10-Q 1 f10q_2qtr-2005.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, 2004 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, 2004, there were 18,460,199 shares of the registrant's common stock outstanding. Standard Microsystems Corporation Form 10-Q For the Quarter Ended August 31, 2004 Table of Contents PartI Financial Information Item 1 Financial Statements (unaudited): Condensed Consolidated Balance Sheets as of August 31, 2004 and February 29, 2004 Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended August 31, 2004 and 2003 Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended August 31, 2004 and 2003 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 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Item 4 Submission of Matters to a Vote of Security Holders Item 6 Exhibits and Reports on Form 8-K Signature PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (In thousands) August 31, February 29, 2004 2004 ---- ---- Assets Current assets: Cash and cash equivalents $ 159,524 $ 135,161 Short-term investments 13,835 23,136 Accounts receivable, net 27,747 21,946 Inventories 27,849 23,162 Deferred income taxes 13,435 15,064 Other current assets 3,314 8,549 -------------------------------------------------------------------------------- Total current assets 245,704 227,018 -------------------------------------------------------------------------------- Property, plant and equipment, net 24,299 23,430 Long-term investments 8,600 15,600 Goodwill 29,435 29,595 Intangible assets, net 4,115 4,697 Deferred income taxes 6,784 6,493 Other assets 3,327 3,192 -------------------------------------------------------------------------------- $ 322,264 $ 310,025 ================================================================================ Liabilities and shareholders' equity Current liabilities: Accounts payable $ 19,022 $ 14,679 Deferred income on shipments to distributors 12,858 7,972 Accrued expenses, income taxes and other liabilities 11,113 13,168 -------------------------------------------------------------------------------- Total current liabilities 42,993 35,819 -------------------------------------------------------------------------------- Other liabilities 12,143 12,104 Shareholders' equity: Preferred stock - - Common stock 2,030 2,019 Additional paid-in capital 184,023 181,830 Retained earnings 102,817 99,010 Treasury stock, at cost (23,799) (23,454) Deferred stock-based compensation (2,573) (1,962) Accumulated other comprehensive income 4,630 4,659 -------------------------------------------------------------------------------- Total shareholders' equity 267,128 262,102 -------------------------------------------------------------------------------- $ 322,264 $ 310,025 ================================================================================ See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)

Three Months Ended Six Months Ended August 31, August 31, ---------------------------------- ------------------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Sales and revenues: Product sales $ 47,233 $ 47,961 $ 97,585 $ 90,449 Intellectual property revenues 2,924 328 5,625 561 ------------------------------------------------------------------------------------------------------------------------------------ 50,157 48,289 103,210 91,010 Cost of goods sold 26,260 26,783 52,645 48,842 ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 23,897 21,506 50,565 42,168 Operating expenses (income): Research and development 11,220 9,280 22,082 18,381 Selling, general and administrative 11,852 9,965 23,704 19,478 Amortization of intangible assets 266 317 583 677 Gains on real estate transactions - - - (1,444) ------------------------------------------------------------------------------------------------------------------------------------ Income from operations 559 1,944 4,196 5,076 Interest income 556 391 1,022 834 Other expense, net (6) (9) (38) (745) ------------------------------------------------------------------------------------------------------------------------------------ Income before provision for income taxes and minority interest 1,109 2,326 5,180 5,165 Provision for income taxes 214 785 1,373 1,680 Minority interest in net income of subsidiary - 35 - 96 ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations 895 1,506 3,807 3,389 Loss from discontinued operations (net of income tax benefits of $14 and $106) - (26) - (190) ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 895 $ 1,480 $ 3,807 $ 3,199 ==================================================================================================================================== Basic net income per share: Income from continuing operations $ 0.05 $ 0.09 $ 0.21 $ 0.20 Loss from discontinued operations - - - (0.01) ------------------------------------------------------------------------------------------------------------------------------------ Basic net income per share $ 0.05 $ 0.09 $ 0.21 $ 0.19 ==================================================================================================================================== Diluted net income per share: Income from continuing operations $ 0.05 $ 0.08 $ 0.20 $ 0.19 Loss from discontinued operations - - - (0.01) ------------------------------------------------------------------------------------------------------------------------------------ Diluted net income per share $ 0.05 $ 0.08 $ 0.20 $ 0.18 ==================================================================================================================================== Weighted average common shares outstanding: Basic 18,308 16,863 18,278 16,830 Diluted 19,169 17,869 19,482 17,643

