SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10938
SEMX CORPORATION
(formerly known as SEMICONDUCTOR PACKAGING MATERIALS CO., INC.)
(Name of Business Issuer in its charter)
Delawa 13-3584740
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1 LABRIOLA COURT, ARMONK, NY 10504
(Address of principal executive offices, including zip code)
(914) 273-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
The number of shares outstanding of the Registrant's sole class of
common stock, as of June 30, 1998 was 6,041,016 shares.
1
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheet at
June 30, 1998 and December 31, 1997. 3
Consolidated Statement of Operations and
Comprehensive Income (Loss) for the three and six
Months ended June 30, 1998 and 1997. 4
Consolidated Statement of Cash Flows
for the three and six-months ended
June 30, 1998 and 1997. 5
Consolidated Statement of Shareholders' Equity
for the six-months ended June 30, 1998 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote 12-13
Of Security Holders
SIGNATURE PAGE 14
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2
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SEMX Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31,
ASSETS 1998 1997
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,592 $ 2,260
Accounts receivable, less allowance for doubtful accounts of $260 and $181 respectively 8,902 10,788
Inventories 15,255 12,370
Prepaid expenses and other current assets 2,934 2,079
-------- --------
Total current assets 28,683 27,497
-------- --------
Property and Equipment-at cost, net of accumulated depreciation and amortization of $12,754
and $10,163, respectively. 42,201 42,031
-------- --------
Other Assets-net of accumulated amortization
Technology rights and intellectual property 1,068 1,077
Goodwill 19,438 19,788
Other 1,671 1,472
-------- --------
Total other assets 22,177 22,337
-------- --------
Total Assets $ 93,061 $ 91,865
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,871 $ 7,322
Accrued expenses 3,014 2,602
Current portion of obligations under capital leases 2,264 2,142
Current portion of long-term debt 17,479 5,944
-------- --------
Total current liabilities 28,628 18,010
-------- --------
Deferred income taxes 2,036 2,143
Long-term debt 18,782 26,670
Obligations under capital leases 5,821 6,047
-------- --------
Total Liabilities 55,267 52,870
-------- --------
Minority Interest in Subsidiary 1,223 1,537
-------- --------
Shareholders' Equity:
Preferred stock-$.10 par value;authorized 1,000,000 shares, none issued 0 0
Common stock-$.10 par value; authorized 20,000,000
shares, issued 6,375,616 and 6,375,616 shares, respectively 638 638
Additional paid-in-capital 28,199 28,199
Accumulated other comprehensive income (437) (405)
Retained earnings 8,383 9,026
-------- --------
36,783 37,458
Less: Treasury stock: 334,600 and 300,000 shares, respectively, at cost 212 0
-------- --------
Shareholders' Equity 36,571 37,458
-------- --------
Total Liabilities And Shareholders' Equity $ 93,061 $ 91,865
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
page 3
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SEMX Corporation and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
(Dollar amounts in thousands: per share amounts in dollars)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 11,030 $ 11,021 $ 25,484 $ 20,060
Service Revenue 3,969 5,908 9,407 10,776
----------- ----------- ----------- -----------
Total Revenue 14,999 16,929 34,891 30,836
Cost of Goods Sold 7,602 7,604 17,395 14,127
Cost of Services Performed 3,172 4,545 7,814 8,016
----------- ----------- ----------- -----------
Total 10,774 12,149 25,209 22,143
----------- ----------- ----------- -----------
Gross Profit 4,225 4,780 9,682 8,693
Selling, General and Administrative Expense 3,376 2,966 7,307 5,677
Restructuring Charge 0 0 1,950 0
----------- ----------- ----------- -----------
Operating Income 849 1,814 425 3,016
Interest Expense (Net) 889 699 1,708 1,215
----------- ----------- ----------- -----------
Income (Loss) Before Provision for Income
Taxes and Minority Interest in Loss of
Consolidated Subsidiary (40) 1,115 (1,283) 1,801
Provision (Credit) for Income Taxes 18 404 (434) 685
----------- ----------- ----------- -----------
Income (Loss) Before Minority Interest in Loss
of Consolidated Subsidiary (57) 711 (849) 1,116
Minority Interest in Loss of Consolidated Subsidiary 73 153 206 229
----------- ----------- ----------- -----------
Net Income (Loss) $ 16 $ 864 $ (643) $ 1,345
----------- ----------- ----------- -----------
Other Comprehensive Income:
Foreign currency translation net of tax benefit of
$3 and $54; and $17 and $163,
