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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-10938
SEMX CORPORATION
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(Name of Business Issuer in Its Charter)
Delaware 13-3584740
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1 Labriola Court
Armonk, New York 10504
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (914) 273-5500
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.10 par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Check 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Exhibit Index is located on page 20
At March 31, 1999 the aggregate market value of the voting stock of
the Registrant held by non-affiliates was approximately $7,477,700.
At March 31, 1999 the Registrant had 6,041,016 shares of Common
Stock outstanding, $.10 par value ("Common Stock"). In addition, at such date,
the Registrant held 334,600 shares of Common Stock in treasury.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT Parts Into Which Incorporated
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Portions of the Definitive [Part III. Item 10,11,12 13]
Proxy Statement prepared in
connection with the Company's
1999 Annual Meeting of Stockholders
which will be held on May 26, 1999.
-ii-
PART I
Item 1. Business.
(a) General. SEMX Corporation, formerly Semiconductor Packaging Materials
Co. Inc., consists of a Delaware corporation and its wholly owned and majority
owned subsidiaries (collectively the "Company"). In April, 1998, the Company
changed its name to SEMX Corporation (its existing ticker symbol). The Company
primarily provides specialty materials and services to the microelectronic and
semiconductor industries on a worldwide basis.
At the end of the fiscal year, the Company's Materials Group consisted of
the operating division of the parent company ("SPM") and its subsidiaries,
Polese Company, Inc.("Polese"), Retconn Incorporated ("Retconn") and its
subsidiary, S.T. Electronics, Inc.("S.T.").The Materials Group primarily
designs, develops, manufactures and markets customized fine wire and metal
ribbon, precision metal stampings, aluminum silicon carbide stampings, powdered
metal copper/tungsten heat dissipation products, seal frames, RF coaxial
contacts and connectors and cable and cable harness assemblies which are used in
the assembly of microelectronic packages. Such products are incorporated into
electronic components used for industrial and commercial applications, primarily
to conduct electrical currents or signals, solder electronic circuitry, provide
electrical interconnects, house electronic components, mount components or
dissipate heat. In 1997, the Company entered the recreational products market by
supplying a proprietary copper/tungsten sole weight to Taylor Made Golf for use
in its Titanium Bubble 2(TM) irons. In 1998, the Company further expanded its
product offering of sole weights to additional customers in the recreational
products marketplace. The Company's products are sold through internal sales
personnel and a network of independent sales representatives, principally to
manufacturers and assemblers of electronic devices who service the aerospace,
automotive, communications, computer, medical, military and semiconductor
industries. As described herein, the Company completed the sale of its Retconn
and S.T. businesses in February 1999 and as of that date no longer designs
develops or manufacturers RF coaxial contacts, connectors and cable and cable
harness assemblies.
The Company's Services group consists of its American Silicon Products,
Inc. ("ASP") subsidiary and a jointly owned Singapore corporation, International
Semiconductor Products Pte Ltd ("ISP"). Each provide silicon wafer polishing and
reclaiming services to the semiconductor industry. Reclaimed wafers are used in
the evaluation and testing of equipment and processes in semiconductor
fabrication. ISP is 50.1% owned by the Company, 39.9% owned by Semiconductor
Alliance Pte Ltd. and 10% owned by EDB Ventures 2 Pte ltd. ISP began operations
in the third quarter of 1997.
History. The registrant, SEMX Corporation, formerly Semiconductor
Packaging Materials Co. Inc. is a Delaware corporation incorporated in 1988 as a
successor to a company started in 1981. In December 1991 the Company had a
public offering of its securities and became a public company. In April 1998,
the stockholders of the Company approved an amendment to the Company's
Certificate of Incorporation to change the name of the Company to SEMX
Corporation.
The Company has attained significant revenue growth over the last several
years. A substantial portion of that growth has been realized through the
acquisition of businesses and by applying monetary and management resources to
further the growth of the acquired companies.
Acquisitions:
In 1993, the Company acquired Polese Company, Inc.. Polese manufactures
and markets seal frames and copper/tungsten heat dissipation products for use in
the manufacture of electronic components, and produces sophisticated parts
through the use of electrical discharge machines ("EDM") and computer numerical
control ("CNC") turning centers for customers in the medical and aerospace
industries. In addition, the Company acquired from Frank J. Polese all of the
rights, including, but not limited to, a pending patent application, which was
subsequently issued to Mr. Polese, for the development and application of
copper/tungsten powdered metal technology to the electronics industry.(See Part
II, Item 6, Management Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"))
In 1994, A/S Acquisition Company, Inc., a Rhode Island corporation
("ASAC") merged with and into the Company's wholly-owned subsidiary, American
Silicon Products, Inc., a Delaware corporation. ASAC had no operations of its
own, but simultaneously with the merger, acquired the assets of American Silicon
Products, Inc.("ASP"), a Rhode Island corporation. The ASP assets acquired
embodied a silicon wafer reclaiming and reconditioning business located in
Providence, Rhode Island.
In 1996, the Company acquired Retconn Incorporated. Retconn developed,
designed and manufactured subminiature coaxial contacts and connectors which
were sold principally to manufacturers in the communications and computer
industries.
In 1996, the Company entered into a joint venture agreement to develop a
silicon wafer polishing and reclaiming facility in Singapore. The jointly owned
Singapore corporation, International Semiconductor Products Pte Ltd, is 50.1%
owned by the Company, 39.9% owned by a holding company, Semiconductor Alliance
Pte Ltd. and 10% owned by EDB Ventures 2 Pte Ltd.
On January 23, 1997, the Company acquired certain assets and assumed
certain liabilities of Silicon Materials Service ("SMS") of Garland, Texas and
100% of the outstanding stock of Silicon Materials Service, B.V. ("SMSBV") of
Helmond, Netherlands for approximately $13,000,000 in cash. The SMS Texas
operation was merged into ASP and SMSBV was renamed American Silicon Products,
B.V. ("ASPBV"). During 1998, the Company closed the SMS Texas operation and
relocated certain customers and equipment to its Providence plant.
Effective July 30, 1997, Retconn, a wholly owned subsidiary of the
Company, acquired 100% of the outstanding stock of S.T. Electronics, Inc
("S.T."), a company that manufactures and markets custom cable and cable
harness assemblies for $1,000,000 in cash and $2,000,000 in notes, subject to
adjustment, based on the closing net worth and adjusted EBIT delivered by S.T.
as of the closing date. In addition, Retconn acquired certain proprietary rights
from S.T. shareholders for $200,010. The notes are payable in twenty equal
quarterly installments beginning on November 1, 1997 at an interest rate of 7%
per annum on the unpaid principal.
Dispositions
In February 1999, the Company completed the sale its Retconn and S.T
Electronics businesses (collectively "Retconn") to Litton Systems Inc. for a
purchase price of $23.9 million in cash plus the assumption of approximately
$3.5 million of Retconn's liabilities. Commensurate with the sale, the Company
no longer engages in the manufacture, development or design of subminiature
coaxial contacts, connectors, custom cables or cable harness assemblies.
Information pertaining to these products, contained herein, is related only for
calendar 1998 and through the February 1999 date of disposition.
(b) Financial Information about Industry Segments - The Company has
operated in two industry segments, materials and services, during each
of its last three years.
(c) Narrative Description of Business
Products
Wire and Metal Ribbon. The Company manufactures fine wire and metal ribbon
used to conduct electricity or signals between two points of a circuit. Metal
ribbon is wire which is flattened to specific height and width specifications
and is used primarily in microwave and selected industrial applications to
regulate electrical conductivity. Wire and metal ribbon are manufactured using
gold, aluminum, copper, nickel and various metal alloys, each of which has a
distinct characteristic for conducting electrical currents or signals. These
products are sometimes coated or plated.
The Company manufactures various sizes of wire in dimensions as thin as
.0005 inches (less than the size of a human hair) for specific applications.
Ribbon is produced in sizes as small as .00025 X .002 inches. The Company's
products must adhere to rigid OEM standards used in electronic applications,
including military specifications.
Precision Metal Stampings. Precision metal stampings are parts stamped out
of metals that are used to solder or connect electronic circuitry, package
electronic circuitry, dissipate heat or provide an interface for an electronic
connection. Stampings manufactured by the Company, in dimensions as small as
.005 inches, include preforms, heat sinks, jumper chips, bonding islands,
connectors, frames, seals, bases, and cans. The Company also produces rolled
strip.
Preforms are custom shaped stampings used to solder metal parts to a
substrate (a base on which the electronic circuitry rests). Preforms must
quickly change from a solid state to a molten state and back again to effectuate
an efficient bond. Heat sinks are specialized metal stampings used to dissipate
heat generated by electrical currents. Jumper chips, bonding islands and
connectors are metal stampings generally used to provide an interface for an
electrical connection. Rolled strip is metal, either in pure or alloy form, that
is flattened from an ingot to a specified thickness and slit to a width to meet
a customer's specification or matched to fit with a die in the Company's
manufacturing process.
Stampings are produced from a variety of metals, including copper,
aluminum, gold and gold alloys, special metals such as molybdenum, and clad and
plated materials. Molybdenum is a metal used for its unique heat dissipating
properties. Clad materials, which are also used to manufacture precision
stampings, are pieces of two or more different metals laminated together, and
are generally used as an interface between aluminum and gold circuitry. The
Company also has stampings plated for enhanced soldering and brazability. The
Company also manufactures assembly products by brazing low expansion materials
to ceramic.
Tape on Reel Products. The Company offers a number of packaging options
for its stamping products, including bulk packaging, parts supplied on carrier
strips and, for high volume parts, tape on reel packaging. Tape on reel
packaging is used to support surface mount assembly operations. The Company
offers its customers stampings packaged on contact or in pocket tape. Since many
of the Company's stamped products are very small, the Company employs the use of
automated and manual tape on reel equipment to perform this packaging function.
The Company has constructed a class 10,000 clean room to facilitate the
packaging of die ("semiconductor chips") in tape on reel.
Seal Frames. In electronic applications of high reliability (military,
medical and aerospace) where a circuit is exposed to severe environmental
conditions (oceanographic and automotive applications) an electronic package is
used to hermetically seal the circuit to insure its reliability. To obtain
hermeticity, a sealing frame is brazed (a process similar to soldering) to
either a ceramic or metal base and at a later point in the production a lid is
added to complete the protective environment.
Powdered Metal Heat Dissipation and Recreational Products. Heat
dissipation products are used to conduct heat away from critical areas of
electronic circuits where it can be dissipated. Heat dissipation products are
primarily used to conduct heat in high power wireless communication devices and
high speed microprocessor packages. In 1991 with the financial and technical
support of one of its customers, Polese began the development of a powdered
copper/tungsten materials with a more homogeneous copper and tungsten particle
distribution than similar copper/tungsten materials available in the
marketplace. In early 1995, the Company obtained a patent for a Method for
Making Heat-Dissipating Elements for Micro-Electronic Devices. Polese utilizes
this proprietary method to manufacture copper/tungsten heat dissipation
products. The Company has also developed a non-electronic use of its powdered
metal technology with the introduction of a copper/tungsten metal matrix
composite for sole weights which are used in the manufacture of golf clubs. In
addition, in late 1997, Polese introduced a new material, Nitral(TM). Nitral(TM)
is a high dissipation substrate that can be tailored for high thermal
conductivity. In 1998, Polese bought the rights to Alcoa's AlSiC technology,
which is used for certain electronics applications.
Other EDM Products. As a result of Polese's successful EDM operation in
the manufacture of seal frames, a number of special products have been brought
to Polese for manufacture. At this time, Polese is manufacturing small and
complicated parts for the medical supply and other industries.
Silicon Wafer Polishing and Reclaiming Services. ASP, ASPBV and ISP offer
a variety of high tech, state-of-the-art wafer polishing and reclaiming services
to the semiconductor industry. ISP began offering these services in the third
quarter of 1997. Reclaimed wafers are used in the evaluation and testing of
equipment and processes in semiconductor fabrication.
Coaxial Contacts and Connectors, Cable and Cable Harnesses. During 1998
and through February 1999, Retconn manufactured RF coaxial contacts and
connectors which were sold principally to manufacturers in the wireless
communication and computer industries. Retconn's products included a full line
of DM subminiature RF contacts and connectors, including solder, solder/crimp,
and crimp/crimp standard coaxial contacts. It had a line of SMA, SMB, SMC and
MCX connectors that met military specifications. In addition, Retconn and its
wholly owned subsidiary, S.T., offered cable terminations, specials and cable
assemblies. As of the February 1999 sale of the Retconn and S.T business, the
Company no longer manufacturers these product lines.
Raw Materials and Principal Suppliers
The Company in most cases utilizes two or more alternative sources of
supply for each of its raw materials. In certain instances, however, the Company
will use a single source of supply when directed by a customer or by need. In
order to ensure the quality of the Company's products, the Company has
instituted strict supplier evaluation and qualification procedures. Once a
supplier has been qualified to supply materials to the Company, they will be
included on the Company's preferred supplier list and will be evaluated and
rated on an ongoing basis. The Company considers several of its vendors as
principal suppliers. For precious metals the Company's vendors include Fleet
Precious Metals, Sigmund Cohen, Handy and Harmon and Degussa Metz Metallurgical
Corp.
The parent company makes extensive use of precious metals, including gold
and, to a lesser extent, silver and platinum, as raw materials in the
manufacture of certain products. Precious metals, particularly gold, are
utilized based upon their reliability and conductivity. The prices at which the
Company purchases precious metals are based upon market prices at the time of
purchase. Such metals have historically been subject to significant price
fluctuations and subject to volatility as a result of numerous factors beyond
the control of the Company.
Substantially all of the parent company's gold requirements are
currently purchased from Fleet Precious Metals ("Fleet") pursuant to a
consignment agreement. Under the agreement, Fleet has agreed to advance up to
the lesser of 5,000 troy ounces of gold or gold having a market value of
$1,870,000. The agreement provides that title to the gold remains with Fleet
until the finished material is shipped, at which time the parent company is
required to replace the gold. The prices paid by the parent company for its
purchases are generally based upon the Comex or the Second London gold price and
are fixed automatically on a first-order, first-priced basis. The parent company
pays for gold in cash as of the date of purchase and pays a fee computed daily,
currently at the rate of 5% per annum, based upon the value of gold consigned to
the parent company. The revised and amended agreement with Fleet expires on June
30, 1999. The Company believes that there are alternative sources of supply for
the parent company's gold requirements in the event that the agreement with
Fleet is terminated.
Silver and platinum are currently purchased from various trading
companies. The Company has no agreements with such suppliers, but believes that
there are numerous alternative sources of supply for such metals.
The Company purchases base metals, including aluminum, copper,
copper/tungsten, kovar, molybdenum ,solder and clad metals and specially shaped
materials from local metal distributors, cladding companies, roll formers, or
other specialized suppliers. Principal suppliers for non-precious metals and
outside processing services include Osram Sylvania, Platronics, AEP, Fusco,
Donham Craft, Technical Materials and Clad Metal Specialties.