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, ----------------------------------- 2004 2003 ---------------- ---------------- Cash flows from operating activities: Cash received from customers and licensees $ 105,124 $ 89,931 Cash paid to suppliers and employees (98,520) (85,190) Interest received 983 836 Interest paid (72) (40) Income taxes refunded (paid) 6,738 (510) --------------------------------------------------------------------------------------- Net cash provided by operating activities 14,253 5,027 --------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (6,202) (4,628) Sales of property, plant and equipment - 7,080 Sales of long-term investments 4,000 2,114 Purchases of short-term investments (7,130) (14,055) Sales of short-term investments 19,431 15,794 Other 36 149 --------------------------------------------------------------------------------------- Net cash provided by investing activities 10,135 6,454 --------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock 976 1,036 Repayments of obligations under capital leases and notes payable (1,016) (874) --------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (40) 162 --------------------------------------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents 15 138 Cash used for discontinued operation - (296) --------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 24,363 11,485 Cash and cash equivalents at beginning of period 135,161 90,025 --------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 159,524 $ 101,510 ======================================================================================= Reconciliation of income from continuing operations to net cash provided by operating activities: Income from continuing operations $ 3,807 $ 3,389 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 6,111 5,429 Tax benefits from employee stock plans 117 265 Gains from sales of investments and property, net - (732) Other adjustments, net (18) (74) Changes in operating assets and liabilities: Accounts receivable (5,632) (6,431) Inventories (4,696) (3,553) Accounts payable, deferred income, accrued expenses and other liabilities 6,935 5,682 Current and deferred income taxes 7,995 906 Other changes, net (366) 146 --------------------------------------------------------------------------------------- Net cash provided by operating activities $ 14,253 $ 5,027 =======================================================================================

See Notes to Condensed Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial information of Standard Microsystems Corporation and subsidiaries, referred to herein as "SMSC" or "the Company", has been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission, and reflects all adjustments, consisting only of normal recurring adjustments, which in management's opinion are necessary to state fairly the Company's financial position, results of operations and cash flows for all periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of sales and revenues and expenses during the reporting period. Actual results may differ from those estimates, and such differences may be material to the financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended February 29, 2004 included in the Company's annual report on Form 10-K, as filed on May 14, 2004 with the Securities and Exchange Commission (SEC). The results of operations for the three and six-month periods ended August 31, 2004 are not necessarily indicative of the results to be expected for any future periods. 2. Stock-Based Compensation The Company has in effect several stock-based compensation plans under which incentive stock options, non-qualified stock options and restricted stock awards are granted to employees and directors. All stock options are granted with exercise prices equal to the fair value of the underlying shares on the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and accordingly recognizes no compensation expense for the stock option grants. Additional pro forma disclosures as required under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," are detailed below. For purposes of pro forma disclosures, the estimated fair market value of the Company's options is amortized as an expense over the options' vesting periods. The fair value of each option grant, as defined by SFAS No. 123, is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, that significantly differ from the Company's stock option awards. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. Had compensation expense been recorded under the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below (in thousands, except per share data):

Three Months Ended Six Months Ended August 31, August 31, ------------------------------------------------------ 2004 2003 2004 2003 ------------------------------------------------------ Net income - as reported $ 895 $ 1,480 $ 3,807 $ 3,199 Add: Stock-based compensation expense included in net income, net of taxes - as reported 189 256 331 459 Deduct: Stock-based compensation expense determined using the fair value method for all awards, net of taxes (2,100) (2,256) (4,522) (4,691) ---------------------------------------------------------------------------------------------------------- Net loss - pro forma $(1,016) $ (520) $ (384) $(1,033) ========================================================================================================== Basic net income per share - as reported $ 0.05 $ 0.09 $ 0.21 $ 0.19 ========================================================================================================== Diluted net income per share - as reported $ 0.05 $ 0.08 $ 0.20 $ 0.18 ========================================================================================================== Basic net loss per share - pro forma $ (0.06) $ (0.03) $ (0.02) $ (0.06) ========================================================================================================== Diluted net loss per share - pro forma $ (0.06) $ (0.03) $ (0.02) $ (0.06) ==========================================================================================================

3. Balance Sheet Data Inventories are valued at the lower of first-in, first-out cost or market and consist of the following (in thousands): Aug. 31, 2004 Feb. 29, 2004 ------------------------------------------------------------------------ Raw materials $ 1,117 $ 910 Work in process 17,742 13,202 Finished goods 8,990 9,050 ------------------------------------------------------------------------ $ 27,849 $ 23,162 ======================================================================== Property, plant and equipment consist of the following (in thousands): Aug. 31, 2004 Feb. 29,2004 ------------------------------------------------------------------------ Land $ 1,570 $ 1,570 Buildings and improvements 21,643 20,842 Machinery and equipment 95,166 90,195 ------------------------------------------------------------------------ 118,379 112,607 Less: accumulated depreciation 94,080 89,177 ------------------------------------------------------------------------ $ 24,299 $ 23,430 ======================================================================== 4. Net Income Per Share Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of 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, 2004 2003 2004 2003 ---------------------------------------- Average shares outstanding for basic net income per share 18,308 16,863 18,278 16,830 Dilutive effect of stock options and unvested restricted stock awards 861 1,006 1,204 813 --------------------------------------------------------------------------- Average shares outstanding for diluted net income per share 19,169 17,869 19,482 17,643 =========================================================================== Options covering 1.3 million and 1.9 million shares for the three-month periods ended August 31, 2004 and 2003, respectively, and 0.8 million and 2.3 million shares for the six-month periods ended August 31, 2004 and 2003, respectively, were excluded from the computation of average shares outstanding for diluted net income per share because their effect was antidilutive. 5. Comprehensive Income The Company's other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, and unrealized gains and losses on equity investments classified as available-for-sale. The components of the Company's comprehensive income for the three and six months ended August 31, 2004 and 2003 were as follows (in thousands):

