-----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, AwS+i0aonzcnlJdW0MbrwLiVBzfEqaBo94/eFDKyR81DTGSOtfRr6r+V7DYkKs58 gVr/a3st5ehHLiJleJjmog== 0000093384-05-000034.txt : 20051011 0000093384-05-000034.hdr.sgml : 20051010 20051011162321 ACCESSION NUMBER: 0000093384-05-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050831 FILED AS OF DATE: 20051011 DATE AS OF CHANGE: 20051011 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: 0806 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07422 FILM NUMBER: 051132972 BUSINESS ADDRESS: STREET 1: 80 ARKAY DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 6314342904 MAIL ADDRESS: STREET 1: 80 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-Q 1 form_10-q.txt UNITED STATES 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 August 31, 2005 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 ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 31, 2005, there were 20,953,000 shares of the registrant's common stock outstanding. Standard Microsystems Corporation Form 10-Q For the Quarter Ended August 31, 2005 Table of Contents Part I Financial Information Item 1 Financial Statements (unaudited): Condensed Consolidated Balance Sheets as of August 31, 2005 and February 28, 2005 Condensed Consolidated Statements of Operations for the Three and Six-Month Periods Ended August 31, 2005 and 2004 Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended August 31, 2005 and 2004 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 2 Unregistered Sales of Equity Securities and Use of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits Signature PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands) August 31, February 28, 2005 2005 ------------- ---------------- Assets Current assets: Cash and cash equivalents $ 24,678 $ 116,126 Short-term investments 106,988 56,519 Accounts receivable, net 29,109 23,788 Inventories 38,818 33,310 Deferred income taxes 16,612 17,701 Other current assets 4,794 4,295 - ------------------------------------------------------------------------------- Total current assets 220,999 251,739 - ------------------------------------------------------------------------------- Property, plant and equipment, net 28,915 22,630 Goodwill 79,032 29,435 Intangible assets, net 48,152 3,584 Deferred income taxes 9,456 7,163 Other assets 3,864 4,708 - ------------------------------------------------------------------------------- $ 390,418 $ 319,259 =============================================================================== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 22,216 $ 15,995 Deferred income on shipments to distributors 8,876 7,689 Accrued expenses, income taxes and other liabilities 21,574 13,400 - ------------------------------------------------------------------------------- Total current liabilities 52,666 37,084 - ------------------------------------------------------------------------------- Deferred income taxes 16,116 - Other liabilities 15,429 12,326 Shareholders' equity: Preferred stock - - Common stock 2,295 2,053 Additional paid-in capital 229,340 187,854 Retained earnings 103,658 100,612 Treasury stock, at cost (25,961) (23,799) Deferred stock-based compensation (3,588) (1,925) Accumulated other comprehensive income 463 5,054 - ------------------------------------------------------------------------------- Total shareholders' equity 306,207 269,849 - ------------------------------------------------------------------------------- $ 390,418 $ 319,259 =============================================================================== See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
Three Months Ended Six Months Ended August 31, August 31, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 -------------- --------------- --------------- -------------- Revenues $ 79,060 $ 50,157 $ 147,867 $ 103,210 Costs and expenses: Cost of goods sold 44,372 26,260 80,864 52,645 Research and development 14,685 11,220 27,651 22,082 Selling, general and administrative 18,554 11,852 32,145 23,704 Amortization of intangible assets 1,557 266 2,710 583 In-process research and development - - 895 - - ------------------------------------------------------------------------------------- ----------------------------------- Income (loss) from operations (108) 559 3,602 4,196 Interest income 649 556 1,372 1,022 Other expense, net (5) (6) (52) (38) - ------------------------------------------------------------------------------------- ----------------------------------- Income before provision for income taxes 536 1,109 4,922 5,180 Provision for income taxes 517 214 1,876 1,373 - ------------------------------------------------------------------------------------- ----------------------------------- Net income $ 19 $ 895 $ 3,046 $ 3,807 ===================================================================================== =================================== Basic net income per share: $ - $ 0.05 $ 0.15 $ 0.21 ===================================================================================== =================================== Diluted net income per share: $ - $ 0.05 $ 0.14 $ 0.20 ===================================================================================== =================================== Weighted average common shares outstanding: Basic 20,630 18,308 20,325 18,278 Diluted 21,611 19,169 21,071 19,482
See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended August 31, ---------------------------------------- 2005 2004 ----------------- ----------------- Cash flows from operating activities: Cash received from customers and licensees $ 150,179 $ 105,124 Cash paid to suppliers and employees (118,969) (98,520) Interest received 1,067 983 Interest paid (45) (72) Income taxes refunded (paid) (2,560) 6,738 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 29,672 14,253 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (9,204) (6,202) Acquisition of Oasis SiliconSystems Holding AG, net of cash acquired (60,349) - Sales of long-term investments - 4,000 Purchases of short-term investments (248,227) (231,141) Sales of short-term investments 197,831 276,923 Other 21 36 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) investing activities (119,928) 43,616 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from issuance of common stock 2,814 976 Purchases of treasury stock (2,162) - Repayments of obligations under capital leases and notes payable (1,313) (1,016) - ------------------------------------------------------------------------------------------------------------------------ Net cash used for financing activities (661) (40) - ------------------------------------------------------------------------------------------------------------------------ Effect of foreign exchange rate changes on cash and cash equivalents (531) 15 - ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (91,448) 57,844 Cash and cash equivalents at beginning of period 116,126 14,050 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 24,678 $ 71,894 ======================================================================================================================== Reconciliation of net income to net cash provided by operating activities: Net income $ 3,046 $ 3,807 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,238 5,664 Tax benefits from employee stock plans 698 117 In-process research and development charge 895 - Stock-based compensation 6,347 500 Other adjustments, net (11) (18) Changes in operating assets and liabilities, net of business acquisition impact: Accounts receivable (13) (5,632) Inventories 6,675 (4,696) Accounts payable, deferred income, accrued expenses and other liabilities 4,336 6,882 Current and deferred income taxes (1,370) 7,995 Other changes, net 831 (366) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities $ 29,672 $ 14,253 ========================================================================================================================
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 (SEC), 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 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 fiscal year ended February 28, 2005 included in the Company's annual report on Form 10-K, as filed on May 16, 2005 with the SEC. The results of operations for the three and six-month periods ended August 31, 2005 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, restricted stock awards and stock appreciation rights (SARs) are granted to employees and directors. All stock options and SARs 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 the pro forma disclosures required by SFAS No. 123, 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 Six Months Ended August 31, August 31, ----------------------------------------------------- 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------- Net income - as reported $ 19 $ 895 $ 3,046 $ 3,807 Stock-based compensation expense included in net income, net of taxes - as reported 3,844 189 3,989 331 Stock-based compensation expense determined using the fair value method for all awards, net of taxes (5,416) (2,100) (7,731) (4,522) - ----------------------------------------------------------------------------------------------------------------- Net loss - pro forma $ (1,553) $ (1,016) $ (696) $ (384) ================================================================================================================= Basic net income per share - as reported $ - $ 0.05 $ 0.15 $ 0.21 ================================================================================================================= Diluted net income per share - as reported $ - $ 0.05 $ 0.14 $ 0.20 ================================================================================================================= Basic and diluted net loss per share - pro forma $ (0.08) $ (0.06) $ (0.03) $ (0.02) =================================================================================================================
3. Acquisition of OASIS SiliconSystems Holding AG On March 30, 2005, SMSC announced the completion that day of its acquisition of OASIS SiliconSystems Holding AG (OASIS). Based in Karlsruhe, Germany, OASIS is engaged in the development and marketing of integrated circuits that enable networking of multimedia devices for automotive infotainment applications. The transaction was accounted for as a purchase under accounting principles generally accepted in the United States of America, whereby the purchase price for OASIS has been allocated to the net tangible and intangible assets acquired, based upon their fair values as of March 30, 2005, and the results of OASIS' operations subsequent to March 30, 2005 have been included in the Company's consolidated results of operations. SMSC acquired all of OASIS' outstanding capital stock in exchange for aggregate consideration of $118.7 million, including approximately 2.1 million shares of SMSC common stock valued for accounting purposes at $35.8 million, $79.5 million of cash, and approximately $3.4 million of direct acquisition costs, including legal, banking, accounting and valuation fees. The tangible assets of OASIS at March 30, 2005 included approximately $22.4 million of cash and cash equivalents, resulting in a net cash outlay of approximately $60.5 million. SMSC's existing cash balances were the source of the cash used in the transaction. For accounting purposes, the value of the SMSC common stock was determined using the stock's market value for the average of the two days before and after the date the terms of the acquisition were announced. Under the terms of the Share Purchase Agreement, approximately 1.2 million of the shares and $1.8 million of the cash issued to the former shareholders of OASIS is being held in an escrow account as security for certain indemnity obligations of OASIS' former shareholders. Up to $20.0 million of additional consideration, payable in cash and SMSC common stock, may be issued to OASIS' former shareholders during fiscal 2007 upon satisfaction of certain future performance goals. Any additional consideration earned and paid will be recorded as goodwill. The following table summarizes the components of the purchase price (in millions): Cash $ 79.5 SMSC common stock issued 35.8 Transaction costs 3.4 - ---------------------------------------------------------------- $ 118.7 ================================================================ The following table summarizes the allocation of the purchase price (in millions): Cash and cash equivalents $ 22.4 Accounts receivable 5.8 Inventory 12.9 Other current assets 0.5 Identifiable intangible assets: Purchased technology 32.4 Customer relationships 10.5 Trademark 5.4 Other 0.6 Property and equipment 2.7 Goodwill 51.9 Deferred income tax benefits 0.6 Accounts payable (1.7) Accrued expenses and income taxes (6.9) Deferred income tax liabilities (19.3) In-process research and development 0.9 - ---------------------------------------------------------------- $ 118.7 ================================================================ The majority of OASIS' net assets, including goodwill and identifiable intangible assets, are located in Europe, and the functional currency of OASIS' operations in Europe is the euro. Accordingly, these euro-denominated net assets are translated into U.S. dollars at period-end exchange rates and gains or losses arising from translation are included as a component of accumulated other comprehensive income within shareholders' equity. In accordance with the provisions of SFAS No. 141, OASIS' finished goods inventory was valued at estimated selling prices less the costs of disposal and a reasonable profit allowance for the related selling effort; work-in-process inventory was valued at estimated selling prices of the finished goods less costs to complete, costs of disposal, and a reasonable profit allowance for the completing and selling efforts; and raw materials were valued at current replacement costs. These values initially exceeded OASIS' historical inventory cost by approximately $1.7 million. This value was included within the $12.9 million of fair value assigned to OASIS' inventory at March 30, 2005, and is being recorded as a component of cost of goods sold as the underlying inventory is sold, $1.0 million and $1.6 million of which was recognized during the three and six-month periods ended August 31, 2005, respectively. The estimated fair value attributed to purchased technology was determined based upon a discounted forecast of the estimated net future cash flows to be generated from the technologies, using a discount rate of 25%. The estimated fair value of purchased technology is being amortized over a period of 8 years on a straight-line basis, which approximates the pattern in which the economic benefits of the technology are expected to be realized. The estimated fair value attributed to customer relationships was determined based on a discounted forecast of the estimated net future cash flows to be generated from the relationships, discounted at a rate of 23%. The estimated fair value of the customer relationships is being amortized over a period of 8 years on a straight-line basis, which approximates the pattern in which the economic benefits of the customer relationships are expected to be realized. OASIS owns certain trademarks related to its automotive infotainment technology. The estimated fair value attributed to these trademarks was determined by calculating the present value of the royalty savings related to the trademarks using an assumed royalty rate of 1.5% and a discount rate of 23%. These trademarks have indefinite lives and are therefore not being amortized. They will be subject to an impairment test on an annual basis, or when an event or circumstance occurs indicating a possible impairment in value. Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired. This acquisition significantly expands SMSC's sales of integrated circuits into automotive infotainment applications, and is also providing opportunities for expanded revenues into other applications, including consumer networking. It also added an assembled workforce of approximately 150 employees into SMSC's operations. These factors contributed to recognition of goodwill in the purchase price. In accordance with SFAS No. 142, goodwill is not amortized but will be tested for impairment at least annually. The $0.9 million allocated to in-process research and development represents the fair value of purchased in-process technology for research projects that, as of the March 30, 2005 closing date of the acquisition, had not reached technological feasibility and had no alternative future uses. This value was based upon discounted cash flows attributable to the projects using a discount rate of 28%, the estimated time to complete the projects and the levels of risks involved. These projects are primarily focused on deployment of certain technology into consumer applications. The $0.9 million estimated fair value of in-process research and development is reflected within Costs and expenses for the six-month period ended August 31, 2005. The following unaudited pro forma financial information presents the combined operating results of SMSC and OASIS as if the acquisition had occurred as of the beginning of each period presented. Pro forma data is subject to various assumptions and estimates, and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results. Pro forma financial information for the three and six-month periods ended August 31, 2005 and August 31, 2004, is presented in the following table (in millions, except per share data): Three Months Ended Six Months Ended August 31, August 31, ----------------------------------------- 2005 2004 2005 2004 ------------------------------------------------------------------------------- Revenues $ 79.1 $ 63.3 $ 152.0 $ 128.3 Net income (loss) $ (0.5) $ (0.8) $ 2.5 $ 1.9 Basic net income (loss) per share $ (0.03) $ (0.04) $ 0.12 $ 0.09 Diluted net income (loss) per share $ (0.03) $ (0.04) $ 0.12 $ 0.09 4. Short-Term Investments Short-term investments consist of investments in obligations with maturities of between three and twelve months, at acquisition, and investments in auction rate securities. All of these investments are classified as available-for-sale. The costs of these short-term investments approximate their market values as of February 28, 2005 and August 31, 2005. The Company invests excess cash in a variety of marketable securities, including auction rate securities. Auction rate securities have long-term underlying maturities, but have interest rates that are reset every 90 days or less, at which time the securities can typically be purchased or sold, which creates a highly liquid market for these securities. The Company's intent is not to hold these securities to maturity, but rather to use the interest rate reset feature to provide liquidity as necessary. The Company's investment in these securities provides higher yields than money market and other cash equivalent investments. For all periods through November 30, 2004, the Company classified auction rate securities as cash equivalents. Effective at February 28, 2005, auction rate securities are being classified as short-term investments on the Company's consolidated balance sheet for all dates presented, reflecting current interpretations of the accounting treatment for these securities. In addition, consistent with this change in classification, all purchases and sales of auction rate securities are reflected in the investing activities section of the Company's Consolidated Statements of Cash Flows for all periods presented. The Company does not consider this change in classification to be material to its financial condition or cash flows. In addition, this reclassification has no effect on the Company's total current assets, working capital, total assets, or operating cash flows, and the change in classification in no way revises or restates the Company's Consolidated Statements of Operations. For purposes of the Condensed Consolidated Statement of Cash Flows for the six months ended August 31, 2004, auction rate and other securities at August 31, 2004 were changed in classification as follows (in thousands): Cash and Cash Short-Term Equivalents Investments - -------------------------------------------------------------------------------- As previously classified $ 159,524 $ 13,835 Change in classification - auction rate securities (87,369) 87,369 Change in classification - other securities (261) 261 - -------------------------------------------------------------------------------- As currently classified $ 71,894 $ 101,465 ================================================================================ For the six-month period ended August 31, 2004, $33.5 million of net cash provided by investing activities, related to activity in auction rate securities, was previously included in the net increase in cash and cash equivalents in the Consolidated Statements of Cash Flows. 5. Balance Sheet Data Inventories are valued at the lower of first-in, first-out cost or market and consist of the following (in thousands): August 31, February 28, 2005 2005 - ----------------------------------------------------------------------- Raw materials $ 1,343 $ 1,143 Work in process 17,592 16,626 Finished goods 19,883 15,541 - ----------------------------------------------------------------------- $ 38,818 $ 33,310 ======================================================================= Property, plant and equipment consist of the following (in thousands): August 31, February 28, 2005 2005 - ----------------------------------------------------------------------- Land $ 578 $ 578 Buildings and improvements 12,275 12,064 Machinery and equipment 72,328 68,190 Construction in progress 9,007 1,601 - ----------------------------------------------------------------------- 94,188 82,433 Less: accumulated depreciation 65,273 59,803 - ----------------------------------------------------------------------- $ 28,915 $ 22,630 ======================================================================= The increase in construction in progress reflects expenditures incurred to expand the Company's primary facility in Hauppauge, New York, which will allow consolidation of the Company's Hauppauge operations into a single facility, currently expected to occur during fiscal 2007. Portions of the Company's Hauppauge operations currently occur in a separate 50,000 square foot facility, the lease for which will expire during fiscal 2007. The Company currently expects the cost of this building expansion to be approximately $20 million. The majority of the expenditures for this project are expected to occur during fiscal 2006. 6. 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 unvested restricted stock awards and 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 Six Months Ended August 31, August 31, 2005 2004 2005 2004 ----------------------------------------------------------------------------------------------------------- Average shares outstanding for basic net income per share 20,630 18,308 20,325 18,278 Dilutive effect of stock options and unvested restricted stock awards 981 861 746 1,204 ----------------------------------------------------------------------------------------------------------- Average shares outstanding for diluted net income per share 21,611 19,169 21,071 19,482 -----------------------------------------------------------------------------------------------------------
Options covering 1.6 million and 1.3 million shares for the three-month periods ended August 31, 2005 and 2004, respectively, and 2.1 million and 0.8 million shares for the six-month periods ended August 31, 2005 and 2004, respectively, were excluded from the computation of average shares outstanding for diluted net income per share because their effect was antidilutive. 7. 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 and six-month periods ended August 31, 2005 and 2004 were as follows (in thousands):
Three Months Ended Six Months Ended August 31, August 31, 2005 2004 2005 2004 ------------------------------------------------------------------------------------------------------------ Net income $ 19 $ 895 $ 3,046 $ 3,807 Other comprehensive income (loss): Change in foreign currency translation adjustments (175) 43 (4,643) (10) Change in unrealized gain (loss) on marketable equity securities, net of taxes (19) (15) 52 (19) ------------------------------------------------------------------------------------------------------------ Total comprehensive income (loss) $ (175) $ 923 $(1,545) $ 3,778 ============================================================================================================
8. Business Restructuring In December 2001, the Company announced a restructuring plan for its exit from the PC chipset business. The Company's reserve related to this restructuring declined from $0.5 million at February 28, 2005 to $0.4 million at August 31, 2005, reflecting payments against previously reserved non-cancelable lease obligations, which will continue through their respective lease terms through August 2008. 9. Goodwill and Intangible Assets The Company's March 2005 acquisition of OASIS included the acquisition of $42.9 million of finite-lived intangible assets, an indefinite-lived trademark of $5.4 million, and goodwill of $51.9 million. Some of these intangible assets are denominated in currencies other than the U.S. dollar, and these March 2005 values reflect foreign exchange rates in effect on the date of the transaction. The June 2002 acquisition of Tucson, Arizona-based Gain Technology Corporation included the acquisition of $7.1 million of finite-lived intangible assets and $29.4 million of goodwill, after adjustments. All finite-lived intangible assets are being amortized on a straight-line basis, which approximates the pattern in which the estimated economic benefits of the assets are realized, over their estimated useful lives. Existing technologies have been assigned estimated useful lives of between six and eight years, with a weighted-average useful life of approximately eight years. Customer relationships and contracts have been assigned useful lives of between one and ten years, with a weighted-average useful life of approximately eight years. Intangible assets that are denominated in a functional currency other than the U.S. dollar have been translated into U.S. dollars using the exchange rate in effect on the reporting date. As of August 31, 2005 and February 28, 2005, the Company's identifiable intangible assets consisted of the following (in thousands):
August 31, 2005 February 28, 2005 - ------------------------------------------------------------------------------------------------------ Accumulated Accumulated Cost Amortization Cost Amortization - ------------------------------------------------------------------------------------------------------ Purchased technologies $ 37,799 $ 4,994 $ 6,179 $ 2,832 Customer relationships and contracts 10,354 628 326 89 - ----------------------------------------------------------------------------------------------------- Total - finite-lived intangible assets 48,153 5,622 6,505 2,921 - ----------------------------------------------------------------------------------------------------- Trademark and other 5,621 - - - - ----------------------------------------------------------------------------------------------------- $ 53,774 $ 5,622 $ 6,505 $ 2,921 =====================================================================================================
Total amortization expense recorded for finite-lived intangible assets was $1.6 million and $0.3 million for the three-month periods ended August 31, 2005 and 2004, respectively, and $2.7 million and $0.6 million for the six-month periods ended August 31, 2005 and 2004, respectively. Estimated future finite-lived intangible asset amortization expense for the remainder of fiscal 2006 and thereafter is as follows (in thousands): Period Amount - --------------------------------------------------- Remainder of fiscal 2006 $ 3,134 Fiscal 2007 6,268 Fiscal 2008 6,268 Fiscal 2009 5,496 Fiscal 2010 5,239 Fiscal 2011 and thereafter 16,126 =================================================== 10. Retirement Plans The Company maintains an unfunded Supplemental Executive Retirement Plan to provide senior management with retirement, disability and death benefits. The Company's subsidiary, SMSC Japan, also maintains an unfunded retirement plan, which provides its employees and directors with separation benefits, consistent with customary practices in Japan. Benefits under these defined benefit plans are based upon various service and compensation factors. The following table sets forth the components of the consolidated net periodic pension expense for these plans for the three and six-month periods ended August 31, 2005 and 2004, respectively (in thousands):
Three Months Ended Six Months Ended August 31, August 31, -------------------------------------------------- 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------ Service cost - benefits earned $ 85 $ 71 $ 171 $ 143 Interest cost on projected benefit obligations 99 107 197 213 Net amortization and deferral 67 73 134 145 - ------------------------------------------------------------------------------------------------------ Net periodic pension expense $ 251 $ 251 $ 502 $ 501 ======================================================================================================