The Company also purchased certain components used in the assembly of
coaxial contacts and connectors from such companies as MGB and Sorenson
Engineering until the February 1999 sale of the Retconn and S.T businesses.
The Company's Services Group purchases polishing materials, gases and
chemicals and specialized equipment from various suppliers. These vendors
include, but are not limited to, Empak, Rodel and Hubbard Hall.
The Company's decision to purchase certain raw materials is generally
based upon whether such material is available consistent with required
specifications at a cost lower than the Company's manufacturing costs. If the
Company does not have, or could not, at a reasonable cost, develop the
manufacturing capability for a specific material, it attempts to maintain at
least two suppliers for such materials. While the Company attempts to maintain
alternative sources for the Company's raw materials and believes that
alternative sources are currently available for most of such metals and
materials, the Company is subject to price fluctuations and periodic shortages
of raw materials. The Company has no supply agreements with its suppliers and,
accordingly, purchases raw materials pursuant to purchase orders placed from
time to time in the ordinary course of business. Failure or delay by such
suppliers in supplying required raw materials could adversely affect the
Company's ability to manufacture and deliver products on a timely and
competitive basis.
Production Process
Products manufactured to customer specifications account for almost all of
the Company's total revenues.
Wire and metal ribbon are manufactured by casting pure metals with
selected additives into cylindrical shapes which are then drawn through a series
of diamond dies to progressively reduce the metal to a finished size. Wire is
then either annealed in batches or strands. Metal ribbon is made by rolling wire
into a flat shape or by slitting strip into narrow widths. Annealing, spooling
and packaging are similar to those for wire.
The manufacturing process for stamping consists of casting specific metals
or alloy combinations into ingots which are passed through a series of rolling
mills to meet specified thickness requirements, and then slit to specified
widths. The material is stamped in a press which contains the die for the
customer's part. Parts are then cleaned and packaged to suit customer
requirements. The Company ships stampings in bulk form or employs packaging
methods to integrate its stampings with automated manufacturing equipment
utilized by its customers.
Seal Frames are manufactured by sawing tubing, primarily copper or kovar
(a nickel alloy of steel), or "burning" the frames out of stacked sheets of
kovar on EDM machines. The seal frames are lapped (ground flat), machined when
necessary, lapped again, cleaned, plated when necessary and inspected.
Other EDM products are "burned" on EDM machines and finished on CNC
milling machines or in selected secondary operations.
The manufacturing process for metal matrix composite heat dissipation and
recreational products consists of manufacturing a tool and die for the specific
part, pressing the powdered materials in a powdered metal press, sintering the
parts in a furnace, and machining them to the customer's specifications. The
parts are then cleaned, plated, tested and packaged for shipment.
Silicon wafer polishing and reclaiming services begin with incoming
inspection of customer wafers. The wafers are sorted for reclaim suitability and
conformance to customer specifications. A report is then sent to the customer
indicating which wafers are reclaimable. While the Company from time to time
procures its own wafers, the majority of the wafers it processes are owned by
its customers. The customer usually retains title to the reclaimable wafers
throughout the polishing and reclaiming process. The wafers are then processed
to remove all diffusions and deposited layers (i.e., polysilicon, metals,
nitrides, oxides, etc.). A two step polishing process, similar to that which is
utilized by silicon suppliers, is then performed. The wafers are then cleaned
with a front and back side scrubbing followed by rinsing, drying and further
removal of particles. All cleaning is done in certified clean rooms utilizing
deionized water. Product quality is assured through procedural discipline and
Statistical Process Controls. The Company has achieved the ability to regularly
process wafers with particles of less than .12 microns in size, with extremely
low trace metals. The Company believes that its processing capability is
comparable to that of any reclaiming capability in the world.
The Company currently utilizes third party manufacturers in connection
with certain packaging and manufacturing processes. Such manufacturing processes
include the screw machine operations and other secondary operations performed to
produce connectors and the application of certain surface finishes, such as
plating and cladding. Additionally, the Company from time to time arranges for
third party vendors to package stamped parts for compatibility with automated
manufacturing equipment.
The parent company usually operates on an eight-hour daily shift five days
per week, with its tape on reel production and aluminum wire drawing operating
on a two or three shift basis, consistent with business requirements. Polese
usually operates seven days per week, with its various departments running two
to three shifts per day, consistent with business requirements. ASP usually
operates on a three shift basis five days per week. Management believes that the
Company possesses sufficient capacity to expand production of its existing
products. The Company owns much of its equipment and when appropriate, leases
certain equipment from third parties.
Quality Control
The Company utilizes extensive in-house statistical process quality
control procedures ("SPC"), excluding Retconn operations, and employs 24 persons
engaged full-time in quality control functions.
A substantial portion of the Company's customers require the Company to
qualify as an approved supplier utilizing SPC. Generally, this qualification
includes providing samples to the customer, passing preliminary evaluations and
usage testing, completing customer evaluations and checklists and undergoing
extensive in-plant inspections of the Company's personnel, manufacturing
processes, equipment and associated quality control systems. The Company has
undergone numerous inspections by various customers and continues to undergo
such inspections on a regular basis. Accordingly, the Company's efforts are
devoted to ensure that its capabilities and quality control standards are
adequate to satisfy specific customer requirements. The Company receives quality
control certifications each year from various customers.
The Company is certified ISO 9000 (an international quality standard for
the European community) at five of its operations, excluding Retconn, and holds
various quality awards throughout the industries it serves. The Company believes
that its ISO 9000 certifications are important in establishing the Company as a
world class supplier and will greatly aid the Company in penetrating markets for
the Company's products throughout the world. The Company is also designated as a
"Q-1" supplier by The Ford Motor Company. One of the Company's divisions
completed an initial QS 9000 Quality Control audit. Subject to resolution of
pending audit issues, the Company expects to receive its final approval during
early 1999. The Company believes that QS 9000 certification will be important to
the Company's status as a world class supplier, especially within the automotive
industry.
Marketing and Sales
The Company's domestic and foreign sales efforts are directed towards
customers in numerous industries where the Company's products have wide
application. The Company engages independent sales representatives in various
regions throughout the United States, Europe, South America, the Middle East and
the Far East for marketing to customers. These sales representatives are paid on
a commission basis. As of February 28, 1999, the Company had arrangements with
24 sales representatives in the United States and 16 sales representatives who
market the Company's products in Europe , the Middle East, Far East and South
America, including France, Germany, Italy, the United Kingdom, Sweden, Israel,
Singapore, Hong Kong, China, Taiwan, Korea, Malaysia, the Philippines, Mexico
and Brazil. The Company believes that the use of independent sales
organizations, which typically specialize in specific products and areas and,
accordingly, have specific knowledge of and contacts in particular markets,
enhance the scope of the Company's marketing and sales efforts. Pursuant to
agreements with independent sales representatives, such representatives are
prohibited from carrying a line of products competitive with the Company's
products. The Company continues to engage new sales representatives as needed.
The Company believes that additional sales representatives are available, if
required.
The Company currently employs 25 inside sales and marketing personnel,
including two of its executive officers, who are responsible for direct sales to
the Company's customers. The Company's sales personnel also work closely with
customers to solicit future orders and to render technical assistance and
advice.
Other marketing efforts include generation and distribution of the
Company's product catalogs and brochures and attendance at trade shows. The
Company also advertises in trade publications, primarily in the United States.
Product and Process Development
The Company places significant emphasis on product and process development
and believes that such efforts are important to take advantage of market trends
and to maintain its competitive position. The Company's product and process
development activities include refinement of its manufacturing and processing
capabilities and improvement in the metallurgical composition, durability and
reliability of its products. The Company's technical personnel and outside
consultants conduct specific projects to enhance performance of the Company's
products and to meet specific customer requirements. In the past years these
efforts have led to the development of a new gold wire for flip chips, a
copper/tungsten metal matrix composite for sole weights used in golf clubs, a
high dissipation substrate that can be tailored for high thermal conductivity, a
packaging process for die in tape on reel and process improvements which enable
the Company's reclaiming facilities to produce wafers with particles of less
than .12 microns and extremely low levels of trace metals.
The Company has expanded its product lines and processing capabilities
through various acquisitions and a joint venture, including the Company's
acquisition of Polese in 1993, ASP in 1994 and Retconn in 1996, the ISP joint
venture in 1996 and the SMS and S.T. acquisitions in 1997 and will continue to
seek to expand through acquisitions and other strategic alliances. Not
withstanding the sale of Retconn in February 1999, the Company continues to seek
expansion of its product lines.
Customers
The Company's products are sold principally to customers servicing the
computer, automotive, aerospace, military, medical, semiconductor and
communications industries. The Company's customers include Kyocera America,
Motorola, IBM, Texas Instruments, National Semiconductor, Hewlett Packard,
Analog Devices, Lucent, Berg Electronics, Hi-Tech Assemblies, Ford Motor
Company, Delco Electronics, ST Electronics, Northern Telecom, Cardiac
Pacemakers, Medtronics/Micro-Rel and Wafernet.
For the years ended December 31, 1998 and 1997, sales of the Company's
products, to the Company's five largest customers accounted for approximately
29% and 32%, respectively, of the Company's revenues. For the years ended
December 31, 1998 and 1997, single, but different, customers accounted for
approximately 10 % and 11% of the Company's total revenues.
The Company does not maintain contracts with many of its customers and
generally sells its products pursuant to customer purchase orders. Certain of
the customers purchase orders provide for annual requirements of a particular
product. A substantial portion of the Company's orders for products which
include precious metals provide that the initial price quotation is adjusted to
reflect any changes in the price of precious metals at the time of shipment.
Customer purchase orders are generally filled within two to six weeks and
shipped to customers by common carrier.
To date, the Company has relied upon foreign markets, including Europe and
the Far East, for a portion of its revenues. For the years ended December 31,
1998 and 1997, direct sales of the Company's products into foreign markets
accounted for approximately 15% of the Company's consolidated revenues. Sales of
the Company's products to foreign customers are made through 16 foreign
manufacturer's representatives. The Company believes that a portion of its
revenues will continue to be derived from the sale of its products in foreign
markets, which will result in the Company's being subject to risks associated
with foreign sales, including economic or political instability, shipping
delays, fluctuations in foreign currency exchange rates, custom duties and
export quotas and other trade restrictions. The Company is not aware of any
foreign tariffs with respect to products marketed by the Company. Although
export sales are subject to certain governmental restrictions, the Company has
not experienced any difficulties with foreign or domestic trade restrictions.
Backlog
The Company manufactures standard and custom products pursuant to customer
purchase orders. Backlog is comprised of orders for products which have a
scheduled shipment date within the next 12 months. Certain orders in the backlog
may be canceled under certain conditions without significant penalty to the
customer. At January 2, 1999 and 1998, the Company's backlog of orders,
excluding Retconn and ST, believed to be firm was approximately $15,161,000 and
$16,511,000, respectively. Backlog of the Company's Retconn and S.T. Businesses
which were sold in February 1999, were $3,538,000 at January 2, 1999 and
$4,132,000 at
January 2, 1998. The Company believes that the majority of the Company's backlog
of orders existing as of January 2, 1999 will be shipped over the next twelve
months.
Competition
The market for the Company's products is highly competitive. The Company
competes with numerous well-established foreign and domestic companies, many of
which possess substantially greater financial, marketing, personnel and other
resources than the Company and have established reputations for success in the
development, sale and service of products. Such companies include Kulicke &
Soffa Industries, Inc., Tanaka, Heraeus, Polymetallurgical Corporation, Coining
Corp., Williams Advanced Materials, Climax Specialty Metals, Inc., Johnson
Matthey, A.T. Wall, Exsil, Sumitomo Corporation, Phoenix Electronics Company of
Chicago, Inc., Radiall, Inc.,Kobe, Precision, Huber and Suhner, Inc. and
Amphenol Corporation. The Company believes that it is one of a limited number of
manufacturers of all of its primary products and services: fine wire and metal
ribbon, precision metal stampings, seal frames, other EDM products, powdered
metal heat dissipation and recreational products, coaxial contacts and
connectors, cable assemblies and harnesses and polishing and reclaiming of
silicon wafers. The Company believes that this capability provides an advantage
in marketing products to customers which seek to limit the number of their
suppliers. As discussed herein, after the February, 1999 sale of the Retconn and
S.T the Company no longer competes in the coaxial contacts and connectors, cable
assemblies and harnesses markets.
The ability of the Company to compete successfully will depend in large
measure on its ability to fund and maintain development capabilities in
connection with upgrading its products and quality control procedures and to
adapt to technological changes and advances in the electronics industry,
including ensuring continuing compatibility with evolving generations of
electronic components and manufacturing equipment.
Patents and Proprietary Information
The Company's ability to compete effectively may be materially dependent
upon the proprietary nature of its technologies. The Company has been issued a
patent for a Method for Making Heat-Dissipating Elements for Micro-Electronic
Devices. Polese Company utilizes this proprietary method to manufacture
copper/tungsten heat dissipation products. The powdered metal technology covered
by this patent was acquired by the Company in connection with the Polese Company
acquisition. In addition, Polese Co. has received a patent covering its newly
developed material, Nitral(TM). Few of the Company's other manufacturing
processes or products are protected by patents.
The Company relies on proprietary know-how and employs various methods to
protect its processes, concepts, ideas and documentation associated with its
proprietary products. However, such methods may not afford complete protection
and there can be no assurance that others will not independently develop such
processes, concepts, ideas and documentation. Although the Company has and
expects to have confidentiality agreements with its employees, there can be no
assurance that such arrangements will adequately protect the Company's trade
secrets.
Government Regulation
The Company is subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities. Among
other things, these regulatory bodies impose restrictions to control air, soil
and water pollution and dictate safety in the workplace. The extensive
regulatory framework imposes significant compliance burdens and risks on the
Company. Governmental authorities have the power to enforce compliance with
these regulations and to obtain injunctions and/or impose civil and criminal
fines or sanctions in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), imposes strict, joint and several liability on
the present and former owners and operators of facilities which release
hazardous substances into the environment. The Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), regulates the generation,
transportation, treatment, storage and disposal of hazardous waste. The Company
is also subject to various state and local laws which are the counterparts of
CERCLA and/or RCRA in the jurisdictions where the Company maintains facilities
(New York, California, Connecticut and Rhode Island). The Company believes that
it is in substantial compliance with all material federal and state laws and
regulations governing its operations. The Company continually evaluates its
environmental and safety practices with respect to such requirements and
maintains all required licenses or permits.
Various laws and regulations relating to safe working conditions,
including the Occupational Safety and Health Act, are also applicable to the
Company. The Company believes it is currently in substantial compliance with all
material federal, state and local laws and regulations regarding safe working
conditions. The Company believes that the cost of compliance with such
government and environmental regulations is not material.
Executive Corporate Officers of the Company
Gilbert D. Raker, 55, President since December 31, 1995; Chairman of the
Board and Chief Executive Officer of the Company since May 1990; Vice President
of the Company from November 1988 until May 1990.