Three Months Ended Six Months Ended August 31, August 31, 2004 2003 2004 2003 ---------------------------------------------------- Net income $ 895 $ 1,480 $ 3,807 $ 3,199 Other comprehensive income: Change in foreign currency translation adjustment 43 178 (10) 216 Change in unrealized gain (loss) on marketable equity securities, net of taxes (15) 21 (19) 35 Reclassification adjustment for loss on marketable equity security included in net income, net of taxes - - - 665 ---------------------------------------------------------------------------------------------------- Total comprehensive income $ 923 $ 1,679 $ 3,778 $ 4,115 ====================================================================================================

During the six months ended August 31, 2003, the Company sold its remaining equity investment in Chartered Semiconductor Manufacturing, Ltd. This investment was classified as available-for-sale, and temporary changes in its market value, net of income taxes, were included within the Company's Other comprehensive income, and were presented cumulatively as an unrealized gain or loss, net of income taxes, within Accumulated other comprehensive income on the Company's Consolidated Balance Sheets. The amount presented as a reclassification adjustment in the preceding table represents the amount previously reported within Other comprehensive income as an unrealized loss on this investment, net of income taxes, through February 28, 2003. 6. Agreements with Intel Corporation In 1987, the Company and Intel Corporation (Intel) entered into an agreement providing for, among other things, a broad, worldwide, non-exclusive patent cross-license, covering manufacturing processes and products, thereby providing each company access to the other's current and future patent portfolios. In September 2003, the Company and Intel announced that they had enhanced their intellectual property and business relationship. The companies agreed to collaborate on certain future Input/Output (I/O) and sensor products, and Intel agreed to use the Company's devices on certain current and future generations of Intel products. In addition, the Company agreed to limit its rights, under its 1987 patent cross-license with Intel, to manufacture and sell Northbridge products and Intel Architecture Microprocessors on behalf of third parties. The companies also terminated an Investor Rights Agreement between them, which had been entered into in connection with Intel's 1997 acquisition of 1,543,000 shares of the Company's common stock. Under this agreement, Intel had certain information, corporate governance and other rights with respect to the activities of the Company. In respect of this relationship, Intel will pay to the Company an aggregate amount of $75 million, of which $20 million and $2.5 million was recognized as Intellectual property revenue, and paid, in the third and fourth quarters of fiscal 2004, respectively, and $2.5 million was recognized as Intellectual property revenue, and paid, in each of the first and second quarters of fiscal 2005, respectively. Of the remaining amount, $5.0 million is payable during the balance of fiscal 2005, $10.25 million is payable in fiscal 2006, $11.25 million is payable in fiscal 2007, $12.0 million is payable in fiscal 2008 and $9.0 million is payable in fiscal 2009. Such amounts are payable in quarterly installments each year, and are subject to possible reduction, in a manner and to an extent to be agreed by the parties, based upon the companies' collaboration and sales, facilitated by Intel, of certain future new products of the Company. 7. 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 $1.0 million at February 29, 2004 to $0.7 million at August 31, 2004, reflecting payments against previously reserved non-cancelable lease obligations, which will continue through their respective lease terms through August 2008. 8. Discontinued Operations The Company had been involved in an arbitration proceeding with Accton Technology Corporation (Accton) and SMC Networks, Inc. (Networks), relating to claims associated with the October 1997 purchase of a majority interest in Networks by Accton from SMSC. This divestiture was accounted for as a discontinued operation, and accordingly, costs associated with this action, net of income taxes, were reported within Loss from discontinued operations on the Consolidated Statements of Operations. These costs were negligible for the three-month period ended August 31, 2003, and totaled $0.2 million for the six-month period ended August 31, 2003, after applicable income tax benefits. This action was settled during the fourth quarter of fiscal 2004. 