respectively (6) (104) (32) (317)
Comprehensive Income $ 10 $ 760 $ (675) $ 1,028
=================================================== =========== =========== =========== ===========
Basic Income (Loss) per Common Share $ .00 $ .14 $ (.11) $ .22
Diluted Income (Loss) per Common Share $ .00 $ .14 $ (.11) $ .22
Weighted Average Number of Common
Shares Outstanding - Basic 6,058,364 6,068,516 6,066,990 6,067,035
Weighted Average Number of Common
Shares Outstanding - Diluted 6,111,653 6,176,518 6,066,990 6,198,048
</TABLE>
See Notes To Consolidated Financial Statements
page 4
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SEMX Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 16 $ 864 $ (643) $ 1,345
Adjustments To Reconcile Net Income To Net
Cash Used In Operating Activities:
Loss on Sales of Property and Equipment 0 0 0 (46)
Depreciation And Amortization of Property And Equipment 1,270 1,170 2,565 2,167
Other Amortization 262 191 523 375
Increase (Decrease) in Deferred Income Taxes 31 0 (107) 0
Minority Interest in Subsidiary Loss (73) (153) (206) (229)
Changes In Operating Assets And Liabilities:
(Increase) Decrease In Accounts Receivable 2,475 (1,188) 1,871 (1,562)
Increase In Inventory (1,645) (662) (2,879) (1,178)
(Increase) Decrease In Prepaid Expenses And
Other Current Assets 623 (394) 522 147
Increase (Decrease) In Accounts Payable (235) (902) (1,435) 201
Increase (Decrease) In Accrued Expenses (1,497) (187) 414 (118)
Increase (Decrease) In Income Taxes Payable (245) 113 (735) (1,262)
------- ------- ------- --------
Net Cash Provided By (Used In) Operating Activities 982 (1,148) (110) (160)
------- ------- ------- --------
Cash Flows From Investing Activities:
Purchase Of Property And Equipment (873) (806) (1,983) (7,854)
Proceeds From Sale of Property and Equipment 0 15 0 275
(Increase) Decrease In Other Assets (349) 382 (301) (279)
Acquisition of Subsidiary (391) (104) (391) (13,127)
------- ------- ------- --------
Net Cash Used In Investing Activities (1,613) (513) (2,675) (20,985)
------- ------- ------- --------
Cash Flows From Financing Activities:
Purchase of Treasury Stock (180) 0 (212) 0
Proceeds From Exercise Of Stock Options 0 0 0 88
Proceeds From Long-Term Debt 1,064 1,224 1,064 18,606
Borrowing Under Revolving Credit 2,600 2,475 5,650 3,775
Payment Under Capital Leases (377) (417) (885) (761)
Payment Under Term Loan Agreements (2,753) (1,154) (3,343) (1,608)
Increase in Other Notes Payable (137) 0 (91) 0
------- ------- ------- --------
Net Cash Provided By Financing Activities 217 2,128 2,183 20,100
------- ------- ------- --------
Effect of Exchange Rate Change on Cash (56) 40 (66) (17)
Net Increase (Decrease) In Cash (470) 507 (668) (1,062)
Cash At Beginning Of Period 2,062 1,962 2,260 3,531
------- ------- ------- --------
Cash At End Of Period $ 1,592 $ 2,469 $ 1,592 $ 2,469
======= ======= ======= ========
Supplemental schedule of noncash investing and
financing activity:
Machinery and equipment acquired under capital leases $ 230 $ 0 $ 781 $ 0
</TABLE>
See Notes to Consolidated Financial Statements
page 5
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SEMX Corporation and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the six months ended June 30, 1998
(Unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED TREASURY STOCK SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME* EARNINGS SHARES AMOUNT EQUITY
---------- ----- -------- ------ ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 6,375,616 $ 638 $ 28,199 $ (405) $ 9,026 300,000 $ 0 $ 37,458
Treasury Stock 34,600 $ (212) (212)
Net Income (Loss) (643) (643)
Other
Comprehensive
Income* (32) (32)
---------- ----- -------- ------ ------- ------- ------ --------
Balance at
June 30, 1998 6,375,616 $ 638 $ 28,199 $ (437) $ 8,383 334,600 $ (212) $ 36,571
========== ===== ======== ====== ======= ======= ====== ========
</TABLE>
* Other Comprehensive Income is inclusive of the Foreign Currency
Translation Adjustment
See Notes To Consolidated Financial Statements
page 6
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SEMX Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries and its majority owned subsidiary. The
consolidated balance sheet as of June 30, 1998, the consolidated statement
of operations and comprehensive income for the three and six-months ended
June 30, 1998 and 1997, the consolidated statement of cash flows for the
three and six-months ended June 30, 1998 and 1997 and the consolidated
statement of shareholders' equity for the six-months ended June 30, 1998,
have been prepared by the Company and are unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at June 30, 1998 and for
all periods presented have been made.