Frank J. Polese, 42, Vice Chairman of the Company since January 1996 and a
Director of the Company since July 1993. Mr. Polese also served as President of
the Company from January 1994 through December 1995. From August 1991 until
November 1996 and again since March 1997, Mr. Polese has served as President of
Polese Company, which was acquired by the Company on May 27, 1993, prior to
which Mr. Polese was its sole shareholder. Prior to August 1991, Mr. Polese was
a manufacturer's representative specializing in products incorporated into
microelectronic packages for the electronics industry.
Kenneth J. Huth, 60, Executive Vice President of the Company since January
1994, President of the Company from January 1990 to December 1993 and President
of the Semiconductor Packaging Materials division since July 1998. From 1972
until December 1989, Mr. Huth served as President of Kenneth J. Huth, Inc., a
manufacturer's representative specializing in precision stampings and related
products for the electronics industry.
Douglas G. Sages, Vice President and Chief Financial Officer, resigned
February 22, 1999.
Employees
As of February 28, 1999, the Company employed approximately 524 persons.
All manufacturing personnel are paid on an hourly basis. The majority of
employees are employed full-time. None of the Company's employees are covered by
a collective bargaining agreement. The Company considers its relationship with
its employees to be good.
Item 2. Properties.
The Company's executive offices and the parent's manufacturing facility
are located in a 43,700 square foot building in Armonk, New York. The Company's
Armonk facility is suitable for the Company's current needs and is estimated to
be currently operating at approximately 50% of its productive capacity. The
property is well maintained and in good condition. SPM opened a 3000 square foot
facility in Casablanca, Morocco in January, 1999 to supply aluminum bonding wire
to North Africa and Europe.
Polese entered into an agreement to lease approximately 24,211 square feet
of industrial space at 10103 Carroll Canyon Road and 34,615 sq. ft. at 10111
Carroll Canyon Road, San Diego, California. The lease term commenced on March
31, 1998 and expires on March 31, 2004 and calls for an initial monthly rental
of $29,833 for the first eight months, increasing to $35,296 for the next 4
months, with a 3% annual rent increase in the second through sixth years. The
performance of Polese Company's obligations under the lease is guaranteed by the
Company. Polese Company also leases approximately 10,600 square feet at 8680
Mirilani Drive, San Diego, California. The lease term commenced on May 1, 1997
and expires on December 31, 1999 and calls for a monthly rental of $5,760 with
an increase of 4% effective January 1, 1998. The facilities are suitable for the
Company's current needs and are currently operating at approximately 80% of
their productive capacity. The properties are well maintained and are in good
condition.
ASP owns a 28,000 square foot facility in Providence, Rhode Island. The
facility is suitable for the Company's current needs and is currently operating
at approximately 70% of its productive capacity. The property is well maintained
and is in good condition. ASP formerly operated two leased facilities in
Garland, Texas; a 26,590 square foot facility at 2985 Market Street ("Market
Street"), and a 16,600 square foot facility at 2613 Industrial Lane ("Industrial
Lane"). In March, 1998 the Company closed the Garland Texas facilities and
shifted certain production and equipment to its Providence and Helmond
facilities. The Company completed its remaining lease obligations and vacated
these facilities as of February 28, 1999. American Silicon Products, B.V.'s
operations are located in a facility of approximately 25,800 square feet at
Achterdijk 8, 5705 CB, Helmond, Netherlands. This facility was purchased on
December 1, 1997 by ASP. The Helmond facility is suitable for the Company's
current needs and is currently operating at approximately 70% of its productive
capacity. The facility consists of production, office and warehouse space and is
well maintained and in good condition.
As described herein, the Company sold its Retconn and S.T. businesses in
February 1999. Retconn's primary operations were located in a 12,000 square foot
facility in Torrington, Connecticut occupied on a month to month basis with
annualized lease payments of $56,525. Retconn also leased a 6,360 square foot
facility near its main facility to house its cable assembly operation. This
lease expired on October 31, 1998 and called for monthly rentals of $3,000. The
facilities were suitable for the Company's needs and operated at approximately
90% of their productive capacity during the latest fiscal year
S.T. Electronics operations were housed in three separate manufacturing
"suites" totaling approximately 6030 square feet, located in Rancho Cordova, CA.
The lease was for a three year period, which commenced on July 30, 1997 with a
monthly lease
payment of $4,500 per month. The facility was suitable for the Company's needs
and operated at approximately 70% of its productive capacity during the last
fiscal year.
Item 3. Legal Proceedings.
The Company is subject to claims and suits in the ordinary course of
business. Management believes that the ultimate resolution of such proceedings
will not have a material adverse effect on the Company. The Registrant received
notice, on January 5, 1998, that a shareholder class action was filed against
it, its Chief Executive Officer and its Chief Financial Officer, in the United
States District Court for the Eastern District of Pennsylvania on November 18,
1997, for an indeterminate amount of damages, (Blum et.al. v. Semiconductor
Packaging Materials Co., Inc., et. al. (97CV 7078)). On May 5, 1998, the United
States District Court for the Eastern District of Pennsylvania dismissed the
case. An appeal of the order dismissing this lawsuit was not filed within the
period permitted for such appeal.
Separately, the Northeast Regional Office of the Securities and Exchange
Commission is conducting a private investigation pursuant to a formal order,
captioned "In the Matter of Trading in the Securities of Semiconductor Packaging
Materials Co., Inc.", to determine whether any persons may have violated the
federal securities laws in connection with the purchase or sale of the
Registrant's securities prior to the December 30, 1996 announcement relating to
its anticipated financial results for the fourth quarter of fiscal 1996. As a
general matter, the Commission takes the position that its investigation should
not be construed as an indication that any violations of law have occurred or as
an adverse reflection upon any person or security. The Registrant cooperated
fully with the Commission in its investigation which commenced in early 1998.
Since June 1998, the Company has not received any additional requests for
information or communications from the SEC concerning this matter.
Item 4. Submission of Matters to a Vote of Security-Holders.
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since April 8, 1996, the Company's Common Stock has traded on the NASDAQ
National Market (Ticker Symbol: SEMX). Prior thereto, the Company's Common Stock
was traded on the American Stock Exchange (Ticker Symbol: SEM).
The prices of the Company's Common Stock for each quarter during 1998 and
1997 were as follows:
1998 1997
---------------- -----------------
High Low High Low
---- --- ---- ---
1st Quarter .............. 9-1/2 7-1/4 12-1/4 7-5/8
2nd Quarter .............. 8-1/2 5 10-1/8 7
3rd Quarter .............. 6-1/2 2-1/8 14-1/2 8-1/2
4th Quarter .............. 4-7/8 2-1/16 14-1/2 6-7/8
As of April 9, 1999 (the "record date") there were approximately 101 holders of
record of the Company's Common Stock and approximately 3,700 beneficial holders.
On March 31, 1999, the high and low bid price of the common stock was $1.875 and
$1.625 per share, respectively. The Company paid no dividends on its Common
Stock in 1998 or 1997.
Item 6 SELECTED FINANCIAL DATA
Year Ended December 31,
(Dollar amounts in thousands; -----------------------------------------------
per share amounts in dollars) 1994 1995 1996 1997 1998
Operating Data:
Revenue $16,485 $28,064 $46,027 $71,076 $ 65,903
Net income (loss) $ 736 $ 2,526 $ 3,805 $ 3,793 ($11,958)
Amounts Per Common Share:
Basic $ .25 $ .53 $ .64 $ .62 ($ 1.98)
Diluted $ .21 $ .50 $ .62 $ .61 ($ 1.98)
Weighted average number
of common and common
equivalent shares:
Basic 2,965 4,784 5,968 6,070 6,054
Diluted 3,498 5,064 6,170 6,232 6,054
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Balance Sheet Data:
Working capital (deficiency) $ 789 $ 9,175 $10,947 $ 9,486 ($14,064)
Total assets $24,929 $36,071 $56,489 $91,865 $ 82,324
Long-term obligations
excluding current portion $10,475 $ 2,863 $12,432 $32,717 $ 13,055
Shareholders' equity $ 7,706 $29,261 $33,940 $37,458 $ 25,371
(1) Financial data presented includes the results of the following
acquisitions: American Silicon Products in December 1994, Retconn in
January 1996, Silicon Materials Service in January 1997 and S.T.
Electronics in July 1997. For details relating to these acquisitions
please reference the Management Discussion and Analysis, Liquidity and
Capital Resources sections.
(2) Financial data presented for 1998 includes special charges. For details
please reference the Management Discussion and Analysis section.
(3) Amounts per common share for the years ended prior to December 31, 1997
have been restated to conform to the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share, which was adopted during
the fourth quarter of 1997.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales:
Fiscal Year Ended
December 31 1998 1997 1996
------ ------ ------
Net Sales 100.0 100.0 100.0
Cost of Sales 80.6 71.3 66.7
Gross Profit 19.4 28.7 33.3
Selling, General and
Administrative Expenses 24.0 16.9 17.8
Operating Income (21.6) 11.8 15.4
Interest Expense (Net) 5.3 3.7 2.0
Income (Loss)
before Income Taxes (26.9) 8.1 13.4
Provision (Credit)
for Income Taxes (8.3) 3.1 5.3
Net Income (Loss) (18.1) 5.3 8.3
RESULTS OF OPERATIONS (1998 compared to 1997)
Total revenue for 1998 decreased $5,173,000, or 7.3%, from the comparable 1997
period.
Sales by the Company's Materials Group for the year ended December 31, 1998
decreased $505,000, or 1.1% from the 1997 period. The Materials Group includes
the Company's SPM, Polese and Retconn business units. The sales decline was
primarily due to a $2,003,000, or 10.8% decrease at Polese, offset by an
increase of $1,529,000, or 9.3% at Retconn. 1998 Retconn sales included a full
years revenue from S.T. Electronics, Inc., which was acquired in July 30, 1997.
Sales at SPM were slightly down from 1997 levels. In 1998, the sales decrease at
Polese was primarily due to a downturn in sales of heat dissipation products as
they relate to the communications and computer related marketplaces.
Service revenue from the Company's Service Group for the year ended December 31,
1998 decreased $4,668,000 or 20.3% from the 1997 period. The Service Group
includes the Company's American Silicon Products "(ASP)" and International
Silicon Products Pte. Ltd. ("ISP") business units. The 1998 decrease included a
$5,860,000, or 26.3% decrease in revenue at ASP's U.S. and European operations,
which was partially offset by increased revenue of $1,192,000 from ISP. The
Services Group revenue decrease was the result of a slowdown in the demand for
reclaimed wafers and pricing pressures caused by a downturn in the semiconductor
industry.
Direct sales of the Company's products into foreign markets accounted for 15% of
consolidated revenue for the years ended December 31, 1998 and 1997. The Company
currently maintains foreign manufacturing operations in the Netherlands ("ASP
B.V."), in Morocco, Semiconductor Materials S.A. R. L. ("S.A.R.L."), and in
Singapore, International Silicon Products Pte. Ltd. ("ISP"). In the year ended
December 31, 1998 and 1997, the Company derived revenue from ASP B.V. of
$3,230,000 and $3,168,000 respectively, revenue from S.A.R.L. of $192,000 and $0
respectively, and revenue from ISP of $1,936,000 and $744,000, respectively.
Foreign sales made through the Company's domestic operations are made through
foreign manufacturer's representatives and are priced and paid for both in local
currencies and in U.S. dollars. Sales for ASP B.V., S.A.R.L. and ISP are
conducted in the local currencies of Dutch Guilders, Dirhams, and Singapore
Dollars respectively and account for 8 % and 6 % of the consolidated revenue for
the years ended December 31, 1998 and 1997, respectively.
The Company's consolidated backlog as of December 31, 1998 was $18,699,000. This
compares to consolidated backlog of $20,643,000 at December 31, 1997. The
$1,944,000 decrease, which includes a $594,000 decrease in the backlog of
Retconn which was sold in February 1999, was primarily the result of $200,000
and $2,334,000 decreases at Polese and ASP, respectively. These decreases were
partially offset by a $1,204,000 increase in the backlog of SPM. The decrease at
Polese was the result of a significant decrease in order levels by a customer
servicing the communication related industry. In 1999, Polese has seen a
significant increase in its backlog from December 1998 levels primarily from
increased order inflow from its communications, computer and recreational
products customers and has recently seen an increase in order levels from the
customer which had decreased order levels in 1998. While ASP's backlog has
recently improved, it still remains at depressed levels due to the continuing
slowdown in the semiconductor industry.
Gross profit for 1998 decreased $7,599,000, or 37.3% from the comparable 1997
period. In the Materials Group, the decrease was primarily due to a $3,756,000,
or 78.6% decrease at Polese, a $452,000, or 8.4% decrease at Retconn and a
$1,156,000, or 24.3% decrease at SPM. During the fourth quarter of 1998 the
Company's Materials Group adjusted the carrying value of its inventories in
response to changing semiconductor and microelectronic market conditions and
realized charges of $1,267,000 to cost of sales to record provisions for excess
and obsolete inventory. Materials Group gross profit in 1998 reflected the
decreased sales levels as well as provisions for excess and obsolete inventory.
In the Services Group, ASP's gross profit decreased $2,711,000, or 46.5%
during 1998 as a result of decreased sales and pricing pressures. Gross profit
declines during 1998 at ASP were partially offset by an increase in gross profit
of $414,000 at ISP. Gross margin in the Materials Group decreased to 20.1% in
the 1998 period from 30.9% in the 1997 period. As a result of the foregoing,
consolidated gross margin for the Company decreased to 19.4% in 1998 from 28.7%
in the 1997 period
Selling, general and administrative ("SG&A") expenses in 1998, excluding
$11,217,000 of special charges, increased $3,796,000, or 31.7% over the 1997
period. The increase was primarily due to increased legal fees, corporate staff,
and infrastructure additions at the operational level in sales and research and
development. SG&A expenses as a percentage of revenue, excluding special
charges, increased to 24% in the 1998 period from 17% in the 1997 period.
In 1998, the Company recorded special charges of $11,217,000, the majority of
which relate to a review of the carrying values of the Company's Service Group
Assets and the closing of a Service Group plant. During the first quarter of
1998, the Company recorded a charge of $1,950,000 in conjunction with a
restructuring of the Service Group that included closing its Texas operation and
consolidating domestic business and equipment into the Group's Rhode Island
facility. As a result of the Services Group's inability to achieve the
improvements anticipated by the restructuring plan, primarily due to a more
severe than anticipated market decline, the division continued operating at a
loss in 1998. This triggered an impairment and utilization review of the
Services Group's long lived assets. The review identified approximately
$4,700,000 of excess Services Group equipment that was written down to estimated
fair value, less cost of disposal. In addition the Company wrote down
approximately $2,700,000 of Goodwill associated with certain Texas facility
customers and lines of business that have been eliminated. Due to continuing
financial problems of the Service Groups 51% owned Singapore operation, the
Company recorded an asset impairment of $1,000,000 in response to uncertainty
regarding the ultimate recoverability of its investment.