Additionally, the Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing benefits under the Supplemental Executive Retirement Plan. 11. Common Stock Repurchase Program The Company maintains a common stock repurchase program, as approved by its Board of Directors, which authorizes the Company to repurchase up to three million shares of its common stock on the open market or in private transactions. Under this program, the Company repurchased approximately 150,000 shares of its common stock at a cost of $2.2 million during the first quarter of fiscal 2006. No shares were repurchased during the second quarter of fiscal 2006. The Company repurchased approximately 22,000 shares at a cost of $0.3 million during the second quarter of fiscal 2005. The Company currently holds repurchased shares as treasury stock. As of August 31, 2005, the Company has repurchased a total of approximately 2.0 million shares of its common stock, at a cost of $26.0 million, under this program. 12. Operating Segment Information The Company's operating segments conform to aggregation criteria set forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and their operating results are therefore aggregated into one reportable operating segment - the design, development and marketing of semiconductor integrated circuits. 13. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, "Inventory Costs, An Amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 151 and does not expect that its adoption will have a material impact on its consolidated financial condition, results of operations and cash flows. In December 2004, the FASB issued SFAS No. 123R (Revised 2004), "Share-Based Payment." The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted the option of continuing to apply the guidance in APB Opinion 25, provided that the footnotes to the consolidated financial statements disclosed pro forma net income and net income per share, as if the preferable fair-value-based method had been applied. SFAS No. 123R requires that compensation costs relating to share-based payment transactions be recognized in the consolidated financial statements. Compensation costs will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R is effective for the first annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 123R and believes that the adoption of this statement could have a material impact on its consolidated financial position and results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on the Company's consolidated financial position, results of operations and cash flows. In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004." The American Jobs Creation Act introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to U.S. companies, provided certain criteria are met. FSP No. 109-2 provides accounting and disclosure guidance on the impact of the repatriation provision on a company's income tax expense and deferred tax liability. The Company is currently studying the impact of the one-time favorable foreign dividend provision and intends to complete the analysis by the end of fiscal 2006. Accordingly, the Company has not recorded any adjustments to its income tax expense or deferred income taxes to reflect the tax impact of any repatriation of non-U.S. earnings it may make. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations." Interpretation No. 47 clarifies that an entity must record a liability for a "conditional" asset retirement obligation if the fair value of the obligation can be reasonably estimated. Interpretation No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Interpretation No. 47 is effective no later than the end of the fiscal year ending after December 15, 2005. The Company does not expect the adoption of Interpretation No. 47 to have a material impact on its consolidated financial position, results of operations and cash flows. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", which supersedes APB Opinion No. 20, "Accounting Changes" and "SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. Opinion No. 20 had required that changes in accounting principles be recognized by including the cumulative effect of the change in the period in which the new accounting principle was adopted. SFAS No. 154 requires retrospective application of the change to prior periods' financial statements, unless it is impracticable to determine the period-specific effects of the change. The Statement is effective for fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a material effect on the Company's financial statements. ITEM 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations The following discussion should be read in conjunction with the Company's Consolidated 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. 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. 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 may not inform, or be required to inform, investors of such changes. 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. 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 SEC. Investors are advised to read the Company's Annual Report on Form 10-K and 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. Other cautionary statements and risks and uncertainties may also appear elsewhere in this report. Overview - -------- Description of Business Many of the world's global technology companies rely upon SMSC as a go-to resource for semiconductor system solutions that span analog, digital and mixed-signal technologies. Leveraging intellectual property, integration expertise and a comprehensive global infrastructure, SMSC solves design challenges and delivers performance, space, cost and time-to-market advantages to its customers. SMSC's application focus targets key vertical markets including mobile and desktop PCs, consumer electronics, automotive infotainment and industrial applications. The Company has developed leadership positions in its select markets by providing application specific solutions such as mixed-signal PC system controllers, non-PCI Ethernet, ARCNET, MOST and Hi-Speed USB. SMSC is headquartered in Hauppauge, New York with operations in North America, Taiwan, Japan, Korea, China and Europe. Engineering design centers are located in Arizona, New York, Texas and Karlsruhe, Germany. Additional information is available at www.smsc.com. Key Indicators Management measures the condition and performance of the Company's business in numerous ways. Among the key quantitative indicators generally used in this regard are bookings, revenues, cost of goods sold and operating expenses relative to revenues. The Company also carefully monitors the progress of its product development efforts. Critical Accounting Policies and Estimates - ------------------------------------------ This discussion and analysis of the Company's financial condition and results of operations is based upon the unaudited condensed consolidated 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 taxes 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, 2005 filed with the SEC on May 16, 2005. During the three-month period ended August 31, 2005, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying these policies. Business Acquisition - -------------------- On March 30, 2005, SMSC announced the completion that day of its acquisition of OASIS SiliconSystems Holding AG (OASIS). Based in Karlsruhe, Germany, OASIS is engaged in the development and marketing of integrated circuits that enable networking of multimedia devices for automotive infotainment applications. OASIS is a leading provider of Media Oriented Systems Transport (MOST(R)) technology, which enables the seamless transport of digital audio, video, and packet-based data, along with control information, within automobiles. SMSC acquired all of OASIS' outstanding capital stock in exchange for aggregate consideration of $118.7 million, including approximately 2.1 million shares of SMSC common stock valued for accounting purposes at $35.8 million, $79.5 million of cash, and approximately $3.4 million of direct acquisition costs, including legal, banking, accounting and valuation fees. The tangible assets of OASIS at March 30, 2005 included approximately $22.4 million of cash and cash equivalents, resulting in a net cash outlay of approximately $60.5 million. SMSC's existing cash balances were the source of the cash used in the transaction. The results of OASIS' operations subsequent to March 30, 2005 have been included in the Company's consolidated results of operations. Up to $20.0 million of additional consideration, payable in cash and SMSC common stock, may be issued to OASIS' former shareholders during fiscal 2007 upon satisfaction of certain future performance goals. Stock Appreciation Rights - ------------------------- The Company maintains a Stock Appreciation Rights (SAR) Plan, the purpose of which is to attract, retain, reward and motivate employees and consultants to promote the Company's best interests and to share in its future success. As of August 31, 2005, there were approximately 1.5 million SARs outstanding, none of which were vested, but all of which are scheduled to vest between September 2005 and September 2010. Recognition of compensation expense for SARs is based upon the market price of the Company's common stock at the end of the reporting period and the vesting period of the SAR. Based upon the $26.05 closing price of the Company's common stock on August 31, 2005, the Company recorded SAR compensation expense of $5.7 million during the quarter ended as of that date, including $0.4 million within cost of goods sold, $1.4 million within research and development, and $3.9 million within selling, general and administrative expenses. For the current six-month period, SAR expense was $5.6 million, including $0.4 million within cost of goods sold, $1.4 million within research and development, and $3.8 million within selling, general and administrative expenses. Based upon SARs outstanding at August 31, 2005, if the market price of SMSC stock remained at $26.05 on November 30, 2005, an expense provision of approximately $1.0 million would be required in the third quarter due to the passage of additional SARs vesting time. Each $1.00 change in the Company's stock price above or below $26.05 at November 30, 2005 would result in an additional expense provision or credit of approximately $0.8 million in the third quarter, with any credit limited to a maximum of $5.7 million. Results of Operations - --------------------- Revenues Beginning in fiscal 2006, SMSC is categorizing its revenues into three vertical markets, as presented in the following tables for the three and six-month periods ended August 31, 2005 and 2004 (dollars in millions): Three Months Ended August 31, 2005 2004 Amount Percent Amount Percent ------------------------------------------------------------------------------- Mobile and desktop PC $ 39.0 49% $ 28.4 56% Consumer electronics and infotainment 26.1 33% 7.9 16% Industrial and other 14.0 18% 13.9 28% ------------------------------------------------------------------------------- $ 79.1 100% $ 50.2 100% =============================================================================== Six Months Ended August 31, 2005 2004 Amount Percent Amount Percent ------------------------------------------------------------------------------- Mobile and desktop PC $ 75.4 51% $ 59.1 57% Consumer electronics and infotainment 45.3 31% 15.0 15% Industrial and other 27.2 18% 29.1 28% ------------------------------------------------------------------------------- $ 147.9 100% $ 103.2 100% =============================================================================== Revenues for the three months ended August 31, 2005 were $79.1 million, compared to revenues of $50.2 million for the year earlier period, an increase of approximately 58%. Included in the current quarter's revenues are $14.4 million of revenues associated with the acquisition of OASIS. Revenues for the six months ended August 31, 2005 were $147.9 million, compared to revenues of $103.2 million for the year-earlier period, an increase of approximately 43%. Included in the current six-month period's revenues are $23.7 million of revenues associated with the acquisition of OASIS. The OASIS revenues reflect shipments subsequent to March 30, 2005, representing approximately five months of activity within the current six-month period. The increase in mobile and desktop PC revenues, for both the three and six-month periods, was driven by an increase in revenues from mobile products, reflecting strong market demand in mobile computing applications, as well as increased revenues from environmental monitoring and control (EMC) products, which benefited from broader product offerings in the current year quarter. Revenues from mobile PC products also include $1.1 million of revenue recognized in the second quarter of fiscal 2006 associated with a prior accounts receivable collectibility issue, as more fully described in the subsequent paragraph. During the second half of fiscal 2005, mobile PC revenues were adversely impacted by an accounts receivable collectibility issue with one of the Company's Taiwan-based component distributors, which prevented the Company from recognizing approximately $5.4 million of revenues during that period. Approximately $2.7 million of inventory underlying those revenues, which had already been shipped to and resold by the distributor prior to identification of the collectibility issue, was written off within cost of goods sold in the fourth quarter of fiscal 2005. During the second quarter of fiscal 2006, the Company received a payment of $1.1 million from this customer, which recovered a portion of the distributor's obligation to the Company. This $1.1 million payment was recognized within revenues for the current quarter, without any associated cost of goods sold, because, as noted above, the underlying inventory was written off during the fourth quarter of fiscal 2005. Any future collections from this distributor would also be recognized as revenue when received, but the likelihood of any such payments remains uncertain. The increase in revenues from consumer and infotainment products includes revenues associated with the March 2005 acquisition of OASIS, totaling $9.3 million and $23.7 million for the three and six-month periods ended August 31, 2005, respectively. These revenues are from products serving automotive infotainment applications. Revenues from connectivity products for consumer electronics applications, which have benefited from broader product offerings during fiscal 2006, also increased in the current year periods, compared to the prior-year periods. Industrial and other revenues primarily represent revenues from products used within industrial information networking applications in various business, service, factory, transportation and telecommunications environments. Revenues from these products were approximately flat in the current year quarter, compared to the prior year quarter. The decline in industrial and other revenues for the six-month period, compared to the prior-year period, reflects lower revenues from certain telecommunications applications, and lower intellectual property revenues. Revenues from customers outside of North America accounted for approximately 87% and 86% of the Company's consolidated revenues for the three and six-month periods ended August 31, 2005, respectively. The comparable percentages for the three and six-month periods in the prior fiscal year were 79% and 81%, respectively. While the largest portion of the Company's revenues continues to be derived from Asia, the acquisition of OASIS has significantly increased the Company's revenues in Europe, which accounts for the general increase in revenues outside of North America in fiscal 2006 periods, compared to the fiscal 2005 periods. The Company's revenues in Europe, including the impact of OASIS, were about $14.1 million in the current year quarter, compared to $2.7 million in the prior year