9. Goodwill and Intangible Assets The Company's 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. In accordance with the provisions of SFAS No. 142, this goodwill is not amortized, but is tested for impairment in value annually, as well as when an event or circumstance occurs indicating a possible impairment in its value. All finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives. Existing technologies were assigned an estimated useful life of six years. Customer contracts were assigned useful lives of between one and ten years (with a weighted average life of approximately seven years), and non-compete agreements were assigned useful lives of two years. The weighted average useful life of all intangible assets is approximately six years. As of August 31, 2004 and February 29, 2004, the Company's finite-lived intangible assets consisted of the following (in thousands): August 31, 2004 February 29, 2004 --------------------------------------------------------------------------- Accumulated Accumulated Cost Amortization Cost Amortization --------------------------------------------------------------------------- Existing technologies $ 6,179 $ 2,317 $ 6,179 $ 1,802 Customer contracts 326 73 326 57 Non-compete agreements - - 410 359 --------------------------------------------------------------------------- $ 6,505 $ 2,390 $ 6,915 $ 2,218 =========================================================================== Estimated future intangible asset amortization expense for the remainder of fiscal 2005 and thereafter is as follows (in thousands): Period Amount ------------------------------------------- Remainder of fiscal 2005 $ 531 Fiscal 2006 1,063 Fiscal 2007 1,063 Fiscal 2008 1,062 Fiscal 2009 290 Fiscal 2010 and thereafter 106 =========================================== 10. Real Estate Transactions During the quarter ended May 31, 2003, the Company sold certain portions of its Hauppauge, New York real estate holdings, for aggregate proceeds of $7.0 million, net of transaction costs. These transactions resulted in an aggregate gain of $1.7 million, $1.4 million of which related to property in which the Company has no continued interest and was recognized within the Company's fiscal 2004 first quarter operating results, and $0.3 million of which related to property that the Company has leased back from the purchaser and was therefore deferred. This deferred gain is being recognized within the Company's operating results as a reduction in rent expense on a straight-line basis over a 30-month period beginning in June 2003, consistent with the term of the lease. As of August 31, 2004, the Company's remaining rent obligation over the term of this lease is approximately $0.4 million. 11. 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 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. The following table sets forth the components of the consolidated net periodic pension expense for the three and six months ended August 31, 2004 and 2003, respectively (in thousands): Three Months Ended Six Months Ended August 31, August 31, ---------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------------------- Service cost - benefits earned $ 71 $ 65 $ 143 $ 131 Interest cost on projected benefit obligations 107 101 213 203 Net amortization and deferral 73 68 145 136 --------------------------------------------------------------------------- Net periodic pension expense $ 251 $ 234 $ 501 $ 470 =========================================================================== 12. Litigation In June 2003, SMSC was named as a defendant in a patent infringement lawsuit filed by Analog Devices, Inc. (ADI) in the United States District Court for the District of Massachusetts (Analog Devices, Inc. v. Standard Microsystems Corporation, Case Number 03 CIV 11216). The Complaint, as amended, alleges that some of the Company's products infringe one or more of three of ADI's patents, and seeks injunctive relief and unspecified damages. In September 2003, the Company filed an Answer in the lawsuit, denying ADI's allegations and raising affirmative defenses and counterclaims. The Company is vigorously defending the lawsuit and collecting evidence to support its defenses to infringement and its allegations of patent invalidity and unenforceability. Although it is premature to assess the outcome of the litigation, the Company believes that the allegations against it are without merit. 13. 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 22,000 shares of its common stock 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, 2004, the Company has repurchased a total of approximately 1.8 million shares of its common stock, at a cost of $23.8 million, under this program. 14. Subsequent Event - Stock Appreciation Rights Plan In September 2004, the Company's Board of Directors approved a Stock Appreciation Rights (SAR) Plan (the 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. The Plan authorizes the Board's Compensation Committee to grant up to two million SAR awards to eligible officers, employees and consultants. Each award, when granted, provides the participant with the right to receive payment in cash, upon exercise, for the appreciated market value of a share of SMSC common stock over the award's exercise price. The exercise price of a SAR is equal to the closing market price of SMSC stock on the date of grant. SAR awards will generally vest over four or five-year periods, and will expire no later than ten years from the date of grant. The Company will recognize compensation expense for the appreciation of a SAR award's market value over its exercise price over the term of the award. 15. Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised SFAS No. 132 requires additional disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information related to pensions and other postretirement benefits. It also requires certain disclosures related to pensions and other postretirement benefits to be included in quarterly filings, which are included within Note 11 to the Condensed Consolidated Financial Statements included within this report. In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 03-1 (EITF 03-1), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The objective of this issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual periods ending after June 15, 2004. In September 2004, the EITF delayed the effective date to apply EITF 03-1 on certain impaired debt securities. The adoption of this pronouncement did not impact the Company's results of operations or financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Condensed 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. These include the timely development and market acceptance of new products; the impact of competitive products and pricing; the effect of changing economic conditions in domestic and international markets; changes in customer order patterns, including loss of key customers, order cancellations or reduced bookings; and excess or obsolete inventory and variations in inventory valuation, among others. Words such as "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers or divestitures. SMSC competes in the semiconductor industry, which has historically been characterized by intense competition, rapid technological change, cyclical market patterns, price erosion and periods of mismatched supply and demand. In addition, sales of many of the Company's products depend largely on sales of personal computers (PCs) and peripheral devices, and reductions in the rate of growth of the PC, consumer electronics and embedded markets could adversely affect its operating results. SMSC conducts business outside the United States and is subject to tariff and import regulations and currency fluctuations, which may have an effect on its business. All forward-looking statements speak only as of the date hereof and are based upon the information available to SMSC at this time. Such information is subject to change, and the Company may not inform, or be required to inform, investors of such changes. 