The Company's Material's Group recorded a Special charge of $620,000 in the
fourth quarter consisting of a write down of $473,000 in goodwill associated
with a line of business that has been eliminated and the write down of $147,000
of surplus equipment.
Net interest expense for the 1998 period increased $874,000 from the 1997 period
primarily due to increased interest costs associated with debt incurred with the
SMS and ST acquisitions, the ISP startup and increased capital lease
obligations.
A credit of $5,500,000 for income taxes was recorded for the 1998 period as
compared to a $2,214,000 provision in the 1997 period. In the 1998 period, the
Company received a tax credit at an effective rate of (31%) as compared to an
effective tax rate of 38% in the comparable 1997 period. The 1998 losses have
generated Net Operating Loss ("NOL") carryforwards for income tax purposes,
which are available to offset future taxable income.
Excluding $1,000,000 in special charges, the Company has included a $740,000
loss before income taxes and minority interest, as compared to $677,000 in the
1997 period, associated with ISP in its income before minority interest in loss
of consolidated subsidiary. The Company has a 50.1% interest in the joint
venture and has accordingly excluded $244,000, net of tax, as compared to
$223,000 in 1997, or 49.9% of such loss from its consolidated net income.
As a result of the foregoing, the net losses for 1998 amounted to $11,958,000 as
opposed to net income of $3,793,000 in 1997. In 1998, as a result of the above
and special charges taken during the year, all of the Company's operations
sustained a loss except for Retconn.
RESULTS OF OPERATIONS (1997 compared to 1996)
Total revenue for 1997 increased $25,049,000, or 54%, over the comparable 1996
period. Sales by the Company's Materials Group increased $14,889,000 or 45% over
the 1996 period. The sales growth was due to a $8,704,000, or 89% increase at
Polese Company, an increase of $5,276,000, or 48% at Retconn, which includes
revenue of $1,944,000 from S.T. Electronics, Inc., which was acquired on July
30, 1997 and in increase at the parent company of $909,000 or 7% from prior year
levels. In 1997, the sales increase in the Materials Group was primarily due to
increased sales to the growing communications and computer marketplace. Service
revenue generated by the Company's Service Group increased $10,160,000 or 79%
over the comparable period. This increase included a $9,416,000, or 73% increase
in revenue at ASP, which includes revenue of $10,451,000 from the January 23,
1997 acquisition of Silicon Materials Service and Silicon Materials Service,
B.V. and revenue of $744,000 from International Semiconductor Products Pte Ltd.
While revenues increased in the 1997 period, the Services Group revenue growth
has been impacted by the slowdown in the semiconductor industry. For 1997 and
1996, direct sales of the Company's products into foreign markets accounted for
slightly less than 15% and 10%, respectively, of consolidated revenue. The
Company currently maintains foreign manufacturing operations in Singapore and in
the Netherlands. In 1997, the Company derived $3,912,000 or 6% of its
consolidated revenue from its foreign manufacturing operations. Foreign sales
are made through sixteen foreign manufacturer's representatives and are priced
and paid for in both local currencies (Dutch Florins and Singapore Dollars)and
in US Dollars. The Company believes that its revenue has been, and
will be, affected by the cyclical nature of the industries it serves. The SMS
acquisition, and the Company's joint venture in Singapore, further increases the
Company's reliance on the semiconductor industry. During the 1997 period, the
Company has not experienced any significant impact on revenue or earnings from
the economic instability being experienced in Asia.
Gross profit for 1997 increased $5,067,000, or 33%, from the comparable 1996
period. In the Materials Group, the increase was primarily due to a $2,738,000,
or 133% increase at Polese, gross profit of $2,051,000, or 63% increase at
Retconn and a $468,000, or 11% increase at SPM. In the Services Group, ASP's
gross profit increased $104,000, or 2% and ISP had a gross profit loss of
($293,000). While gross margin in the Materials Group increased to 31% in the
1997 period from 29% in the 1996 period, consolidated gross margin for the
Company decreased to 29% in 1997 from 33% in the comparable 1996 period. The
decrease in consolidated gross margin was caused by a decrease in the Services
Group gross margin which decreased from 44% in the 1996 period to 24% in the
1997 period, due to the acquisition of SMS, which has gross margins
significantly below those of ASP, a gross profit loss at ISP and increased
depreciation and manufacturing costs at ASP's Rhode Island operation.
Selling, general and administrative ("SG&A") expenses in 1997 increased
$3,789,000, or 46% over the comparable 1996 period. The increase was primarily
due to the inclusion of $1,344,000 of SMS's SG&A costs with the Company's and
the increase in the sales and marketing activities throughout the Company. The
Company's 1997 SG&A expenses also include $265,000 of expenses generated by its
Singapore joint venture. SG&A expenses as a percentage of revenue decreased to
17% in the 1997 period from 18% in the comparable 1996 period.
Net interest expense for the 1997 period increased $1,681,000 from the
comparable 1996 period primarily due to increased interest costs associated with
debt incurred with the SMS and ST acquisitions, the ISP startup and increased
capital lease obligations.
A provision of $2,214,000 for income taxes has been made for the 1997 period as
compared to a $2,445,000 provision in the comparable 1996 period. In the 1997
period, the Company's earnings were taxed at an effective tax rate of 38% as
compared to an effective tax rate of 40% in the comparable 1996 period.
In the 1997 period, the Company has included a $677,000 loss before income taxes
and minority interest, as compared to $128,000 in the 1996 period, associated
with its Singapore joint venture in its income before minority interest in loss
of consolidated subsidiary. The Company has a 50.1% interest in the joint
venture and has accordingly excluded $223,000, net of tax, as compared to
$64,000 in 1996, or 49.9% of such loss from its consolidated net income.
As a result of the foregoing, net income decreased $13,000 in 1997 from the
comparable 1996 period. In 1997, all of the Company's operations were profitable
except for ISP.
Year 2000
The year 2000 problem arises since many computer programs and some pieces of
computer hardware manipulate and store dates as a two-digit field and are unable
to recognize dates past December 31, 1999.
The Company has completed its initial assessment of the systems and software at
all of its operations, including external interfaces with critical suppliers and
customers. The Company is in the process of replacing non-compliant hardware,
installing new manufacturing enterprise computer software systems at SPM and
installing software upgrades that are year 2000 compliant at its other
locations. The Company expects to complete the installation and testing of these
new systems and upgrades by the end of 1999. Outside suppliers, and customers
have been contacted and requested to complete the Company's assessment
questionnaire. The Company has completed its review of all of the assessment
questionnaires received and is re-contacting third parties who have not
responded to date.
The Company has expended approximately $300,000 to date and estimates that the
remaining incremental cost of addressing the potential Year 2000 problem beyond
those expenditures already incurred will be less than $250,000 based upon the
information assembled to date.
In the event that the company's internal software project is not completed, the
Company anticipates that the existing systems could continue functioning without
undue business interruption while the new software installation and testing is
completed. Failure of the Company to achieve year 2000 compliance is not
anticipated to have a material adverse impact on the operations of the Company.
The Company can not predict the potential effect of third parties "Year 2000"
issues on its business for those third parties that either do not complete their
own Year 2000 compliance or do not respond to the Company's assessment
questionnaire in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
General
To support the Company's growth the Company has historically made significant
capital expenditures to support its facilities and manufacturing processes as
well as working capital needs. The Company has financed its capital needs
through cash flow from operations, its line of credit facility, term loans from
the Bank, other bank financing including gold consignment supply agreements, and
capital leases. The Company has Bank short term debt maturities, standby letter
of credit maturities, gold consignment agreements and debt service requirements
which are presently deferred until June 30, 1999 under a limited forbearance
agreement with its banks. The Company completed the sale of its Retconn business
on February 19, 1999 and repaid $22,191,000 of existing Bank debt. The Company
is pursuing several additional courses of action to address its remaining Bank
debt service, gold consignment supply needs and refinancing needs.
Summary of 1998 Activity
At December 31, 1998, the Company had cash and cash equivalents of $1,141,000
and an available balance on its revolving credit facility of $200,000 as
compared to $2,260,000 and $4,525,000 respectively at December 31, 1997.
Net cash provided by operating activities in 1998 amounted to $872,000 as
compared to $3,063,000 in the comparable 1997 period. Cash provided by
operations decreased compared to 1997 principally as a result of 1998 losses
before non cash special charges and due to a dimunition in its working capital.
While the Company significantly decreased its trade receivables and inventory
levels in 1998, such decreases did not offset the more significant use of cash
for reductions in its trade payables. The increase in the deferred tax assets is
due to net operating loss carryforwards generated by the 1998 losses, which are
available for utilization in 1999, and future years to offset future taxable
income.
To support the Company's facilities and productive processes, in 1998 and 1997,
the Company invested $3,063,000 and $13,119,000, respectively, in property and
equipment. This investment excludes $3,078,000 and $4,271,000, respectively, in
the 1998 and 1997 periods for equipment acquired under capital leases. Capital
expenditures in 1997 included approximately $7,400,000 in machinery and
equipment purchased for a new wafer reclaim facility in Singapore and
approximately $996,000 for purchase of a formerly leased facility in the
Netherlands. The majority of capital lease arrangements which the Company has
entered into have lease terms of five years and provide for a bargain purchase
when the lease term expires. At December 31, 1998, the Company had capital
commitments of approximately $1,121,000 for the ongoing upgrade of the Company's
manufacturing equipment. The Company believes that the lease financing available
to it for certain equipment together with cash flow from operations will be
sufficient to fund its capital needs.
Net Cash provided by financing activities amounted to $916,000 in 1998 as
compared to $21,469,000 during 1997. During 1998, the Company's borrowings
included $1,000,000 under a interim term facility, $4,925,000 under its Bank
revolving line of credit and $690,000 from an overseas bank. Debt repayments
during 1998 of $3,371,000 include $2,450,000 in Bank term debt, $521,000 in
notes payable and $400,000 in mortgages and other debt. In addition, the Company
made payments of $2,222,000 under capital leases obligations. During 1998, the
Company also repurchased 34,600 of its shares to be held in treasury, at a cost
of $212,000.
Factors Affecting Future Liquidity
In January 1997, the Company entered into a $21,000,000 five-year term loan
("Term Loan") with First Union Bank and Fleet National Bank (collectively the
"Bank"). Pursuant to the Term Loan agreements and Interim Term Loan agreements,
as amended, the Bank has a first priority security interest in substantially all
of the Company's assets. The loan agreements provide, among other things, that
the Company maintains certain financial ratios. The Company is also subject to
restrictions relating to incurring additional indebtedness, additional liens and
security interests, capital expenditures and the payment of dividends. Under a
limited forbearance agreement, as amended, the Bank extended a previous waiver
of the Term Loan's financial ratio covenants, agreed to waive principal payments
of $350,000 per month from August 1, 1998 forward and set the maturity of the
Term Loan at June 30, 1999.
In January 1997, the Company entered into a $15,000,000 line of credit with the
Bank that originally expired in February 1999. As part of the limited
Forbearance Agreement, as amended, the Bank extended the maturity to June 30,
1999. This credit line includes a standby letter of credit for ISP in the amount
of approximately $3,000,000. Interest is payable monthly at the lower of the
Bank's loan pricing rate or a Eurodollar rate plus 2.25%. The line of credit is
collateralized by substantially all of the company's assets and provides for
limited availability based upon the eligible percentages of the Company's
receivables and inventory. The line of credit, as amended, is subject to the
same restrictions and financial covenants governing the Term Loan and Interim
Term Loan. As of December 31, 1998 and January 30, 1999 the Company was in
technical default of certain financial ratio covenants. The Company is
continuing to have discussions with the Bank concerning the waiver of the
technical default and was in compliance with its financial ratio covenants in
February 1999 and continues to make monthly interest payments.
On June 19, 1998 the Company entered into a 90-day note for $1,000,000 ("Interim
Term Loan") with the Bank to supplement the Company's working capital
requirements. The Interim Term Loan note provided for the payment of interest
monthly and for the repayment of principal on October 1, 1998. As part of the
limited Forbearance Agreement, as amended, the Bank extended the maturity to
June 30, 1999. As of December 31, 1998 and January 30, 1999 the Company was in
technical default of certain financial ratio covenants. The Company is
continuing to have discussions with the Bank concerning the waiver of the
technical default and was in compliance with its financial ratio covenants in
February 1999 and continues to make monthly interest payments.
In December 1996, the Company entered into a consignment agreement (the "Gold
Consignment Agreement") with Fleet Precious Metals ("FPM") which expired
December 23, 1998. As part of the limited Forbearance Agreement, as amended, the
Bank extended the maturity to June 30, 1999. Under the Gold Consignment
Agreement, the Company purchases gold used in its manufacturing of materials.
The Gold Consignment Agreement provides for gold on consignment not to exceed
the lesser of 5,000 troy ounces of gold or gold having a market value of
$1,870,000. The Gold Consignment Agreement requires the Company to pay a
consignment fee of 5.0 % per annum based upon the value of all gold consigned to
the Company. The Company is currently in discussions with FPM and other lenders
to extend and/or negotiate a new agreement.
The limited Forbearance Agreement discussed, herein, was originally signed in
August 1998 and later amended in 1998 and early 1999. The Forbearance Agreement,
as amended, waived Term Loan principal payments of $350,000 per month from
August 1 forward, extended a previous waiver of financial ratio covenants, set
the Term Loan maturity date to June 30, 1999 and also extended the maturity of
the Interim Term Loan, the Revolving Credit Agreement, the standby letter of
credit and the Gold Consignment agreement to June 30, 1999. The Company is
pursuing a number of courses of action to restructure or refinance its existing
debt and Gold Consignment agreement. These include continuing negotiations with
the current lenders, discussions with other prospective lenders and
investigation of the sale of one or more of its subsidiaries as a means of
paying its debt obligations. On February 19, 1999, the Company sold its Retconn
business and used $22,191,000 of the cash proceeds to repay $15,050,000 of bank
term debt and $7,141,000 of line of credit borrowings. Although the Company
believes that it is presently meeting all of the Bank's covenants, as amended,
and is paying interest as due on its obligations, there is no assurance that the
Company will be able to successfully renegotiate the terms of its existing
credit/consignment agreements and/or negotiate new financing arrangements and/or
realize cash through the sale of one or more of its subsidiaries. Failure to
achieve the necessary financing could have a material adverse effect on the
Company.
The Company's 50.1% owned Singapore operation ("ISP") is currently in
discussions with its bank and may not be able to meet its financing obligations
through cash flow from operations without a change in its existing arrangements.