2. Earnings per share - Earnings per share for the periods presented are
computed on a basic and diluted basis in accordance with SFAS No. 128.
Basic earnings per common share is computed using the weighted average
number of common shares outstanding. Diluted earnings per common share is
computed using the weighted average number of common shares outstanding
plus the shares that would be outstanding assuming the exercise of
employee stock options and stock warrants during the periods presented.
3. In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. The Company has elected to adopt SFAS
130 effective January 1, 1998.
4. See the Company's Annual Report and Form 10-K for the year ended December
31, 1997 for additional disclosures relating to the Company's financial
statements.
5. On January 23, 1997, American Silicon Products, Inc. ("ASP"), a wholly
owned subsidiary of the Company, acquired all of the assets of Silicon
Materials Service of Garland, Texas and acquired 100% of the outstanding
stock of Silicon Materials Service, B.V. (collectively "SMS"), a company
which polishes and reclaims silicon wafers, for a purchase price of
approximately $12,972,000 in cash. This business combination was accounted
for as a purchase. In addition, the Company incurred approximately
$2,000,000 of costs associated with the acquisition of SMS. The fair value
of the assets acquired, including approximately $2,923,000 allocated to
goodwill, which is being amortized over 25 years, amounted to $15,609,000
and liabilities assumed amounted to $637,000. On April 17, 1998 the
Company announced the restructuring of its Semiconductor Services Group,
including the closing of the Garland, Texas plant of ASP, a wholly owned
subsidiary of SEMX Corporation. A restructuring charge of $1,950,000 was
taken against Operating Income in the month of March 1998 and is reflected
in the presented year to date financials. As of June 30, 1998, $1,182,557
has been incurred against the restructuring charge.
6. Effective July 30, 1997, Retconn Incorporated ("Retconn"), a wholly owned
subsidiary of the Company, acquired 100% of the outstanding stock of S.T.
Electronics, Inc. ("S.T."), a company which manufactures and markets
custom cable and cable harness assemblies, for $1,000,000 in cash plus
approximately $54,000 based on S.T.'s closing net worth and $2,000,000 in
notes. In addition, Retconn acquired certain proprietary rights from the
S.T. shareholders for $200,010. The notes are payable in twenty equal
quarterly installments which began on November 1, 1997 together with
interest on the unpaid principal at the rate of 7% per annum. This
business combination was accounted for as a purchase. In addition, the
Company incurred approximately $300,000 in estimated closing expenses. The
fair value of the assets acquired, including $2,788,000 allocated to
goodwill, which is being amortized over 25 years, amounted to $4,231,000
and liabilities assumed amounted to $877,000.
7. Effective August 28, 1996, the Company entered into a joint venture
agreement (see ISP Joint Venture herein) to develop a silicon wafer
polishing and reclaiming facility in Singapore. The jointly owned
Singapore corporation, International Semiconductor Products Pte Ltd
("ISP"), 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 May 12, 1998 the Company invested an additional $385,000 as a
redeemable convertible bond ("RCB"). The RCB interest rate is 8% per annum
with the note payable April 15, 2001. The RCB may be converted 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/accrued interest. The RCB
instrument ranks senior to all other existing shareholder loans. If the
RCB is fully converted the additional shares will be issued and the
Company's equity level will
7
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increase from 50.1% to 69%. The Company has the option to convert the RCB
into ordinary shares at any time during the term of the bond upon written
notice.