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. Overview -------- Description of Business SMSC provides semiconductor systems solutions for high-speed communication and computing applications. Through the integration of its digital, mixed-signal and analog design capabilities and software expertise, SMSC delivers complete solutions that monitor and manage computing systems and connect peripherals to computers and to one another. The Company addresses computing, communications and consumer electronics markets through world-leading positions in Input/Output and non-PCI Ethernet products, innovations in USB2.0 and other high-speed serial solutions, and integrated networking products employed in a broad range of applications. SMSC is a fabless semiconductor supplier, whose products are manufactured by world-class third-party semiconductor foundries and assemblers. To ensure the highest product quality, the Company conducts a significant portion of its final testing requirements in the Company's own state-of-the-art testing operation. The Company is based in Hauppauge, New York with operations in North America, Taiwan, Japan, Korea, China and Europe. SMSC operates engineering design centers in New York, Arizona and Texas. New Brand Identity and Corporate Image On April 26, 2004, SMSC was honored to open the Nasdaq stock market and concurrently unveiled a new global brand identity, including a new logo, tagline - "Success by Design," and website design at its www.smsc.com homepage. Through its communication initiatives, the Company is placing renewed emphasis on building awareness of its market leadership position and capabilities to serve its customers. The new "Success by Design" tagline underscores the Company's mission of being an essential ingredient that fuels its customers' success. This tagline highlights SMSC's culture, which is deliberate in the manner in which it seeks to ensure success for its customers and stakeholders. 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 tax assets o Legal contingencies Further information regarding these policies appears within the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's annual report on Form 10-K for the fiscal year ended February 29, 2004 filed with the SEC on May 14, 2004. During the three-month period ended August 31, 2004, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying these policies. Results of Operations --------------------- Sales and Revenues Sales and revenues for the three months ended August 31, 2004 were $50.2 million, consisting of $47.3 million of product sales and $2.9 million of intellectual property revenues, compared to sales and revenues of $48.3 million for the prior-year's corresponding quarter, consisting of $48.0 million of products sales and $0.3 million of intellectual property revenues. Sales and revenues for the six months ended August 31, 2004 were $103.2 million, consisting of $97.6 million of product sales and $5.6 million of intellectual property revenues, compared to sales and revenues of $91.0 million, consisting of $90.4 million of product sales and $0.6 million of intellectual property revenues, for the year earlier period. During the quarter ended August 31, 2004, consistent with a trend experienced across much of the semiconductor industry, the Company experienced a general slowdown in orders across its businesses, with the larger decline occurring within PC I/O products. The Company attributes this, in part, to certain original design manufacturers (ODMs) adjusting their inventories to reflect both shortened lead times and revised launch schedules of Intel chipset products. As such, second quarter product sales of $47.3 million declined sequentially from $50.4 million achieved in the first quarter of fiscal 2005, and were about 2% below the prior year's second quarter. Compared to the prior year's second quarter, in which non-PC I/O products contributed 26% of total product sales, the Company has experienced strong growth in its non-PC I/O products, which contributed 41% of product sales for the three months ended August 31, 2004. Non-PC I/O products include networking, connectivity and other products. During the six months ended August 31, 2004, non-PC I/O products contributed 41% of total product revenue, compared to 30% for the year earlier period. These mix changes reflect the impact of new non-PC I/O design-wins, broader product offerings, and the Company's ongoing focus on aggressively identifying and pursuing market opportunities in its non-PC I/O product lines, and is consistent with the Company's diversification goals. Product sales to customers outside of North America accounted for approximately 84% and 86% of the Company's product sales for the three and six-month periods ended August 31, 2004, respectively, the largest portion of which was to the Asia and Pacific Rim region. The comparable percentages for the three and six-month periods in the prior fiscal year were 93% and 92%, respectively. The Company expects that international shipments, particularly to the Asia and Pacific Rim region, will continue to represent a significant portion of its product sales. Intellectual property revenues for the three and six-month periods ended August 31, 2004 were $2.9 million and $5.6 million, respectively, compared to $0.3 million and $0.6 million, respectively, for the corresponding prior-year periods. Intellectual property revenues for the current fiscal year include payments of $2.5 million from Intel Corporation in each of the first and second quarters, as more fully described within Note 6 to the Condensed Consolidated Financial Statements. Gross Profit Gross profit for the quarter ended August 31, 2004 was $23.9 million, or 47.6% of sales and revenues, compared to $21.5 million, or 44.5% of sales and revenues, for the three months ended August 31, 2003. Excluding intellectual property revenues, gross profit from product sales was $21.0 million, or 44.4% of product sales, for the quarter ended August 31, 2004, compared to $21.2 million, or 44.2% of product sales, for quarter ended August 31, 2003. For the six-month