quarter. For the current year six-month period, revenues from Europe were $23.6 million, compared to $5.6 million in the prior year six-month period. The Company expects that international shipments, particularly to Asia, will continue to represent a significant portion of its revenues. Cost of Goods Sold Cost of goods sold for the quarter ended August 31, 2005 was $44.4 million, or 56.1% of revenues, compared to $26.3 million, or 52.4% of revenues, for the three months ended August 31, 2004. The increase in cost of goods sold as a percentage of revenues in the current year period, compared to the prior year period, results from a combination of (1) declines in average selling prices on certain desktop I/O products, which outpaced reductions in unit costs; (2) production yield losses aggregating $1.5 million resulting from certain atypical production issues; (3) $0.4 million of higher charges for inventory obsolescence; (4) a $0.4 million provision for SAR compensation expense in the current year quarter; and (5) a higher proportion of intellectual property revenues in the prior year quarter. Partially offsetting these factors was $1.1 million of revenue recognized during the current year period without any associated cost of goods sold, as discussed earlier within the "Revenues" section. The yield losses noted in item (2) were related to certain device-specific supplier production issues. These issues have been corrected, and production yields have now returned to acceptable levels. For the six-months ended August 31, 2005, cost of goods sold was $80.9 million, or 54.7% of revenues, compared to $52.6 million, or 51.0% of revenues, for the six-month period ended August 31, 2004. The factors contributing to the increase in cost of goods sold as a percentage of revenues for the six-month period are the same as those that contributed to the increase for the three-month period, as discussed in the previous paragraph, although the dollar impact differs for some of the factors. The current year six-month period includes $0.2 million of higher inventory obsolescence charges, compared to the prior year six-month period. Research and Development Expenses Research and development (R&D) expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools and computer hardware, subcontractor costs and device prototyping costs. The Company's R&D activities are performed by highly-skilled and experienced engineers and technicians, and are primarily directed towards the design of new integrated circuits and the development of new software drivers, firmware and design tools and blocks of logic, as well as ongoing cost reductions and performance improvements in existing products. The Company intends to continue its efforts to develop innovative new products and technologies and believes that an ongoing commitment to R&D is essential in order to maintain product leadership and compete effectively. Therefore, the Company expects to continue to make significant R&D investments in the future. R&D expenses were $14.7 million, or approximately 19% of revenues, for the three months ended August 31, 2005, compared to $11.2 million, or approximately 22% of revenues, for the three months ended August 31, 2004. The increase in the current year's three-month period, compared to the prior year's three-month period, is primarily due to the addition of approximately $2.5 million of R&D expenses associated with the operations of OASIS, whose staff includes approximately 90 engineers and technicians. The current year quarter also includes a charge of $1.4 million for SAR compensation expense. These increases were partially offset by a decline in device prototype expenses, reflecting the timing of product development projects. For the six months ended August 31, 2005, R&D expenses were $27.7 million, or approximately 19% of revenues, compared to $22.1 million, or approximately 21% of revenues, for the six months ended August 31, 2004. As with the three-month comparison, the increase in the current year's six-month period, compared to the prior year's six-month period, is primarily due to the addition of approximately $4.1 million of R&D expenses associated with the operations of OASIS, which impacted five months of the current six-month period's operating results. The remainder of the increase resulted primarily from $1.4 million of SAR compensation expense. Selling, General and Administrative Expenses Selling, general and administrative expenses were $18.6 million, or approximately 23% of revenues, for the quarter ended August 31, 2005, compared to $11.9 million, or approximately 24% of revenues, for the quarter ended August 31, 2004. The increase in the current year's three-month period, compared to the prior year's three-month period, reflects $2.3 million of expenses associated with the operations of OASIS, $3.9 million of SAR compensation expense, and $0.4 million of higher employee recruiting and relocation expenses. For the six-month period ended August 31, 2005, selling, general and administrative expenses were $32.1 million, or approximately 22% of revenues, compared to $23.7 million, or approximately 23% of revenues, for the six-month period ended August 31, 2004. This period-over-period increase reflects $3.7 million of expenses associated with the operations of OASIS, $3.8 million of SAR compensation expense, and $0.4 million of higher employee recruiting and relocation expenses. Amortization of Intangible Assets For the three and six-month periods ended August 31, 2005, the Company recorded $1.3 million and $2.2 million, respectively, of amortization expense for finite-lived intangible assets acquired in the OASIS transaction, as well as $0.3 million and $0.5 million, respectively, of amortization expense for finite-lived intangible assets associated with the acquisition of Gain Technology Corporation (Gain) during fiscal 2003. Amortization expense of $0.3 million and $0.6 million for the Gain intangible assets was recorded in the prior year's three and six-month periods, respectively. In-Process Research and Development The $0.9 million in-process research and development expense recorded in the fiscal 2006 six-month period represents the fair value of in-process technology for OASIS research projects that, as of the March 30, 2005 closing date of the OASIS acquisition, had not reached technological feasibility and had no alternative future uses. These projects are primarily focused on deployment of certain technology into consumer electronics applications. The estimated fair value of this in-process research and development was recorded as an expense in the quarter ended May 31, 2005. Other Income and Expense The increases in interest income in the current year three and six-month periods, compared to the corresponding prior year periods, primarily reflects the impact of higher average interest rates, partially offset by a lower average level of investments, during the current year periods. Provision For Income Taxes The Company's effective income tax rate reflects statutory federal, state and foreign tax rates, the impact of certain permanent differences between the book and tax treatment of certain expenses, and the impact of tax-exempt income and various income tax credits. The Company's $0.5 million and $1.9 million provisions for income taxes for the three and six-month periods ended August 31, 2005, respectively, reflect an expected fiscal 2006 effective tax rate of approximately 31%, and also include a provision of $0.35 million for incremental taxes resulting from internal corporate restructuring activities completed during the second quarter of fiscal 2006. Since these restructuring activities were considered unusual and infrequent, these taxes are reflected entirely within the provision for income taxes for the second quarter of fiscal 2006, and are not reflected within the 31% expected effective tax rate for fiscal 2006. The Company's $1.4 million provision for income taxes for the six months ended August 31, 2004 reflected an expected fiscal 2005 effective tax rate of 26.5%, which was a reduction from a 28.5% effective rate expected at May 31, 2004. This reduction in the then-anticipated fiscal 2005 effective income tax rate reflected a higher proportionate impact of anticipated income tax credits against a reduced pre-tax income projection. The $0.2 million provision for income taxes for the three months ended August 31, 2004 reflected the cumulative impact of this lower expected effective income tax rate for fiscal 2005. The higher projected effective tax rate for fiscal 2006 (31%), compared to the effective tax rate which was anticipated for fiscal 2005 at August 31, 2004 (26.5%), reflects a lower proportionate effective tax rate impact of income tax credits and tax-exempt interest income, resulting from a higher current year pre-tax income expectation. 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 were $131.7 million at August 31, 2005, compared to $172.6 million at February 28, 2005, a decrease of $40.9 million. Operating activities generated $29.7 million of cash during the first six months of fiscal 2006, compared to a $14.3 million during the first six months of fiscal 2005. Operating cash flows during the current year period reflect a $6.7 million combined decrease in accounts receivable and inventories (excluding the impact of the OASIS acquisition), while the prior year's six-month operating cash flows were burdened by a $10.3 million combined increase in accounts receivable and inventory receivable. Discussion of accounts receivable and inventory activity appear later within this section. The current year six-month period's operating activities include $15.5 million of non-cash charges, including depreciation, amortization, in-process research and development and stock-based compensation, compared to $6.2 million in the prior year six-month period. Investing activities consumed $119.9 million of cash during the first half of fiscal 2006, due principally to $60.3 million used for the acquisition of OASIS, a net increase of $50.4 million in short-term investments, and $9.2 million of capital expenditures. The $60.3 million of cash used for the acquisition of OASIS includes $79.5 million of cash paid to the former OASIS shareholders as part of the transaction's consideration, $3.4 million of transaction costs ($0.2 million of which were paid prior to the current year quarter), partially offset by $22.4 million of cash acquired from OASIS. Investing activities provided $43.6 million of cash during the first half of fiscal 2005, due principally to a net decrease of $49.8 million in short-term and long-term investments, offset by $6.2 million of capital expenditures. Net cash of $0.7 million used for financing activities during the first six months of fiscal 2006 included $2.2 million of treasury stock purchases and $1.3 million of debt repayments, partially offset by $2.8 million of proceeds from exercises of stock options. Financing activities were neutral to cash during the first six months of fiscal 2005, and were comprised of $1.0 million of proceeds from exercises of stock options, offset by $1.0 million of debt repayments. The Company's inventories were $38.8 million at August 31, 2005, compared to $33.3 million at February 28, 2005. This increase includes $10.1 million of OASIS product inventories at August 31, 2005, partially offset by a net decline in PC I/O, networking and connectivity device inventories. Accounts receivable increased from $23.8 million at February 28, 2005 to $29.1 million at August 31, 2005, an increase of $5.3 million. This increase includes $5.8 million of accounts receivable of OASIS, partially offset by a decline in other trade accounts receivable. Total current liabilities increased from $37.1 million at February 28, 2005 to $52.7 million at August 31, 2005, including $10.2 million of current liabilities associated with the operations of OASIS, and a $1.2 million increase in deferred income on shipments to distributors. The increase in deferred income reflects an increase in distributor inventories in advance of anticipated product demand during the Company's third quarter ending November 30, 2005. Capital expenditures for the six-month period ended August 31, 2005 were $9.2 million, and were predominantly for facility expansion, production test equipment, advanced semiconductor design tools and investments in intellectual property. Capital expenditures were $6.2 million for the six-month period ended August 31, 2004. The Company anticipates that capital expenditures in fiscal 2006 will exceed those incurred during fiscal 2005, due in part to the Company's in-progress construction of an addition to its primary facility in Hauppauge, New York, which will expand the facility from its current 80,000 square feet to approximately 200,000 square feet, and which will allow consolidation of the Company's Hauppauge operations into a single facility, currently expected to occur during fiscal 2007. Portions of the Company's Hauppauge operations currently occur in a separate 50,000 square foot facility, the lease for which will expire during fiscal 2007. The Company currently expects the cost of this building expansion to be approximately $20 million, of which $9.0 million has been expended, and is classified as construction in progress, at August 31, 2005. The majority of the expenditures for this project are expected to occur during fiscal 2006. There were no other material commitments for capital expenditures as of August 31, 2005. SMSC maintains a common stock repurchase program, as approved by its Board of Directors, which authorizes the Company to repurchase up to three million shares of its common stock on the open market or in private transactions. Under this program, the Company repurchased approximately 150,000 shares of its common stock at a cost of $2.2 million during the first quarter of fiscal 2006. No shares were repurchased during the second quarter of fiscal 2006. The Company repurchased approximately 22,000 shares at a cost of $0.3 million during the second quarter of fiscal 2005. The Company currently holds repurchased shares as treasury stock. As of August 31, 2005, the Company has repurchased a total of approximately 2.0 million shares of its common stock, at a cost of $26.0 million, under this program. In connection with the March 2005 acquisition of OASIS, up to $20.0 million of additional consideration, payable in cash and SMSC common stock, may be issued to the former shareholders of OASIS during fiscal 2007 upon satisfaction of certain future performance goals. The Company has considered in the past, and will continue to consider, various possible transactions to secure necessary wafer foundry and assembly 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 investments 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 twelve months and for the foreseeable future thereafter. Recent Accounting Pronouncements - --------------------------------- In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, "Inventory Costs, An Amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 151 and does not expect that its adoption will have a material impact on its consolidated