In May 1998, the Company invested an additional $385,000 in ISP in the form of a
redeemable convertible bond. The Company and ISP are pursuing a number of
courses of action designed to provide future capital resources including
discussions with its ISP's lenders to obtain principal repayment forbearance as
well as discussions with other investors who would provide a new source of
equity capital. There is no assurance that ISP will be able to successfully
renegotiate the terms of its existing credit agreements and/or realize cash
through an equity investor. Failure to achieve the necessary financing would
have a material adverse effect on ISP. In addition, ISP's bank could draw down
the S$5,000,000 (approximately $3,000,000 at December 31, 1998) standby letter
of credit provided by the Company's Bank. There is no assurance that the Company
would have the resources available to repay the Bank immediately as required by
the Company's Bank agreement in which case an event of default would exist.
Failure to repay the drawn Letter of Credit would have a material adverse effect
on the Company.
In conjunction with the Company's acquisition of Polese Company on May 27, 1993,
the Company acquired from Frank J. Polese, the former sole shareholder of Polese
Company, all of the rights, including a subsequently issued patent, for certain
powdered metal technology and its application to the electronics industry. For a
period of ten years, Mr. Polese has the right to receive 10% of (i) the pre-tax
profit from the copper tungsten product line, after allocating operating costs
and (ii) the proceeds of the sale, if any, by the Company of the powdered metal
technology. Through December 31, 1998, no amounts have been charged to
operations pursuant to this agreement
On December 18, 1997, the Board of Directors authorized the Company to
repurchase up to $2,000,000 of SEMX common stock on the open market. Repurchased
shares will be held as Treasury shares and may be reissued in the future or may
be reissued pursuant to the Company's stock option programs. As of December 31,
1998, the Company had repurchased 34,600 of its shares.
The Company continually seeks to broaden its product lines by various means,
including through acquisitions. The Company intends to pursue only those
acquisitions for which it will be able to arrange the necessary financing by
means of the issuance of additional equity, the use of its cash or, through bank
or other debt financing. The Company is uncertain that without a restructuring
or refinancing of Bank Debt, its working capital and internally generated funds
and other sources of financing will be sufficient to satisfy the Company's
currently anticipated cash requirements on both a short-term and long-term
basis.
Forward Looking Statements
Except for historical information contained herein, this Form 10-K contains
forward looking statements which are based on the Company's current expectations
and assumptions. Various factors could cause actual results to differ materially
from those set forth in such statements. These factors include, but are not
limited to, the availability of continuing credit from the Company's banks,
general economic conditions, increased competition, changes in government
regulations, dependence on critical suppliers, increased operating costs, the
cyclical nature of the semiconductor and microelectronics industries and the
impact of the instability currently being experienced in Asia on the U.S.
economy.
Item 7(a) Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements.
The Company's consolidated financial statements are set for herein in Part IV
beginning at Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10, 11, 12 and 13. Directors and Executive Officers of the Registrant,
Executive Compensation, Security Ownership of Certain Beneficial Owners and
Management, and Certain Relationships and Related Transactions.
The information required by these Items is omitted because the Company
will file a definitive proxy statement pursuant to Regulation 14A with the
Commission, not later than 120 days after the end of the fiscal year, which
information is herein incorporated by reference as if set out in full.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following is an index of the financial statements of the Company which
are incorporated herein.
(a) (1) Financial Statements:
Report of Independent Auditors F-2
Consolidated Balance Sheet as of December 31, 1997 and 1998 F-3
Consolidated Statement of Income for the Years
Ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statement of Shareholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-22
(a) (2) Financial Statement Schedules:
All schedules have been omitted because of the absence of conditions
under which they are required or because the required information is
given in the above financial statements or the notes thereto
included in this report.
(b) Reports on Form 8-K
No form 8-K reports have been filed by the Registrant during the
last quarter of the period covered by this Report.
(a) (3) Exhibits:
3.1 Certificate of Incorporation of the Company (1)
3.2 Amendment to Certificate of Incorporation (1)
3.3 Bylaws of the Company (1)
4.1(a) Underwriter's Warrant Agreement, dated as of December 20 , 1991,
between the Company and the Underwriter (2)
4.1(b) Amendment No. 1 to the Underwriter's Warrant Agreement, dated as of
April 27, 1993 (6)
10.1 Gold Lease Agreement between the Company and Republic National Bank
of New York dated May 17, 1989 (1)
10.3(a) Amended and Restated Non-Competition Agreement by and between the
Company and Rudolf Hanau and dated as of May 23, 1990 (1)
10.3(b) Amended and Restated Non-Competition Agreement by and between the
Company and Richard Gordon and dated as of May 23, 1990 (1)
10.5(a) Termination Agreement between the Company and Rudolf Hanau dated
October 30, 1991 (1)
10.5(b) Termination Agreement between the Company and Richard Gordon dated
October 30, 1991 (1)
10.6 Employment Agreement between the Company and Richard Gordon dated
October 30, 1991 (1)
10.7 Employment Agreement between the Company and Rudolf Hanau dated
October 30, 1991 (1)
10.8 Non-Competition Agreement between the Company and Richard Gordon
dated as of November 30, 1988 (3)
10.9 Non-Competition Agreement between the Company and Rudolf Hanau
dated as of November 30, 1988 (3)
10.10(a) Company's Employee Stock Option Plan (4)
10.10(b) Company's Amended Employee Stock Option Plan (6)
10.12(a) Stock Purchase Agreement dated April 30, 1993 by and between
Registrant and Frank J. Polese (5)
10.12(b) Asset Purchase Agreement dated April 30, 1993 by and between the
Registrant and Frank J. Polese (5)
10.13(a) Term Loan and Security Agreement dated May 27, 1993, between the
Registrant and Union Trust Company (5)
10.13(c) Promissory Note dated May 27, 1993 from the Registrant to Union
Trust Company (5)
10.13(d) Guaranty and Security Agreement between Polese Company, Inc. and
Union Trust Company (5)
10.15 Lease Agreement dated as of October 22, 1993 between Transamerica
Occidental Life Insurance Company and Polese Company, Inc. (6)
10.16 Form of Warrant Agreement between the Company, Continental Stock
Transfer & Trust Company and Sands Brother & Co., Ltd. (6)
10.17 Form of Agreement to Contribute Redeemable Warrants to Company. (6)
10.18 Promissory Note dated May 27,1993 payable to Frank J. Polese. (6)
10.19 Documents related to Secured Loan from Union Trust Company dated
December 16, 1993
(a) Loan and Security Agreement (6)
(b) Promissory Note (6)
(c) Subordination and Intercreditor Agreement (6)
(d) Guaranty and Security Agreement (6)
(e) Loan Modification Agreement to Loan and Security Agreement
dated May 27, 1993 (6)
(f) Assignment of Patents (6)
10.20 Documents related to Revolving Loan Agreement from Union Trust
Company dated June 16, 1994
(a) Revolving Credit Agreement (8)
(b) Revolving Credit Note (8)
(c) Subordination and Pledge Agreement (8)
(d) Guaranty and Security Agreement of Parent (8)
(e) Guaranty and Suretyship Agreement of Polese Company, Inc. (8)
(f) Assignment of Patents (8)
10.21 Loan Modification Agreement dated November 23, 1994 to Revolving
Credit Agreement between the Registrant and Union Trust Company (8)
10.22 Form of Modification of Gold Lease Agreement between the Registrant
and Republic National Bank of New York dated December 6, 1994 (8)
10.23(a) Employment Agreement dated as of December 15, 1994 between the
Company and Gilbert D. Raker (8)
10.23(b) Modification of Employment Agreement dated as of December 15, 1994
between Polese Company, Inc and Frank J. Polese (8)
10.23(c) Employment Agreement dated as of December 15, 1994 between the
Company and Kenneth J. Huth (8)
10.23(d) Employment Agreement dated as of December 15, 1994 between the
Company and Andrew A. Lozyniak (8)
10.24 Lease Extension Agreement dated December 1, 1994 between the Company
and R&R Associates (8)
10.25 Lease Agreement dated as of June 1, 1994 between Nobbs Family Trust
and Polese Company, Inc. (8)
10.26 Lease Agreement dated as of January 1, 1995 between W. Ralph Byrne
and American Silicon Products, Inc. (8)
10.27 Lease Agreement dated as of January 19, 1995 between Thomas A.
Langton and David T. Kearns, Jr. d/b/a Alak Associates, and American
Silicon Products, Inc. (8)
10.28 Documents related to the ASAC merger and the acquisition of the
assets of American Silicon Products, Inc., a Rhode Island
corporation
(a) Asset Purchase Agreement dated as of September 28, 1994, as
amended, among Peter Vessella, ASPI and ASAC. (7)
(b) Merger Agreement dated as of November 18, 1994 by and among
the Registrant, Newco, ASAC and the stockholders of ASAC. (7)
(c) Consulting Agreement dated as of December 15, 1994 by and
between the Registrant and Peter J. Hurley. (7)
(d) Term Loan Agreement (Bridge Loan) dated December 15, 1994 by
and between the Registrant and UTC. (7)
(e) Term Loan Agreement dated December 15, 1994 by and between the
Registrant and UTC. (7)
(f) Promissory Note in the principal amount of $8,250,000, dated
December 15, 1994 from the Registrant to UTC. (7)
10.29 Documents related to Revolving Loan Agreement from First Fidelity
Bank dated December 20, 1995.
(a) Revolving Loan and Security Agreement
(b) Revolving Promissory Note
10.30 Documents related to Term Loan Agreement from First Union Bank of
Connecticut dated January 4, 1996.
(a) Term Loan Agreement
(b) Term Promissory Note
10.31(a) Termination Agreement dated as of October 27, 1995 between the
Company and John P. Holmes, III.
10.31(b) Termination Agreement dated as of October 27, 1995 between the
Company and J. Francis Lavelle.
10.31(c) Termination Agreement dated as of October 27, 1995 between the
Company and Rolf E. Soderstrom.
10.31(d) Termination Agreement dated as of October 27, 1995 among the Company
Peter J. Hurley, Harrison Hurley & Co., Inc and Harrison Hurley &
Co. II, Inc.
10.49 1994 Amendment to Employees' Incentive Stock Option Plan. (9)
10.50 1995 Amendment to Employees' Incentive Stock Option Plan. (9)
10.51 Commercial Grid Note dated May 31, 1995 in the amount of $1,250,000
from the Company to Union Trust Company. (9)
10.55 Stock Purchase Agreement dated as of December 20, 1995 by and among
Retconn Acquisition, Inc. and Daniel A. LeDonne, The Richard C.
Ashworth 1993 Trust, Richard C. Ashworth individually, William
S.White and Retconn Incorporated.(10)
10.56 Employment Agreement dated January 4, 1996 between Retconn
Incorporated and Daniel A. LeDonne. (10)
10.57 Closing Date Agreement dated January 4, 1996 among Retconn
Acquisition, Inc., Daniel A. LeDonne, The Richard C. Ashworth 1993
Trust, Richard C. Ashworth individually, William G. White and
Retconn Incorporated. (10)
10.58 Joint Venture Agreement dated August 28, 1996 between Semiconductor
Alliance Pte Ltd., the Company and International Semiconductor
Products Pte Ltd.(11)
10.59 Intellectual Property License Agreement dated August 28, 1996
between American Silicon Products, Inc. and International
Semiconductor Products Pte Ltd.(11)
10.60 Purchase Agreement dated as of January 16, 1997 between American
Silicon Products, Inc. and Air Products & Chemicals, Inc.(12)
10.61 Credit Agreement dated as of January 23, 1997 between the Company
and First Union Bank of Connecticut. (12)
10.62 Stock Purchase Agreement dated as of July 30, 1997 by and among
Retconn Incorporated, Semiconductor Packaging Materials Co., Inc.,
Niwatana Chaimongkol, Somnuk Thongkumthamachart and S.T.
Electronics, Inc. (13)
10.63 Fifth Amendment and Forebearance Agreement among SEMX Corporation
and Subsidiairies and First Union Bank dated as of January 13, 1999
10.64 Asset Purchase Agreement by and among Litton Systems, Inc. and SEMX
Corporation, Retconn Incorporated, S.T. Electronics, Inc. and
Retconn SPM (Malaysia) SDN. BHD. Dated as of January 26, 1999 and
related documents.
10.65 Sixth Amendment and Forebearance Agreement among SEMX Corporation
and Subsidiaries and First Union National Bank dated as of February
19, 1999.
22 List of Subsidiaries of the Company
23.1 The Consent of Goldstein Golub Kessler LLP, the Company's
independent certified pubic accountants, to incorporation by
reference to Registration Statement on Form S-8 of their report
dated February 5, 1999 except for Note 15 as to which the date
is February 19, 1999.
(1) Incorporated herein by reference to the Company's Registration
Statement No. 33-43640-NY on Form S-18, filed with the
Securities and Exchange Commission on November 1, 1991.
(2) Incorporated herein by reference to the Company's Annual
Report for the year ended December 31, 1991, filed with the
Securities and Exchange Commission on March 31, 1992.
(3) Incorporated herein by reference to Amendment No. 1 to the
Company's Registration Statement No. 33-43640-NY on Form S-18,
filed with the Securities and Exchange Commission on December
6, 1991.
(4) Incorporated herein by reference to Amendment No. 2 to the
Company's Registration Statement No. 33-43640-NY on Form S-18,
filed with the Securities and Exchange Commission on December
20, 1991.
(5) Incorporated herein by reference to Current Report on Form 8-K
filed with the SEC on June 11, 1993, as amended by Form 8-K/A.
(6) Incorporated herein by reference to the Company's Registration
Statement No. 33-70876 on Form S-3 filed, with the Securities
and Exchange on October 28, 1993 and as amended on December
30, 1993, January 20, 1994 and February 7, 1994.
(7) Incorporated herein by reference to Current Report on Form 8-K
filed with the SEC on December 29, 1994.
(8) Incorporated herein by reference to the Company's Annual
Report for the year ended December 31, 1995, filed with the
SEC for March 31, 1995.
(9) Incorporated herein by reference to the Company's Registration
Statement No. 33-93502 on Form SB-2 filed, with the Securities
and Exchange on June 16, 1995 and as amended on July 19, 1995
and July 26, 1995.
(10) Incorporated by reference to the Company's Form 8-K filed
January 4, 1996.
(11) Incorporated by reference to the Company's 10-QSB filed for
the quarter ended September 30, 1996.
(12) Incorporated by reference to the Company's Form 8-K filed
February 4, 1997 and amended by Form 8-K/A.