period ended August 31, 2004, gross profit was $50.6 million, or 49.0% of sales and revenues, compared to $42.2 million, or 46.3% of sales and revenues, for the six-month period ended August 31, 2003. Excluding intellectual property revenues, gross profit from product sales was $44.9 million, or 46.1% of product sales, for the current year six-month period, compared to $41.6 million, or 46.0% of product sales, for prior year six-month period. During fiscal 2005, the Company has experienced a change in its product mix, with more of its product sales being derived from non-PC I/O products, as compared to the year-earlier periods. While in the past, non-PC I/O products traditionally produced higher gross profit margins than PC I/O products, the Company has introduced new USB2.0 products into a very competitive market which currently generate lower gross profit margins than other non-PC I/O products. Accordingly, the Company is not currently realizing the overall increased gross profit percentage that would otherwise be expected from a higher product sales mix of non-PC I/O products. The Company is working on increasing its margins through design changes, enhanced product features, and cost saving initiatives, as it continues expanding its new product offerings in these competitive markets. 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, subcontracting costs and prototyping costs. 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 $11.2 million, or approximately 22% of sales and revenues, for the three months ended August 31, 2004, compared to $9.3 million, or approximately 19% of sales and revenues, for the three months ended August 31, 2003. For the six months ended August 31, 2004, R&D expenses were $22.1 million, or approximately 21% of sales and revenues, compared to $18.4 million, or approximately 20% of sales and revenues, for the six months ended August 31, 2003. This dollar increase reflects the impact of engineering staff additions, investments in advanced semiconductor design tools, higher costs associated with development programs in advanced semiconductor technologies, and higher costs for contract design services. Selling, General and Administrative Expenses Selling, general and administrative expenses were $11.9 million, or approximately 24% of sales and revenues, for the quarter ended August 31, 2004, compared to $10.0 million, or approximately 21% of sales and revenues, for the quarter ended August 31, 2003. For the current six-month period, selling, general and administrative expenses were $23.7 million, or approximately 23% of sales and revenues, compared to $19.5 million, or approximately 21% of sales and revenues, in the prior year six-month period. The dollar increases in both the three and six-month periods, compared to the prior year periods, reflect the impact of additional staff added to expand the Company's sales and marketing capabilities, associated recruitment and relocation costs, as well as expenses associated with projects to achieve compliance with provisions of the Sarbanes-Oxley Act of 2002. During the current year periods, the Company also incurred higher professional fees associated with litigation than in the corresponding prior-year periods, and incurred additional costs associated with its April 2004 launch and promotion of its new global brand identity and corporate image campaign. Amortization of Intangible Assets For the three and six-month periods ended August 31, 2004, the Company recorded amortization expenses of $0.3 million and $0.6 million, respectively, for intangible assets associated with the June 2002 acquisition of Gain. Comparable amortization expense was $0.3 million and $0.7 million for the three and six-month periods ended August 31, 2003. Gains on Real Estate Transactions During the quarter ended May 31, 2003, the Company sold certain portions of its Hauppauge, New York real estate holdings, for aggregate proceeds of $7.0 million, net of transaction costs. These transactions resulted in an aggregate gain of $1.7 million, $1.4 million of which related to property in which the Company has no continued interest and was recognized within the Company's fiscal 2004 first quarter operating results, and $0.3 million of which related to property that the Company has leased back from the purchaser and was therefore deferred. This deferred gain is being recognized within the Company's operating results as a reduction in rent expense on a straight-line basis over a 30-month period beginning in June 2003, consistent with the term of the lease. As of August 31, 2004, the Company's remaining rent obligation over the term of this lease is approximately $0.4 million. Other Income and Expense During the quarter ended May 31, 2003, the Company sold its remaining equity investment in Chartered Semiconductor Manufacturing, Ltd., realizing losses of $0.7 million, which are included within Other expense, net, for the six-month period ended August 31, 2003. Provision For Income Taxes The Company's effective income tax rate primarily reflects statutory Federal and state income tax rates, adjusted for the impact of tax-exempt interest income and anticipated income tax credits. The Company's $1.4 million provision for income taxes for the six months ended August 31, 2004 reflects an expected fiscal 2005 effective tax rate of 26.5%, a reduction from the 28.5% effective rate expected at May 31, 2004. This reduction in the anticipated fiscal 2005 effective income tax rate reflects a higher proportionate impact of 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 reflects the cumulative impact of this lower expected effective income tax rate. The $1.7 million provision for income taxes for the six months ended August 31, 2003 reflected an effective tax rate of 32.5% for that period. The higher expected fiscal 2004 effective tax rate at August 31, 2003, compared to the expected fiscal 2005 effective income tax rate, reflected a lower proportionate impact from expected income tax credits in fiscal 2004. In addition, operating results for the first six months of fiscal 2004 included unusual and infrequently occurring real estate and equity security sale transactions that, net, provided $0.7 million of pre-tax income. Taxes on those transactions were provided for at the Company's approximate 36.0% incremental income tax rate. Discontinued Operations The Company had been involved in an arbitration proceeding with Accton Technology Corporation (Accton) and SMC Networks, Inc. (Networks), relating to claims associated with the October 1997 purchase of a majority interest in Networks by Accton from SMSC. The divestiture was accounted for as a discontinued operation, and accordingly, costs associated with this action, net of income taxes, were reported within Loss from discontinued operations on the Consolidated Statements of Operations. These costs were negligible for the quarter ended August 31, 2003, and totaled $0.2 million for the six-month period ended August 31, 2003, after applicable income tax benefits. This action was settled during the fourth quarter of fiscal 2004. 