8. The comparative financial statements for 1997 have been reclassified to
conform with the current periods presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
Portions of the narrative set forth in this 10-Q that are not historical in
nature are forward looking statements. The Company's actual performance may
differ materially from that contemplated by the forward looking statements as a
result of a variety of factors that include, but are not limited to, the general
economic or business climate, business conditions of the microelectronic and
semiconductor markets and wireless communications industry which the Company
serves, the timely and successful completion of the Company's capital and plant
expansion programs, economic volatility in Asian markets and the ability of the
Company to obtain necessary financing when required.
RESULTS OF OPERATIONS (for the three and six-month periods ended June 30, 1998
compared to the three and six-month period ended June 30, 1997)
Revenue:
Total revenue for the three-month period ended June 30, 1998 decreased
$1,930,000 or 11% and increased $4,055,000 or 13% for the six-month period as
compared to the comparable 1997 period.
The Materials Group sales increased $9,000 for the second quarter and $5,424,000
or 27% for the six-month period ended June 30, 1998 over the comparable 1997
periods. The Materials Group includes SPM, Polese and Retconn. Sales for the
second quarter 1998 for the Materials Group increased by $11,000 for
Semiconductor Packaging Materials Co. ("SPM"), decreased by $1,506,000 or 33%
for Polese and increased by $1,504,000 or 47% for Retconn over the comparable
1997 period. The decline in sales at Polese for the second quarter was primarily
due to lower than anticipated sales from an ultimate major customer who adjusted
their inventory levels based upon reduced sales for the cellular infrastructure
market. Sales for the second quarter for Retconn increased primarily due to
increased product demand as well as the inclusion of S.T. Electronics which was
acquired on July 30, 1997. The Company's Materials Group's increased sales for
the six-month period ended June 30, 1998 of $5,424,000 was due to an increase of
$1,292,000 or 17% at Polese Company, an increase of $3,406,000 or 54% at
Retconn, and an increase of $726,000 or 12% at SPM from the comparable 1997
period. The Materials Group's sales increase for the six-month period ended June
30, 1998 was primarily due to an overall increase in demand for its products by
the communication and computer industries.
The Company's Service Group revenues decreased $1,939,000 and $1,369,000 or 33%
and 13%, respectively, in the three and six-month period ended June 30, 1998 as
compared to the comparable 1997 periods. The decline in the Service Group's
revenues is primarily due to the aggregate softness in demand for reclaimed
wafers in addition to price competition. The Service Group's revenue from ASP's
Rhode Island and Netherlands operations, decreased a total of $2,413,000 and
$2,080,000, or 41% and 19%, for the three and six-month period ended June 30,
1998, respectively, as compared to the comparable 1997 periods. The Service
Group's revenues exclude revenue of $1,074,000 for the three-months ending June
30, 1998 from the discontinued Texas operations which were accounted for on the
balance sheet restructuring reserve established in the first quarter 1998. ASP's
Netherlands and Texas operations were acquired on January 23, 1997 and,
therefore, revenues in the comparable periods of 1997 were only included from
the time of acquisition. On April 17, 1998, the Company announced that it was
closing its Texas operation and would consolidate all of ASP's domestic business
into its Rhode Island facility. The Company decided to close its Texas operation
to, among other things, improve the profitability of its Services Group. The
closing was completed on June 30, 1998. The consolidation of the equipment into
ASP's Providence and other facilities is continuing.
Although the Company's consolidated backlog as of June 30, 1998 was $18,565,000
and represents a 10% decrease since the beginning of the year, we are encouraged
by recent positive trend improvements in the backlog at Polese, Retconn, and
ASP. The Polese backlog at the end of the first quarter was $2,165,000 which has
improved to $4,139,000 or 91% as of June 30, 1998. The declining trend which
Retconn and ASP were experiencing since the beginning of 1998 appears to be
reversing in June 1998. During the first 5 months of 1998 Retconn's backlog
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continued to decline, but as of June 1998 has improved to nearly the backlog
that Retconn had at the beginning of the year. Retconn's backlog improvement was
primarily due to increased sales orders in the wire and harness product backlog
for S.T. Electronics which improved from $267,000 at December 31, 1997 to
$839,000 at June 30, 1998, a 214% improvement. The backlog for ASP which has
declined steadily during 1998 due to the softness in demand for reclaimed
wafers, appears to have reached a bottom in April 1998 with ASP's backlog
improving steadily in May and June 1998.