(13) Incorporated by reference to the Company's Annual Report for
the year ended December 31, 1997, filed with the Securities
and Exchange Commission on March 20, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
SEMX CORPORATION
(Registrant)
By: /s/ Gilbert D. Raker
---------------------------------
Gilbert D. Raker, Chief Executive
Officer, President, Chairman of the Board of
Directors and Director
Dated: April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
/s/ Gilbert D. Raker April 14, 1999
- -----------------------------------
Gilbert D. Raker, Chief Executive
Officer, President, Chairman of
the Board of Directors and Director
/s/ Frank J. Polese April 14, 1999
- -----------------------------------
Frank J. Polese, Vice Chairman
and Director
/s/ Kenneth J. Huth April 14, 1999
- -----------------------------------
Kenneth J. Huth, Executive Vice
President
/s/ Mark A. Koch April 14, 1999
- -----------------------------------
Mark A. Koch,
Controller and Secretary
Chief Accounting Officer
/s/ Mark A. Pinto April 14, 1999
- -----------------------------------
Mark A. Pinto, Director
/s/ John U. Moorhead, II April 14, 1999
- -----------------------------------
John U. Moorhead, II, Director
/s/ Andrew Lozyniak April 14, 1999
- -----------------------------------
Andrew Lozyniak, Director
/s/ Steven B. Sands April 14, 1999
- -----------------------------------
Steven B. Sands, Director
/s/ Richard D. Fain April 14, 1999
- -----------------------------------
Richard D. Fain, Director
SEMX CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
Independent Auditor's Report F-2
Consolidated Balance Sheet as of December 31, 1997 and 1998 F-3
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998 F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-22
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
SEMX Corporation
We have audited the accompanying consolidated balance sheets of SEMX Corporation
and Subsidiaries as of December 31, 1997 and 1998 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. We have also audited the pro
forma consolidated balance sheet which gives effect to the sale of a subsidiary
and the repayment of debt as described in Note 15 to the consolidated financial
statements. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SEMX Corporation and
Subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the pro forma balance sheet presents fairly the financial
position of SEMX Corporation and Subsidiaries as it would have appeared at
December 31, 1998 had the transaction described in Note 15 been consummated at
that date.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 5, 1999 except for Note 15 as to
which the date is February 19, 1999
F-2
SEMX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
======================================================================================================================
1998
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1997 1998 Pro forma
- ----------------------------------------------------------------------------------------------------------------------
(Note 15)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,260 $ 1,141 $ 984
Accounts receivable, less allowance for doubtful
accounts of $181, $245 and $191, respectively 10,789 8,007 5,480
Inventories 12,369 10,447 4,914
Prepaid expenses and other current assets 2,079 948 744
Deferred income tax assets - 5,643 1,855
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 27,497 26,186 13,977
- ----------------------------------------------------------------------------------------------------------------------
Property plant and Equipment - at cost, net of accumulated
depreciation and amortization of $10,163, $13,974
and $13,357, respectively 42,031 38,352 36,720
- ----------------------------------------------------------------------------------------------------------------------
Other Assets:
Goodwill 19,788 15,938 8,981
Technology rights and intellectual property 1,077 963 963
Other 1,472 885 815
- ----------------------------------------------------------------------------------------------------------------------
Total other assets 22,337 17,786 10,759
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $91,865 $82,324 $61,456
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,322 $ 5,262 $ 4,164
Accrued expenses 2,602 2,947 2,544
Income taxes payable - - 1,028
Current portion of long-term debt and short-term
obligations 5,944 29,393 6,739
Current portion of obligations under capital leases 2,142 2,648 2,490
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,010 40,250 16,965
Deferred Income Tax Liabilities 2,143 2,329 2,031
Long-term Debt 26,670 6,657 5,638
Obligations under Capital Leases 6,047 6,398 5,710
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 52,870 55,634 30,344
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingency
Minority Interest in Subsidiary 1,537 1,319 1,319
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock - $.10 par value; authorized 1,000,000
shares, none issued - - -
Common stock - $.10 par value; authorized 20,000,000
shares, issued 6,375,616 shares 638 638 638
Additional paid-in capital 28,199 28,199 28,199
Accumulated other comprehensive loss (405) (322) (322)
Retained earnings (accumulated deficit) 9,026 (2,932) 1,490
- ----------------------------------------------------------------------------------------------------------------------
37,458 25,583 30,005
Less treasury stock: 300,000, 334,600 and 334,600
shares, respectively, at cost - (212) (212)
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity 37,458 25,371 29,793
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $91,865 $82,324 $61,456
======================================================================================================================
The accompanying notes are an integral part of these statements
F-3
SEMX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
======================================================================================================================
Year ended December 31, 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------------
Revenue:
Net sales $33,140 $48,029 $47,524
Service revenue 12,887 23,047 18,379
- ----------------------------------------------------------------------------------------------------------------------
46,027 71,076 65,903
- ----------------------------------------------------------------------------------------------------------------------
Cost of goods sold and services performed:
Cost of goods sold 23,552 33,185 37,982
Cost of services performed 7,165 17,514 15,143
- ----------------------------------------------------------------------------------------------------------------------
30,717 50,699 53,125
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 15,310 20,377 12,778
Selling, general and administrative expenses 8,203 11,992 15,788
Special charges - - 11,217
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 7,107 8,385 (14,227)
Interest expense - net 920 2,601 3,475
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income
taxes and minority interest in loss of consolidated
subsidiary 6,187 5,784 (17,702)
Provision (benefit) for income taxes 2,445 2,214 (5,500)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest in loss of
consolidated subsidiary 3,742 3,570 (12,202)
Minority interest in loss of consolidated subsidiary 63 223 244
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,805 $ 3,793 $(11,958)
======================================================================================================================
Earnings per common share:
Basic $ .64 $ .62 $ (1.98)
Diluted $ .62 $ .61 $ (1.98)
======================================================================================================================
Shares used in computing earnings per common share:
Basic 5,968 6,070 6,054
Diluted 6,170 6,232 6,054
======================================================================================================================
The accompanying notes are an integral part of these statements
F-4
SEMX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands)
===================================================================================================================================
Accumulated
Other Retained
Additional Comprehensive Earnings
Common Stock Paid-in Income (Accumulated
Shares Amount Capital (Loss) Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 6,190,066 $619 $27,214 - $ 1,428
Net proceeds from exercise of stock warrants 1,200 - 2 - -
Proceeds from exercise of stock options 149,250 15 612 - -
Tax benefit related to incentive stock option plan - - 97 - -
Issuance of common stock 15,000 2 145 - -
Net income and comprehensive income - - - - 3,805
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,355,516 636 28,070 - 5,233
Proceeds from exercise of stock options 20,100 2 129 - -
Comprehensive income:
Net income - - - - 3,793
Foreign currency translation adjustment -
net of deferred taxes of $385 - - - $(405) -
Total comprehensive income
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,375,616 638 28,199 (405) 9,026
Proceeds from exercise of stock options - - - - -
Comprehensive income (loss):
Net loss - - - - (11,958)
Foreign currency translation adjustment -
net of deferred taxes of $85 - - - 83 -
Total comprehensive income
Purchase of treasury stock - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,375,616 $638 $28,199 $(322) $ (2,932)
===================================================================================================================================
=================================================================================================
Total
Treasury Stock Shareholders'
Shares Amount Equity
- -------------------------------------------------------------------------------------------------
Balance at January 1, 1996 (300,000) - $ 29,261
Net proceeds from exercise of stock warrants - - 2
Proceeds from exercise of stock options - - 627
Tax benefit related to incentive stock option plan - - 97
Issuance of common stock - - 147
Net income and comprehensive income - - 3,805
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (300,000) - 33,939
Proceeds from exercise of stock options - - 131
Comprehensive income:
Net income - - -
Foreign currency translation adjustment -
net of deferred taxes of $385 - - -
Total comprehensive income 3,388
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (300,000) - 37,458
Proceeds from exercise of stock options - - -
Comprehensive income (loss):
Net loss - - -
Foreign currency translation adjustment -
net of deferred taxes of $85 - - -
Total comprehensive income (11,875)
Purchase of treasury stock (34,600) $(212) (212)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (334,600) $(212) $ 25,371
=================================================================================================
The accompanying notes are an integral part of these statements
F-5
SEMX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
======================================================================================================================
Year ended December 31, 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 3,805 $ 3,793 $(11,958)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Write-offs and accrued special charges - - 9,267
Gain on sale of property and equipment - (56) --
Depreciation and amortization of property and equipment 2,240 4,072 5,182
Other amortization 689 855 1,022
Deferred income taxes 907 1,058 (5,542)
Minority interest in subsidiary loss (64) (223) (244)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (951) (3,195) 2,641
(Increase) decrease in inventories (2,784) (2,298) 1,994
(Increase) decrease in prepaid expenses and other current assets (321) (322) 539
Increase (decrease) in accounts payable 1,209 3,210 (2,136)
Increase in accrued expenses 298 1,000 107
Increase (decrease) in income taxes payable 1,186 (1,497) --
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,214 6,397 872
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (7,943) (13,119) (3,063)
Payments for acquisition of subsidiaries, net of cash acquired (8,111) (14,939) --
Payment for technology rights - (400) --
Proceeds from sale of property and equipment - 278 -
Increase in other assets (277) (873) 129
Investment in joint venture by minority interest (Note 2) 1,996 - -
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,335) (29,053) (2,934)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of warrants 2 - -
Proceeds from exercise of stock options 627 131 -
Net proceeds under revolving credit - 6,875 4,925
Payments under capital leases (937) (1,617) (2,222)
Payments under long-term debt (721) (4,263) (3,371)
Proceeds from long-term debt 7,760 20,343 1,796
Purchase of treasury stock - - (212)
Cash received from equipment financing 677 - -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,408 21,469 916
- ----------------------------------------------------------------------------------------------------------------------
Effect of foreign translation on cash - (84) 27
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (713) (1,271) (1,119)
Cash and cash equivalents at beginning of year 4,244 3,531 2,260
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,531 $ 2,260 $ 1,141
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 935 $ 2,654 $ 3,623
======================================================================================================================
Income taxes $ 307 $ 2,849 $ 285
======================================================================================================================
Supplemental schedule of noncash investing and financing activities:
Machinery and equipment, net of trade-in, acquired under capital lease $ 3,523 $ 4,271 $ 3,078
======================================================================================================================
Issuance of common stock in connection with the acquisition of a
subsidiary $ 146 -- --
======================================================================================================================
Accrued amounts relating to acquisition of subsidiary -- $ 621 --
======================================================================================================================
Notes payable in connection with the acquisition of a subsidiary -- $ 2,000 --
======================================================================================================================
The accompanying notes are an integral part of these statements
F-6
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
1. PRINCIPAL The accompanying consolidated financial statements
BUSINESS include the accounts of SEMX Corporation ("SPM")
ACTIVITIES AND and its wholly owned and majority-owned
SUMMARY OF subsidiaries (collectively the "Company"). All
SIGNIFICANT significant intercompany transactions and balances
ACCOUNTING have been eliminated. As further described in Note
POLICIES: 2, on January 2, 1996, the Company acquired
Retconn Incorporated ("Retconn"). Additionally, as
described in Note 2, on August 28, 1996 the
Company established International Semiconductor
Products Pte Ltd. ("ISP"), a joint venture with an
unrelated third party. As further described in
Note 2, on January 23, 1997 the Company acquired
certain assets and assumed certain liabilities of
Silicon Materials Service and the common stock of
Silicon Materials Service, B.V. (collectively
"SMS") and on July 30, 1997, the Company acquired
S.T. Electronics Inc. ("ST"). The results of
operations of Retconn, SMS and ST are included in
the Company's consolidated financial statements
from the dates of acquisition and the results of
operations of ISP are included in the Company's
consolidated financial statements from the date of
its formation. On February 19, 1999, the Company
completed the sale of its Retconn and ST
businesses as described in Note 15.
The Company primarily provides specialty materials
and services to the microelectronic and
semiconductor industries and operates in two
business segments consisting of the Materials
Group and the Services Group. The Materials Group
includes the Company's SPM, Polese Company, Inc.
("Polese") and Retconn business units. The
Services Group includes the Company's American
Silicon Products, Inc. ("ASP") and ISP business
units.
Revenue from the sale of products is generally
recognized at the date of shipment to customers.
Service revenue is recognized when the services
are performed.
The Company considers all investments purchased
with an original maturity of three months or less
to be cash equivalents.
The Company maintains cash in bank accounts which,
at times, may exceed federally insured limits. The
Company has not experienced any loss on these
accounts.
The financial position and results of operations
of the Company's foreign subsidiaries are measured
using local currency as the functional currency.
Assets and liabilities of these subsidiaries have
been translated at current exchange rates, and
related revenue and expenses have been translated
at average monthly exchange rates. The aggregate
effect of translation adjustments net of deferred
taxes is reflected as a separate component of
stockholder's equity until there is a sale or
liquidation of the underlying foreign investment.
Inventories, which consist principally of
work-in-process inventory, include raw materials,
labor and manufacturing expenses and are stated at
the lower of cost, determined by the first-in,
first-out method, or market.
Deferred income taxes arise from differences in
bases between tax reporting and financial
reporting (see Note 8).
Depreciation and amortization of property and
equipment is provided for by the straight-line
method over the estimated useful lives of the
related assets.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimates by
management affecting the reported amounts of
assets and liabilities and revenue and expenses
and the
F-7
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
The excess of cost over fair value of net assets
acquired (goodwill), amounting to approximately
$21,615 and $18,281 at December 31, 1997 and 1998,
respectively, is being amortized over periods
ranging from 25 to 40 years using the
straight-line method (see Note 2). Accumulated
amortization at December 31, 1997 and 1998 was
approximately $1,827 and $2,343, respectively. The
Company reviews the carrying value of goodwill for
impairment, periodically or whenever events or
changes in circumstances indicate that the amounts
may not be recoverable. The review for
recoverability includes an estimate by the Company
of the future undiscounted cash flows expected to
result from the use of the assets acquired and
their eventual disposition. An impairment will be
recognized if the carrying value of the assets
exceeds the estimated future undiscounted cash
flows of those assets (see Note 13).
Certain technology rights, proprietary rights and
intellectual property, amounting to approximately
$1,350 and $1,311 at December 31, 1997 and 1998,
respectively, are being amortized over periods
ranging from 11 to 17 years using the
straight-line method. Accumulated amortization at
December 31, 1997 and 1998 was approximately $273
and $348, respectively.
The Company elected to measure compensation cost
using APB Opinion No. 25 as is permitted by
Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based
Compensation, and has elected to comply with other
provisions and the disclosure-only requirements of
SFAS No. 123 (see Note 10).
Basic earnings per common share is computed using
the weighted-average number of shares outstanding.
Diluted earnings per common share is computed
using the weighted-average number of shares
outstanding adjusted for the incremental shares
attributed to outstanding options and warrants to
purchase common stock. Incremental shares of
$201,747 and $162,536 in 1996 and 1997,
respectively, were used in the calculation of
diluted earnings per common share. No incremental
shares were used in the 1998 calculation of
diluted earnings per common share since they would
have had an antidilutive effect.
In 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. This statement
establishes rules for the reporting of
comprehensive income and its components.
Comprehensive income consists of net income and
foreign currency translation adjustments and is
presented in the consolidated statement of
shareholders' equity. The adoption of SFAS 130 had
no impact on total shareholders' equity.
Prior-year financial statements have been
reclassified to conform with SFAS 130
requirements.
The Company does not believe that any recently
issued but not yet effective accounting standards
will have a material effect on the Company's
consolidated financial position, results of
operations or cash flows.