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 liquid investments (including marketable securities with maturities in excess of one year) were $182.0 million at August 31, 2004, compared to $173.9 million at February 29, 2004, an increase of $8.1 million. The Company's operating activities provided $14.3 million of cash during the first six months of fiscal 2005, including income tax refunds of $6.7 million, net of income taxes paid. Operating activities for the first six months of fiscal 2004 generated $5.0 million of cash. The Company's inventories were $27.8 million at August 31, 2004, an increase of $4.6 million compared to $23.2 million at February 29, 2004. Inventories at the Company's distributors also increased during the period, as evidenced by the increase in Deferred income on shipments to distributors from $8.0 million at February 29, 2004 to $12.9 million at August 31, 2004. This increase in both the Company's and its distributors' inventories reflects the impact of a general slowdown in orders across the Company's businesses, as well as higher anticipated product demand during the upcoming third quarter. Management considers inventories to be appropriate for expected demand. Accounts receivable increased from $21.9 million at February 29, 2004 to $27.7 million at August 31, 2004, an increase of $5.8 million. This increase in receivables reflects a reduction in unclaimed pricing credits by distributors during the period. SMSC accrues a liability for distributor pricing credits when the distributor ships the Company's products and earns such credits, but the issuance of the actual credit memo to the distributor is dependent upon the distributor's submission of an appropriate claim to SMSC. Delays in distributors' claims for these credits typically results in lower than expected accounts receivable balances, since the delays result in full collections for certain invoices against which the distributor is actually entitled to, but has not yet claimed, a pricing credit. It has been the Company's experience that all such pricing credits are claimed, although the timing of the claims varies by distributor. Pricing credits are recorded as a reduction of product sales when accrued. Overall, the Company's accounts receivable portfolio remains almost entirely current. Capital expenditures for the six-month period ended August 31, 2004 were $6.2 million, and were predominantly for production test equipment and investments in intellectual property used in product design activities. Capital expenditures for the six-month period ended August 31, 2003 were $6.7 million, including $4.3 million in advanced design tools, $2.1 million of which was financed on a short-term basis by the supplier with payment terms which extended throughout fiscal 2004. The $2.1 million obligation was reported within Accounts payable at August 31, 2003. The Company anticipates that capital expenditures in fiscal 2005 will exceed those incurred during fiscal 2004, due in part to the Company's plan to begin construction of an addition to its primary facility in Hauppauge, New York, during the second half of fiscal 2005. The current plan is to expand the facility from its current 80,000 square feet to approximately 200,000 square feet, allowing consolidation of the Company's Hauppauge operations into a single facility during fiscal 2006. The Company is awaiting final regulatory approval for this project. The Company currently expects that the cost of this expansion will be between $15 million and $20 million. There were no material commitments for capital expenditures as of August 31, 2004. During the quarter ended August 31, 2004, the Company filed claims for $7.3 million of Federal income tax refunds which resulted from the carry back of several capital losses realized during fiscal 2004 against capital gains reported in previous fiscal years. Refunds of $6.9 million were received against these claims during the second quarter, and receipt of the remaining $0.4 million refund is dependent upon completion of the related I.R.S. audit. For federal income tax purposes, the Company has $8.3 million of net operating loss carryforwards that are available to offset ordinary taxable income generated in fiscal 2005 and beyond. The Company has considered in the past, and will continue to consider, various possible transactions to secure necessary foundry manufacturing capacity, including equity investments in, prepayments to, or deposits with foundries, in exchange for guaranteed capacity or other arrangements which address the Company's manufacturing requirements. The Company may also consider utilizing cash to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company may evaluate potential acquisitions of or investment in such businesses, products or technologies owned by third parties. The Company expects that its cash, cash equivalents, short-term investments, cash flows from operations and its borrowing capacity will be sufficient to finance the Company's operating and capital requirements for at least the next 12 months and for the foreseeable future thereafter. Recent Accounting Pronouncements -------------------------------- In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised SFAS 132 requires additional disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information related to pensions and other postretirement benefits. It also requires certain disclosures related to pensions and other postretirement benefits to be included in quarterly filings, which are included within Note 11 to the Condensed Consolidated Financial Statements included within this report. In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 03-1 (EITF 03-1), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The objective of this issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual periods ending after June 15, 2004. In September 2004, the EITF delayed the effective date to apply EITF 03-1 on certain impaired debt securities. The adoption of this pronouncement did not impact the Company's results of operations or financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Market