Direct sales of the Company's products into foreign markets accounted for 15%
and 14%, respectively, of consolidated revenue for the six-months ended June 30,
1997 and 1998. The Company currently maintains foreign manufacturing operations
in the Netherlands ("ASP B.V.") and in Singapore, International Silicon Products
Pte. Ltd. ("ISP"). In the three and six-month period ended June 30, 1998, the
Company derived revenue from ASP B.V. of $776,000 and $1,579,000, respectively,
and revenue from ISP of $494,000 and $731,000, respectively. Foreign sales made
through the Company's domestic operations are made through foreign
manufacturer's representatives and are priced and paid for in U.S. dollars.
Sales for ASP B.V. and ISP are conducted in the local currencies of Dutch
Guilders and Singapore Dollars respectively and account for 5% and 7% of the
consolidated revenue for the six-months ended June 30, 1997 and 1998,
respectively.
The Company believes that its revenue has been, and will continue to be affected
by the cyclical nature of the industries it serves.
Gross Profit:
Gross profit for the three and six-month period ended June 30, 1998 decreased
$555,000 or 12% and increased $989,000 or 11%, respectively, from the comparable
1997 periods. The Materials Group's gross profit for the three and six-month
period ended June 30, 1998 increased respectively by $11,000 and $2,156,000 or
0% and 36% from the comparable 1997 periods. The Materials Group's favorable
results are primarily due to increased sales for all subsidiaries within the
Materials Group due to an increased demand for its products by the communication
and computer industries. The Service Group's gross profit for the three and
six-month period ended June 30, 1998 gross profit decreased $566,000 and
$1,167,000, or 42% for both periods, respectively, from the comparable 1997
periods due to the lower volume of reclaimed wafers processed during the period
and increased price competition. Although the gross profit decreased at ASP due
to aggregate lower volumes and increased price competition, ISP's gross profit
increased $194,000 and $54,000, respectively, from the comparable 1997 periods
due to increased volume in the Singapore operation.
Gross Margins:
The Company's gross margins for the three and six-month period ended June 30,
1998 and June 30, 1997 remained constant at 28%. The Materials Group gross
margin remained constant at 31% for the quarter and increased from 30% to 32%
for the six-month period ended June 30, 1998 from the comparable 1997 periods.
The Service Group's gross margins decreased from 23% to 20% for the quarter and
decreased from 26% to 17% for the six-month period ended June 30, 1998 from the
comparable 1997 periods.
Selling, General and Administrative:
Selling, general and administrative ("SG&A") expenses in the three and six-month
period ended June 30, 1998 increased $410,000 and $1,630,000 or 14% and 29%,
respectively, over the comparable 1997 periods. The SG&A increase over the
comparable 1997 six-month period is primarily due to additional organizational
infrastructure at the operational level in the 1998 period which included an
increase in the sales force. SG&A expenses as a percentage of revenue increased
from 18% to 23% for the quarter and 18% to 21%, for the six-month period ended
June 30, 1998 from the comparable 1997 periods.
Restructuring Charge:
The increase shown for the six-month period ended June 30, 1998 includes a
one-time restructuring charge of $1,950,000 associated with the closing of ASP's
Texas operation and the relocation of the equipment and other assets.
Interest Expense (Net):
Net interest expense for the three and six-month period ended June 30, 1998
increased $190,000 and $493,000, respectively, from the comparable 1997 periods.
The increase in net interest expense is due to increased borrowings under the
Company's revolving credit facility to support the working capital needs of the
Company and due to increased interest costs associated with capital lease
obligations. The Company's borrowings under the revolving credit facility and
capitalized leases increased by $9.3 million from $10.3 million at June 30, 1997
to $19.6 million as of June 30, 1998.
9
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Provision (Credit) for Income Taxes:
A provision of $18,000 and credit of $434,000, respectively, for income taxes
has been made for the three and six-month periods ended June 30, 1998 as
compared to a provision of $404,000 and $685,000, respectively, for the
comparable 1997 periods. The credit for the current six-month period includes a
$759,000 income tax credit associated with the restructuring charge.