F-8
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
2. ACQUISITIONS In connection with the Company's acquisition of
AND INVESTMENTS: Polese in 1993, for a period of 10 years from the
date of acquisition, the former sole shareholder
of Polese is entitled to receive 10% of (i) the
pretax profit from the Company's copper/tungsten
product line after allocating operating costs, and
(ii) the proceeds of the sale, if any, by the
Company of the powdered metal technology. Amounts
due pursuant to this agreement will be charged to
operations as incurred. Through December 31, 1998,
no amounts have been charged to operations
pursuant to this agreement.
Effective January 2, 1996, the Company acquired
all of the common stock of Retconn for $5,933 in
cash. This business combination was accounted for
as a purchase. In addition, the Company incurred
approximately $1,132 in costs associated with the
acquisition of Retconn, which included the
issuance of 15,000 shares of the Company's common
stock. The fair value of assets acquired,
including approximately $4,696 allocated to
goodwill, amounted to approximately $8,033 and
liabilities assumed amounted to approximately
$968. As described in Note 15, the Company sold
its Retconn and ST businesses on February 19,
1999.
On August 28, 1996, the Company invested $2,004 in
ISP, a joint venture located in Singapore, for a
50.1% ownership interest. On May 12, 1998 the
Company invested an additional $385 as a
redeemable convertible bond ("RCB"). The RCB bears
interest at the rate of 8% per annum and matures
in April 2001. The Company may convert the RCB at
any time into ordinary shares of par value S$1.00
(Singapore Dollar) at the rate of one ordinary
share for every S$3.00 worth of RCB plus accrued
interest. The RCB instrument ranks senior to all
other existing shareholder loans. If the RCB was
converted on December 31, 1998 the Company's
ownership interest would have increased to 69%.
Effective January 23, 1997, the Company acquired
SMS for approximately $10,400 in cash plus the
working capital of SMS as of January 23, 1997,
approximating $2,572, in a business combination
accounted for as a purchase. In addition, the
Company incurred approximately $2,000 in costs in
connection with the acquisition of SMS. The fair
value of assets acquired, including approximately
$2,923 allocated to goodwill, which is being
amortized over 25 years, amounted to approximately
$15,609 and liabilities assumed amounted to
approximately $637. SMS provides silicon wafer
polishing and reclamation services to the
semiconductor industry.
On July 30, 1997, the Company acquired ST for
$1,000 in cash plus approximately $54 based on
ST's closing net worth and $2,000 in
interest-bearing notes payable to the former
shareholders of ST (see Note 6), in a business
combination accounted for as a purchase. In
addition, the Company incurred approximately $300
in costs associated with the acquisition of ST.
The fair value of assets acquired, including
approximately $2,788 allocated to goodwill,
amounted to approximately $4,231 and liabilities
assumed amounted to $877. As described in Note 15,
the Company sold its Retconn and ST businesses on
February 19, 1999.
F-9
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
3. INVENTORIES: The components of inventories are as follows:
December 31, 1997 1998
----------------------------------------------------------------------------------------
Precious metals $ 1,675 $ 1,245
Nonprecious metals 10,694 9,202
----------------------------------------------------------------------------------------
$12,369 $10,447
========================================================================================
The Company has a consignment arrangement with a
bank, as described in Note 9, which provides for
the leasing of precious metals by the Company. The
Company pays for these precious metals based on
actual usage.
4. PROPERTY PLANT AND Property plant and equipment, at cost, consist of
EQUIPMENT: the following:
Estimated
December 31, 1997 1998 Useful Life
----------------------------------------------------------------------------------------
Land $ 642 $ 642
Buildings and leasehold improvements 8,051 10,301 1.5 to 39 years
Machinery and equipment 39,131 40,387 3 to 15 years
Construction-in-progress 4,370 996
-----------------------------------------------------------------------------------------
52,194 52,326
Less accumulated depreciation 10,163 13,974
----------------------------------------------------------------------------------------
Property, plant and equipment, net $42,031 $38,352
========================================================================================
Included in machinery and equipment and
construction-in-progress is approximately $44
and $200, respectively, of capitalized
interest for the year ended December 31, 1997.
Included in machinery and equipment are
approximately $11,587 at December 31, 1997 and
approximately $15,531 at December 31, 1998 of
property acquired under capital leases.
Amortization of these assets is included in
depreciation and amortization expense. Accumulated
amortization of these assets amounted to
approximately $2,340 and $3,929 at December 31,
1997 and 1998, respectively. The property held
under these leases is collateral for the related
capital lease obligations described in Note 7.
F-10
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
5. ACCRUED Accrued expenses consist of the following:
EXPENSES:
December 31, 1997 1998
----------------------------------------------------------------------------------------
Accrued payroll bonuses and vacations $1,062 $ 801
Other (all amounts are less than 5% of
total current liabilities) 1,540 2,146
----------------------------------------------------------------------------------------
$2,602 $2,947
========================================================================================
6. LONG-TERM DEBT AND Long-term debt and short-term obligations consist
SHORT-TERM OBLIGATIONS: of the following:
December 31, 1997 1998
---------------------------------------------------------------------------------------
Term loan (a) (g) $17,500 $16,050
Line of credit (b) (g) 6,875 11,800
Term loan (c) (h) 4,041 4,578
Term loan (d) (h) 1,900 1,482
Term loan (e) (h) 1,569 1,393
Term loan (f) (h) - 684
Other 729 63
----------------------------------------------------------------------------------------
Total long-term debt and short-term obligations 32,614 36,050
Less current maturities 5,944 29,393
----------------------------------------------------------------------------------------
Long-term debt $26,670 $ 6,657
========================================================================================
(a) In January 1996, in conjunction with the
acquisition of Retconn (see Note 2), the
Company entered into a $6,000 term loan with
a bank (the "Bank"). This loan was
refinanced in January 1997 when, in
conjunction with the acquisition of SMS (see
Note 2), the Company entered into a new
$21,000 term loan with the Bank. The loan
bears interest at the Eurodollar rate (5.6%
at December 31, 1998) plus 2.25% and is
payable in 60 consecutive monthly
installments of $350, plus interest, which
commenced on March 1, 1997. On June 19,
1998, the Company entered into a note for
$1,000 ("Interim Term Loan") with the Bank
to supplement the Company's working capital
requirements. The Interim Term Loan note
provided for the payment of interest monthly
at the Bank's prime rate and for the
repayment of principal on October 1, 1998.
In August 1998, the Bank extended a previous
waiver of the Term Loan's financial ratio
covenants, agreed to waive principal
payments of $350 per month from August 1
through December 31, 1998 and extended the
maturity of the Interim Term Loan (the
"Forbearance Agreement"). In January 1999,
the Bank extended the Forbearance Agreement
through April 1, 1999. On February 19, 1999,
in conjunction with the sale of Retconn and
ST and the repayment of $15,050 of Bank Term
Debt, the Bank extended the Forbearance
Agreement through June 30, 1999.
F-11
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
(b) In January 1997, the Company entered into a
$15,000 line of credit ("Line of Credit")
with the Bank. The Line of Credit originally
was to expire in February 1999 and includes
a standby letter of credit guaranteeing
certain ISP debt in the amount of S$5,000
(approximately $3,000 at December 31, 1998).
Interest is payable monthly at the lower of
the Eurodollar rate plus 2.25% or the Bank's
loan pricing rate (7.75% at December 31,
1998). To support its working capital
requirements and for general corporate
purposes, the Company borrowed $11,800 under
its Line of Credit and did not have any
drawings under the standby letter of credit
at December 31, 1998. The remaining
availability at December 31, 1998 was $200.
In conjunction with the Forbearance
Agreement described above, the Bank extended
the maturity of the Line of Credit through
June 30, 1999. On February 19, 1999, the
Company repaid an amount of $7,141 of
principal outstanding under the Line of
Credit.
As of December 31, 1998 and January 31, 1999
the Company was in default of certain
financial ratio covenants with the Bank. The
Bank has agreed to grant a waiver for these
periods in exchange for a fee from the
Company, which fee has not been paid. With
respect to this default, the Company
believes that the Bank will not call the
Term Loan and the Line of Credit prior to
June 30, 1999. The Company continues to make
monthly interest payments and is currently
pursuing a number of courses of action to
restructure or refinance its debt with the
Bank and the Consignment Agreement described
in Note 9. These include continuing
negotiations with the Bank, discussions with
other prospective lenders and investigating
the sale of an additional subsidiary as a
means of paying its debt obligations.
(c) In 1997, ISP entered into a S$19,700
(approximately $11,600 at December 31, 1998)
credit facility with a Singapore financial
institution in order to acquire certain
equipment, acquire a building, provide for
an overdraft facility and to provide a
multi-currency letter of credit facility.
Amounts borrowed under the facility are
subject to availability restrictions and
bear interest at an average rate of
approximately 6.75%. As described above, up
to S$5,000 (approximately $3,000) of this
credit facility is guaranteed by a standby
letter of credit with the Bank. At December
31, 1998, ISP has outstanding S$7,554
(approximately $4,578) under the facility.
ISP is currently in discussions with its
bank regarding a possible restructuring of
these facilities due to difficulties in
meeting the repayment terms through cash
flow from operations.
(d) As described in Note 2, the Company issued
notes payable to the former shareholders of
ST. The notes bear interest, payable
quarterly, at 7% per annum. The principal on
the notes is payable in 20 consecutive
quarterly installments of $100, which
commenced November 1, 1997. These notes were
assumed by the purchaser of the Company's
Retconn and ST businesses on February 19,
1999, as described in Note 15.
(e) In conjunction with the acquisition of a
building, the Company entered into a term
loan with the Bank on November 4, 1996 in
the principal amount of $1,760. The loan
bears interest at the Bank's loan pricing
rate and is payable in 120 consecutive
monthly installments of $15, plus interest,
which commenced on December 1, 1996.
(f) In conjunction with the acquisition of a
building, the Company entered into a term
loan with a foreign bank in August 1998 in
the principal amount of 1,300 Dutch Guilders
(approximately $693 as of December 31,
1998). The loan bears interest at 5.25% for
three years which increases to 5.5% for the
remaining life of the loan and is payable in
quarterly installments of approximately $9,
plus interest, which commenced on December
15, 1998. In addition, the Company entered
into a 1,000 Dutch Guilder (approximately
$531 as of December 31, 1998) overdraft
facility with the foreign bank which is
collateralized by accounts receivable.
Interest is payable monthly at the rate of
1.75% plus the central banks' promissory
note discount rate. At December 31, 1998
there were no amounts outstanding under this
facility.
F-12
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
(g) Because the interest rates will change with
changes in the prime rate and the Eurodollar
rate, the fair value of the bank debt is
equal to the carrying amount.
(h) Based on market rates currently available to
the Company for loans with similar terms and
maturities, the fair value of the long-term
debt does not vary significantly from the
carrying amount.
Maturities of long-term debt and short-term
obligations are as follows:
Year ending December 31,
1999 $29,393
2000 1,480
2001 1,480
2002 1,480
2003 567
Thereafter 1,650
------------------------------------------------
$36,050
================================================
The above bank loan agreements provide, among
other things, that the Company is subject to
restrictions related to the issuance of additional
indebtedness, additional liens and security
interests, capital expenditures and the payment of
dividends. In addition, the above loans are
collateralized by a blanket lien on substantially
all the Company's assets. In addition, the loan
agreements provide that the Company maintain
certain financial ratios.
7. OBLIGATIONS UNDER The Company is the lessee of property and
CAPITAL LEASES: equipment acquired under capital leases
expiring in various years through 2003.
Future lease payments under capital leases are as
follows:
Year ending December 31,
1999 $ 3,254
2000 3,032
2001 2,341
2002 1,358
2003 476
-------------------------------------------------
10,461
Less amount representing interest 1,415
-------------------------------------------------
9,046
Less current portion 2,648
-------------------------------------------------
$ 6,398
=================================================
F-13
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
Interest rates on these capital leases range from
7.4% to 11% per annum.
8. INCOME TAXES: The provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998
consists of the following components:
Year ended December 31, 1996 1997 1998
----------------------------------------------------------------------------------------
Current:
Federal $1,349 $ 907 -
State 190 249 $ 42
Deferred:
Federal 742 948 (4,876)
State 164 210 (113)
Foreign - (100) (553)
----------------------------------------------------------------------------------------
$2,445 $2,214 $(5,500)
========================================================================================
The provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998
differs from the amount computed using the federal
statutory rate of 34% as a result of the
following:
Year ended December 31, 1996 1997 1998
----------------------------------------------------------------------------------------
Tax at federal statutory rate 34.0% 34.0 % (34.0)%
Change in valuation allowance - - 4.3
State tax credits - - (1.5)
State income tax provision (benefit), net
of federal tax effect 3.8 5.0 (3.3)
Effect of permanent differences 1.1 1.4 1.8
Other .6 (2.1) 1.6
----------------------------------------------------------------------------------------
39.5% 38.3% (31.1)%
========================================================================================
The tax effects of available tax carryforwards and
temporary differences that give rise to the net
short-term deferred income tax asset are presented
below:
December 31, 1998
----------------------------------------------------------------------------------------
Federal net operating loss carryforward $5,334
Other 309
----------------------------------------------------------------------------------------
$5,643
========================================================================================
F-14
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
The tax effects of available tax carryforwards,
temporary differences and foreign currency
translation adjustments that give rise to the net
long-term deferred income tax liabilities are
presented below:
December 31, 1997 1998
----------------------------------------------------------------------------------------
Deferred income tax liabilities:
Accelerated depreciation $1,674 $3,151
Basis difference in amortization of intangibles 954 920
----------------------------------------------------------------------------------------
Total deferred income tax liabilities 2,628 4,071
----------------------------------------------------------------------------------------
Deferred income tax assets:
Net loss in foreign subsidiaries 100 686
State tax, net operating loss carryforward - 649
State investment tax credit carryforward - 790
Accumulated translation adjustment 385 300
Other - 74
----------------------------------------------------------------------------------------
Total deferred income tax asset 485 2,499
Less valuation allowance - (757)
----------------------------------------------------------------------------------------
Net deferred income tax asset 485 1,742
----------------------------------------------------------------------------------------
Net long-term deferred income tax liabilities $2,143 $2,329
========================================================================================
At December 31, 1998, the Company has a $15,689
federal net operating loss carryforward available
to offset future taxable income through 2013. The
Company also has state net operating loss
carryforwards aggregating $14,106 which expire in
2003. State investment tax credit carryforwards
aggregating $790 at December 31, 1998 expire at
various dates from 2003 through 2013. A valuation
allowance has been established for the tax effect
of those state net operating loss carryforwards
and state investment tax credit carryforwards
which are not expected to be realized.
The Company files a consolidated federal income
tax return which includes the results of all its
domestic subsidiaries and separate state and local
income tax returns.
For the year ended December 31, 1996, the Company
recognized for income tax purposes a tax benefit
of $97 for compensation expense related to its
incentive stock option plan for which no
corresponding charge to operations has been
recorded. Such amount has been added to additional
paid-in capital for the year ended December 31,
1996. No tax benefit was recorded for the years
ended December 31, 1997 and 1998.