financial condition, results of operations and cash flows. In December 2004, the FASB issued SFAS No. 123R (Revised 2004), "Share-Based Payment." The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted the option of continuing to apply the guidance in APB Opinion 25, provided that the footnotes to the consolidated financial statements disclosed pro forma net income and net income per share, as if the preferable fair-value-based method had been applied. SFAS No. 123R requires that compensation costs relating to share-based payment transactions be recognized in the consolidated financial statements. Compensation costs will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R is effective for the first annual reporting period that begins after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 123R and believes that the adoption of this statement could have a material impact on its consolidated financial position and results of operations. In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on the Company's consolidated financial position, results of operations and cash flows. In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004." The American Jobs Creation Act introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to U.S. companies, provided certain criteria are met. FSP No. 109-2 provides accounting and disclosure guidance on the impact of the repatriation provision on a company's income tax expense and deferred tax liability. The Company is currently studying the impact of the one-time favorable foreign dividend provision and intends to complete the analysis by the end of fiscal 2006. Accordingly, the Company has not recorded any adjustments to its income tax expense or deferred income taxes to reflect the tax impact of any repatriation of non-U.S. earnings it may make. In March 2005, the Financial Accounting Standards Board issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations." Interpretation No. 47 clarifies that an entity must record a liability for a "conditional" asset retirement obligation if the fair value of the obligation can be reasonably estimated. Interpretation No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Interpretation No. 47 is effective no later than the end of the fiscal year ending after December 15, 2005. The Company does not expect the adoption of Interpretation No. 47 to have a material impact on its consolidated financial position, results of operations and cash flows. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", which supersedes APB Opinion No. 20, "Accounting Changes" and "SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. Opinion No. 20 had required that changes in accounting principles be recognized by including the cumulative effect of the change in the period in which the new accounting principle was adopted. SFAS No. 154 requires retrospective application of the change to prior periods' financial statements, unless it is impracticable to determine the period-specific effects of the change. The Statement is effective for fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a material effect on the Company's financial statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The Company's exposure to interest rate risk relates primarily to its investment portfolio. The primary objective of SMSC'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 August 31, 2005, the Company's $107.0 million of short-term investments consisted primarily of investments in auction rate securities, and investments in corporate, government and municipal obligations with maturities of between three and twelve months at acquisition. Auction rate securities have long-term underlying maturities, but have interest rates that are reset every 90 days or less, at which time the securities can typically be purchased or sold. As with all fixed-income instruments, these securities are subject to interest rate risk and would likely decline in market value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at August 31, 2005, the Company estimates that the fair values of these investments would decline by an immaterial amount, due to the portfolio's relatively short-term overall maturity. Furthermore, the Company has the option to hold its fixed-income investments until maturity and, therefore, would not expect to realize any material adverse impact to its results from operations or cash flows from such a decline. Declines in market interest rates would, over time, reduce the Company's interest income. Equity Price Risk The Company has no material investments in equity securities of other companies on its Consolidated Balance Sheet as of August 31, 2005. Foreign Currency Risk The Company has international sales and expenditures and is, therefore, subject to certain foreign currency rate exposures. 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. Most transactions in the Japanese market made by the Company's subsidiary, SMSC Japan, are denominated in Japanese yen. SMSC Japan purchases a significant amount of its products for resale from SMSC in U.S. dollars, and from time to time has entered into forward exchange contracts to hedge against currency fluctuations associated with these product purchases. No such contracts were executed during either fiscal 2005 or the first six months of fiscal 2006, and there are no obligations under any such contracts as of August 31, 2005. The Company has never received a cash dividend (repatriation of cash) from SMSC Japan. OASIS' operating activities in Europe include transactions conducted in both euros and U.S. dollars. The euro has been designated as OASIS' functional currency for its European operations. From time to time, OASIS has entered into foreign currency contracts to minimize the exposure of its U.S dollar denominated transactions, assets and liabilities to currency exchange rate risk. Gains or losses on these contracts are intended to offset the gains or losses recorded from the remeasurement of certain assets and liabilities from U.S. dollars into euros. As of August 31, 2005, OASIS has foreign currency contracts to convert an aggregate of $2.1 million into euros in varying monthly amounts through December 31, 2005. Gains and losses on these contracts, as well as gains and losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into euros, were not significant during the three or six-month periods ended August 31, 2005. 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 changes 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, 2005 filed with the SEC on May 16, 2005. ITEM 4. Controls and Procedures The Company has carried out an evaluation under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the Company's evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of August 31, 2005, the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized, and reported as and when required. There have been no changes in the Company's internal control over financial reporting during the Company's fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company completed the acquisition of OASIS on March 30, 2005, as more fully described in Note 3 to the Condensed Consolidated Financial Statements included within Part I of this report on Form 10-Q. As part of its ongoing integration activities, the Company is in the process of incorporating its controls and procedures into OASIS' operating activities. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings As of August 31, 2005, SMSC was not a party to any legal proceedings, claims, disputes or litigation that are expected to have a material adverse effect on the Company's results of operations or financial condition. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Unregistered Sales of Equity Securities None. Purchases of Equity Securities by the Issuer In October 1998, the Company's Board of Directors approved a plan authorizing the repurchase of up to one million shares of the Company's common stock in the open market or in private transactions. The Board of Directors increased the authorization from one million shares to two million shares in July 2000, and from two million shares to three million shares in July 2002. The plan has no specified expiration date. Shares of common stock purchased pursuant to the repurchase plan are held as treasury stock. There was no activity under this plan during the current period covered by this report. ITEM 3. Defaults Upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of security holders at the registrant's August 1, 2005 annual meeting of shareholders. (1) The following were elected directors, each receiving the number of votes set opposite their respective names: Votes For Votes Withheld --------- -------------- Steven J. Bilodeau 17,696,755 230,610 Peter F. Dicks 16,904,013 1,023,352 Each of the following directors, who were not up for reelection at the August 1, 2005 annual meeting of shareholders, will continue to serve as directors: Andrew M. Caggia, Timothy P. Craig, Ivan T. Frisch, Robert M. Brill and James A. Donahue. (2) The selection of PricewaterhouseCoopers LLP as the Company's auditors for the fiscal year ended February 28, 2006 was ratified by the following vote: Votes For Votes Against Abstained --------- ------------- --------- 17,821,209 98,534 7,622 ITEM 5. Other Information None. ITEM 6. Exhibits 3.1 - By-Laws of Standard Microsystems Corporation, as amended and restated. 10.1 - Standard Microsystems Corporation 2005 Directors' Stock Appreciation Rights Plan, as adopted by the Board of Directors on October 7, 2005. * 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Indicates a management or compensatory plan or arrangement. 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: October 11, 2005 By: /s/ Andrew M. Caggia ------------------------- (Signature) Andrew M. Caggia Senior Vice President (duly authorized officer) and Chief Financial Officer (principal financial officer) EX-3.1 2 exhibit_3-1.txt Exhibit 3.1 AMENDED AND RESTATED BY-LAWS OF STANDARD MICROSYSTEMS CORPORATION (Effective August 1, 2005) 1. STOCKHOLDERS 1.1 Place of Stockholders' Meetings. All meetings of the stockholders of the Corporation shall be held at such place or places, within or outside the state of incorporation, as may be fixed by the Board of Directors from time to time or as shall be specified in the respective notices thereof. 1.2 Date and Hour of Annual Meetings of Stockholders. An annual meeting of stockholders shall be held each year on the third Tuesday of July, unless said date is a legal holiday, in which case the meeting shall be held on the next day thereafter which is not a legal holiday, at 10:00 A.M., or on such other date and at such other times as may be designated by the Board of Directors. Each such meeting shall be held at ten o'clock in the morning, local time in effect at the place where the meeting is held, unless the Board of Directors shall fix another hour which shall be stated in the notice of the meeting. 1.3 Purposes of Annual Meeting. The annual meeting of the stockholders shall be held for the purpose of electing directors and transacting such other business as may properly come before the meeting. 1.4 Special Meetings of Stockholders. Special meetings of the stockholders or of any class or series thereof entitled to vote may be called by the Chairman or by the President or by the Board of Directors, or at the request in writing by stockholders of record owning at least sixty-six and two-thirds percent (66-2/3%) of the issued and outstanding shares of the Corporation entitled to vote at such meeting. Any such request by stockholders shall include a detailed description of the purposes of, and the actions proposed to be taken at, such meeting and, if such meeting is requested for purposes of the election of directors, the request shall include the information specified in Section 2.2.1(B) with respect to each nominee to be considered for election at the meeting. The Corporation shall use reasonable efforts to hold any special meeting requested by stockholders as promptly as practicable following receipt of a request therefor complying with the provisions of this Section 1.4; provided, that the Corporation shall not be required to hold any such meeting prior to the 60th day following receipt of such request. 1.5 Notice of Meetings of Stockholders. Except as otherwise expressly required or permitted by the laws of the state of incorporation, not less than ten days nor more than fifty days before the date of every stockholders meeting the Secretary shall give to each stockholder of record entitled to vote at such meeting, written notice stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Such notice, if mailed, shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address for notices to such stockholder as it appears on the records of the Corporation. 1.6 Quorum of Stockholders. (a) Unless otherwise provided by the laws of Delaware, at any meeting of the stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum. (b) At any meeting of the stockholders at which a quorum shall be present, a majority of those present in person or by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting. In the absence of a quorum, the officer presiding thereat shall have power to adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting, other than announcement at the meeting, shall not be required to be given, except as provided in paragraph (d) below and except where expressly required by law. (c) At any adjourned session at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof, unless a new record date is fixed by the Board of Directors. (d) If an adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 1.7 Chairman and Secretary of Meeting. The Chairman or the Vice-Chairman or the President shall preside at meetings of the stockholders. The Secretary shall act as secretary of the meeting, or in his absence, the Assistant Secretary shall act, or if neither is present, then the presiding officer may appoint a person to act as secretary of the meeting. 1.8 Voting by Stockholders. Except as may be otherwise provided by these By-laws, at every meeting of the stockholders, each stockholder shall, unless otherwise provided, be entitled to one vote for each share of stock standing in his name on the books of the Corporation on the record date for the meeting. All elections and questions shall be decided by the vote of a majority in interest of the stockholders present in person or represented by proxy and entitled to vote at the meeting, except as otherwise permitted or required by the laws of Delaware, the certificate of incorporation or these By-laws. 1.9 Proxies. Any stockholder entitled to vote at any meeting of stockholders may vote either in person or by his attorney-in-fact. Every proxy shall be in writing, subscribed by the stockholder or his duly authorized attorney-in-fact, but need not be dated, sealed, witnessed or acknowledged. 1.10 Inspectors. The election of Directors and any other vote by ballot at any meeting of the stockholders shall be supervised by at least two inspectors. Such inspectors may be appointed by the Chairman or President before or at the meeting; or if one or both inspectors so appointed shall refuse to serve or shall not be present, such appointment shall be made by the officer presiding at the meeting. 