Minority Interest:
In the three and six-month periods ended June 30, 1998 and 1997, the Company has
included a loss associated with ISP in its income (loss) before minority
interest in loss of consolidated subsidiary, net of tax. The Company has a 50.1%
interest in the joint venture and has accordingly, excluded 49.9% of such loss
from its consolidated net income. The ISP loss has improved from $153,000 to
$73,000 for the quarter and $229,000 to $206,000 for the six-month period ended
June 30, 1998 from the comparable 1997 periods.
Net Income:
Net income decreased $848,000 for the quarter and $1,988,000, for the six-month
period ended June 30, 1998 from the comparable 1997 period and resulted in a
profit of $16,000 for the quarter and a loss of $643,000 for the six-month
period ended June 30, 1998.
Year 2000
The Company is currently addressing the potential problems associated with the
Year 2000. The Company has designed a program, under the direction of the
Information Technology (IT) Manager, to address compliance with the Year 2000
both internally, including all subsidiaries, and externally, including critical
suppliers and customers. All aspects of the Company's computer hardware and
software are being reviewed and the Company is in the process of upgrading its
computers and installing new third party software that is Year 2000 compliant.
Concurrent with the Year 2000 project, new enterprise manufacturing systems are
currently being implemented at SPM, Retconn and Polese which, in addition to
satisfying the business' ongoing needs, are Year 2000 compliant. The Company
estimates that the incremental cost of addressing the potential Year 2000
problem beyond those expenditures already incurred will be less than $250,000
based upon the preliminary information assembled to date. The Company expects to
complete the Year 2000 project in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed and expects to continue to satisfy its capital needs
through cash flow from operations, its line of credit facility and term loans
from the Bank (defined herein) and capital leases. The Company is in the process
of refinancing its existing Term Loan and Line of Credit (defined herein). At
June 30, 1998, the Company had cash and cash equivalents of $1,592,000 and had
an available balance on its Line of Credit facility of $500,000 (see Line of
Credit herein). Net Cash decreased by $470,000 for the quarter and decreased by
$668,000 for the six months ended June 30, 1998 as compared to net cash
increasing by $507,000 for the comparable quarter in 1997 and decreasing by
$1,062,000 for the comparable six-months ended June 30, 1997. The Company has
meet its obligations to the Bank from cash generated from operations and through
borrowings. As at June 30, 1998, the Company was in compliance with the
covenants contained in its loan agreements, as amended. In August 1998, the Bank
extended a previous waiver of the Term Loan and Line of Credit agreement's (see
Term Loan and Line of Credit herein) financial covenants and further agreed to
waive the Term Loan principal payments of $350,000 per month from August through
December 31, 1998.
Term Loan:
On January 23, 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") which is further described in the Company's 1997 Annual Report and 10K.
Pursuant to the Term Loan and Line of Credit (see Line of Credit herein)
agreements, the Bank has a first priority security interest in substantially all
of the Company's assets. The principal amount which is payable in 60 consecutive
installments of $350,000, commenced on March 1, 1997. The loan bears interest at
a Eurodollar rate plus 2.25% (7.9% at June 30, 1998). In August 1998, the Bank
extended a previous waiver of the Term Loan's financial covenants and further
agreed to waive principal payments of $350,000 per month from August through
December 31, 1998. The Company continues to make monthly interest payments.
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On June 23, 1998 the Company entered into a 90-day note for $1,000,000 with the
Bank to supplement the Company's working capital requirements. Interest is
payable monthly at a fixed rate of 8.5% with the principal due on September 23,
1998. In August 1998, the Bank agreed to extend the due date to December 31,
1998.
Line of Credit:
On January 23, 1997 the Company entered into a $15,000,000 line of credit ("Line
of Credit") with the Bank which is further described in the Company's 1997
Annual Report and 10K. The Line of Credit expires in February 1999 and includes
a standby letter of credit for ISP in the amount of S$5,000,000 (approximately
$2,975,000 at June 30, 1998). Interest is payable monthly at the lower of the
Eurodollar rate plus 2.25% or the Bank's loan pricing rate (8.5% at June 30,
1998). The Line of Credit loan agreement provides, 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. Pursuant
to the Term Loan and Line of Credit agreements, the Bank has a first priority
security interest in substantially all of the Company's assets. To support its
working capital requirements and for general corporate purposes, the Company has
borrowed $11,525,000 under its Line of Credit and did not have any drawings
under the standby letter of credit at June 30, 1998. The remaining availability
at June 30, 1998 was $500,000. In August 1998, the Bank extended a previous
waiver of the Line of Credit agreement's financial covenants through December
31, 1998. The Company continues to make monthly interest payments.