9. COMMITMENTS, The Company has noncancelable operating leases
CONTINGENCIES AND expiring through 2004 for the rental of office and
RELATED PARTY manufacturing facilities. The leases also require
TRANSACTIONS: payments for real estate taxes and other operating
costs. The Company also leases land at one of its
foreign subsidiaries. This lease expires in
January 2026 with an option to renew for an
additional 29 years.
F-15
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
Approximate minimum future rental payments,
exclusive of payments for real estate taxes and
other operating costs under these leases, are as
follows:
Year ending December 31,
1999 $ 665
2000 497
2001 510
2002 524
2003 538
Thereafter 1,519
----------------------------------------------------------------------------------------
$4,253
========================================================================================
The amounts reflected in the above table exclude
commitments which were eliminated upon the sale of
Retconn and ST, described in Note 15.
Rent expense charged to operations for the years
ended December 31, 1996, 1997 and 1998 amounted to
approximately $466, $669, and $853, respectively.
During 1997, a company owned by the former sole
shareholder of Polese acquired machinery and
equipment from the Company for $254. The Company
recognized a $46 gain on this sale.
The Company has employment agreements with 5
shareholders (the "Shareholders"), and 10 other
employees, expiring in various years through 2003.
The approximate aggregate commitment for future
salaries, excluding bonuses, under these
employment agreements is as follows:
Year ending December 31,
1999 $1,402
2000 416
2001 120
Thereafter 187
----------------------------------------------------------------------------------------
$2,125
========================================================================================
The amounts reflected in the above table exclude
commitments which were eliminated upon the sale of
Retconn and ST, described in Note 15.
The Shareholders have agreed not to engage in a
business that is competitive with the Company
during the term of their agreement and for a
period of one year thereafter.
In 1996, the Company entered into a consignment
agreement (the "Consignment Agreement") with a
bank. The Consignment Agreement, which was
subsequently amended, expires June 30, 1999. Under
the Consignment Agreement, the Company purchases
gold used in its manufacturing of materials.
F-16
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
The Consignment Agreement provides for gold on
consignment not to exceed the lesser of 5,000 troy
ounces of gold or gold having a market value of
$1,870. At December 31, 1998, the Company's
obligation under the Consignment Agreement was
approximately 3,927 troy ounces of gold valued at
approximately $1,130. The Consignment Agreement
requires the Company to pay a consignment fee of
5% per annum based upon the value of all gold
consigned to the Company.
The Company has capital commitments at December
31, 1998 of approximately $1,121 for the
acquisition of machinery and equipment.
The Company received notice on January 5, 1998
that a shareholder class action lawsuit was filed
during 1997 against the Company, its chief
executive officer and its then chief financial
officer. The complaint alleges, among other
things, that the Company, intentionally or
recklessly, failed to disclose adverse material
financial information regarding its business in
the fourth quarter of 1996. On May 5, 1998, the
United States District Court for the Eastern
District of Pennsylvania dismissed the case. An
appeal of the order dismissing this lawsuit was
not filed within the period permitted for such
appeal.
Separately, the Securities and Exchange Commission
(the "SEC") is conducting a private investigation
pursuant to a formal order to determine whether
any persons may have violated the federal
securities laws in connection with the purchase or
sale of the Company's securities prior to the
December 30, 1996 announcement relating to its
anticipated financial results for the fourth
quarter of fiscal 1996. As a general matter, the
SEC takes the position that its investigation
should not be construed as an indication that any
violations of law have occurred or as an adverse
reflection upon any person or security. The
Company is cooperating fully with the SEC in its
investigation which commenced in early 1998. Since
June 1998, the Company has not received any
additional requests for information or
communications from the SEC concerning this
matter.
10. CAPITAL TRANSACTIONS: The Company has an incentive stock option plan
(the "Incentive Plan"), as amended, under which
900,000 common shares have been reserved for
future issuance. The Incentive Plan provides for
the sale of shares to employees of the Company at
a price not less than the fair market value of the
shares on the date of the option grant, provided
that the exercise price of any option granted to
an employee owning more than 10% of the
outstanding common shares of the Company may not
be less than 110% of the fair market value of the
shares on the date of the option grant. The term
of each option and the manner of exercise is
determined by the board of directors, but in no
case can the options be exercisable in excess of
10 years beyond the date of grant. In May 1995,
the Company adopted a nonqualified stock option
plan (the "Nonqualified Plan"), as amended, under
which 300,000 shares have been reserved for future
issuance.
At December 31, 1998, options to purchase 495,025
and 85,000 shares of common stock (excluding
lapsed shares) have been granted under the
Incentive Plan and the Nonqualified Plan,
respectively, since the inception of both plans.
In addition, at December 31, 1998, options to
purchase 188,750 shares of
F-17
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
common stock have been granted outside the
Incentive Plan and the Nonqualified Plan at a
price equal to the fair market value of the shares
at the date of grant.
A summary of the status of the Company's options
as of December 31, 1996, 1997 and 1998, and
changes during the years then ended is presented
below:
Year Ended December 31, 1996 1997 1998
----------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------
Outstanding at
beginning of
year 408,000 $4.86 510,000 $7.00 644,950 $7.69
Canceled (5,500) 7.84 (23,000) 8.06 (555,550) 7.73
Granted 256,750 8.81 178,050 9.55 403,525 4.48
Exercised (149,250) 4.22 (20,100) 6.37 - N/A
----------------------------------------------------------------------------------------
Outstanding at
end of year 510,000 $7.00 644,950 $7.69 492,925 $5.01
========================================================================================
Options exercisable
at year-end 332,250 499,900 386,050
========================================================================================
Weighted-average
fair value of
options granted
during the year $4.39 $4.88 $4.49
========================================================================================
The Board of Directors approved a stock option
exchange and repricing program pursuant to which,
on December 1 and December 10, 1998, certain
holders of qualified and nonqualified options were
eligible to reduce by 1/2 the number of their
existing shares under option in exchange for
repriced options at a price of $3.00 per share.
The market price of the underlying shares was
$2.47 and $2.94 on December 1 and December 10,
respectively, and therefore, no compensation
expense has been recorded by the repricing. The
repriced options under the program continued the
terms and vesting periods as the underlying
exchanged options. Of the 695,700 options
outstanding as of December 1, 1998 approximately
491,800 shares were eligible for the exchange and
repricing program. Holders exchanged a total of
403,550 shares under option resulting in a total
of 201,775 repriced shares which are included for
purposes of the accompanying table as shares
canceled and granted, respectively, during 1998.
F-18
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
The following table summarizes information about
fixed stock options outstanding at December 31,
1998:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
----------------------------------------------------------------------------------------
$ 1.85 - $ 3.88 242,025 6.8 $ 2.99 200,650 $ 2.99
$ 4.26 - $ 6.63 140,500 4.9 5.40 80,000 4.80
$ 7.69 - $ 8.25 57,400 4.2 8.06 52,400 8.10
$ 8.88 - $ 9.88 43,000 4.6 9.52 43,000 9.52
$11.63 10,000 8.6 11.63 10,000 11.63
----------------------------------------------------------------------------------------
$1.85 - $11.63 492,925 5.8 $ 5.01 386,050 $ 5.01
=========================================================================================
The Company has elected, in accordance with the
provisions of SFAS No. 123, to apply the current
accounting rules under APB Opinion No. 25 and
related interpretations in accounting for its
stock options and, accordingly, has presented the
disclosure-only information as required by SFAS
No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the
options granted at the grant date as prescribed by
SFAS No. 123, the Company's net income and
earnings per common share for the years ended
December 31, 1996, 1997 and 1998 would approximate
the pro forma amounts indicated in the table
below.
Year ended December 31, 1996 1997 1998
----------------------------------------------------------------------------------------
Net income (loss) - as reported $3,805 $3,793 $(11,958)
=========================================================================================
Net income (loss) - pro forma $3,117 3,245 $(12,111)
=========================================================================================
Earnings (loss) per share - as reported:
Basic $ .64 $ .62 $ (1.98)
Diluted $ .62 $ .61 $ (1.98)
=========================================================================================
Earnings (loss) per share - pro forma:
Basic $ .52 $ .53 $ (2.00)
Diluted $ .51 $ .52 $ (2.00)
=========================================================================================
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for the years
ended December 31, 1996, 1997 and 1998,
F-19
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
respectively: expected volatility of 56.9%, 57%
and 66.6%, respectively; risk-free interest rates
5.8%, 6.3% and 5.6%, respectively; and expected
lives of 4.2 years, 3.5 years and 4.9 years,
respectively.
11. SEGMENT INFORMATION: In fiscal 1998, the Company adopted SFAS No. 131
"Disclosure about Segments of an Enterprise and
Related Information". The accounting policies of
the segments are described in Note 1, "Principal
Business Activities and Summary of Significant
Accounting Policies". The Company evaluates
performance of its segments and allocates
resources to them based on sales and operating
income. The Company operates primarily in two
industry segments, the Materials Group and the
Services Group. The tables below present
information about reported segments:
Materials Services Corporate and Consolidated
Year Ended December 31, 1996 Group Group Reconciling Items Total
---------------------------- --------- -------- ----------------- ------------
Revenue 33,140 12,887 - 46,027
Cost of Goods Sold and Services 23,552 7,165 - 30,717
Performed
Gross Profit 9,588 5,722 - 15,310
Operating Expenses 6,448 1,755 - 8,203
Income from Operations 3,140 3,967 - 7,107
Segment Assets 52,841 25,571 (21,923) 56,489
Capital Expenditures 3,671 4,272 - 7,943
Depreciation Expense 1,540 700 - 2,240
Materials Services Corporate and Consolidated
Year Ended December 31, 1997 Group Group Reconciling Items Total
---------------------------- --------- -------- ----------------- ------------
Revenue 48,029 23,047 - 71,076
Cost of Goods Sold and Services 33,185 17,514 - 50,699
Performed
Gross Profit 14,844 5,533 - 20,377
Operating Expenses 8,311 3,681 - 11,992
Income from Operations 6,533 1,852 - 8,385
Segment Assets 71,844 47,390 (27,369) 91,865
Capital Expenditures 2,734 10,385 - 13,119
Depreciation Expense 1,935 2,137 - 4,072
Materials Services Corporate and Consolidated
Year Ended December 31, 1998 Group Group Reconciling Items Total
---------------------------- --------- -------- ----------------- ------------
Revenue 47,524 18,379 - 65,903
Cost of Goods Sold and Services 37,982 15,143 - 53,125
Performed
Gross Profit 9,542 3,236 - 12,778
Operating Expenses 12,319 14,686 - 27,005
Loss from Operations (2,777) (11,450) - (14,227)
Segment Assets 76,688 36,641 (31,005) 82,324
Capital Expenditures 2,036 1,027 - 3,063
Depreciation Expense 2,460 2,722 - 5,182
The Company's areas of operation are principally
in the United States. Operations outside the
United States are worldwide but are primarily in
Europe, North Africa and Asia. No single foreign
country or geographic area is significant to the
consolidated operations. Revenue from a single
customer accounted for 11% of the Company's total
revenue for the years ended December 31, 1996 and
1997. Revenue from a different customer accounted
for approximately 10% of the Company's total
revenue for the year ended December 31, 1998.
F-20
12. EXPORT REVENUE: For the years ended December 31, 1996, 1997 and
1998, export revenue to unaffiliated customers
amounted to approximately 10%, 15% and 15%,
respectively, of the Company's total revenue.
13. SPECIAL CHARGES: In 1998, the Company recorded special charges of
$11,217 ($7,740 after tax or $1.28 per share). The
Company recorded $1,950 of this charge during the
first quarter and the balance of $9,267 during the
fourth quarter of the year. The majority of this
charge relates to a review of the carrying values
of the Company's services group assets and the
closing of a services group plant in the first
quarter of 1998.
During the first quarter of 1998, the Company
recorded this charge of $1,950 in conjunction with
a restructuring of the Services Group that
included closing its Texas operation and
consolidating domestic business and equipment into
the Group's Rhode Island facility. During 1998,
the Company paid all of the $1,950 charges
recorded in the first quarter. The Company
recorded an additional $230 of charges in the
fourth quarter related to a leased facility for
costs which continued after the Texas facility was
vacated.
As a result of the Services Group's inability to
achieve the improvements anticipated by the
restructuring plan, primarily due to a more severe
than anticipated market decline, the division
continued operating at a loss in 1998. This
triggered an impairment and utilization review of
the Services Group's long-lived assets. The
Company prepared revised projections by customer
and product line which provided the basis for
determining the continued usability and carrying
value of its long-term assets. The Company
identified approximately $4,700 of excess services
group equipment that was written down to estimated
fair value, less cost of disposal. In addition,
the Company wrote down approximately $2,700 of
goodwill associated with the Texas facility
customers and lines of business that have been
eliminated. Due to continuing financial problems
of the Services Group's 51%-owned Singapore
operation, the Company recorded an asset
impairment of $1,000 in response to uncertainty
regarding the ultimate recoverability of its
investment.
The Company's Materials Group recorded a special
charge of $620 in the fourth quarter, consisting
of a write-down of $473 in goodwill associated
with a line of business that has been eliminated
and the write-down of $147 of unusable equipment.
F-21
SEMX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
================================================================================
14. ALLOWANCE FOR Information relating to the allowance for doubtful
DOUBTFUL accounts is as follows:
ACCOUNTS:
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
---------------------------------------------------------------------------------------
Year ended December 31,
1996 $ 86 $ 66 $ 9 (a) $143
=========================================================================================
1997 $143 $103 $ 65 (a) $181
=========================================================================================
1998 $181 $188 $124 (a) $245
=========================================================================================
(a) Write-off of uncollectible accounts
receivable.
15. SUBSEQUENT EVENTS: In February 1999, the Company sold its connector
businesses, Retconn and ST, to Litton Corporation
("Litton"). Litton acquired the specified assets
and assumed certain liabilities of Retconn, as
defined in the purchase agreement, in
consideration for a cash payment to the Company of
$23,871. The liabilities assumed by Litton
amounted to approximately $3,500. The purchase
price is subject to adjustment for changes in
Retconn's closing date balance sheet. In addition,
the Company is prevented from directly competing
in the connector business for a period of three
years.
On February 19, 1999, the Company entered into an
agreement with the Bank concerning the
distribution of $23,871 in proceeds from the sale
of Retconn. Pursuant to the agreement, the Company
repaid $15,050 of term indebtedeness and $7,141 of
revolving credit borrowings. In addition, the
Company paid approximately $1,680 of
transaction-related fees and severance payments.
The agreement also provided for the Bank's
forbearance of noncompliance with certain existing
covenants and an extension of its revolving credit
and interim term loan facilities through June 30,
1999.
The accompanying pro forma balance sheet presents
the financial position of the Company as it would
have appeared on December 31, 1998 had the sale of
Retconn and the repayment of debt occurred on that
date.
F-22