1.11 List of Stockholders. (a) At least ten days before every meeting of stockholders, the Secretary shall prepare and make a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. (b) During ordinary business hours, for a period of at least ten days prior to the meeting, such list shall be open to examination by any stockholder for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. (c) The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting and it may be inspected by any stockholder who is present. (d) The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section 1.11 or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 1.12 Procedure at Stockholders' Meetings. The order of business and all other matters of procedure at every meeting of stockholders may be determined by the presiding officer. Not less than 15 minutes following the presentation of any resolution to any meeting of stockholders, the presiding officer may announce that further discussion on such resolution shall be limited to not more than three persons who favor and not more than three persons who oppose such resolution, each of whom shall be designated by the presiding officer and shall thereupon be entitled to speak thereon for not more than five minutes. After such person, or such a lesser number thereof as shall advise the presiding officer of their desire so to speak, shall have spoken on such resolution, the presiding officer may direct a vote on such resolution without further discussion thereon at the meeting. Except where otherwise provided by the certificate of incorporation, law or these By-laws, every question that shall come before a meeting shall be decided by a majority of the votes cast thereon and any such majority vote shall be the act of the stockholders. 2. DIRECTORS 2.1 Powers of Directors. The property, business and affairs of the Corporation shall be managed by its Board of Directors which may exercise all the powers of the Corporation except such as are by law or the certificate of incorporation or these By-laws required to be exercised or done by the stockholders. 2.2 Number, Method of Election, Terms of Office of Directors. The number of directors which shall constitute the whole Board of Directors shall not be less than three, nor more than fifteen, the exact number of directors to be such number as may be fixed from time to time within such limits by resolution adopted by affirmative vote of a majority of the whole Board of Directors. No decrease in the number of directors shall shorten the term of any incumbent director. Each director shall at all times from and after the second anniversary of the director's first election own at least an amount of the Corporation's common stock, including common stock equivalents in the form of phantom stock grants, determined as the quotient obtained by dividing two times the then current annual retainer for non-employee directors by the closing price of a share of Corporation common stock on the trading day immediately before the date of such determination. The Secretary shall periodically perform audits regarding the compliance of each director with such stock ownership requirements, and in the event that a director receives written notification from the Secretary indicating such director's noncompliance with the stock ownership requirements, such director shall have six months from the date of such written notice to come into compliance with the stock ownership rules. 2.2.1 (A) Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. (B) Such nominations, if not made by the Board of Directors, shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, by a stockholder to the Secretary of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 20 days, or delayed by more than 60 days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Each such notice shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, (iv) all other information relating to such nominee that would be required to be disclosed in solicitations of proxies for election of directors, or otherwise would be required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including such person's written consent to serving as a director if elected, and (v) a statement that such nominee is qualified to serve as a director of the Corporation or, if not so qualified, the basis for such nominee's failure to so qualify, all in reasonable detail so that such information may be independently verified. Such notice shall be accompanied by the certificate of the stockholder proposing to make such nomination that the statements made in such notice are true, accurate, and complete in all respects. Nomination or election of any such nominee as a director shall not constitute a proposal made by or on behalf of the Corporation for purposes of Regulation 14A, unless the Board of Directors shall otherwise determine. (C) Notice of nominations which are proposed by the Board of Directors shall be given on behalf of the Board, at or prior to the meeting of stockholders at which such nominations are to be voted upon, by the chairman of the meeting. (D) The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the By-laws, and if he should so determine, he shall so declare to the meeting, whereupon the defective nomination shall be disregarded. 2.3 Vacancies on Board of Directors. (a) Any Director may resign his office at any time by delivering his resignation in writing to the Chairman or the President or the Secretary. It will take effect at the time specified therein, or, if no time is specified, it will be effective at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. (b) Any vacancy occurring in the Board of Directors caused by death, resignation, or removal, and any newly created directorship resulting from an increase in the number of directors, may be filled by a majority of the directors in office, although less than a quorum, or by a sole remaining director. Each director chosen to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen, and until his successor shall be elected and qualified, or until his death, or until he shall have resigned, or have been removed. 2.4 Meetings of the Board of Directors. (a) The Board of Directors may hold their meetings, both regular and special, either within or outside the state of incorporation. (b) Regular meetings of the Board of Directors may be held at such time and place as shall from time to time be determined by resolution of the Board of Directors. No notice of such regular meetings shall be required. If the date designated for any regular meeting be a legal holiday, then the meeting shall be held on the next day which is not a legal holiday. (c) Immediately following the annual meeting of the stockholders, a regular annual meeting of the Board of Directors shall be held for the election of officers and the transaction of such other business as may come before it. If such meeting is held at the place of the stockholders meeting, no notice thereof shall be required. (d) Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman or the President or at the written request of two directors. (e) The Secretary shall give notice to each director of any special meeting of the Board of Directors by mailing the same at least two days before the meeting or by telegraphing or delivering the same not later than the day before the meeting. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Any and all business may be transacted at any meeting of the Board of Directors. No notice of any adjourned meeting need be given. No notice to or waiver by any Director shall be required with respect to any meeting at which such Director is present. 2.5 Quorum and Action. One-half of the total number of directors, but not less than two directors, shall constitute a quorum for the transaction of business; but if there shall be less than a quorum at any meeting of the Board, a majority of those present may adjourn the meeting from time to time. Except where otherwise provided by the By-laws, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 2.6 Presiding Officer and Secretary of Meeting. The Chairman, or, in his absence, the Chairman of the Corporate Governance Committee, or, in his absence, the Vice-Chairman, or in his absence, the President, or, in their absence, a member of the Board of Directors selected by the members present, shall preside at meetings of the Board. The Secretary shall act as secretary of the meeting, but in his absence, the presiding officer may appoint a secretary of the meeting. 2.7 Action by Consent without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes or proceedings of the Board or committee. 2.8 Executive Committee. The Board of Directors may appoint from among its members and, from time to time, may fill vacancies in an Executive Committee of two or more to serve during the pleasure of the Board. During the intervals between the meetings of the Board, the Executive Committee shall possess and may exercise all of the powers of the Board in the management of the business and affairs of the Corporation conferred by these By-laws or otherwise. The Committee shall keep a record of all its proceedings and report the same to the Board. A majority of the members of the Committee shall constitute a quorum. The vote of a majority of the members of the Committee present at any meeting at which a quorum is present shall be the act of the Committee. 2.9 Compensation Committee. The Board of Directors may appoint from among its members and, from time to time, may fill vacancies in, a Compensation Committee of two or more to serve during the pleasure of the Board. Such Committee shall have the power and authority vested in the Committee referred to in any Stock Option Plan of the Corporation, and shall have power with respect to the salaries and other compensation of all employees of the Corporation or its subsidiaries who are directors or whose salaries are at a rate of $25,000 or more per year. The members of such Committee shall not be eligible to receive any compensation from the Corporation or any subsidiary of the Corporation except as provided in Section 2.11. Such Committee shall keep a record of all its proceedings and report the same to the Board. A majority of the members of such Committee shall constitute a quorum. The vote of a majority of the members of such Committee present at any meeting at which a quorum is present shall be the act of the Committee. 2.10 Other Committees. The Board of Directors may also appoint from among its members such other committees of two or more directors as it may from time to time deem desirable and may delegate to such committees such powers of the Board as it may consider appropriate. 2.11 Compensation of Directors. Directors shall receive such reasonable compensation for their service on the Board of Directors or any committees thereof, whether in the form of salary or a fixed fee for attendance at meetings, or both, with expenses, if any, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any Director from serving in any other capacity and receiving compensation therefor. 2.12 Removal of Directors. A director may be removed only for cause. 3. OFFICERS 3.1 Officers, Title, Elections, Terms. (a) The Corporation shall have a Chairman, Vice-Chairman, President, a Treasurer and a Secretary, who shall be elected by the Board of Directors at its annual meeting following the annual meeting of the stockholders, to serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election and until their successors are elected and qualify. (b) The Board of Directors may elect at any time, and from time to time, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, a Controller, one or more Associate Treasurers, one or more Assistant Treasurers, one or more Assistant Secretaries and one or more Assistant Controllers and may elect or appoint such other officers or agents with such duties as it may deem necessary or desirable. Such additional officers shall serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election or appointment. Two or more offices may be held by the same person. (c) Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. (d) Any officer or agent elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the entire Board of Directors. (e) Any officer may resign his office at any time. Such resignation shall be made in writing and shall take effect at the time specified therein or, if no time be specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. (f) The salaries of all officers of the Corporation shall be fixed by the Board of Directors. 3.2 Powers and Duties of Chairman. The Chairman shall have such specific powers and responsibilities as may be conferred upon him by the Board of Directors and shall report directly to the Board of Directors. He shall be the chief policy officer of the Corporation. He shall, when present, preside at meetings of the stockholders, the Board of Directors and the Executive Committee. 3.3 Powers and Duties of Vice-Chairman. The Vice-Chairman shall have such specific powers and responsibilities as may be conferred upon him by the Board of Directors. He shall report directly to the Chairman. In the event of the absence of the Chairman, or his incapacity or inability to act, then the Vice-Chairman shall preside at all meetings of the stockholders, the Board of Directors and the Executive Committee. 3.4 Powers and Duties of President. (a) Except in such instances as the Board may confer powers in particular transactions upon the Chairman or any other officer, and subject to the control and direction of the Board of Directors, the President shall supervise, manage and direct the business of the Corporation and shall communicate to the Board of Directors and any committee thereof reports, proposals and recommendations for their respective consideration or action. In the event of the absence of the Chairman and the Vice-Chairman, or their incapacity or inability to act, then the President shall preside at all meetings of the stockholders, the Board of Directors and the Executive Committee. (b) The President shall act for or on behalf of the Corporation in all matters in which action by the President as such is required by law, and he may do and perform all other acts and things incident to the position of President, including the signing of contracts and other documents in the name of the Corporation, except as may be otherwise provided in these By-laws or ordered by the Board of Directors. 