Capital Expenditures:
In the three and six-month period ended June 30, 1998, the Company invested
$873,000 and $1,983,000, respectively as compared to $806,000 and $7,854,000,
respectively, for the three and six-month period ended June 30, 1997, in
property and equipment to support its growth and expand its facilities and
production capabilities. At June 30, 1998, the Company had capital commitments
of approximately $2,678,000 for the ongoing upgrade of the Company's
manufacturing equipment and facilities. On June 26, 1998 the Company entered
into a master lease agreement with Fleetwood Financial Corporation to provide a
$4,000,000 line of credit to fund its capital expenditures for the remainder of
1998. The agreement provides for a 5-year amortization on all drawings at an
interest rate of 190 basis points over the 5-year Treasury, which becomes a
fixed rate for the duration of the lease schedule at the time of execution. The
Company believes that the lease financing available to it for certain equipment
together with cash flow from operations should be sufficient to fund its capital
needs.
SMS Acquisition:
On January 23, 1997, ASP completed the acquisition of the assets of Silicon
Materials Service of Garland, Texas, and acquired 100% of the outstanding stock
of Silicon Materials Service, B.V. of Helmond Netherlands. See the Company's
1997 Annual Report and 10K for further information.
S.T. Acquisition:
Effective July 30, 1997, Retconn Incorporated ("Retconn"), a wholly owned
subsidiary of the Company, acquired 100% of the outstanding stock of S.T.
Electronics, Inc. ("S.T."), for $1,000,000 in cash plus approximately $54,000
based on S.T.'s closing net worth and $2,000,000 in notes. In addition, Retconn
acquired certain proprietary rights from the S.T. shareholders for $200,010. The
notes are payable in twenty equal quarterly installments which began on November
1, 1997 together with interest on the unpaid principal at the rate of 7% per
annum. In addition, the Company incurred approximately $300,000 in costs
associated with the acquisition of S.T. This business combination was accounted
for as a purchase. See the Company's 1997 Annual Report and 10K for further
information.
Stock Repurchase:
On December 18, 1997, the Board of Directors authorized the Company to
repurchase up to $2,000,000 of its common stock on the open market. Repurchased
shares are held as Treasury shares and may be reissued in the future or may be
reissued pursuant to the Company's stock option programs. During the three and
six-month period ended June 30, 1998, the Company repurchased 4,200 and 30,400
of its shares at a cost of $32,000 and $180,000, respectively.
ISP Joint Venture:
Effective August 28, 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 ("ISP"), 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. In
1996, the Company and its joint venture partner made a total of
11
<PAGE>
$4,000,000 in equity contributions into ISP, which was contributed pro-ratably
based on ownership. In addition, the Company has paid approximately $289,000 in
costs associated with the establishment of the joint venture. On May 12, 1998
the Company invested an additional $385,000 as a redeemable convertible bond
("RCB"). The RCB interest rate is 8% per annum with the note payable April 15,
2001. The RCB may be converted 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/accrued interest. The RCB instrument ranks senior to all other existing
shareholder loans. If the RCB is fully converted the additional shares will be
issued and the Company's equity level will increase from 50.1% to 69%. The
Company has the option to convert the RCB into ordinary shares at any time
during the term of the bond upon written notice.
ISP Equipment Credit Facility:
In 1997, ISP entered into a S$19,685,000 (approximately $11,600,000 at June 30,
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 bear interest at an average rate of approximately 6.75%. In the three
and six-month periods ended June 30, 1998 and 1997, ISP borrowed $17,000 and
$635,000, respectively, and $1,224,000 and $3,606,000, respectively, under its
credit facility. At June 30, 1998, ISP has borrowed S$8,228,000 (approximately
$4,840,000) under the facility.