Risks ---------------------- Interest Rate Risk - The Company's exposure to interest rate risk relates primarily to its investment portfolio. The primary objective of 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, 2004, the Company's $22.4 million of short-term and long-term investments consisted primarily of investments in corporate, government and municipal obligations with maturities of between three and fifteen months. If market interest rates were to increase immediately and uniformly by 10 percent from levels at August 31, 2004, the Company estimates that the fair value of these short-term and long-term investments would decline by an immaterial amount. The Company generally expects to hold these investments until maturity and, therefore, would not expect operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. Equity Price Risk - The Company has no material investments in equity securities of other companies on its Consolidated Balance Sheet as of August 31, 2004. Foreign Currency Risk - The Company has international sales and expenditures and is, therefore, subject to certain foreign currency rate exposure. The Company conducts a significant amount of its business in Asia and the Pacific Rim region. 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 2004 or the first six months of fiscal 2005, and there are no obligations under any such contracts as of August 31, 2004. The Company has never received a cash dividend (repatriation of cash) from SMSC Japan. Other Factors That May Affect Future Operating Results ------------------------------------------------------ As a supplier of semiconductors, the Company competes in a challenging business environment, which is characterized by intense competition, rapid technological change and cyclical business patterns. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements. The Company faces a variety of risks and uncertainties in conducting its business, some of which are out of its control, and any of which, were they to occur, could impair the Company's operating performance. For a more detailed discussion of risk factors, please refer to the Company's annual report on Form 10-K for the fiscal year ended February 29, 2004 filed with the Securities and Exchange Commission on May 14, 2004. 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, 2004, 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 has been no change in the Company's internal control over financial reporting during the Company's fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings In June 2003, SMSC was named as a defendant in a patent infringement lawsuit filed by Analog Devices, Inc. (ADI) in the United States District Court for the District of Massachusetts (Analog Devices, Inc. v. Standard Microsystems Corporation, Case Number 03 CIV 11216). The Complaint, as amended, alleges that some of the Company's products infringe one or more of three of ADI's patents, and seeks injunctive relief and unspecified damages. In September 2003, the Company filed an Answer in the lawsuit, denying ADI's allegations and raising affirmative defenses and counterclaims. The Company is vigorously defending the lawsuit and collecting evidence to support its defenses to infringement and its allegations of patent invalidity and unenforceability. Although it is premature to assess the outcome of the litigation, the Company believes that the allegations against it are without merit. ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (e) Purchases of Equity Securities by the Issuer In October 1998, the Company's Board of Directors approved a plan authorizing the repurchase 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. Activity under this plan during the period covered by this report was as follows (shares in thousands): Total Average Total Number of Maximum Number of Number of Price Shares Purchased Shares that May Yet Shares Paid per as Part of Publicly Be Purchased Under Period Purchased Share Announced Plans the Plans or Programs --------------------------------------------------------------------------- June 2004 - - - 1,180 July 2004 - - - 1,180 August 2004 22 $ 15.80 22 1,158 ----------------------------------------------------- 22 $ 15.80 22 ===================================================== All purchases during this period were open market transactions. 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 July 14, 2004 annual meeting of shareholders. (1) The following were elected directors, each receiving the number of votes set opposite their respective names: Broker Votes Received Votes Withheld Non-votes -------------- -------------- --------- Andrew M. Caggia 15,227,175 1,287,363 -- Timothy P. Craig 15,372,560 1,141,978 -- Ivan T. Frisch 15,351,314 1,163,224 -- Each of the following directors, who were not up for reelection at the July 14, 2004 annual meeting of shareholders, will continue to serve as directors: Steven J. Bilodeau, Robert M. Brill, James A. Donahue and Peter F. Dicks. (2) The 2004 Stock Option Plan was not approved by the following vote: Broker For Against Abstain Non-votes --- ------- ------- --------- 2,366,550 11,786,623 431,698 1,929,667 (3) The 2004 Restricted Stock Plan was not approved by the following vote: Broker For Against Abstain Non-votes --- ------- ------- --------- 4,470,293 9,681,324 433,254 1,929,667 (4) The 2004 Director Stock Option Plan was not approved by the following vote: Broker For Against Abstain Non-votes --- ------- ------- --------- 4,526,467 9,624,550 433,854 1,929,667 (5) The selection of PricewaterhouseCoopers LLP as the Company's auditors for the fiscal year ended February 28, 2005 was ratified by the following vote: Broker For Against Abstain Non-votes --- ------- ------- --------- 16,405,172 84,633 24,733 -- ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 * - Amendments to Stock Option Plans and Restricted Stock Plans, dated April 7, 2004. 10.2 * - January 1, 2005 Amendment to the Standard Microsystems Corporation Executive Retirement Plan. 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 contract or compensatory plan or arrangement. (b) Reports on Form 8-K On June 15, 2004, SMSC filed a report on Form 8-K pursuant to which it furnished a press release announcing the Company's operating results for the first quarter of fiscal 2005. 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 12, 2004 By: /s/ Andrew M. Caggia ------------------------- (Signature) Andrew M. Caggia Senior Vice President - Finance (duly authorized officer) and Chief Financial Officer (principal financial officer)