithstanding anything in this Contract of Sale to the contrary, the sale of the Premises excludes (i) any deposits with utility companies; (ii) property of seller's lessees, if any; (iii) any electric meters and equipment owned by the metering company; and (iv) personal tools, property and equipment of seller and its employees. 33. Omission of "Subject to" Clauses. Any and all of the "Subject to" clauses contained in this Contract of Sale may be omitted from the deed to the Premises to be delivered at the closing of title, but all such omitted clauses shall survive the delivery of the deed despite any provisions in this Contract to the contrary. 34. Seller' Closing Obligations. At the Closing, in addition to seller's obligations elsewhere provided in this Contract of Sale, seller shall deliver the following instruments to purchaser: (a)The Deed; (b) The assignment and assumption of all seller's right, title and interest in and to the Leases and all original Lease documents in seller's possession in the form annexed hereto as Schedule H; (c) An updated rent schedule setting forth the security deposits and all rent arrearages and prepayments of rent, if any; (d) An assignment to purchaser, without recourse or warranty, of all of the interest of seller in those service contracts to be delivered to purchaser at the Closing which are then in effect and are assignable by seller; (e) To the extent they are in seller's possession and not posted at the Premises, any certificates, licenses, permits, authorizations and approvals issued for or with respect to the Premises by governmental and quasi-governmental authorities having jurisdiction; (f) Such affidavits as purchaser's title insurance company shall reasonably require in order to omit from its title insurance policy all exceptions for judgments, bankruptcies or other returns against persons or entities whose names are the same as or similar to seller's name; (g) An original letter in the form annexed hereto as Schedule K, executed by the seller or its agent, advising the tenants that the Premises have been sold to the purchaser and directing that all communications, rents and other payments after the date of closing be directed to the purchaser; (h) A certificate of seller's corporate secretary certifying that seller's board of directors has adopted a resolution authorizing the sale of the Premises; (i) A certificate, executed by seller, confirming that the representations contained in paragraph 8 of this Contract are true and correct as of the Closing Date; (j) A financial closing statement, in form and substance reasonably acceptable to purchaser and seller, which has been executed by purchaser and seller; and (k) Any other documents reasonably required by purchaser or purchaser's title company to close in accordance with the terms and provisions of this Contract. 35. Conditions Precedent to Closing. The obligations of purchaser hereunder are subject to the following conditions prior to or on the Closing Date (any one of which may be waived in whole or in part by purchaser at or prior to the Closing) and in the event any of the conditions are not complied with, purchaser may terminate this Contract of Sale by notifying seller and thereafter this Contract of Sale shall be null and void: (a) Seller shall have performed all of its obligations, covenants and agreements under this Contract of Sale; (b) All of seller's representations and warranties made in this Contract shall be true and correct as of the Closing Date; (c) All Leases shall be in full force and effect, the tenants thereunder shall be current in their payment of all rents, additional rents and other charges due thereunder ( it being understood an agreed that seller shall be prohibited from applying any security deposit(s) currently held under the Leases for the purpose of satisfying this condition precedent), and the tenants shall not otherwise be in default under any of the terms and conditions of the Leases (other than the obligation of Kollmorgen [or its successor]to occupy the space it is currently leasing at 350 Kennedy Drive and Sprint's failure to obtain necessary sign offs and approvals for open permits with respect to their equipment); and (d) Seller shall obtain and deliver to purchaser prior to the expiration of the Feasibility Period a tenant estoppel certificate from all tenants at the Premises in the forms annexed hereto as Schedules D-1 and D-2 (it being understood and agreed that any changes or modifications to such tenant estoppel form must be approved, in writing, by purchaser prior to the expiration of the Feasibility Period). Seller shall deliver the form tenant estoppel certificate to each of the tenants immediately after the Effective Date. 36. Purchaser's Representations. Purchaser hereby represents and warrants to seller that purchaser is a Delaware limited partnership, validly existing and in good standing under the laws of the State of Delaware, is qualified to do business under the laws of the State of New York and has full power and authority to conduct its business as presently conducted. Neither the entry into this Contract nor the consummation of the transactions contemplated hereby will constitute or result in a violation or breach by purchaser of the certificate of incorporation or by laws of purchaser, or any judgment, writ, order, injunction or decree issued against it or imposed upon it, or will result in a violation of any applicable law, order, rule or regulation of any governmental authority. No approval, consent, order or authorization of , or designation, registration or filing (other than for recording purposes) with any governmental authority is required in connection with the due and valid execution and delivery of this Contract and compliance with the provisions hereof and the consummation of the transaction contemplated hereby. This Contract and the consummation of the transaction contemplated hereby have been duly authorized by all necessary action on the part of purchaser and this Contract constitutes a legal, valid and binding obligation of purchaser. 37. Purchaser's Lien. It is understood and agreed that the title examination and survey update costs (if any) referred to in paragraph 10 of this Contract are hereby made liens on the Premises, but such liens shall not continue after a default by purchaser under this Contract or following the termination of this Contract of Sale. 38. Intentionally Omitted. 