Polese Agreement:
In conjunction with the Company's acquisition of Polese Company in 1993, the
Company entered into an agreement with Mr. Frank Polese, the former sole
shareholder of Polese Company, whereby, 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. To date, no
payments have been made pursuant to this agreement.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 28, 1998, the registrant conducted its annual meeting. At such
meeting, stockholders of record as of the close of business on March 17,
1998 were entitled to notice of and to vote at the meeting. A total of
6,036,816 shares were entitled to vote at the meeting. A total of
5,822,554 shares, or 96% of those shares entitled to vote, were present
in person or by proxy at said meeting. The matters voted on at the
meeting were limited to: the election of six directors to serve for one
year and until their successors are elected and qualify; an amendment to
Article First of the Company's Certificate of Incorporation to change
the name of the Company to SEMX Corporation; the ratification of the
amendment to the Company's Amended Employee's Incentive Stock Option
Plan to increase the authorized option shares from 600,000 to 900,000;
the ratification of the amendment to the Company's Non-Qualified
Incentive Stock Option Plan to increase the authorized option shares
from 100,000 to 300,000 and to make employees eligible to participate in
the Plan; and the ratification of the appointment of Goldstein Golub
Kessler & Company, P.C. as the Company's auditors for the year ending
December 31, 1998.
The following Directors were elected at such meeting:
Mark A. Pinto Richard D. Fain
John U. Moorhead, II Steven B. Sands
Gilbert D. Raker Frank J. Polese
The following votes were cast to amend the Article First of the
Company's Certificate of Incorporation to change the name of the Company
to SEMX Corporation.
Affirmative Against Abstain
----------- ------- -------
5,778,304 Shares 13,410 Shares 30,840 Shares
Adoption to amend the Company's Certificate of Incorporation was
approved.
12
<PAGE>
The following votes were cast to amend the Company's Amended Employee's
Incentive Stock Option Plan to increase the authorized option shares
from 600,000 to 900,000.
<TABLE>
<CAPTION>
Affirmative Against Abstain Not Voted
----------- ------- ------- ---------
<S> <C> <C> <C>
3,215,430 Shares 659,445 Shares 33,209 Shares 1,914,470 Shares
</TABLE>
Adoption to amend the Amended Employee's Incentive Stock Option Plan was
approved.
The following votes were cast to amend the Company's Non-Qualified
Incentive Stock Option Plan to increase the authorized option shares
from 100,000 to 300,000 and to make employees eligible to participate in
the Plan.
<TABLE>
<CAPTION>
Affirmative Against Abstain Not Voted
----------- ------- ------- ---------
<S> <C> <C> <C>
3,675,505 Shares 200,870 Shares 31,709 Shares 1,914,470 Shares
</TABLE>
Adoption to amend the Non-Qualified Incentive Stock Option Plan was
approved.
The following votes were cast in the election of Goldstein Golub Kessler
& Company, P.C. as the Company's auditors.
<TABLE>
<CAPTION>
Affirmative Against Abstain
----------- ------- -------
<S> <C> <C>
5,772,077 Shares 14,918 Shares 35,559 Shares
</TABLE>
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEMX CORPORATION
Date: August 14, 1998 By: /s/ Gilbert D. Raker
--------------------
Name: Gilbert D. Raker
Title: Chairman of the Board
and Chief Executive Officer
Date: August 14, 1998 By: /s/ Douglas G. Sages
--------------------
Name: Douglas G. Sages
Title: Treasurer and Secretary
(Chief Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,592
<SECURITIES> 0
<RECEIVABLES> 9,162
<ALLOWANCES> 260
<INVENTORY> 15,255
<CURRENT-ASSETS> 28,683
<PP&E> 54,955
<DEPRECIATION> 12,754
<TOTAL-ASSETS> 93,061
<CURRENT-LIABILITIES> 28,628
<BONDS> 24,603
0
0
<COMMON> 638
<OTHER-SE> 35,933
<TOTAL-LIABILITY-AND-EQUITY> 93,061
<SALES> 25,484
<TOTAL-REVENUES> 34,891
<CGS> 17,395
<TOTAL-COSTS> 25,209
<OTHER-EXPENSES> 9,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,708
<INCOME-PRETAX> (1,283)
<INCOME-TAX> (434)
<INCOME-CONTINUING> (643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (643)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