3.5 Powers and Duties of Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board of Directors or the President may from time to time prescribe, and shall perform such other duties as may be prescribed in these By-laws. 3.6 Powers and Duties of Treasurer, Associate Treasurer and Assistant Treasurers. (a) The Treasurer shall have the care and custody of all the funds and securities of the Corporation except as may be otherwise ordered by the Board of Directors, and shall cause such funds to be deposited to the credit of the Corporation in such banks or depositories as may be designated by the Board of Directors, and shall cause such securities to be placed in safekeeping in such manner as may be designated by the Board of Directors. (b) The Treasurer, or an Associate Treasurer, or an Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board of Directors, may endorse in the name and on behalf of the corporation all instruments for the payment of money, bills of lading, warehouse receipts, insurance policies and other commercial documents requiring such endorsement. (c) The Treasurer, or an Associate Treasurer, or an Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board of Directors may sign all receipts and vouchers for payments made to the Corporation; he shall render a statement of the cash account of the Corporation to the Board of Directors as often as it shall require the same; he shall enter regularly in books to be kept by him for that purpose, full and accurate account of all moneys received and paid by him on account of the Corporation, and of all securities received and delivered by the Corporation. (d) The Treasurer shall perform such other duties as may be prescribed in these By-laws or assigned to him and all other acts incident to the position of Treasurer. Each Associate Treasurer and each Assistant Treasurer shall perform such duties as may from time to time be assigned to him by the Treasurer or by the Board of Directors. In the event of the absence of the Treasurer or his incapacity or inability to act, then any Associate Treasurer or any Assistant Treasurer may perform any of the duties and may exercise any of the powers of the Treasurer. 3.7 Powers and Duties of Secretary and Assistant Secretaries. (a) The Secretary shall keep the minutes of all proceedings of the stockholders, the Board of Directors, the Executive Committee and any other committees of the Board in proper books provided for that purpose. The Secretary shall attend to the giving and serving of all notices of the Corporation, in accordance with the provisions of these By-laws and as required by law. The Secretary shall be the custodian of the seal of the Corporation. The Secretary may, with the President, an Executive Vice President, a Senior Vice President, a Vice President or other authorized officer, sign all contracts and other documents in the name of the Corporation, and shall affix or cause to be affixed the seal of the Corporation to such contracts and other documents requiring the seal of the Corporation, and when so affixed, may attest the same. He shall perform such other duties as may be prescribed in these By-laws or assigned to him and all other acts incident to the position of Secretary. (b) Each Assistant Secretary shall perform such duties as may from time to time be assigned to him by the Secretary or by the Board of Directors. In the event of the absence of the Secretary or his incapacity or inability to act, then any Assistant Secretary may perform any of the duties and may exercise any of the powers of the Secretary. (c) The Secretary shall prepare and have custody of the list of stockholders at each meeting of the stockholders as required by Section 1.11 of these By-laws. The Secretary shall have custody of all stock books and of all unissued stock certificates. 3.8 Powers and Duties of Controller and Assistant Controllers. (a) The Controller shall be responsible for the maintenance of adequate accounting records of all assets, liabilities and transactions of the Corporation. The Controller shall prepare and render such balance sheets, budgets and other financial reports as the Board of Directors, the Chairman or the President may require; and he shall perform such other duties as may be prescribed in these By-laws or assigned to him and all other acts incident to the position of Controller. (b) Each Assistant Controller shall perform such duties as from time to time may be assigned to him by the Controller or by the Board of Directors. In the event of the absence of the Controller or his incapacity or inability to act, then any Assistant Controller may perform any of the duties and may exercise any of the powers of the Controller. 4. INDEMNIFICATION (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) or (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) or (b) may be made as ordered by a court or as authorized by the Corporation (i) in any specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b), or (ii) in any other lawful manner. Without limiting the next preceding sentence, such determination may be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders, or (4) in any other lawful manner. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Section 4. (f) The indemnification provided by this Section 4 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section 4. (h) For the purpose of this Section 4, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. (i) The Board of Directors shall have power to indemnify any person included within any category described in Section 4(a) against any loss, liability or expense (including attorneys' fees, fines, judgments and amounts paid in settlement) arising out of his service in any such category, unless such indemnity is prohibited by law applicable to the Corporation, and shall have such power regardless of whether such indemnity is authorized by Section 145 of the General Corporation Law. 5. CAPITAL STOCK 5.1 Stock Certificates (a) Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of, the Corporation by the Chairman or the Vice-Chairman, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares owned by him. (b) If such certificate is countersigned by a transfer agent other than the Corporation or its employee, or by a registrar other than the Corporation or its employee, the signatures of the officers of the Corporation may be facsimiles, and, if permitted by law, any other signature may be a facsimile. (c) In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. (d) Certificates of stock shall be issued in such form not inconsistent with the Certificate of Incorporation as shall be approved by the Board of Directors. They shall be numbered and registered in the order in which they are issued. (e) All certificates surrendered to the Corporation shall be cancelled with the date of cancellation, and shall be retained by the Secretary, together with the powers of attorney to transfer and the assignments of the shares represented by such certificates, for such period of time as shall be prescribed from time to time by resolution of the Board of Directors. 5.2 Record Ownership. A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to treat the holder of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by law. 5.3 Transfer of Record Ownership. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or his attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so. 5.4 Lost, Stolen or Destroyed Certificates. Certificates representing shares of the stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed in such manner and on such terms and conditions as the Board of Directors from time to time may authorize. 5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The Corporation shall maintain one or more transfer offices or agencies where stock of the Corporation shall be transferable. The Corporation shall also maintain one or more registry offices where such stock shall be registered. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates. 5.6 Fixing Record Date for Determination of Stockholders of Record. The Board of Directors may fix in advance a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of the stockholders or any adjournment thereof, or the stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or to express consent to corporate action in writing without a meeting, or in order to make a determination of the stockholders for the purpose of any other lawful action. Such record date in any case shall not be more than sixty days nor less than ten days before the date of a meeting of the stockholders, nor more than sixty days prior to any other action requiring such determination of the stockholders. A determination of stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6. SECURITIES HELD BY THE CORPORATION 6.1 Voting. Unless the Board of Directors shall otherwise order, the Chairman, the Vice-Chairman, the President, any Vice President, the Secretary or the Treasurer shall have full power and authority, on behalf of the Corporation, to attend, act and vote at any meeting of the stockholders of any corporation in which the Corporation may hold stock and at such meeting to exercise any or all rights and powers incident to the ownership of such stock, and to execute on behalf of the Corporation a proxy or proxies empowering another or others to act as aforesaid. The Board of Directors from time to time may confer like powers upon any other person or persons. 6.2 General Authorization to Transfer Securities Held By the Corporation. (a) Any of the following officers, to wit: the Chairman, the Vice-Chairman, the President, any Vice President, the Treasurer, the Controller, any Associate Treasurer, Assistant Treasurer or Assistant Controller of the Corporation shall be, and they hereby are, authorized and empowered to transfer, convert, endorse, sell, assign, set over and deliver any and all shares of stock, bonds, debentures, notes, subscription warrants, stock purchase warrants, evidences of indebtedness, or other securities now or hereafter standing in the name of or owned by the Corporation, and to make, execute and deliver, under the seal of the Corporation, any and all written instruments of assignment and transfer necessary or proper to effectuate the authority hereby conferred. (b) Whenever there shall be annexed to any instrument of assignment and transfer executed pursuant to and in accordance with the foregoing paragraph (a), a certificate of the Secretary or an Assistant Secretary of the Corporation in office at the date of such certificate setting forth the provisions of this Section 6.2 and stating that they are in full force and effect and setting forth the names of persons who are then officers of the Corporation, then all persons to whom such instrument and annexed certificate shall thereafter come shall be entitled, without further inquiry or investigation and regardless of the date of such certificate, to assume and to act in reliance upon the assumption that the shares of stock or other securities named in such instrument were theretofore duly and properly transferred, endorsed, sold, assigned, set over and delivered by the Corporation, and that with respect to such securities, the authority of these provisions of the By-laws and of such officers is still in full force and effect. 7. SIGNATORIES All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 8. SEAL The seal of the Corporation shall be in such form and shall have such content as the Board of Directors shall from time to time determine. 9. FISCAL YEAR The fiscal year of the Corporation shall be determined by the Board of Directors. 10. WAIVER OF OR DISPENSING WITH NOTICE (a) Whenever any notice of the time, place or purpose of any meeting of the stockholders, directors or a committee is required to be given by law, the Certificate of Incorporation or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the holding thereof, or actual attendance at the meeting in person or, in the case of any stockholder, by his attorney-in-fact, shall be deemed equivalent to the giving of such notice to such persons. (b) No notice need be given to any person with whom communication is made unlawful by any law of the United States or any rule, regulation, proclamation or executive order issued under any such law. 11. AMENDMENT OF BY-LAWS 11.1 By Board of Directors. The By-laws of the Corporation may be altered, amended or repealed or new By-laws may be made or adopted by the affirmative vote of a majority of the whole Board at any regular or special meeting of the Board. No notice of any such meeting shall be required unless required otherwise than under this Section 11 and no such notice need in any event make any reference to any proposed change in the By-laws. 11.2 By Stockholders. The By-laws of the Corporation may also be altered, amended or repealed or new By-laws may be made or adopted by the vote of a majority in interest of the stockholders represented and entitled to vote upon the election of directors, at any meeting at which a quorum is present. EX-10.1 3 exhibit_10-1.txt Exhibit 10.1 STANDARD MICROSYSTEMS CORPORATION 2005 DIRECTORS STOCK APPRECIATION RIGHTS PLAN 1. Purpose. The purpose of this 2005 Directors Stock Appreciation Rights Plan (the "Plan" or the "SAR Plan") of Standard Microsystems Corporation (the "Company" or "SMSC"), is to link the compensation of outside directors of the Company, whose services are considered essential to the Company's continued progress, to the performance of SMSC stock, and to also provide them with a further incentive to continue to serve as directors of the Company. The Plan is also intended to assist the Company through utilization of the incentives provided by the Plan to attract and retain experienced and qualified candidates to fill vacancies in the Board that may occur in the future. 2. Administration a. The Plan will be administered by the Board of Directors (the "Board") of the Company. Subject to the express provisions of the Plan, the Board will have complete authority to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to it; to determine the terms and provisions of the respective Stock Appreciation Rights ("SAR") Agreements (which need not be identical); and to make all other determinations necessary or advisable for the administration of the Plan. The Board's determinations on the matters referred to in this Section 2 will be conclusive and binding on all parties. b. No member of the Board, or any employee of the Company authorized to administer the Plan, shall be liable for any action or determination made in good faith with respect to this Plan or any SAR Grant. To the full extent permitted by law, the Company shall indemnify and hold harmless each person made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that such person, or such person's testator or intestate, is or was a member of the Board, or an authorized employee. 3. Participation in the Plan. Each person who is now or shall become a director of the Company and who is not, while serving as director, an employee of the Company or any Subsidiary of the Company, shall be eligible to participate in the Plan (an "Eligible Director", hereinafter also referred to as a "Grantee"). A director of the Company shall not be deemed to be an employee of the Company solely by reason of the existence of a consulting contract between such director and the Company or any Subsidiary thereof pursuant to which the director agrees to provide consulting services as an independent consultant to the Company or its Subsidiaries on a regular or occasional basis for a stated consideration. 