39. Captions. The captions in this Contract are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Contract, or any of the provisions hereof. 40. No financing contingency. It is understood and agreed that purchaser's obligations under this Contract are not contingent upon purchaser's ability to finance the purchase of the Premises. 41. Seller's Covenants Until Closing. Seller hereby covenants to purchaser as follows: (a) until the Closing or earlier termination of this Contract, seller shall not remove any items of Personalty from the Premises unless in the ordinary course of the operation and maintenance of the Premises and, in such event, seller shall replace such items of Personalty if such replacement would likewise be in the ordinary course of the operation and maintenance of the Premises; (b) until the Closing or earlier termination of this Contract, seller shall not make any alterations to the Premises costing in excess of Ten Thousand and 00/100 ($10,000.00) Dollars other than decorative changes, without first obtaining the prior written consent of purchaser, unless such alterations are required by the terms of the Leases, or unless such alterations are required by law or are otherwise required to ensure the health and safety of the tenants at the Premises and their employees, guests and invitees (in which events, if circumstances permit, seller shall endeavor to obtain purchaser's prior written consent, but only as to the scope of the plans and specifications for such alterations, and not as to the necessity therefore); (c) until the Closing, seller shall maintain the insurance coverage on the Premises described in Schedule F; and (d) until the Closing or the earlier termination of this Contract, (i) seller shall continue to operate the Premises in the same manner as it is currently being operated by seller; and (ii) seller agrees that it will not (directly or indirectly) offer to sell or solicit offers to purchase or negotiate the sale or disposal of the Premises with any other party other than purchaser. 42. Confidentiality Agreement. In connection with the negotiation of this Contract and the preparation for the consummation of the transactions contemplated hereby, each party acknowledges that it will have access to confidential information relating to the other party. Each party shall treat such information as confidential, preserve the confidentiality thereof, and not duplicate or use such information, except to advisors, consultants, investors and affiliates in connection with the transactions contemplated hereby. In the event of the termination of this Contract for any reason whatsoever, each party shall return to the other party, if requested, all documents, work papers and other material (including all copies thereof) obtained from the other party in connection with the transactions contemplated hereby, and each party shall use its best efforts, including instructing its employees and others who have had access to such information, to keep confidential and not to use any such information. The provisions of this Paragraph will survive the closing, or if the purchase and sale is not consummated, any termination of this Contract, for the Survival Period. 43. Like Kind Exchange. Seller hereby acknowledges that it is the intent of purchaser to complete a reverse "like-kind exchange" pursuant to Section 1031 of the Internal Revenue Code and purchaser may utilize the Premises as "Replacement Property" in connection with such like-kind exchange. In no event will purchaser's like-kind exchange delay the close of the purchase transaction or cause an additional expense to seller. Seller shall fully cooperate with purchaser in effectuating any like-kind exchange and, accordingly, purchaser's rights under this Contract may be assigned to a Qualified Intermediary of Purchaser's choice for the purpose of completing such exchange. Purchaser's effectuation of a like-kind exchange prior to closing shall not be a condition or contingency to purchaser's obligation hereunder. Purchaser shall be responsible for all costs and expenses incurred in connection with the effectuation of the like-kind exchange over and above those seller would incur in a straight purchase/sale. In the event a "like-kind" exchange is effectuated by purchaser, the Premises shall constitute Replacement Property in the Internal Revenue Code Section 1031 exchange. The provisions of this paragraph shall survive the closing for the Survival Period. 44. Lighting and Landscaping. With respect to that certain letter dated February 27th, 2003 from the Town of Smithtown (the "Town") to seller regarding open Permit No. 91693, (a) prior to Closing, seller shall post with the Town any bond(s) which the Town shall require with respect to the same and (b) subsequent to the Closing, seller shall perform and complete all work described in said letter as well as obtain a certificate of occupancy and/or completion for Permit No. 91693. 45. Counterparts. This Contract may be executed in counterparts each of which (or any combinations of which, signed by all of the parties) shall be deemed an original, but all of which taken together, shall constitute one and the same instrument. Seller: STANDARD MICROSYSTEMS CORPORATION by: /s/ Andrew M. Caggia --------------------- Andrew M. Caggia, Senior Vice President and Chief Financial Officer Purchaser: RCG Kennedy Drive, LLC. By: Reckson Construction Group, Inc., its sole member by: /s/ Gregg Rechler ------------------ Gregg Rechler, president List of Schedules Schedule A Metes and Bounds Description of the Premises Schedule B Schedule of the Leases Schedule C Lease back of the portion of the premises known as 300 Kennedy Drive, Hauppauge, N.Y. between purchaser, as owner, and seller, as tenant. Schedule D-1 Tenant Estoppel Certificate Schedule D-2 Tenant Estoppel Certificate Schedule E VST Right of Way Schedule F Insurance Policies covering the Premises Schedule G Deed Schedule H Assignment and Assumption Agreement Schedule I Purchaser's receipt of the Security Deposits Schedule J Accounts Receivable Report Schedule K Tenant Notice Letter -----END PRIVACY-ENHANCED MESSAGE-----