4. SAR Shares Subject to the Plan. Subject to the provisions of Section 10 hereof, this Plan has 49,000 "hypothetical" shares (the "Shares") of $.10 par value common stock of SMSC (the "Common Stock") available for the granting of SARs under the Plan. The Plan does not permit any payments for a SAR Grant to be made in the Common Stock of SMSC. If any SARs are not granted under the Plan in whole or in part, such as if an Eligible Director should cease to be a Board member before any Current Service SAR is granted, or before a Vesting SAR becomes vested, "hypothetical" Shares that could have been granted or do not vest shall remain available for the granting of new SARs under the Plan. 5. General Terms and Conditions of SAR Grants a. Form of SARs. Each SAR granted under this Plan shall be evidenced by a written SAR Agreement in such form as the Board shall from time to time approve, which SAR Agreement shall set forth the applicable date of grant (the "Grant Date") and shall comply with and be subject to the terms and conditions set forth in the Plan. b. Vesting SARs. Any Eligible Director first elected after the adoption of this Plan, upon such election, may be granted SARs in the event this Plan is amended to allocate any new SARs under the Plan, as provided by any Amendment to Section 4 above. Each SAR granted pursuant to this Section 5(b) (i.e., "Vesting SARs") shall become vested, to the extent of one-third (1/3) of the number of SARs granted on the first anniversary of the date of grant, and cumulatively to the extent of an additional one-third (1/3) on each of the next two (2) succeeding anniversaries, so that on the third anniversary of the Grant Date, all SARs shall be fully vested. c. Current Service SARs. In addition to Vesting SARs, that are currently not available under the Plan, each Eligible Director incumbent for at least three (3) years shall be granted SARs equal to 3,500 shares of Common Stock (the "Current SAR Grant"), which shall be fully vested upon the granting thereof and, subject to any other provisions of the Plan, shall be granted on each January 15, April 15, July 15, and October 15 (or, if any such day shall not be a business day, then on the next succeeding business day). Current Service SARs shall only be forfeited to the extent an Eligible Director is no longer a member of the Board on the applicable Grant Date. d. SAR Value Per Share. All SARs granted hereunder shall have a "Grant Value" equal to the "Fair Market Value" of a share of Common Stock on the date of the grant, as defined in Section 13(f). e. SARs Nontransferable. Each SAR granted under the Plan by its terms shall not be transferable by the Grantee otherwise than by will, or by the laws of descent and distribution. No SAR or interest therein may be transferred, assigned, pledged, or hypothecated by the Grantee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment, or similar process. f. No Exercise of SARs. A SAR, once vested, cannot be exercised by a Grantee at any point in time. SAR Grants are only paid in accordance with the provisions of Section 5(g) below. g. Payment Dates. All SARs (i.e., Vesting or Current Service SARs) shall automatically be paid on the applicable Payment Date, which is the end of the fifth fiscal year following the Grant Date, which is intended to be a fixed date to avoid any adverse tax consequences under Section 409A of the Code. Accordingly, for purposes of the SAR Plan, Current Service SARs shall be paid as follows: Grant Date Payment Date October 15, 2005 February 28, 2011 January 15, 2006 February 28, 2011 April 15, 2006 February 29, 2012 Notwithstanding the proceeding provisions of this Section 5(g), the fixed Payment Date in the event of death, Disability or a Change in Control shall be the date sixty (60) days after the occurrence of such an event, or sixty (60) days after the determination that such an event has occurred, or the next business day, consistent with the provisions of Section 409A of the Code (regardless of the thirty (30) day notice period for a Change in Control under Section 11). Upon the Payment Date of a SAR, a Grantee shall be entitled to receive an amount in cash equal to the excess of the Fair Market Value of one share of Common Stock determined on such Payment Date over the Grant Value per share specified in the related SAR Grant Agreement, multiplied by the number of shares in respect of which the SAR Grant is payable. Full or fractional shares may be paid. Payment will be made on each applicable Payment Date. Fair Market Value shall be determined as of the date of death, Disability, or the date a Change in Control is determined to have occurred, regardless of when the actual Payment Date is (i.e., the Fair Market Value is determined as of the date of the event and not the date of payment sixty (60) days after such an event occurs). h. Termination of Grantee's Directorship. If a Grantee's directorship with the Company is terminated for any reason, other than by reason of death or Disability (as described in Subsections (i) and (j) below) prior to the Payment Date, any vested SARs shall nevertheless be valued and paid on the applicable Payment Date under Section 5(g). i. Death of Grantee. If a Grantee's directorship is terminated by reason of his death prior to the Payment Date of his SAR Grant, or if a Grantee whose directorship is terminated as a result of a Disability (as described in Subsection (j) below) shall die following the Grantee's termination of being a director, but prior to the Payment Date of any SAR Grant, such SAR Grant shall be paid to the Grantee's Beneficiary to the extent of the number of SARs in which the Grantee was vested on the date of the Grantee's death, as of the applicable Payment Date (i.e., under the sixty (60) day provision). j. Disability of Grantee. If a Grantee shall become Disabled during the Grantee's directorship with the Company and the Grantee's directorship with the Company is terminated as a consequence of such Disability, or if a Grantee whose directorship is terminated shall become Disabled following the Grantee's termination of being a Director, but prior to the Payment Date of any SAR Grant, any SAR Grant shall be paid to the Grantee or the Grantee's personal representative on the applicable Payment Date (i.e., under the sixty (60) day provision). k. Delivery of Notice and Execution of SAR Grant Agreement. Upon the determination to issue a SAR Award, the Company shall promptly issue a notice representing the Shares subject to the SAR Grant to the Grantee. Each Grantee shall enter into, and be bound by the terms of, a SAR Grant Agreement which shall include or incorporate by reference the terms of the Plan and which shall contain such other terms, conditions and restrictions not inconsistent with the Plan as the Board shall determine. l. Tax Withholding. The obligation of the Company to make payment upon any Payment Date of any SAR Grant shall be subject to all applicable Federal, state and local tax withholding requirements. A Grantee shall be responsible for any portion of the Grantee's tax liabilities associated with the exercise of any SAR Grants. 6. No Right to Continue as a Director. Neither the Plan, the execution of any SAR Grant Agreement, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time, or at any particular rate of compensation. 7. No Stockholder's Rights for Grantees. A Grantee shall have no rights as a stockholder with respect to any Shares covered by SAR Grant, and no adjustments shall be made for any dividends paid prior to any Payment Date. 8. No Right to Vote. A Grantee shall have no right to vote any Shares as a result of the granting of any SAR. 9. No Right to Dividends. A Grantee shall have no right to dividends as a result of the granting of any SARs. 10. Adjustments. The number of Shares representing the number of SARs which may be issued under the Plan, as stated in Section 4 hereof, as well as the Grant Value per share under such outstanding SAR Awards, and the amount to be paid upon the Payment Date of any SAR, shall be suitably adjusted by the Board to reflect any stock dividend, stock split, shares combination, or similar change in the capitalization of the Company. The Board shall use its reasonable judgment in determining a suitable adjustment. In the event the Company is liquidated or a corporate transaction described in Section 424(a) of the Code and the Treasury Regulations issued thereunder occurs (as, for example, a merger, consolidation, acquisition of property or stock, separation or reorganization), each outstanding SAR Grant shall be assumed by the surviving or successor corporation if any. 11. Change in Control. Notwithstanding any provisions to the contrary, in the event of a Change in Control, the Board may, within its discretion, within a period of twelve (12) months after such Change in Control, determine that each SAR Grant outstanding hereunder shall terminate within thirty (30) days after notice to the Grantees, and such Grantees shall receive, with respect to each SAR Grant, an amount equal to the excess of the Fair Market Value of such SAR Grant as determined under Section 5(g), to the extent such action is consistent with Section 409A of the Code, and any guidance issued thereunder. Such amount shall be payable in cash. 12. Amendment of the Plan. The Board may suspend or discontinue the Plan or revise or amend it in any respect whatsoever; provided, however, that, without approval of the Grantees, no revision or amendment shall change the rights under any granted or vested SARs. 13. Definition. For purposes of the Plan the words and phrases used herein shall have the following meanings: a. "Beneficiary" shall mean a Grantee's spouse, if married, or the Grantee's estate, if no spouse exists as of any applicable Payment Date. A Grantee may, however, designate other individuals or entities as a Beneficiary for any payment, in accordance with procedures established by the Board. b. "Board" means the Board of Directors of SMSC. c. "Change in Control" means a Change in Control as defined under IRS Notice 2005-1 Q&A-11, 12, 13 and 14. In accordance with these provisions, the Plan may permit a payment upon the occurrence of a change in "ownership" of the Company as defined in Q&A-12; a change in "effective control" of the Company is defined in Q&A-13; or "change in the ownership" of a substantial portion of the assets of the Company as defined as Q&A-14. To qualify as a Change in Control, the occurrence of the event must be objectively determinable and the requirement that the Board certify the occurrence of a Change in Control event, must be strictly ministerial and not involve any discretionary authority. For purposes of this provision, a payment shall be treated as occurring upon a Change in Control if the right to the payment arises due to the Board's exercise of discretion under the terms of this Plan to terminate the Plan upon a Change in Control and paid benefits in accordance with Section 11. d. "Code" means the Internal Revenue Code of 1986, as amended from time to time. e. "Disability" means a Grantee is: (i) Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or can be expected to last for a continuous period of not less than twelve (12) months; or (ii) By reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees or directors of SMSC. f. "Fair Market Value" means, as of the date on which such Fair Market Value is to be determined, the closing price of a share of Common Stock as reported in The Wall Street Journal (or a publication or reporting service deemed equivalent to The Wall Street Journal for such purpose by the Board) for the over-the-counter market or any national securities exchange and other securities market which at the time are included in the stock price quotations of such publication. If no closing price is so reported for such date, Fair Market Value shall mean the average of the latest bid and asked prices so reported for such date, or if there was no bid and asked prices so reported for such date, Fair Market Value shall mean the closing price on the last previous day on which a closing price was reported. g. "SAR Grant" means an award of SARs granted under the Plan. h. "Stock Appreciation Right" means a contractual right that allows a Grantee to receive payment for a SAR Grant equal to the value of any appreciation in the value of SMSC Common Stock over the Grant Price, as provided in Section 5, on the applicable Payment Date. i. "Subsidiary" means any entity as defined in Section 424(f) of the Code. 14. Section 409A. The Company acknowledges that a SAR Plan may be classified as a form of deferred compensation if the Grantee can control the payment of benefits. It is intended that by use of fixed payment dates, no Grantee has the ability to control the recognition of income attributable to any SAR Grant. To the extent necessary, the Plan shall be amended to avoid any adverse tax consequences under Section 409A, or any guidance issued thereunder. 15. Notice. Any notice to the Company required by this Plan shall be in writing addressed to the General Counsel of the Company at its principal office, and shall be deemed delivered only when it is received by the General Counsel. 16. Severability. In the event that any one or more provisions of the Plan or any Agreement, or any action taken pursuant to the Plan or such Agreement, should, for any reason, be unenforceable or invalid in any respect under the laws of the United States, any state of the United States or any other government, such unenforceability or invalidity shall not affect any other provision of the Plan or of such or any other Agreement, but in such particular jurisdiction and instance the Plan and the affected Agreement shall be construed as if such unenforceable or invalid provision had not been contained therein or as if the action in question had not been taken thereunder. 17. Gender and Number. The masculine gender, where appearing herein, shall be deemed to include the feminine gender, and the singular shall be deemed to include the plural, unless the context clearly indicates to the contrary. 18. Conflict. In the event of a conflict between the terms of this Plan and the terms of any Agreement, the terms of this Plan shall govern. 19. Governing Law. This Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of the State of New York, without regard to the provisions governing conflict of laws, and construed accordingly. EX-31.1 4 exhibit_31-1.txt Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15 (f) and 15d - 15 (f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 11, 2005 By: /s/ Steven J. Bilodeau -------------------------- (signature) Steven J. Bilodeau Chairman of the Board, President and Chief Executive Officer EX-31.2 5 exhibit_31-2.txt Exhibit 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15 (f) and 15d - 15 (f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 11, 2005 By: /s/ Andrew M. Caggia ------------------------ (signature) Andrew M. Caggia Senior Vice President and Chief Financial Officer EX-32.1 6 exhibit_32-1.txt Exhibit 32.1 CERTIFICATIONS 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 August 31, 2005 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: October 11, 2005 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 and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----